Monthly Archives: May 2011
All the talk last week, at a Chinese-language conference on Aluminium, was about the upcoming summer, and the likely shortage of electricity.
China’s energy supply-demand balance has been on a knife-edge for several years. With GDP growth in the 10% range for the last decade, came matching demand for electricity. Energy supply companies could barely keep up with the growth in demand. At one stage, it was said that China was adding one new power station per month to the grid.
But electricity generating is not the only challenge. About 70% of China’s electricity comes from coal. It is now at the point where China is consuming billions of tonnes of coal per year. All that coal needs to be produced (and we all know about the horrific safety record at Chinese coal mines), it needs to be transported long distances (coal reserves are mostly in the north and west, but secondary industry is in the east and south, and it needs a working market. The producers need to make a profit, as do the generators, transmission companies and distribution companies.
This year, all three elements of the energy supply chain are being tested. Coal mines in some areas are now producing less coal, partly because of the crack-down on small independent producers, and partly because of inherent inefficiency in the mines. The logistics system is barely able to cope, especially after the Ministry of Railways got distracted by the bullet train program. (the head of that ministry has been purged, and the cargo transport system has been put back on the top of the agenda.)
But the market is still suffering. Thermal coal prices have been rising around the world, and this has impacted the China market. The public market for coal, based at Qinhuangdao, has its price fixed by the Government. But the direct contract negotiations for coal have been disrupted. Power companies have complained that they can’t afford the price that producers want, citing the fact that the residential price of electricity is also fixed by the government.
As a result, the on-grid price of electricity was raised recently, by about 0.12 RMB per MWH. The transmission companies now have to pay extra, but then they are all Government companies, so it is really a form of rebate. That has freed up the generators to go buy more coal, and pump more electrons down the wires. But will it be enough?
Already some provinces have reported rationing. There is talk of rolling outages through the peak summer times, when everyone turns on their air conditioning. And it has been reported that the domestic price of electricity is set to rise, although that’s only a rumour.
Of course, China is one of the leading countries for investment in alternative energy supply. Whether it be nuclear, wind, solar or other forms, China is aggressively pursuing a growth strategy. But none of these will be much use for this summer.
What does all this mean for the aluminium industry? If there are shortages, or planned outages, will smelters be asked to throttle back? If smelters are exempted, but secondary industry finds itself restricted, then will the demand for metal go down? And the price with it?
These are questions which we at AZ China are seeking to answer. We are putting together a study of the present market conditions, and hope to have it available in the next few weeks. Watch this space for more information.
Meantime, those at the conference were almost lemming-like in their attitude, according to our people who were there. Yes, there will be power shortages, was the general feeling amongst those we spoke to. Will aluminium smelters be affected? Nobody was prepared to hazard a guess.
An interesting insight into how the decisions are made as to the size of future expansions.
Xinjiang Zhonghe, better known outside China as Joinworld, were planning to build an expansion of 125,000t using 330KA technology.
But they looked around at their neighbours and realised that if they had gone ahead with this plan, it would have put them on the bottom of the totem pole, when it comes to size. They have since changed their minds, and are now building a plant which will use 500KA technology, and churn out 500,000t per year.
Xinjiang province is set to outdo the Middle East, once all the smelting capacity is finished. We count well over 10 million tonnes of new plant being built there at the moment. Xinjiang province was not included in the list of provinces that would have smelter restrictions. (But then, only 8 provinces were listed, and most of them have only a small aluminium industry presence.)
Much has been made recently, of the announcement that the Chinese Government would act to limit overcapacity in the primary aluminium industry.
But it is worth to check the actual announcement, especially the detail and even more especially, look for what is not in the detail. Only certain provinces are named as being on the target list, despite the fact that for most of those provinces, there is little or no new building activity. Brownfield expansions are exempted, as well.
Meantime, the future powerhouse of Chinese primary aluminium, Xinjiang province is not mentioned. Given that there is about 10 million tonnes of new capacity planned for that province alone, it gives an idea of the scale of the expansions, and how little the recent announcement really means.
