posted April 29, 2004 02:09 AM            

The Bush administration bluntly rebuffed critics of trade with China yesterday, turning down requests by labor and industry groups to consider imposing duties on Chinese goods over Beijing's treatment of workers and its currency policy.

Four Cabinet members, appearing at an unusual joint news conference, said the administration would not accept a petition filed last month by the AFL-CIO calling for stiff tariffs on Chinese imports to punish China for allegedly exploiting workers. Nor, they said, would they accept a petition readied by some industry associations that would threaten China with sanctions to force a rise in the value of the Chinese currency.

Asserting that the most effective way to change China is to trade with it and "engage" it, Robert B. Zoellick, the U.S. trade representative, said: "Accepting these petitions would take us down the path of economic isolationism. That is a path we will not take."

The defense of trade and engagement came despite widespread public anxiety about job losses to Chinese competition, and it exposed the White House to renewed election-year attacks over the issue of trade with China. On Monday, Sen. John F. Kerry (D-Mass.) accused the administration of failing to enforce U.S. trade laws, especially concerning China, and his presidential campaign responded swiftly to yesterday's announcement.

"This administration has once again refused to make any serious effort to use the legitimate rules that govern trade to level the playing field and prevent our businesses and workers from being taken to the cleaners," Kerry said in a statement. "When it comes to China and defending American jobs, this White House is all talk and no action."

Likewise, John J. Sweeney, president of the AFL-CIO, issued a statement denouncing the administration's decision, saying: "It shows decisively that this administration will only enforce U.S. trade laws when corporate profits and concerns are at stake. . . . It is the multinational corporations who benefit from the artificially low wages and repressed rights of Chinese workers."

Since such attacks were predictable and could prove a rallying point for Democrats, the administration's announcement surprised some trade experts. Under U.S. trade law, the administration could have accepted the AFL-CIO petition but then taken up to a year to study its allegations that China's suppression of worker rights gives it an unfair commercial edge.

"I thought the politics at a minimum would lead them to accept the labor petition," said Nicholas R.Lardy, a specialist in the Chinese economy at the Institute for International Economics. "And if they didn't want to do anything with it, they could have waited" until after the election.

But business groups were pressing for a summary dismissal of the labor-rights claim raised by the AFL-CIO, and at the news conference Zoellick said: "We do not need to conduct a year-long investigation to know that there are serious concerns with labor rights and working conditions in China, as there are in many other developing countries. We do not need a year-long investigation to know that we have serious concerns with China's policies on the value of its currency." China keeps its currency, the yuan, pegged at about 8.3 yuan per dollar, a rate that many American manufacturers complain makes Chinese goods unfairly cheap.

Zoellick and his Cabinet colleagues contended that they have taken a hard-nosed posture with China on other trade matters, noting that last week they extracted a number of concessions at a meeting with a high-level Chinese delegation. On the labor issue, they argued that China has already made substantial progress as the nation's growth, fueled by trade, has lifted hundreds of millions of Chinese out of poverty. On the issue of the yuan, they said, Beijing is moving gradually for its own internal reasons toward complying with U.S. pleas to allow the yuan to rise according to market rates, and it is held back mainly by concerns that it must modernize its financial system further before letting the yuan float.

"With steady progress clearly being made, the most effective way at this time to achieve the goal of a flexible, market-based exchange rate in China is to maintain the persistent engagement we have established," Treasury Secretary John W. Snow said.

The administration will also use leverage to prod the Chinese to move faster on both the labor and currency fronts, the Cabinet members said, by dangling the prospect that China will be designated a "market economy" by the Commerce Department. Because China is currently deemed a "non-market economy," U.S. firms filing anti-dumping cases against Beijing can more easily win the imposition of duties against Chinese goods that are allegedly sold at unfairly low prices.

"China will be required to reform its labor standards and its currency policies before it can be granted market economy status," Commerce Secretary Donald L. Evans said, noting that of the six criteria for market economy status set under U.S. law, one deals with currency policy and another concerns the extent of free bargaining between labor and management.

The petition concerning currency policy was going to be filed soon by the Fair Currency Alliance, which is led by the National Association of Manufacturers and includes the AFL-CIO. The administration's rejection "took us by surprise," said Frank Vargo, the NAM's vice president for international economic affairs. "We don't want a confrontation with the administration, but we want to move forward on getting a fair Chinese currency. What is the best way? Honestly, I don't know."

