Archive for category China
China economy shows signs of strength
China released a series of figures on Sunday showing continued economic strength as it prepares for new leaders tasked with sustaining the country’s dramatic growth.
Production statistics and other figures released by China – including retail sales, fixed asset investment and inflation – all showed an improvement. Photo: EPA
12:47PM GMT 09 Dec 2012
The 10.1pc November increase follows rises of 9.6pc the previous month, 9.2pc in September and a three-year low of 8.9pc in August.
Overall growth has slowed for seven straight quarters in China. It hit 7.4pc in the three months through September, the weakest performance in more than three years.
But the production statistics and other figures released by the bureau – including retail sales, fixed asset investment and inflation – all showed an improvement.
The statistics – the first major economic figures to be released since the Communist Party held its pivotal congress last month – will be welcomed by the political elite as it prepares to usher in new leaders in March.
“Overall it’s a quite strong set of numbers, supporting our view of rebounding GDP growth,” said Lu Ting, China economist with Bank of America Merrill Lynch.
President Hu Jintao has called for efforts to strengthen domestic consumption in a bid to create a new growth model, echoing mounting calls for change to stabilise growth amid the slowdown.
Economists say the country faces mounting pressure to restructure its economy to ensure long-term growth, such as reducing its reliance on exports and boosting domestic consumption.
HSBC China economist Sun Junwei said Sunday’s figures have created favourable conditions to implement reforms under Beijing’s new leaders.
Xi Jinping replaced Hu as party chief last month and is strongly expected to succeed him as national president next March. The party’s new number two Li Keqiang is set to assume the premiership at the same time.
“The leaders will step up the reform efforts gradually in the coming quarters,” Sun said.
“There will not be drastic changes that will happen overnight, but the current recovery will create favourable conditions to accelerate these reforms next year.”
Other figures released on Sunday include retail sales, the main measure of consumer spending, which rose 14.9pc year-on-year in November from 14.5pc in October.
Fixed-asset investment, a key gauge of infrastructure spending, was up 20.72pc year-on-year in the first 11 months of 2012, from 20.7pc in January-October.
The consumer price index, the main measure of inflation, increased to an annual 2pc from a near three-year-low of 1.7pc in October, which will give lawmakers less room to loosen monetary policy.
Premier Wen Jiabao and Commerce Minister Chen Deming have both said in recent months that they expect China to achieve its targeted growth rate of 7.5pc this year despite the impact of the global slowdown.
China cut interest rates twice this year and has reduced the amount of funds banks must keep in reserve three times since last December, to encourage lending.
But it has avoided the kind of huge stimulus package it announced after the 2008-2009 global financial crisis, which sent inflation soaring.
- China pledges rural reforms to boost incomes, consumption (chinadailymail.com)
- China reports strong economy data (bbc.co.uk)
- China’s economy shows pick-up amid leadership transition (rappler.com)
- China Is Now In A Sweet Spot For Economic Growth (businessinsider.com)
- China economy shows signs of strength (telegraph.co.uk)
- China’s logistics industry picks up (nzweek.com)
- China: Diggers pile up unsold after Caterpillar adds capacity (chinadailymail.com)
- China’s recent trade statistics have been artificially inflated (chinadailymail.com)
- China’s non-manufacturing industries expand at a faster pace (chinadailymail.com)
- Quality, efficiency to feature in China’s economy (nzweek.com)
Dec 10, 2012 6:31pm
U.S. Intelligence: China Economy to Surpass U.S. by 2030
A report on global trends prepared by the U.S. intelligence community notes that by 2030 China is likely to have surpassed the United States as the world’s largest economy. The report suggests the United States would likely serve as “the first among equals” in a multi-polar world.
“China alone will probably have the largest economy, surpassing that of the United States a few years before 2030,” The report “Alternative Worlds” prepared by the National Intelligence Council notes in their findings released Monday at the National Press Club.
“In terms of the indices of overall power in gross domestic product, population size, military spending and technological investment, Asia will surpass North America and Europe combined,” said Christopher Kojm, Chairman of the National Intelligence Council at the press conference.
But a lot could happen in the next seventeen years. And there is uncertainty about how China will evolve.
“China is…the wild card. I mean, its actions itself can be its worst enemy, particularly if it becomes, as we’ve seen in a couple — starting a couple of years back, a lot more aggressive in the neighborhood, then actually is sowing a lot more support for continued U.S. — a continued U.S. role in the region.” Said Dr. Matthew Burrows, counselor to the National Intelligence Council at a press conference Monday morning.
Despite the findings about China’s economy, the report notes that the United States will remain a dominant power militarily with a strong economy as the boom in domestic natural gas production possibly helps lower costs for manufacturing and reduces unemployment.
“When you broaden your definition of power beyond just the basic ones of GDP [Gross Domestic Product], military spending, R&D [Research and Development] and GDP, and you look broader at what a lot of the other — what a lot of people would call more softer powers, the U.S. still in 2030 stands head and shoulders above China, India and actually all other powers in the world.” Burrows said.
“The U.S. most likely will remain ‘first among equals’ among the other great powers in 2030 because of its preeminence across a range of power dimensions and legacies of its leadership role. More important than just its economic weight, the United States’ dominant role in international politics has derived from its preponderance across the board in both hard and soft power. Nevertheless, with the rapid rise of other countries, the ‘unipolar moment’ is over and Pax Americana—the era of American ascendancy in international politics that began in 1945—is fast winding down,” The assessment noted.
Noting the abundant shale gas reserves in the United States the NIC report notes, “With shale gas, the US will have sufficient natural gas to meet domestic needs and generate potential global exports for decades to come. Increased oil production from difficult-to-access oil deposits would result in a substantial reduction in the US net trade balance and faster economic expansion.”
Among the reports other major trends and concerns noted are the growing demand for food and water with climate change exacerbating the need for these resources as the world’s population is expected to approach 8.3 billion people in 2030. The report also notes that the Middle East and South Asia could face increased instability as 2030 approaches.
“The Middle East’s trajectory will depend on its political landscape. On the one hand, if the Islamic Republic maintains power in Iran and is able to develop nuclear weapons, the Middle East will face a highly unstable future. On the other hand, the emergence of moderate, democratic governments or a breakthrough agreement to resolve the Israeli-Palestinian conflict could have enormously positive consequences.” The report noted.
While terrorism has been the main national security concern for the United States for over a decade the NIC report notes that Islamist terrorism is likely to decline but not completely disappear.
“The current Islamist phase of terrorism might end by 2030, but terrorism is unlikely to die completely. Many states might continue to use terrorist group out of a strong sense of insecurity, although the costs to a regime of directly supporting terrorists looks set to become even greater as international cooperation increases. With more widespread access to lethal and disruptive technologies, individuals who are experts in such niche areas as cyber systems might sell their services to the highest bidder, including terrorists who would focus less on causing mass casualties and more on creating widespread economic and financial disruptions.”
