Recent Reports Hint Of Trouble on the Chinese Front

In the difficult times ahead, it will be more important than ever to try and get an early fix on where serious trouble may be brewing. This means trying to read between the lines of official statements and published reports. Or stepping back and looking at seemingly unrelated developments to see if, in combination, they offer valuable insights about the “big picture.” Or analyzing the timing and pattern of news flow, which can be an important signal in and of itself. While the assessment may prove inaccurate, the risk of false alarms will be less than the danger of being totally blindsided. In that vein, a series of recent China-related reports hint at a flashpoint-in-the-making that bears watching.

First off, the Wall Street Journal reported yesterday that “China Will Raise Interest Rates.”

China's central bank said Saturday it will raise interest rates for the first time since the middle of last year to temper growth and investment, as well as steady the financial system of its fast-growing economy.

The People's Bank of China said the 0.27 percentage point increase will push the benchmark one-year lending rate to 6.39% and the one-year deposit rate to 2.79%. The higher interest rates will apply starting Sunday.

The increase marks the third boost in lending rates for the past year. The central bank noted in its statement that it aims for an economy that develops "both well and fast."

That follows from a Bloomberg report on Friday, “China's Growth Is Unstable, Unsustainable, Wen Says,” which features curiously outspoken remarks from that nation’s leader.

China's economic expansion, the source of about a 10th of global growth last year, is unstable and environmentally unsustainable, Premier Wen Jiabao said.

“China's investment growth is too high, lending growth too fast, liquidity excessive and trade and international payments very imbalanced,” Wen said at a press conference in Beijing today. Energy efficiency and environmental protection issues haven't been “properly resolved,” he said.

Wen's comments underscore government concern that too many factories are being built in China, worsening pollution and leaving the world's fastest-growing major economy vulnerable to a slowdown in demand. A record $177.5 billion trade surplus has flooded the economy with cash, making it harder for the government to cool investment by reining in bank lending.

Elsewhere, an article in Sunday’s Los Angeles Times, “China to End Tax Breaks for Foreign Firms,” notes what some view as a benign change in policy, but which also alludes to rising protectionist sentiment.

Chinese lawmakers approved a tax overhaul Friday that would eventually end nearly three decades of preferential treatment for foreign companies.

The measure is likely to pinch a variety of U.S. and other foreign corporations, particularly larger manufacturers, whose sales and profits have been growing robustly in China. But analysts don't expect a significant slowdown in foreign corporate investment in China, given the country's large market, extensive supply chain and rapid growth.

Some American businesses welcomed the long-awaited change as a step toward creating a more simplified, transparent and uniform tax system in a nation where local governments often levy different rates depending on relationships with individual companies.

"The more important thing in the long term is that everybody is treated in a fair manner," said Alex Xu, a Los Angeles developer who has opened a chain of two dozen business hotels in China.

Chinese enterprises had long pushed for a unified tax policy, complaining that overseas firms enjoyed an unfair advantage over them. Foreign companies have been paying an income tax rate of 15%, while domestic firms were taxed as much as 33%. A single corporate tax rate of 25% is to take effect next year.

More broadly, the change in tax policy highlights a maturing Chinese economy, now the world's fourth-largest, that is becoming much more selective about foreign investments and focused on nurturing domestic companies and industries….

Foreign companies long viewed their low tax rate as a benefit that helped them compete in a market they felt was tilted toward domestic players because of bureaucracy and other regulations.

But Chinese scholars argued that over the last five years, as China opened up its markets under commitments to the World Trade Organization, the balance shifted in favor of foreign companies.

Other frictions are also finding their way into the media. In a People’s Daily Online article, “China Regrets U.S. Decision on Macao-Based Bank,” the budding superpower makes it clear -- despite the subtle diplomatic language -- that it does not like other nations intruding on its turf.

China on Thursday expressed "deep regret" at a decision made by the U.S. Treasury Department to impose strict financial curbs on a Macao-based bank which has links with the Democratic People's Republic of Korea (DPRK).

"We express deep regret at the United States insisting on using U.S. domestic law to apply a ruling on Banco Delta Asia." Foreign Ministry spokesman Qin Gang told a news conference.

Qin said both Chinese central government and government of Macao Special Administrative Region [SAR] have expressed their concern on the issue of Banco Delta Asia to the U.S. side many times.

"The Chinese central government firmly supports the government of Macao SAR to appropriately resolve the related issues in accordance with the law," he said.

