• Geithner to reassure China on U.S. fiscal discipline

On his trip to China next week, U.S. Secretary of Treasury Timothy Geithner will try to reassure Chinese leaders on U.S. fiscal discipline. Promising to promote U.S. national savings and to reduce national debt, Mr. Geithner hopes to ease Beijing’s anxiety about potential losses in its U.S. investments. He will also emphasize the need for a more balanced and more sustainable global growth, with China and other economies boosting domestic demand to lower the reliance on the U.S. consumption for growth. While praising China for its bold stimulus measures amidst the global financial crisis, Mr. Geithner will urge Beijing to accelerate moves to shift the Chinese economy from export orientation to a stronger focus on domestic demand. Different from previous visits of U.S. treasury officials to Beijing, China’s currency will not be among the top issues for the talks.

• Tougher environment rules for Chinese outbound investment

China’s Ministry of Environmental Protection together with the Ministry of Commerce drafted guidelines for projects abroad requiring higher environmental standards. Chinese companies investing abroad will be asked to improve their environmental standards and to carry out environmental impact studies. The rules may take effect in a few months, and–if enforced–may affect Chinese investments in Asia, Africa and Latin America. In countries with lower environmental requirements, Chinese investors will have to follow the new standards. The new rules could require investores to install sewage and waste treatment facilities as well as to pay compensation for any environmental damage.

• Emissions reduction: common responsibility, differentiated levels

After meeting with Chinese Vice Premier Li Keqiang during his China trip, U.S. Senator John Kerry sees China to play a “positive and constructive” role in the global fight against climate change. The results of Senator Kerry’s trip sparked hope that China and the U.S.–the two largest emitter of greenhouse gases–are generally willing to cooperate and could resolve their differences ahead of upcoming negotiations on emissions reductions. Xie Zhenhua, the Chinese president’s special envoy for climate change underscored China’s commitment to fight climate change in an article in the South China Morning Post, saying that China views global warming as more serious than the financial crisis. In its original statement China–together with other developing countries–recently called for industrialized countries to cut their emissions by at least 40 percent from 1990 levels by 2020. The various statements following Senator Kerry’s China trip are signs that there may be mutual understanding for more realistic emissions targets.

• Protectionist stimulus measures

Joerg Wuttke, president of the European Union Chamber of Commerce in China, has accused Beijing of protectionism in its stimulus measures. According to Mr. Wuttke, foreign companies were deliberately locked out of the contracts for new projects financed by the stimulus package. By setting the bidding criteria for new wind energy projects in a way that made it difficult for foreign suppliers to win, China is said to give domestic companies an edge over their foreign competitors. None of the world’s leading wind turbine makers–including Vestas, Gamesa, Suzlon and GE–made it into the second round of bidding.

• More support for export sector

China’s State Council has vowed to increase the support for the country’s struggling export sector. The support policies announced at an executive meeting presided over by Premier Wen Jiabao include expanded export credit insurance, tax breaks and improved financing opportunities. China’s trading companies and exporters are among the ones worst hit by the slump in global demand, most notably in the U.S. and EU. Previous support measures included financing guarantees and higher tax rebate rates for exporters.

• China’s U.S. dollar quandary

There has been a lot of talk recently about China pushing for dethroning of the U.S. dollar as the world’s dominant currency. Topping the discussion, China’s central bank governor Zhou Xiaochuan called for the International Monetary Fund’s Special Drawing Rights to eventually replace the dollar as omnipresent global reserve currency. Seen from this background, today’s statement by senior official Guan Tao from China’s State Administration of Foreign Exchange (SAFE) seems all the more surprising. Mr. Tao said in a statement that instead of the global financial crisis and the constant talk about currency reserve diversification the U.S. dollar will retain its dominant international role. SAFE manages China’s $1.95 trillion currency reserves, giving Mr. Tao’s statement–although declared private–significant weight in the ongoing discussion about the future role of the dollar as international currency. Mr. Tao sees severe lacks in reserve alternatives to the dollar. Although the share of gold among China’s currency reserves has strongly increased over the last years, the precious metal is of little practical value and not in suited to replace the dollar. Diversifying reserve baskets by adding more currencies will increase the risk of greater turbulence in non-dollar currencies. Finally, replacing the dollar by another super-sovereign currency is impeded by numerous technical implementation problems and cannot function without the backing of the United States. So, although obviously not content with the status quo, China can be expected to rely on the U.S. dollar in the short to medium term.

