Beijing Review -- economic news

Beijing Review
n. 44 - November 4, 2010

Battling Over Currencies
The G20 Seoul summit must work out a feasible plan to ease frictions before a currency war breaks out
By LAN XINZHEN

THE BIG ISSUE: G20 financial ministers and central bank governors discussed the currency issue at a meeting Gyeongju, South Korea in October, which will be a major topic at the G20 summit in Seoul on November 11-12 (XINHUA)
The threat of a currency war is obviously a major topic at the G20 summit in Seoul, South Korea, on November 11-12.
Currently, most developed countries are still mired in economic slowdowns, while emerging economies have managed to secure heightened growth rates. Room for more aggressive fiscal stimulus in developed economies such as the United States, the EU and Japan is limited due to rising fiscal deficits and government debts. And the sovereign debt crisis in the euro zone has certainly done nothing to alleviate the economic unease. Now, they are scheming to propel economic development through monetary policy adjustments, which involves depreciating their own currencies or forcing emerging economies to appreciate theirs.
Hoping to boost exports, the United States, EU and Japan announced successive rounds to quantitatively ease their monetary policies.
Emerging economies aren't without problems of their own—concerns about inflation are rampant due to the economic rebound from the financial crisis. And as developed countries mostly adopt zero-interest rate policies, these measures are pushing emerging economies into a corner of appreciation. For instance, Brazil's benchmark interest rate stands as high as 10.75 percent, causing the Brazilian real to appreciate more than 30 percent against the U.S. dollar, the fastest appreciating currency in the world.
Central banks in emerging economies like Brazil, India, South Korea, Thailand, Malaysia and Russia have interfered with the currency exchange markets out of fear of an export slump caused by the currency appreciation. The interference has not gone unnoticed, as developed countries are pointing fingers and accusing emerging economies of manipulating their currencies. Emerging economies in turn have argued developed countries are using loose monetary policies to trigger depreciations of their currencies.
The world economy is at a crossroad where all countries are trying to keep their currencies competitive to spur exports. Already, the scenario bears a striking resemblance to the currency war in the 1930s following the Great Depression—and that currency war only managed to push the world deeper into recession. A currency war, if breaks out now, is likely to play out the same way.

A very bad idea
Although disputes over currency policies are on the rise, the situation is far from being an actual currency war, said Zhou Yu, an expert on international finance and currency at the Shanghai Academy of Social Sciences.
Zhou said all countries must strive to prevent a currency war, since an open conflict would only spell disaster for the world economy.
A currency war, Zhou said, would first increase the risk of inflation. If other countries blindly follow the U.S. method of quantitative easing, this "herd mentality" would trigger a rampant flow of liquidity. Judging from past experiences, the depreciation of the U.S. dollar will inevitably prop up the value of raw materials, crude oil and agricultural products, which will cause cost-driven inflation. In the second half of 2010, the U.S. dollar's depreciation has led to a substantial increase of wheat, corn and cotton prices by 50 percent.
The inner stability of the international monetary system would also be shattered, Zhou said. The fluctuation of the U.S. dollar has a huge impact on international financial stability. At present, more than 60 percent of the reserved currencies of central banks around the world are in U.S. dollars, and 50 percent of international settlement is done using the U.S. currency. If the dollar depreciates dramatically, economies using the dollar as a settlement or reserve currency will face heavy pressures.
What's worse, a currency war could escalate into a global trade war. As it stands, it will be nearly impossible for developed countries to increase their exports through currency depreciation as many emerging economies are interfering with the currency exchange markets. Under these circumstances, developed countries tend to adopt protectionist measures, such as threats of trade sanctions, to force emerging economies to appreciate their currencies.
No matter the cause, a currency war will increase the risks facing emerging economies. The U.S. monetary policies could lead to large capital inflows into emerging economies as the yields in emerging markets are much higher than those of developed countries. In turn, if those countries tolerate the dollar depreciation, their external trading conditions will take a beating. But if they interfere with their foreign exchange markets and prevent their currencies from appreciating, their inflation risk and capital bubble will throw their economies into a financial abyss. Once the U.S. Government raises interest rates, the large capital outflow will likely trigger a financial crisis in emerging markets.
But Zhou has faith in today's decision makers, noting that they are much wiser today when dealing with currency and trade-related issues because they can draw references from the past.
Developed countries, led by the United States, are alleging the undervalued Chinese currency, the yuan, is the culprit for China's huge trade surplus. The United States also blames China for its dwindling exports and rising unemployment. And a growing number of U.S. politicians are pressuring China to appreciate its currency.
Wang Yuanlong, an expert from the Hong Kong-based Tianda Institute, refuted the U.S. allegations, citing other reasons for the China-U.S. trade imbalance. The trade surplus, he said, was caused by differences in industrial division between the two countries. The service sector contributes about 80 percent to the U.S. GDP, with manufacturing making up only 11 percent. In China, the opposite is true, with manufacturing accounting for 60 percent of GDP.