The report also notes that technology will help shape global-security, social and economic developments with increased productivity, automated technologies, precision agriculture and advancements in health care.
Noting the potential for major crisis the report notes the possibility of a severe pandemic as well as weapons of mass destruction and cyber attacks being carried out by non-state actors.
“Our work is invaluable to the administrations past and present. It helps to inform the Pentagon’s Quadrennial Defense Review. It has helped to inform the State Department’s Quadrennial Diplomacy and Development Review. And the policy planning staffs across the national security agencies are keenly interested in our work, and we know that senior policymakers are as well,” NIC Chairman Kojm said at the press conference.
- U.S. won’t be alone at the top by 2030, says new report (tv.msnbc.com)
- Report: U.S. Will Lose Superpower Status By 2030 (personalliberty.com)
- Intelligence community: U.S. out as sole superpower by 2030 (politico.com)
- China Economy to Surpass US by 2030 (abcnews.go.com)
- New Study: Africa, Asia to Overshadow USA, Europe by 2030 (atlantablackstar.com)
- U.S. Intelligence Agencies See a Different World in 2030 (whitenewsnow.com)
- Asia ‘set to eclipse’ US by 2030 (bbc.co.uk)
- US National Intelligence Council says China’s global power more than EU and USA combined by 2030 (chinadailymail.com)
- U.S. Intel Report: China to Overtake U.S. Economy by 2030 (foxbusiness.com)
- China’s economy likely to surpass U.S. before 2030, analysts predict (denverpost.com)
Taking Off: Implications of China’s Second Stealth Fighter Test Flight – China Real Time Report – WSJ
Taking Off: Implications of China’s Second Stealth Fighter Test Flight
By Andrew Erickson and Gabe Collins
China’s fighter aircraft development efforts appeared to take another leap forward after local media reported that Shenyang Aircraft Corporation (SAC) had successfully tested its J-31 stealth fighter prototype this week. Following the test flight of a Chengdu Aircraft Corporation (CAC) J-20 prototype less than two years ago, the test of the J-31 suggests China could eventually become only the second country behind the U.S. to develop two stealth fighter programs – an important development with serious potential implications for the tactical aircraft export market and well as the U.S. military.
Video and photos posted online Thursday show the J-31 prototype conducting an initial high speed taxi run and 10-minute flight test accompanied by a pair of SAC J-11BS fighters. The J-31’s maiden flight represents the second “unveiling” of a significant new fighter aircraft by SAC in less than a year, the other being the J-16, a two seat multi-role variant of the J-11B, similar to the US F-15E and the Russian Su-30MKK.
China’s defense industry can now sustain multiple overlapping advanced programs. SAC alone is currently working on four major fighter aircraft – the J-31 and the J-16 as well as the J-16’s single seat parent the J-11B and the carrier-based J-15, also based on the J-11B.
Like most modern fighter aircraft, the J-31 will likely be a multi-role combat aircraft capable of employing modern precision munitions in both air-to-air and air-to-surface roles. Despite apparent rapid advancement, however, it will take time for the fighter to reach full operational status. As Xu Guangyu of the China Arms Control and Disarmament Association explains, “there is still a huge gap between China and the US’ fighter jet technologies because we are still testing both the J-20 and the J-31. It might take another couple of years before we can put them on the production line.”
Mr. Xu’s observation raises an interesting question because it is not yet clear if the J-20 and J-31 are intended to complement each other or be competitors. Some Chinese analysts like former Aviation World deputy editor Bai Wei share the view of Western counterparts that they may be complementary as part of a “high-low” mix, with the larger J-20 akin to the F-22 and the smaller J-31 akin to the U.S. F-35 Joint Strike Fighter.
One factor that suggests the J-20 and J-31 could complement one another is that the J-31 could be modified for use on aircraft carriers in a way the larger J-20 is unlikely to be. Sr. Capt. Li Jie of the PLA Navy (PLAN)’s strategic think tank has been quoted in Western media as stating the J-31 prototype “might become a carrier-based fighter jet” because it is smaller and slimmer than the J-20.
The prospect of the J-20 and J-31 becoming China’s mainstay tactical strike fighters during the next decade stands to influence regional defense planning and tactical aircraft export markets. Unveiling the J-31 affirms that, save for jet engines, China’s aerospace sector is now in many ways nearly as advanced as Russia’s and suggests that Russian manufacturers will soon be unable to compete with China’s own fighter manufacturers. Beijing is already the world’s sixth-largest arms exporter, and Chinese aircraft export growth would come largely at Moscow’s expense.
This means Russia will need to shift its weapons exports from China to Chinese neighbors such as Vietnam and India. However, given the defense spending cutbacks in the U.S. and Western Europe, Russian firms will have to compete with the likes of Boeing, Lockheed Martin and BAE in a way they never had to when China (which Western defense firms are largely prohibited from selling to by an embargo) was essentially a captive market for Russian weapons exporters. Chinese e increasingly Therefore, the parallel development of the J-20 and J-31 will provide further impetus for China’s aviation industry to master mass-production of modern high-performance jet engines – its last major obstacle to being able to export tactical aircraft.
The J-31 also stands to meaningfully impact decisions on U.S. defense spending, especially if it ends up being produced in conjunction with the J-20 and they end up being complementary to one another. If the J-31 and J-20 both end up in mass production, China could ultimately achieve parity or perhaps even numerical superiority in the Asia-Pacific region in terms of late-generation fighters deployed. There is a rising probability that China’s rapid advancement in indigenous tactical aircraft design will spark a renewed debate in the U.S. over restarting production of the highly advanced but also highly expensive F-22 Raptor.
Bottom Line: China’s Military Aerospace Industry Nearing Critical Mass
It is extremely significant that China may soon join the U.S. as the only other nation to develop two “low-observable” aircraft simultaneously. China’s defense aerospace sector overall may be moving toward an architectural model in which several distinct poles of expertise develop in Shenyang, Xi’an, and Chengdu and then compete with each other on key big ticket projects. Multiple aviation industry bases with significant development and production capacity, including SAC, allow for domestic competition for key aircraft programs. This can minimize the chances of single-point failures jeopardizing development targets, increase efficiency, and maximize the chances of useful breakthroughs.
It is thus not too early to consider the possibility that China’s aviation industry, despite enduring limitations, may already enjoy some key advantages over Western counterparts. As a latecomer, China can draw on knowledge gleaned from industrial espionage, reverse engineering, and study of foreign systems, standards, and specifications, allowing it to save costs by leapfrogging rather than developing every component itself. Meanwhile, it may benefit from lack of legal obstacles to subsidization and technical diffusion through civil-military integration—a lack that Western contractors arguably benefitted from during their Cold War heyday before stricter regulations emerged in the 1980s and 1990s. China’s military aerospace industry is rapidly approaching critical mass. Continuing to add investment to this growing foundation will allow China’s aviation industry to fully harness the flashes of technical prowess shown when new aircraft like the J-31 take flight.
