China plans to invest 2.3 trillion yuan ($375 billion) in energy saving and emission-reduction projects in the five years through 2015 to clean up its environment, the China Daily newspaper reported on Wednesday, citing a senior government official.
The plan, which has been approved by the State Council, is on top of a 1.85 trillion yuan investment in the renewable energy sector, underscoring the government’s concerns about addressing a key source of social discontent.
China has set a target of reducing its carbon emissions per unit of GDP by 40-45 percent by 2020 from the 2005 level, and raising non-fossil energy consumption to 15 percent of its energy mix, Xie Zhenhua, deputy director of the National Development and Reform Commission (NDRC), was quoted as saying.
As part of broader plans to curb pollution, the government will also roll out tiered power pricing for eight energy intensive industries, while sectors that struggle with overcapacity will face higher power tariffs, Xie said.
The government will also gradually expand a carbon trading pilot program to more cities starting from 2015, with the aim of creating a national market, he said.
Seven cities and provinces, including Shanghai, were ordered by the NDRC in late 2011 to set up regional carbon trading markets.
Source: Reuters “China to invest $375 billion on energy conservation, pollution: paper”
Like William the Conquerer before him, Premier Li Kequing is initiating his own Domesday survey in China, and this time the attempt to curb local abuses of power will have global economic consequences.
China’s State Council, chaired by Premier Li, has ordered the National Audit Office to begin auditing what could total $2 trillion or $3 trillion of debt taken on by local governments.
The Audit Office will suspend other work and give all staff “crash” training so that auditors can begin fanning out across the country this week, according to a report by the state-run People’s Daily.
The clear implication is that China is seeking to rein in local governments, which have helped along what is clearly a boom and may be a bubble by borrowing and spending freely on local development. For China, this will act as another brake on already slowing growth. For the rest of the world, it means less demand, especially for the kinds of raw materials and energy which go into real estate development and infrastructure.
William ordered the 1086 “Domesday Book” census of property, so called because it was said to be as thorough and wide-reaching as the final judgement, shortly after the Norman conquest of England in order to nail down who owned what and who might have usurped something belonging to the crown he now possessed. Premier Li, who assumed office in March, has a related but different problem. Despite laws against it, local governments have taken on huge debts, an amount estimated by the last audit at about $1.75 trillion at the end of 2010.
Analysts believe that has grown substantially since then, leading to growing concern about the country’s overall debt profile. While the IMF has estimated China’s total government borrowing to be a bit less than 50 percent of annual GDP (as compared to about 100 percent in the U.S.) local government debt has grown faster, and pays a higher rate of interest, than forms of borrowing more tightly controlled by the central government.
Of particular interest is a story in China Business News, citing an unnamed source, which said China had decided that it should cap its fiscal deficit at 3 percent of GDP, well below the 5 percent or more many economists estimate it may now be. To do that would likely require quite a savage cutting back on local government debt, or for central government to content itself with a smaller piece of the pie and all the diminished opportunities for reward, control and influence that implies.
THE HAND AUDITS ITS FINGERS
Taking a step back, the most surprising thing about this whole story is that a government, much less one in a single-party state, needs an audit to know how much its constituent parts have borrowed. Little wonder ratings agencies have expressed concern about the debt practices.
But the relationship between local and central government in China is complicated, and, in fact, local authorities have exercised much discretion in directing development, and, despite rules to the contrary, contracted much debt to fund it.
Because rural land in China is held, in essence, collectively, there is a huge and profitable opportunity for local governments in re-badging rural land as urban or industrial, paying off its occupiers, and selling rights or leases on for development. So-called Local Government Financing Vehicles are set up to do an end-run around prohibitions on local debt and allow governments to borrow the money needed to fund both development and the infrastructure it requires.
Much of this development has arguably been of low quality in recent years, producing extra manufacturing capacity which may not be needed and apartments to meet speculative demand. China clearly needs to transition to a model in which it depends less on investment and more on consumption, and reining in helter-skelter local development is as good a place to start as any.
