China's trade surplus surged in May as exports rose and imports showed a surprise fall.

Exports increased 7 per cent to $US195.47 billion ($A211.49 billion) year-on-year, the General Administration of Customs announced on Sunday, while imports declined 1.6 per cent to $US159.55 billion.

This resulted in a surplus of $US35.92 billion -- a 74.9 per cent jump from the year before.

The result surpassed the median forecast of a surplus of $US23.4 billion in a survey of 15 economists by Dow Jones.

Exports, which accelerated from April's gain of 0.9 per cent, were in line with the median prediction of a 7.2 per cent rise, while imports missed their forecast of a 6.0 per cent increase.

The latest trade data came as worries over China's growth outlook have increased this year after a series of generally weaker-than-expected statistics, though trade data distortions have partially clouded the situation.

China's gross domestic product (GDP) grew 7.4 per cent in the first three months of 2014, weaker than the 7.7 per cent in October-December last year and the worst since a similar 7.4 per cent expansion in the third quarter of 2012.

The Philippines on Saturday said it was investigating signs that China was reclaiming land on disputed South China Sea reefs but stressed it would not be provoked into a rash response.

President Benigno Aquino's spokeswoman Abigail Valte said the government was looking into reports that the Chinese were damaging the reefs in an alleged effort to turn two remote outcrops in the sea into islands.

But she added that Manila would continue to pursue a diplomatic solution to the dispute.

"We do not respond to provocative action, especially (through) military action... we always exhaust the diplomatic channels, as well as other legal means that can help us address this particular issue."

She also reiterated Aquino's earlier remarks that Chinese ships had been spotted in the South China Sea, possibly carrying land reclamation equipment.

The two reefs are within the Spratly Islands region, a disputed archipelago of reefs, islands and atolls in the South China Sea that is coveted by the Philippines, Vietnam, China, Malaysia, Brunei and Taiwan.

Photographs allegedly taken by the Philippine military showing Chinese ships engaged in land reclamation off a reef, were published by the Philippine Daily Inquirer, a major Manila daily on Saturday.

However, an armed forces spokesman could not confirm if the photos were genuine.

Last month, the Philippines publicly accused Beijing of large-scale reclamation activity at another location within the Spratlys, the Chinese-held Johnson South Reef.

Manila, which also claims the reef, said the reclamation work could lead to China building its first airstrip in the disputed region.

Johnson South Reef lies about 300 kilometres from the large Philippine island of Palawan and is considerably further away from the Chinese coastline.

The Philippines filed a diplomatic protest against China's reclamation works on the reef but Beijing rejected it on grounds the reef is part of Chinese territory.

Tensions have risen over China's claim to most of the South China Sea with the Philippines and Vietnam being the most vocal in recent years in accusing China of using bullying tactics to enforce its claim.

China's central bank is turning into a policy heavyweight in a battle among the country's top economic authorities over how to fuel growth without piling on excessive debt.

The government has sought to portray a united front on its "mini-stimulus" measures, or small adjustments to monetary policy to bolster growth. 

Behind the scenes, however, China's biggest economic agencies--the People's Bank of China, the Ministry of Finance, the state planning commission and other financial regulators--have fought over whether more should be done to bolster growth, such as cutting interest rates for the first time in two years, according to officials familiar with the government's deliberations.

China's gross domestic product growth has fallen below its target of 7.5% for the year, deepening concerns about the strength of the world's No. 2 economy.

In the latest battle, the country's top banking regulator on Friday said it would ease rules to make it easier for banks to lend only to small companies. That followed a decision a week earlier by the State Council, the government's top decision-making body, to target more bank funding for small businesses and farms. 

The central bank fended off calls to cut interest rates, at least for now, the people familiar with the situation said, by arguing that a rush of new credit could add to already ballooning debt and funnel money to the real-estate sector, which is struggling with a housing glut that is dragging down growth and threatening to trigger loan defaults. 

"Theoretically, conditions are ripe for a rate cut as inflation is not a concern right now," a central bank official said. "But it wouldn't be as effective as we would want it to be" because it could worsen other problems in the economy. 

How China negotiates the slowdown matters to the Chinese leadership's goal of restructuring the economy so that it is powered by domestic consumption and service industries. Reliance on investment in infrastructure, construction and smokestack industries produced unmatched growth for more than three decades, but, economists say, is reaching its limits, as evidenced by rising debt and the polluted skies over Beijing.

"There's not a case yet for significant stimulus," said the International Monetary Fund's deputy managing director, David Lipton. "But even if that materializes, we'd still be against a broad use of accommodative monetary policy," he said. 

A too-sharp drop in growth, which has historically led to unemployment and unrest, could prompt Chinese leaders to reach for more-aggressive stimulus measures, setting back restructuring. 

Residential real estate, an economic engine in the past, is suffering its worst slide in years because of excess supply that is hitting other industries including construction, steel and aluminum. 

The central bank has long been more cautious about economic stimulus than the other agencies. It has frequently lost battles to the Ministry of Commerce and the state planning agency, which is called the National Development and Reform Commission, which count big, influential state companies among their constituents. 

In China, the central bank isn't independent; it is one voice among many in the topmost panels of decision-making.

In the previous administration, Premier Wen Jiabao often ignored advice by central bank chief Zhou Xiaochuan, according to officials involved in the decisions, particularly when the central bank lobbied to limit stimulus spending in response to the global financial crisis of 2008 and 2009 out of concern about rising inflation and bad debts. 

Over the past two years, Mr. Zhou has accumulated more power, Chinese and Western officials say. He was one of the few policy makers who kept his post after passing the mandatory retirement age of 65, and the current Communist Party chief, Chinese President Xi Jinping, appointed him to a new panel to oversee economic reform. 

"There is certainly a role reversal from the time when the PBOC was taking orders from other arms of government to one where the PBOC sets the tone of the macroeconomic policy and reform agendas," says Eswar Prasad, aChina scholar at Cornell University.

Mr. Zhou's allies are rising, too. Yi Gang, the central bank's vice governor, who is in charge of managing China's nearly $4 trillion foreign-exchange reserves, was named deputy chief of the economic policy group that advises the Politburo Standing Committee, China's seven-member ruling body, according to Chinese and Western officials familiar with Mr. Yi's assignment. Another Zhou partisan, Fang Xinghai is in charge of putting together a financial-reform blueprint for the economic policy group, called the Office of the Central Leading Group on Financial and Economic Affairs.

