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Aust coal industry facing weaker Chinese demand

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The Australian coal industry is facing the prospect of weaker Chinese demand as the world's biggest greenhouse gas emitter works to cut coal consumption by 160 million tons within five years.

China plans to reduce its coal consumption and increase its use of non-fossil energy to 15 per cent by 2020 as it moves towards cleaner energy such as hydropower, nuclear, wind and solar because of widespread air pollution problems.

Coal is Australia's second biggest export earner behind iron ore but many Australian coal producers have been posting financial losses in recent years.

CMC chief market strategist Michael McCarthy said it was no surprise that China had made a significant announcement about reducing its use of brown coal ahead of commodity contract negotiations this month.

"It's not a positive for Australian thermal coal producers and it adds to the gloomy scenario that a lot of commodity prices are reflecting already," Mr McCarthy said.

"It's not a disaster either, given the huge reduction we've seen in the coal price in the last 18 months."

He said China's announcement was "a bit light on detail" on how the energy would be replaced.

"There's clearly going to be a replacement somewhere," he said.

Still, Mr McCarthy said a reduction in brown coal exports to China could result in India soaking up extra supply.

"Given the cheapness of coal relative to other forms of energy production, Australian coal producers could be selling more coal to India rather than China," he said.

China recorded its first drop in coal production since 2000 last year, as the nation pulls back on its use of the fossil fuel, but still only 10 per cent of China's major cities met the country's air quality standards in 2014.

The world's most populated nation has banned seven million high-emission vehicles from the road, shut down 50,000 coal-fired furnaces, installed filtration equipment in power plants and factories, and added new sewage treatment plants.

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World's biggest greenhouse gas emitter looks to cut coal consumption by 160m tonnes.

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Tibetan woman self-immolates in China

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A Tibetan woman has burned herself to death days before the anniversary of a failed uprising against Chinese rule, in the first such incident this year.

The woman aged in her 40s, whose name was given only as Norchuk, set herself alight on Friday near Trotsuk township in Aba county in the southwestern province of Sichuan, the British-based Free Tibet campaign group and US-funded Radio Free Asia (RFA) both said.

It was the first self-immolation in Tibetan areas this year and came days before March 10, the anniversary of the failed uprising in 1959 that led Tibet's spiritual leader the Dalai Lama to flee into exile in India.

Norchuk is the 137th Tibetan known to have set themselves on fire since 2008, RFA said at the weekend, and was affiliated with a monastery in the area.

Its Chinese-language report said she had one son and two daughters.

Her body was cremated by the local government, Free Tibet said late on Sunday, "preventing her family and community from carrying out traditional funeral ceremonies".

But an official with the Communist Party's office in Aba county on Monday denied the reports.

"The reports are wrong," she said, adding there had not been any self-immolations in the area in recent days.

Security in many Tibetan areas had been tightened recently, RFA said.

It cited locals as saying the move was aimed at intimidating Tibetans who wanted to celebrate religious observances during the Lunar New Year, and preventing protests on Tuesday's anniversary.

Pictures have emerged on social media of a heavy security presence at Kumbum monastery in Qinghai for the Monlam prayer festival last week, showing dense ranks of uniformed personnel in a courtyard.

Many Tibetans in China accuse the government of religious repression and eroding their culture, as the country's majority Han ethnic group increasingly moves into historically Tibetan areas.

Self-immolations peaked in the run-up to the ruling Communist Party's pivotal five-yearly congress in November 2012, and have become less common in recent months.

Beijing condemns the acts and blames them on the Dalai Lama, saying he uses them to further a separatist agenda.

The Dalai Lama, a Nobel Peace laureate, has described the burnings as acts of desperation that he is powerless to stop.

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Mother of three carries out lone self-immolation protest in Sichuan: reports.

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Chinese currency manipulation not a problem

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East Asia Forum

America’s two political parties rarely agree, but one thing that unites them is their anger about ‘currency manipulation’, especially by China. Perhaps spurred by the recent appreciation of the dollar and the first signs that it is eroding net exports, congressional Democrats and Republicans are once again considering legislation to counter what they view as unfair currency undervaluation. The proposed measures include countervailing duties against imports from offending countries, even though this would conflict with international trade rules.

But this approach is misguided.

Even if one accepts that it is possible to identify currency manipulation, China no longer qualifies. Under recent conditions, if China allowed the renminbi to float freely, without intervention, it would be more likely to depreciate than rise against the dollar, making it harder for US producers to compete in international markets.

But there is a more fundamental point: from an economic viewpoint, currency manipulation is exceedingly hard to pin down conceptually. The renminbi’s slight depreciation against the dollar in 2014 is not evidence of it; many other currencies, most notably the yen and the euro, depreciated by far more last year. As a result, the overall value of the renminbi was actually up slightly on an average basis.

The key criterion of manipulation is currency-market intervention: selling the domestic currency and buying foreign currencies to keep the foreign-exchange value lower than it would otherwise be. To be sure, the People’s Bank of China did a lot of this over the last ten years. Capital inflows contributed to a large balance-of-payments surplus, and the authorities bought US dollars, thereby resisting upward pressure on the renminbi. The result was as an all-time record level of foreign exchange reserves, reaching $US3.99 trillion by July 2014.

But the situation has recently changed. In 2014, China’s capital flows reversed direction, showing substantial net capital outflows. As a result, the overall balance of payments turned negative in the second half of the year, and the PBOC actually intervened to dampen the renminbi’s depreciation. Foreign-exchange reserves fell to $US3.84 trillion by January 2015.

There is no reason to think that this recent trend will reverse in the near future. The upward pressure on the dollar relative to the renminbi reflects the US economy’s relatively strong recovery, which has prompted the Federal Reserve to end a long period of monetary easing, and China’s economic slowdown, which has prompted the PBOC to start a new period of monetary stimulus.

Similar economic fundamentals are also at work in other countries. Congressional proposals to include currency provisions in the Trans-Pacific Partnership, the mega-regional free-trade agreement currently in the final stage of negotiations, presumably target Japan (as China is not included in the TPP). Congress may also want to target the eurozone in coming negotiations on the Transatlantic Trade and Investment Partnership.

But it has been years since the Bank of Japan or the European Central Bank intervened in the foreign-exchange market. Indeed, at an unheralded G-7 ministers’ meeting two years ago, they agreed to a US Treasury proposal to refrain from unilateral foreign-exchange intervention. Those who charge Japan or the eurozone with pursuing currency wars have in mind the renewed monetary stimulus implied by their central banks’ recent quantitative easing programs. But, as the US government knows well, countries with faltering economies cannot be asked to refrain from lowering interest rates just because the likely effects include currency depreciation.

Indeed, it was the US that had to explain to the world that monetary stimulus is not currency manipulation when it undertook quantitative easing in 2010. At the time, Brazilian Finance Minister Guido Mantega coined the phrase ‘currency wars’ and accused the US of being the main aggressor. The US has not intervened in a major way in the currency market to sell dollars since the coordinated interventions associated with the Plaza Accord in 1985.