That said, a crackdown on local borrowing will have large repercussions. As the U.S. demonstrated in the last decade, borrowing and spending money to dig holes in the ground and put up buildings is a great way to give the appearance of strong economic growth. Limit that and growth goes down with it, though perhaps the growth you get is more stable. Estimates of the likely run-rate of Chinese growth have been dropping sharply, and this will only exacerbate this trend.
Like everything in China today, what happens there matters everywhere. The big and easy-to-pick losers are the commodities and energy used in developing infrastructure, and those countries, such as Australia, which produce them.
This won’t be quite doomsday, but as one more piece of evidence that China is aiming for higher quality, if slower, growth, the local debt audit is a big story.
(James Saft is a Reuters columnist. The opinions expressed are his own)
- Debt crisis looms in Jiangsu Province dated July 27
- China orders nationwide government debt audit dated July 29
China’s edict to more than 1,900 companies to shut excess production capacity by September is the latest effort to slim down bloated industries, but in the key steel, aluminum and cement sectors the cuts are just a fraction of their surpluses.
Broader efforts, including credit curbs, raising environmental standards and energy efficiency will help slow the expansion of these sectors, but Beijing’s push towards industry consolidation will be slow to materialize, analysts said.
Premier Li Keqiang has vowed to curb overcapacity as part of efforts to shift the economy away from investment in heavy industries, a move that could dampen its appetite for raw material imports such as iron ore, coal, copper and bauxite.
China is the world’s biggest producer of steel, aluminum and cement.
Beijing’s latest orders suggest less than 1 percent of steel and aluminum production capacity will shut by September, which analysts said will still leave a significant surplus. In cement, the shutdown will cover about 3 percent of production capacity, also only denting the excess.
“Many of these plants that have overcapacity problems have actually idled their production line for a while,” said Raymond Yeung, an economist with ANZ Banking Group. “So the actual impact of the cut on the rebalancing of supply will be pretty mild.”
China has ordered about 7 million metric tons of excess steel output to be shut in a sector that the China steel association says has surplus capacity amounting to 300 million metric tons.
It has ordered 260,000 metric tons of excess aluminum output to be shut when smelting capacity is 27 million metric tons and demand is about 21 million metric tons.
Many smelters ordered to shut were already running at production rates as low as 20 percent and the impact of the shutdowns will be offset by some 2 million metric tons of new projects due to start by the end of 2013, analysts said.
China has said 92 million metric tons of excess cement production must be phased out. Capacity is now about 3 billion metric tons a year and demand is 2.2 billion metric tons.
“The expansion of aluminum smelting plants happening in the western regions like Xinjiang will have a cheaper production cost and that will again hit domestic prices further,” said Liao Zhenyuan, an analyst at Minmetals Futures.
In base metals, China also plans to phase out 654,400 metric tons of copper production capacity.
The nonferrous metals association estimates there was more than 7 million metric tons of idle capacity last year and production capacity is expected to reach 40 million metric tons by 2015.
More broadly, analysts have said that for now Li will avoid radical macro reforms out of concern it could weigh too heavily on growth in the world’s second-biggest economy.
Beijing’s previous efforts to rein in “blind expansion” in some sectors have been thwarted by local governments that have offered cheap land, tax deductions, subsidies and loans to attract investment, the People’s Daily said on Tuesday, citing a spokesman for Ministry of Industry and Information Technology.
Of the 18 million metric tons of aluminum capacity added in recent years, only 800,000 metric tons were approved by the central government, the paper reported, adding that China also has 800 million metric tons of unapproved cement capacity.
In a sign of Beijing’s resolve to fix the problem, the State Council has talked about limiting credit and blocking approval of new projects. New and existing projects must include stricter rules on environmental protection and power consumption.
It has already issued tougher standards for the aluminum sector and similar rules are expected for steel, cement and other industries.
“Beijing is finally getting its message across that there will be no stimulus to help them this time, so there’s a wider recognition from these sectors that they need to restructure,” said Andrew Driscoll, a resource analyst with CLSA-Asia Pacific.
“But these industries tend to be big employers and have heavy debts, and the local governments also have vested interests to keep them alive. This will make the consolidation a very slow process.”