Among its other victories, the PBOC has won approval for the creation of privately owned banks and the widening of the band in which the tightly controlled Chinese yuan can trade daily--a step toward full convertibility. It is also in the last stages of getting approval of bank deposit insurance, which has been batted around for 20 years and has been opposed by large state-owned banks. 

In the days before the State Council's mini-stimulus announcement late last month, Chinese Vice Premier Ma Kai, who is responsible for the financial sector, called a meeting of the major economic agencies to discuss how to make credit more accessible and less expensive for businesses around the country, according to a government official with knowledge of the matter. The meeting took place shortly after Premier Li Keqiang's visit to Inner Mongolia, during which companies across energy, textiles and other industries complained about the difficulty in getting financing. 

During the discussions, officials from China's top banking regulator and the state planning agency pushed for an interest-rate cut, saying the easing measures taken by the central bank so far weren't enough to help prop up the economy, the official said. The central bank, which in mid-April approved a cut in the funds rural banks had to keep in reserve at the central bank, was now pushing for a similar cut at other banks, but only if the funds were targeted to small and medium-size businesses. Such enterprises, Chinese officials have said, have been shortchanged by the big state banks and are considered important to creating jobs and restructuring the economy.

The opponents at the session argued that cutting the reserve requirements would be ineffective because many banks were already approaching government-imposed lending limits and wouldn't be able to lend more, Chinese officials said. J.P. Morgan economist Haibin Zhu says that changes in the reserve requirement would only have "very modest" effect. 

PBOC officials carried the day, the official said, by citing concerns about boosting credit growth. Two other officials said that Mr. Ma was among those convinced by the arguments. 

China has experienced a credit boom in the past five years similar in pace to the economies of the U.S., Europe, Japan and South Korea before they crash-landed. The PBOC officials argued that a broad rate cut would inevitably mean credit would flow to the very sectors China has been trying to rein in, such as property, steel and other industries beset by overcapacity, according to the official familiar with the meeting.

Press officials at the State Council, Finance Ministry and the NDRC referred questions to the central bank. The PBOC and the China Banking Regulatory Commission press officials didn't respond to requests to comment.

In the end, the State Council agreed to limited measures, including reducing business fees, and tightening regulation on so-called shadow-banking institutions, such as trust companies, leasing companies and other informal lenders, as a way to reduce borrowing costs for business. It also approved the reserve-requirement reduction aimed at smaller businesses. 

Details continue to be thrashed out. Central bank officials were scheduled to brief reporters on supporting small businesses and the agricultural sector Thursday. But the news conference was canceled, an official from the State Council, which was organizing the event, said Wednesday, without providing a reason. 

China faces three big challenges in the next few years: a slowing real estate sector, growing local debt and the intractable problem of excess capacity. Of the three big challenges, the one that has the most important bearing on Australia is the problem of excess capacity -- in particular in the steel industry.

The Chinese steel industry is not only the largest in the world, it is also the biggest consumer of Australian iron ore -- the country’s largest export earner. Beijing has singled out the steel industry as the one with the most acute problem of excess capacity.

Beijing’s ability to tackle this problem will be one of the most important determinants of the iron ore price and therefore Australia’s budget bottom-line for years to come. The dilemma for Australia is: if the Chinese succeed in curbing excess capacity, it would be good news for the country’s economic rebalancing and future prosperity.

However, if Beijing fails to make headway in this endeavour, Australian miners would be able to enjoy more years of inflated demand. But it will be at the cost of greater economic uncertainty in the country’s largest trading partner, which takes in a third of Australian exports.

First we need to get some perspectives on how bad the problem is. According to the National Bureau of Statistics, the average industrial utilisation rate, which measures excess capacity, was 78 per cent in first half of 2013. It was the lowest point since the fourth quarter of 2009, when Beijing unleashed its 4 trillion yuan stimulus package.

However, there are certain sectors that have lower utilisation rates than the alarming national average of 78 per cent. For example, the utilisation rate for steel was only 72 per cent in 2012; it ranked alongside the plate glass industry as the worst performer when it comes to excess capacity.

Other bad offenders are the cement, aluminium and shipbuilding industries. 2014 will be a particularly important year for culling excess capacity; the Chinese government needs to get rid of 56.3 per cent of excess capacity in the steel industry, 11.4 per cent in cement and 38.9 per cent in plate glass if it wants to achieve its goals under the 12-year plan.

So far, the Chinese government is showing all the signs that it is determined to rein in excess capacity. In early May, the Ministry of Industry and Information Technology, which oversees the steel industry, said the country would need to cut an extra 1.7 million tonnes of steel and 8.5 million tonnes of cement in 2014.

However, Beijing faces two formidable challenges; the slowing economy and the all-important goal of maintaining employment stability.

This is best illustrated through the example of Hebei province, the largest producer of steel in the country. The province is adjacent to Beijing and has contributed heavily to the capital’s sickening smog problem. Hebei has been under tremendous pressure to shut down its polluting industrial capacity to improve Beijing’s environment.

The economic consequence of this environmental crackdown is dire. The provincial GDP almost halved from the same period last year, which was 9.1 per cent. It only expanded 4.2 per cent, which was the second lowest of 31 provinces in the whole country. 

The party secretary of Hebei, Zhou Benshun told Chinese media this week the provinces effort to fulfil the central government’s mandates on excess capacity and environmental standards would hurt its “tendons and bones”.

“The impact will be long-lasting. We need to develop new industries to stabilise economic growth, but new strategic industries cannot be developed overnight,” he said.

The steel industry will be the worst affected. According to the estimates of the Hebei Development and Reform Commission, the key economic planning agency, the province would lose 258 billion yuan ($44 billion) in assets, 55.7 billion yuan ($9.5 billion) in revenues and most importantly 600,000 jobs, directly and indirectly.

One can only imagine the pressure on local officials, who would not be keen to surrender so much tax revenue and bear the heavy responsibility of looking after an army of unemployed. The provincial government needs to fork out an extra 13 billion yuan a year to provide the minimum social security for the unemployed.

The Minister of Industry and Information Technology, Miao Wei, the man who is in charge of implementing the drastic reduction, openly admitted the difficultly of forcing through these changes at a time when the economy is under downward pressure.

The success or otherwise of Beijing’s effort to curb the country’s excessive industrial capacity will have a significant impact on Australia’s future economic wellbeing. This is an area where we need to pay close attention.

China's consumer-price index rose 2.5 per cent in May from a year earlier, quicker than a 1.8 per cent year-to-year rise in April, data from the National Bureau of Statistics showed.

The rise in the inflation gauge matched the median 2.5 per cent gain forecast by 15 economists in a Wall Street Journal survey.