Other criteria besides currency-market intervention are used to ascertain whether a currency is deliberately undervalued or, in the words of the International Monetary Fund’s Articles of Agreement, ‘manipulated’ for ‘unfair competitive advantage’. One criterion is an inappropriately large trade or current-account surplus. Another is an inappropriately low real (inflation-adjusted) foreign-exchange value. But many countries have large trade surpluses or weak currencies. Usually it is difficult to say whether they are appropriate.

Ten years ago, the renminbi did seem to meet all of the criteria for undervaluation. But this is no longer the case. The renminbi’s real value rose from 2006–13. The most recent purchasing power statistics show the currency to be in a range that is normal for a country with per capita real income of around $US10,000.

By contrast, the criterion on which the US Congress focuses -- the bilateral trade balance -- is irrelevant to economists (and to the IMF rules). It is true that China’s bilateral trade surplus with the US is as big as ever. But China also runs bilateral deficits with Saudi Arabia, Australia, and other exporters of oil and minerals, and with South Korea, from which it imports components that go into its manufactured exports. Indeed, imported inputs account for roughly 95 per cent of the value of a ‘Chinese’ smartphone exported to the US; only 5 per cent is Chinese value added. The point is that bilateral trade balances have little meaning.

Congress requires by law that the US Treasury report to it twice a year which countries are guilty of currency manipulation, with the bilateral trade balance specified as one of the criteria. But Congress should be careful what it wishes for. It would be ironic if China agreed to US demands to float the renminbi and the result was a depreciation that boosted its exporters’ international competitiveness.

Jeffrey Frankel, a professor at Harvard University’s Kennedy School, previously served as a member of President Bill Clinton’s Council of Economic Advisers. He directs the Program in International Finance and Macroeconomics at the US National Bureau of Economic Research.

This article was originally published here by Project Syndicate and republished at East Asia Forum and here with permission.

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China’s island construction in South China Sea no threat, says Foreign Minister

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BEIJING—China’s foreign minister defended his government’s efforts to reclaim and develop land around disputed reefs and islands in the South China Sea, saying the work was “necessary” and posed no threat to other nations.

“This construction does not target or affect anyone,” Wang Yi said at a news conference Sunday on the sidelines of an annual meeting of parliament.

“We are not like some countries who engage in illegal construction in another person’s house, and we do not accept criticism from others when we are merely building facilities in our own yard. We have every right to do things that are lawful and justified.”

Satellite images show China has significantly expanded reclamation and construction work on several reefs it controls in the disputed Spratly Islands in the past two years, raising fresh concerns in the U.S. and Asia about increasing Chinese assertiveness in the region.

U.S. officials have spoken out in recent weeks against the construction work, which defence experts say could form a network of island fortresses to help enforce Chinese control of most of the South China Sea—one of the world’s busiest shipping routes.

Vietnam publicly protested China’s reclamation work last week. Vietnam and other countries with South China Sea claims have also built infrastructure on islands and reefs they control, but on a much smaller scale than China, U.S. officials and defence experts say.

China’s claims cover almost all of the South China Sea, and overlap with those of Malaysia, Vietnam, Brunei, Taiwan and the Philippines—a U.S. treaty ally. Many of those countries have bolstered defence ties with the U.S. in recent years in response to what they see as Beijing’s enhanced efforts to enforce its claims.

In the past year, China has tried to improve relations with its neighbours by unveiling plans for massive investment in roads, pipelines, ports and other infrastructure that it says will help to build new overland and maritime trade routes between Asia and Europe.

Mr. Wang said China had made progress in negotiations with India over their disputed Himalayan border, without giving details. China lodged an official protest last month when Indian Prime Minister Narendra Modi visited one of the disputed border areas.

Mr. Wang also didn’t rule out inviting Japanese Prime Minister Shinzo Abe to a military parade in China marking the 70th anniversary of the end of World War II. Asked if Mr. Abe would come, he said all world leaders were welcome at the parade “as long as they come in sincerity.” But he reiterated China’s stance that Japan needed to reflect on its wartime aggression.

Asked if North Korean leader Kim Jong Un would attend the parade, on what would be his first visit to China since taking power in late 2011, Mr. Wang said the two sides would have to see when it was “convenient” for their leaders to meet.

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Foreign Minister Wang Yi says work is lawful, necessary and in China’s ‘own yard’.

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Hanergy’s lightning rally blinds investors to reality

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To think solar energy is the future is a question of belief. But to think investors are fairly valuing Hanergy Thin Film Power might instead require suspending disbelief.

With its $35.6 billion* market value, up nearly sixfold from a year ago,the Chinese solar firm has overtaken Tesla to rank as the most valuable clean-energy company in the world. Similar to Tesla, the stock trades at an eyebrow-raising multiple of 95 times earnings for the next 12 months.

Hanergy is a young firm in a new technological arena, so believers would argue its best years lie further ahead than the next 12 months. The company, which makes a type of niche solar technology called thin film, is beginning to specialize in a new, though promising, thin-film variant called CIGS.

Consider a few optimistic scenarios for Hanergy in 2020.

Hanergy currently makes equipment that its unlisted parent, Hanergy Holding Group, then buys to manufacture the actual solar panels. The parent’s plan is to transfer a chunk of those assets back to the listed unit over the next three years. This unusual relationship has raised concerns, but put those aside for now.

By 2020, listed Hanergy could make and sell CIGS panels to third parties that generate 13.6 gigawatts a year, according to estimates by CLSA’s Charles Yonts. That’s equivalent to nearly half of China’s current installed solar capacity.

These panels cost about $2.4 per watt to manufacture today, though the primary cost of making panels has fallen by 37 per cent a year on average since 2008. Assume the cost keeps falling at this rate, and it will come to 24 cents per watt by 2020.

Thin-film CIGS panels these days sell for 63 cents per watt, according to PVinsights. But as costs drop, the selling price could fall as well to 42 cents, reckons Mr. Yonts.

At these prices, Hanergy’s 2020 sales would come to $5.7 billion and its cost of goods $3.3 billion, yielding a gross profit of $2.4 billion. Its operating profit has averaged 80 per cent of its gross profit since 2010. At that rate, and assuming no debt to service plus China’s 25 per cent statutory tax rate, it would earn a net $1.4 billion.

In this scenario, Hanergy’s current market value is 24.4 times its 2020 net profits. Five other solar energy companies, both Chinese and global, trade at an average 12 times earnings for 2016, according to FactSet. That’s half Hanergy’s 2020 multiple, even though predicting an income stream five years out is a risky proposition in a rapidly changing industry like solar.

But let’s be generous to Hanergy. Perhaps demand for thin-film panels will skyrocket in coming years. Assuming panel costs fall but the selling price stays at current levels, the stock commands 11.1 times 2020 earnings. That’s still no bargain.

Investors have to make more and more heroic assumptions to justify Hanergy’s valuation. They also need to have faith that CIGS works commercially when the technology’s only major producer, a Japanese firm, still hasn’t gotten costs under control.

The biggest assumption is that by 2020, no better technology will come along to supplant CIGS, or solar panels altogether. Investors should be questioning whether the frenzy around Hanergy has much basis in reality.

*All dollar figures are in USD

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The Chinese solar stock has risen so fast that it looks overvalued.