Source: Reuters “China underwhelms with salvo to slim bloated industry”
After decades of emulating Japan’s export-driven economic miracle, China appears in danger of following it into the same kind of economic coma that Japan is trying to wake up from 20 years later.
China is struggling to wean itself off a habit picked up from its more advanced neighbor: relying for growth on exports and credit-fuelled investment. That has left its economy lopsided, economists say, with massive over investment in property and industries rapidly losing their cost advantage, from mining and electronics to cars and textiles. Wages are rising, the return on investments falling.
With growth slipping, China’s President Xi Jinping and Premier Li Keqiang seem determined to avoid a U.S.-style financial crisis, complete with widespread bankruptcies and job losses.
Preventing such a crisis though could embalm diseased sectors, stifling efforts to make growth more sustainable and instead create the kind of “zombie” banks and companies that sucked the life out of Japan’s economy, economists say.
Add a population graying faster than Japan’s did, and economists worry China may be attempting the impossible.
“There is a huge amount of denial. People think that demographics don’t matter,” said Chetan Ahya, chief Asia economist at Morgan Stanley in Hong Kong. “I’m worried about the deflationary risk.”
Deflation may seem unlikely in an economy still growing at a 7.5 percent clip and where consumer prices are rising 2.7 percent a year. But economists warn that China in many ways resembles Japan in 1989, two years before its crash.
Like Japan, China relied on banks to funnel investment into export industries to create jobs and finance development. In return, interest rates were regulated to ensure banks a healthy profit. Because the most profitable loans were those to the least-risky borrowers, banks concentrated their lending on big state-owned companies.
As Japan did in the 1980s, China tried to remedy this by partially liberalizing the financial sector, creating new avenues of finance, a bond market and other non-bank lending. But as in Japan, this encouraged banks to lend more, not more wisely, helping fuel a property bubble. Things got worse in 2009, when China launched a 4 trillion yuan, credit-powered stimulus to ward off the global crisis.
While Japan saw credit expand from 127 percent of GDP to 176 percent between 1980 and 1990, China’s credit rose from 105 percent in 2000 to 187 percent of GDP last year, JPMorgan Chase in Hong Kong says.
China’s problem now is that each yuan of new investment is yielding a diminishing amount of new GDP. The slowdown is already creating signs of deflationary pressure: producer prices have been falling for 16 months and Morgan Stanley notes that real borrowing costs of 8.7 percent are outpacing the sector’s growth.
One risk, therefore, is that China’s reforms push growth low enough to trigger a wave of defaults that shakes the entire financial system.
“It’s very important to slow down the growth of credit,” said Grace Ng, senior China economist at J.P. Morgan in Hong Kong. “But if we slow and de-leverage too much you could have too much downside risk on the real economy.”
The bigger risk, she and others caution, is that to avoid social unrest Beijing refuses to tolerate such pain, instead encouraging banks to keep troubled borrowers afloat by rolling over their loans like Japan’s banks did in the 1990s, preventing them from lending to profitable new ventures that could revive growth.
Beijing’s recent efforts to blunt the slowdown are thus drawing mixed reviews. Last week’s announcement by Premier Li that Beijing would cut taxes on small businesses and red tape for importers is seen as welcome restructuring, while boosting credit for foreign trade and speeding up railway investment smacks of mini-bailouts.
Likewise, some economists saw the central bank’s move this month to eliminate a floor on lending rates as a positive step towards making banks price loans according to their risk. Others saw Japan-style “regulatory forbearance,” a way to help banks refinance loans for their best customers so they can pass the savings to needier borrowers of their own.
“Since profit margins will be cut, banks will try to increase lending volumes by reducing their credit standard,” said Wataru Takahashi, a former Bank of Japan official who is now a professor at the Osaka University of Economics. “This is the story of the Japanese banks in the late-1980s.”
JAPAN COULD OFFER SOLUTION TOO
Some economists caution against exaggerating the similarities. “Comparing it to Japan in the 1990s is a little bit too much,” said Changyong Rhee, chief economist at the Asian Development Bank in Manila.
China’s lower development, Rhee and others say, gives it a reservoir of demand that affluent Japan did not have. China’s poor, inland provinces do not suffer from overcapacity and it will not take long before China needs the infrastructure projects that now might look like white elephants.