The CPI also increased 0.1 per cent in May from April. In April, it fell 0.3 per cent from the preceding month.

China's producer-price index, a gauge of factory-gate prices, dropped 1.4 per cent in May from a year earlier, compared with a 2 per cent year-to-year decline in April. The fall was less than the median 1.5 per cent decline forecast in the same survey.

The PPI also declined 0.1 per cent in May from April. In April, it fell 0.2 per cent from the preceding month. 

China's central bank on Monday unveiled details of plans to let some banks lend more of their deposits, in a move to give the sluggish economy a boost. 

The People's Bank of China said that it was making a "targeted cut" in the portion of deposits that banks need to keep on reserve. It trimmed the rate by half a percentage point for banks that lend to the rural sector and smaller companies. 

The move effectively frees up more money for banks to lend, though it falls short of a broad reserve-rate cut that would have included China's biggest banks. 

Late last month, China State Council, or cabinet, promised a cut in the reserve requirements for some banks but gave no details. It followed another targeted move in April aimed at county-level rural commercial banks and rural cooperatives. 

China's economy has been posting slower growth this year, and the government has been looking for ways to ensure that sufficient credit is channeled to key segments of the economy. Growth slowed to 7.4% year-over-year in the first quarter from 7.7% in the final quarter of last year. 

"It's a timely move and shows that the central bank realizes how serious the economic slowdown is," said Shen Jianguang, economist at Mizuho Securities. "But it's not enough." 

Analysts said that it is difficult to estimate the impact due to the lack of details in the central bank's statement. Some said it could release about 100 billion yuan--still a small portion of the total of about 111.7 trillion yuan ($18 trillion) in deposits in the banking system. 

"It's a positive signal in support of the economy, which still faces downward pressure," said Ma Xiaoping, economist at HSBC. "It's a targeted cut and it is consistent with the central bank's objective this year of avoiding the kind of big stimulus that had been used in the past." 

Beijing has been trying to avoid a bigger stimulus package for the economy and not repeat the spending spree that resulted from its effort to cushion the impact of the 2008 financial crisis. That led to an overdose of spending on projects that were unproductive and created overcapacity, such as in steel and cement, and ultimately led to bad loans in the banking system. 

Beijing instead has focused on railway spending and tax breaks for small businesses while it has also told local governments to speed up spending on already approved projects. 

More recently, the central bank has come under pressure to announce an across-the-board cut in the bank reserve requirement ratio--which now stands at 20% of deposits for most banks. 

So far it has flexed its growing political muscle and resisted that pressure, preferring to use tools that can be aimed at specific sectors of the economy. 

On Monday, the Chinese Securities Journal, a major state-run newspaper, joined the chorus that has been calling for a broader cut in the bank reserve ratio. 

"Amid considerable downward pressure on economic growth, there has been a consensus that monetary policy easing is necessary," the China Securities Journal said. 

"In order to effectively reduce the funding costs of the real economy, lowering banks' reserve-requirement ratio at an appropriate time is a good option," the paper said, without saying when the move should be made. 

The central bank said on Monday that its latest move, which takes effect June 16, will affect about two-thirds of the nation's city commercial banks and applies to financial leasing and auto financing firms. 

The central bank also said on Monday that the measures don't signal a monetary policy change. It added that it is maintaining its prudent monetary policy.

China has reopened the market for initial public offerings after a nearly five-month halt, allowing 10 companies to pitch their shares to investors and providing a much-needed funding channel as economic growth slows.

The long-anticipated restart comes as the nation's stock market underperformed most of its global peers so far this year. The benchmark Shanghai Composite Index has fallen 4% year to date.

Half of the companies will list on the Shanghai Stock Exchange and the other half on the Shenzhen Stock Exchange, China Securities Regulatory Commission said in a statement released late Monday via an official account on Sina Weibo, WB +0.59% the U.S. Twitter TWTR +3.42% -like microblogging service.

The CSRC didn't name the 10 firms, but the website of the two bourses showed that seven of the 10 have published their prospectuses, including electronics manufacturer Guangdong Ellington Electronics Technology Co., which seeks to raise 1.3 billion yuan ($208 million), the biggest IPO among the seven, and plans to list on the Shanghai bourse.

The CSCR last allowed companies to float shares in January after a 14-month moratorium on IPOs, though issues stopped abruptly in March. Analysts say the halt may have come as a result of lackluster market conditions and because the CSRC discovered loopholes in new IPO rules issued late last year.

The number of IPOs CSRC targets should remove the overhang of uncertainty that has covered the market over the past few months, said Deng Wenyuan, an analyst at Soochow Securities.

Following weeks of declines in the nation's stock market amid concerns over economic outlook and a share glut, Xiao Gang, the chairman of the securities regulator, said on May 19 that China plans to allow about 100 companies to list between June and the end of the year at a balanced pace.

Since then, the benchmark Shanghai Composite Index has rebounded 1.2% after signs of stabilizing economic growth and fewer new-share supply, which encourages investors that the market won't be flooded. The benchmark Shanghai Composite Index also opened higher on Tuesday after the central bank unveiled details of plans to let some banks lend more of their deposits to give the sluggish economy a boost.

The number of planned initial public offerings not only is lower from that of 2012, the year before a 14-month moratorium was imposed on the country's IPO market, but also undershot previous market expectation.

In 2012, China allowed 154 companies to go public which raised 103.4 billion yuan ($16.6 billion) in total. Investors previously were expecting 300 to 400 companies to be listed this year.

While Beijing ended the 14-month moratorium on IPOs in January—allowing 48 companies to list in the first two months of this year after raising a total of 33.5 billion yuan—the new issues stopped in March. Later that month, the CSRC adjusted the rules for IPOs. Changes included capping the amount of old shares that can be sold from an IPO to limit the amount of money that existing shareholders can get from such a deal.

The seven companies that have published prospectuses—including manufacturers, pharmaceutical companies and food companies—plan to pitch their shares to investors as early as Wednesday, according to their prospectuses.

Investors' interest in IPOs will likely stay high, at least for the time being, as sharp gains in the stocks listed earlier this year indicate that buying into IPOs remains lucrative, said Huang Cendong, an analyst at Sinolink Securities. The 48 stocks listed this year recorded an average rise of 66% as of Monday.

Demand for natural gas is set to nearly double within five years in China but the emerging market giant will meet half that with domestic supplies, the International Energy Agency said Tuesday.

In its latest medium-term forecasts for the natural gas sector, the IEA trimmed its five-year outlook for consumption by 0.2 points to an annual increase of 2.2 percent as European countries step up use of renewable energy.

