China is squeezing the supply of vital rare earths. But not for long
The Economist
RARE by name, though not by nature, 17 elements in the periodic table—the “rare earths”—are among the most sought-after materials in modern manufacturing.
In tiny amounts, their unique magnetic and phosphorescent properties make them vital ingredients in a host of gadgets and components, ranging from hard drives to lasers.
Though abundant in nature, extracting them is difficult, costly, time-consuming and dirty.
China is the world’s largest (and for some of them the only) producer of rare earths.
Fears are growing about the political effects of that clout.
In September Japan claimed that China was blocking supplies in response to the arrest of a Chinese fisherman in disputed territorial waters.
Japan, with its electronics and car industries, uses a fifth of the global supply, making it the world’s biggest importer of rare earths.
China denies that it has interfered with shipments, but Japanese traders say that supplies were stuck in Chinese ports for a week.
The Chinese dominance comes from heavy investments in the 1980s.
Deng Xiaoping later said that rare earths would be to China what oil was to the Middle East.
As Chinese production came on stream, prices plummeted and other producers closed.
Since 2006 China has behaved in a way that resembles OPEC, the oil-producers’ cartel, cutting exports by 5-10% a year.
In July the export quota was cut by 40%.
Prices have soared: the cost of cerium oxide (often used as a catalyst) has increased sixfold since the start of the year, and is 20 times higher than in 2005.
The squeeze comes as a surge in demand for high-tech equipment has sent demand for rare earths soaring.
In 2003 some 85,000 tonnes were shipped, valued at $500m.
This year’s sales are expected to total 125,000 tonnes, worth nearly $2 billion.
Demand is forecast to increase by around two-thirds over the next five years.
For now, China’s position is strong.
It holds 35% of global reserves but supplies more than 95% of demand, of which 60% is domestic, according to Industrial Minerals Company of Australia (IMCOA), a consultancy.
In “heavy” rare earths such as dysprosium, which helps magnets keep their properties at high temperatures, its market share is nearly 100%.
China cites environmental concerns to justify its export curbs.
The real reason is to persuade foreign firms to move manufacturing to China before non-Chinese mines are on stream and its market control ebbs.
Market forces should be providing an answer already.
But they face peculiar snags.
The quantities of rare earths used in technology components are so tiny that higher prices are invisible in the cost to consumers.
Recycling is tricky: just half a penny’s worth of neodymium helps a mobile phone vibrate.
In the next four years new production is starting in Australia and in California (where it ceased in 2002). Capacity is being increased at mines in India and Vietnam.
The newcomers will shrink China’s market share by 15%, says Dudley Kingsnorth of IMCOA.
The only existing producer outside Asia not dependent on Chinese ores is Silmet, a rare-metal firm in Estonia, which says it is now besieged by eager customers.
It hopes other producers come online soon.
Thursday, September 30, 2010
Eye on China, House Votes for Greater Tariff Powers
Sander M. Levin is chairman of the House Ways and Means Committee.
WASHINGTON — The House of Representatives sent an unusually confrontational signal to the Chinese leadership on Wednesday, voting overwhelmingly to give the Obama administration expanded authority to impose tariffs on virtually all Chinese imports to the United States.
The move, which could affect more than $300 billion in goods this year, was made in retaliation for the country’s refusal to revalue its currency.
The bill passed 348 to 79 and included the support of 99 Republicans, a highly unusual bipartisan vote at a time when large numbers of House Republicans have rarely joined Democrats on an economic issue.
House Speaker Nancy Pelosi, who has long pressed China trade issues, personally gaveled the vote closed.
Nonetheless, prospects for Senate approval are unclear.
The action was intended to hand President Obama new leverage in what has become a major flashpoint between the world’s two largest economies.
While tariffs have been placed on specific products, like steel and tires, because of evidence of unfair export subsidies, the threat of putting sizable tariffs on a country’s entire line of exports to the United States is highly unusual.
It reflects both election-year politics over a loss of American jobs and great frustration over unfulfilled promises by China to allow its currency to rise in value, which would make Chinese goods less competitive in the United States.
The Obama administration never took an emphatic position on the legislation and some officials say that, if passed, signed into law and challenged at the World Trade Organization, it might well be struck down.
But this is a case where the symbolism may be more important than the legal niceties, and for that reason, the White House has been of two minds about the bill.
Mr. Obama has tried to use the rising public anger over China’s trade advantage to argue to Chinese leaders that the United States would no longer tolerate deliberate currency manipulation, a point Mr. Obama made repeatedly in a meeting last week with Wen Jiabao, China’s prime minister.
He did so again on Wednesday in Des Moines, where one businessman asked the president about the issue.
“The reason that I’m pushing China about their currency is because their currency is undervalued,” he said, adding: “People generally think that they are managing their currency in ways that make our goods more expensive to sell and their goods cheaper to sell here. And that contributes — that’s not the main reason for our trade imbalance — but it’s a contributing factor to our trade imbalance.”
But in conversations with Congress, the Treasury secretary, Timothy F. Geithner, and other officials have warned of the danger of touching off a trade war, in which China blocks American goods in retaliation, that could hurt both economies.
The risks go beyond trade.
Mr. Obama is pressing China for help on cutting exports to Iran, managing a dangerous leadership transition in North Korea and some kind of accord on curbing carbon outputs that contribute to global warming.
He is also coming up with what one senior administration official called on Tuesday “new rules of the road” over disputed maritime territory.
But in Beijing, and on Capitol Hill, all that pales in comparison to the currency dispute, which is often portrayed in the Chinese news media as an effort to curb China’s growth, and thus its power.
Eswar S. Prasad, a professor of trade policy at Cornell, called the legislation “a shot across the bow that indicates a clear escalation from overheated rhetoric about Chinese currency policy to more substantive action.”
While it is unlikely there will be a trade war, he said, “there is now a real risk that a cycle of tit-for-tat trade sanctions could spin out of control and cause some real, if not lasting, damage.”
Under the bill, Mr. Obama would not have personal control to turn sanctions on or off.
The legislation would make it easier for the Commerce Department to place duties on imports from countries that have “fundamentally undervalued” currencies — defined as “protracted, large-scale intervention” in foreign exchange markets; an undervaluation of at least 5 percent; persistent global current account surpluses; and “excessive” foreign asset reserves.
Traditionally, only direct subsidies to an industry, rather than the indirect help that comes from an undervalued currency, have been considered a reason for retaliatory tariffs.
Because so many countries have managed their currency rates for so long, it is unclear that the W.T.O. would uphold any American efforts to make the manipulation of a currency a justification for action.
While the bill did not mention China by name, the criteria were clearly written with China, the largest creditor of the United States, in mind.
In response, the official Xinhua news agency quoted China’s commerce ministry spokesman, Yao Jian, as saying: “Starting a countervailing investigation in the name of exchange rates does not conform with relevant W.T.O. rules.”
But later in the day the Chinese Foreign Ministry was more emphatic about its displeasure, saying the House effort could harm economic ties between the two countries.
"We firmly oppose the U.S. Congress approving such bills," Jiang Yu, a ministry spokeswoman told reporters in Beijing.
"We urge the U.S. congressmen to be clearly aware of the importance of China-U.S. trade and economic relations, resist protectionism so as to refrain from any damage to the interests of both peoples and people around the world."
So far the administration has been reluctant to pursue retaliation against China.
The Treasury Department has repeatedly declined to formally declare China a currency manipulator.
And last month, the Commerce Department decided not to investigate allegations that China’s currency practices amounted to an improper export subsidy.
But the Obama administration may have few other options and few allies.
Europeans are largely uninterested in the problem: the euro has weakened because of the sovereign debt crisis, limiting European incentives to get involved.
Japan is intensely interested, and this month intervened in the currency markets for the first time since 2004, moving to devalue the yen unilaterally.
Representative Sander M. Levin, Democrat of Michigan and chairman of the House Ways and Means Committee, said that “China’s persistent manipulation of its currency” had resulted in a “tilted field of competition” and the loss of as many as 1.5 million American jobs.
“This manipulation is one of the causes of outsourcing of our jobs — manufacturing and other good jobs,” he said.
“Talk hasn’t worked.”
The top Republican on the committee, Representative Dave Camp of Michigan, said that the Obama administration had been insufficiently engaged in securing international pressure on the Chinese; that the bill would not promote Mr. Obama’s goal of doubling American exports over five years; and that other issues — like China’s tolerance for violations of intellectual property rights — were as significant as the currency undervaluation.
Even so, Mr. Camp said, “I will vote for this bill because it signals to China that Congress’s patience is running out.”
For U.S. and China, Co-Dependency Breeds Bilateral Risk
By DAVID WESSEL
An employee handles stacks of yuan at a Bank of China branch in Hefei, China. The U.S. House passed a bill penalizing China over foreign-exchange practices.
The leaders of the U.S. and China know that each country's economy depends enormously on the other. China is hugely dependent on selling goods to the U.S. to keep its vast army of workers employed.
The U.S. is hugely dependent on China continuing to lend the U.S. government billions of dollars a day.
But recent ratcheting-up of tensions between the two is a reminder that leaders in both countries face mounting internal political pressure—largely around jobs at home.
While politicians on both sides seek to use popular outrage and local business interests as levers to pressure the other side, there's a risk that the simmering squabble will boil over, scalding both economies and innocent-bystander economies as well.
Though the temperature is clearly rising, tensions have been mainly rhetorical and low-intensity trade spats despite the devastating recession in the U.S.
About two-thirds of antidumping complaints filed in the U.S.—which allege some country is selling goods below cost—are aimed at China.
On Wednesday, a World Trade Organization panel ruled that congressionally mandated U.S. restrictions on imports of cooked chicken from China were unscientific and discriminatory.
The restrictions, which have since expired, led China to impose duties of more than 100% on certain U.S. exports of chickens to China.
Yet while free traders wince at the escalating rhetoric and raise the specter of a tit-for-tat series of trade measures that will yield the 21st-century equivalent of the Smoot-Hawley tariffs of the Great Depression, some Obama administration officials note that—despite the deep recession—the U.S. on their watch has adopted fewer protectionist measures than Ronald Reagan did.
For China, the U.S. is a market it can't afford to lose.
It accounts for about a fifth of all Chinese exports, some of those goods that the U.S. no longer makes and has to buy from somewhere.
In the first seven months of this year, according to U.S. data, the U.S. imported $193.9 billion worth of goods from China, more than from the European Union ($178.9 billion) or Canada ($159.9 billion) or Mexico ($128.8 billion) or Japan ($66 billion).
China's reluctance to bow to U.S. pressure to let its currency, the yuan, appreciate against the U.S. dollar is driven in large part by the interest of its politically powerful exporters.
A higher currency would make their wares more costly in the U.S.
In New York recently, Chinese Premier Wen Jiabao said that if China were to allow the yuan to appreciate by as much as some U.S. politicians demand, a wave of job losses and business bankruptcies would engulf China.
"Only the Chinese premier has such pressure on his shoulders," Mr. Wen said.
"And that is the reality."
Despite apparent support among some Chinese economists and central bankers for letting the currency rise gradually, Eswar Prasad, a professor of trade policy at Cornell University, sees "a shift in the narrative in Chinese political circles."
In the aftermath of the global financial crisis that the U.S. triggered, he says, "there is a sense that China has the upper hand and the U.S. is beholden to China."
That's makes the leadership more determined not be pushed around by the U.S.
For the U.S., borrowing more than $1 billion a day from abroad, China is a lender it can't do without as well as an obvious target for Americans worried about jobs and wages.
It's also a significant and potentially huge market for U.S. companies—both as a destination for U.S.-made goods and as place to produce goods cheaply.
The U.S. exported $48.6 billion worth of goods to China in the first seven months of the year, more than to Japan ($34.4 billion), but far less than to the EU ($135.1 billion) or Mexico ($90.4 billion).
But some big U.S. companies doing business in China are increasingly irritated by the obstacles to selling there—particularly financial and other services—and at what they complain is a Chinese propensity to steal intellectual property.
"That group has become disillusioned and is no longer a counterweight to those who see China as a threat," says Mr. Prasad.
Indeed, the National Association of Manufacturers, its members divided, didn't join three dozen other business groups in opposing the House bill.
There is widespread consensus among economists that China's refusal to let the exchange rate rise is an impediment to the much-discussed "rebalancing" of the world economy—where the U.S. consumes less and China and Germany consume more.
There is a growing sense that existing global institutions aren't well equipped to prod a big country (China) with a large trade surplus to reduce it even amid global pressure on another big country (the U.S.) to reduce a large trade deficit.
The International Monetary Fund lacks the muscle; the better-armed World Trade Organization lacks jurisdiction.
In the U.S., China is, of course, an easily identifiable villain for when voters want someone to blame for 9.6% unemployment.
Incumbent Rep John Boccieri (D., Ohio), for instance, is blasting his Republican opponent as a "self-described free-trader" who says Ohio voters are more exercised about big government than about free-trade pacts.
"He must be talking to people visiting from China," Mr. Boccieri says. "Because that's about the only place free-trade deals have created jobs."
A new Wall Street Journal/NBC News poll found that Americans overwhelmingly believe free-trade agreements have hurt the U.S. and cost jobs.
An employee handles stacks of yuan at a Bank of China branch in Hefei, China. The U.S. House passed a bill penalizing China over foreign-exchange practices.
The leaders of the U.S. and China know that each country's economy depends enormously on the other. China is hugely dependent on selling goods to the U.S. to keep its vast army of workers employed.
The U.S. is hugely dependent on China continuing to lend the U.S. government billions of dollars a day.
But recent ratcheting-up of tensions between the two is a reminder that leaders in both countries face mounting internal political pressure—largely around jobs at home.
While politicians on both sides seek to use popular outrage and local business interests as levers to pressure the other side, there's a risk that the simmering squabble will boil over, scalding both economies and innocent-bystander economies as well.
Though the temperature is clearly rising, tensions have been mainly rhetorical and low-intensity trade spats despite the devastating recession in the U.S.
About two-thirds of antidumping complaints filed in the U.S.—which allege some country is selling goods below cost—are aimed at China.
On Wednesday, a World Trade Organization panel ruled that congressionally mandated U.S. restrictions on imports of cooked chicken from China were unscientific and discriminatory.
The restrictions, which have since expired, led China to impose duties of more than 100% on certain U.S. exports of chickens to China.
Yet while free traders wince at the escalating rhetoric and raise the specter of a tit-for-tat series of trade measures that will yield the 21st-century equivalent of the Smoot-Hawley tariffs of the Great Depression, some Obama administration officials note that—despite the deep recession—the U.S. on their watch has adopted fewer protectionist measures than Ronald Reagan did.
For China, the U.S. is a market it can't afford to lose.
It accounts for about a fifth of all Chinese exports, some of those goods that the U.S. no longer makes and has to buy from somewhere.
In the first seven months of this year, according to U.S. data, the U.S. imported $193.9 billion worth of goods from China, more than from the European Union ($178.9 billion) or Canada ($159.9 billion) or Mexico ($128.8 billion) or Japan ($66 billion).
China's reluctance to bow to U.S. pressure to let its currency, the yuan, appreciate against the U.S. dollar is driven in large part by the interest of its politically powerful exporters.
A higher currency would make their wares more costly in the U.S.
In New York recently, Chinese Premier Wen Jiabao said that if China were to allow the yuan to appreciate by as much as some U.S. politicians demand, a wave of job losses and business bankruptcies would engulf China.
"Only the Chinese premier has such pressure on his shoulders," Mr. Wen said.
"And that is the reality."
Despite apparent support among some Chinese economists and central bankers for letting the currency rise gradually, Eswar Prasad, a professor of trade policy at Cornell University, sees "a shift in the narrative in Chinese political circles."
In the aftermath of the global financial crisis that the U.S. triggered, he says, "there is a sense that China has the upper hand and the U.S. is beholden to China."
That's makes the leadership more determined not be pushed around by the U.S.
For the U.S., borrowing more than $1 billion a day from abroad, China is a lender it can't do without as well as an obvious target for Americans worried about jobs and wages.
It's also a significant and potentially huge market for U.S. companies—both as a destination for U.S.-made goods and as place to produce goods cheaply.
The U.S. exported $48.6 billion worth of goods to China in the first seven months of the year, more than to Japan ($34.4 billion), but far less than to the EU ($135.1 billion) or Mexico ($90.4 billion).
But some big U.S. companies doing business in China are increasingly irritated by the obstacles to selling there—particularly financial and other services—and at what they complain is a Chinese propensity to steal intellectual property.
"That group has become disillusioned and is no longer a counterweight to those who see China as a threat," says Mr. Prasad.
Indeed, the National Association of Manufacturers, its members divided, didn't join three dozen other business groups in opposing the House bill.
There is widespread consensus among economists that China's refusal to let the exchange rate rise is an impediment to the much-discussed "rebalancing" of the world economy—where the U.S. consumes less and China and Germany consume more.
There is a growing sense that existing global institutions aren't well equipped to prod a big country (China) with a large trade surplus to reduce it even amid global pressure on another big country (the U.S.) to reduce a large trade deficit.
The International Monetary Fund lacks the muscle; the better-armed World Trade Organization lacks jurisdiction.
In the U.S., China is, of course, an easily identifiable villain for when voters want someone to blame for 9.6% unemployment.
Incumbent Rep John Boccieri (D., Ohio), for instance, is blasting his Republican opponent as a "self-described free-trader" who says Ohio voters are more exercised about big government than about free-trade pacts.
"He must be talking to people visiting from China," Mr. Boccieri says. "Because that's about the only place free-trade deals have created jobs."
A new Wall Street Journal/NBC News poll found that Americans overwhelmingly believe free-trade agreements have hurt the U.S. and cost jobs.
China's Aggressive New Diplomacy
Beijing drives its neighbors into the arms of the U.S.