- Second China stealth fighter prototype has test flight (foxnews.com)
- China’s Newest Stealth Fighter The J-31 (Updated) (warnewsupdates.blogspot.com)
- China’s Newest Stealth Fighter The J-31 Has It’s Maiden Flight (warnewsupdates.blogspot.com)
- Stealth fighter jet dubbed as the J-31 reportedly tested in China (ubergizmo.com)
- J-31 Chinese Stealth Fighter completes successful maiden flight (americanlivewire.com)
- The secret flight of China’s new stealth fighter (killerapps.foreignpolicy.com)
- New pictures show second Chinese stealth fighter being test flown (security.blogs.cnn.com)
- China ‘makes first test flight’ of new stealth fighter jet (telegraph.co.uk)
- J-31 (thing) (everything2.com)
- Second Chinese stealth fighter makes test flight (guardian.co.uk)
By Trefor Moss
October 19, 2012
Picture a vast Chinese state institution with around two million staff, comprising a baffling array of units and sub-departments all scattered across the country. Under the guise of this institution’s budget expands so quickly – to around $100 billion a year – that it is hard for anyone to keep track of how much is really being spent, or on what. All the while, the institution’s sprawling nature and its near-autonomy mean that it operates almost entirely without accountability or oversight: There is only the money, and the many pockets into which it disappears.
We are of course talking about China’s Ministry of Railways. But we might as well be talking about the People’s Liberation Army (PLA). The only difference is that the former is building a high-speed rail network, while the latter is building a high-performance military. Neither, perhaps, is doing a very good job of it.
If you haven’t read Evan Osnos’s of the rampant corruption within the Railways Ministry in the , then you’re missing out. What is really striking for a PLA watcher, however, is how easily the military could be substituted for the railways ministry throughout Osnos’s portrayal. He describes the ministry as a “state-within-a-state” that was effectively given a blank check by the central government, and which, with nothing to curb its behavior, misappropriated a mind-boggling amount of its allocation. But if anything, the PLA is even more autonomous than the Ministry of Railways, in which senior staff routinely skimmed off millions of dollars in kickbacks even as they did a lousy job of building their new rail network.
Is corruption within the PLA as corrosive as it was within Liu Zhijun’s shaky railway empire? The first thing to note is that the headline budget of the PLA and the Ministry of Railways is very similar. This week the Center for Strategic & International Studies (CSIS) its estimate of what China and other Asian countries spend on their militaries. In 2011 China spent somewhere between around $90 billion and $142 billion, the CSIS report calculates, and concludes the money was split fairly equally between personnel costs (34% of the total), operations and maintenance (33.7%), and defense investment (32.2%) in 2009, the latest year they did a breakdown of.
This breakdown suggests that 100% of the PLA’s budget was diverted towards real requirements. But the parable of the railways strongly suggests that this cannot be right. How much of the PLA’s budget has been spent on retirement homes for generals in Florida, or funneled into private business ventures, or used to buy promotions? How much has been wasted on bogus capabilities that the military doesn’t really need, but whose purchase helped to line influential pockets? And how much , but capabilities whose price tag was hugely inflated so that highly-placed officials could skim off the surplus?
We can only guess how much of the PLA’s budget has been squandered; but what we do know is that the organization has a serious corruption problem. The situation has become so severe, by John Garnaut in April, that one of the PLA’s top generals, Liu Yuan, openly warned his colleagues at the General Logistics Department that the Chinese military was facing a life-and-death struggle against corruption. In fact, the PLA faces nothing short of destruction unless it puts an end to the corrupt culture that has become embedded within the PLA system, Liu was reported as saying.
The top people at the Ministry of Railways wanted to get rich, while seeming to produce fast results. In the end, they were caught: Their high-speed trains did not work when really put to the test, and 40 people died as a result. China’s new military system remains largely untested. But if billions have been stolen by generals and contractors, instead of spent perfecting complex systems and operating procedures, then China’s military could in effect be a high-speed accident waiting to happen.
As for those budget estimates, the Pentagon and China spends a lot more on defense than it claims should maybe think again. Adjusted for wastage and corruption, actual PLA spending could be much lower than anyone realizes.
China Confronts Mounting Piles of Unsold Goods
Forbes Conrad for The New York Times
Bags of toys stored at a shop in a wholesale market in Guangzhou, a city in southeast China.
Published: August 23, 2012
GUANGZHOU, China — After three decades of torrid growth, China is encountering an unfamiliar problem with its newly struggling economy: a huge buildup of unsold goods that is cluttering shop floors, clogging car dealerships and filling factory warehouses.
The glut of everything from steel and household appliances to cars and apartments is hampering China’s efforts to emerge from a sharp economic slowdown. It has also produced a series of price wars and has led manufacturers to redouble efforts to export what they cannot sell at home.
The severity of China’s inventory overhang has been carefully masked by the blocking or adjusting of economic data by the Chinese government — all part of an effort to prop up confidence in the economy among business managers and investors.
But the main nongovernment survey of manufacturers in China showed on Thursday that inventories of finished goods rose much faster in August than in any month since the survey began in April 2004. The previous record for rising inventories, according to the HSBC/Markit survey, had been set in June. May and July also showed increases.
“Across the manufacturing industries we look at, people were expecting more sales over the summer, and it just didn’t happen,” said Anne Stevenson-Yang, the research director for J Capital Research, an economic analysis firm in Hong Kong. With inventories extremely high and factories now cutting production, she added, “Things are kind of crawling to a halt.”
Problems in China give some economists nightmares in which, in the worst case, the United States and much of the world slip back into recession as the Chinese economy sputters, the European currency zone collapses and political gridlock paralyzes the United States.
China is the world’s second-largest economy and has been the largest engine of economic growth since the global financial crisis began in 2008. Economic weakness means that China is likely to buy fewer goods and services from abroad when the sovereign debt crisis in Europe is already hurting demand, raising the prospect of a global glut of goods and falling prices and weak production around the world.
Corporate hiring has slowed, and jobs are becoming less plentiful. Chinese exports, a mainstay of the economy for the last three decades, have almost stopped growing. Imports have also stalled, particularly for raw materials like iron ore for steel making, as industrialists have lost confidence that they will be able to sell if they keep factories running. Real estate prices have slid, although there have been hints that they might have bottomed out in July, and money has been leaving the country through legal and illegal channels.
Interviews with business owners and managers across a wide range of Chinese industries presented a picture of mounting stockpiles of unsold goods.
Business owners who manufacture or distribute products as varied as dehumidifiers, plastic tubing for ventilation systems, solar panels, bedsheets and steel beams for false ceilings said that sales had fallen over the last year and showed little sign of recovering.
“Sales are down 50 percent from last year, and inventory is piled high,” said To Liangjian, the owner of a wholesale company distributing picture frames and cups, as he paused while playing online poker in his deserted storefront here in southeastern China.