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Kaisa may face fight with offshore creditors over debt terms

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BEIJING—The property developer Kaisa Group Holdings Ltd. could face a fight with its offshore creditors after offering restructuring terms on US$2.5 billion in debt that would leave them worse off than Chinese lenders, analysts said.

Kaisa, in a conference call with offshore creditors and analysts on Monday morning, reiterated terms for offshore creditors it proposed on Sunday and highlighted the threat of a liquidation. It said offshore creditors would recover only 2.4 per cent of their investment if a rescue deal with another property developerSunac China Holdings Ltd. , fails.

Offshore creditors “may not accept the first offer, and I expect there will be some negotiation,” said Standard & Poor’s credit analyst Christopher Lee. “At face value, the terms offered to both onshore and offshore creditors appear to be similar, but the offshore creditors are worse off.”

More than two dozen foreign fund companies, ranging from BlackRock Inc. to Fidelity Investments, owned Kaisa debt in recent months, according to Thomson Reuters, but it isn’t clear how many currently hold the debt. BlackRock and Fidelity declined to comment on Monday.

Brandon Gale, a senior vice president at Houlihan Lokey, Kaisa’s financial adviser, said they were “getting feedback” from the creditors, and declined to give additional details. Neil McDonald, a partner at the law firm Kirkland and Ellis who is representing offshore creditors in negotiations with Kaisa, didn’t respond to requests for comment.

Standard & Poor’s said Monday that it will downgrade Kaisa—the company is already rated below investment grade—and lower the ratings on its outstanding notes if it completes the restructuring of offshore debt under the current proposed terms. Kaisa’s notes, which are currently rated “CC,” could be downgraded to “D” because S&P views the current terms as a “distressed exchange offer.”

The terms, disclosed in a filing to the Hong Kong Stock Exchange late Sunday, include cutting the interest rates on six issuances of bonds and convertible bonds by as much as two-thirds and extending the maturities of the debt by five years. While offshore creditors stand behind onshore creditors in the line to get their money, some analysts said that the terms offered to the former seemed disproportionate.

“Kaisa is facing liquidity rather than insolvency issues,” said Glenn Ko, an analyst at UBS Global Research, in a note. “Hence, we are surprised to see the five-year maturity extension across the board and consider the extension not necessary.”

Kaisa has asked the offshore bondholders to approve the restructuring by March 20.

Last week, Kaisa said it was looking to extend maturities on its Chinese onshore debt by three to six years, and to reduce coupon payments to a floor of 70 per cent of the base rate set by the People’s Bank of China, China’s central bank. The PBOC’s one-year benchmark lending rate is currently 5.35 per cent.

“It appears the creditors are forced to take a longer view as they’d have to remain invested in the firm for 10 years,” said Mr. Lee.

Some offshore creditors are betting on the possibility that Kaisa could sweeten its restructuring offer to complete the rescue from Sunac China. The developer plans to acquire 49.25 per cent of Kaisa for 4.55 billion Hong Kong dollars (US$586 million) and then buy the rest from investors—a plan that Kaisa says hinges on its ability to restructure its debt.

“It’s the opening round, and it’s a game of chicken,” said one lawyer who has knowledge of the discussion among creditors.

Kaisa’s woes started late last year, when authorities in Shenzhen, where the company is based, blocked sales of properties in a number of its projects in the southern city, without providing a reason. Numerous senior executives later resigned, including Chairman Kwok Ying Shing.

Many creditors demanded early repayment of debt after his resignation. In response to litigation by the lenders, local courts in cities across China have blocked sales or frozen 22 of the firm’s projects and bank accounts.

Kaisa said that its total cash balance has declined to 1.9 billion yuan (US$303 million) as of March 2 from 10.9 billion yuan in June, due to the sale blockages and asset freezes. The company said that it will run out of cash by the middle of 2015.

In December, the property developer said it had 65 billion yuan of debt, more than double the 30 billion yuan it had in late June.

A dollar-denominated Kaisa bond due 2017 fell 8 cents to 51.4 cents on the dollar, while its shares fell as much as 3.7 per cent to HK$1.57 during intraday trading Monday, before ending at HK$1.58.

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Offshore creditors would recover only 2.4 per cent of their investment if Kaisa’s rescue deal fails.

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China’s international payments system ready

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China is set to launch a long-awaited international payment system for cross-border yuan transactions as early as September or October reports Reuters.

Citing three sources, the news service reports that the system is ready and will undergo testing at 20 banks — 13 Chinese and the rest subsidiaries of foreign banks.

The China International Payment System (CIPS) will put the RMB on an even footing with other global currencies and should increase global usage of the currency by cutting transaction cots and processing times.

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Will remove major hurdle to internationalisation of RMB.

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China Feb inflation jumps to 1.4%

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China's consumer inflation jumped to 1.4 per cent in February, rebounding from a more-than-five-year low, official data shows.

China’s consumer price index (CPI), the main gauge of inflation, has beaten expectations in February rising 1.4 per cent on year, up from 0.8 in January.

However. the producer price index (PPI), the measure of costs for goods at the factory gate, fell further than expected to negative 4.8 per cent.

Analysts surveyed by Bloomberg had expected CPI to rise by 1 per cent in the year, while PPI was forecast to have fallen by 4.4 per cent.

China lowered its 2015 economic growth target to "around seven per cent” last week, scaling down expectations in the face of "formidable" difficulties for the world's second-largest economy after its decades-long boom.

The figure announced by Premier Li Keqiang is the lowest since a similar goal in 2004 and comes after China's gross domestic product (GDP) expanded 7.4 per cent in 2014 -- the slowest pace in 24 years. Last year's target was "about 7.5 per cent".

The cut was widely expected by economists and reflects the reality of a multi-year slowdown in the Asian giant that has seen the economy come off regular annual double-digit expansions.

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China's CPI beats expectations, while producer prices fall further than forecast.

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Can China grow at 7 per cent in 2015?

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China’s GDP target is usually quite meaningless, because the actual growth nearly always exceeds the official target. But in the past few years, the once unstoppable Chinese economic engine is running out of steam. Beijing barely met its own goal of around 7.5 per cent last year.

There has been a lot of scepticism about whether Beijing can deliver 7 per cent growth in 2015. Chinese Premier Li Keqiang publicly admitted the economic conditions this year were even worse than last year and 2014 was not a good year. All the well-known problems such as sluggish exports, slowing investment and the frothy housing market are still with us and some are getting worse.

Xiang Dong, a senior planning official from the State Council, the Chinese cabinet, said in an interview with the Beijing News the central government would not tolerate a deviation in the growth rate from a “reasonable zone”. “Our preference is to grow more than 7 per cent and we must keep 7 per cent growth.”

Why 7 per cent? Many of China’s economic policy makers believe 7 per cent growth is necessary to absorb all new job seekers in China. The country needs to create 10 million new jobs every year to keep the registered urban unemployment rate at 4.5 per cent. Estimates vary on how fast China needs to grow to create 10 million jobs.

Xiang believes every one per cent of GDP growth creates 1.75 million positions. The Information Centre of the State Council estimates the number to be about 1.4 to 1.5 million jobs. The Ministry of Human Resources and Social Security estimates one per cent GDP growth can lead to 800,000 to one million jobs.