The Wall Street Journal
Ever since Deng Xiaoping dumped the Marxist half of Marxism-Leninism some 30 years ago, the Chinese regime has depended on the twin pillars of economic growth and nationalism for its legitimacy.
Usually the world sees more of the former than the latter.
Perhaps not anymore.
In the last two weeks, China has engaged in an unusually bitter spat with Japan over the uninhabited Senkaku Islands, claimed by Japan since the 1890s and disputed by the Chinese since the 1970s.
Beijing reacted to Japan's detention of a Chinese fishing boat captain in increasingly emotive terms, including the arrest of Japanese expats and midnight harangues of Japan's ambassador in Beijing.
Even though Japan released the captain over the weekend, Beijing is keeping up the pressure by demanding an apology.
The Senkaku clash is of a piece with other fishy incidents.
Last year, Chinese fishing boats harassed a U.S. Navy ship in waters that are international by everyone's definition except that of Beijing, which claims the South China Sea as its "historical waters."
More recently, fleets of Chinese fishing ships illegally entered Indonesian waters in May and June, leading to a stand-off with Indonesian patrol craft that ended when one of the Chinese vessels aimed a large-caliber gun at the Indonesians.
After the South Korean corvette Cheonan was sunk by a North Korean torpedo, China promised Seoul it wouldn't shield the guilty party.
But once the investigation was complete, Beijing closed ranks behind Pyongyang, shielding it from U.N. condemnation and tightening military ties.
After two decades of developing strong economic and diplomatic links to Beijing, South Koreans must face the reality that China's interest in keeping the peninsula divided trumps all.
China's new assertiveness is more than a matter of provocation and petulance.
It's also a new state of mind.
Under both Mao and Deng, China posed as the champion of the Third World and railed against allegedly hegemonic powers like the U.S. and the Soviet Union.
Deng was usually careful to put intractable disputes with its neighbors on hold in favor of economic development.
Yet in July, when Hillary Clinton took the side of Vietnam in mildly pushing back against China's claims to the South China Sea, Foreign Minister Yang Jiechi could barely contain his anger.
Calling the Secretary of State's remarks "an attack on China," he lectured that "China is a big country and other countries are small countries, and that's just a fact."
China's behavior may be for domestic consumption, or perhaps it is related to the jockeying for power at the next leadership succession in 2012.
But it will do lasting damage to China's standing in the region, where governments will not easily bend to a form of diplomacy that smacks of an imperial tribute system.
China's preference has long been to keep all disputes with its neighbors on a bilateral basis.
But with China's new assertiveness, it's hardly surprising that "small countries" should fear this strategy as another form of "divide and conquer."
As Singapore's founding father Lee Kuan Yew wrote recently, "China has to carefully consider whether insisting on dealing with the Asean countries separately will make them gravitate closer to the U.S."
That's precisely what seems to be happening.
The hastily arranged summit between President Barack Obama and the leaders from Southeast Asian nations last Friday in New York was a relatively low-key event.
But the summit's joint statement, reaffirming the importance of "freedom of navigation" and "maritime security," no doubt got Beijing's attention.
There is still time to nudge China's leaders back to the Dengist road, perhaps long enough for political pluralism to take hold.
One key is to keep the door open to Chinese goods so that China cannot conclude that its economic rise is being stifled.
But at the same time, the onus is on the U.S. to show that it has the will and means to protect its allies against aggression.
As social pressures build within China, some in the leadership may be falling back on one of their core claims to legitimacy—that only the Communist Party can restore China's dignity after a "century of humiliation" at the hands of foreign powers.
A rising power that depends on old grievances to maintain authoritarian rule is inherently unstable.
The U.S. needs to show firm but fair treatment to help the statesmen in Beijing shepherd China through this dangerous period.
The Wall Street Journal
Ever since Deng Xiaoping dumped the Marxist half of Marxism-Leninism some 30 years ago, the Chinese regime has depended on the twin pillars of economic growth and nationalism for its legitimacy.
Usually the world sees more of the former than the latter.
Perhaps not anymore.
In the last two weeks, China has engaged in an unusually bitter spat with Japan over the uninhabited Senkaku Islands, claimed by Japan since the 1890s and disputed by the Chinese since the 1970s.
Beijing reacted to Japan's detention of a Chinese fishing boat captain in increasingly emotive terms, including the arrest of Japanese expats and midnight harangues of Japan's ambassador in Beijing.
Even though Japan released the captain over the weekend, Beijing is keeping up the pressure by demanding an apology.
The Senkaku clash is of a piece with other fishy incidents.
Last year, Chinese fishing boats harassed a U.S. Navy ship in waters that are international by everyone's definition except that of Beijing, which claims the South China Sea as its "historical waters."
More recently, fleets of Chinese fishing ships illegally entered Indonesian waters in May and June, leading to a stand-off with Indonesian patrol craft that ended when one of the Chinese vessels aimed a large-caliber gun at the Indonesians.
After the South Korean corvette Cheonan was sunk by a North Korean torpedo, China promised Seoul it wouldn't shield the guilty party.
But once the investigation was complete, Beijing closed ranks behind Pyongyang, shielding it from U.N. condemnation and tightening military ties.
After two decades of developing strong economic and diplomatic links to Beijing, South Koreans must face the reality that China's interest in keeping the peninsula divided trumps all.
China's new assertiveness is more than a matter of provocation and petulance.
It's also a new state of mind.
Under both Mao and Deng, China posed as the champion of the Third World and railed against allegedly hegemonic powers like the U.S. and the Soviet Union.
Deng was usually careful to put intractable disputes with its neighbors on hold in favor of economic development.
Yet in July, when Hillary Clinton took the side of Vietnam in mildly pushing back against China's claims to the South China Sea, Foreign Minister Yang Jiechi could barely contain his anger.
Calling the Secretary of State's remarks "an attack on China," he lectured that "China is a big country and other countries are small countries, and that's just a fact."
China's behavior may be for domestic consumption, or perhaps it is related to the jockeying for power at the next leadership succession in 2012.
But it will do lasting damage to China's standing in the region, where governments will not easily bend to a form of diplomacy that smacks of an imperial tribute system.
China's preference has long been to keep all disputes with its neighbors on a bilateral basis.
But with China's new assertiveness, it's hardly surprising that "small countries" should fear this strategy as another form of "divide and conquer."
As Singapore's founding father Lee Kuan Yew wrote recently, "China has to carefully consider whether insisting on dealing with the Asean countries separately will make them gravitate closer to the U.S."
That's precisely what seems to be happening.
The hastily arranged summit between President Barack Obama and the leaders from Southeast Asian nations last Friday in New York was a relatively low-key event.
But the summit's joint statement, reaffirming the importance of "freedom of navigation" and "maritime security," no doubt got Beijing's attention.
There is still time to nudge China's leaders back to the Dengist road, perhaps long enough for political pluralism to take hold.
One key is to keep the door open to Chinese goods so that China cannot conclude that its economic rise is being stifled.
But at the same time, the onus is on the U.S. to show that it has the will and means to protect its allies against aggression.
As social pressures build within China, some in the leadership may be falling back on one of their core claims to legitimacy—that only the Communist Party can restore China's dignity after a "century of humiliation" at the hands of foreign powers.
A rising power that depends on old grievances to maintain authoritarian rule is inherently unstable.
The U.S. needs to show firm but fair treatment to help the statesmen in Beijing shepherd China through this dangerous period.
Woken Up by a Stirring Dragon
Asia is catching on to China's new hardball foreign-policy tendencies. Beijing should take heed.
By MICHAEL AUSLIN
Japan has released the captain of the Chinese trawler that collided with its coast guard boats in the East China Sea, but tempers in Tokyo and Beijing show no sign of cooling.
Beijing's interest in asserting territorial claims throughout its neighborhood is longstanding, but the fact that others are increasingly paying attention—and standing up to China—is new.
How China's leadership reacts to the ensuing conflicts in the coming months may well determine how peacefully the entire region develops over this decade.
Japan is far from the only nation that China has incensed as it attempts to assert maritime dominance.
In August, Indonesia seized a Chinese fishing boat operating illegally in its "exclusive economic zone," a territory that international law defines as the 370 kilometers extending from a country's coast.
China recently conducted live-fire training in the Yellow Sea, not far from where joint American-Korean naval exercises were being held at the same time.
Long-simmering tensions between Vietnam and China over territorial boundaries have cast a shadow on diplomatic initiatives to improve relations among Asian nations; the two fought a border war on land in 1979, and more recently Chinese ships have harassed Vietnamese fisherman around the Spratley and Paracel archipelagos in the South China Sea, which both countries (and several others, too) claim.
What has changed is that Asian nations large and small now seem more willing to stand up to their errant neighbor.
Southeast Asian states have used the Asean Regional Forum as a venue for opposing China's maritime claims. They got a major boost when American Secretary of State Hilary Clinton announced at July's forum that Washington considered the peaceful resolution of South China Sea claims to be in America's national interest. Similarly, a new Japanese report lists "access to markets and safety of sea lines of communications" high among the country's security priorities—an undeniable reference to China.
Asia's citizens are likewise becoming more vocal, both against Chinese intimidation and against their own governments' perceived weakness when facing such bullying.
South Koreans, for example, have been more wary of China since a violent 2008 demonstration by Chinese students in Seoul that nearly sparked a riot in a downtown hotel.
Japanese Prime Minister Naoto Kan, far from being lauded for resolving the latest maritime crisis peacefully, is being lambasted by his countrymen for caving to Chinese pressure.
Behind this rhetorical toughening is a swell of military spending aimed at keeping up with China's own beefed-up capabilities.
The Asia-Pacific region has become the world's second-largest naval spending market.
Vietnam, Indonesia, Singapore and Japan are growing their submarine fleets, and India will spend $40 billion on new ships, making it the largest naval consumer in Asia.
Both Japan and South Korea are looking to purchase the U.S. F-35 fifth-generation fighter jet, while Singapore and Australia are already co-producing the plane with the United States.
Meanwhile Japan and Korea continue to invest in expensive ballistic missile defense systems.
With Beijing becoming more assertive, this may be the year consensus finally tips from the belief that China will eventually take its place among the great powers as a responsible stakeholder to a less-rosy conviction: that China's military might will be used in ways that reveal its regional goals to be incompatible with international norms for diplomatic behavior.
Beijing could take steps to assuage such fears.
For instance, it could have adopted a more conciliatory approach to Japan in the recent Senkaku Islands controversy or muted its criticism of U.S.-South Korean drills in the Yellow Sea.
Worryingly, Beijing's current attitude instead suggests that years of patient diplomacy can be wasted in just a few months' time.
What's more, China's military appears to be driving policy more than its diplomats, further inflaming fears about the country's future course.
One consequence is that few nations seem to believe that open-ended engagement with China will change its behavior; such deference may simply encourage more assertiveness.
The U.S. now more openly pursues a dual-track strategy, in which hedging is paired with engagement, as displayed by Washington's unqualified support for Japan in the recent crisis or its support for Southeast Asian nations against China's territorial claims.
Beijing's more militaristic tone is typical of rising powers and may also resonate with a public receptive to nationalism.
But it's not without risks.
If China continues to believe that it can bully its way toward its ends, it will discourage other countries from engaging with it diplomatically, making them in turn more willing to unite against Chinese interests.
As nonlethal as the most recent dispute has been for China, the outcome of the next run-in may not be so happy: Japan may not back down as quickly, and the U.S. may be unable to stay neutral, leaving China with two choices: retreat, which would unleash nationalist fury inside the country, or chance an outright clash.
Avoiding this kind of scenario should be foremost in the minds of Chinese leaders both military and civilian. The stability of the next decade may depend on it.
By MICHAEL AUSLIN
Japan has released the captain of the Chinese trawler that collided with its coast guard boats in the East China Sea, but tempers in Tokyo and Beijing show no sign of cooling.
Beijing's interest in asserting territorial claims throughout its neighborhood is longstanding, but the fact that others are increasingly paying attention—and standing up to China—is new.
How China's leadership reacts to the ensuing conflicts in the coming months may well determine how peacefully the entire region develops over this decade.
Japan is far from the only nation that China has incensed as it attempts to assert maritime dominance.
In August, Indonesia seized a Chinese fishing boat operating illegally in its "exclusive economic zone," a territory that international law defines as the 370 kilometers extending from a country's coast.
China recently conducted live-fire training in the Yellow Sea, not far from where joint American-Korean naval exercises were being held at the same time.
Long-simmering tensions between Vietnam and China over territorial boundaries have cast a shadow on diplomatic initiatives to improve relations among Asian nations; the two fought a border war on land in 1979, and more recently Chinese ships have harassed Vietnamese fisherman around the Spratley and Paracel archipelagos in the South China Sea, which both countries (and several others, too) claim.
What has changed is that Asian nations large and small now seem more willing to stand up to their errant neighbor.
Southeast Asian states have used the Asean Regional Forum as a venue for opposing China's maritime claims. They got a major boost when American Secretary of State Hilary Clinton announced at July's forum that Washington considered the peaceful resolution of South China Sea claims to be in America's national interest. Similarly, a new Japanese report lists "access to markets and safety of sea lines of communications" high among the country's security priorities—an undeniable reference to China.
Asia's citizens are likewise becoming more vocal, both against Chinese intimidation and against their own governments' perceived weakness when facing such bullying.
South Koreans, for example, have been more wary of China since a violent 2008 demonstration by Chinese students in Seoul that nearly sparked a riot in a downtown hotel.
Japanese Prime Minister Naoto Kan, far from being lauded for resolving the latest maritime crisis peacefully, is being lambasted by his countrymen for caving to Chinese pressure.
Behind this rhetorical toughening is a swell of military spending aimed at keeping up with China's own beefed-up capabilities.
The Asia-Pacific region has become the world's second-largest naval spending market.
Vietnam, Indonesia, Singapore and Japan are growing their submarine fleets, and India will spend $40 billion on new ships, making it the largest naval consumer in Asia.
Both Japan and South Korea are looking to purchase the U.S. F-35 fifth-generation fighter jet, while Singapore and Australia are already co-producing the plane with the United States.
Meanwhile Japan and Korea continue to invest in expensive ballistic missile defense systems.
With Beijing becoming more assertive, this may be the year consensus finally tips from the belief that China will eventually take its place among the great powers as a responsible stakeholder to a less-rosy conviction: that China's military might will be used in ways that reveal its regional goals to be incompatible with international norms for diplomatic behavior.
Beijing could take steps to assuage such fears.
For instance, it could have adopted a more conciliatory approach to Japan in the recent Senkaku Islands controversy or muted its criticism of U.S.-South Korean drills in the Yellow Sea.
Worryingly, Beijing's current attitude instead suggests that years of patient diplomacy can be wasted in just a few months' time.
What's more, China's military appears to be driving policy more than its diplomats, further inflaming fears about the country's future course.
One consequence is that few nations seem to believe that open-ended engagement with China will change its behavior; such deference may simply encourage more assertiveness.
The U.S. now more openly pursues a dual-track strategy, in which hedging is paired with engagement, as displayed by Washington's unqualified support for Japan in the recent crisis or its support for Southeast Asian nations against China's territorial claims.
Beijing's more militaristic tone is typical of rising powers and may also resonate with a public receptive to nationalism.
But it's not without risks.
If China continues to believe that it can bully its way toward its ends, it will discourage other countries from engaging with it diplomatically, making them in turn more willing to unite against Chinese interests.
As nonlethal as the most recent dispute has been for China, the outcome of the next run-in may not be so happy: Japan may not back down as quickly, and the U.S. may be unable to stay neutral, leaving China with two choices: retreat, which would unleash nationalist fury inside the country, or chance an outright clash.
Avoiding this kind of scenario should be foremost in the minds of Chinese leaders both military and civilian. The stability of the next decade may depend on it.
Belgium's Option Can `Survive Battle' Against China's Huawei With EU Help
By Jonathan Stearns and John Martens
Option NV, the unprofitable Belgian maker of modems, predicted a “turning point” for its business and renewed hope for innovation in the European Union should the EU make good on threats to slow imports from China.
Option Chief Executive Officer Jan Callewaert made the projections as the EU weighs imposing tariffs on wireless modems from China to counter alleged subsidies to Huawei Technologies Co. and ZTE Corp. and possible below-cost -- or “dumped” -- sales by those producers in Europe.
The bloc is also threatening to apply quantitative limits, known as safeguards, on imports of the devices from all non-EU countries led by China.
At stake is Europe’s manufacturing presence in an EU market worth 1.5 billion euros ($2 billion), according to Option, the bloc’s only producer of the wireless wide-area networking modems covered by the three European trade probes.
This marks the first time the EU has opened simultaneous dumping, subsidy and safeguard investigations in support of a single European producer, shifting the focus of European trade curbs against China from traditional goods such as shoes and bicycles to high-tech telecommunications.
“This will be a turning point,” Callewaert said in an interview yesterday at Option’s headquarters in Leuven, Belgium.
“We should come to a level playing field. It would re-establish the company in the market with respect.”
Option exemplifies how Europe is stepping up the threat of trade curbs against China.
To bolster European exporters and narrow its trade deficit, the 27-nation EU has joined the U.S. in pressing China to let its currency strengthen as the global economy recovers from the financial crisis.
Chinese Dumping
The EU imposes anti-dumping duties on dozens of Chinese goods ranging from textiles and chemicals to ironing boards and candles.
China, the world’s most populous country, faces this kind of EU trade protection on about 50 products -- more than any other nation.
The EU opened the dumping and safeguard probes covering Chinese wireless modems in June and began the government-aid inquiry in mid-September -- only the second European subsidy case against China following an April one involving paper.
Initial measures on modems may come within nine months of the start of the investigations.
“There is evidence of a number of unfair trade practices happening at the same time,” John Clancy, a spokesman at the European Commission, the EU’s trade authority in Brussels, said in an e-mail yesterday about the Option cases.