Wu Weiqing, the manager of a faucet and sink wholesaler, said that his sales dropped 30 percent in the last year and he has piled up extra merchandise. Yet the factory supplying him is still cranking out shiny kitchen fixtures at a fast pace.
“My supplier’s inventory is huge because he cannot cut production — he doesn’t want to miss out on sales when the demand comes back,” he said.
Part of the issue is that the Chinese government’s leaders have decided to put quality-of-life concerns ahead of maximizing economic growth when it comes to two of the country’s largest industries: housing and autos.
Premier Wen Jiabao has imposed a strict ban on purchases of second and subsequent homes, in the hope that discouraging real estate speculation will improve the affordability of homes. The ban has resulted in a steep decline in residential real estate prices, a sharp fall in housing construction and widespread job losses among construction workers.
At the same time, the municipal government in Guangzhou, one of China’s largest cities, has sharply reduced this summer the number of new car registrations it allows so as to reduce traffic congestion and air pollution.
Municipal officials from all over China have been flocking to Guangzhou to ask for details. Xi’an, the metropolis of northwestern China, has already announced this month that it will limit car registrations, although it has not settled on the details.
The Chinese auto industry has grown tenfold in the last decade to become the world’s largest, looking like a formidable challenger to Detroit. But now, the Chinese industry is starting to look more like Detroit in its dark days in the 1980s.
Inventories of unsold cars are soaring at dealerships across the nation, and the Chinese industry’s problems show every sign of growing worse, not better. So many auto factories have opened in China in the last two years that the industry is operating at only about 65 percent of capacity — far below the 80 percent usually needed for profitability.
Yet so many new factories are being built that, according to the Chinese government’s National Development and Reform Commission, the country’s auto manufacturing capacity is on track to increase again in the next three years by an amount equal to all the auto factories in Japan, or nearly all the auto factories in the United States.
“I worry that we’re going down the same road the U.S. went down, and it takes quite some time to fix that,” said Geoff Broderick, the general manager of Asian operations at J. D. Power & Associates, the global consulting firm.
Automakers in China have reported that the number of cars they sold at wholesale to dealers rose by nearly 600,000 units, or 9 percent, in the first half of this year compared to the same period last year.
Yet dealerships’ inventories of new cars rose 900,000 units, to 2.2 million, from the end of December to the end of June. While part of the increase is seasonal, auto analysts say that the data shows that retail sales are flat at best and most likely declining — a sharp reversal for an industry accustomed to double-digit annual growth.
“Inventory levels for us now are very, very high,” said Huang Yi, the chairman of Zhongsheng Group, China’s fifth-largest dealership chain. “If I hadn’t done special offers in the first half of this year, my inventory would be even higher.”
Manufacturers have largely refused to cut production, and are putting heavy pressure on dealers to accept delivery of cars under their franchise agreements even though many dealers are struggling to find places to park them or ways to finance their swelling inventories. This prompted the government-controlled China Automobile Dealers Association to issue a rare appeal to automakers earlier this month.
“We call on manufacturers to be highly concerned about dealer inventories, and to take timely and effective measures to actively digest inventory, especially taking into account the financial strain on distributors, as manufacturers have to provide the necessary financing support to help dealers ride out the storm,” the association said.
Officially, though, most of the inventory problems are a nonissue for the government.
The Public Security Bureau, for example, has halted the release of data about slumping car registrations. Data on the steel sector has been repeatedly revised this year after a new method showed a steeper downturn than the government had acknowledged. And while rows of empty apartment buildings line highways outside major cities all over China, the government has not released information about the number of empty apartments since 2008.
Yet businesspeople in a wide range of industries have little doubt that the Chinese economy is in trouble.
“Inventory used to flow in and out,” said Mr. Wu, the faucet and sink sales manager. “Now, it just sits there, and there’s more of it.”
- China Besieged by Glut of Unsold Goods (nytimes.com)
- China beseiged by flut of unsold goods (staradvertiser.com)
- Signs Of Trouble In The Chinese Economy (outsidethebeltway.com)
- fuel pump/module manufacturer in Guangzhou China (jrwang.net)
- China Has Become One Big “Stuffed Channel” (zerohedge.com)
- The other Malthusian problem (marginalrevolution.com)
- Did China cause North Dakota’s oil boom? (knowledgeproblem.com)
- China’s Solar Panel Manufacturers Face Trade and Finance Hurdles (nytimes.com)
- China enters unfamiliar economic territory with rising inventory – Contraction in China’s manufacturing sector now inching closer to one year. What does this say about the global recovery? (mybudget360.com)
- Survey finds 9-month low for China’s manufacturing (thehimalayantimes.com)
China’s $2.2-trillion shadow banking system: What you need to know | Business Insider | Financial Post
Should we be worried about China’s $2.2-trillion shadow banking system?
Jul 19, 2012 – 6:08 AM ET | Last Updated: Jul 18, 2012 3:30 PM ET
If economic growth in China continues to slow, rising and sudden defaults on loans made in the country’s shadow banking system could threaten to bring down China’s traditional banking sector and throw the world’s third-largest economy in jeopardy, according to Bank of America Merrill Lynch China Strategist David Cui.
The hodgepodge web of non-banks that comprise the shadow nexus in China includes pawn shops, underground banks, various wealth management products, trust companies, and guarantors – many of which don’t take deposits to insure against risky lending activities and operate completely beyond the eye of regulators and authorities.
What follows are highlights from Cui’s comprehensive report examining China’s shadow banking system.
Why the shadow banking system in China is so important
The sheer size of the system is overwhelming. At an estimated 14.5 trillion renminbi ($2.2 trillion) according to BofA, the amount of loans made by shadow banking entities amount to 25 percent of all the loans made in China by the traditional, regulated banking sector.
The system is also highly leveraged. Shadow lenders make most of their money by borrowing from regular banks at low interest rates and lending out at higher interest rates to riskier borrowers. No deposits at these institutions means they are highly vulnerable to loans gone bad, especially given the types of less-than-creditworthy clients who borrow from shadow banks.
Cui walks through the shadow banking system in China and takes a look at the institutions that comprise it and the unique risks posed by the activities of each.
Shadow banking entity #1: The investment trust industry
Investment trusts are basically companies that manage other people’s money by lending it out to finance various business projects or property loans on the one side and, on the other, guaranteeing a certain percentage return to the investors.
The investment trust industry in China has seen stunning growth recently. In 2007, the industry managed 1 trillion renminbi; in 2011, that number was up all the way to 4.8 trillion renminbi, a nearly 5x increase in under five years.
Cui says his team at BofA has “noticed early signs of stress in the system, e.g. at least three property trust products had failed to meet their repayment schedule and had to be bailed out.” Furthermore, he estimates that leverage in the investment trust entities “remains high, often reaching 10-15x.”
Not only is the trust industry highly leveraged, but also highly concentrated.