But spare a thought for poor old Chalco. Being the darling of the State Council, Chalco cannot afford to be seen to thumb its nose at its benefactors and true owners (not the shareholders in HK and NYSE and elsewhere, but the Communist Party). Chalco has found itself having to do a re-take on its expansion plans, and is no doubt now checking with the relevant authorities which projects must be shelved and which ones can go ahead.
China’s automobile industry reported sales of 1.5 million units in April, along with production of 1.1 million. the sales figure is down 15% on March, and is a touch under the figure for April 2010. It is the first month of negative growth in more than 2 years.
Production, meanwhile, was impacted by parts shortages caused by the Japan Earthquake and Tsunami.
The auto market has been impacted by the combination of the removal of Government incentives, interest rate rises and fuel price increases. Inflation is also starting to hurt disposable income, according to local commentators.
It is a slightly worrying sign for the aluminium industry. It has already lost one major market sector, with the bullet train program halted earlier this year. That program screeched to a halt with the sacking of the Minister for Railways on corruption charges. “Corruption” is a good catchall if you want to purge a cadre these days, and it had been rumoured that the more conservative types inside the Politburo were not impressed by the focus on fashionable bullet trains at the expense of more practical transport needs.
Two bits of news from the China coker industry.
A fire at Sinopec’s Wuhan refinery has knocked out its coker. The main refinery has not suffered any major damage, and crude processing is continuing as normal. But the 1.5 million tonnes per year coker is out of action. The coker produces anode grade coke, usually grades 2B or 3A. That could create a supply hiccup, though the market has not reacted yet.
Shandong province’s Rizhao Port Petrochemical company has announced that its new coker is set for production, with the first coke coming out in early June. That coker will have a coking capacity of 1 million tonnes per year, according to their announcement. Presumably that is the charging capacity, meaning that coke output will be in the order of 200 - 250 thousand tonnes.
Rizhao Port is an independent refinery, not tied to any of the majors.
Acknowledgements to C1 Energy for both these stories.
Those of you who attended the China Aluminium Briefing in San Diego in February will remember our first speaker, Mr John Garnaut. John is the China Correspondent for the Sydney Morning Herald and the Melbourne Age. John has some uncompromising views on what is happening inside China, as he illustrated in his speech for us that day.
In his regular column in the newspapers today, John has written about a subject that the West will hear more about in the coming months and years. There is no question that China is becoming more right-wing. It is becoming increasingly difficult for foreigners to do business here. We can attest to this here inside AZ China, with the ever more demands for documents, records, and taxes. There are now at least 3 different Beijing departments that we must submit reports to, with those reports often being duplicated or full of meaningless demands. One example - Foreigners must have a Chinese name from now on, in order to be able to work in our company, including foreigners who left our employment 2 years ago. We now pay two lots of taxes, to two different government administrations.
Our experiences here in AZ China are anecdotal at best. John’s article this morning looks at the roots of where this new mood is coming from. Here is the article.
WHEN Chinese leaders look to the past for clues to the future they fix on communist China’s former patron, brother and nemesis, the Soviet Union. In September 2009, the former president, Jiang Zemin, gathered China’s leading Soviet historians for a personal tutorial at Zhongnanhai.
His first question, as relayed by a participant, cut straight to the chase.
Jiang: Why do you think Soviet Russia collapsed?
Historian Shen Zhihua: Why does the Politburo think it collapsed?
Jiang: We used to say it was because of Gorbachev. What do historians think?
Shen: Yes, there are some historians who believe so, but they tend to be the ones who are more political than empirical. The Bolsheviks had been around for 93 years, Soviet Russia for 74 years, I don’t think the problem was a single person or event. The question was whether socialism was feasible, or not.
Jiang: Oh? Is that right? Continue.
