Randomly Noted

My colleagues report that some or all of the four Rio Tinto employees on trial in China for alleged bribery said they accepted payments of one sort or another. Given the  lack of clarity and transparency in the process – which began with their detentions last summer – it’s impossible to know whether the defendants are acting voluntarily or under duress. Also, we don’t know what has happened to the alleged bribers – the employees of Chinese steel mills who offered the alleged bribes to the Rio Four. Are they getting away with alleged crimes? Have they been secretly detained, tried and punished? Why is it we know about the people who allegedly accepted bribes but not those who paid them, and whose enterprises allegedly benefited? You may recall that the saga began last July when China imprisoned the Rio employees – one Australian citizen and four Chinese nationals – on allegations they stole national secrets. Later, Beijing decided it was a routine criminal matter. Even as the closed trial began today in Shanghai, Rio Tinto’s CEO Tom Albanese was shaking hands with Chinese Premier Wen Jiabao in Beijing’s Great Hall of the People.

The Rio Tinto four will go on trial next week – finally – after sitting in jail since last summer without due process, without any clarity about their alleged misdeeds. This is how China operates, and as a result multi-national corporations are finally starting to wise up. I’ve long been amazed at the slavish way in which Western businessmen deal with Beijing. Chinese business and political interests trample all over multi-nationals – and yet their CEOs keep coming back for more. “But China’s HUGE, companies can’t afford NOT to be in China, the Chinese economy is growing FAST even as the West stagnates”  - so goes the conventional wisdom dating back 15 or so years. Perhaps the sobering reality circa 2010, as freshly reported in today’s WSJ, is a sign of a new sobriety about China. Maybe companies will now start looking at China as it really is: an economy with limited opportunities for certain companies and industries, with an awful lot of risk for many.

You’d think China Inc. might have learned from its manipulative missteps of recent months – ill-conceived moves which forced Beijing to reverse its Green Dam web-filtering decision and reduce charges against the Rio Tinto four; these are just some of the about-faces we’ve documented in earlier blogs. But now comes news that the Beijing government is pumping money into a weak Australian miner called Fortescue Metals Group in exchange for securing a mere 3% iron ore price discount for the rest of the year. Fortescue provides only 7% of the world’s iron ore output, all of which will now go to China, which will in turn extend loans of up to $6 billion. Now in hock to Beijing, Fortescue has relinquished pricing leverage over its customer, China, which continues to negotiate prices with the world’s three most powerful miners – Rio Tinto, BHP Billiton and Vale – representing some 70% of global output. It’s a futile effort by China and a desperate move by Fortescue’s impetuous CEO, Andrew Forrest. Moreover, it will only aggravate foreign firms’ concerns about doing business in China. Overseas investors should now assume Beijing can at any time pit them against each other in unpredictable ways, and by extension should view their Chinese investments as riskier than they were, say, last week. All this follows China’s biggest fiduciary misstep of the summer – its decision to prolong iron ore price talks with the big miners even as spot market prices rose, forcing Chinese steel companies to pay more as the weeks passed and “giving iron-ore miners little incentive to lock in cheap prices,” as my colleagues report today. Supporters of the Fortescue-China deal argue it will alter the dynamics of the iron ore negotiations in coming months and years. But this hinges on Fortescue’s ability to expand fast and effectively enough to deserve a place at the bargaining table with Rio, BHP and Vale. The loans of $5.5-$6 billion from China will certainly help but they don’t guarantee world-class production in short order. And as Chinese interests continue scouring the globe for resources firms to buy, the Fortescue pact will only foster suspicion among target companies and governments that China’s priority is securing the lowest-possible prices for domestic consumers – not ensuring the health of acquired companies, their employees and shareholders. It all comes down to this: A state attempting to manipulate the shape of global commerce is folly and will fail.