Of the 62 Chinese investment trusts, 10 of them account for half of all assets under management industry-wide, and 20 account for 72 percent.
The huge issue in Cui’s mind is the total lack of transparency in the investment trust industry. Only 2 of those 62 companies are required to disclose any sort of investment returns. This leads to investment “pooling,” wherein a trust will take an investor’s money and invest it in multiple projects at the same time.
The problem is that the investment trusts don’t really have to disclose any sort of detail on the investments in the pool, either. And Cui says that “some local experts think the share of pooled products in total trust assets may surge from 5% in 2011 to 30-40% by the end of 2012.”
Bottom line: If property prices and other investments turn sour and highly-leveraged, highly-concentrated investment trusts have guaranteed a certain level of returns to investors, they will have to be bailed out or they will face collapse.
Shadow banking entity #2: Pawn shops
There are over 4,000 pawn shops spread across China. They will probably provide theearliest warning signal that the system is melting down, according to Cui.
Pawn shops will show up on the radar first because of the nature of their lending business: most borrowers seek loans from pawn shops for extremely short periods of time, and for the typical borrower, it only takes one to three days to secure a loan.
So, with the pawn shops, it’s all about short-term lending. And, being pawn shops, they accept all sorts of collateral against these short-term loans – everything from cars and jewelry to financial securities like stocks and bonds, and property.
Bottom line: The property is a big issue, because if volatility in China’s property market continues and property prices take a further tumble from here, thousands of pawn shops will be left holding the bag on defaulted loans backed by collateral heavily discounted in value.
Cui warns in his report that we know how this sort of situation could play out becausewe already saw the exact same thing happen last summer. He writes, “for example, seven pawn shops in Wenzhou reported big losses in July 2011 because they couldn’t liquidate their collateral fast enough while their carrying costs were high.”
Shadow banking entity #3: Guarantors
China has guarantors of over 19,000 different businesses. They provide guarantees on loans to risky borrowers, making it more palatable for traditional banks to lend to those who are less creditworthy than the average client.
The upshot here is that guaranteeing loans to risky borrowers isn’t that great of a business to begin with since a guarantor makes probably half the rate on a given loan that a pawn shop does, for example.
Given that, guarantors are turning to illegal practices in order to boost their returns. Cui surmises that “the biggest risk in the industry is guarantors are acting more like a lender rather than focusing on their core guarantee business.”
BofA Merrill Lynch
What do the guarantors do to make money instead? They literally take a portion of the loan they are guaranteeing from the borrower they are guaranteeing and lend that money back into the shadow banking system to other underground borrowers. The net effect, of course, is amplified leverage within the shadow nexus.
And that is how the loan guarantee business in China really gets wild – instead of providing guarantees on clients’ loans, guarantors themselves are taking the loan money they are guaranteeing and lending it out to even riskier borrowers.
Bottom line: When those new shadow loans blow up (potentially due to any of the four triggers mentioned at the beginning of this article), it is the clients – who are supposed to be guaranteed by the guarantors in the first place – that end up footing the bill.
And the big worry is that this has already begun. Two guarantors, for example – Huading and Chuangfu – have already run into trouble. Cui writes that “many of their clients have been sued by their banks for loan repayments although the borrowers claim that their guarantors have been using the fund,” and that “some of these borrowers are now seeking help from the municipal government of Beijing…to negotiation for a loan extension with the banks.”
Shadow banking entity #4: Underground banks
Cui calls underground banks “arguably the most unstable shadow banking sector”. And the commodities business is currently a major player in this area.
Letters of credit – trade finance agreements in which a bank pays the seller of a commodity and then goes and collects payment from the buyer of the commodity – are booming, and they are off-balance sheet vehicles, meaning they don’t factor into the traditional banking sector’s balance sheet leverage ratios and regulations regarding loan quotas.
Cui points out that many of the companies that are shut out of the official loan market are resorting to securing letters of credit from banks using copper and other commodities as collateral.
And metals traders are getting in on the game, too. A trader will borrow to buy copper or steel via a bank who issues a letter of credit to the seller on behalf of the trader. The trader can then take his new metal stock and pledge that as collateral for a normal bank loan, which he can then take and make money by lending the funds back into the shadow banking market at a higher interest rate.
When it comes time to for the trader to cover the letter of credit several months later, he recalls the loan from whoever he lent it to and pays back the bank.
Cui says these practices in the steel market are potentially explosive because “local warehouses, unlike those four or five well regulated in bonded areas, often provide multiple bills of lading to traders so they can obtain loans from different banks using the same steel inventory.”
In other words, there’s a lot of hidden leverage all over the place that is very difficult to quantify.
Shadow banking entity #5: Wealth management products
Wealth management products set up by traditional banks have some characteristics that are similar to trust companies that cause concern, and there are rumblings that a lot of the industry could be operating one big Ponzi scheme.
Indeed, the biggest problem with wealth management products in China is that by and large, no one has any idea what they are investing in or what kind of returns they generate.
Here’s an idea of how much we know about what a typical wealth management product – specifically, one of China Merchants Bank’s “most popular 7-day WMP products,” according to Cui – is invested in:
BofA Merrill Lynch
In other words, not much. Cui writes, “So in theory, the bank can invest up to 70% of the fund in areas we have zero information on.”
When Cui looked into all 59,082 of the wealth management products that have been issued in China since 2004, he found that less than half have even disclosed what return the investments have generated in the past few years.
Bottom line: Pooling is a big concern. Cui says banks will “issue multiple WMPs with various durations, pool the funds together, and invest in various areas with different durations jointly and pay out ‘expected’ returns from the pool.”
Cui continues: “According to some industry insiders, some banks have been using new WMP proceeds to cover losses from previous products in the pool – in our view, this is not fundamentally different from a Ponzi scheme. However, the music may stop at a certain point if/when WMP asset size stops expanding.”
The underlying problem facing all the institutions that make up China’s colossal shadow banking system is a slowdown in growth.
In fact, just last week we wrote about four major triggers that could bring down China’s shadow banks, all of which stem from continued economic weakness, just like the one China is currently experiencing. The four triggers are 1) (Illegal) Ponzi schemes falling apart; 2) a wave of defaults in highly-leveraged loans within the shadow banking system; 3) more turbulence in the Chinese property market; and 4) shrinking corporate sector earnings.
Given the shadow banking system’s enormous size, importance to the real economy in terms of the credit it provides, and the numerous feedback loops back into the traditional banking sector, China could face major issues if it starts to look like no one is able to pay anyone else back.