Jiang’s tutors, who included four historians and a recent ambassador to Moscow, spent half a day detailing how the Soviets had missed every opportunity to reform so that by the time Gorbachev arrived it was already too late. The 83-year-old former president took copious notes on his big black notepad and later cross-checked with the official historians at the Chinese Academy of Social Sciences, and then the Party’s International Department, and then ordered a senior official to impart the lessons to cadres of ministerial rank.
The most intriguing thing about Jiang’s history lessons, however, is that China’s leaders appear to have gone so far out of their way to ignore them since.
They have reverted to conspiratorial foreign policy, declared war on civil society and, perhaps most unsustainably, pushed back against the market economy. In short, the Chinese Communist Party has been busily rediscovering its Soviet DNA.
After three decades of successful economic reform China seems far too open, its work force and entrepreneurs too dynamic and its nascent civil society too vibrant to follow the death spiral of the Soviet Union.
If the party continues its current backwards march analysts will be following Jiang Zemin back to the Finland Station where Lenin got off the train to take charge of the Soviet revolution.
The first few decades of Soviet socialism and Chinese communism entailed similar patterns of forced industrialisation, agricultural collectivisation and extreme famine, as both ruling parties chased the myth of utopian socialism that justified their monopolies on power. The inevitable consequence was totalitarian terror.
”Since the myth is only that, any leader acting on it would be compelled to a massive use of force and violence,” wrote an author, identified only as ”Z”, in one of the most celebrated works of Sovietology of the time.
His article of December 1989, ”To the Stalin Mausoleum”, describes how the post-totalitarian state is lumped with an impossible legacy.
”The Myth was now transformed into the Lie,” he wrote, just before the Soviet edifice came tumbling down. ”This Lie could be made to appear to be the truth, and the fraud concealed for a time, indeed for quite a long time, by a combination of terror and drumbeat indoctrination. But when the moment came, could the regime admit to the truth and at the same time preserve the results of the achievement? This moment has now arrived and constitutes one of the great unresolved contradictions of perestroika today. The collapse of the Lie under glasnost is destroying acceptance of the system itself, especially among the young, just as Gorbachev is trying to save it.”
The lesson independent Chinese historians have drawn from the collapse of the Soviet Union is that political reform must begin before a regime is forced into it. Chinese Politburo members, in contrast, appear to have concluded there is no way of controlling the process so they should not try.
Z, who later identified himself as Californian scholar Martin Malia, believed that a Leninist state, with its insistence on one-party rule, was structurally incompatible with moves towards democratic reform.
”Marketisation and democratisation lead to the revival of civil society, and such a society requires the rule of law,” he wrote. ”But civil society under the rule of law is incompatible with the preservation of the lawless leading role.”
And all would agree with French historian Alexis de Tocqueville, who summed up the dictator’s predicament 150 years earlier: ”The most dangerous time for a bad government is when it starts to reform itself.”
According to China’s National Bureau of Statistics, April’s production of primary aluminium came in at 1.459 million tonnes, for an average daily rate of 48,600 tonnes.
That compares to March when the daily rate was 46,100 tonnes, and is a step above the previous record rate set in June 2010, at 47,500 tonnes.
The NBS numbers come out a bit too early to be accurate, and we know that they sometimes miss some smelters, so it will be interesting to see what the CNIA reports in a week’s time.
So far this year, based on this latest figure, China has produced 5.5 million tonnes. They are well on target to meet our forecast for 2011 of 18.5 - 19 million tonnes.
The big question is, where is all this metal going? Part of the answer will be in the Import/Export figures when they come out. The figures to the end of March indicate that primary imports had been more than covered by exports of alloyed metal, while imports of scrap metal were more than double exports of semis, for a net balance of 235,000t of imports. With the LME sitting well above SHFE through April, it’s hard to see that much metal will be imported into China, even on a turnaround basis.
The most remarkable part of the puzzle is that the metal price remains in positive territory, relative to the cash cost of production, despite record production levels and high imports.
Subscribers to our Black China Reports will get more information on these questions.