• Details of China’s economic stimulus package revealed

For the first time since it was announced in November last year, China’s National Development and Reform Commission gave details of the central government’s 4 trillion yuan economic stimulus package. According to the government statement, the central government will provide 29.5 percent–1.2 trillion yuan–of the stimulus funding. The remaining 2.8 trillion yuan will come from local governments, policy loans, local government bonds issued by the central government, corporate bonds, medium-term notes, and bank loans. As to the investment portfolio of the stimulus package, infrastructure is the biggest beneficiary with 37.5 percent of the stimulus spending to be spent on construction projects.

• Tough stance ahead of climate change negotiations

Spelling out its initial bargaining position for the upcoming climate change negotiations, China adopted a hard line. Most notably, Beijing called for developed countries to cut their greenhouse gas emissions 40 percent by 2020 from 1990 levels. Beyond that, China also required rich countries to help pay for reduction schemes in poorer countries–including itself. The Chinese move was not welcomed in Washington and Brussels, indicating tough negotiations in the meetings leading up to the final climate change summit in Copenhagen in December. While concerned that other developing nations might get encouraged by China’s tough stand, analysts and diplomats pointed out that Beijing’s demands were just an initial negotiations position. There was still enough room for movement and negotiations.

• U.S. firms more concerned about China risk

U.S. manufacturers and retailers that source from China see the country’s products as more risky than three months ago, according to a study published on Thursday. Concerns about product quality, intellectual property and labor costs were among the most cited risks when sourcing from China. The study was conducted by AMR Research Inc., a Boston based market research firm, surveying 133 U.S. companies that source products from China, including Boeing, Cisco Systems and Intel. 26 percent of surveyed companies considered China as a risk to their supply chain, up from 21 percent three months ago. 51 percent cited concerns about product quality, up from 45 percent in the first quarter. Intellectual property protection in China was seen as a risk by 59 percent, compared with 8 percent who said so about India.

• Hopes about China recovery premature?

The World Bank sees hopes about an economic recovery in China as “premature”, according to David Dollar, country director for China. The main reason for the World Bank’s doubts about China’s recovery is low private investment. While stimulus measures have helped boosting fixed-asset investment and stabilizing the Chinese economy, private investment lags far behind government spending. Private investment is seen as the main driver of sustainable growth and job creation. For China, with its export sector down and large-scale stimulus packages unsustainable over the long run, private consumption is necessary to achieve sufficient growth over the next years.

• New stimulus package for home appliances

China is intensifying its efforts to boost domestic demand by offering consumers a 10 percent subsidy for home appliance purchases. To make up for the continued lack in export demand, China desperately needs to push domestic consumption. Together with the home appliance stimulus, Beijing also announced that it would continue and expand an existing stimulus program for the automobile industry. Owners of old, less fuel-efficient vehicles are encouraged to trade them in for new cars by financial incentives such as purchase tax cuts. The new home appliance stimulus with a total volume of Rmb2 billion ($292 million) is aimed at China’s wealthiest cities, including Beijing, Shanghai and Guangdong.

• IMF pushes for social security reform in China

Vivek  Arora, the IMF’s chief representative in China, urged Beijing to step up efforts for a social security reform in order to push domestic consumption. Mr. Arora emphasized that reliable and secure social security, such as health care, pension funds and education, were needed to encourage higher consumer spending. China’s current social security system is far from being reliable and so far fails to cover the majority of the people. As a result, Chinese saving rates were at a record 49.9 percent in 2007, compared to 4.2 percent in the U.S. and between 5 and 12 percent in the EU. By securing a sufficient level of social security China could encourage private consumers to spend a larger part of their income, thereby boosting economic growth.