- Here’s All You Need To Know About China’s Fragile $2.2 Trillion Shadow Banking System (businessinsider.com)
- Should we be worried about China’s $2.2-trillion shadow banking system? (business.financialpost.com)
- Here Are 4 Triggers That Could Cause A Meltdown In China’s Enormous Shadow Banking System (businessinsider.com)
- Shadow banking in US (sandyyadav.com)
- China’s Shadow Banking Risks Are Spreading Through The Financial System (businessinsider.com)
- China Slowdown Stymies Plan to Curb Shadow-Banking Risks – Bloomberg (bloomberg.com)
- Deloitte Shadow Banking Index – ‘Only’ $9.53 Trillion in Size at End of 2011 (bespacific.com)
- Public outrage turns spotlight on bank regulators (livinglies.wordpress.com)
- Shadow Banking: The Rise, Fall and Future (valuewalk.com)
- Zero Hedge Provides Empirical Proof of Deflation (However, He Does Not Even Realize It) (ilene.typepad.com)
China’s Wen Warns Of Severe Job Outlook As Growth Yet To Rebound
The government will continue to implement a more “proactive” labor policy, Wen said yesterday at a government meeting on employment, according to a statement posted on the central government’s website. The job situation will become more “complex,” Wen said.
The comments build on the premier’s warning published three days ago that the nation’s economic rebound lacks momentum and difficulties may persist for a while. Authorities are intensifying efforts to halt a slowdown in expansion as the ruling Communist Party prepares for a once-a-decade leadership handover later this year.
“Party commissions and governments at all levels should further enhance the awareness that employment work is extremely important and earnestly put promoting employment at a priority place among all work tasks,” Wen said, according to the . The country should maintain steady and relatively rapid economic and enhance the economy’s role of driving job growth, he said.
More than 2,000 Hong Kong-owned factories in China’s may close this year as export orders fall and wages rise, the Federation of Hong Kong Industries said this week. China’s gross domestic product rose 7.6 percent in the second quarter from a year earlier, the statistics bureau said July 13, the sixth straight quarterly slowdown.
There are “more factors of instability and uncertainty” in the world economy, which faces “downward pressure”, Wen said yesterday in remarks to a U.S. group headed by U.S. Chamber of Commerce President , according to the official Xinhua News Agency. Wen called for China and U.S. to boost cooperation and mutual trust, and to “calmly” handle issues in economic and trade relations.
The government will “appropriately” step up policy fine- tuning in the second half to support growth, Wen said during an inspection tour in Sichuan province, according to a July 15 Xinhua report.
Promoting employment for college graduates should continue to be a top priority among job-related work, Wen said. China will support growth in small and medium-sized enterprises, which are the mainstay of , he said.
China’s urban registered jobless rate has held at 4.1 percent for seven quarters as of the end of March, according to figures from the labor ministry. There are no available figures for a nationwide that includes migrant and other unregistered workers.
- China’s Wen Warns of Severe Job Outlook as Growth Yet to Rebound – Bloomberg (bloomberg.com)
- Premier Wen Jiabao Warns On China Growth (247wallst.com)
- China’s premier promises job creation efforts (seattlepi.com)
- Chinese unemployment will become ‘more severe’, Wen Jiabao warns (telegraph.co.uk)
- Wen Warns China Economic Rebound Not Stable, Xinhua Says – Bloomberg (bloomberg.com)
- China’s premier promises job creation efforts (miamiherald.com)
- China’s Wen promises job creation efforts (seattletimes.nwsource.com)
- Wen: Rebound not yet stable (upi.com)
- China’s Leader Goes On Tour To Drum Up Support For Economy (forbes.com)
- China’s economic woes could continue for ‘some time’ (telegraph.co.uk)
China’s Manufacturing Growth Weakens As New Orders Drop
Employees put on clean suits at Semiconductor Manufacturing International Corp. (SMIC), in Shanghai.
’s manufacturing expanded at the weakest pace in seven months as overseas orders dropped, and South Korea cut its estimate for export growth this year, underscoring risks to Asian economies from ’s debt crisis.
The ’ Index fell to 50.2 in June from 50.4 in May, the Beijing-based National Bureau of Statistics and China Federation of Logistics and Purchasing said yesterday. South Korea’s Ministry of Knowledge Economy lowered its projection for overseas sales to an increase of 3.5 percent from 6.7 percent, citing a slowdown in major economies.
Manufacturing data from China, the world’s biggest exporter, signal the government may need to add stimulus to arrest an economic slowdown that probably extended into a sixth quarter. The downturn is rippling through Asian nations, with ’s sales to China, its biggest market, stalling in the first 20 days of June.
“It’s clear the slowdown of export growth as a result of weakness in Europe and the U.S. continues to weigh on the Chinese economy,” said Lu Ting, head of greater China economics at Bank of America Corp. in Hong Kong. The weaker PMI reading “will likely push policy makers to introduce incremental measures such as reserve-ratio cuts and easing lending restrictions to stabilize growth,” he said.
Asian stocks and currencies strengthened last week as European leaders agreed on measures to try to ease the region’s debt crisis. The Bloomberg-JPMorgan Dollar Index rose 0.8 percent and the MSCI Asia Pacific Index advanced 2.7 percent.
Gains in China’s currency against the have stalled as growth in Asia’s biggest economy slowed and Europe’s austerity curbed demand for exports. The weakened 0.88 percent in the second quarter, its biggest quarterly decline since a dollar peg ended in 2005.
Elsewhere in Asia today, the Bank of ’s second-quarter for the nation’s large manufacturers will be unchanged from minus 4 in the first quarter, according to the median estimate of 19 analysts surveyed by Bloomberg.
The European Union’s statistics office will say unemployment in the 17-nation euro area rose to 11.1 percent in May, according to the median estimate in a Bloomberg News survey. The jobless rate was 11 percent in March and April, the highest on record.
In the U.S., manufacturing probably grew at a slower pace in June, with the Institute of Supply Management’s factory index showing a decline to 52.0, the lowest level in eight months, according to economists by Bloomberg.
The June reading for China’s official PMI, based on responses from 820 companies in 31 industries, compared with the 49.9 median estimate of 24 economists surveyed by Bloomberg News. The dividing line between expansion and contraction is 50.
A separate released by HSBC Holdings Plc and indicated manufacturing may have contracted for an eighth month in June, according to a preliminary report on June 21. The final reading of the survey, which covers more than 420 companies and is weighted more toward smaller businesses, is due today.
While yesterday’s PMI reading was “slightly better than consensus, the underlying trend still indicates a deterioration in economic activity,” said Shen Jianguang, Hong Kong-based chief Asia economist for Mizuho Securities Asia Ltd. “Further monetary easing is warranted, with two interest-rate cuts and reserve ratio cuts in the second half increasingly likely.”
The People’s Bank of China lowered last month for the first time in more than three years and reduced the amount of cash banks must set aside as reserves three times starting in November. The ratio stands at 20 percent for the biggest banks after the last cut in May.
Shen estimates economic growth slid to 7.2 percent in the second quarter from a year earlier while Bank of America’s Lu forecasts 7.5 percent. Gross domestic product expanded 8.1 percent in the first three months of the year, the fifth quarterly slowdown and the slowest pace in almost three years.