However, it said demand for cleaner-burning natural gas was likely to grow in China as air quality concerns prompted authorities to take measures to reduce pollution

"Driven by booming demand, the 'Golden Age' of natural gas that is now firmly established in North America will expand to China over the next five years," said the IEA.

"The power, industrial and transport sectors will drive overall Chinese gas demand to 315 billion cubic meters in 2019, an increase of 90 percent over the forecast period."

The energy analysis arm of the OECD group of advanced countries said China was also set to benefit from a boom in gas production.

"While China will remain a significant importer, half of its new gas demand will be met by domestic resources, most of them unconventional: Chinese production is set to grow by 65 percent, from 117 bcm (billion cubic metres) in 2013 to 193 bcm in 2019," said the IEA.

The IEA was somewhat cautious about the outlook overall for natural gas given efforts to switch to renewables, high prices for liquefied natural gas (LNG) supplies, and competition from other fuels such as coal.

"High LNG prices are threatening to crimp demand as many countries are increasingly unwilling, or unable, to afford these supplies -- and that could open the door to coal," IEA Executive Director Maria van der Hoeven said in a statement.

That is of major concern as increased Asian demand for gas is expected to be met mostly by LNG supplies, which the IEA forecasts to increase by 450 percent to reach 450 bcm in 2019.

The IEA expects half of all new LNG exports will come from Australia and North America to account for 8 percent of global LNG trade by 2019.

Sino Australia Oil and Gas is the subject of a criminal investigation after the Australian Federal Police executed search warrants against the Australian-listed mining services company as part of a probe into market ­manipulation and false trading.

The Australian Securities & Investments Commission last week continued a freezing order over the HSBC bank account of the Chinese drilling services company after its chairman and maj­ority shareholder, Shao Tian­-peng, attempted to transfer $7.5 million to Chinese bank accounts a day after the company floated on the Australian Securities Exchange on December 12 last year.

Sino Australia listed on the ASX last year, raising $12.8m at 50c a share for a market capitalisation of $109m.

According to a letter of complaint to the corporate regulator from two of the company’s sacked directors, Wayne Johnson and Andrew Faulkner, Mr Shao asked the board to authorise the payment of $7.5m into a Chinese bank account, which would have left $170,000 in its accounts just a day after listing. Mr Johnson and Mr Faulkner were removed from the board after refusing to sign off on the transfer.

The Chinese drilling-services company also had trading in its shares halted by the ASX after it failed to lodge its accounts in February.

The Australian revealed significant discrepancies between profit assurances given by Sino prior to the float and its actual ­financial performance, as well as significant “related-party transactions” paid to Mr Shao by the company worth $3.1m.

Last night, Sino issued a statement to the ASX calling on ASIC and the Federal Court to release the company’s funds, but did not comment on a criminal investi­gation.

“It is the unanimous opinion of the company’s directors that the injunction is hurting the company, is not in shareholders’ best interest, is unwarranted and should be removed,” it said.

The Sino board said the frozen funds identified by ASIC had been earmarked for drilling purchases in China, and it was the court’s freezing order that was dragging down expected profits.

“ASIC is concerned about an historical variance in forecast profit to actual profit caused by the company’s reliance on leased equipment but is actively preventing the company from expending its money, in a manner entirely in accordance with what was disclosed, to purchase equipment that would reduce the reliance on leased equipment and increase profitability,” the statement said.

Affidavits filed in the Federal Court by ASIC reveal that the AFP executed a search warrant at an address in Mosman in Sydney on May 21 “pursuant to s3E of the Crime Act”.

“The search warrant relates to suspected contraventions of the following provisions of the Corporations Act arising from the trading in SAO’s shares during the period from around 12 December 2013 to 24 February 201.”

The ASIC and AFP investigation relates to “market manipulation” and “false trading” of Sino shares.

“Evidence obtained by ASIC prior to obtaining this warrant ­indicates that Mr Shao was aware of the motive underpinning the trading in SAO’s shares (that is the subject of ASIC’s in­vestigation into market manipulation and false trading) and supported it.”

An ASIC spokesman would not comment further on the search warrants or the ongoing investigation into Sino. ASIC is understood to have interviewed Mr Shao and other Sino directors late last month, with Mr Shao now having returned to China.

According to Hans Morgenthau, one of the arch-realists of international relations theory, "International politics, like all politics, is a struggle for power".

Morgenthau thought that "the drives to live, to propagate, and to dominate" were inherent to human nature, and that nations were motivated by similarly elemental urges.

The often pitiless power politics of contemporary Asia seem to confirm Morgenthau’s grim prognosis.

Washington and Beijing are divided by bitter strategic distrust, China is attempting to bully its maritime neighbours with brinkmanship, and countries across the region are expanding their defence budgets and seeking security assurances from the United States.

With Beijing’s aggressive territorial claims in the East and South China Seas the driving force behind the resurgence of Realpolitik in Asia, political leaders and policy makers need to know just how far China will go.

Is speculation about Beijing turning the South and East China Seas into Chinese lakes and asserting hegemony over Asia irresponsible alarmism? Or will China’s foreign policy soon become truly "red in tooth and claw", as Morgenthau would have predicted?

First, the good news. China will not violently challenge the current US-led Asian order of free trade and freedom of navigation.

To be sure, since the time of Mao Zedong, China has railed against what it calls US ‘great-power chauvinism’ and ‘superpower hegemony’, and Beijing would still like to see the US unipolar international system replaced with a ‘multipolar world’.

But China is also careful to stress that while it would welcome the end of US pre-eminence, it does not want to become the region’s new hegemonic power. As Chinese Foreign Minister Wang Yi emphasised last year, China has "never had the strategic intention to … replace the United States for its position in the world".

Given Beijing’s concerted effort to rival the US navy in the Western Pacific, conciliatory remarks about China’s grand strategy could, of course, be disingenuous. However, Beijing knows that the benefits of usurping US leadership in Asia will be minimal.

China is likely to have the world’s largest nominal GDP by 2019 and largest defence budget by the 2030s. This rapid rise means that contrary to dire predictions of a clash between the United States and China over who leads Asia, it is not necessary for Beijing to directly challenge US pre-eminence to bring it to an end.

Ironically, as Beijing appreciates, the US-led Asian order secures the liberal economic conditions that will see China and other emerging nations peacefully surpass the US economically and militarily.

Now for the bad news. China might be content with the slow decline of the US-led unipolar international system, but Beijing will continue to violently revolt against Asia’s territorial status quo.