• China to increase strategic petrol reserves

After reaching storage capacity in crude oil reserves, China now plans to build up its strategic reserves in refined oil products. The decision follows the same pattern of using low commodity prices and high company inventories to increase strategic reserves of raw materials. China is planning to pile up on refined oil products as well as fertilizers. Also, inefficient and low-end petrochemical production facilities will be replaced. High strategic crude oil reserves combined with stockpiles of refined oil products will shield China better against disruptions in oil supplies as well as problems arising in refineries.

• Overseas investment encouraged

China’s State Administration of Foreign Exchange (SAFE) announced on Monday a new plan to encourage overseas investment by Chinese companies. The plan, which was made public on SAFE’s webpage for public opinion, calls for easier approval procedures, more financing options and more efficient supervision.

• It’s loans for oil again
  

China and Brazil announced a new loans-for-oil agreement. José Sérgio Gabrielli, CEO of Brazilian oil giant Petrobras, worked out the deal with the China Development Bank during a visit in Beijing by Brazil’s President Luiz Inácio Lula da Silva. Brazil needs new capital to develop newly discovered oil fields off its coast. It turned to China to finance the $174.4 billion plan, with an investment of $28.6 billion in 2009 alone. In exchange for a $10 billion loan, China would receive up to 200.000 barrels of oil per day. In February of this year, China sealed a similar deal with Russia, granting loans for new oil and gas field developments in exchange for oil deliveries in the future.

• New challenge for the US dollar

China continues its efforts to replace the US dollar as global currency. Following a meeting between China’s President Hu Jintao and Brazil’s President Luiz Inácio Lula da Silva in Beijing, China’s central bank announced a new Chinese-Brazilian deal. The two countries will work towards using their own currencies in trade transactions rather than the greenback. Instead of a currency swap, as recently agreed upon between China and Argentina, the new agreement calls for Brazil paying for Chinese goods with real and China paying for Brazilian goods with renminbi. While the talks are still at an early stage, the governors of the two countries’ central banks are expected to meet soon to further discuss the details of the bilateral plan.

• China’s IMF quota may raise significantly by 2011

There is a possibility that China may become the third largest voting power at the International Monetary Fond (IMF) after the European Union and the United States. China, which currently holds a quota of 3.7 percent, may overtake Japan (6.1 percent) and establish itself right behind the U.S. with 17.1 percent and the EU member states with 32 percent. The IMF decided in a meeting in April to reform its governance structure in order to better reflect the economic importance of emerging economies. The reform process is scheduled to be completed by January 2011. With a higher quota China would also have to provide the IMF with more funding and take more responsibilities in the IMF’s decisions.

• Slower industrial production growth in April

China’s industrial output growth last month slowed down from March and was less than half the rate of April 2008. With a comparatively weak growth of 7.3 percent industrial production was mainly backed by government’s economic stimulus measures. The new data raised uncertainty whether Chinese recovery is under way and sustainable yet. Generally, officially released statistics tend to overstate consumer demand and are inflated by stimulus measures. Analysts point to drops in electricity production and crude steel output in April, while industrial output and car production grew in the same period.

• China’s shipyards severely hit by recession

Chinese shipbuilders reported a drop in new orders of 95 percent for the first four months this year. Demand for new ships is on a record low due to overcapacity and low international trade volumes. The bleak financial situation for China’s shipyards is exacerbated by cash shortages and higher financing costs.

Forging a new partnership between the United States and China can help address climate change, but only if regulatory and market shortcomings can be overcome.

A new alignment on energy and the environment between China and the United States sounds like a formula capable of delivering real solutions on climate-change issues. China’s abundant scientific research-and-development resources and manufacturing capacity not only help carbon sink testing and the scaling up of renewable energies become more feasible, but also less costly.