The gauge of export orders in the federation’s index contracted for the first time since January. HSBC’s preliminary report showed new export orders had their largest decline since March 2009.
“Tumbling export orders point to headwinds to exports in the third quarter, suggesting domestic demand needs to pick up to stabilize growth,” Chang Jian, a Hong Kong-based economist at , said yesterday.
South Korea’s exports rose 1.3 percent in June from a year earlier, the Ministry of said yesterday. That compared with the 0.5 percent median estimate in a Bloomberg News survey of 16 analysts and an 11.1 percent increase a year earlier. Shipments to the European Union fell 22.7 percent from a year earlier in the first 20 days of June and sales to China were little changed, the data showed.
Taurus Investment & Securities Co. said on June 25 it reduced its estimate for second-quarter operating profit at Samsung Electronics Co., the world’s biggest maker of computer memory chips and flat screens. Taurus cut its forecast to 6.9 trillion won ($6 billion) from 7.2 trillion won, citing weaker- than-expected demand for products such as televisions.
- S Korea to halt Iran oil imports (bbc.co.uk)
- China PMI grows at slowest in 7 months (marketwatch.com)
- Chinese manufacturing continues to slump (oddonion.com)
- The Latest on China’s Crashing Economy (economicpolicyjournal.com)
- China manufacturing falls to 7-month low (business.inquirer.net)
- Faster clearance for certified local companies exporting goods to China (todayonline.com)
- Survey shows Chinese manufacturing slows in June – Kansas City Star (kansascity.com)
- China in a Growth Recession (forbes.com)
- China PMI Falters Again In June – Are The Numbers Real? (247wallst.com)
- GET READY: Here Comes A Huge 12 Hours For The Global Economy (businessinsider.com)
China responds to Fukushima
BY YUN ZHOU | 28 JUNE 2012
§ Before the Fukushima Daiichi nuclear accident, China had big nuclear expansion plans, with more than 40 reactor units under construction or in planning.
§ The Fukushima disaster led China to conduct safety inspections of all its reactors and to suspend nuclear project approvals until a new nuclear safety plan could be adopted.
§ Under Beijing’s new safety regulatory system, reactors that are operating or under construction will be spared major redesign, but future projects will face re-engineering, perhaps leading the Chinese to adopt safer third-generation reactor designs created by Chinese firms.
Before the Fukushima nuclear disaster, China had a relatively small fleet of 14 nuclear reactor units with a relatively small capacity — less than 12 gigawatts of electricity — but the country had big nuclear plans. It led the world in new reactor construction, with 27 units under way, five units approved and awaiting construction, and another 16 units scheduled. If all current construction went forward as planned, the country would be ensured of reaching its original target of 40 gigawatts of nuclear-generated electric capacity by 2020.
The National Development and Reform Commission planned to update the country’s medium- and long-term development plans after a National People’s Congress meeting in March 2011. The earthquake and tsunami that rocked Japan and gravely damaged the Fukushima Daiichi Nuclear Power Plant stopped the update cold.
In the immediate aftermath of the Fukushima disaster, the Chinese government claimed it would not change its nuclear power development policy. Even so, the government took actions summarized as the “four guidelines.” Under those guidelines, the government would:
§ Conduct safety inspections at all nuclear facilities.
§ Strengthen the approval process for new nuclear plant projects.
§ Draft a new nuclear safety plan.
§ Adjust the medium- and long-term development plan for nuclear power, suspending new project approvals until a nuclear safety plan could be enacted.
Although the Chinese government reaffirmed nuclear energy as an indispensable resource, the suspension of new nuclear projects sent shock waves through the ranks of international nuclear vendors and investors. Since then, China’s media have reported several scenarios for a potential restoration of nuclear construction. Finally, after 15 months of waiting, the State Council approved the nuclear facility safety inspection report and the new nuclear safety plan proposed by National Nuclear Safety Administration. The full text of the inspection report and safety plan was released to the public in June. The new medium- and long-term nuclear development plan proposed by National Development and Reform Commission is, however, still pending approval.
As China’s new nuclear regulatory system goes forward, reactors that are already operating and under construction will be spared from major redesign, but future reactor projects will face re-engineering. Additionally, it appears that the Fukushima disaster may lead China to adopt newer, third-generation (or Gen III) reactor designs created by Chinese firms, allowing China to wean itself from purely foreign reactor technology much more quickly than was expected pre-Fukushima.
The Fukushima response to date. Soon after the Fukushima accident, China planned safety inspections for all of the country’s nuclear facilities, including commercial reactors under construction; the inspection process was officially completed in August 2011. Before the comprehensive inspection report was released, inspectors told the media that no major incidents of non-compliance with safety regulations were found.
At the end of 2011, the National Nuclear Safety Administration finished and submitted the nuclear safety inspection report and a draft of a nuclear safety plan to the State Council, which primarily oversees ministries’ administrative activities, formulates administrative regulations, and drafts and implements national economic and social-development plans. The State Council reviewed both reports in executive meetings in February but, surprisingly, approved neither, requesting further investigation and modifications. Normally, proposals or reports brought to the executive meeting of the State Council are heavily reviewed, with negotiations among important stakeholders in government, but very few are rejected.
Both reports were reviewed again and finally approved on May 31. According to the State Council, the inspection report indicated that most of nuclear power plants meet the current domestic safety regulations and are line with International Atomic Energy Agency safety standards and requirements. However, some existing nuclear power plants will have to meet new standards on flood protection, and some research reactors will need to meet new earthquake requirements. The inspections revealed four major nuclear safety issues, including a lack of severe accident mitigation guidelines at some nuclear power plants.Overall, the inspection report noted 16 safety areas that should be addressed and remedied in three years, mainly involving emergency backup systems, flooding prevention, and safety margins related to earthquakes.
In June, the National Nuclear Safety Administration released its nuclear safety plan in full text; it provides safety goals not only for commercial nuclear plants, but also for research reactors and nuclear fuel cycle facilities. The plan requires core damage and large radioactive release frequencies for newly constructed units to be less than one event in 100,000 reactor years and one event in one million reactor years, respectively. In addition, the safety plan calls for elimination of large radioactive release incidents for units constructed after 2016.
Meanwhile, the National Development and Reform Commission is still working on setting a new goal for China’s medium- and long-term nuclear power development plan; this goal will direct China’s near-term pace for building nuclear power plants. As a part of China’s post-Fukushima actions, a first draft of a proposed atomic energy law was also submitted to the Ministry of Industry and Information for review. The law aims to provide a legal basis for all nuclear-related activities, including those relating to nuclear security and non-proliferation.
Taken together, these changes in policy strongly indicate that the Chinese government now considers nuclear safety a national priority and is prioritizing safety over the economic and environmental benefits of nuclear power.
Impacts on China’s nuclear industry. China has 22 second-generation (or Gen II) type reactors under construction. The question was whether those units will be regulated according to the standards and requirements of the new safety plan. Apparently, they will not. Minor design changes and upgrades to emergency systems and procedures will be adopted in response to the findings of the post-Fukushima inspection report.