Clinton Dines is widely respected as one of the most knowledgeable people on the question of China’s raw materials future. Here is an article that my friend Professor Ici sent me. it’s from an investment service, and is Australia-focused, but gives a good review of how Dines sees things. Here is the article - with thanks to the good Professor.
Recently I was privileged to interview Clinton Dines BHP’s senior China representative for 21 years. It was the most exciting investment interview of my lifetime. Dines provides valuable insights into Iron Ore, Copper and Oil prices over the next decade. I have made part one of this essential reading 2-part Special Report available to you below.
Opportunities from China - Part 1
Spending several hours interviewing and listening to immediate former head of BHP China, Clinton Dines, is an exhilarating experience. Is there a looming housing crash in China - “FROGSHIT”, says Dines. What of the One Child Policy - “What One Child Policy?” With over 30 years experience based in China, mainly Beijing and Shanghai, Dines has an awesome knowledge, but what most impresses is on-the-ground anecdotal knowledge which makes much academic statistical musings sheer nonsense.
Look at the elephant, he insists, not the ticks and flies on its flanks. With a logic honed at top French business academy INSEAD - current CEO BHP Billiton (BHP), Marius Kloppers, is also a graduate - he refers to the prisms through which various nations view China, and get the wrong sighting. Dines is a Queenslander and a 1978 graduate of Asian studies from Brisbane’s Griffith University. He went immediately to China on a post graduate program and remained there mostly on the mainland, going on to serve as BHP’s senior executive China for 21 years, retiring as President BHP Billiton China August 2010.
Again look at the elephant, he insists when discussing how many westerners get China wrong as they look through a prism where they feel challenged by their perception of the emergence of another superpower. I had brought a prominent American economist’s very current view (that day!) that a Chinese housing bubble was about to bust. And in Australia we are still influenced by of our history of viewing the north as the yellow peril, but China is a major economic boon for us. He expresses strong disappointment at our politicians’ lack of appreciation of China, says our banks do not understand it, only a few academics do. But he singles a few out on the “they understand” side like Grattan Institute’s Saul Eslake, and Reserve Bank Governor, Glenn Stevens.
His bottom line for Australia is that Chinese development is very positive for our economy as long as we do not fall foul of the so called Dutch Disease where the text book version says other industries were damaged by the impact of diversion of resources to the North Sea oil industry, and the subsequent high currency. The Dines version is that our “fat and happy and complacent culture could become lazy and unprepared for when the worm turns.” He is a strong advocate of an Australian Sovereign Wealth fund. He is a Visiting Fellow of the Lowy Institute whose role is to develop new ideas and dialogue on international development and Australia’s role in the world.
He recalls selling of iron ore in the late 1990s at just US$17 a tonne, and discounting from that level, reflecting the state of the commodity markets in that era.
I met him at an investor presentation held by Caledonia Investments, the Australian global fund manager currently launching an Asia Fund. Clinton is executive chairman and, with CIO Tim Davies, aims to invest in Hong Kong-listed Chinese and Asia Pacific companies which are highly-leveraged to the China growth story. Minimum subscription is $250,000. Caledonia was founded in 1992 by Mark Nelson, Principal and joint chief investment officer, and the Darling family led by Michael Darling, a keen student of China for many years. If Caledonia can match Clinton’s extraordinary China knowledge with similar investment expertise, the fund will be a major winner. I have had funds invested in the Caledonia Global Investment Trust for some years so admit to a positive bias and was at the presentation as a client guest.
Dines remains a BHP Billiton shareholder and speaks very warmly indeed of the company and its prospects in the years ahead. He hugely appreciates “being a very interested and privileged spectator of one of the great transformations in human history and one of the most significant eras of China’s long and spectacular history. And I happened to land there just as this era began, an era in which China started along the path to resume what the Chinese think of as their rightful place in the world.” (Speech to Lowy Institute, February 2010).
When he began in China early 1979, aged 20, the economy was the same size as Australia’s, but today is half the size of the US. “The transformation began after 200 years of social upheaval,” he points out.