It seems the ministry’s estimate is too conservative -- especially in light of the fast growth of Chinese services sector, which employs more people than the industrial sector. If we take the State Council estimations, China only needs to grow at around about 6.2 per cent to create 10 million jobs. It is clear that Beijing wants to play safe with its 7 per cent figure.

There is a growing chorus of people in China calling for the government to abandon its GDP growth target. Shanghai became the first city in the country to ditch the target for the first time. Shanghai’s party secretary said in an interview with FT Chinese, that he only checks the GDP figure once a year (Is China bidding farewell to 'GDPism'? 28 January 2015).

However, if Beijing wants to deliver the 7 per cent target, it still has to rely on investment as a key driver. China’s industrial sector already suffers from the intractable problem of massive overcapacity. The country’s housing sector is weak and many third and fourth tier cities have clearly over built in the last few years. This leaves infrastructure as the only plausible area for more investment.

Xu Shaoshi, the head of the National Development and Reform Commission, China’s economic planning agency, says new investment will be in areas to improve citizens’ living standards such as public housing projects, building transport networks in central and western parts of China, clean technology and environmental projects.

Though China has a problem with over-investment, it is often in wrong areas with excess capacity such as steel, coal and cement sectors. The country stills need more investment but they have to be in areas of need such as clean technology, environmental and conservation projects. But the inertia to shift money from production to conservation will be significant -- especially at the local government level.

With slower revenue growth, both central and local governments are turning to the private sector for help and money. So far, private investors have been somewhat reluctant to commit to public private partnership projects. Beijing needs to pass laws to protect private investors’ money and more importantly, be willing to enforce them to build confidence. Time is not on their side.

The fiscally strong and financially stable central government is expected to do more heavy lifting in 2015. Beijing will increase its fiscal deficit from 2.1 per cent of GDP to 2.3 per cent with the planned deficit at 1.62 trillion yuan. The central government will be responsible for about 70 per cent of new borrowing, leaving local governments with less debt in 2015.

According to Caixin, all levels of government have 3.1 trillion yuan worth of savings deposited with the central government. Beijing’s economic officials are looking for better ways for the government to use that money, rather than simply put it away in the bank’s safety vaults.

Beijing is committed to deliver 7 per cent this year to keep unemployment rates down and maintain confidence. It is prepared to expand its deficit and let the fiscally strong central government do more heavy lifting. However, the bigger question remains whether the government can push through the big reform agenda while pursuing a pro-growth strategy.

Cutting off life-support to zombie steel firms may hurt the GDP in the short term, but it will be better for the country’s longer financial and environmental health. It seems pro-growth people are digging in their heels to defend an unnecessary 7 per cent target at the cost of pushing through hard reforms.

Follow Peter Cai on Twitter: @peteryuancai

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Your daily digest of the biggest business news in China, translated and summarized every day. China Spectator has not verified these stories.

Local government debt continues to balloon

The amount of debt on the books of China's local government's has expanded dramatically since the last official accounting, which was calculated by the National Audit Office through to June 2013, according to information gleaned from interviews with delegates to China's National People's Congress and members of the CPPCC.

Local governments had been given a deadline of March 8 to provide updated details on the local government debt situation to the Ministry of Finance.

In 2015, at least 2 trillion yuan in local government loans will reach maturity, according to a report in today's Economic Information Daily

Against this background, some delegates told the paper that some regions could face liquidity risks and have called for the extension of the period to roll over debt and an increase in the amount of funds being set aside to deal with problem debt.

(Economic Information Daily)

Property tycoon says the golden age for real estate is over

China’s most powerful property developer, Wang Jianlin says the golden age for the real estate industry has ended and supply will exceed demand.

However, despite the gloomy outlook, he still believes the industry can maintain 10 per cent growth for the next ten years.  He said in an interview with CNBC that it would be difficult for the sector to maintain 40 per cent.

Apartment sales and investment reached low ebb last year. All major cities apart from Beijing, Shanghai, Guangzhou, Shenzhen and Sanya have lifted their restrictions on buying property to boost the market. 

(The Paper)

Baidu proposes artificial intelligence push

Robin Li, the founder and chief executive of online search giant Baidu, has proposed establishing a “China Brain” national project to spur artificial intelligence technology development.

The project will research human-machine interaction, big data analysis and prediction, automated driving, smart medical diagnosis, smart drones, and robotics technologies for both military and civilian uses.

Li made the proposal in his capacity as a delegate to the Chinese People's Political Consultative Conference (CPPCC).

The company said the platform should be kept open and competitive, and used to and push forward integration and innovation in traditional industries.

Last year, the company hired Andrew Ng - once head of Google Brain, the American firm's "deep learning" project.

(CCTV) 

Scale of local government debt needs to expand: former PBoC advisor

Li Daokui, professor at Tsinghua University’s School of Economics and Management and a former adviser to the People’s Bank of China, has called for a restructuring of the financial system to better serve the real economy. 

“Financing the real economy is difficult and at much higher cost in China’s current financial system. Most companies are forced to turn to loan sharks because they struggle to secure bank loans” Mr Li told a plenary meeting in Beijing.

Mr Li  said long-term financing of infrastructure projects from commercial banks and trusts and secondly should be ruled out.

Establishing specialized investment fund for infrastructure projects would not not only reduce their sharing of credit resources in banking system, Mr Li said, but also make long-term financing of infrastructure projects independent from governments. 

Mr Li also suggested the scale of local government debt should be expanded. Local governments should be allowed to raise funds for long-term construction directly from bond market to improve transparency and investment efficiency, he said.

(CCTV)

Private investment in aged care sector in need of better protection

Private investors seeking to profit from the recent opening up of China's aged care facilities are calling for an even playing field, according to a report in today's Economic Information Daily that quotes delegates to China's consultative conference.

Since China's State Council announced measures to open up the country's aged care sector to private capital investment in September 2013, they've been a flurry of policies aimed at encouraging investment in such facilities.

However, the public and private system operate according to different rules and this is posing problems for private investors, according to the article.

Investors say that position of private institutions is unclear and that they're having difficulty in making profits and will have trouble continuing to operate.

The paper quotes CPPCC delegates as saying that during the process of developing the aged care industry, policies must 'treat all players equally'

"Currently it's very difficult for private capital to invest in the aged care industry", according to Dai Hao, the chairman of Hezhong Life Insurance and CPPCC delegate.

Dai also noted that "as the market still needs more awareness, the rate of occupancy is not high enough and the operations of privately run aged care facilities are under extreme pressure."

(Economic Information Daily)

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Chinese ore demand strong: BHP, Rio

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The world's two largest mining companies say they are convinced China's hunger for iron ore isn't about to fade, even as the price plumbed new lows after Beijing's official acceptance it is set for slower economic growth. 

In an interview with The Wall Street Journal, BHP Billiton's iron ore president Jimmy Wilson said the outlook for China's resource demand remained compelling, as the world's second-largest economy expands from a larger base level. 

He said demand for steelmaking ingredient iron ore from the country's manufacturing sector had been running above BHP's expectations in recent months and the country's cooling property market could also be set for an uptick. 