Market Share
Huawei and ZTE, both based in Shenzhen, now control 95 percent of the European market for the wireless modems covered by the trade probes compared with nothing in 2005, according to Option.
Average prices for Option’s devices dropped 30 percent last year, following a 39 percent slide in 2008.
“We need to survive this battle,” Callewaert said.
“The sooner the commission comes out with measures, the better.”
Option, which hasn’t reported a profit since the first quarter of 2008, has cut its workforce to 250 from 679 at the end of 2008.
The company’s market value has fallen 97 percent from a peak in 2006.
Option had 7.65 million euros of cash and short-term investments left at the end of June after raising 20.2 million euros in a stock sale to existing shareholders in December.
The company is selling a unit developing a wireless radio transceiver for the next generation of embedded modems to avoid running out of cash, according to Callewaert.
‘Canary in Coal Mine’
Huawei reported that 2009 sales rose 19 percent to 149.1 billion yuan ($22.3 billion) and Tim Watkins, the company’s western Europe vice president, predicts that revenue will climb to about $30 billion this year. Huawei is the world’s only supplier of telecom equipment that ranks among the three largest vendors in fixed, mobile and Internet-based networks.
China’s biggest telecom-equipment maker beat Stockholm-based Ericsson AB, the world’s No. 1 provider of wireless phone networks, in December to win a contract for so-called Long-Term Evolution wireless technology from Tele2 AB and Telenor ASA in Sweden.
“We are a canary in a coal mine,” Callewaert said.
“Everyone is waking up and they look to this case because it’s an important one. It’s one of the first cases in the high-tech arena for Europe.”
He forecast the global market for those modems, including built-in devices, will triple to 60 million units in 2012 from about 20 million last year.
‘Reasonable’ Earnings
Huawei disputes the validity of Option’s complaints, saying the Belgian company is no longer a European producer after farming out manufacturing to China.
Option says it has shifted basic hardware assembly to China from the EU while keeping development, control, testing and final processing of the wireless modems at European sites including Leuven and Cork, Ireland.
As a result, Option says it remains an EU producer of the devices.
Option NV, the unprofitable Belgian maker of modems, predicted a “turning point” for its business and renewed hope for innovation in the European Union should the EU make good on threats to slow imports from China.
Option Chief Executive Officer Jan Callewaert made the projections as the EU weighs imposing tariffs on wireless modems from China to counter alleged subsidies to Huawei Technologies Co. and ZTE Corp. and possible below-cost -- or “dumped” -- sales by those producers in Europe.
The bloc is also threatening to apply quantitative limits, known as safeguards, on imports of the devices from all non-EU countries led by China.
At stake is Europe’s manufacturing presence in an EU market worth 1.5 billion euros ($2 billion), according to Option, the bloc’s only producer of the wireless wide-area networking modems covered by the three European trade probes.
This marks the first time the EU has opened simultaneous dumping, subsidy and safeguard investigations in support of a single European producer, shifting the focus of European trade curbs against China from traditional goods such as shoes and bicycles to high-tech telecommunications.
“This will be a turning point,” Callewaert said in an interview yesterday at Option’s headquarters in Leuven, Belgium.
“We should come to a level playing field. It would re-establish the company in the market with respect.”
Option exemplifies how Europe is stepping up the threat of trade curbs against China.
To bolster European exporters and narrow its trade deficit, the 27-nation EU has joined the U.S. in pressing China to let its currency strengthen as the global economy recovers from the financial crisis.
Chinese Dumping
The EU imposes anti-dumping duties on dozens of Chinese goods ranging from textiles and chemicals to ironing boards and candles.
China, the world’s most populous country, faces this kind of EU trade protection on about 50 products -- more than any other nation.
The EU opened the dumping and safeguard probes covering Chinese wireless modems in June and began the government-aid inquiry in mid-September -- only the second European subsidy case against China following an April one involving paper.
Initial measures on modems may come within nine months of the start of the investigations.
“There is evidence of a number of unfair trade practices happening at the same time,” John Clancy, a spokesman at the European Commission, the EU’s trade authority in Brussels, said in an e-mail yesterday about the Option cases.
Market Share
Huawei and ZTE, both based in Shenzhen, now control 95 percent of the European market for the wireless modems covered by the trade probes compared with nothing in 2005, according to Option.
Average prices for Option’s devices dropped 30 percent last year, following a 39 percent slide in 2008.
“We need to survive this battle,” Callewaert said.
“The sooner the commission comes out with measures, the better.”
Option, which hasn’t reported a profit since the first quarter of 2008, has cut its workforce to 250 from 679 at the end of 2008.
The company’s market value has fallen 97 percent from a peak in 2006.
Option had 7.65 million euros of cash and short-term investments left at the end of June after raising 20.2 million euros in a stock sale to existing shareholders in December.
The company is selling a unit developing a wireless radio transceiver for the next generation of embedded modems to avoid running out of cash, according to Callewaert.
‘Canary in Coal Mine’
Huawei reported that 2009 sales rose 19 percent to 149.1 billion yuan ($22.3 billion) and Tim Watkins, the company’s western Europe vice president, predicts that revenue will climb to about $30 billion this year. Huawei is the world’s only supplier of telecom equipment that ranks among the three largest vendors in fixed, mobile and Internet-based networks.
China’s biggest telecom-equipment maker beat Stockholm-based Ericsson AB, the world’s No. 1 provider of wireless phone networks, in December to win a contract for so-called Long-Term Evolution wireless technology from Tele2 AB and Telenor ASA in Sweden.
“We are a canary in a coal mine,” Callewaert said.
“Everyone is waking up and they look to this case because it’s an important one. It’s one of the first cases in the high-tech arena for Europe.”
He forecast the global market for those modems, including built-in devices, will triple to 60 million units in 2012 from about 20 million last year.
‘Reasonable’ Earnings
Huawei disputes the validity of Option’s complaints, saying the Belgian company is no longer a European producer after farming out manufacturing to China.
Option says it has shifted basic hardware assembly to China from the EU while keeping development, control, testing and final processing of the wireless modems at European sites including Leuven and Cork, Ireland.
As a result, Option says it remains an EU producer of the devices.
Stuxnet 'cyber superweapon' moves to China
BEIJING (AFP) — A computer virus dubbed the world's "first cyber superweapon" by experts and which may have been designed to attack Iran's nuclear facilities has found a new target -- China.
The Stuxnet computer worm has wreaked havoc in China, infecting millions of computers around the country, state media reported this week.
Stuxnet is feared by experts around the globe as it can break into computers that control machinery at the heart of industry, allowing an attacker to assume control of critical systems like pumps, motors, alarms and valves.
It could, technically, make factory boilers explode, destroy gas pipelines or even cause a nuclear plant to malfunction.
The virus targets control systems made by German industrial giant Siemens commonly used to manage water supplies, oil rigs, power plants and other industrial facilities.
"This malware is specially designed to sabotage plants and damage industrial systems, instead of stealing personal data," an engineer surnamed Wang at antivirus service provider Rising International Software told the Global Times.
"Once Stuxnet successfully penetrates factory computers in China, those industries may collapse, which would damage China's national security," he added.
Another unnamed expert at Rising International said the attacks had so far infected more than six million individual accounts and nearly 1,000 corporate accounts around the country, the official Xinhua news agency reported.
The Stuxnet computer worm -- a piece of malicious software (malware) which copies itself and sends itself on to other computers in a network -- was first publicly identified in June.
It was found lurking on Siemens systems in India, Indonesia, Pakistan and elsewhere, but the heaviest infiltration appears to be in Iran, according to software security researchers.
A Beijing-based spokesman for Siemens declined to comment when contacted by AFP on Thursday.
Yu Xiaoqiu, an analyst with the China Information Technology Security Evaluation Centre, downplayed the malware threat.
"So far we don't see any severe damage done by the virus," Yu was quoted by the Global Times as saying.
"New viruses are common nowadays. Both personal Internet surfers and Chinese pillar companies don't need to worry about it at all. They should be alert but not too afraid of it."
A top US cybersecurity official said last week that the country was analysing the computer worm but did not know who was behind it or its purpose.
"One of our hardest jobs is attribution and intent," Sean McGurk, director of the National Cybersecurity and Communications Integration Center (NCCIC), told reporters in Washington.
"It's very difficult to say 'This is what it was targeted to do,'" he said of Stuxnet, which some computer security experts have said may be intended to sabotage a nuclear facility in Iran.
A cyber superweapon is a term used by experts to describe a piece of malware designed specifically to hit computer networks that run industrial plants.
"The Stuxnet worm is a wake-up call to governments around the world," Derek Reveron, a cyber expert at the US Naval War School, was quoted as saying Thursday by the South China Morning Post.
"It is the first known worm to target industrial control systems."
The Stuxnet computer worm has wreaked havoc in China, infecting millions of computers around the country, state media reported this week.
Stuxnet is feared by experts around the globe as it can break into computers that control machinery at the heart of industry, allowing an attacker to assume control of critical systems like pumps, motors, alarms and valves.
It could, technically, make factory boilers explode, destroy gas pipelines or even cause a nuclear plant to malfunction.
The virus targets control systems made by German industrial giant Siemens commonly used to manage water supplies, oil rigs, power plants and other industrial facilities.
"This malware is specially designed to sabotage plants and damage industrial systems, instead of stealing personal data," an engineer surnamed Wang at antivirus service provider Rising International Software told the Global Times.
"Once Stuxnet successfully penetrates factory computers in China, those industries may collapse, which would damage China's national security," he added.
Another unnamed expert at Rising International said the attacks had so far infected more than six million individual accounts and nearly 1,000 corporate accounts around the country, the official Xinhua news agency reported.
The Stuxnet computer worm -- a piece of malicious software (malware) which copies itself and sends itself on to other computers in a network -- was first publicly identified in June.
It was found lurking on Siemens systems in India, Indonesia, Pakistan and elsewhere, but the heaviest infiltration appears to be in Iran, according to software security researchers.
A Beijing-based spokesman for Siemens declined to comment when contacted by AFP on Thursday.
Yu Xiaoqiu, an analyst with the China Information Technology Security Evaluation Centre, downplayed the malware threat.
"So far we don't see any severe damage done by the virus," Yu was quoted by the Global Times as saying.
"New viruses are common nowadays. Both personal Internet surfers and Chinese pillar companies don't need to worry about it at all. They should be alert but not too afraid of it."
A top US cybersecurity official said last week that the country was analysing the computer worm but did not know who was behind it or its purpose.
"One of our hardest jobs is attribution and intent," Sean McGurk, director of the National Cybersecurity and Communications Integration Center (NCCIC), told reporters in Washington.
"It's very difficult to say 'This is what it was targeted to do,'" he said of Stuxnet, which some computer security experts have said may be intended to sabotage a nuclear facility in Iran.
A cyber superweapon is a term used by experts to describe a piece of malware designed specifically to hit computer networks that run industrial plants.
"The Stuxnet worm is a wake-up call to governments around the world," Derek Reveron, a cyber expert at the US Naval War School, was quoted as saying Thursday by the South China Morning Post.
"It is the first known worm to target industrial control systems."
Perils of clashes with China over rare-earth exports
Using trade as a tool for market advantage or as a substitute for war has its limits. China went too far in cutting exports of rare-earth minerals to Japan.
The Christian Science Monitor
Is the world heading into a dangerous storm of trade reprisals and economic sanctions?
Individually, such actions often seem worthy.
The US House, for instance, passed a bill today that would make it easier for the Commerce Department to penalize China for manipulating its currency rate – an unfair way to favor Chinese exporters.
But Beijing appeared to anticipate that move this week by slapping high tariffs on imports of American poultry.
Two weeks ago, Japan helped its ailing exporters by intervening in currency markets – for the first time in six years – to devalue the yen.
Many Latin American and Asian nations have also artificially altered their currency rates to create export-related jobs.
But taken together, such actions amount to a global “currency war,” warns Brazilian Finance Minister Guido Mantega.
Too many nations are competing with devaluations to create a trade advantage but causing damage to the market-based system of world trade.
The United States, meanwhile, has led many nations to tighten sanctions on Iran and North Korea for their nuclear programs.
But then, in a similar political move that sent shivers around Asia and into the Pentagon, China last week halted exports of “rare earth” minerals to Japanese high-tech industries in a dispute with Japan over a set of small islands.
One Japanese official called China’s action a “surprise attack,” a phrase often used by the US for the 1941 Japanese bombing of Pearl Harbor.
What made China’s retaliation so troubling is that it controls 97 percent of the world’s production of these 17 exotic metallic elements, such as dysprosium.
They contain unusual properties that are critical for making computers, TVs, smart bombs, fighter jets, battery-driven cars, wind turbines, and many other advanced products.
Over the past five years, Beijing has begun to slowly restrict rare-earth exports in order to force foreign manufacturers to set up industries in China, such as electric-car factories, even as the world’s appetite for these elements has grown.
Using trade as a tool or weapon can easily get out of hand, especially if a country like China has little regard for maintaining the system that governs the global economy or seeks strong leverage over other nations’ strategic industries and defenses.
As former Chinese leader Jiang Zemin once said, China must use its advantage in rare-earth resources to create “economic superiority.”
In October, the Pentagon plans to issue a report on how the US should respond to Chinese control of the rare-earth market.
While China commands nearly all of the world’s production, it has only about 57 percent of global reserves. The US used to be self-sufficient in rare-earth production.
But it gave up production in 2002 when a Colorado company, Molycorp Minerals, was closed down because of cheaper exports from China.
The company hopes to reopen in 2012 – if investors can be found.
The process of extraction is costly, dirty, and dangerous.
One idea is for the US to set up a stockpile of rare-earth elements.
But a report in April by the US General Accountability Office said it may take 15 years for America to revive its industry and avoid vulnerability to China’s mercantile and manipulative use of these exports.
In Japan, officials want to devise alternatives to rare-earth minerals so the country can never again be held hostage to Chinese demands.
The threat of reciprocity always hangs over any nation’s trade sanctions.
History shows that sanctions can sometimes lead to war, as happened in 1941 when the US stopped vital exports of oil to Imperial Japan for its occupation of China.
Sanctions have a mixed record in changing the course of world affairs.
Sometimes they work, as they did in forcing an end to white rule in South Africa, to Vietnam’s occupation of Cambodia, and to Libya’s drive to build weapons of mass destruction.
Often they don’t work, as was the case with sanctions on Saddam Hussein’s Iraq or military-controlled Burma (Myanmar).
China went a step too far with its rare-earth squeeze on Japan.
Many nations noted it.
The global economy needs safeguarding – even if China has yet to understand that.
The Christian Science Monitor
Is the world heading into a dangerous storm of trade reprisals and economic sanctions?
Individually, such actions often seem worthy.
The US House, for instance, passed a bill today that would make it easier for the Commerce Department to penalize China for manipulating its currency rate – an unfair way to favor Chinese exporters.
But Beijing appeared to anticipate that move this week by slapping high tariffs on imports of American poultry.
Two weeks ago, Japan helped its ailing exporters by intervening in currency markets – for the first time in six years – to devalue the yen.
Many Latin American and Asian nations have also artificially altered their currency rates to create export-related jobs.
But taken together, such actions amount to a global “currency war,” warns Brazilian Finance Minister Guido Mantega.
Too many nations are competing with devaluations to create a trade advantage but causing damage to the market-based system of world trade.
The United States, meanwhile, has led many nations to tighten sanctions on Iran and North Korea for their nuclear programs.
But then, in a similar political move that sent shivers around Asia and into the Pentagon, China last week halted exports of “rare earth” minerals to Japanese high-tech industries in a dispute with Japan over a set of small islands.
One Japanese official called China’s action a “surprise attack,” a phrase often used by the US for the 1941 Japanese bombing of Pearl Harbor.
What made China’s retaliation so troubling is that it controls 97 percent of the world’s production of these 17 exotic metallic elements, such as dysprosium.
They contain unusual properties that are critical for making computers, TVs, smart bombs, fighter jets, battery-driven cars, wind turbines, and many other advanced products.
Over the past five years, Beijing has begun to slowly restrict rare-earth exports in order to force foreign manufacturers to set up industries in China, such as electric-car factories, even as the world’s appetite for these elements has grown.
Using trade as a tool or weapon can easily get out of hand, especially if a country like China has little regard for maintaining the system that governs the global economy or seeks strong leverage over other nations’ strategic industries and defenses.
As former Chinese leader Jiang Zemin once said, China must use its advantage in rare-earth resources to create “economic superiority.”
In October, the Pentagon plans to issue a report on how the US should respond to Chinese control of the rare-earth market.
While China commands nearly all of the world’s production, it has only about 57 percent of global reserves. The US used to be self-sufficient in rare-earth production.
But it gave up production in 2002 when a Colorado company, Molycorp Minerals, was closed down because of cheaper exports from China.
The company hopes to reopen in 2012 – if investors can be found.
The process of extraction is costly, dirty, and dangerous.
One idea is for the US to set up a stockpile of rare-earth elements.
But a report in April by the US General Accountability Office said it may take 15 years for America to revive its industry and avoid vulnerability to China’s mercantile and manipulative use of these exports.
In Japan, officials want to devise alternatives to rare-earth minerals so the country can never again be held hostage to Chinese demands.
The threat of reciprocity always hangs over any nation’s trade sanctions.
History shows that sanctions can sometimes lead to war, as happened in 1941 when the US stopped vital exports of oil to Imperial Japan for its occupation of China.
Sanctions have a mixed record in changing the course of world affairs.
Sometimes they work, as they did in forcing an end to white rule in South Africa, to Vietnam’s occupation of Cambodia, and to Libya’s drive to build weapons of mass destruction.
Often they don’t work, as was the case with sanctions on Saddam Hussein’s Iraq or military-controlled Burma (Myanmar).
China went a step too far with its rare-earth squeeze on Japan.