In the Lowy speech he adds: “The changing China that I have been privileged to observe over the last 30 years is characterised by several features - scale, complexity, diversity, dynamism, opacity. The virtues of the Chinese people - willingness to work hard, a reverence for literacy, a propensity to save - have been well harnessed to the cause of national development in the past 30 years by the insights of Deng Xiaoping and nurtured through an unusually extended period of stability by a government that has muddled through with considerable agility and, by Chinese standards, benevolence. The change in China has been good for the Chinese people and it has generally been good for the world and for Australia. What we perhaps didn’t anticipate is the extent to which the arrival of a wealthy and powerful China would be disruptive. But China is with us, China is not going away anytime soon, China will continue to change, China will inevitably become more influential and assertive of her national interests - the onus is on us to be good at reading the signs and agile enough to make the appropriate adjustments so that our national interests are also asserted and protected.”
In his Caledonia presentation and in a following one hour interview with myself and our resource analyst Mark Taylor, Clinton aimed full bore at The Elephant, emphasising:
Over the last 30 years some 200 million Chinese - or “three Germanies” - have become ‘comparatively affluent’, earning money over and above basic needs. As now as living standards increase, they can take out a mortgage, and buy a car. Where once a house was 8 square metres that size has grown past 10, towards 25 square metres, and the “process keeps on going.” He expects another 200 million to achieve the same affluence over the next decade. They now can eat better, wear nicer clothing, obtain better health care, better education for the kids, then luxury items and leisure - jewellery, hotels, the second TV and tourism abroad. All the things Australians want!
Australian tourism - huge opportunity
Last year, he noted, 454,000 Chinese visited Australia with plenty of money to spend. I mentioned the Japanese tourism years ago when control largely went to Japanese hands. He was scathing of Australia’s commercial agility at the time, and obviously felt there was a big future for our tourism industry in developing the Chinese market. How is Oprah Winfrey spelled in Chinese, I wondered.
China is not indebted. Its massive pool of household savings exceeds the combined GDPs of the other BRICs - Russia, India and Brazil - not counting corporate savings. China has some US$2.8 trillion in foreign reserves, only half placed in US dollars. Where the country uses debt it is not “stupid enough” to use short term debt, most debt is medium to long term denominated. Chinese are fiscally prudent and wary of debt by nature. The budget deficit currently runs at 2%.
One Child Policy. I listened to this with great interest, having read (very doubtfully) screeds of doomsday stuff on China growth based a on supposed One Child Policy and perusal of official statistics indicating an aging population. Clinton says the One Child Policy population may have affected the cities to some degree but in rural areas as the inspectors visited, the children were sent to the next village. When an additional child was born, overnight a childless family down the road got lucky. The Government understood and simply ignored the process. He also has a view of these issues through his wife’s eyes, where she works for a foundation (Half the Sky) which operates in over 40 orphanages providing staff and training. In an indication of changing times, he noted that China’s rising incomes means that fewer healthy children are now being abandoned and a high proportion of those coming into the orphanage system these days are children with disabilities or special needs.
Dependence on exports. The initial tigers - Japan, Korea, Taiwan, Hong Kong, Singapore and Malaysia - were export oriented insular economies. But China is a continent and it takes off on the same developmental journey as the US with a population at least 10 times larger when it began the same journey late in the 19th century. And China as a continent has the same immense need for transcontinental infrastructure. The early tigers were export oriented, but he emphasises over the last decade net exports contributed on average only 1.5% to GDP growth per annum. His presentation notes summarise: “Growth is driven by human aspiration, modernisation, industrialisation, urbanisation and rising levels of per capita consumption. Domestic investment and domestic consumption dominate economic activity. With investment capacity supported by a high savings rate, low debt levels and increasing capital efficiency, the economy has irresistible momentum and is demonstrably resilient to internal challenges and external shocks - for instance the rapid recovery from the GFC.”