"I think we have to appreciate that China is getting bigger -- they are targeting 7 per cent [growth] and they are actually uncannily capable of delivering against those targets," Mr Wilson said. "We should never underestimate what is happening in China, and what continues to happen in China." 

His remarks echoed earlier comments from Rio Tinto's iron ore chief executive Andrew Harding, who expressed optimism Beijing can maneuver the Chinese economy into a new stage of growth during a speech in Perth on Tuesday. 

China last week lowered its economic growth forecast to about 7 per cent for 2015. That compared with 7.4 per cent growth last year, its lowest level in nearly a quarter-century. 

Leaders have dubbed it a "new normal" during the annual National People's Congress in Beijing. 

China's more sobre tone has rattled the global iron ore market. Around $US58 a tonne, the spot iron ore price is at its lowest since The Steel Index began publishing prices in 2008. China's iron ore imports are already down 0.9 per cent year-to-date, according to the latest customs data. 

Mr Wilson said the sharp downturn in prices -- which have halved in the past year -- isn't drastically different from BHP's internal expectations. 

Both BHP and Rio have been aggressively expanding their operations in the Pilbara iron ore mining hub of northwest Australia. 

Rio, the world's No. 2 iron ore exporter, after Brazil's Vale, is aiming to increase its ore shipments from the Pilbara by nearly 30 per cent within a few years. While BHP isn't investing so much in expansion, it expects to grow production from existing mines in the near-term thanks to higher productivity. 

The two companies have been heavily criticised by competitors and some investors for maintaining their rapid output growth despite iron ore's slide. 

Rio's Mr Harding said China's steel production only needs to rise 1 per cent a year-in line with its estimated growth last year-for the country to reach 1 billion tonnes of crude steel output around 2030. 

"China is currently the country demonstrating the most exciting growth in the developing world," Mr Harding said. 

Neither of the Australian giants seems prepared to cut output to help boost iron ore prices. Instead, they argue producers with higher costs will have to cut supply first, a trend that should eventually put a floor under ore prices, they say. 

Rio Tinto has estimated 125 million tonnes of costly output -- about 85 million from China -- was shuttered last year. It estimated another 85 million tonnes could be cut in 2015; helping cushion the blow of another 100 million tonnes of higher supply from places such as Australia. 

BHP's Mr Wilson -- who visits China at least once a year -- meanwhile said China's recent surprise interest rate cut could aid iron ore demand. 

"That would certainly put a bit more impetus into the housing market," he said, although he said it was still too early to assess the rate cut's impact. 

Chinese Premier Li Keqiang has meanwhile vowed to cut overcapacity in the steel industry, and tackle pollution; yet more measures traders worry will damp demand for iron ore. 

But Mr Wilson said such efforts weren't affecting overall iron ore demand, though they were making steel mills more eager for higher-quality ore. 

Both BHP and Rio are cutting their own costs aggressively, though, to cushion the pullback in prices. 

While BHP says the "lion's share" of its job cuts have already been handled, rival Rio Tinto Tuesday confirmed it likely has hundreds of layoffs ahead in its iron ore division. 

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Twitter opens office in HK

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Twitter has opened an office in Hong Kong as it attempts to attract the business of Chinese firms, despite having been blocked on the mainland for six years.

The social networking company revealed its plans to open an office in Hong Kong late last year saying it would focus on ad sales instead of the one-to-many messaging service banned in China.

The service that has been a platform for dissent and free speech wants to tap into booming growth in Greater China by selling ads to businesses such as exporters.

US internet titans Google and Facebook already have similar strategies in place.

"We are not entering China, we're still blocked there," Twitter said at the time.

"With half of all internet, mobile and social media users worldwide in Asia today, we see many opportunities across the region."

Through the new office, Twitter will target Hong Kong and Taiwan advertising markets while establishing partnerships and promoting its new Fabric platform for developers to weave the service into applications made for smartphones or tablets.

Twitter has offices in Singapore, Seoul, Tokyo and Sydney. Earlier this year, the company announced it will open an office in Jakarta.

The company referred to the Asian-Pacific area as "the growth engine for the company".

Twitter has been under pressure to ramp up use of the service along with revenue.

Earnings figures showed that the number of people using Twitter monthly climbed 23 per cent to 284 million in the third quarter of last year. More than three-quarters of Twitter users reside outside the US.

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China plans to have one private bank in every province

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The China Banking Regulatory Commission wants to run a pilot program that will establish one private bank in every province, according to Caixin, a respected business publication.
 
The Chinese government work report says there will be no upper limit on the number of private banks that will be allowed. Beijing has issued licenses to five private banks so far.
 
In 2014, the regulator approved the establishment of 14 privately controlled financial services firms as well as 108 privately controlled country credit unions.
 
Under China’s dated Commercial Banking Law, the minimum capital requirement for setting up a bank is one billion yuan.

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MMG prepares for its global transformation

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At face value China’s unique experiment in using western management to try to build a base metals miner of global significance is making slow progress. MMG’s results, however, provide a misleading picture of its progress.

For the best part of six years Andrew Michelmore, the former WMC Resources chief executive, and a team of mainly Australian executives have been patiently building on the assets carved out of OZ Minerals by China’s Minmetals when it was in the hands of its bankers in 2009.

While the 2014 earnings of $US99.2 million (down 19 per cent) are respectable in the context of what’s happened to commodity prices generally, they don’t reflect Michelmore’s openly-stated ambition – and that of the Chinese state-owned enterprises backing MMG – of transforming the group into a $US20 billion base metals miner ranked at the top of the mid-tier of global resource companies by 2020.

That’s because the great leap forward for MMG isn’t yet impacting the group’s numbers. It is still reliant on the assets it acquired from OZ Minerals, built around the Century zinc mine in Queensland and Seppon gold mine in Laos, both of which performed relatively well last year.

There is, however, potential for a structural leap latent within the group. Last year Glencore was “encouraged” to divest its world-class Las Bambas copper project in Peru as the price of approval for its merger with Xstrata.

MMG, in partnership with a Chinese investment group, Guoxin International Investment and CITIC Metal, acquired the project for about $US6.25 billion, with MMG emerging with a 62.5 per cent interest.

Las Bambas is a large, long-life copper resource which, when fully operational, will rank among the top three copper mines in the world. It is still, however, about a year away from first production, scheduled for the first quarter of next year. MMG doesn’t appear to be in a hurry to bring it into production.

Michelmore’s focus is on base metals and Las Bambas will make his group a significant force, particularly in copper, which will dominate the MMG portfolio once the mine is in production.

The timing looks good. Copper was probably the last of the core commodities to get belted last year during the general sell-off of all hard commodities, with the markets questioning the previous conventional wisdom that copper had the best longer-term fundamentals of any of the commodities.

That change of perspective might have been overdone. There has already been a supply-side response, with mine closures and reduced capital investment and, as Glencore – whose market intelligence is second to none – said recently, the consensus of a surplus of supply is proving “elusive”. It sees a downside risk to supply in 2015-16 as production growth slows and stocks continue to fall.

The longer-term fundamentals of copper which underpinned previous confidence in the metal appear to remain intact. Copper mines have relatively short lives, the costs of extracting ore from the existing big mines are increasing and the grades decreasing, and continuing industrialisation in the developing world underpins demand.