China’s push to move more citizens into its cities represents another source of growth.
But lower development also makes it harder to weather weak job growth or stagnant wages. And urbanization may not be as potent as it once was: with more than half of China already in the cities, the median age in rural areas is roughly 40, not a demographic prone to relocating for new career opportunities.
Ultimately, it may be demographics that put China most firmly on Japan’s deflationary trail. Thanks to its one-child policy, China’s working age population is already shrinking. That’s what happened to Japan in the 1990s, resulting in lower consumption and sharply lower growth rates.
The solution may lie – where else – in Japan, where the government is fighting deflation with aggressive new policies to lower borrowing costs, by boosting government spending and, though it has implemented few of them yet, by removing bottlenecks to growth.
“Two things are needed to avoid deflation after a credit binge,” said Ahya at Morgan Stanley. “One is good fiscal and monetary response and the second is structural reforms.”
Source: Reuters “Analysis: China risks following Japan into economic coma”
Xinhua reports on July 27, “On July 26, South Sea Fleet of Chinese navy successfully organized a life-ammunition drill under complicated electromagnetic environment focusing on such goals as the drill concerning battle command at sea based on information system, joint long-range attack by various arms of the services, air force combat for control of sky and comprehensive anti-aircraft and anti-missile capability.
“The drill was organized and directed by South Sea Fleet with participation mainly by the new-type main battle troops accompanied by parts of the navies and air forces of the North and East Sea Fleets and some students of navy’s universities and colleges.
“Under strong electromagnetic interference, a certain new-type submarine cruising deep underwater took the lead by launching submarine-launched missiles. Its attack was immediately followed by waves after waves of attack at target vessels on the sea by new-type frigates, missile fast-boats, aircrafts, and land-based missiles. Fighter jets conducted battles for control of the sky to intercept medium-height, high and super low targets under the command and guidance of early warning aircrafts.
“At the stage of comprehensive anti-aircraft and anti-missile combat, under wave after wave of missile attacks from various directions and with various kinds of interference, the fleet of destroyers and frigates and anti-aircraft and anti-missile units responded calmly and intercepted all the attacking missiles. For a time, the sea area of the drill was filled with fires, smoke and thundering explosion.”
The report said that according to the person in charge of naval training, the drill was an annual routine military training drill of the navy under the environment of real war and was successful in attaining expected goals.
Source: Xinhua “South Sea Fleet Drill with New Weapons: New-type Submarine Launched Missiles” (translated from Chinese by Chan Kai Yee)
However, we are mainly interested in the unspecified new-type submarine that is able to launch missiles when deeply submerged in the sea.
Was it the new-type submarine in Sanya that Xi Jinping visited on April 11?
Was it a Type 096 Zhou-class nuclear submarine mentioned in the article that The Mirror monthly will publish in August?
The drill scenario is similar to the one that after a strategic nuclear submarine has launched a submarine-launched strategic missile and exposed its position, lots of enemy warships and aircrafts rush to attack the submarine. All Chinese various arms of the services have to conduct long-range attacks at enemy warships and aircrafts to protect the submarine.
China Developing Super Quiet and Fast Strategic Nuclear Submarines dated July 26
China’s National Audit Office will conduct an audit of all government debt at the request of China’s State Council or cabinet, it said in a statement on Sunday, underlining concern over rising debt levels in the world’s second biggest economy.
The audit office, responsible for overseeing state finances, made the announcement in a one-sentence item on its website, but gave no details on the audit.
The official People’s Daily newspaper said separately on its website, citing unidentified sources, that an urgent order for the audit was issued on Friday and work will start this week.
The audit could indicate increased official concern over the systemic risk from rising debt levels in China, especially debt of local governments, as top leaders slow economic growth in order to promote reform.
A local government buckling under the weight of its own debt is a troubling scenario for the leadership, and one that Deutsche Bank has said could potentially pose a systemic and macroeconomic risk to the country.
Standard Chartered, Fitch and Credit Suisse have estimated local government debt in China at the equivalent of anywhere between 15 percent and 36 percent of the country’s output, or as much as $3 trillion based on World Bank GDP figures for 2012.
