• Australian approval for Valin-Fortescue deal

Australian authorities approved $438 million Chinese investment in Fortescue Metals Group, Australia’s third-largest iron ore miner. China’s state-owned Hunan Valin Iron and Steel Group received approval to take up to 17.55 percent of Fortescue. The Australian decision was relatively unexpected as a similar Chinese mining investment bid was blocked on Friday and yet another Chinese-Australian investment deal is still waiting for official approval.

• Argentina and China to trade in RMB

Argentina and China signed a currency swap that will allow China to receive renminbi instead of dollars for its exports. Argentina, which mostly imports industrial components and electrical goods from China, supports Beijing’s call for a new global currency reserve regime. China has recently suggested replacing the dollar as global currency and actively promotes wider international use of its own currency.

• Asian Development Bank expects slower economic growth for China

The Asian Development Bank cut its forecast for economic growth in China to 7 percent from 9.5 percent. Although the Chinese economy is reacting positively to the $585 billion stimulus package and leading indicators are pointing to an economic recovery, the ADB doubts that the stimulus measures are sufficient to create enough jobs. The ADB report concludes that unemployment will be China’s “most pressing issue” as infrastructure projects and other stimulus measures will fail to create enough employment for the country’s growing labor surplus.

The G20 Global Summit, which will take place in the UK in April, stands to be an important factor in determining China’s stance on climate change commitments as Copenhagen draws near.

First, this meeting will provide the US and China a chance to meet behind the scenes, for the first time since Hillary Clinton visited China last month to initiate a discussion on robust bilateral coordination on energy and climate issues. Both Clinton and her Chinese counterparts suggested in February that the G20 meeting would give the two nations’ leaders a chance to move ahead with the compact. The next step may well be a US-China leader summit, which a recent policy think tank “roadmap” for collaboration, given to Clinton in advance of her trip, identified as a crucial building block in the process.

Secondly, this meeting will give other countries some signposts as to what they can expect from China in December. G20 participants have already expressed their expectation that China will ante up in this time of global economic need. Gauging the tone of China’s reaction to G20 participants’ financial demands will provide participating OECD countries – particularly those expecting China to make serious commitments on emissions reductions in the “Green New Deal” – some hint as to what a distressed China can be expected to deliver in environmental negotiation terms. The last two weeks’ NPC legislative session in Beijing definitively demonstrated that China’s first priority is repairing the economy, not the environment. Thus, China’s reaction to the key role G20 participants expect her to play in the summit may serve as an accurate litmus test for anticipated outcomes in Copenhagen.

China Ascending, if Somewhat Awkwardly

Chinese leaders are not accustomed to being in this kind of spotlight. They have been known to remain quiet listeners in previous international accords, choosing to survey the scene rather than make a flourish onto it. This record of international engagement, or lack thereof, contrasts significantly with statements China’s leadership have made internally regarding her position and influence in the international arena.

The timeline of nationalist, if not almost bellicose, proclamations that China will soon dominate, and play a strong role in, international affairs uttered by Hu Jintao and others began with the “peaceful rise” theory promulgated in 2005. These statements – which were toned down significantly in the run-up to the Olympics, but flared again in the face of criticism from countries like France and the US over the government’s response to last year’s Tibetan Buddhist-led demonstrations in Lhasa – have at times generated confusion on how responsive China’s leadership will be to international perspectives, and on which issues is China willing to act multilaterally, rather than unilaterally.

James Fallows characterized China’s inconsistent behavior in a November 2008 Atlantic article, arguing:

The damage China does to itself by its clumsy public presentation is obvious—though apparently not yet obvious enough to its leadership. For outsiders, the central problem is that a country that will inevitably have increasing and perhaps dominant influence on the world still has surprisingly little idea of how the world sees it. That, in turn, raises the possibility of blunders and unnecessary showdowns, and in general the predicament of a new world power stomping around, Gargantua-like, making onlookers tremble.

In the lead up to the summit, the UK and other countries have called on China to play a major role in the global recovery. Already, rumblings from China’s state-controlled media suggest leaders are not willing to meet demands that China bolster IMF funding, besides in a paltry, primarily symbolic, way. Why does China seem unwilling to do more, to “pull their weight” given the country’s abundant liquidity and an economy still highly dependent on global demand?