Las Bambas, and Oyu Tolgoi, where Rio Tinto is having apparently intractable problems with the Mongolian government, are the two best new mines on the horizon. It appears the start of Las Bambas production will be well-timed to coincide with any improvement in the balance of supply and demand.

The transformational impact of the Las Bambas acquisition on MMG will, once it starts generating cash and earnings, create a platform for the next major step towards realising Michelmore’s ambition at a time when there still ought to be a raft of distressed assets, or good assets sitting within distressed resource groups, available.

Apart from Mick Davis’ X2 Resources, which has amassed a war chest but has yet to acquire anything, and perhaps Glencore, there aren’t that many vehicles for acquisitive growth in the resource sector.

With the backing of China Inc and a demonstrated track record of being disciplined and able to operate mines efficiently -- MMG actually grew its earnings before interest, tax, depreciation and amortisation by 4 per cent to $US780.8 million last year despite the difficult environment for commodity producers -- MMG ought to have the capacity to pursue a “straw hats in winter” strategy.

In fact it will need to make acquisitions to achieve its ambitions. As Las Bambas nears completion MMG is going to increasingly feature in speculation about resource sector transactions.

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Sina profit soars on investment-related gains

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Sina Corp. said fourth-quarter earnings soared on investment-related gains and higher revenue driven by advertising growth at the Chinese online media company’s Weibo Corp. unit.

Sina, an early pioneer of the Chinese Internet, and Weibo are battling with much larger companies-including Alibaba, Internet conglomerate Tencent Holdings Ltd. and search provider Baidu Inc. to dominate the Chinese Internet sector.

Weibo, which went public in the U.S. in April but remains controlled by Sina, allows users to publish brief public messages to followers who can repost them, similar to Twitter .

Chief Executive Charles Chao said “As we enter into 2015, we are excited about the various opportunities unfolding ahead of us on both Weibo and portal sides. We are also confident that our initiatives in revamping our legacy business will start to take shape and form the foundation for longer term growth.”

For 2015, Sina projected revenue, excluding effects of deferred license revenue, at between US$800 million and US$900 million. Analysts polled by Thomson Reuters expected US$885 million.

Overall, Sina reported a profit of US$59.8 million, or 90 cents a share, up from US$44.5 million, or 59 cents a share, a year earlier. Excluding stock-based compensation, gains related to investments and other items, earnings fell to 24 cents from 47 cents. Analysts expected per-share profit of 18 cents.

Revenue increased 7.2 per cent to US$211.1 million. Adjusted to exclude deferred license revenue effects, revenue rose 8 per cent to US$208.5 million, above the midpoint of company expectations for US$204 million to US$210 million.

Advertising revenue improved 14 per cent to US$181.9 million as an increase in Weibo advertising revenue was offset by a decline in portal revenue.

Operating expenses surged to US$132.9 million from US$99.5 million a year earlier, reflecting higher personnel costs, marketing expenditures and bad debt expenses.

Overall, Weibo reported a profit of US$4.6 million, or two cents a share, down from US$21.6 million, or 11 cents a share, a year earlier. Excluding stock-based compensation and other items, earnings rose to four cents from two cents. Analysts expected per-share profit of four cents.

Revenue increased 47 per cent to US$105.2 million, slightly above company expectations for US$102 million to US$105 million. Advertising and marketing revenue improved 57 per cent to US$88 million.

As of Dec. 31, monthly active users reached 175.7 million, and increase of 36 per cent from a year earlier.

Total costs and expenses grew 43 per cent to US$100.3 million.

For the first quarter, Weibo forecast net revenue of US$93 million and US$96 million, compared with analysts’ estimates of US$94 million.

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China's path to global military dominance

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Graph for China's path to global military dominance

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Announced in Beijing last week with much fanfare, China’s already colossal official defence budget of US$130 billion is this year set to expand by a whopping 10 per cent.

To calm the nerves of jittery defence planners in Tokyo, Taipei, Manila and Washington, Beijing was quick to insist that this year’s rise was the smallest percentage increase to the defence budget in five years.

Such clarifications are, however, cold comfort for China’s nervous neighbours and other beneficiaries of the US-led strategic status quo.

A radical rewrite of the globe’s military hierarchy is under way, and China will likely end up on top.

A February PricewaterhouseCoopers (PwC) analysis of the globe’s economic trajectory projects that Chinese GDP will grow to nearly 130 per cent of US GDP in market exchange rate terms by mid-century.

Although this story of China’s impending economic primacy is well-trodden territory, the likely military implications are rarely explored.

According to the Stockholm International Peace Research Institute, China’s real military spending in 2013 was approximately US$188 billion, or roughly the equivalent of 2 per cent of the country’s GDP. This left China’s defence budget dwarfed by US defence outlays, which at 3.8 per cent of GDP totalled approximately US$640 billion.

Since the end of the Cold War, the levels of US and Chinese military spending have averaged 4 per cent and 2 per cent of GDP, respectively.

If US and Chinese military spending as a percentage of GDP remain constant in the coming decades, the PwC projections would see the US defence budget expand to approximately US$1.7 trillion by 2050, with Chinese military spending rising to US$1.1 trillion.

This would constitute a massive military power shift in China’s favour: from a defence budget worth 30 per cent of US military spending in 2013 to one worth 65 per cent of US military spending less than 40 years later.

Striking though it is, such a scenario grossly underestimates the scale of likely Chinese military spending in 2050.

The Chinese Communist Party is already raising military spending above the long-term average of 2 per cent of GDP.

Although this year’s 10 per cent rise in the Chinese defence budget is modest compared to previous years, it is still well above the expected GDP growth rate of 7 per cent for 2015.

More importantly, Beijing’s extensive and expanding geostrategic interests will likely compel Chinese political leaders to push for much higher levels of military spending in the coming decades.

Beijing’s contested territorial claims in East, Southeast and South Asia pit China against Asia’s emerging great powers and key US allies.

Beijing is intent on seizing vast tracts of the East and South China seas from Japan and the Philippines and incorporating Taiwan into the People’s Republic of China. But Tokyo, Manila and Taipei enjoy de jure and de facto US security guarantees, while Japan already hosts US military forces and the Philippines will soon follow suit.

China is equally uncompromising in its claims to territory administered by India and Indonesia, and yet these Asian demographic giants are likely to emerge as two of the world’s top five economic and military powers by 2050.

As China’s economic and strategic interests grow worldwide, Beijing is also taking on the responsibilities of a great global power. Consider, for example, Chinese efforts to safeguard political stability in South Sudan and protect critical trade routes in the Gulf of Aden.

Nations that must either contend with severe geostrategic tensions (e.g. Pakistan and India) or that become great global powers (e.g. the Soviet Union and the United States) typically spend significantly more than two per cent of their GDP on defence.

Given that China is set to simultaneously assume the status of a truly great global power and remain embroiled in multiple territorial disputes, it would be historically anomalous for Chinese military spending to remain at two per cent of GDP.

A more likely scenario in which China eventually spends the equivalent of at least 4 per cent of its GDP on defence would see Chinese military spending balloon to a staggering US$2.1 trillion by mid-century. This would make China’s defence budget the world’s largest by a wide margin, and roughly the equivalent of 124 per cent of US military spending in 2050.