The U.S. Treasury Department announced Wednesday to bar U.S. banks from dealing with Macao-based Banco Delta Asia which the United States accused of money laundering for the DPRK.

As part of the nuclear deal reached during the six-party talks in Beijing on Feb. 13, the United States agreed to settle the financial dispute with the DPRK within 30 days.

Other nations are also airing their grievances with China. In a Bloomberg report, “Nakagawa Says China Military Spending Threatens Japan”, the Japanese don't pull any punches in remarks about their neighbor’s seeming geopolitical ambitions.

China's military spending is growing at an “abnormal” pace and threatens Japan, said Shoichi Nakagawa, policy chief for the ruling Liberal Democratic Party.

“It's a direct, military threat,” Nakagawa said at a speech in Tokyo. Chinese military spending “has grown abnormally since the 1990s.”

China on March 4 said it will raise its 2007 defense spending by 17.8 percent to 350 billion yuan ($45 billion), the biggest increase in five years. Japan's military budget in the fiscal year starting April 1 is 4.86 trillion ($41.8 billion).

“China's announcement only covers ordinary military spending, not nuclear weapons development, or testing, research, or arms imports,” Nakagawa said. “According to European and U.S. analysts, spending is actually two or three times that.” Nakagawa also said China's explanations for an anti-satellite missile test in January were “ambiguous and unclear.”

Nakagawa also said China must explanation its testing of a missile on a weather satellite. China destroyed the obsolete satellite on Jan. 11, prompting concern from the U.S., U.K., Japan and Australia. China told the U.S. that the test wasn't meant as a threat.

“Their words say they are peaceful, but what was defensive about that?” Nakagawa said. “Since the announcement, any explanation has been insufficient, ambiguous and unclear.”

Finally, in a little noted story from the Epoch Times, “Martial Law Imposed In China's Yongzhou, Hunan Province,” there are signs that things are not quite what they seem on the domestic front

The riot in Zhushan, Yongzhou has been quelled by the police, but the whole city remains under martial law. Since the afternoon of March 13, road traffic has partially resumed for restricted time periods, but public transport service has not been permitted yet.

According to a local resident, authorities have stationed over 2,000 armed police in the town.

On March 13, police vehicles patrolled the city and broadcast messages requesting the residents to keep calm and not to listen to "rumors." They claimed that the police had been restrained and would not harm civilians.

Responding to the messages broadcast from the police vehicle, a local resident said, "It's a lie! I saw the police beating civilians. Some even targeted pedestrians; passengers on motorcycles were beaten as well. At least 50 people were injured from the beatings."

Over the last two days, many international media have arrived at the scene. Major television stations including several from Hong Kong, Japan, England, etc. have been reporting on the event as their top story.

After the incident, Pan-Blue Coalition member Zhang Zilin—who had been monitoring the development of the protests—left Yongzhou in the afternoon of March 13. He said that the Security Department had summoned him because he reported this incident to the international media and the authorities had issued strict orders prohibiting media reports.

Local residents believe that corruption in the government has directly caused the increase in bus fares. Because the National People's Congress is currently being held in Beijing, people are angered by the arrogance of the local authorities who dared to create trouble during this "sensitive period."

According to local residents, the public transport service between Zhushan, Daqingping, etc. to Yongzhou were taken over and brought under the control of Anda Bus Company, the only allowed bus operator in the region. Passengers were dissatisfied with the company's service. After the New Year, students returning to school were charged extra for their luggage and medium-sized buses were not permitted to take students. This increase in bus fares finally triggered long accumulated public resentment and the demonstration turned into a riot. The actual numbers participating in the riot could possibly exceed 20,000.

Human Rights in China spokesman Feng Congde commented that the Yongzhou incident and the recent large scale conflicts between the police and the public reflects the huge gap between the true situation and the image of a harmonious society that the Chinese regime has endeavored to build.

No doubt these various developments could turn out to be wholly unrelated and may come to naught. The risk, of course, is that they are the sorts of rumblings that precede a far more damaging upheaval.

Comments

[huangjin:]

There are a few riots like that every year in China, among tens of thousands of other public protests. The real threat to China is that a good portion of their GDP growth is funded by low interest loans to party members and their immediate family, who used the money to build unwise infrastructure that directly benefit themselves in some way. There is a 1929 style credit bubble brewing in China.

2007 Mar 19 08:45 AM