Many nations noted it.
The global economy needs safeguarding – even if China has yet to understand that.
Pentagon Loses Control of Bombs to China Metal Monopoly
By Peter Robison and Gopal Ratnam
Workers handle neodymium ingots before they are crushed at Neo Material Technologies Inc.'s Magnequench Tianjin Co. factory in Tianjin, China.
Annealed neodymium iron boron magnets sit in a barrel prior to being crushed into powder at Neo Material Technologies Inc.'s Magnequench Tianjin Co. factory in Tianjin, China.
The research facility at Inner Mongolia Baotou Steel Rare-Earth Hi-Tech Co.
Motors in missiles like the JDAM might be three times as big without advanced magnets. The JDAM has been used extensively in Iraq and Afghanistan.
An open pit mine in Nevada owned by Molycorp, which plans to mine almost 20,000 tons of rare earths annually by late 2012 but doesn’t yet have the capacity to refine the raw elements into metals.
Samarium-cobalt magnets of different strengths, left, and a defense component with mounted magnets are arranged for a photo at the Electron Energy Corp. factory in Landisville, Pennsylvania.
A senior manager at a company that churns out metals routinely used in U.S. smart bombs pauses in mid-sentence when his phone rings: a Wall Street stockbroker looking for information.
He makes a note to have an assistant call back -- someone who is fluent in English, not just Chinese.
“It’s a seller’s market now,” says Bai Baosheng, 43, puffing a cigarette in his office in Baotou, China, where his company sells bags of powder containing a metallic element known as neodymium, vital in tiny magnets that direct the fins of bombs dropped by U.S. Air Force jets in Afghanistan.
A generation after Chinese leader Deng Xiaoping made mastering neodymium and 16 other elements known as rare earths a priority, China dominates the market, with far-reaching effects ranging from global trade friction to U.S. job losses and threats to national security.
The U.S. handed its main economic rival power to dictate access to these building blocks of modern weapons by ceding control of prices and supply, according to dozens of interviews with industry executives, congressional leaders and policy experts.
China in July reduced rare-earth export quotas for the rest of the year by 72 percent, sending prices up more than sixfold for some elements.
Military officials are only now conducting an inventory of where and how U.S. suppliers use the obscure but essential substances -- including those that silence the whoosh of Boeing Co. helicopter blades, direct Raytheon Co. missiles and target guns in General Dynamics Corp. tanks.
Warning Signs
“The Pentagon has been incredibly stupid and negligent,” said Peter Leitner, who was a senior strategic trade adviser at the Defense Department from 1986 to 2007.
“There are plenty of early warning signs that China will use its leverage over these materials as a weapon.”
China may already be flexing its muscles amid a diplomatic spat with its East Asian neighbor Japan.
China last week imposed a ban on exports to Japan of the metals used in liquid crystal displays and laptop computers, Japanese Economy Minister Banri Kaieda said Sept. 28.
That followed Japan’s detention of a Chinese fishing boat captain whose ship collided with two Japanese Coast Guard vessels.
Japan later released the man.
New Factor
“What it does, clearly, is bring a new factor into the consideration of supply of critical materials,” said Dudley Kingsnorth, director of Industrial Minerals Co. of Australia, a forecaster in Perth.
The U.S. Congress’s investigative arm, the Government Accountability Office, in April warned of “vulnerabilities” for the military because of the lack of domestic rare-earth supplies.
The House of Representatives Armed Services Committee will hold a hearing in October, the same month a Pentagon report on how to secure future supplies of the metals is due.
“The department has long recognized that rare-earth elements are important raw material inputs for many defense systems and that many companies in our base have expressed concern regarding the future availability of the refined products of these elements,” Brett Lambert, director of the Pentagon’s Office of Industrial Policy, said.
While two rare-earth projects are scheduled to ramp up production by the end of 2012 -- one owned by Molycorp Inc. in California and another by Lynas Corp. in Australia -- the GAO says it may take 15 years to rebuild a U.S. manufacturing supply chain.
China makes virtually all the metals refined from rare earths, the agency says.
The elements are also needed for hybrid-electric cars and wind turbines, one reason supply may fall short of demand in 2014 even with the new mines, according to Kingsnorth of Imcoa.
Doggy Day Care
Just how far U.S. manufacturing has waned is apparent at a factory in Valparaiso, Indiana, where dogs skitter across a bare concrete shop floor, their nails clicking.
This brick plant on Elm Street once made 80 percent of the rare-earth magnets in laser-guided U.S. smart bombs, according to U.S. Senator Evan Bayh, a Democrat from Indiana.
In 2003, the plant’s owner shifted work to China, costing 230 jobs.
Now the plant houses Coco’s Canine Cabana, a doggy day care the current tenants started to supplement sagging income from their machine shop.
On most days dogs outnumber the 15 metalworkers, said Kathy DeFries, co-owner of Excel Machine Technologies Inc.
“When things got slow for manufacturing, we had this big empty shop floor,” said DeFries, nuzzling a floppy-eared puppy.
“It’s a great stress reliever.”
Expensive to Mine
The rare earths are chemically similar elements, with names such as yttrium and dysprosium.
China has the largest share of worldwide reserves, about 36 percent, and the U.S. is second, with 13 percent, the U.S. Geological Survey says.
While the elements aren’t rare, they’re less frequently found in profitable concentrations, expensive for Western producers to extract and often laced with radioactive elements.
China produced 120,000 tons, or 97 percent, of the world’s 124,000-ton supply last year, according to the GAO.
Half of that came from Baotou, said Kingsnorth.
The raw elements have many applications.
Neodymium is used by Chinese companies including magnet makers, who sell to U.S. suppliers of defense contractors.
Export Quotas
Export quotas and taxes for overseas buyers that the GAO says can reach 25 percent are pushing up prices of elements even in relatively large supply.
For example, the cost of a kilogram of samarium powder, needed for the navigation system of General Dynamics’ M1A2 Abrams tank, jumped to $34 in early September, from $4.50 in June, according to U.K. researcher Metal Pages Ltd.
The U.S. and the European Union consider Chinese restrictions on a range of raw goods part of a strategy to draw in higher-paying manufacturing jobs by making them cheaper to buy inside China.
The export taxes violate World Trade Organization rules because China pledged to limit them to 84 product categories when it joined the trade group in 2001, said Terence Stewart, managing partner of Washington law firm Stewart & Stewart.
In 2010, China had taxes on 329, he said.
The U.S. and the EU filed a WTO complaint over raw materials including bauxite and coke last year.
Some manufacturers in China are lobbying the ministry to back off the latest quotas because a dispute will disrupt the market, said Constantine Karayannopoulos, chief executive officer of Toronto-based Neo Material Technologies Inc., which has rare-earth production facilities in China.
Risk of Trade War
“It was very sudden and didn’t give the industry any time to adjust,” he said.
“This quota action could risk a trade war.”
For Western companies, China’s policies are creating the real “unobtanium,” the fictional mineral fought over in James Cameron’s 2009 film “Avatar.”
It’s taking as long as 10 weeks to get neodymium magnets, double the previous wait time, said Joe Schrantz, group supply chain manager at Moog Inc. in East Aurora, New York.
He said the company buys hundreds of thousands of magnets a year to make motors for cars, trucks and weapons including Raytheon’s AMRAAM -- or Advanced Medium-Range Air-to-Air Missile -- and Boeing’s Joint Direct Attack Munition, a tail fin kit for making precision-guided “smart” bombs out of ordinary weapons.
Rising Prices
Rising neodymium prices are forcing up the price of magnets, which typically cost between $2 and $30 apiece.
That’s having a “significant” effect on profit, and suppliers say costs will keep going up, Schrantz said.
The company is considering buying blocks of raw material and storing it.
“If everybody does that, then it’s going to get really crazy,” he said.
Neodymium, a silvery metal, is essential in a magnetic alloy developed separately by engineers at General Motors Co. in Detroit and Sumitomo Special Metals Co. in Japan in the 1980s.
The magnets are now in millions of stereo speakers, computer disk drives and motors.
In missiles, they replace a hydraulic system of pumps and fluids that was costlier and heavier.
Motors in weapons like the JDAM might be three times as big without advanced magnets, said Todd Brewster, senior design engineer at Kollmorgen, a unit of Washington-based Danaher Corp.
The JDAM has been used extensively in Iraq and Afghanistan.
Hybrid-Electric Motors
A Chinese supplier makes neodymium magnets for hybrid-electric motors the Navy is developing to cut fuel use of Arleigh Burke-class destroyers, according to the GAO.
The agency also says Lockheed Martin Corp.’s SPY-1 radar on Aegis destroyers contains samarium-cobalt magnets that will need to be replaced over 35 years.
China is virtually the only supplier of yttrium needed for laser gun sights in the General Dynamics Abrams tank, the U.S. Geological Survey says.
“It’s amazing how this issue seems to have caught the country off guard,” said U.S. Representative Mike Coffman, a Colorado Republican who was a U.S. Marine Corps infantry officer.
He noted that China’s capabilities have expanded significantly since 2001, when the U.S. Army canceled plans to buy Chinese-made berets under pressure from Congress.
“How ironic is that we were concerned about berets?”
Jon Kasle, a spokesman for Raytheon of Waltham, Massachusetts, said his company hasn’t experienced supply shortages.
Spokesmen for Bethesda, Maryland-based Lockheed Martin; General Dynamics, of Falls Church, Virginia; and Chicago-based Boeing declined to comment.
“There is a particular need to focus on rare-earth minerals,” said Alexis Allen, spokeswoman for the Aerospace Industries Association, an Arlington, Virginia-based lobby group for defense contractors.
“The Department of Defense should consider many alternatives to reliable access.”
Stockpile
One option is to stockpile the metals with allies.
Since 1994 the Pentagon has sold off excess raw materials for $7 billion.
Another is subsidies of U.S. manufacturing.
The U.S. House of Representatives approved yesterday a proposal by Representative Kathy Dahlkemper, a Pennsylvania Democrat, that would set up a research and development program at the Department of Energy to help U.S. rare-earth manufacturers such as Molycorp with measures including loan guarantees.
To become law the bill, which cleared the House on a 325-98 vote, must have a matching Senate version and be signed by the president.
Currently there is no such measure.
While Molycorp plans to mine almost 20,000 tons of rare earths annually by late 2012, it doesn’t yet have the capacity to refine the raw elements into metals.
‘No Substitute’
Complicating matters is that even the Pentagon has been unsure of its own needs.
Stephen Luckowski, chief of materials manufacturing and prototype technology at the U.S. Army’s Picatinny Arsenal in New Jersey, told participants at a February conference in Cleveland that it took him a month to learn that rare-earth metals are in the nose of the Excalibur missile, and he still wasn’t certain of the exact supply route.
Luckowski, a metallurgist, was sure the Army needed the rare earths.
“That may be a case where you have no substitute,” he said.
China’s dominance in the materials comes as it scours the planet for resources to feed its economy, which is expanding more than 10 percent this year while the U.S. struggles with an almost 10 percent unemployment rate.
The country has been snapping up oilfields, buying copper mines and investing in wind power.
China is also expanding its military, developing an aircraft carrier, nuclear-powered submarines and ballistic missiles, the Pentagon said in an August report.
Deng’s Quotation
In the lobby of Bai’s company, a unit of state-owned Baotou Iron & Steel Group Co., a now-famous 1992 quotation by Deng is emblazoned in pink marble.
It reads: “The Middle East has oil, and China has rare earths.”
A May interview with Bai is regularly interrupted by calls from stockbrokers, analysts and fund managers looking to learn more about the company.
“Because export quotas are limited, we basically can choose our clients; we are no longer compelled to sell to just about anybody who comes knocking,” said Bai, who handles investor relations for Inner Mongolia Baotou Steel Rare-Earth Hi-Tech Co.
The shares have more than doubled in the past year, reaching 72.72 yuan on Sept. 29, giving the company a market value of $8.8 billion.
The company is especially proud of the samarium-cobalt magnets used in the Shenzhou 7 space capsule that lifted Chinese astronauts into space in 2008.
They were developed at the nearby Baotou Research Institute of Rare Earths.
Environmental Costs
The export restrictions compensate for the heavy environmental toll, said Zhang Anwen, vice secretary of the Chinese Society of Rare Earths, a group of researchers in Beijing.
“It’s unfair for the U.S. to be pointing fingers at China now,” he said.
“To undo the damage done to the earth, we need to return the vegetation, increase water flow and treat the ground. It’s an extremely costly repair.”
Deng set China on its path with a 1986 initiative whose goals included acquisition of technology in “exotic materials” such as rare-earth metals, new energy compounds and high-capacity engineering plastics, according to a U.S. House of Representatives committee report.
That year Zhu Weiheng, an electrical engineer at the Chinese Academy of Sciences, wrote a report to Chinese officials suggesting they control exports of rare-earth minerals because of their high value in manufacturing.
Zhu had studied at the Massachusetts Institute of Technology in Cambridge, Massachusetts, and in 1965 designed a motor for China’s first satellite, the East is Red.
Later he spent part of Chinese leader Mao Zedong’s Cultural Revolution under arrest as a suspected spy.
‘Real Revolution’
By the early 1980s, Zhu was testing samples of neodymium iron boron, the alloy perfected by engineers at GM and Sumitomo.
Two Chinese research institutes also developed it, said Zhu, 91.
“It was a real revolution,” he said.
In 1990, Zhang Hong, the Chinese academy’s deputy director of technology, visited Magnequench, a GM unit in Indiana that used a spinning wheel to quench, or cool, the molten alloy into flakes to make magnets. Five years later, a group including then state-owned San Huan New Materials and Hightech Inc. agreed to buy Magnequench.
The Committee on Foreign Investment in the United States, a cross-agency board that reviews foreign takeover deals, allowed the purchase partly because the partners agreed to keep open facilities in the U.S.
Shipped to China
The company opened a new plant in Tianjin in 1998 and shut a former GM operation in Anderson, Indiana, four years later.
Magnequench also purchased and later closed the factory in Valparaiso, where Kathy DeFries now boards dogs for $5 an hour.
That plant’s tools were shipped to three San Huan operations in China, according to Shannon Song, a Beijing-based executive at Magnequench.
“What they were basically doing was replicating the production lines in China,” said Leitner, the former Pentagon official.
Indiana’s Bayh and Hillary Clinton, now U.S. secretary of state, both cited Magnequench as an example of the U.S. losing jobs and expertise to China.
In the 1990s a dozen U.S.-based suppliers of magnets employed 6,000 people.
Today there are four, employing 500, said Ed Richardson, vice president of Thomas & Skinner Inc. in Indianapolis, one of the survivors.
Business Decision
The plant closures were a business decision after the technology bust in 2000 hurt sales, Song said.
Most of the Valparaiso factory’s business came from computer makers; defense was a minor share, she said. In 2001, labor costs in Anderson averaged $7.32 per kilogram of neodymium powder on top of $10.07 in direct production overhead, she estimates.
In 2003 in Tianjin, labor costs were 16 cents and overhead $3.20.
“It was a question of letting the ship sink or doing something to cut the operating cost,” she said.
Toronto-based AMR Technologies Inc. bought Magnequench in 2005 and renamed the merged company Neo.
The company’s shares rose to C$4.92 yesterday from as little as C$1.05 in early 2009.
San Huan, now known as Beijing Zhong Ke San Huan High-Tech Co., went public in 2000.
Sales have risen more than fourfold, from 371 million yuan that year to 1.6 billion yuan in 2009.
The stock has almost tripled in the past year, reaching 17.14 yuan on Sept. 29.
God and Magnets
“God created the universe from nothing and organized it with the help of a magnet,” the company declares on its website, in English and Chinese.
Shares of Aluminum Corp. of China Ltd. rose 18 percent over the past two days in Shanghai trading after its parent announced a plan to invest at least 10 billion yuan ($1.5 billion) to build a rare earth production base in Jiangxi province with a local partner.
A group of U.S. investors led by Denver-based private equity firm Resource Capital Funds wants to challenge China’s dominance by restoring the fortunes of Molycorp, the largest supplier of rare earths for much of the last century.
Its mine, west of Las Vegas in California’s Mojave Desert, shut eight years ago, under pressure from Chinese competitors and regulatory scrutiny of wastewater spills.
Molycorp, based near Denver, says it needs $511 million to refurbish and expand.
It raised $379 million in its July share sale, and has applied for a $280 million loan guarantee under a U.S. Department of Energy program for “innovative technologies.”
The shares have almost doubled, closing at $26.73 yesterday from $14 in July.
Joshua Trees
Costs of environmental compliance will be steep, Molycorp warns in a filing that says it spent $3 million last year alone.
Beyond a 300-foot-deep open pit, John Benfield, manager of quality assurance, points to a valley sheltering Joshua trees where slurry left after processing ore will be pumped and harden like concrete.
The trees, protected under California law, will be given new homes after their precise positions are measured with compasses.
Their bark burns in the desert sun without the right orientation. Even so, only 20 percent of replanted trees survive, Benfield said.
The company will keep processing costs to $1.26 per pound, half the average in China, by recycling more water and using a single acid to separate elements, said Mark Smith, Molycorp’s CEO.
Molycorp is also negotiating with potential partners to alloy metals and turn them into neodymium magnets in the U.S., creating as many as 900 jobs.
“It was a very, very strategic move that the Chinese made,” he said.
“They created a very, very large number of jobs for the citizens of China. We ought to be looking at executing that exact same strategy here in this country.”
Workers handle neodymium ingots before they are crushed at Neo Material Technologies Inc.'s Magnequench Tianjin Co. factory in Tianjin, China.
Annealed neodymium iron boron magnets sit in a barrel prior to being crushed into powder at Neo Material Technologies Inc.'s Magnequench Tianjin Co. factory in Tianjin, China.
The research facility at Inner Mongolia Baotou Steel Rare-Earth Hi-Tech Co.