Of course, projections of the scale of Chinese military spending in the decades ahead are highly speculative. Defence budgets can fluctuate wildly depending on a host of external and internal factors, including GDP growth rates, the global security environment, and domestic fiscal constraints.

Moreover, military spending (an input) is at best a rough guide to military might (an output). Factors like morale, corruption and the pre-existing stock of infrastructure, technology and accumulated knowledge are not reflected in a given year’s defence outlays despite obviously having a huge influence on military power.

Nevertheless, even accounting for these caveats, the sheer scale of the fiscal resources available to Beijing will soon give it the means to end the era of decisive US military superiority in the Asia-Pacific.

Beijing might insist that it has modest military ambitions, and yet the underlying economic and strategic trends tell an altogether different story.

Dr Benjamin Herscovitch is a Beijing-based Research Fellow at The Centre for Independent Studies

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China and Japan are spiralling toward confrontation

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On the heels of China’s announcement that it will again increase defence spending by 10 per cent this year even as its economy slows, Chinese and Japanese diplomats meet next week to discuss the parlous state of relations between their nations. Don’t expect friendship to break out.

Japan and China last held a security dialogue in 2011. The next year, bilateral relations went into a tailspin when Japan nationalized several of the East China Sea’s Senkaku Islands, which lie northeast of Taiwan and are claimed by Tokyo, Beijing and Taipei. Although Japan has administered the Senkakus since 1972 (when the U.S. postwar occupation ended), China began objecting to the status quo only after Tokyo purchased the islands from their private owners.

Chinese anger heightened tensions stemming from prior Japanese actions to block Chinese fishermen from entering the Senkakus’ exclusive economic zone. Since the nationalization, Chinese maritime patrol vessels have regularly intruded into the waters around the islands, leading to countermoves by the Japanese coast-guard vessels asserting administrative control.

The islands lie at the end of what some in Japan call its “south-western wall,” a chain of islands stretching down from Kyushu through Okinawa and almost reaching Taiwan. These have strategic value because they form a potential obstacle to Chinese naval and commercial ships reaching the Pacific Ocean from China’s coast.

As the Senkaku issue roiled Sino-Japanese relations, Xi Jinping and Shinzo Abe were assuming their offices in Beijing and Tokyo and putting a personal stamp on security issues. After more than two years in power, the leaders have never met for a substantive meeting.

Mr. Xi’s defence spending and decision to dramatically expand landfill efforts in the disputed South China Sea, building military airstrips and ports on reclaimed land, show that Beijing won’t alter its goal of becoming Asia’s dominant military power. Mr. Abe, for his part, is widening Japan’s net of security partners, selling military equipment and modestly increasing Japan’s defence budget.

It’s too simplistic to say that Beijing and Tokyo are on a collision course. Yet Japan shows no signs of buckling to Chinese pressure. Its military consistently responds to China’s expanding presence in northeast Asia’s skies and waters. That, in turn, raises the stakes for Beijing, which cannot afford to be seen backing down from its claims. Both sides have effectively made the Senkakus (called the Diaoyu Islands by China) a symbol of their determination to assert their national interest.

The two may be manoeuvring themselves into a real confrontation, regardless of tepid diplomatic attempts to reduce tension. Neither wants to risk being seen as weak by the other or overshadowed in the eyes of regional states. So they are locked in a slowly spiralling competition reminiscent of the European powers in the late 19th century. As Chinese academic Shen Dingli has put it, “the more the U.S. and Japan do, the more China will do.”

That attitude reveals the stakes for America, too. Washington policy makers may like to think that their attempts to develop better working relations with Beijing should be taken at face value. But the Chinese see the Obama administration’s attempts to deepen its alliance with Japan as proof of an encirclement policy dedicated to blocking China’s rise, which prevents U.S. diplomats from playing the role of honest broker between China and Japan.

This leaves few palatable options for any of the major three players. Washington wants to tone down the rhetoric and tension but must continue to support its ally. Neither Japan nor the U.S. has much choice but to remain vigilant and ensure that they hold a firm line against Chinese attempts to use or threaten force to change the territorial status quo.

Over time, Japanese resolve, with U.S. support, may convince Beijing that it cannot intimidate its way to control over the islands and that a confrontation isn’t in its best interests. That could lead to more creative thinking about how to leave the Senkaku issue behind and focus on improving overall Sino-Japanese relations. It also would send a message to the rest of Asia that territorial disputes need not remain intractable.

But such an outcome is not yet in sight. Messrs. Xi and Abe could each lead their country for the rest of this decade, which should induce them to make statesmanlike gestures to break the deadlock. Yet so far both see security and political relations as a zero-sum game. That’s bad news. It means that luck, not statesmanship, may determine whether East Asia remains peaceful or repeats the mistakes of the 20th century.

Mr. Auslin, a resident scholar at the American Enterprise Institute in Washington, D.C., and a columnist for WSJ.com, is writing a book on risk in Asia.

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Chinese SOE reform: one step forward and two steps back

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Lowy Interpreter

15 years ago, Beijing made an important strategic decision about its sprawling aviation manufacturing monopoly, AVIC.

Dissatisfied with AVIC's slothfulness, and keen to promote competition, the state's planners split the company in half, creating two firms. Unimaginatively named AVIC-1 and AVIC-2, these entities continued to stumble, and in 2008 a decision was made to put them back together again. Today, the AVIC monopoly reigns once more, still ungainly and inefficient (although Beijing did make the sensible move to hive off the commercial airliner business into COMAC, where AVIC's influence has been diluted).

The AVIC restructurings didn't go well, in either direction. Is the experience about to be repeated in other strategic industries?

People close to the National Development and Reform Commission (NDRC) have let it be known that the centrally-owned portfolio of 112 SOEs – the backbone of China's state-capitalist economy – may be pared back to 30-50 companies through consolidation. China's two major locomotive manufacturers, CNR and CSR (the original SOE was split into North and South respectively), have been ordered to merge again, reportedly out of cabinet-level frustration that the two were over-competing against each other in overseas markets.

The re-marriage appears to have been under compulsion; no details have been forthcoming since the announcement on 30 December 2014, and CNR and CSR are notorious for their mutual hostility. Their managers are unenthusiastic about merging with the enemy. This is a shotgun wedding. As with AVIC, the process will be ugly.

Recently there have been reports that Beijing may recombine its three national oil companies. The reports have been greeted with disbelief by analysts, and denial by the companies themselves. Some investors, admittedly, would welcome the return of monopolistic profits. The logic of merging PetroChina (strong in onshore oil and gas), Sinopec (downstream refining and marketing) and CNOOC (offshore oil) supposedly is to create a mega-integrated petroleum firm, rather like the old CNPC but better equipped to compete overseas, i.e., 'we want our own ExxonMobil.'

If the SOE consolidation story is true, we might also see the re-melding of China Telecom and China Unicom back into something resembling their predecessor, the old fixed-line monopoly carrier. Years of painful separation would be undone. And so it would go, back to the future, for all of China's strategic industries (shipbuilding and shipping have also been mentioned) in the name of economic reform.