Vice Finance Minister Zhu Guangyao said earlier this month that the government did not know precisely how much debt local governments had built up.
The audit office warned in a June report that debt levels among local governments are rising and the financial burdens and risks are not being properly managed. It put total debt of a sample of 36 local governments at 3.85 trillion yuan ($628 billion) at the end of 2012.
China’s budget law forbids local governments from taking on debt directly, but they have borrowed heavily through special-purpose vehicles, while many have also borrowed from companies in private arrangements at high cost, with the money often used in speculative real estate projects.
($1 = 6.1316 Chinese yuan)
Source: Reuters “China orders nationwide government debt audit”
China: Debt crisis looms in Jiangsu Province dated July 27
China and the European Union defused their biggest trade dispute by far on Saturday with a deal to regulate Chinese solar panel imports and avoid a wider war in goods from wine to steel.
After six weeks of talks, the EU’s trade chief and his Chinese counterpart sealed the deal over the telephone, setting a minimum price for panels from China near spot market prices.
European solar panel makers accuse China of benefitting from huge state subsidies, allowing them to dump about 21 billion euros ($28 billion) worth of below-cost solar panels in Europe last year, putting European firms out of business.
Other European industries that have accused China of dumping have faced imports of about 1 billion euros a year.
Europe planned to impose hefty tariffs from August 6 but, wary of offending China’s leaders and losing business in the world’s No. 2 economy, a majority of EU governments – led by Germany – opposed the plan, which led to the compromise deal.
“We found an amicable solution,” EU Trade Commissioner Karel De Gucht said. “I am satisfied with the offer of a price undertaking submitted by China’s solar panel exporters,” he said, referring to the minimum price for China’s imports.
Chinese Commerce Ministry Spokesman Shen Danyang welcomed the deal, hailing a “positive and highly constructive outcome”.
An EU diplomatic source said that in the solar agreement, the agreed price was 0.56 euro cents per watt, near the spot price for Chinese solar panels in July in Europe, according to solar exchange pvXchange.
Under the terms of the deal, China will also be allowed to meet about half Europe’s solar panel demand, if taken at last year’s levels. EU consumption was about 15 gigawatts in 2012, and China will be able to provide 7 gigawatts without being subject to tariffs under the deal, the EU source said.
That did not satisfy some EU solar manufacturers who said the minimum import price agreed still constitutes dumping and accused the European Commission of breaking EU law by failing to protect European industry.
European solar panel manufacturer association EU ProSun said it will go to the European Court of Justice in Luxembourg to challenge the deal.
“Even the biggest EU trade conflict ever must still be resolved on the basis of the applicable law,” said EU ProSun’s president, Milan Nitzschke.
However, China has sold solar panels for as little as 0.38 cents a watt, according to the European Commission, which handles trade issues for EU states, and tariffs would also hurt EU panel installers, who benefit from cheaper Chinese panels.
Chinese manufacturers such as U.S.-listed Trina Solar (TSL.N), Yingli Green Energy (YGE.N) and Suntech Power Holdings (STP.N) are among those exporting to Europe.
Chinese solar panel production quadrupled between 2009 and 2011 to more than the world’s entire demand as it took advantage of a growing market for renewable energy in the face of concerns about climate change.
But the global financial crisis and ensuing euro zone crisis have forced European governments to withdraw generous subsidies for solar energy. That, along with Chinese imports pushing down prices, have sent many European solar companies into bankruptcy.
German group Conergy (CGYGk.DE) filed for insolvency this month.
Still, those concerns have become secondary to the much larger EU-China trade relationship at stake over the panels dispute.
Europe is China’s most important trading partner, while for the EU, China is second only to the United States. Chinese exports of goods to the bloc totaled 290 billion euros last year, with 144 billion going the other way.
Responding to the EU’s move to impose duties, China launched an anti-dumping inquiry into European wine sales, which may have led to exporters in France, as well as Spain and Italy, being hit with retaliatory duties.
EU and Chinese diplomats now expect that case to be dropped as a goodwill gesture, although officials declined to comment on Saturday.
Source: Reuters “EU, China resolve solar dispute – their biggest trade row by far”