Motors in missiles like the JDAM might be three times as big without advanced magnets. The JDAM has been used extensively in Iraq and Afghanistan.
An open pit mine in Nevada owned by Molycorp, which plans to mine almost 20,000 tons of rare earths annually by late 2012 but doesn’t yet have the capacity to refine the raw elements into metals.
Samarium-cobalt magnets of different strengths, left, and a defense component with mounted magnets are arranged for a photo at the Electron Energy Corp. factory in Landisville, Pennsylvania.
A senior manager at a company that churns out metals routinely used in U.S. smart bombs pauses in mid-sentence when his phone rings: a Wall Street stockbroker looking for information.
He makes a note to have an assistant call back -- someone who is fluent in English, not just Chinese.
“It’s a seller’s market now,” says Bai Baosheng, 43, puffing a cigarette in his office in Baotou, China, where his company sells bags of powder containing a metallic element known as neodymium, vital in tiny magnets that direct the fins of bombs dropped by U.S. Air Force jets in Afghanistan.
A generation after Chinese leader Deng Xiaoping made mastering neodymium and 16 other elements known as rare earths a priority, China dominates the market, with far-reaching effects ranging from global trade friction to U.S. job losses and threats to national security.
The U.S. handed its main economic rival power to dictate access to these building blocks of modern weapons by ceding control of prices and supply, according to dozens of interviews with industry executives, congressional leaders and policy experts.
China in July reduced rare-earth export quotas for the rest of the year by 72 percent, sending prices up more than sixfold for some elements.
Military officials are only now conducting an inventory of where and how U.S. suppliers use the obscure but essential substances -- including those that silence the whoosh of Boeing Co. helicopter blades, direct Raytheon Co. missiles and target guns in General Dynamics Corp. tanks.
Warning Signs
“The Pentagon has been incredibly stupid and negligent,” said Peter Leitner, who was a senior strategic trade adviser at the Defense Department from 1986 to 2007.
“There are plenty of early warning signs that China will use its leverage over these materials as a weapon.”
China may already be flexing its muscles amid a diplomatic spat with its East Asian neighbor Japan.
China last week imposed a ban on exports to Japan of the metals used in liquid crystal displays and laptop computers, Japanese Economy Minister Banri Kaieda said Sept. 28.
That followed Japan’s detention of a Chinese fishing boat captain whose ship collided with two Japanese Coast Guard vessels.
Japan later released the man.
New Factor
“What it does, clearly, is bring a new factor into the consideration of supply of critical materials,” said Dudley Kingsnorth, director of Industrial Minerals Co. of Australia, a forecaster in Perth.
The U.S. Congress’s investigative arm, the Government Accountability Office, in April warned of “vulnerabilities” for the military because of the lack of domestic rare-earth supplies.
The House of Representatives Armed Services Committee will hold a hearing in October, the same month a Pentagon report on how to secure future supplies of the metals is due.
“The department has long recognized that rare-earth elements are important raw material inputs for many defense systems and that many companies in our base have expressed concern regarding the future availability of the refined products of these elements,” Brett Lambert, director of the Pentagon’s Office of Industrial Policy, said.
While two rare-earth projects are scheduled to ramp up production by the end of 2012 -- one owned by Molycorp Inc. in California and another by Lynas Corp. in Australia -- the GAO says it may take 15 years to rebuild a U.S. manufacturing supply chain.
China makes virtually all the metals refined from rare earths, the agency says.
The elements are also needed for hybrid-electric cars and wind turbines, one reason supply may fall short of demand in 2014 even with the new mines, according to Kingsnorth of Imcoa.
Doggy Day Care
Just how far U.S. manufacturing has waned is apparent at a factory in Valparaiso, Indiana, where dogs skitter across a bare concrete shop floor, their nails clicking.
This brick plant on Elm Street once made 80 percent of the rare-earth magnets in laser-guided U.S. smart bombs, according to U.S. Senator Evan Bayh, a Democrat from Indiana.
In 2003, the plant’s owner shifted work to China, costing 230 jobs.
Now the plant houses Coco’s Canine Cabana, a doggy day care the current tenants started to supplement sagging income from their machine shop.
On most days dogs outnumber the 15 metalworkers, said Kathy DeFries, co-owner of Excel Machine Technologies Inc.
“When things got slow for manufacturing, we had this big empty shop floor,” said DeFries, nuzzling a floppy-eared puppy.
“It’s a great stress reliever.”
Expensive to Mine
The rare earths are chemically similar elements, with names such as yttrium and dysprosium.
China has the largest share of worldwide reserves, about 36 percent, and the U.S. is second, with 13 percent, the U.S. Geological Survey says.
While the elements aren’t rare, they’re less frequently found in profitable concentrations, expensive for Western producers to extract and often laced with radioactive elements.
China produced 120,000 tons, or 97 percent, of the world’s 124,000-ton supply last year, according to the GAO.
Half of that came from Baotou, said Kingsnorth.
The raw elements have many applications.
Neodymium is used by Chinese companies including magnet makers, who sell to U.S. suppliers of defense contractors.
Export Quotas
Export quotas and taxes for overseas buyers that the GAO says can reach 25 percent are pushing up prices of elements even in relatively large supply.
For example, the cost of a kilogram of samarium powder, needed for the navigation system of General Dynamics’ M1A2 Abrams tank, jumped to $34 in early September, from $4.50 in June, according to U.K. researcher Metal Pages Ltd.
The U.S. and the European Union consider Chinese restrictions on a range of raw goods part of a strategy to draw in higher-paying manufacturing jobs by making them cheaper to buy inside China.
The export taxes violate World Trade Organization rules because China pledged to limit them to 84 product categories when it joined the trade group in 2001, said Terence Stewart, managing partner of Washington law firm Stewart & Stewart.
In 2010, China had taxes on 329, he said.
The U.S. and the EU filed a WTO complaint over raw materials including bauxite and coke last year.
Some manufacturers in China are lobbying the ministry to back off the latest quotas because a dispute will disrupt the market, said Constantine Karayannopoulos, chief executive officer of Toronto-based Neo Material Technologies Inc., which has rare-earth production facilities in China.
Risk of Trade War
“It was very sudden and didn’t give the industry any time to adjust,” he said.
“This quota action could risk a trade war.”
For Western companies, China’s policies are creating the real “unobtanium,” the fictional mineral fought over in James Cameron’s 2009 film “Avatar.”
It’s taking as long as 10 weeks to get neodymium magnets, double the previous wait time, said Joe Schrantz, group supply chain manager at Moog Inc. in East Aurora, New York.
He said the company buys hundreds of thousands of magnets a year to make motors for cars, trucks and weapons including Raytheon’s AMRAAM -- or Advanced Medium-Range Air-to-Air Missile -- and Boeing’s Joint Direct Attack Munition, a tail fin kit for making precision-guided “smart” bombs out of ordinary weapons.
Rising Prices
Rising neodymium prices are forcing up the price of magnets, which typically cost between $2 and $30 apiece.
That’s having a “significant” effect on profit, and suppliers say costs will keep going up, Schrantz said.
The company is considering buying blocks of raw material and storing it.
“If everybody does that, then it’s going to get really crazy,” he said.
Neodymium, a silvery metal, is essential in a magnetic alloy developed separately by engineers at General Motors Co. in Detroit and Sumitomo Special Metals Co. in Japan in the 1980s.
The magnets are now in millions of stereo speakers, computer disk drives and motors.
In missiles, they replace a hydraulic system of pumps and fluids that was costlier and heavier.
Motors in weapons like the JDAM might be three times as big without advanced magnets, said Todd Brewster, senior design engineer at Kollmorgen, a unit of Washington-based Danaher Corp.
The JDAM has been used extensively in Iraq and Afghanistan.
Hybrid-Electric Motors
A Chinese supplier makes neodymium magnets for hybrid-electric motors the Navy is developing to cut fuel use of Arleigh Burke-class destroyers, according to the GAO.
The agency also says Lockheed Martin Corp.’s SPY-1 radar on Aegis destroyers contains samarium-cobalt magnets that will need to be replaced over 35 years.
China is virtually the only supplier of yttrium needed for laser gun sights in the General Dynamics Abrams tank, the U.S. Geological Survey says.
“It’s amazing how this issue seems to have caught the country off guard,” said U.S. Representative Mike Coffman, a Colorado Republican who was a U.S. Marine Corps infantry officer.
He noted that China’s capabilities have expanded significantly since 2001, when the U.S. Army canceled plans to buy Chinese-made berets under pressure from Congress.
“How ironic is that we were concerned about berets?”
Jon Kasle, a spokesman for Raytheon of Waltham, Massachusetts, said his company hasn’t experienced supply shortages.
Spokesmen for Bethesda, Maryland-based Lockheed Martin; General Dynamics, of Falls Church, Virginia; and Chicago-based Boeing declined to comment.
“There is a particular need to focus on rare-earth minerals,” said Alexis Allen, spokeswoman for the Aerospace Industries Association, an Arlington, Virginia-based lobby group for defense contractors.
“The Department of Defense should consider many alternatives to reliable access.”
Stockpile
One option is to stockpile the metals with allies.
Since 1994 the Pentagon has sold off excess raw materials for $7 billion.
Another is subsidies of U.S. manufacturing.
The U.S. House of Representatives approved yesterday a proposal by Representative Kathy Dahlkemper, a Pennsylvania Democrat, that would set up a research and development program at the Department of Energy to help U.S. rare-earth manufacturers such as Molycorp with measures including loan guarantees.
To become law the bill, which cleared the House on a 325-98 vote, must have a matching Senate version and be signed by the president.
Currently there is no such measure.
While Molycorp plans to mine almost 20,000 tons of rare earths annually by late 2012, it doesn’t yet have the capacity to refine the raw elements into metals.
‘No Substitute’
Complicating matters is that even the Pentagon has been unsure of its own needs.
Stephen Luckowski, chief of materials manufacturing and prototype technology at the U.S. Army’s Picatinny Arsenal in New Jersey, told participants at a February conference in Cleveland that it took him a month to learn that rare-earth metals are in the nose of the Excalibur missile, and he still wasn’t certain of the exact supply route.
Luckowski, a metallurgist, was sure the Army needed the rare earths.
“That may be a case where you have no substitute,” he said.
China’s dominance in the materials comes as it scours the planet for resources to feed its economy, which is expanding more than 10 percent this year while the U.S. struggles with an almost 10 percent unemployment rate.
The country has been snapping up oilfields, buying copper mines and investing in wind power.
China is also expanding its military, developing an aircraft carrier, nuclear-powered submarines and ballistic missiles, the Pentagon said in an August report.
Deng’s Quotation
In the lobby of Bai’s company, a unit of state-owned Baotou Iron & Steel Group Co., a now-famous 1992 quotation by Deng is emblazoned in pink marble.
It reads: “The Middle East has oil, and China has rare earths.”
A May interview with Bai is regularly interrupted by calls from stockbrokers, analysts and fund managers looking to learn more about the company.
“Because export quotas are limited, we basically can choose our clients; we are no longer compelled to sell to just about anybody who comes knocking,” said Bai, who handles investor relations for Inner Mongolia Baotou Steel Rare-Earth Hi-Tech Co.
The shares have more than doubled in the past year, reaching 72.72 yuan on Sept. 29, giving the company a market value of $8.8 billion.
The company is especially proud of the samarium-cobalt magnets used in the Shenzhou 7 space capsule that lifted Chinese astronauts into space in 2008.
They were developed at the nearby Baotou Research Institute of Rare Earths.
Environmental Costs
The export restrictions compensate for the heavy environmental toll, said Zhang Anwen, vice secretary of the Chinese Society of Rare Earths, a group of researchers in Beijing.
“It’s unfair for the U.S. to be pointing fingers at China now,” he said.
“To undo the damage done to the earth, we need to return the vegetation, increase water flow and treat the ground. It’s an extremely costly repair.”
Deng set China on its path with a 1986 initiative whose goals included acquisition of technology in “exotic materials” such as rare-earth metals, new energy compounds and high-capacity engineering plastics, according to a U.S. House of Representatives committee report.
That year Zhu Weiheng, an electrical engineer at the Chinese Academy of Sciences, wrote a report to Chinese officials suggesting they control exports of rare-earth minerals because of their high value in manufacturing.
Zhu had studied at the Massachusetts Institute of Technology in Cambridge, Massachusetts, and in 1965 designed a motor for China’s first satellite, the East is Red.
Later he spent part of Chinese leader Mao Zedong’s Cultural Revolution under arrest as a suspected spy.
‘Real Revolution’
By the early 1980s, Zhu was testing samples of neodymium iron boron, the alloy perfected by engineers at GM and Sumitomo.
Two Chinese research institutes also developed it, said Zhu, 91.
“It was a real revolution,” he said.
In 1990, Zhang Hong, the Chinese academy’s deputy director of technology, visited Magnequench, a GM unit in Indiana that used a spinning wheel to quench, or cool, the molten alloy into flakes to make magnets. Five years later, a group including then state-owned San Huan New Materials and Hightech Inc. agreed to buy Magnequench.
The Committee on Foreign Investment in the United States, a cross-agency board that reviews foreign takeover deals, allowed the purchase partly because the partners agreed to keep open facilities in the U.S.
Shipped to China
The company opened a new plant in Tianjin in 1998 and shut a former GM operation in Anderson, Indiana, four years later.
Magnequench also purchased and later closed the factory in Valparaiso, where Kathy DeFries now boards dogs for $5 an hour.
That plant’s tools were shipped to three San Huan operations in China, according to Shannon Song, a Beijing-based executive at Magnequench.
“What they were basically doing was replicating the production lines in China,” said Leitner, the former Pentagon official.
Indiana’s Bayh and Hillary Clinton, now U.S. secretary of state, both cited Magnequench as an example of the U.S. losing jobs and expertise to China.
In the 1990s a dozen U.S.-based suppliers of magnets employed 6,000 people.
Today there are four, employing 500, said Ed Richardson, vice president of Thomas & Skinner Inc. in Indianapolis, one of the survivors.
Business Decision
The plant closures were a business decision after the technology bust in 2000 hurt sales, Song said.
Most of the Valparaiso factory’s business came from computer makers; defense was a minor share, she said. In 2001, labor costs in Anderson averaged $7.32 per kilogram of neodymium powder on top of $10.07 in direct production overhead, she estimates.
In 2003 in Tianjin, labor costs were 16 cents and overhead $3.20.
“It was a question of letting the ship sink or doing something to cut the operating cost,” she said.
Toronto-based AMR Technologies Inc. bought Magnequench in 2005 and renamed the merged company Neo.
The company’s shares rose to C$4.92 yesterday from as little as C$1.05 in early 2009.
San Huan, now known as Beijing Zhong Ke San Huan High-Tech Co., went public in 2000.
Sales have risen more than fourfold, from 371 million yuan that year to 1.6 billion yuan in 2009.
The stock has almost tripled in the past year, reaching 17.14 yuan on Sept. 29.
God and Magnets
“God created the universe from nothing and organized it with the help of a magnet,” the company declares on its website, in English and Chinese.
Shares of Aluminum Corp. of China Ltd. rose 18 percent over the past two days in Shanghai trading after its parent announced a plan to invest at least 10 billion yuan ($1.5 billion) to build a rare earth production base in Jiangxi province with a local partner.
A group of U.S. investors led by Denver-based private equity firm Resource Capital Funds wants to challenge China’s dominance by restoring the fortunes of Molycorp, the largest supplier of rare earths for much of the last century.
Its mine, west of Las Vegas in California’s Mojave Desert, shut eight years ago, under pressure from Chinese competitors and regulatory scrutiny of wastewater spills.
Molycorp, based near Denver, says it needs $511 million to refurbish and expand.
It raised $379 million in its July share sale, and has applied for a $280 million loan guarantee under a U.S. Department of Energy program for “innovative technologies.”
The shares have almost doubled, closing at $26.73 yesterday from $14 in July.
Joshua Trees
Costs of environmental compliance will be steep, Molycorp warns in a filing that says it spent $3 million last year alone.
Beyond a 300-foot-deep open pit, John Benfield, manager of quality assurance, points to a valley sheltering Joshua trees where slurry left after processing ore will be pumped and harden like concrete.
The trees, protected under California law, will be given new homes after their precise positions are measured with compasses.
Their bark burns in the desert sun without the right orientation. Even so, only 20 percent of replanted trees survive, Benfield said.
The company will keep processing costs to $1.26 per pound, half the average in China, by recycling more water and using a single acid to separate elements, said Mark Smith, Molycorp’s CEO.
Molycorp is also negotiating with potential partners to alloy metals and turn them into neodymium magnets in the U.S., creating as many as 900 jobs.
“It was a very, very strategic move that the Chinese made,” he said.
“They created a very, very large number of jobs for the citizens of China. We ought to be looking at executing that exact same strategy here in this country.”
Japan May Spend on Rare Earths After China’s Cut
By Go Onomitsu and Jae Hur
Japan may budget measures to secure supplies of rare earths after China curtailed exports of the minerals, said Japan’s Trade Minister Akihiro Ohata.
The Ministry of Economy, Trade and Industry “hopes” to ask for a supplementary budget to secure stable rare earth supplies, Ohata told Jiji Press today.
The comments were confirmed by a ministry spokesman, who didn’t want to be identified.
Ties between China and Japan soured this month over the detention of a Chinese boat captain whose ship collided with two Japanese Coast Guard vessels in disputed waters.
Japanese Economy Minister Banri Kaieda Tuesday said China’s export ban on rare earths, metals used to make parts of hybrid cars, missiles and televisions, will hurt its economy.
China ended a ban on rare-earth exports to Japan when it began accepting customs applications, the Asahi newspaper reported yesteday, citing unidentified Japanese companies.
Exports resumed to at least one Japanese company’s subsidiary in Malaysia, the paper reported today.