© 2004 The Washington Post Company

posted April 29, 2004 02:31 AM            

By David R. Francis

This century, watch China. That nation's explosive development is reshaping the global economy. Its inexpensive exports, for example, are squeezing profits for business competitors in the United States and other nations. Its huge appetite for raw materials threatens to heat up inflation overseas. Well aware of these effects, the finance ministers and central bankers of the world's richest nations - the G-7 - meeting last week in Washington agreed that China should ease the trade pressure by letting its currency move upward.
US officials even talked of giving China a role in that club of powerful nations.

Before it joins the world's biggest economies, however, China faces two huge internal challenges. And surprisingly, the biggest one may be neither economic nor political but environmental.

The drought in northeast China, for instance, has created a water shortage that shut down nonessential enterprises in Dalian, a port city. In Taiyun, a coal-producing region, water scarcity meant the city had the stark choice of moving 3 million people, shutting down heavy industry, or diverting a major river. It chose the last option.

Water shortages also mean crop losses. In Qianghai, some 2,000 lakes and rivers have dried up, with serious implications for the flow of the crucial Yellow River. Already a quarter of China, about the size of the United States, is desert.

Air pollution is also serious, creating health problems that mean days lost on the job. Beijing roads carry 2 million cars now, with 3 million predicted for next year. Traffic cops, breathing foul air, live 40 years on average.

That's some of the environmental damage toted up by Elizabeth Economy, author of "The River Runs Black," a new Council on Foreign Relations book. The damage imposes huge costs. Lost output runs between 8 and 12 percent of gross domestic product a year, she estimates.

For example, because millions of farmers are leaving the land, especially degraded land, China must build new housing. It needs to add the equivalent of a city the size of Houston every month.

Environmental protection issues are dealt with primarily by local officials. Wealthier regions of China with strong leaders and international ties are defending their local environments, Ms. Economy notes. But she would like it done better than American-style suburbanization. Shanghai, for instance, plans to build 10 "satellite cities," or suburbs - without adequate mass transportation.

China's other big challenge is a delicate balancing act: to maintain growth without overheating. Since 1978, when Premier Deng Xiaoping set economic reform in motion, China's GDP has grown at a spectacular average real rate of more than 9 percent a year. Two weeks ago, Beijing officials announced that the nation's output grew at a 9.7 percent rate in the first quarter.

That's too fast. Runaway growth can cause imbalances and real estate bubbles. These eventually burst. That's why the People's Bank of China is braking the economy. But that also carries risks.

For example, China's banking system is fragile, says Minxin Pei, a senior associate at the Carnegie Endowment for International Peace in New York. About 45 to 50 percent of bank loans are not being repaid on schedule.

Because of a huge expansion of credit, various new plants making aluminum, steel, autos, and so on may face a market with excess capacity in the next two to five years, worsening the loan situation.

Bank loans to inefficient state-owned enterprises are also not promising.

Worrying a bit about a financial crash, Mr. Pei says: "The problem is whether the Chinese people will retain their confidence in the banking system."

But Ken Zhao, a China specialist with the Bank Credit Analyst in Montreal, says the banking problem is a red herring. Since China doesn't owe huge amounts of money to foreigners and has massive US dollar reserves, it can handle a banking crisis by providing new credit - printing money. And, he adds, the Chinese have a fantastic savings rate of 40 to 45 percent.

Pei says China's leaders are fully aware of these problems and will tackle them. The China story, adds Zhao, "will dominate this century for 50 years."

posted April 29, 2004 02:34 AM            

Reports that China had banned smaller banks from lending for the rest of this week followed, although the central bank denied it had done any such thing.

Shares in China, Korea, Australia and elsewhere fell following the news.

The Nikkei 225 in Tokyo was closed on Thursday for a public holiday.

Wildfire growth

China's economy has been among the world's fastest-growing for some time.

But 2003 saw a fresh spurt, with gross domestic product expanding 9.1%.

The main driver has been a 43% leap in investment in fixed assets such as industrial machinery and construction.

That has stoked fears that the economy will overheat, triggering government action to restrict lending and tighten land-use rules to slow industrial developments.

Shares

These moves lent substance to the stories that smaller banks had been told not to block new lending for a few days, despite official denials.

Mr Wen says the banking system is the first priority
Combined with Mr Wen's warning - in an exclusive interview with the Reuters news agency - that it was time to take the economy off the boil, the result was to hit commodities firms across the region.

In Korea, the Kospi index fell more than 2.5%, with steel giant Posco leading the way down.