In 1982 during an address to a delegation of Indian academics, then paramount leader Deng Xiaoping famously summarised China’s approach to territorial disputes: "Even if the border question cannot be resolved for the time being, we can leave it as it is for a while. We still have many things to do in the fields of trade, the economy and culture and can still increase our exchanges so as to promote understanding and friendship between us."

Deng’s crucial caveat was that contentious territorial disputes will only be deferred for a while, meaning that eventually they will need to be resolved.

As China’s combative tactics in the East and South China Seas suggest, Beijing will reject any resolution that undermines its prospects of regaining what it considers to be lost Chinese territory. Foreign Minister Wang made this abundantly clear earlier this year: "There is no room for compromise in territorial and historical issues."

As with Beijing’s steadfast commitment to ‘reunifying’ Taiwan with the ‘motherland’, China may be willing to play a patient long game with Japan over the Senkaku/Diaoyu Islands and with Vietnam, the Philippines, Brunei, Malaysia and Indonesia over the roughly 90 per cent of the South China Sea that it claims.

But hopes of a mutually acceptable negotiated solution to these territorial disputes are illusory. As the economic and military asymmetry between the Chinese behemoth and its diminutive maritime neighbours grows, the temptation to create new ‘facts on the water’ by unilaterally seizing disputed territory will prove irresistible for Beijing.

China is a revisionist power: it wants the post-Cold War era of unipolar US leadership to end and it is intent on taking control of vast swathes of the Western Pacific.

But Beijing’s revisionism is cautious and considered. China will allow relative US decline to loosen the American grip on pre-eminence, and will only resort to foreign policy that is "red in tooth and claw" when maritime neighbours block its territorial aggrandisement.

Morgenthau was therefore half right: China will employ the traditional tactics of domineering power politics, but only when it cannot get what it wants by more enlightened means.

Dr Benjamin Herscovitch is a Beijing-based research fellow at The Centre for Independent Studies.

If there was a global competition for the anti-capitalist villain of the 20th century, Mao Zedong, the founder of the People’s Republic of China would certainly be one of the most serious contenders for the position.

He tried to build a communist utopia in China, eliminating all form of private capital. Mao probably holds the world record for killing the largest number of capitalists and landowners. One of the most heinous crimes in Mao’s China was to be a “capitalist roader”, someone who sympathises with the class enemies.

However, in a strange twist of fate, Mao still enjoys semi-deified status amongst some of the most unlikely people in modern materialist China -- the country’s richest and most powerful corporate tycoons. Just to clarify, I am not talking about senior executives of state-owned enterprises, but self-made billionaires.

These include Liu Chuanzhi, chairman and founder of Lenovo, the world’s largest computer maker, Ren Zhengfei, founder of Huawei Technologies, a world-class telecommunication company, and Zong Qinghou, who has a personal fortune of $11.6 billion and was the richest man in China in 2012.

Wu Xiaobo, one of the country’s most respected business writers, says there is a “Maoist business gang” in China, which includes not only the corporate titans mentioned above, but also many other high-profile billionaires. Jack Ma, the arch-hero of the new capitalist China and a darling of Wall Street, is also an admirer of Maoist strategy, according to an interview with Esquire in 2013.

Ren, the founder of Huawei, is arguably one of the best known admirers of Mao and his strategic thinking. The founder of the world’s largest telecommunication equipment maker has studied the collected volumes of Mao repeatedly, seeking inspiration from a man who defeated a much larger and better equipped nationalist army during the civil war.

How Huawei rose from its humble origins to become a serious challenger to established Western rivals is a perfect case study of Maoist military strategy. When the company first started, it was excluded from China’s lucrative coastal cities. Ren put to practice the lessons he learnt as a PLA officer -- using the countryside to encircle and finally capture the cities.

He deployed salesmen and engineers to capture markets deemed too small for multinationals like Cisco. Huawei used a similar strategy internationally, targeting developing markets in Africa and Latin America. Huawei engineers soldiered on through civil wars and natural disasters and successfully undercut Ericsson and Nokia, according to The Economist.

Ren also runs Huawei like a military organisation and tries to imbue the organisation with an aggressive military culture. In 2002, when the company was trying to crack the overseas market, Ren wrote to his employees, saying “It is essential to maintain organisational integrity and coherence at the critical moment”, referring to a crucial civil war battle in the 1940s.

Ren is not alone in adopting Maoist strategy to conquer the Chinese market. Zong Qinghou, the founder of China’s largest beverage company and one of the richest men in the country, also used a similar strategy of going after the country’s vast countryside before taking on the affluent cities.

He openly admitted his admiration for Mao in an interview with the Southern Weekend, one of the country’s most liberal newspapers with a thinly-disguised distaste for Maoism. He runs his company, which has 150 subsidiaries and 30,000 employees, like an autocrat. He combines the office of the chairman with that of chief executive, and all managers report to him directly.

Jack Ma, founder of the world’s largest e-commerce bazaar and arguably the most popular and well-known Chinese entrepreneur in the West, is also an admirer of Mao, but he is more far circumspect in his respect for the Chairman.

In the eyes of Jack Ma, there are two Maos: the great strategist before 1949 and the psychopath after 1949. In 2013, he told the Chinese edition of Esquire that people must examine Mao’s legacy critically, acknowledging his many military and political achievements in the first part of his career.

“Before Mao founded the People’s Republic, there were many things we could learn from his military and political thoughts. We cannot dismiss him because of what he did during the Cultural Revolution. I have spent a lot of time thinking about the decisions and policies Mao made before 1949,” he told Esquire.

“I think people of my generation, who were born in the 1960s, have all studied him.”

Wu Xiaobo explains the allure of Mao to the country’s home-grown billionaires. Many of Mao’s admirers come from humble backgrounds just like him; they are leaders who have managed to grow up against enormous adversity. They admire Mao’s tenacity and his ability to turn weakness into strength.

Two dominant forces in China today are state capitalism and multinationals. Chinese private capital is like a weed growing between hard rocks; business leaders are drawn to Mao’s ability to challenge authority and his revolutionary romanticism, Wu explains.

It is fascinating to see how China’s most entrepreneurial business people are turning to Mao’s tactics and strategy to expand their business empires. It is also ironic to see Chinese millionaires in their flashy s-class Mercedes laying wreaths at Mao’s memorials in Beijing.

Maybe it is the time for business schools to think about a course on strategy according to Mao. After all, the Art of War by Sun Tzu is already required readings for managers and military officers alike.