China hasn’t allowed regular shipments to resume, the International Herald Tribune reported today, citing three unidentified rare-earth industry officials.
Tadashi Kurakata, general manager of Advanced Material Japan, a Tokyo-based trading house that specializes in rare earths, said today that he couldn’t confirm whether China had resumed exports.
Japan’s trade ministry is investigating China’s effective ban on rare earths.
The government will check with about 30 companies including users and trading houses to confirm whether China has banned the shipments, Tsutomu Murasaki, director of the non-ferrous metals division, said Sept. 28.
The ministry plans to release the results of its investigation next week, the spokesman said.
Japan Oil, Gas and Metals National Corp., which manages the nation’s strategic metals including rare earths, hasn’t disclosed stockpile details of each mineral since early this year, according to spokesman Kazuhiro Uematsu.
Japan may budget measures to secure supplies of rare earths after China curtailed exports of the minerals, said Japan’s Trade Minister Akihiro Ohata.
The Ministry of Economy, Trade and Industry “hopes” to ask for a supplementary budget to secure stable rare earth supplies, Ohata told Jiji Press today.
The comments were confirmed by a ministry spokesman, who didn’t want to be identified.
Ties between China and Japan soured this month over the detention of a Chinese boat captain whose ship collided with two Japanese Coast Guard vessels in disputed waters.
Japanese Economy Minister Banri Kaieda Tuesday said China’s export ban on rare earths, metals used to make parts of hybrid cars, missiles and televisions, will hurt its economy.
China ended a ban on rare-earth exports to Japan when it began accepting customs applications, the Asahi newspaper reported yesteday, citing unidentified Japanese companies.
Exports resumed to at least one Japanese company’s subsidiary in Malaysia, the paper reported today.
China hasn’t allowed regular shipments to resume, the International Herald Tribune reported today, citing three unidentified rare-earth industry officials.
Tadashi Kurakata, general manager of Advanced Material Japan, a Tokyo-based trading house that specializes in rare earths, said today that he couldn’t confirm whether China had resumed exports.
Japan’s trade ministry is investigating China’s effective ban on rare earths.
The government will check with about 30 companies including users and trading houses to confirm whether China has banned the shipments, Tsutomu Murasaki, director of the non-ferrous metals division, said Sept. 28.
The ministry plans to release the results of its investigation next week, the spokesman said.
Japan Oil, Gas and Metals National Corp., which manages the nation’s strategic metals including rare earths, hasn’t disclosed stockpile details of each mineral since early this year, according to spokesman Kazuhiro Uematsu.
Google Fighting the Good Fight in China
By Alice Truong
Google’s head of government affairs in Asia said at a recent speech in Hong Kong that the company continues to push for more Internet freedom in China, where many of Google’s products are censored.
More than half a year after Google announced that it would stop censoring its content in China, it’s still hard to say whether the move did more to help or hurt free access of information within the country.
Though users in China may still access Google’s overseas websites, access is inconsistent and unstable, with the Chinese site being occasionally blocked by the mechanisms of the so-called Great Firewall.
Still, Ross LaJeunesse, Google’s head of government affairs in Asia, says the company continues to push for more freedom in China as part of its government relations strategy.
“I believe strongly that Google is fighting the good fight in China, in Asia and around the globe,” Mr. LaJeunesse said at a recent lecture at the University of Hong Kong.
“And we’ll keep fighting because if we don’t, there’s a very real danger that the Internet will look a lot different in the future than it does today.”
Mr. LaJeunesse said the Chinese are fighting back against censorship.
Chinese opposition to implementing a monitoring software called Green Dam Youth Escort, for instance, forced the government to stop funding the initiative in July.
Even though 30% of the world’s population is online, many governments have been wary to welcome the Internet unfettered.
In the 100 countries Google operates in, about 25 have blocked various Google products, from YouTube to Blogger, Mr. LaJeunesse said.
In China, Iran and North Korea, YouTube is blocked entirely.
“The Internet’s openness, the very thing that makes it so powerful, is exactly what makes it so dangerous in the eyes of some people, and especially some governments,” he said.
Mr. LaJeunesse said censorship is a violation of Article 19 of the Universal Declaration of Human Rights, which grants everyone the right to freedom of opinion and expression without interference.
In China, its 420 million Internet users have been subject to the country’s Great Firewall.
When google.cn debuted in 2006 with some results censored, Mr. LaJeunesse said the company uneasily complied with the Chinese government.
The justification was twofold: Google was able to increase the population’s access to information and open the door for an expansion of its user base, and thus advertising dollars.
But in December, Google said it discovered sophisticated cyber attacks on its infrastructure from China, eventually learning they targeted human rights activists’ Gmail accounts.
This created a standoff between Google and the government, leading to the government eventually blocking access to the site and Google redirecting search results to google.com.hk, which is not subject to China’s censorship policies.
The landing page for Google in China now links to its Hong Kong site to keep in line with its Internet content provider license.
What China has joined together
By MICHAEL RICHARDSON
SINGAPORE — China takes pride in the way science and technology have been used to modernize its armed forces.
One of the roles of the increasingly powerful Chinese military is to enforce claims to land territory, sea space, fisheries, and ocean bed energy and mineral resources.
These claims are disputed with neighboring states in a zone stretching from the mountainous border with India to three seas off the coast of the Chinese mainland — the South China Sea, the East China Sea and the Yellow Sea.
A wave of Chinese nationalism has accompanied Beijing's attempts to recover areas it says were illegally taken away when the country was weak, and to create a strong maritime security cordon.
But in the fervor, China appears to have forgotten one of the fundamental laws of physics — for every action, there is an equal and opposite reaction.
What applies in science is also a feature of statecraft.
As a rising China asserts what it regards as its rights and interests, countries affected by this expansive policy push back, often by joining forces to resist.
The latest reaction came last Friday in New York at only the second summit meeting between leaders of the Association of Southeast Asian Nations and the United States since the first was held in Singapore last November.
U.S. President Barack Obama and ASEAN representatives issued a joint statement saying their comprehensive partnership would be elevated to a "strategic level."
Vietnam's President Nguyen Minh Triet, who cohosted the lunch meeting with Obama, said relations between ASEAN and the United States play "a very important role in the security, peace and development of the region" and should be deepened.
The joint statement, issued by the White House, did not mention China or the South China Sea, one of the world's key shipping lanes, by name.
However, it "reaffirmed the importance of regional peace and stability, maritime security, unimpeded commerce, and freedom of navigation, in accordance with relevant universally agreed principles of international law, including the United Nations Convention on the Law of the Sea and other international maritime law, and the peaceful settlement of disputes."
Beijing says it has "indisputable" sovereignty over islands and surrounding waters and seabed covering as much as 90 percent of the South China Sea.
Other claimants to all or part of this vast zone in the maritime heart of Southeast Asia include Vietnam, the Philippines, Malaysia and Brunei.
All the four are ASEAN members.
While there have been no serious armed clashes in the South China Sea for years, China and some other claimants garrison some of the disputed Spratly Islands in the central and southern section of the sea have been building up their military presence in the region.
This is despite a Declaration on the Conduct of Parties in the South China Sea agreed by ASEAN member states and China in 2002 in which claimants agreed to "exercise self-restraint in the conduct of activities that would complicate or escalate disputes and affect peace and stability."
The declaration is voluntary, although ASEAN has been urging China to negotiate a legally binding accord.
Although Vietnam, Malaysia and the Philippines have been reinforcing their presence in the Spratlys, China is by far the strongest of the claimants in terms of economic and military clout.
Hence, its words and actions are closely scrutinized.
Earlier this year, senior U.S. officials said they were told by Chinese counterparts that Beijing now regards its South China Sea claims as one of its "core national interests" on a par with Tibet and Taiwan.
The implication was clear: that China reserved the right to use force to recover lost territory and forge what it regards as national unity in a hotly contested zone.
Even before the ASEAN-U.S. summit, Beijing tried to put pressure on the participants, continuing its long-standing attempt to divide and rule.
A Chinese foreign ministry spokesperson said that the South China Sea disputes were a matter only for China and the countries directly involved.
Countries without claims should stay out.
In an obvious reference to the U.S., she said that foreign intervention "will only complicate rather than help solve the issue."
Yet across Asia, China's attempts to throw its weight around are proving to be counterproductive, prompting key Asian countries to respond by aligning their interests and engaging the U.S. as a counterbalance.
China seems to be intent on trying to intimidate three of the four Asian allies of the U.S. — Japan, South Korea and the Philippines — while simultaneously confronting the dominant South Asian power, India, and alienating many of the 10 ASEAN countries including Indonesia, Vietnam, Malaysia and Singapore.
All of these nations have developed extensive commercial ties with China, which recently overtook Japan as the world's second-largest economy after the U.S.
They would much prefer not to put these trade, investment and tourism links at risk.
But the scope of China's land and sea claims and Beijing's evident determination to enforce them is now causing widespread concern in Asia.
Japan and South Korea are strengthening their previously languishing alliances with the U.S. to balance what they see as an increasingly assertive China.
The Philippines is looking both to the U.S. and ASEAN for support, as is Vietnam which is leading ASEAN this year.
Last month, Vietnam held its first defense talks with its former Indochina war enemy, the U.S.
India's Defense Minister A. K. Antony visited Washington this week for talks with top U.S. officials on ways to expand India-U.S. security cooperation.
"We want to develop friendly relations with China," Antony said earlier this month.
"However, we cannot lose sight of the fact that China has been improving its military and physical infrastructure (in Tibet and other areas close to India). In fact, there has been an increasing assertiveness on the part of China."
Some Chinese military analysts have accused Washington of orchestrating an increasingly tight encirclement of China in a bid to contain its growing power.
If hedging against a potentially belligerent China by deterring use of force and raising its costs is what these analysts have in mind, then China has largely itself to blame.
SINGAPORE — China takes pride in the way science and technology have been used to modernize its armed forces.
One of the roles of the increasingly powerful Chinese military is to enforce claims to land territory, sea space, fisheries, and ocean bed energy and mineral resources.
These claims are disputed with neighboring states in a zone stretching from the mountainous border with India to three seas off the coast of the Chinese mainland — the South China Sea, the East China Sea and the Yellow Sea.
A wave of Chinese nationalism has accompanied Beijing's attempts to recover areas it says were illegally taken away when the country was weak, and to create a strong maritime security cordon.
But in the fervor, China appears to have forgotten one of the fundamental laws of physics — for every action, there is an equal and opposite reaction.
What applies in science is also a feature of statecraft.
As a rising China asserts what it regards as its rights and interests, countries affected by this expansive policy push back, often by joining forces to resist.
The latest reaction came last Friday in New York at only the second summit meeting between leaders of the Association of Southeast Asian Nations and the United States since the first was held in Singapore last November.
U.S. President Barack Obama and ASEAN representatives issued a joint statement saying their comprehensive partnership would be elevated to a "strategic level."
Vietnam's President Nguyen Minh Triet, who cohosted the lunch meeting with Obama, said relations between ASEAN and the United States play "a very important role in the security, peace and development of the region" and should be deepened.
The joint statement, issued by the White House, did not mention China or the South China Sea, one of the world's key shipping lanes, by name.
However, it "reaffirmed the importance of regional peace and stability, maritime security, unimpeded commerce, and freedom of navigation, in accordance with relevant universally agreed principles of international law, including the United Nations Convention on the Law of the Sea and other international maritime law, and the peaceful settlement of disputes."
Beijing says it has "indisputable" sovereignty over islands and surrounding waters and seabed covering as much as 90 percent of the South China Sea.
Other claimants to all or part of this vast zone in the maritime heart of Southeast Asia include Vietnam, the Philippines, Malaysia and Brunei.
All the four are ASEAN members.
While there have been no serious armed clashes in the South China Sea for years, China and some other claimants garrison some of the disputed Spratly Islands in the central and southern section of the sea have been building up their military presence in the region.
This is despite a Declaration on the Conduct of Parties in the South China Sea agreed by ASEAN member states and China in 2002 in which claimants agreed to "exercise self-restraint in the conduct of activities that would complicate or escalate disputes and affect peace and stability."
The declaration is voluntary, although ASEAN has been urging China to negotiate a legally binding accord.
Although Vietnam, Malaysia and the Philippines have been reinforcing their presence in the Spratlys, China is by far the strongest of the claimants in terms of economic and military clout.
Hence, its words and actions are closely scrutinized.
Earlier this year, senior U.S. officials said they were told by Chinese counterparts that Beijing now regards its South China Sea claims as one of its "core national interests" on a par with Tibet and Taiwan.
The implication was clear: that China reserved the right to use force to recover lost territory and forge what it regards as national unity in a hotly contested zone.
Even before the ASEAN-U.S. summit, Beijing tried to put pressure on the participants, continuing its long-standing attempt to divide and rule.
A Chinese foreign ministry spokesperson said that the South China Sea disputes were a matter only for China and the countries directly involved.
Countries without claims should stay out.
In an obvious reference to the U.S., she said that foreign intervention "will only complicate rather than help solve the issue."
Yet across Asia, China's attempts to throw its weight around are proving to be counterproductive, prompting key Asian countries to respond by aligning their interests and engaging the U.S. as a counterbalance.
China seems to be intent on trying to intimidate three of the four Asian allies of the U.S. — Japan, South Korea and the Philippines — while simultaneously confronting the dominant South Asian power, India, and alienating many of the 10 ASEAN countries including Indonesia, Vietnam, Malaysia and Singapore.
All of these nations have developed extensive commercial ties with China, which recently overtook Japan as the world's second-largest economy after the U.S.
They would much prefer not to put these trade, investment and tourism links at risk.
But the scope of China's land and sea claims and Beijing's evident determination to enforce them is now causing widespread concern in Asia.
Japan and South Korea are strengthening their previously languishing alliances with the U.S. to balance what they see as an increasingly assertive China.
The Philippines is looking both to the U.S. and ASEAN for support, as is Vietnam which is leading ASEAN this year.
Last month, Vietnam held its first defense talks with its former Indochina war enemy, the U.S.
India's Defense Minister A. K. Antony visited Washington this week for talks with top U.S. officials on ways to expand India-U.S. security cooperation.
"We want to develop friendly relations with China," Antony said earlier this month.
"However, we cannot lose sight of the fact that China has been improving its military and physical infrastructure (in Tibet and other areas close to India). In fact, there has been an increasing assertiveness on the part of China."
Some Chinese military analysts have accused Washington of orchestrating an increasingly tight encirclement of China in a bid to contain its growing power.
If hedging against a potentially belligerent China by deterring use of force and raising its costs is what these analysts have in mind, then China has largely itself to blame.
As China stamps its foot ...
Political implications of Beijing's diplomatic victory against Japan reverberate through region and beyond
By Maria Siow
China may be justifiably pleased with its diplomatic victory in securing the release of a Chinese fishing boat captain during its recent stand-off with Japan.
However, the reverberations of the ongoing incident are increasingly being felt not just within China and Japan but also in the region and beyond.
The confluence of China's growing economic and political clout, coupled with recent events and developments in the region, may well turn the latest Sino-Japanese skirmish into a milestone with long-term implications.
Japan has released the captain detained after the Sept 7 incident in the East China Sea near the Senkaku island chain, but that was not enough to placate the Chinese, who relentlessly and at times vociferously called for his release and the return of the trawler.
Beijing has continued to demand compensation and an apology.
Tokyo has asked China to pay for damages to its patrol boats hit by the Chinese vessel in the disputed waters.
Within China, the mood is one of jubilance tinged with anxiety.
On one end of the spectrum are those who hail Japan's release of the Chinese captain as "a victory in China's recent diplomatic history".
One Chinese newspaper editorial stated: "Japan's surrender and humiliating retreat has boosted China's maritime confidence not only in the East Sea but also in the South China Sea."
The victorious camp claims that China's maritime triumph will place the country in an advantageous position in its future attempts in securing maritime resources and expanding the "physical boundaries" for its maritime vessels.
Given Japan's greater economic dependence and reliance on China, Beijing now has more tools at its disposal when dealing with its traditional Asian rival.
The United States' non-interference in the row was also seen as an indication that, firstly, US power has declined and, secondly, Washington does not want to complicate matters, given its reliance on China in resolving issues ranging from nuclear non-proliferation to the revaluation of the Chinese currency.
This group also argues that Japan's deference to Chinese demand in releasing the Chinese captain stemmed not only from China's "enhanced comprehensive strength", but also from Japan's "mistaken and puerile assessment" of how China would react.
On the other end of the spectrum are anxious voices expressing concerns about how far China should up the ante and whether Beijing's assertiveness will revive the issue of the "China threat" within the region.
It will be difficult for China to retract its calls on Japan for an apology and compensation, which would in turn accelerate domestic anger within Japan.
This will in turn make the process of fence mending "longer and more circuitous".
Together with other recent developments, the Sino-Japanese standoff has and will increasing drive regional countries closer to the US.
Following the sinking of the South Korean naval vessel, Seoul and Washington had -- despite Beijing's denouncement -- held joint naval exercises to send the North a message of deterrence.
Japan has also been pushed back under the US security umbrella and may even strengthen its military alliance with the US.
The US has also promised to help South-east Asian nations resolve peacefully its territorial disputes with China and recently took steps to boost its military relationship with Vietnam.
Washington is certainly not resisting the perfect -- if not timely -- opportunity in further engaging Asia and reclaiming its dominance in the region.
But even so, Washington is awash with policy wonks wondering if the US should, in view of current developments, review its six decades of hub-and-spoke system in the region.
The system has US as the hub, which is positioned to wield its power through its bilateral relationships with Asian countries as the spokes.
American Enterprise Institute scholar Michael Auslin wondered in Washington on Tuesday whether America's bilateral institutions with Asian countries will be able to withstand the region's mounting issues, from the ongoing North Korean threat, climate change, to China's growing political and military assertiveness.