Australia's main ASX index fell almost 1.3%, while the Hong Kong Hang Seng slid 1.2%.

Dashed currency hopes

But Mr Wen's interview also contained cautionary words for those hoping China could soon change its currency policy.

Despite the booming economy, the Chinese yuan is pegged at about 8.28 to the dollar, making Chinese exports cheaper and attracting ire from some US politicians and unions.

Mr Wen made it clear that sorting out the investment boom - and most importantly the banking system, hobbled by massive bad debts to underperforming state firms - was the top priority.

posted April 29, 2004 03:10 AM            

This is another one the blows my mind:

BEIJING -- China declared yesterday it will not allow Hong Kong to elect its next chief executive in 2007 or to expand legislative elections in 2008, rejecting the demands of the territory's prodemocracy movement in unequivocal language for the first time.

The announcement marked a major shift in strategy by the Chinese Communist Party, which for months has tried to quash growing calls for democratic reform in Hong Kong without explicitly ruling out universal suffrage in 2007 and 2008. By doing so now, the party appears to have decided to risk a popular backlash in an attempt to end the debate in the former British colony.

The decision provoked an immediate and angry outcry among Hong Kong's democracy advocates, who vowed a series of large-scale demonstrations this summer, and prompted criticism from US and British diplomats, who warned that Beijing was eroding the high degree of autonomy promised the territory upon its return to Chinese rule in 1997.

''This is terrible news, absolutely awful. They're telling the whole world that Beijing will now run Hong Kong," said Martin Lee, a veteran lawmaker and democracy advocate. ''They're not even hiding it or pretending anymore."

The ruling, issued by the Chinese government's top parliamentary committee, follows a similar declaration just three weeks ago in which Beijing said it alone had the power to initiate political reform in Hong Kong. At the time, mainland and Hong Kong officials said no decision had been made about introducing elections.

But the new ruling explicitly states that ''universal suffrage shall not be applied" to select Hong Kong's next chief executive and that only half the seats in the territory's Legislative Council can be filled through direct elections in 2008, the same proportion that will be popularly elected in September this year.

posted April 29, 2004 03:20 AM            

NEW YORK: For big US blue-chip companies like General Motors Corp (GM) and Coca-Cola Co, first-quarter results have soared on sales in China.

But for many companies heavily invested there, the risk of a government-sponsored economic slowdown gives them reason to view the future with a little trepidation.

China, traditionally seen as only an exporter of low-priced products, is rapidly changing in the eyes of Corporate America.

More US companies are willing to bet big – with money, time and people – for the chance to reach consumers in China. With its population of 1.3 billion, China is the world’s sixth biggest economy.

But China’s success also creates risks. Beijing is worried that annual economic growth of 9.7% in the first quarter is fuelling inflation.

The central bank has raised bank reserve ratios three times in the past seven months, forcing banks to keep more cash on hand instead of lending it out. China has also slapped bans on new projects such as aluminium smelters.

The next few months will be critical for China and companies relying on it to boost sales and profits.

“I would be cautiously optimistic because the general performance of the Chinese economy has tended to be better than most people have heretofore assumed,” said Denis Simon, dean of the Lally School of Management at the Rensselaer Polytechnic Institute.

“However, I think there are a number of major challenges that the government faces and if it is unable to slow down ... and rein in a lot of this growth, we’re in for a bumpy ride,” Simon said.

China’s government is trying to cool off the surging economy to curb inflation, which could cut spending on everything from consumer goods to heavy machinery.

The first quarter, though, was clearly a strong one for companies doing business in China.

GM, the world’s top carmaker, and Coca-Cola, the world’s largest soft-drink maker, as well as Caterpillar Inc, the world’s biggest construction equipment maker, have long had an eye on China.

And these three companies, among the 30 whose stocks make up the blue-chip Dow Jones Industrial Average, are finally starting to reap some benefits from their China strategy.

Caterpillar, known for its big yellow tractors, expects sales in China to grow 35% this year to US$1bil. GM posted a leap of almost 70% in first-quarter vehicle sales in China, with the market growing about 45% in the equivalent period.

And Coca-Cola’s first-quarter profit rose 35%, due partly to strong overseas sales, including a 14% increase in sales volume in China.

“Over the next 12 to 24 months, the opportunities are fairly good for US companies. But longer term, they are excellent,” said Anthony Chan, chief economist at Banc One Investment Advisors. – Reuters