Urbanisation and the accompanying boom in residential, commercial and infrastructure construction are only partially completed. “Shanghai is only half developed when you look at the old buildings, empty spaces, yet to be filled or redeveloped,” he says. A materials and energy intensive phase of growth is likely to continue for another two decades, accompanied by rapid consumption growth.
Chinese housing bust: “Unadulterated Frogshit!” - Dines expressed very strong disagreement with the views expressed last year by “Mr. Short Seller” Jim Chanos. Apart from that immense rising tide of affluence, some key points were:
(a) Chinese housing prices had been growing for many years at 9% per annum, but income growth has been 10% per annum.
(b) Chinese home buyers typically put down a 35-40% deposit and to the chagrin of the banks, pay it back quickly in 5-7 years. Credit card penetration is very low, many have debit cards!!!
He accepted some parts of some cities were overbuilt, but clearly regarded these instances as simply flies on the elephant - “look at the elephant, not the ticks and flies…”
In the energy sphere they were diversifying away from the coal - which supplies some 70% of their energy. “It’s not like Queensland coal, 90% of China’s is 600 metres deep and getting deeper - and the Chinese have rising costs too! They are moving away from it on a greater scale than anyone else. “They are developing wind, solar; they are at the leading edge of developing battery technology, biomass, tidal, and algae. Algae? - they have the capacity to throw 50 Ph.D.s at their research on any given problem and they are serious about it because they have got to be.” By 2020 the aim is to reduce dependence on coal from 70% to 60-50%. Of that 10% shift, the lions share, perhaps 8%, would come from gas and nuclear.
We discussed the outlook for some key commodities.
Iron Ore
Until earlier this year Dines was slightly more bearish than consensus, feeling the iron ore price could begin to weaken from 2013, as against consensus 2014/15. But now he cites (1) delay in projects following the GFC (2) rapidly rising costs for BHP and Rio Tinto (RIO) to build new capacity now at $180 per annual ton. He does not see the iron ore price rolling over until late decade perhaps 2018/19 at earliest mid decade. “It’s difficult to tell, to be precise, there are so many variables.” He believes iron ore will be the first major mineral to see a price fall as it is plentiful around the world, thus likely first to see supply come into balance with demand. He emphasises the maxim that high prices are the elixir to achieve low prices, as they bring on additional supply. It is notable that he does not mention any cessation in Chinese demand. BHP and Rio are the lowest cost Australian producers, respectively the Rolls Royce and Bentley of the resources market. Demand for iron ore is not going to slacken, even at current prices as steel represents only a small component of construction costs, with land costs and developers’ margins being significantly larger variables.
Copper
Dines describes this as the “modern metal” coming into its own after Thomas Edison brought electricity to the world in the 1880s. Again he looked at demand, the transmission of electricity, that a McMansion required 200-250lbs copper, and concluded again that copper was a small and difficult to replace component of total costs. He believes to meet supply the world needs to bring on the equivalent of one new Escondida each year, for many years to come. He does not see copper’s price falling from current US$4 plus levels for any length of time for many years after iron first dips.
Oil
Since the 70s we have become far more efficient in the use of oil, through smaller more fuel efficient cars and so on. So we could live with relatively high oil prices. I brought up the issue of Hubberts’ Peak where early this decade ex Shell man Kenneth Deffeyes projected that the supply of traditionally produced oil was and is about to fall. Dines discussed this issue but then brought up the issue popularised by well regarded US oil industry veteran investment banker, the late Matthew Simmons, in his 2005 Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy. Dines agreed very strongly with the direction of Simmons’ arguments that the Saudis simply did not have the oil reserves they claimed and that rather, they faced the threat of diminishing production as their major oil fields faced rapid decline. He pointed to a minimum oil price close to US$100 in today’s dollars, to justify alternative supply including from deep offshore fields and areas such as Canada’s Athabascan tar sands.
So in summary, we found a medium term bull on iron ore and a long term bull on copper and oil. We could have spent many hours talking with Clinton, but had just one hour and that through wonderful courtesy from my friends at Caledonia. I had already listened to Dines for over an hour at that presentation, and learned a great deal from a very animated Q and A that night!