The Chinese central bank surprised markets Monday by guiding the yuan to its strongest level against the U.S. dollar in more than two months amid fresh signs the economy is stabilizing after a recent slowdown. 

The move by Beijing was in contrast to largely stable foreign-exchange markets elsewhere, suggesting to some analysts that Beijing may be ready to end the yuan's roughly 3% fall this year. The People's Bank of China says its wants a more market-oriented exchange rate, but frequently steps in to set the direction--earlier this year, it engineered a surprising deprecation to deter speculators betting on gains. 

The central bank set the dollar-yuan central parity, a daily reference exchange rate it uses to dictate the yuan's trading, at 6.1485 Monday, down from 6.1623 Friday and significantly lower than the 6.2502 market closing level the currency recorded on Friday. The currency is allowed to trade 2% in either direction from the morning rate, and a lower number means a stronger yuan. 

The gains came after the economy posted strong trade numbers, with exports climbing 7% year-over-year in May. This marks a sharp pickup from earlier in the year, and is the latest sign of stabilization in the Chinese economy after manufacturing data for May began recovering from a soft patch in recent months. 

"There's likely a linkage between the central bank's action and the better-than-expected export number. The latter may have given the central bank a bit of confidence," said Suan Teck Kin, an economist at United Overseas Bank.

In contrast with a fast rebounding export sector, China's imports fell 1.6% from a year earlier in May, after a 0.8% increase in April, missing the economists' median forecast of a 6% increase. 

"The export data does point to a better outlook for the economy for the second half of this year but since imports remain quite weak, will there be sharp appreciation for the yuan? Probably not yet," Mr. Suan said. 

While the comforting export data showed recovering demand from China's large trading partners, including the U.S. and Europe, the surprisingly weak imports in the same month raised concerns over the Chinese government's efforts to boost domestic demand and rebalance an investment-driven economy. 

"It seems that the central bank is signaling the yuan can be back to its appreciation path now, but the market isn't taking it very well," said a Shanghai-based foreign bank trader. 

The trader added that given the relatively sharp rise in the yuan's reference rate, the currency's gains against the dollar in trading look rather tame, reflecting continued caution among investors.

China Premier Li Keqiang said on Tuesday that policy makers will focus more on "targeted measures" to support economic growth, the state radio reported, in a sign showing that Beijing is unlikely to unveil large stimulus measures soon.

The government should target the "most prominent problems" in the economy and identify the most effective tools to address them, Mr. Li was cited as saying. 

Mr. Li didn't specify any problems in the report but economists have said that high borrowing costs for smaller companies, lingering overcapacity in some industries and an ailing property sector, among others, are dragging China's economic growth.

The government has refrained from rolling out any big stimulus package and instead has been using modest measures to boost economic growth. 

Peter Cai: If the central bank loosens the purse strings it risks repeating past mistakes.

The central bank said on Monday it would reduce the bank reserve requirement for city commercial banks and rural banks--but not the nation's biggest banks--by half a percentage point. 

Beijing in recent months has also stepped up spending on rail, water and energy projects and announced new initiatives to boost exports, cut red tape, route more venture capital to emerging industries and ease lending terms for first-time homeowners.

The premier reiterated in the report that the government is determined to keep economic growth in a reasonable range and will make sure that the country can reach this year's economic growth targets.

Beijing set a goal for the economy to expand around 7.5% and creating at least 10 million new urban jobs this year. 

The Chinese economy expanded 7.4% in the first quarter of the year, down from an increase of 7.7% in the fourth quarter of last year. 

The premier made the remarks when meeting with a group of state researchers, the report said.

Bankers in China are focusing on the actions of a commodities-trading firm as they scramble to find metals they believed were backing loans but which appear to have been used as collateral multiple times.

The operator of Qingdao port, on China's eastern coast, said this week Chinese authorities were investigating an alleged fraud involving metals stored at the port and used as collateral to obtain multiple bank loans. 

Several executives at Western banks said they made loans to entities linked to Qingdao-based Decheng Mining. They are now trying to determine whether these entities issued more than one receipt for the same collateral, using it to back multiple loans, the executives said. 

They are also trying to contact Chen Jihong, Chairman of Decheng Mining parent, Dezheng Resources Holding Co. Ltd. These bankers say Mr. Chen has been detained by Chinese authorities and is now unreachable. 

Attempts to reach Mr. Chen weren't successful. Police in Qingdao couldn't be reached for comment. Efforts to reach both companies for comment were unsuccessful. 

The probe has hurt global prices of some commodities on concerns China may crack down further on the use of metals to back loans, which could lead to the dumping of metals onto markets as these trades unwind. 

The practice of using commodities to back loans is legal in China, and has been used to get billions of dollars of capital into the country, helping fuel economic growth. But Chinese authorities in April raised concerns the practice could pose a systemic risk to the financial system. 

Bankers investigating the matter say they have been unable to get access to Qingdao's port to assess the collateral. "Until they open up for us to go and look at it we don't know the extent of the damage," one executive said. 

On Tuesday, inspectors for a Western bank also were unable to survey collateral stored at Penglai port, located about 150 miles south of Qingdao, people familiar with the matter said. 

Mr. Chen, a national of Singapore, the Southeast Asian city state, is also a director of Hong Kong-based Zhong Jun Resources Company Ltd., which has offices in Singapore. 

A secretary at Zhong Jun said she hadn't seen Mr. Chen for weeks. A spokesman for Singapore's Ministry of Foreign Affairs said it was "rendering consular assistance to Mr. Chen and his family." 

The spokesman gave no further details about Mr. Chen or whether he has been detained in China. 

Banks, worried about collecting on their loans, have already scaled back lending for metal purchases, potentially cutting Chinese imports, which drive most global commodities markets. 

According to accounts by executives at Western banks involved in the probe, lenders provided finance backed by metals such as copper and aluminum stored at Qingdao, one of China's biggest ports. 

These banks would issue the cash upon receiving a receipt from the warehouse showing proof of collateral. But they now are concerned the collateral has been pledged to other lenders. 

The bonded zone of Qingdao's port, one of China's largest, sits to the city's north. The zone is banded by six-lane highways, throbbing with the dust and noise of 12-wheel trucks. The largest warehouses are as large as two soccer pitches. A reporter wasn't allowed to enter. 

Decheng's office is located on the southeastern side of the city in a three-story mall. A guard at Decheng's gate said the company's staff had left but operations at the company appeared normal. 

Earlier Tuesday, in an announcement to the Hong Kong Stock Exchange, state-owned Citic Resources Holdings Ltd. said it had applied to courts in Qingdao to secure metal assets it owns in warehouses. It said it owns aluminum and copper stored in bonded warehouses at the port. 