Developing Countries, with Benefits

The answer boils down to China’s strategic insistence that it is still a poor country deserving of the rest of the world’s assistance; not the other way around. G. John Ikenberry, a well-known international relations theorist who focuses on foreign policy has said that “As China sheds its status as a developing country (and therefore as a client of these institutions), it will increasingly be able to act as a patron and stakeholder instead.” In times like these, and on subjects like carbon abatement, China plays the developing country card, in hopes it will give them reprieve from costly and complicated climate commitments.

China’s “non-developed” status is alluded to as part of China’s position on climate policy, which the Brookings Institution “Overcoming Obstacles to US-China Cooperation on Climate Change” report lays out as:

•    Developed countries have already gone through high-emissions stages of development while developing countries still have much of this work to do. International agreements should recognize this fundamental reality.

The other two framework issues identified in the report are:

•    Metrics should not focus on total national emissions and neglect to account for per capita emissions in densely-populated countries.

•    Countries should be held responsible not only for their current emissions but also for their cumulative historical emissions, given that greenhouse gases accumulate in the atmosphere over many decades.

While environmentalists remain hopeful they can navigate around, or find cracks, in this framework, they are unlikely to reach consensus on the issue of responsibility.

The Blame Game

A controversial new report “Journey to world top emitter”, which will soon be published in Geophysical Research Letters, concludes that 50 percent of increases in Chinese CO2 emissions between 2002 to 2005 were due to export production, of which 60 percent came from goods exported to western countries. This study, and others like it, point to Western consumption-driven culpability.

The scholarship-supported assignment of guilt is shaping China’s position on the terms of the next climate change treaty. Just Monday, during a trip to Washington, senior climate official, Li Gao, insisted that China’s export sector be exempt from carbon emissions reductions in the next treaty on climate change.

Given the state of the global economy, and China’s latest G20 Summit and Washington posturing on financial and environmental commitments, China’s leverage in the international arena is clearly on the rise. For the sake of the environment, let’s hope it’s not just peaceful, but sustainable too.

• Shifting bargaining power in China trade

The steady price increase in China-made goods has come to an end and bargaining power has shifted back to overseas buyers, according to executives at Li & Fung, the world’s largest trade sourcing company. After almost four years of steadily increasing prices for goods made in China a deflationary price trend emerged over the last months. According to analysts, prices fell between 5 and 10 percent in 2008 and are expected to drop further in 2009.

• Chinese investment in Africa slows down

As global commodity prices have tumbled and political instability is on the rise in Africa, Chinese investors have become more hesitant. Until very recently China has filled the vacuum left by Western companies unwilling to invest in unstable or politically denounced countries. China will continue to play an important role in Africa’s investment growth, but new projects in the planning stage might face a tighter scrutiny as the economic factors around commodities have changed significantly.

• Reducing government influence in investment decisions

Peng Sen, deputy director of the National Development and Reform Commission (NDRC), announced China’s plans to loosen the government grip on investment project approval. In an effort to increase enterprise confidence when making investments, China is willing to give companies more power in investment decisions. The measures could include granting private capital wider access to more sectors, and reducing the number of enterprises that need government approval on investment projects.

• Pentagon report criticizes China’s military transparency

In its annual report on the Chinese military, the Pentagon urged China to be more transparent about its defense spending and military build-up. The report further criticized a continuing deployment of more missiles across the coast from Taiwan, which the Pentagon fears could be used to apply pressure on Taipei towards a settlement of the dispute between both countries. The release of this year’s report sparked strong criticism in China.

• Central Bank advisor: China’s economy has bottomed

Fan Gang, who sits on the Chinese central bank’s monetary policy advisory committee, believes the Chinese economy has bottomed. While further interest rate cuts might remain an option, Mr. Fan sees ubiquitous signs for an end in China’s economic slow down. In his opinion, strong growth in car sales, rising investments, and slower decline in steel and energy consumption all point towards an economic recovery. Chinese officials remain confident that China will achieve its 8 percent GDP growth target for 2009.

• China may offer additional financing to the IMF

Chinese officials and economist predicted additional Chinese financing to the IMF. They expect an additional $100 billion IMF bonds purchase by China. The additional financing would increase the IMF’s ability to tackle the economic crisis and provide financial support to struggling economies. China also demands a higher representation in the IMF, continuously pointing to the growing importance of developing countries.