We gained an immense and believable appreciation for a Chinese future from a highly intelligent and straight talking man deeply embedded in the mainland for over 30 years! Thank you Clinton Dines!
Ian Huntley
Yesterday’s post by Professor Patrick Chovanec (click here if you missed it) led me to thinking about the implications for the metals and raw materials industries. My thoughts were helped along somewhat by a seminar that I attended here in Beijing this morning, on the same subject.
For those of us who are buying raw materials from China, or competing with China for raw materials in other countries, or indeed looking to sell to China, a couple of key issues and potential problems lie ahead.
The first, chronologically, is that the current leadership is not likely to institute any new reforms or take drastic measures between now and the end of their rein in 18 months time. If history is any guide, their focus is more likely to be on preserving their place in history books, and seeing that their anointed successors are groomed for future success. The pattern in China is for the existing leadership to focus on the successor’s successor, thereby ensuring that leadership roles have candidates ready at least 10 years out.
While the transition to the new leadership is likely to be relatively smooth, things will start to get interesting in 2014 and 2015. That’s about the earliest we are likely to see any change of direction start to manifest itself. Part of the problem is that a change of direction will be very hard to predict, since the next crop of potential leaders has almost to a man avoided saying anything that could be controversial. A key performance criteria for rising through the ranks of the Communist Party is to NOT rock the boat. Liberal thinkers do best by not revealing their hand, but so too do hardliners.
One reason why the next wave of policy direction could be fraught with danger is that the next crop of leaders comes with all the wrong credentials. In the group of people who are likely to be in the top 9 jobs (the Politburo Standing Committee), there will be no economists, and nobody with any foreign policy experience. Indeed, the present Foreign Minister is not even a member of the Politburo, much less the Standing Committee.
More worrying for us foreigners will be that the next crop of leaders is likely to include former senior executives of China’s major SOEs (State Owned Enterprises). Any chance of liberalising of competition laws, reduction of corruption or significant effort to reduce piracy, is likely to go out the window once those people start to have more influence.
A lot of economists and commentators talk about China’s economy, and whether it will suffer a hard landing as inflation starts to cause increased problems with labour unrest and spiralling wages. With a group of people moving into the top jobs with no economics skills amongst them, a hard landing is more likely to come from mis-management of the economic levers.
To his credit, Wen Jiabao has steered the economic ship adroitly. He is a geologist by training, and Hu Jintao is a civil engineer. They have pretty much taken an engineering approach to the economy to date, and whether by luck or design, they have been relatively successful.
But the next batch of men (with at most one or two women) will come from a much more diverse background, with some princelings (sons of previous leaders, who usually enjoy poor respect from the masses), proteges from the Communist Youth League (Hu Jintao’s breeding ground), former captains of industry, and the “New Red”, a group of people who have been re-energising old Mao songs, often with cynical disregard to their own heritage (Bo Xilai’s mother was tortured to death by Mao, yet he embraces Mao ideology in his TV appearances).
With such a motley group, perhaps the biggest challenge facing the next generation of leaders will be simply to maintain enough unity to get on with the job, or at least to maintain some semblance of unity.
If you are in the least bit interested in what happens inside China, especially from a political, economic, human rights or other angle, then a post by Professor Patrick Chovanec is vital reading.
Professor Chovanec is Associate Professor of Economics at Beijing’s Tsinghua University. He also recently spoke at AZ China’s TMS conference.
Patrick’s piece, on his own blog site, epitomises the adage that politics trumps economics. Unless you have an excellent understanding of how the political system works (in any country), you will not be able to grasp how economic policy is developed, rolled out or executed. In China, it is difficult enough to get any sort of clear picture of how the Party controls things. Patrick’s piece gives a concise view of the process of selecting leaders, the balance of power between the Party, the State and the Army, and how the whole structure hangs together.
It’s a long article, but well worth reading. Click here to access it.
0