A number of Western and Chinese banks have sought similar court orders in an effort to secure their collateral, according to one person familiar with the matter. But the court orders won't alleviate the problem of multiple lenders claiming the same piece of collateral that had been promised to them by the borrower, this person said.

Leon Lau: “It’s about persistence and knowing the right people to talk to.”

For Australian businesses expanding into Asia, adapting to different cultures and ways of work­ing is often easier said than done.

When Leon Lau was expanding his recruitment business into Hong Kong, it appeared he had hit an insurmountable obstacle.

The name of his recruitment company, Peoplebank, was deem-ed too similar to the People’s Bank of China (the country’s central bank) by a low-level bureaucrat in Hong Kong who rejected his application to rebrand a local company he had bought.

After the application was knocked back several times, Lau hired a Western lawyer and started playing hardball. His lawyers warned the bureaucrats that they would appeal to the chief executive if their application was rejected again. With that threat, the name was approved.

“Whatever the process is, you have to stick to the rules and work your way through it. It takes time but you can get there,” Lau says. “It’s about persistence and knowing the right people to talk to.”

Lau had learned early on that persistence is key when working in Asia. In fact, when he first thought of taking Peoplebank into Asia he was told it couldn’t be done.

“I was told there wasn’t a contracting market in Asia,” he says. “The thought process was being a contractor meant you were not good enough to get a permanent job. They saw getting a contract as second best and they would lose face at the dinner table.”

Having seen how Australia’s workplace culture had evolved to accommodate contracting in IT, Lau was certain the same change was on its way to Asia.

In 2011, Peoplebank made the leap into Asia with the acquisition of PGI Infotech in Singapore, Camcentre in Hong Kong and Confero, which had operations in Singapore, and Hong Kong. The company now has a presence in Kuala Lumpur.

While Peoplebank is enjoying its first mover advantage in Asia, many Australian mid-market businesses — those with annual turnover of between $10 million and $250m — are only just starting to look north as their opportuni­ties for growth are constrained by an increasingly competitive ­market at home.

A recent report on Australian mid-market companies from GE Capital shows that despite some downturn, Asia remains a significant growth market for many Australian mid-market businesses.

Lau’s message to these companies is that if they have a compelling reason to come to Asia, they should seize the opportunity.

“If you’re confident you’re in the right market, if you’re really sure you’ve got a place in the market you’re selling into and you’ve got the right product or the right service, you shouldn’t be scared of Asia,” he says

Before turning to Asia, Peoplebank experienced a sustained period of growth — both organic and through a string of acquisitions — that propelled it to a ­market-leading position.

Having begun with just three people in Sydney at the start of the 1990s, Lau started on an acquisition trail in 2001 that saw­ ­Peoplebank grow into Australia’s leading IT recruitment company. For Lau, the decision to go for growth was clear.

“I could see that in the IT staffing contracting and recruitment business you couldn’t be in the middle ground, you either had to have scale or you had to stay niche,” he says.

“If you’re in the middle ground you really haven’t got a future.”

After a public float in 2005, the company continued to grow organically until 2008 when it acquired Ambit — then the biggest private IT contracting business in Australia — for $100m. The acquisition was funded through an agreement with offshore private equity firm Navis Capital Partners.

When the GFC hit in 2009, Peoplebank’s shares took a hammering, which prompted Lau to launch a takeover bid of his own company with the help of Navis. The company was then delisted.

Throughout this period of change, Lau was looking towards Asia as a potential growth area. Australia was becoming a mature market for IT contracting and Peoplebank was starting to be squeezed on its margins.

“As we were getting squeezed I could see that we had to diversify and the choice for me was either to diversify out of IT into other recruitment sectors or to diversify geographically,” says Lau.

With most other recruitment sectors already well catered for, Lau saw Asia as the next growth area, and when it seemed that Asia was showing signs of a recovery, Lau restarted talks with companies in Hong Kong and Singapore and the rest is history.

According to GE Capital’s managing director of commercial finance, Aaron Baxter, Australian mid-market companies benefit from an agility that large businesses lack and are nimble and innovative enough to adapt to the needs of customers in new markets.

And for those mid-market companies that are lagging behind the likes of Peoplebank, Baxter ­argues it’s never too late. “I think it’s the right time now to start looking beyond Australia” he says. “Perhaps being a fast follower is not so bad as long as they learn from mistakes and organisations that have been successful there.”

China has issued a blunt warning to Hong Kong, showing who's the boss in the relationship, just days after tens of thousands of people staged a vigil in memory of the 25th anniversary of the Tiananmen Square massacre.

The State Council -- China’s cabinet -- published a White Paper that strongly asserts Beijing’s control over the former British colony despite the promise to maintain the so-called “one country, two systems” structure for 50 years after the handover in 1997.

The White Paper affirms that the central government in Beijing has “comprehensive jurisdiction” over Hong Kong and is the final arbiter of authority. Though it stresses that Hong Kong can choose its own head of government in the future through direct election, the candidates must be patriotic and acceptable to Beijing.

“The central government exercises overall jurisdiction over the Hong Kong Special Administrative Region, including the powers directly exercised by the central government, and the powers delegated to the HKSAR by the central government to enable it to exercise a high degree of autonomy in accordance with the law,” the white paper says.

The central government exercises overall jurisdiction over the HKSAR, including the power of the HKSAR to exercise a high degree of autonomy, the white paper said.

The editorial from Beijing’s official newsagency Xinhua, made it clear the foundation of the so-called “one country, two systems” formulation, which guarantees Hong Kong’s capitalist economic structure and inherited British legal system, was based on recognition that China was a unitary state.

The Xinhua editorial also warned against “foreign interferences” in Hong Kong, firing shots at pro-democracy legislators and protesters who enjoy close relationships with the US and Britain.  

Beijing’s blunt warning comes at a time when the relationship between the mainland and Hong Kong is increasingly strained. Pan-democracy legislators and protesters are increasingly frustrated with the progress on universal suffrage and more radical elements are agitating to occupy Central, the island’s financial district.

At the same time, anti-mainland sentiment is brewing among Hong Kong residents and there has been a widespread backlash against mainland tourists and migrants.  Some young people even managed to storm the gates of the Chinese garrison in Hong Kong.

The growing tension between Hong Kong and Beijing is a concern for the business community, both internationally and locally. The Hong Kong General Chamber of Commerce, in conjunction with a number of foreign business chambers, has placed a quarter page advertisement in the South China Morning Post this week, urging people to refrain from taking part in a planned pro-democracy demonstration.