• Higher tax rebates on textile and metal exports

China’s State Council decided to raise tax rebates on textile, iron and steel, nonferrous metals, petrochemical, electronic and light industrial exports. The new rates will take effect on April 1 and are meant to support China’s struggling export sector as part of the country’s economic stimulus package.

• Maybe not fully committed to the dollar?

New doubts about China’s confidence in the U.S. dollar emerged yesterday as Zhou Xiaochuan, governor of the People’s Bank of China, released a statement calling for a new international currency reserve to replace the greenback. Mr. Zhou pointed out the shortcomings of the current dollar-dominated financial system and said a new currency reserve system controlled by the IMF could prove more stable. China currently holds about two-thirds of its almost $2 trillion foreign exchange reserves in dollar assets. In a second statement on Monday, the Central Bank’s vice governor assured China’s continuing commitment to the U.S. currency, aware that every change in China’s FX reserves strategy could result in significant devaluation of the greenback.

• Shanghai’s ambitions to become international finance and shipping center

China’s State Council is expected to approve Shanghai’s bid to turn itself into an international finance and shipping center. The city’s proposal is currently going through routine reviews and already received informal nods by the State Council. The plan aims to establish finance laws, a taxation and credit system, a supervisory system, modern shipping systems, and tax cuts for related industries.

• Concerns about Chinese Navy actions

China’s increasingly aggressive stance in maritime encounters has sparked concerns about the country’s peaceful intentions. Territorial disputes in the South China Sea as well as in the East China Sea bear significant risks for peace in the region. International defense experts interpret China’s more aggressive naval actions in the last months as a sign for the country’s aspirations for expansion. Territorially disputed areas, such as the Spratly Islands in the South China Sea and the Senkaku Islands in the East China Sea, are causing concerns about stability in the region.

• Chinese commitment to U.S. treasuries

Hu Xiaolian, vice governor of the People’s Bank of China, the country’s central bank, expressed China’s commitment to the U.S. dollar. According to Ms. Hu, China will continue to buy U.S. treasuries as part of its foreign exchange reserves strategy. The Chinese assurance comes amidst increased fear of a weak dollar and rising inflation as the U.S. Federal Reserve decided to revive growth by lowering interest rates and increasing the money supply. Analysts assume that China holds about two-thirds of its nearly $2 trillion in reserves in dollar assets, mainly U.S. government and other bond.

• Automaker consolidation ahead in China

China’s State Council recently unveiled a restructuring plan for the country’s struggling auto industry. The plan calls for consolidation of the four leading automakers into two or three large groups. The consolidation, which is aimed for 2011, could help the automakers to return to double-digit growth after a mere 6.7 percent sales growth in 2008 and weak growth expectations for 2009. The State Council identified four automakers–FAW, Dongfeng Motor Corp., Shanghai Automotive Industry Corp., and Chang’an Auto–as the possible survivors at the end of the restructuring plan.

• Further Chinese commitment to growth target

China continues to hold on to its 8 percent GDP growth target for 2009. The most recent assurance that China is able to achieve this target comes from Vice Premier Li Keqiang. Mr. Li expressed China’s confidence about achieving 8 percent growth during the China Development Forum. He promised to increase the government’s efforts in building a social security system, boosting domestic demand, and assuring employment. Last week, the World Bank and the IMF both lowered their forecast for Chinese economic growth in 2009 to between 6 and 7 percent.

• China ready to ease tension with the U.S.

China is ready to ease the military standoff with the United States in the South China Sea, according to Chinese military officials. The defense sources assured that there were no plans for an increase in Chinese military presence in the disputed region. China and the U.S. both played down the incident of a month earlier, when a U.S. surveillance ship was penetrated by five Chinese vessels in the South China Sea. Both sides emphasized the mutual interest in diplomatic exchanges and a functioning cooperation.

• Australia extends review of Fortescue-Valin deal

Australian regulators called for an extended review of a planned Fortescue stake sale to China’s Hunan Valin Iron and Steel Group. Fortescue, Australia’s third-largest iron ore exporter, plans to sell a 17.6 percent stake to Valin in order to raise capital for its expansion. Concerns over national strategic assets have recently slowed down China’s pursuit of overseas assets. Australian authorities are currently reviewing a number of Chinese investment plans, among them the Chinalco-Rio Tinto and the Valin-Fortescue deals.