For the 14 Gen II units planned before the Fukushima accident but yet to begin construction, it will be a different story. These planned units will need to meet the safety requirements of the new safety plan and include some design changes. Indeed, the Fukushima accident has led policy makers to rethink the level of protection needed for low-likelihood, high-consequence, and beyond-design-basis events. As China has done in the past, it will very likely adopt post-Fukushima recommendations of major international nuclear agencies and authorities, including the US Nuclear Regulatory Commission.
The new, much stricter standards for new nuclear construction — especially the call for elimination of large radiation releases in units built beyond 2016 — suggest that utilities may abandon Gen II plants and switch to next-generation designs that include passive core cooling and other accident-prevention and -mitigation features. It has been reported that Guangdong Nuclear Power Corporation is considering the AP1000, a Gen III reactor designed by the US nuclear vendor Westinghouse, for some of its projects. Although the National Development and Reform Commission still aims for an installed nuclear capacity of 70 gigawatts electric by 2020, the new design revisions and regulatory changes will likely cause development delays.
The Fukushima accident involved reactors designed by General Electric. In the aftermath of the accident, the Chinese nuclear industry appears to feel real urgency about developing domestic Gen III designs. In fact, a race to develop indigenous Gen III technology is emerging, with all three major nuclear power companies in China announcing their own Gen III reactor designs. Gen III designs aim for improved fuel technology, superior thermal efficiency, passive safety systems, and reduced maintenance and capital costs compared with Gen II reactors.
A slower but still large nuclear plan. By halting nuclear construction projects and establishing new safety standards, China signaled that it knew the aggressive nuclear power development plans envisioned prior to Fukushima could no longer be followed. While operating reactors and those under construction were spared from major re-engineering as a result of post-Fukushima regulatory reviews, new reactor projects will face critical design alterations under the new safety plan requirements.
But the national goal remains 70 GW of nuclear electricity by 2020. And the standstill has focused main industry stakeholders on the critical safety issues associated with reactor designs.
In the post-Fukushima environment, the shift to newer designs created in China provides the country a great opportunity to adopt advanced Gen III technologies that include safety features that will decrease the frequency of nuclear core damage and large radioactive releases. Combined with the new safety plan’s upgraded safety standards and a basic atomic energy law, this push toward new reactor designs may slow China’s plans for nuclear power development, but that development will be less risky and more sustainable in the long term.
- Japan Selling Radioactive Seafood and Restarting Nuclear Reactors (theaveragejoenewsblogg.com)
- Japan ignores protests to resume nuclear power (telegraph.co.uk)
- Nuclear projects in store (chinawatch.washingtonpost.com)
- Fukushima Radiation at Record High (commondreams.org)
- Opinions on nuclear power dominate Japan and spill over international boundaries (enformable.com)
- Japan set to power up nuclear reactor amid protests (edition.cnn.com)
- TEPCO President says costs stemming from Fukushima compensation impossible for utility to bear (enformable.com)
- 15000 Japanese protesters march against restart of nuke reactors (panarmenian.net)
- Seismologists warn Japan against restarting nuclear reactors (theextinctionprotocol.wordpress.com)
- China Slowing Nuclear Buildout In Response To Fukushima (sascho.wordpress.com)
By Adam Segal
June 19, 2012
In diplomatic speak, the talks were candid and constructive. Both sides acknowledged the mistrust that characterizes the relationship. The Chinese felt their contributions to global cybersecurity, especially by the National Computer Network Emergency Response Technical Team/Coordination Center of China (), weren’t adequately acknowledged. Both sides believe their respective governments have a strong desire for cooperation.
But there was little clarity on what concretely the two sides could actually do to build trust (except for the obvious but seemingly unattainable: for the United States, China should stop stealing so much intellectual property; and for China, the U.S. should stop trying to maintain its hegemony in cyberspace, contain Beijing, and militarize cyberspace). Calls for greater transparency were met from the Chinese with the habitual protest that this was difficult for the weaker side. When pressed for areas where China and the United States might cooperate, Chinese analysts pointed to protecting critical infrastructure and fighting crime, but also noted that cyber cooperation was a work in progress and the conditions might not be right for moving forward.
To be sure, I’m not privy to what happens behind closed-door meetings, but the Chinese response to the , the norms of behavior in cyberspace that China – along with Russia, Tajikistan, and Uzbekistan – has circulated at the United Nations. Their basic line? “In your you said the United States would work collaboratively to develop norms. We suggested some, not insisting that they were for everyone, and since then silence. Isn’t there anything in the International Code that you like?”’ reporting about Stuxnet was more indirect than I expected. The Chinese seemed more direct and aggrieved in their critique of what they saw as the U.S. refusal to engage the
The mistrust has been worsened by both sides inability to signal intentions. This is of course difficult in cyberspace; governments can say that they have nothing to do with attacks, but the attribution problem makes it difficult to verify those statements. Moreover, the United States has repeatedly stated that the primary mission of is the defense of U.S. networks, not offensive operations. Not surprisingly, the Chinese are weighing capabilities as much as, if not more than, expressed intent.
The signaling problem has been exacerbated by what one Chinese academic called the “hype of the media” – breathless reporting about cyberwar and digital espionage. You could see the negative effects of this, as at least one Chinese analyst seemed to accept everything in U.S. newspapers as not only true, but also as the official U.S. government position. For example, the story of Secretary of State Hillary Clinton admitting that the State Department in Yemen, as the purchase of advertisements, was used as evidence of American attacks.
The big takeaway from the meeting was the need for more communication and the development of official points of contact and crisis communication procedures. There was some worrying confusion over how many hotlines exist between the two countries (at least two) and how effective they are (basically, from the U.S. perspective, not at all). It’s a cliché that cyber events can occur in hours, if not minutes, but the two sides need to prepare for the almost inevitable crisis. Summoning the other side’s ambassador for an explanation may have worked in the past, but it will be too slow today. People and procedures need to be prepositioned. Sino-U.S. cyber cooperation is a work in progress, but let’s hope this is one area where the conditions allow for progress.
- Chinese tech giant calls for cyber cooperation (msnbc.msn.com)
- Is India a U.S. Cyber Ally? (the-diplomat.com)
- Chinese tech giant Huawei calls for cyber cooperation (mercurynews.com)
- China bean-counters should open their books. (mbcalyn.com)
- Battle For The Internet – U.S. And China Engage In Cyber War Games (freeinternetpress.com)
- Cyber-Attack Cripples U.S. Website Covering China’s Bo Xilai Scandal (freeinternetpress.com)
- Look For China To Buy More U.S. Companies (forbes.com)
- Bhutan’s move reflects maturing Sino-Indian ties (thehindu.com)
- US, China to Cooperate on Cyber Security (blogs.voanews.com)