He noted that talks of China being a responsible stakeholder have now become increasingly scarce, adding that "China is now working to change the system" and "asserting its power to change the rules of the games".
It is perhaps too early to say if China succeeds to change the system.
But as Beijing presses Japan for further concessions and gestures, it is very possible that any further diplomatic victories may erode its image of a peaceful-rise painstakingly cultivated in recent years.
By Maria Siow
China may be justifiably pleased with its diplomatic victory in securing the release of a Chinese fishing boat captain during its recent stand-off with Japan.
However, the reverberations of the ongoing incident are increasingly being felt not just within China and Japan but also in the region and beyond.
The confluence of China's growing economic and political clout, coupled with recent events and developments in the region, may well turn the latest Sino-Japanese skirmish into a milestone with long-term implications.
Japan has released the captain detained after the Sept 7 incident in the East China Sea near the Senkaku island chain, but that was not enough to placate the Chinese, who relentlessly and at times vociferously called for his release and the return of the trawler.
Beijing has continued to demand compensation and an apology.
Tokyo has asked China to pay for damages to its patrol boats hit by the Chinese vessel in the disputed waters.
Within China, the mood is one of jubilance tinged with anxiety.
On one end of the spectrum are those who hail Japan's release of the Chinese captain as "a victory in China's recent diplomatic history".
One Chinese newspaper editorial stated: "Japan's surrender and humiliating retreat has boosted China's maritime confidence not only in the East Sea but also in the South China Sea."
The victorious camp claims that China's maritime triumph will place the country in an advantageous position in its future attempts in securing maritime resources and expanding the "physical boundaries" for its maritime vessels.
Given Japan's greater economic dependence and reliance on China, Beijing now has more tools at its disposal when dealing with its traditional Asian rival.
The United States' non-interference in the row was also seen as an indication that, firstly, US power has declined and, secondly, Washington does not want to complicate matters, given its reliance on China in resolving issues ranging from nuclear non-proliferation to the revaluation of the Chinese currency.
This group also argues that Japan's deference to Chinese demand in releasing the Chinese captain stemmed not only from China's "enhanced comprehensive strength", but also from Japan's "mistaken and puerile assessment" of how China would react.
On the other end of the spectrum are anxious voices expressing concerns about how far China should up the ante and whether Beijing's assertiveness will revive the issue of the "China threat" within the region.
It will be difficult for China to retract its calls on Japan for an apology and compensation, which would in turn accelerate domestic anger within Japan.
This will in turn make the process of fence mending "longer and more circuitous".
Together with other recent developments, the Sino-Japanese standoff has and will increasing drive regional countries closer to the US.
Following the sinking of the South Korean naval vessel, Seoul and Washington had -- despite Beijing's denouncement -- held joint naval exercises to send the North a message of deterrence.
Japan has also been pushed back under the US security umbrella and may even strengthen its military alliance with the US.
The US has also promised to help South-east Asian nations resolve peacefully its territorial disputes with China and recently took steps to boost its military relationship with Vietnam.
Washington is certainly not resisting the perfect -- if not timely -- opportunity in further engaging Asia and reclaiming its dominance in the region.
But even so, Washington is awash with policy wonks wondering if the US should, in view of current developments, review its six decades of hub-and-spoke system in the region.
The system has US as the hub, which is positioned to wield its power through its bilateral relationships with Asian countries as the spokes.
American Enterprise Institute scholar Michael Auslin wondered in Washington on Tuesday whether America's bilateral institutions with Asian countries will be able to withstand the region's mounting issues, from the ongoing North Korean threat, climate change, to China's growing political and military assertiveness.
He noted that talks of China being a responsible stakeholder have now become increasingly scarce, adding that "China is now working to change the system" and "asserting its power to change the rules of the games".
It is perhaps too early to say if China succeeds to change the system.
But as Beijing presses Japan for further concessions and gestures, it is very possible that any further diplomatic victories may erode its image of a peaceful-rise painstakingly cultivated in recent years.
Hitting and humiliating Japan
By C. Raja Mohan
Until last week, the talk about China’s power was rather abstract.
After it compelled Tokyo to release, unconditionally, the captain of a Chinese fishing trawler that collided with a Japanese coast guard vessel earlier this month, the consequences of Beijing’s rise have been palpable.
Power is about persuading other nations to do one’s bidding.
Big nations, with their expansive economic and military clout, do it all the time.
Beijing’s successful application of pressure against Tokyo will be long remembered as a classic case of coercive diplomacy from a great power.
When Beijing began to protest through diplomatic channels against Japan’s detention of the boat, its crew and captain, Tokyo released the boat and crew, while declaring that the captain would be held while he was tried for obstructing the activities of its coast guard.
If Japan’s decision was uncharacteristically bold, Beijing came down like a ton of bricks.
When Tokyo refused and insisted that the law would take its course, Beijing called off the talks on energy development in disputed waters and cancelled the invitation for 1000 Japanese high school students who were to visit the Shanghai Expo.
Prime Minister Wen Jiabao then stepped in demanding that Japan release the captain “immediately and unconditionally.”
Global Times made a chilling case for hitting Japan where it hurts:
“The pain has to be piercing. Japanese politicians need to understand the consequences — votes will be lost.
Japanese companies have to be made aware of the loss of business involved.
Japanese citizens will feel the burden due to the downturn in their economy... China’s domestic law, business regulations and consumers can all be manoeuvred.”
Tokyo’s soft spots were soon exposed, when Beijing slowed down the export of rare earth materials critical for so many modern industries, and arrested three Japanese citizens working in China.
As pressure mounted from business houses in Japan to call truce with China, Tokyo stepped back by releasing the captain in the name of preserving a good neighbourly relationship.
Once the captain was back in China, Beijing demanded an apology.
Both Tokyo and Beijing now say the ball is in the other’s court to take the first step towards restoring status quo ante.
The story is far from over.
India’s Lessons
India is not a stranger to China’s exercise of power.
After all the 1962 war was about Beijing administering a political lesson to Jawaharlal Nehru.
Unlike in the 1960s when Beijing was isolated in Asia and the world, China is now a great power, with levers that were unimaginable four decades ago.
The small rocky and uninhabited islands in dispute between China and Japan are nothing compared to the size of Ladakh in Jammu and Kashmir and Arunachal Pradesh, contested by Delhi and Beijing.
About 130,000 sq km of territory is under dispute.
The defence ministry would be well-advised to study the violent manner in which Beijing put Tokyo down, and learn the appropriate lessons from it.
Defence Minister A. K. Antony might want to assess what humiliation at the hands of China, of the type suffered by Tokyo last week, could mean for the Congress party and the UPA government.
Antony should know that weakness invites bullying and strength is the only basis for a mutually beneficial engagement with China.
Asian defence
Besides building one’s own strength, our defence establishment must pay more attention to the unfolding dynamic in the western Pacific, and deepen India’s military cooperation with leading East Asian nations.
For the rise of China breaks down the distinctions between East and South Asia.
While the frequency and intensity of Indian contacts with Japan, South Korea, ASEAN and Australia have steadily grown in recent years, the defence ministry is a long way from thinking strategically about the link between the Indian and Pacific Oceans.
The IAS mandarins at the defence ministry tend to sneer at military diplomacy and have been quite cavalier about responding to the many calls from our Asian neighbours for defence cooperation.
They have also avoided building institutional capacity to deal with the rapidly evolving Asian power balance. The longer the ministry’s learning curve, the greater is the possibility that India will be caught on the wrong military foot with China.
Until last week, the talk about China’s power was rather abstract.
After it compelled Tokyo to release, unconditionally, the captain of a Chinese fishing trawler that collided with a Japanese coast guard vessel earlier this month, the consequences of Beijing’s rise have been palpable.
Power is about persuading other nations to do one’s bidding.
Big nations, with their expansive economic and military clout, do it all the time.
Beijing’s successful application of pressure against Tokyo will be long remembered as a classic case of coercive diplomacy from a great power.
When Beijing began to protest through diplomatic channels against Japan’s detention of the boat, its crew and captain, Tokyo released the boat and crew, while declaring that the captain would be held while he was tried for obstructing the activities of its coast guard.
If Japan’s decision was uncharacteristically bold, Beijing came down like a ton of bricks.
When Tokyo refused and insisted that the law would take its course, Beijing called off the talks on energy development in disputed waters and cancelled the invitation for 1000 Japanese high school students who were to visit the Shanghai Expo.
Prime Minister Wen Jiabao then stepped in demanding that Japan release the captain “immediately and unconditionally.”
Global Times made a chilling case for hitting Japan where it hurts:
“The pain has to be piercing. Japanese politicians need to understand the consequences — votes will be lost.
Japanese companies have to be made aware of the loss of business involved.
Japanese citizens will feel the burden due to the downturn in their economy... China’s domestic law, business regulations and consumers can all be manoeuvred.”
Tokyo’s soft spots were soon exposed, when Beijing slowed down the export of rare earth materials critical for so many modern industries, and arrested three Japanese citizens working in China.
As pressure mounted from business houses in Japan to call truce with China, Tokyo stepped back by releasing the captain in the name of preserving a good neighbourly relationship.
Once the captain was back in China, Beijing demanded an apology.
Both Tokyo and Beijing now say the ball is in the other’s court to take the first step towards restoring status quo ante.
The story is far from over.
India’s Lessons
India is not a stranger to China’s exercise of power.
After all the 1962 war was about Beijing administering a political lesson to Jawaharlal Nehru.
Unlike in the 1960s when Beijing was isolated in Asia and the world, China is now a great power, with levers that were unimaginable four decades ago.
The small rocky and uninhabited islands in dispute between China and Japan are nothing compared to the size of Ladakh in Jammu and Kashmir and Arunachal Pradesh, contested by Delhi and Beijing.
About 130,000 sq km of territory is under dispute.
The defence ministry would be well-advised to study the violent manner in which Beijing put Tokyo down, and learn the appropriate lessons from it.
Defence Minister A. K. Antony might want to assess what humiliation at the hands of China, of the type suffered by Tokyo last week, could mean for the Congress party and the UPA government.
Antony should know that weakness invites bullying and strength is the only basis for a mutually beneficial engagement with China.
Asian defence
Besides building one’s own strength, our defence establishment must pay more attention to the unfolding dynamic in the western Pacific, and deepen India’s military cooperation with leading East Asian nations.
For the rise of China breaks down the distinctions between East and South Asia.
While the frequency and intensity of Indian contacts with Japan, South Korea, ASEAN and Australia have steadily grown in recent years, the defence ministry is a long way from thinking strategically about the link between the Indian and Pacific Oceans.
The IAS mandarins at the defence ministry tend to sneer at military diplomacy and have been quite cavalier about responding to the many calls from our Asian neighbours for defence cooperation.
They have also avoided building institutional capacity to deal with the rapidly evolving Asian power balance. The longer the ministry’s learning curve, the greater is the possibility that India will be caught on the wrong military foot with China.
Kan seeks immediate release of remaining Japanese detainee in China
Kyodo News
TOKYO — Japan will seek the ‘‘immediate release’’ of the remaining Japanese national detained in China, Prime Minister Kan Naoto said Thursday following the release of three Japanese earlier in the day.
Kan made the remark to reporters after China released three of the four Japanese who were held since Sept 20 for allegedly entering a military zone without permission.
The four are all employees of Japanese construction company Fujita Corp.
The three were released in the morning ‘‘after admitting to have violated Chinese law and showing regret for their mistake,’’ the official Xinhua News Agency reported, adding that the fourth, Sadamu Takahashi, is still being held for investigation.
The Japanese Embassy in Beijing said the Chinese Foreign Ministry at 10 a.m. informed Japanese Ambassador Uichiro Niwa of the release of the three and Niwa inquired about the safety of the fourth.
In Tokyo, Japanese Foreign Minister Seiji Maehara said he will seek the early release of Takahashi following the freeing of his three colleagues.
State Secretary for Foreign Affairs Yutaka Banno told a press conference later that a Japanese Embassy official confirmed the safety of the three in a telephone conversation.
A senior Japanese Foreign Ministry official said all of the three will likely return to Japan later Thursday.
Fujita, meanwhile, issued a comment saying it has ‘‘confirmed the release of the three’’ and hopes to see the remaining employee set free ‘‘as soon as possible.’’
Fujita added that an employee of its local unit in China, a Chinese national, was also released along with the three.
The four were detained on Sept 20 for allegedly entering a military zone in Hebei Province without permission and videotaping facilities there.
The three released employees are Yoshiro Sasaki, 44, of Fujita’s international business department, Hiroki Hashimoto, 39, from its sales division, and Junichi Iguchi, 59, from a local subsidiary. Takahashi, 57, also works for the local subsidiary.
China strictly controls visitors in military-related areas.
While it is not uncommon for visitors who inadvertently take photos or video to be detained, they are usually fined and freed the same day.
The freeing of the three is seen as reflecting Japan’s release on Saturday of a Chinese fishing boat captain who was detained over maritime collisions near the disputed Senkaku Islands in the East China Sea.
After the collisions on Sept 7, the skipper, 41-year-old Zhan Qixiong, was held along with the 14 other Chinese crew members of the fishing boat.
The 14 were released a week later but Zhan continued to be detained while Japanese prosecutors carried out investigations.
China had repeatedly demanded his immediate release and protested over his detention to Niwa.
The incident has seen bilateral relations deteriorate to their lowest level in years, with China announcing the suspension of ministerial-level exchanges and postponing scheduled talks with Japan over an undersea gas bed dispute.
TOKYO — Japan will seek the ‘‘immediate release’’ of the remaining Japanese national detained in China, Prime Minister Kan Naoto said Thursday following the release of three Japanese earlier in the day.
Kan made the remark to reporters after China released three of the four Japanese who were held since Sept 20 for allegedly entering a military zone without permission.
The four are all employees of Japanese construction company Fujita Corp.
The three were released in the morning ‘‘after admitting to have violated Chinese law and showing regret for their mistake,’’ the official Xinhua News Agency reported, adding that the fourth, Sadamu Takahashi, is still being held for investigation.
The Japanese Embassy in Beijing said the Chinese Foreign Ministry at 10 a.m. informed Japanese Ambassador Uichiro Niwa of the release of the three and Niwa inquired about the safety of the fourth.
In Tokyo, Japanese Foreign Minister Seiji Maehara said he will seek the early release of Takahashi following the freeing of his three colleagues.
State Secretary for Foreign Affairs Yutaka Banno told a press conference later that a Japanese Embassy official confirmed the safety of the three in a telephone conversation.
A senior Japanese Foreign Ministry official said all of the three will likely return to Japan later Thursday.
Fujita, meanwhile, issued a comment saying it has ‘‘confirmed the release of the three’’ and hopes to see the remaining employee set free ‘‘as soon as possible.’’
Fujita added that an employee of its local unit in China, a Chinese national, was also released along with the three.
The four were detained on Sept 20 for allegedly entering a military zone in Hebei Province without permission and videotaping facilities there.
The three released employees are Yoshiro Sasaki, 44, of Fujita’s international business department, Hiroki Hashimoto, 39, from its sales division, and Junichi Iguchi, 59, from a local subsidiary. Takahashi, 57, also works for the local subsidiary.
China strictly controls visitors in military-related areas.
While it is not uncommon for visitors who inadvertently take photos or video to be detained, they are usually fined and freed the same day.
The freeing of the three is seen as reflecting Japan’s release on Saturday of a Chinese fishing boat captain who was detained over maritime collisions near the disputed Senkaku Islands in the East China Sea.
After the collisions on Sept 7, the skipper, 41-year-old Zhan Qixiong, was held along with the 14 other Chinese crew members of the fishing boat.
The 14 were released a week later but Zhan continued to be detained while Japanese prosecutors carried out investigations.
China had repeatedly demanded his immediate release and protested over his detention to Niwa.
The incident has seen bilateral relations deteriorate to their lowest level in years, with China announcing the suspension of ministerial-level exchanges and postponing scheduled talks with Japan over an undersea gas bed dispute.
Chinese Developers Tap Into Japanese Insecurity
By HIROKO TABUCHI
A community hot spring in Misasa, a resort town in Japan. Chinese investors are planning to build vacation homes nearby.
MISASA, Japan — A plan by Chinese real estate developers to invest in this little mountain town has opened a window onto a Japanese crisis of confidence.
For locals here, the planned development — vacation homes for rich Chinese — is a welcome infusion of capital into a town that has been in decline since its heyday in the 1980s as a hot spring resort.
But seen from elsewhere in Japan — there have been news accounts in the national media, not all of them accurate — the investment is a menace to the area’s pristine forests and streams, a land grab that threatens the country’s natural resources and a chilling reminder of the expanding shadow cast by China, which recently surpassed Japan to become the world’s second-largest economy after the United States.
“Targeted by Foreign Money? Japan’s Forests for Sale,” was the warning title of a news program this month by the public broadcaster, NHK.
A fear that “China money” is buying up the Japanese homeland is spreading across this nation, fanned by news reports and a general anxiety over Tokyo’s fading economic prowess and an increasingly hostile wealthy neighbor.
The amount of money invested is still small by China’s standards, but seems to be setting off an outsize reaction among the Japanese.
Tokyo’s recent retreat from the diplomatic face-off over the arrest of a Chinese trawler captain, and China’s suspension of shipments of vital industrial metals and minerals to Japan, have also put many Japanese on edge.
“I’m all for closer ties with China, but we need to be on our guard,” said Hideki Hirano, author of the book “Japan’s Forests Under Siege: How Foreign Capital Threatens Our Water Source,” which was published in March.
“We need to be more vigilant about who’s buying what.”
Here in Misasa, however, nationalist rhetoric is often tempered by pragmatism.
“Rich Chinese spend money in ways that no longer exist in Japan,” said Kiyomi Kawakami, a local developer who plans to build 47 luxury homes in Misasa with partners from Shanghai.