DJN colleague Robert Flint does a lovely job of explaining what’s been going on in China this week as contradictory fears have mounted that 1) Beijing is creating a dangerous economic bubble by permitting its banks to lend at a torrid pace and in some cases to stock-market speculators; and 2) Beijing may suddenly and drastically slam the breaks on such lending by ordering banks to stop, as the government did in 2008. So far, most people seem to be worried about the latter possibility: The Shanghai stock market sank Wednesday after China’s banking regulator signaled it may crack down on banks lending to market speculators, and a well-known magazine, Caijing, cited two big lenders saying they’ll pull back their lending. In an apparent effort to reassure both jittery constituencies, China’s central bank spoke out late Wednesday; it issued a statement on its website – apparently a recently delivered speech by Vice Governor Su Ning – saying 1) the government won’t take administrative steps to curb bank lending, 2) nor will it stand by as banks make inappropriate loans. In his analytical piece, “Let 100 Banks Lend! Let 100 Bubbles Burst!” Flint muses that “Decades after Mao, China’s government is still concerned with the correct handling of contradictions – but now it’s more about contradictions within the financial system than among the people. Maintaining high levels of employment while fending off stimulus-inflated economic bubbles is one such contradiction the fourth generation of Chinese leadership is struggling to resolve. ” Have a look at Robert’s piece, which contains a reminder of the stunning ramp-up in lending that occurred in the months after Beijing launched its massive economic stimulus plan last November. Bank lending in the first half of 2009 totaled CNY7.4 trillion, which is equivalent to half of China’s GDP during the period. China’s industries stocked up on whatever they needed – and lots of stuff it didn’t need. At the same time, the Ministry of Finance found some loans were used by companies to invest in stock and property markets! All in all, “a very bubble-friendly environment,” as Flint puts it. Now we’ll all watch and wait to find out whether the central bank does as Su says and ensures “the mind and action” of all financial institutions are “as one” with the government.

The U.S. has launched a World Trade Organization complaint against China on the grounds that Beijing unfairly helps domestic makers of steel, aluminum and chemicals, among others, by effectively blocking overseas exports of raw materials (eg. the ingredients that go into steel, aluminum and chemicals.) In essence, the complaint alleges that Chinese steel, aluminum and chemical companies get first dibs on raw materials – at ultra-low prices – from domestic producers, and are therefore more potent when competing against overseas companies. For their part, non-Chinese steel/aluminum/chemical makers have to buy raw materials in the open market, and arguably at higher prices because a lack of Chinese output limits the available supply. Here’s what USTR boss Ron Kirk said today at a Washington, D.C., press conference: “And we are most troubled that this appears to be a conscious policy to create unfair preferences for Chinese industries by making raw materials cheaper for China’s companies to get, and goods more economical for them to produce.” The EU has filed a similar complaint. As often happens with WTO matters, this spat might get resolved during a consultation period in which the parties discuss, debate and negotiate. But the dispute has been going on for a couple of years and it’ll take many more months to sort it out. In the meantime, China will keep doing what it’s doing – and, frankly, it can’t really afford to pull back from its preferential quotas and export duties at this point. That’s because Beijing’s huge economic stimulus plan has launched a wave of infrastructure projects across that vast country, all of which need the very products (especially steel) which are helped by the allegedly unfair practices. Continue reading…

Foreign banks trying to make money in China are discovering that Beijing’s easy credit policy isn’t helping them. It’s Chinese banks that are getting all the business lending money for big infrastructure projects. As a result, two foreign banks, HSBC and Citigroup, have recently slashed interest rates on medium-term yuan deposits. The reason: they don’t need to attract deposits because they don’t need to make loans – and this is because the lion’s share of lending’s being done by Chinese competitors. See DJN’s “FOCUS: As China Stimulus Bypasses Foreign Banks, They Cut Rates.” As the story says, “In essence, China’s CNY4 trillion stimulus package has created massive funding needs for infrastructure projects, and led to eye-popping credit lending growth by domestic banks in the first four months of this year. But the lending boom has bypassed foreign lenders.”

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Fresh data show manufacturing in China continued picking up in April from the previous month; also, spending on infrastructure projects in urban areas surged 30.3% in March from a year earlier, reflecting Beijing’s massive stimulus spending efforts. It’s still too early to say China’s economy has bottomed out. But they’re green shoots all the same. (Apologies, Chris. http://newswires-americas.com/randomnotes/wp-admin/post.php?action=edit&post=1417) Continue reading…

More from China boss’s big press conference: Wen Jiabao says he would “crawl” across the strait to visit Taiwan, and refers to “Taiwan compatriots,” Dow Jones Newswires’ Beijing bureau chief says, translating from Mandarin. Wen also says he’ll help Taiwan gain membership in international organizations (surely the types of ineffective clubs one wouldn’t want to belong to …) He avoids reiterating Beijing’s one-China stance but that almost certainly doesn’t mean a reversal of Beijing’s core geopolitical policy. However, the tone’s conciliatory and Taiwan stock market gets a boost on sweet talk.