“We respect the fact that politics is part of community life here,” says the advertisement, “however, we cannot, and should not, sit idly by when political actions threaten to disrupt general business activity and with it, livelihoods of Hong Kong’s workers and their families.”

“Occupy Central could potential cripple commerce in the Central Business District, impacting small local businesses and large multinational operations alike.”

The poisoned political environment is threatening Hong Kong’s future as the international financial hub in the Asia Pacific region.  This is especially true at a time when Shanghai is positioning itself to be a global financial centre with the creation a free trade zone.

The chief executive of ANZ bank, Mike Smith, told a group of visiting Chinese journalists that the creation of the free trade zone was a gentle warning to Hong Kong.

Hong Kong’s prized position as an international financial centre rests on its sound British common law system, closeness to China and stable political environment. The important third leg is under threat now as some Hong Kong residents seek a more confrontational approach with Beijing over its political reform agenda. 

At the same time, Beijing’s heavy-handed and more interventionist approach in Hong Kong will also undermine the territory’s confidence as well as its stability. Most importantly, it will further strain the relationship with Hong Kong’s six million residents who are still suspicious of Beijing’s ultimate designs for the island.

At a time when cities around the region are vying to become financial hubs, political instability will undermine Hong Kong’s claim to be the most important financial centre in the Asia Pacific region.

Australian businesses run the risk of missing out on the Asian internet boom, Sarv Girn, chief information officer at the Reserve Bank of Australia has warned.

Girn points out that internet penetration rates in Asia are very low, particularly when compared with Australia, but they are growing more rapidly than the rest of the world.

The projected growth of internet usage in the region suggests there is clearly a disruptive change coming, Girn said. If the increase continues over the next five years with penetration increasing from 30 to 40 per cent, the number of people on the internet will just about double.

The growth potential across the whole region is indeed staggering. India, which has the third largest online user base globally after China and the US, has an internet penetration rate of just 17.4 per cent.

According to eMarketer, consumers in the Asia-Pacific will spend more money online than the US for the first time ever this year. And for every ten US dollars spent, six will come from China.

The internet is proving to be the most vibrant and dynamic part of the new economy in China. The growth in the mobile market there has been phenomenal, thanks to infrastructure investment as well as the availability of low-cost smartphones and tablets.

According to official figures from the China Internet Network information Center, China has 618 million internet users as of December 2013. In other words, China has an online population 33 times that of Australia with only a 45.8 per cent penetration rate. Half of that population shops online.

Yet despite the huge opportunity for Australian businesses to sell directly to China’s rapidly expanding middle class via the web, our businesses are lagging behind the competition from other countries.

"There are a range of popular Australian brands sold on China's Tmall, but sales volumes are still small,” explains Ben Simpfendorfer, a Hong Kong-based investment banker at strategy consultancy Silk Road Associates.

E-commerce in China is already a fiercely competitive market, with most of the world’s brands looking to tap into the growing affluent classes there, says Simpfendorfer.

“Making your product available is just a first step. But it's hard to be noticed without an effective marketing strategy, especially a digital media strategy.”

A number of Australian brands such as Penfolds wine, dairy provider A2 Milk, baby food manufacturer Bellamy's Organic, and clothing store Jeanswest have their own shopfronts on Alibaba’s B2C website Tmall.

If that seems too daunting for Australian businesses, the process has recently been simplified thanks to a partnership between China’s e-commerce giant Alibaba and Australia Post.

Through the agreement, businesses no longer have to overcome onerous obstacles such as registering as a Chinese business entity or employing local staff in the country. Australian businesses now have the option of piggy-backing off Australia Post and shipping their products directly from Australia.

But while Australian businesses rush to catch up on this sales opportunity, they run the risk of missing the bigger picture.

“Be warned: those additional people on the internet will not just be buying, but also selling themselves, and disrupting markets globally” said Girn yesterday.

As if to hammer home the point, as Girn spoke, Alibaba was launching American shopping website 11 Main in a direct assault on established big players like Amazon, eBay and Walmart on their home turf.

The need for a China strategy is as much a defensive decision, not just offensive, says Simpfendorfer.

“Learning how to compete with Chinese companies in their home market will be critical as those same Chinese companies look to establish themselves in Australia.”

In America this week, Prime Minister Tony Abbott was making a different point entirely.

"A rich China doesn't mean a billion competitors so much as a billion new customers," Mr Abbott told an audience of business.

The reality is that they are both.

Two unfortunate events are converging on the Australian minerals industry. The first is obvious: the possible repercussions from war in Iraq, which include a fall in the US dollar and fears for world growth.

The second -- which is not being talked about -- is China’s crackdown on its fringe financiers, which started with iron ore and now embraces copper. Indeed China’s bank love-affair with copper metal looks like it is coming to an end. Both copper and iron ore were hammered again last night in US dollar terms. In Australian dollars, the fall was worse.

In the last few years Chinese banking institutions have funded apartment blocks using copper as a security. In Western terms it was always a bizarre arrangement but it enabled vast numbers of apartment blocks to be built, many of which remain empty.

More recently, since last October the Chinese banks have been funding copper stocks not linked to apartments in bonded warehouses. Much of the metal came to Shanghai and other Chinese centres from the London metal exchange.

It is always dangerous funding big stocks of metal because there is no income and once traders get a whiff that the stocks could come onto the market, the price falls.

Copper had a setback in February but was helped by the Chinese stockpiling the metal. It performed well until the end of May when a company called Qingdao Decheng was discovered to have irregularities in its books. It would seem that Qingdao Decheng financiers and others funding the copper bond stores decided the banks were too exposed, and that sent the copper price into a downward spiral.

Readers will remember that in January iron ore prices jumped because Chinese banks were funding steel mills via iron ore purchases in a variation of the apartment game. But the iron ore game was stopped and the iron ore price slumped, including another fall last night. It is unlikely copper will fall as far as iron ore unless there is a major liquidation of metal held to back apartments.

Longer term, given that China is looking to stimulate consumer demand, copper is likely to be well supported and unlike iron coal there is no build-up in production capacity. Indeed BHP has selected copper as a metal that should perform well in the future.

Last night we saw the Chinese copper banking gymnastics joined by selling of iron ore and all base metals. But oil prices rose, which helps our gas revenue.

Clearly currency punters fear that the US will be involved in Iraq so the US dollar fell, but yields on US government securities also fell so our high-yielding currency was pushed up. The worst of all worlds for miners.