• OECD may lower China growth forecast

Angel Gurria, Secretary General of the Organization for Economic Cooperation and Development, said the OECD may cut its forecast for China’s economic growth in 2009 to as little as 6 percent. The revised forecast will lower the expected growth from 8 percent in November last year to “between 6 and 7 percent”. With the U.S., Europe and Japan in recession, China’s growth is widely expected to slow down in 2009, but will still significantly outgrow other economies hit by the global financial crisis. Earlier this week, the World Bank cut its forecast for China’s GDP growth to 6.5 percent.

• Yuan rises to highest level this year

Together with other major Asian currencies the Chinese yuan strengthened against the US dollar. The yuan hit its strongest level this year, easing concerns that China would depreciate its currency to help a struggling export sector. China’s central bank continues to be trapped between calls for a stronger currency and calls for a yuan depreciation. According to analysts, the strength of the yuan is mainly a reflection of the dollars current weakness.

• Signs of Chinese protectionism

China’s rejection of Coca Cola’s bid for Huiyuan juice sparked new fears of growing protectionism. China’s ministry of commerce denied its approval to the $2.4 billion Coca Cola takeover on competition and monopoly grounds. The Chinese reaction is similar to Australia’s skepticism about Chinalco’s bid for Rio Tinto, indicating a political retaliation rather than economic reasoning.

• World Bank lowers China’s GDP forecast

The World Bank cut its projection for China’s GDP growth in 2009 to 6.5 percent. The announcement comes only one week after China’s Premier Wen Jiabao assured that his country is able to reach 8 percent GDP growth this year. This is the second cut of China’s GDP forecast by the World Bank, following an earlier cut in November last year to 7.5 percent.

• More Chinese patrols in South China Sea

Chinese officials announced plans to assign more patrol vessels to the South China Sea. The center of the new Chinese strategy are the disputed Spratly Islands, which are claimed in full or part by China, Vietnam, Malaysia, Brunei, Taiwan, and the Philippines. Earlier this week, China already assigned its largest fishery patrol ship to the region. U.S. Navy officials expressed their concerns about China’s more aggressive and military behaviour in territorial disputes.

• New trouble looming over Chinese-Australian mining deal

Australian politicians called for an inquiry into the country’s foreign investment laws as state-owned Aluminium Corporation of China is pursuing a $19.5 billion purchase of Rio Tinto’s mining assets in Australia. The Chinalco-Rio Tinto deal has caused significant suspicion among Australian officials that there are higher political motives at play behind Chinalco’s investment plans.

• China stock market set for strong growth

Chinese and other Asian stock markets are set for an “explosive” rally in mid-2009, according to Fortis Investment Management SA. They justified their confidence in Asian stock markets by pointing to strong potential for domestic demand growth.

• Sluggish profits for Chinese financials

Chinese banks are expected to report  sluggish growth for the final quarter of 2008 as the global downturn takes it toll. Profit margins for 2009 are set to tighten as interest rates decline. Meanwhile, the country’s insurers are expected to report sharp drops in 2008 profits.

• BRIC demand larger say in global financial system

Brazil, Russia, India and China called for a stronger representation of emerging economies in the International Monetary Fund and the World Bank. Chinese finance officials urged the international community to accelerate the reform of international financial institutions and cooperate in the construction of a new global financial system.

• China’s international investment losses exceed $80 billion

China’s State Administration of Foreign Exchange (SAFE), the country’s exclusive manager of almost  $2 trillion foreign exchange reserves, has lost more than $80 billion in its diversification into global equities. Details of SAFE’s holdings are only disclosed to the top Chinese leadership, a fact that makes exact estimates about China’s losses in its international investments rather complicated. Conservative estimates by economists from the Council on Foreign Relations in New York hover around $160 billion in overseas equities and a subsequent loss due to falling stock markets of $80 billion.

• FDI in China continues to decline

Foreign direct investment (FDI) in China continued its decline in February and dropped 15.8 percent from a year earlier. The youngest decline follows a 32.6 percent drop in January and marks the fifth month of falling FDI in China.

• China’s overseas contractual projects up 24.8 percent

China’s outbound investments rose 24.8 percent in the first two months of 2009, according to the Ministry of Commerce. Overseas contractual projects reached around $8 billion as Chinese companies are increasing their international outreach.