However, the potential cost effectiveness of reducing emissions in China could prove more of a liability than a benefit where the environment is concerned. Systemic regulatory and market shortcomings demonstrate the difficulty of managing and preventing environmental degradation and guaranteeing public health in a developing country context. One example is in the power sector, where in some cases emissions performance has not matched infrastructure upgrades as expected because the use of low-grade coal has gone unmonitored. Does the new US administration have the will to face the prospect that a low-cost approach might be inimical to a low-carbon strategy? Will they ensure careful planning and responsible oversight?

The recent release of a joint Asia Society and Pew Center on Global Climate Change report (see “Road to rapprochement” by Banning Garrett and Jonathan Adams), followed by secretary of state Hillary Clinton’s trip to China, generated considerable US interest in enhancing US-China coordination on energy and the environment.

Grand bilateral collaboration undoubtedly can help reduce the rate of growth of emissions in both countries, and bring much needed efficiency improvements to China’s outdated power production and transmission infrastructure. And a powerful US-China nexus may help break post-Kyoto gridlock at Copenhagen in December. However, a partnership between the world’s largest carbon dioxide emitters is not the “holy grail” for preventing further environmental degradation. Though full of promise, the “China advantage” comes with its own pitfalls. …..click here to read more

• Bank lending slowed down in April

China in April tightened its previously loose monetary policy in an effort to curb fears of new asset bubbles. State bank lending fell from a record RMB 1,891 billion in March to RMB 591.8 billion ($85.2 billion). Last month’s lending, however, was still well above the monthly levels of previous years. Besides fears of new asset bubbles and a build up of non-performing loans, critics also point to the risk of rampant inflation. While recent indicators show China still in deflationary territory, the large-scale capital injections of the last months raise the potential for high inflation in the second half of this year. Most of the loans in the first quarter this year were from state banks to government-backed infrastructure projects, with many smaller private enterprises still unable to access urgently needed credit from banks. Private investment remains weak and China’s economic recovery so far depends mostly on government initiated injection of huge volumes of new loans.

• Exports slump, investment jumps

While fixed-asset investment growth in urban areas in China reached an astonishing 30.5 percent in the first four months this year, exports dropped a staggering 22.6 percent in April from a year earlier. Chinese economists point to the importance of domestic demand as Chinese export destinations in America and Europe show no significant signs of recovery yet. China’s trade surplus of $13.1 billion in April was at its lowest for a non-holiday month in more than two years. With the severe drop in export actually contributing negatively to economic growth, domestic demand and government initiated investment are all the more important for China to reach its ambitious goal of 8 percent GDP growth this year.

• Domestic trade to the rescue

Chinese ports increasingly pin their hopes on rising domestic trade. As cargo throughput for overseas markets dropped more than 6 percent year-on-year in April–the sixth month of consecutive decline since November last year–Chinese ports are stepping up their investments in domestic trade infrastructure. Some of the country’s largest cargo ports, including Shenzhen-Yantian, Ningbo and Tianjin, have announced plans to add new domestic shipping routes and to increase container throughput for domestic trade.

The Chinese government is considering imposing a pro rata carbon tax on coal and fossil fuels such as gasoline, jet fuel, and natural gas, Finance Ministry official Su Ming has told the country’s state-run media.

For the past year, 20 experts from seven different government agencies have been investigating the development and implementation of a carbon tax, which has emerged as a preferred mechanism for curbing emissions in China’s energy intensive sectors.

Though the research findings are due out this summer, no details on the size of a tax or date for when it would take effect have been released.

Earlier this year, the government organizations responsible for the study – the China Environmental Culture Promotion Association and the China Institute of Development Strategy Studies – proposed rolling out the carbon tax in select provinces first as a “barometer” for monitoring the carbon intensity of economic activity.

Proponents of the plan favor an incentive structure that would reward producers for investing in cleaner technologies. Under the current market conditions, coal-fired power plant owners reap more profits by using cheaper, lower quality coal, which contributes greater emissions because it’s a less efficient fuel source.

Critics, however, point out that unless the tax rate is set appropriately high, firms would choose to pollute and pay the fee, instead of take steps to curb emissions.

…..click here to read more