“People warn me not to sell land to the Chinese,” he said.
“But I run a business. If somebody’s buying, I’m selling.”
Whether in far-flung corners of Japan like Misasa or in corporate boardrooms, there is a realization that as the Chinese economy booms, Japan needs — even as it remains wary of — China’s money.
The sentiment is reminiscent of the way Americans feared Japanese economic imperialism in the 1980s, alarmed by the acquisition of United States icons like Rockefeller Center by Mitsubishi and Columbia Pictures by Sony.
Chinese companies spent $120 million in the first half of this year to acquire various small and midsize Japanese enterprises, taking advantage of depressed asset prices, according to a recent report from Goldman Sachs.
The figure represents a sixfold increase from the comparable period last year.
China is also now Japan’s biggest trading partner, with overall trade surging by a third, to 12.6 trillion yen ($151 billion) in the first half of the year, compared with the same period last year.
“We shouldn’t think it a bad thing that foreign investors are recognizing value in Japan,” said Kazuhiko Masumoto, an analyst at the Mitsubishi Research Institute in Tokyo.
But Japan’s finance ministry has seemed slow to agree.
This month, Japan’s finance minister, Yoshihiko Noda, asked Chinese policy makers to “clarify their objectives” after recent bulk purchases of Japanese government bonds.
Tokyo was concerned that the buying was helping to drive up the yen’s value — making Japan’s exports less competitive with China’s.
Bowing to economic realities, and Japan’s already high levels of public debt, Finance Ministry officials have since then played down the conflict, saying Japan was happy to find foreign takers of its government bonds.
Until the trawler dispute prompted some tour groups to at least temporarily cancel trips to Japan, waves of newly rich Chinese tourists, with pocketbooks open, had been welcomed in Japan — even while heightening a sense that the country is at the mercy of rich Chinese.
Reports of Chinese snapping up Japan’s mountains and forests have struck a raw nerve, however.
Although Japan is known for its big cities, about 70 percent of its landmass is mountainous forest, and the purchases raise the specter of China’s gaining control of the cherished hinterlands.
Japan’s logging industry is in decline, as the country has been flooded with cheap imported timber.
As a result, forest real estate now sells for rock-bottom prices, and many plots have been abandoned by absentee or aged owners and have fallen into a state of neglect.
In January, the Tokyo Foundation, a respected independent research organization where Mr. Hirano, the author, is an analyst, issued a widely read report warning that foreign brokers could extract natural resources like timber and water and threaten Japan’s national security.
“If we wait until the exploitation of Japan’s natural resources by global interests is well under way,” the report said, “it may be too late.”
Since then, local news media have been sounding alarms, with accounts of deals, or potential deals, with Chinese developers — including a report of the sale of 57 acres of forest on the northern island of Hokkaido to a Chinese broker.
Then came news that Chinese investors were inquiring about mountains in Mie prefecture in western Japan, along with recent coverage of the development plans here in the spa town of Misasa.
Not all of the reports have been accurate.
In Hokkaido, for example, the buyer of those 57 acres turned out not to be Chinese at all, but a French real estate tycoon based in Hong Kong who is known for developing eco-friendly holiday villas powered with solar energy.
Still, the government has ordered a nationwide survey of sales of woodlands to foreigners.
“There have been rumors of foreign companies quietly buying woodlands, so we decided to investigate,” said Takayuki Doi, a senior official at Japan’s Forestry Agency.
It is unclear what the government can do, however, since foreign ownership of forests is legal in Japan.
Mr. Kawakami, the developer in Misasa, has received visits from worried local officials over his plans to team up with Chinese investors.
His plans, he says, simply involve building mountain villas that he had initially planned to sell to Japanese buyers.
But after a four-month marketing blitz yielded just two bidders in the sluggish domestic market, Mr. Kawakami turned to China.
In June, he set up a joint venture with a Shanghai-based developer to build and sell the holiday homes.
“I wanted to sell to Japanese,” he said, “but Japanese can no longer afford second homes.”
Whatever the wisdom of selling to rich Chinese, Misasa, like the rest of Japan, could use the cash.
Once a thriving hot spring resort, Misasa attracted almost 600,000 tourists a year in Japan’s bubble era, drawn by attractions including a spa-themed amusement park.
But by 1998, the park had gone bust, crippled by over 1.7 billion yen in debt.
The attractions fell into disrepair.
Tourist numbers dwindled.
Now, the town of 7,000 is desperate to attract new visitors.
Michiko Mifune, 81, runs the Kiya Ryokan, one of Misasa’s oldest traditional inns.
She says she has heard the rumors — that the Chinese are supposedly taking over Japan’s forests.
But recognizing that newly rich foreign tourists come with pocketbooks open, she is eager to have more visitors to Misasa from China.
She recently learned the word “huanying” — “welcome” in Chinese.
“Nobody cared about Misasa until now,” Ms. Mifune said.
“Now that foreigners might be after it, suddenly everyone cares.”
A community hot spring in Misasa, a resort town in Japan. Chinese investors are planning to build vacation homes nearby.
MISASA, Japan — A plan by Chinese real estate developers to invest in this little mountain town has opened a window onto a Japanese crisis of confidence.
For locals here, the planned development — vacation homes for rich Chinese — is a welcome infusion of capital into a town that has been in decline since its heyday in the 1980s as a hot spring resort.
But seen from elsewhere in Japan — there have been news accounts in the national media, not all of them accurate — the investment is a menace to the area’s pristine forests and streams, a land grab that threatens the country’s natural resources and a chilling reminder of the expanding shadow cast by China, which recently surpassed Japan to become the world’s second-largest economy after the United States.
“Targeted by Foreign Money? Japan’s Forests for Sale,” was the warning title of a news program this month by the public broadcaster, NHK.
A fear that “China money” is buying up the Japanese homeland is spreading across this nation, fanned by news reports and a general anxiety over Tokyo’s fading economic prowess and an increasingly hostile wealthy neighbor.
The amount of money invested is still small by China’s standards, but seems to be setting off an outsize reaction among the Japanese.
Tokyo’s recent retreat from the diplomatic face-off over the arrest of a Chinese trawler captain, and China’s suspension of shipments of vital industrial metals and minerals to Japan, have also put many Japanese on edge.
“I’m all for closer ties with China, but we need to be on our guard,” said Hideki Hirano, author of the book “Japan’s Forests Under Siege: How Foreign Capital Threatens Our Water Source,” which was published in March.
“We need to be more vigilant about who’s buying what.”
Here in Misasa, however, nationalist rhetoric is often tempered by pragmatism.
“Rich Chinese spend money in ways that no longer exist in Japan,” said Kiyomi Kawakami, a local developer who plans to build 47 luxury homes in Misasa with partners from Shanghai.
“People warn me not to sell land to the Chinese,” he said.
“But I run a business. If somebody’s buying, I’m selling.”
Whether in far-flung corners of Japan like Misasa or in corporate boardrooms, there is a realization that as the Chinese economy booms, Japan needs — even as it remains wary of — China’s money.
The sentiment is reminiscent of the way Americans feared Japanese economic imperialism in the 1980s, alarmed by the acquisition of United States icons like Rockefeller Center by Mitsubishi and Columbia Pictures by Sony.
Chinese companies spent $120 million in the first half of this year to acquire various small and midsize Japanese enterprises, taking advantage of depressed asset prices, according to a recent report from Goldman Sachs.
The figure represents a sixfold increase from the comparable period last year.
China is also now Japan’s biggest trading partner, with overall trade surging by a third, to 12.6 trillion yen ($151 billion) in the first half of the year, compared with the same period last year.
“We shouldn’t think it a bad thing that foreign investors are recognizing value in Japan,” said Kazuhiko Masumoto, an analyst at the Mitsubishi Research Institute in Tokyo.
But Japan’s finance ministry has seemed slow to agree.
This month, Japan’s finance minister, Yoshihiko Noda, asked Chinese policy makers to “clarify their objectives” after recent bulk purchases of Japanese government bonds.
Tokyo was concerned that the buying was helping to drive up the yen’s value — making Japan’s exports less competitive with China’s.
Bowing to economic realities, and Japan’s already high levels of public debt, Finance Ministry officials have since then played down the conflict, saying Japan was happy to find foreign takers of its government bonds.
Until the trawler dispute prompted some tour groups to at least temporarily cancel trips to Japan, waves of newly rich Chinese tourists, with pocketbooks open, had been welcomed in Japan — even while heightening a sense that the country is at the mercy of rich Chinese.
Reports of Chinese snapping up Japan’s mountains and forests have struck a raw nerve, however.
Although Japan is known for its big cities, about 70 percent of its landmass is mountainous forest, and the purchases raise the specter of China’s gaining control of the cherished hinterlands.
Japan’s logging industry is in decline, as the country has been flooded with cheap imported timber.
As a result, forest real estate now sells for rock-bottom prices, and many plots have been abandoned by absentee or aged owners and have fallen into a state of neglect.
In January, the Tokyo Foundation, a respected independent research organization where Mr. Hirano, the author, is an analyst, issued a widely read report warning that foreign brokers could extract natural resources like timber and water and threaten Japan’s national security.
“If we wait until the exploitation of Japan’s natural resources by global interests is well under way,” the report said, “it may be too late.”
Since then, local news media have been sounding alarms, with accounts of deals, or potential deals, with Chinese developers — including a report of the sale of 57 acres of forest on the northern island of Hokkaido to a Chinese broker.
Then came news that Chinese investors were inquiring about mountains in Mie prefecture in western Japan, along with recent coverage of the development plans here in the spa town of Misasa.
Not all of the reports have been accurate.
In Hokkaido, for example, the buyer of those 57 acres turned out not to be Chinese at all, but a French real estate tycoon based in Hong Kong who is known for developing eco-friendly holiday villas powered with solar energy.
Still, the government has ordered a nationwide survey of sales of woodlands to foreigners.
“There have been rumors of foreign companies quietly buying woodlands, so we decided to investigate,” said Takayuki Doi, a senior official at Japan’s Forestry Agency.
It is unclear what the government can do, however, since foreign ownership of forests is legal in Japan.
Mr. Kawakami, the developer in Misasa, has received visits from worried local officials over his plans to team up with Chinese investors.
His plans, he says, simply involve building mountain villas that he had initially planned to sell to Japanese buyers.
But after a four-month marketing blitz yielded just two bidders in the sluggish domestic market, Mr. Kawakami turned to China.
In June, he set up a joint venture with a Shanghai-based developer to build and sell the holiday homes.
“I wanted to sell to Japanese,” he said, “but Japanese can no longer afford second homes.”
Whatever the wisdom of selling to rich Chinese, Misasa, like the rest of Japan, could use the cash.
Once a thriving hot spring resort, Misasa attracted almost 600,000 tourists a year in Japan’s bubble era, drawn by attractions including a spa-themed amusement park.
But by 1998, the park had gone bust, crippled by over 1.7 billion yen in debt.
The attractions fell into disrepair.
Tourist numbers dwindled.
Now, the town of 7,000 is desperate to attract new visitors.
Michiko Mifune, 81, runs the Kiya Ryokan, one of Misasa’s oldest traditional inns.
She says she has heard the rumors — that the Chinese are supposedly taking over Japan’s forests.
But recognizing that newly rich foreign tourists come with pocketbooks open, she is eager to have more visitors to Misasa from China.
She recently learned the word “huanying” — “welcome” in Chinese.
“Nobody cared about Misasa until now,” Ms. Mifune said.
“Now that foreigners might be after it, suddenly everyone cares.”
Wednesday, September 29, 2010
Chinese billionaires accused of stinginess after charity banquet snub
Dinner sparks debate about social responsibilities of country's new super-rich
By Tania Branigan in Beijing
Bill Gates hosts a banquet for China's super-rich which has sparked debate about Chinese philanthropy.
It should have been the social event of the year.
The setting was said to be a full-scale replica of the Château Lafite, complete with Greek statuary, a moat and its own wild duckpond.
The hosts were world famous.
The guestlist featured 50 of China's richest business people.
Yet several billionaires snubbed Bill Gates and Warren Buffett – apparently fearful of demands to open their wallets at the charity-promoting banquet – and in doing so have provoked a debate about their apparent stinginess.
Critics argue that China's new rich have ignored their social responsibilities in the rush for wealth.
Among the most scathing is one of last night's guests, Chen Guangbiao, who says Gates has inspired him to leave his fortune to charity when he dies.
"This makes me so mad. How did we get so rich? We've had favourable economic policies and China's working class helped us get there. I think we need to repay society," he told NPR – even threatening to leak the names of those who had turned down the invitation.
Defensive tycoons retort that giving should be a private choice and dismiss American philanthropy as little more than a tax-dodge.
Zong Qinghou, named by the Hurun Rich List as China's richest man with a $12bn fortune, told Phoenix television he had a previous engagement and said real philanthropy was creating wealth and jobs.
"If I want to donate, I will; if I don't want to, I won't be persuaded to either. I don't think donating a lot of money is real philanthropy. It is just a way to get around the high inheritance tax and other taxes," he said.
Gates and Buffett, who have asked US billionaires to commit to leave most of their wealth to charity, wrote to guests to assure them the dinner was not a fundraiser.
They said they merely wanted to promote charity development.
Experts have suggested the rich fear exposing their wealth lest it attract envy, criminals and perhaps too much scrutiny of its origins.
Even when they give, they prefer to do so privately.
Wang Zhenyao, director of the Centre for Philanthropy Research at Beijing Normal University, said high public expectations were another deterrent.
"Many people think that no matter how much rich people donate, it is just not enough. That's wrong thinking: philanthropy is a voluntary act. In China there are now many rich people who fear to donate, because it will attract people's criticism," he said.
"One obstacle is the mindset of the nouveau riche, the idea that they should think about giving their money to society. In the past, these entrepreneurs, if they donated money, donated it to government foundations or officials as a way to improve their relations or [for] public relations, showing they are working with government," said Shawn Shieh, visiting professor at Beijing Foreign Studies University.
"The second obstacle has been systemic – reflected in the lack of regulations that would promote the sector in an effective way. You have regulations but private foundations have restrictions placed on them; they can't publicly fund-raise, for example."
Yet despite the difficulties non-governmental organisations face, tiny grassroots groups are springing up as well as private foundations.
And, although no data is available, Liu Youping, deputy director of the China Charity Donation Information Centre, suspects that – as in many countries – ordinary people give a higher proportion of their incomes than the wealthy do.
While the Americans wooed their mega rich peers, a less glitzy dinner was due to take place in a Beijing restaurant last night.
A website designer who calls himself Lao Wu had rallied artists, doctors and academics under the slogan "Common people's philanthropy is challenging the Gates and Buffett banquet."
"Charity is not just about rich people. More ordinary people should get involved," he told Beijing Times.
By Tania Branigan in Beijing
Bill Gates hosts a banquet for China's super-rich which has sparked debate about Chinese philanthropy.
It should have been the social event of the year.
The setting was said to be a full-scale replica of the Château Lafite, complete with Greek statuary, a moat and its own wild duckpond.
The hosts were world famous.
The guestlist featured 50 of China's richest business people.
Yet several billionaires snubbed Bill Gates and Warren Buffett – apparently fearful of demands to open their wallets at the charity-promoting banquet – and in doing so have provoked a debate about their apparent stinginess.
Critics argue that China's new rich have ignored their social responsibilities in the rush for wealth.
Among the most scathing is one of last night's guests, Chen Guangbiao, who says Gates has inspired him to leave his fortune to charity when he dies.
"This makes me so mad. How did we get so rich? We've had favourable economic policies and China's working class helped us get there. I think we need to repay society," he told NPR – even threatening to leak the names of those who had turned down the invitation.
Defensive tycoons retort that giving should be a private choice and dismiss American philanthropy as little more than a tax-dodge.
Zong Qinghou, named by the Hurun Rich List as China's richest man with a $12bn fortune, told Phoenix television he had a previous engagement and said real philanthropy was creating wealth and jobs.
"If I want to donate, I will; if I don't want to, I won't be persuaded to either. I don't think donating a lot of money is real philanthropy. It is just a way to get around the high inheritance tax and other taxes," he said.
Gates and Buffett, who have asked US billionaires to commit to leave most of their wealth to charity, wrote to guests to assure them the dinner was not a fundraiser.
They said they merely wanted to promote charity development.
Experts have suggested the rich fear exposing their wealth lest it attract envy, criminals and perhaps too much scrutiny of its origins.
Even when they give, they prefer to do so privately.
Wang Zhenyao, director of the Centre for Philanthropy Research at Beijing Normal University, said high public expectations were another deterrent.
"Many people think that no matter how much rich people donate, it is just not enough. That's wrong thinking: philanthropy is a voluntary act. In China there are now many rich people who fear to donate, because it will attract people's criticism," he said.
"One obstacle is the mindset of the nouveau riche, the idea that they should think about giving their money to society. In the past, these entrepreneurs, if they donated money, donated it to government foundations or officials as a way to improve their relations or [for] public relations, showing they are working with government," said Shawn Shieh, visiting professor at Beijing Foreign Studies University.
"The second obstacle has been systemic – reflected in the lack of regulations that would promote the sector in an effective way. You have regulations but private foundations have restrictions placed on them; they can't publicly fund-raise, for example."
Yet despite the difficulties non-governmental organisations face, tiny grassroots groups are springing up as well as private foundations.
And, although no data is available, Liu Youping, deputy director of the China Charity Donation Information Centre, suspects that – as in many countries – ordinary people give a higher proportion of their incomes than the wealthy do.
While the Americans wooed their mega rich peers, a less glitzy dinner was due to take place in a Beijing restaurant last night.
A website designer who calls himself Lao Wu had rallied artists, doctors and academics under the slogan "Common people's philanthropy is challenging the Gates and Buffett banquet."
"Charity is not just about rich people. More ordinary people should get involved," he told Beijing Times.
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