Tellingly, the explanation given by NDRC sources is that re-monopolisation will reduce overlap and replication: 'they're increasingly fighting among each other. That has led to lots of waste and inefficiency.' But 'each soldier fighting his own war' is exactly what happens in competitive markets.

Overlooking this reality, central planners are reaching back to their Soviet roots in seeking the unicorn of 'efficient monopolism.' They like the outcomes of capitalism, but they are still grasping for state-centric relevance. They are jealous of multinational companies and the dominant positions they hold globally. They admire the unexpected dominance of local private companies in new sectors like the internet. And they know that SOEs don't play well together and gorge on capital to over-build. In some cases, like steel, SOEs have openly defied orders to consolidate. The planners are frustrated that truly private actors are actually more coordinated. These bureaucrats, determined to cure the self-harm of overcapacity, are reaching for their shotguns to reverse years of competitive separation.

This is a mistake. Putting two or three mediocre businesses together seldom makes a good one.

Unless there are savage cuts to management ranks, the only result will be higher prices for consumers and thus a deadweight loss for the economy as a whole. If the market is to play a 'decisive role', as the administration has promised, competition, not consolidation, is the way to weed out inefficient capacity. If the Government is truly worried about overeager rivalry overseas, there are organisational alternatives (like joint ventures) to ensure cooperation.

Beijing acts vigorously against foreign monopolists, but it appears to take a contrary attitude to its own cartels.

Re-monopolisation, if it occurs, would be the third major enterprise reform measure that Xi Jinping's team has proposed. The first reform is the attempt to separate financially the Party's governance and executive management, aided by a brutal anti-graft campaign. This is popular and necessary, but it will be exceptionally difficult to unbind the incestuous links between the state's pure 'guardians' and the profit-seeking 'merchants'. Moreover it will be hard to attract talent when the message is 'you'll get nothing and like it', as one analyst puts it. The second reform is the promotion of 'mixed ownership', apparently based on Xi's own observations in Zhejiang. He admires the 'minben' businesses of the province which interweave private and government money. Geely Automobile might be a successful example, but there are other sectors like solar and shipbuilding where state support of entrepreneurs has created an industrial mess.

Even allowing for China's commercial exceptionalism, these two initial reforms will be challenging. They may even be contradictory: attracting private capital into sectors undergoing unpredictable corruption purges will be tough. This third step, cajoling SOEs to form giant national conglomerates, while still expecting private capital to play a decisive role in industry, is another dead-end.

Originally published by The Lowy Institute publication The Interpreter. Republished with permission.

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Chinese iron ore tax reform on the cards

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Chinese struggling iron ore miners are unlikely to find any comfort in proposed changes to the way the commodity is taxed, according to an article in The Paper.

An iron ore tax reform plan is in the final stages of being drafted and will soon be sent to State Council for approval and could come into effect before the end of this year, according to a report published by Economy & Nation Weekly yesterday.

Online news site The Paper picked up the story, noting that it too had earlier been informed by an unnamed 'industry insider' that China's iron ore tax reform plan should be released in 2015.

Following changes to how the country's coal resources are taxed, China's policy makers are now looking to expand the new way of calculating resource tax to other resources. Taxes are currently levied according to value rather than volume.

The report notes that while there is little doubt that iron ore tax reforms will also involve levying taxes according to value rather than volumes, there is still plenty of speculation about the rate at which the tax will be levied and what that means for the tax burden of struggling miners.

Given that coal tax reform actually led to an increase in the amount of tax paid by coal mining firms, hopes that resource tax reform will reduce the tax burden on China's iron ore miners has dissipated. 

Last year, China imported 933 million tonnes of iron ore, an increase of 13.8 per cent on the previous year, lifting the country's reliance on foreign imports to 78.5 per cent.

Yang Jiasheng, chair of the Metallurgical Mines' Association of China, told The Paper, "Of course I personally think we should maintain a certain level of self-reliance, this will help the development of the local mining industry ... but in the end, it's determined by supply and demand, we need to rely on companies putting in the hard work themselves."

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Bad call on China aluminium industry hits Western companies

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Western firms, Rio Tinto in particular, have been damaged by underestimating the cost and technological advantages of China’s aluminium industry, according to new research published today by a leading expert on Chinese resources.

Rio partially justified its purchase of Canadian giant Alcan in 2007 on the expectation, says Australian Michael Komesaroff, that China would soon cease producing aluminium and would instead start importing, resulting in a higher price.

However, says the former executive of Rio Tinto and of a major Chinese resources corporation, in new research for Beijing and Hong Kong-based Gavekal Dragonomics, “rather than shut capacity China continued to expand, and today its aluminium production is twice the size it was in 2007”.

This continued expansion, he says, has kept aluminium prices depressed and has forced Rio to write down two-thirds of its $US38 billion Alcan investment.

Chinese smelters have boosted their comparative efficiency to a degree that has surprised competitors — despite Chinese aluminium giant Chalco being Rio’s largest single shareholder.

And, says Mr Komesaroff, Western industry players, also including US giant Alcoa, who “have long believed that China’s enormous expansion of aluminium capacity defies economic logic … misunderstand how ­industrial policy drives China’s decision-making”.

He says aluminium is the single exception to the big picture of the commodity super-cycle being finished — because its price never rose strongly during the heights of the boom.

Demand did grow during the super-cycle, up an average annual 7.2 per cent over the past five years. But China met most of that demand itself, through massive investment in smelters.

“China’s local government-driven investments set new standards for excess,” says Mr Komesaroff.

Thus 90 per cent of the growth in production worldwide has happened in China in the past decade — so that the country now produces half the total global supply.

The extent of this boosted capacity will, he anticipates, “put pressure on the rest of the global aluminium industry to restructure and consolidate to survive”.

But Paul Adkins, managing director of Beijing-based aluminium-focused ­consultancy AZ China, points out that an ­increasing amount of smelting capacity is shifting far inland, especially to Xinjiang and Inner Mongolia regions in the northwest, “some 2000km from the nearest major port.”

And the industry’s focus is on meeting domestic demand.

Falling coal costs and increasing subsidies by local governments are lowering electricity costs, Mr Adkins says.

And “capital is not a problem in China”, he says, suggesting that with Chinese rolling mills at only 50 per cent utilisation, “there’s no time like the present to start gearing up to penetrate the US auto market”.

Analysts have long argued, says Mr Komesaroff, that since energy accounts for about 40 per cent of the production cost of aluminium, it makes no commercial sense for China, with relatively high-cost electricity, to produce so much — encouraging global producers like Alcoa and Rio to expand.

However, he says that Chinese engineers can now, with their considerable experience building smelters over two decades, ­construct a new plant for only a third of the standard international cost.

Such plants are also among the largest, averaging 400,000 tonnes per year — 45 per cent above the average elsewhere in the world, allowing the Chinese smelters to spread their fixed costs over greater output, lowering average production costs.

Yet Chalco has made losses for two of the past three years, which threatens to continue.

So failing a shake-out of excess Chinese capacity, it has formed a coalition with 11 other smelting firms in China, aiming to support prices by selling directly to ­customers rather than to the Shanghai Futures Exchange.

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Western companies have been damaged by underestimating China’s aluminium industry.

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