RMB not the answer
NOT THE CULPRIT: Many U.S. and Chinese economists agree that the yuan is not the root cause of the U.S. employment predicament—the problem lies in the U.S. economy itself (ZHONG MIN)
Trade in goods contributes less than a quarter to China-U.S. economic cooperation; the rest lies in the service trade. The United States exports as much as $20 billion in services—for instance, investment banks conducting initial public offering for Chinese companies—to China each year; about 50,000 U.S. banks, insurance companies, auditing firms and law firms have operations in China with annual sales revenue of $220 billion.
"Trade between China and developed countries are supplementary to each other. A substantial appreciation of the yuan will not help U.S. employment, but will force the United States to seek imports from other emerging economies," Wang said.
Differences in calculations between the two countries have also caused disputes in terms of trade value. The U.S. calculation overestimates its deficit with China in four ways. First, it applies different statistical standards to imports and exports. It tends to overestimate the value of imports and underestimate the value of exports. Second, the United States adds the "Made-in-China" products it imports from other regions or countries to imports from China, while excluding its exports to China via Hong Kong or other regions, which contributes to the trade imbalance. Third, when calculating its trade value with China, the United States only uses commodity trade data but excludes the value of services it exports to China. Fourth, a large number of Chinese products are exported to the Caribbean and Latin American regions via the United States; and these products, too, have been included into China's export figures to the United States.
Since China started the reform of the yuan exchange rate regime in July 2005, the yuan has risen 23.5 percent against the U.S. dollar. From January 1994 to July 2010, the Chinese currency rose 55.2 percent against the U.S. dollar. But the U.S. trade deficit continued to expand in the same period.
"Those who claim the yuan is undervalued deliberately disregard the fact that the yuan has appreciated substantially since the reform began. Their insistent allegations clearly have other intentions," said Wang.
Yao Jian, spokesman of the Ministry of Commerce, said on October 15 that China had no intention of pursuing a trade surplus in its international trade. During the financial crisis, China's imports from the United States, the EU, Japan, Australia and South Korea rose about 50 percent respectively. China's import growth rate, Yao said, was twice the speed of China's exports to those countries and regions.
Trade surplus
The United States, Yao said, had a trade surplus for 93 years before the 1980s—China has only had a trade surplus for a little more than 10 years. More importantly, China's surplus with the United States is mostly generated by foreign-funded or foreign-owned companies in China, which produce nearly 88 percent of Chinese exports to the United States. Those foreign investors have taken away the lion's share of profits.
"If China held a surplus of $10, $1 or $2 of it goes to China, but $7 or $8 goes to foreign-funded companies, mostly established by American, European and Japanese companies," said Yao. "It's utterly irrational [for the United States] to hold the yuan as the scapegoat for its own national problems," he stressed.
On the Chinese side, the yuan does not have a solid foundation for substantial appreciation.
"The center of the conflict is that the United States wanted to depreciate the dollar, but was met with resistance from other economies. How things develop in the coming months depends on whether the United States changes its mind," said Andy Xie Guozhong, an independent economist and a director at Rosetta Stone Advisors Ltd. "Although the value of the dollar is close to its lowest point in history, the U.S. Government is still pushing for further depreciation."
Right now, the belief among U.S. political leaders is that depreciating the dollar will help boost employment, Xie said. But this is just wishful thinking; the hovering unemployment rate is due to the fact that private companies are reluctant to hire new employees in these uncertain economic times.
"The only benefit of dollar depreciation is a slight increase in U.S. exports, but then inflation will come along. If other countries refuse dollar depreciation, and follow suit to print more money, worldwide inflation is inevitable," said Xie. "Right now, it all depends on the United States," he added.
Many U.S. politicians think that printing more greenbacks to depreciate its currency is totally reasonable and rational, but it is utterly unacceptable for other countries to do the same. Xie said the double standards were too obvious.
Ultimately, dollar depreciation cannot salvage the U.S. economy. The U.S. Federal Reserve has slashed its benchmark interest rate to nearly zero, and the government budget deficit has risen to 10 percent of the GDP. After a recovery for several quarters, the U.S. economy is declining again with the unemployment rate nearing 10 percent.
"If you're Paul Krugman, you'd probably say the current stimulus is not powerful enough. You might suggest raising the budget deficit to 20 percent of GDP, and another round of quantitative easing," Xie said.
"What it all comes down to," Xie said, "is that depreciating currencies for export growth is a zero-sum game."
An end in sight?
How will this round of the currency dispute wrap up? Zhang Ming, an international finance expert at the Chinese Academy of Social Sciences, pointed out three possibilities.
First, the governments of all countries could reach a new Plaza Accords—an agreement reached by developed nations in 1985 to intervene in currency market—with the Chinese Government agreeing to appreciate its currency substantially in the next few years. Second, the Chinese Government could completely refuse currency readjustment, resulting in a trade war with the United States. Third, after international negotiation, the Chinese Government could agree to increase the flexibility of the exchange rate regime, but maintain control over the pace of the yuan appreciation.
Without a doubt, China's interests would be damaged by the first scenario. The second scenario will make both countries sink together. The third is the best, and most difficult, option but requires wisdom and candid cooperation from all leaders and countries.
But no one can argue a currency war is the last thing politicians want. At the G20 financial ministers and central bank governors' meeting held in South Korea on October 21-23, a joint communiqué was released, saying they would move toward more market-determined exchange rate systems that reflect underlying economic fundamentals and refrain from competitive devaluation of currencies.
The joint communiqué also noted their commitment to taking action at the national and international level to raise standards, so that national authorities implement global standards consistently, in a way ensuring a level playing field and avoiding fragmentation of markets, protectionism and regulatory arbitrage.
The currency disputes have highlighted the predicament the global currency system is facing: the dollar, a sovereign currency of the United States, also serves as an international reserve currency. The two functions are actually contradictory. If the U.S. Fed starts to print more money to spur its economic development, a dollar flood will sweep the world, causing huge damage to international financial stability. Therefore, it's time to establish a new monetary system, said Cao Yuanzheng, chief economist at BOC International (China) Ltd.
"The current global reserve currency is still the U.S. dollar. But its fluctuation has led to volatility in other currencies. A new international monetary system must be built or the existing one will collapse for good. Major economies should collaborate on this front to rebuild the international economic and monetary order," said Cao.

Developed countries' low interest policies
United States: In the first half of this year, the U.S. Federal Reserve withdrew part of its stimulus measures. But confronted with a recovery slowdown and impotent fiscal stimuli, the Fed started a new round. In July, it announced buying U.S. Treasury securities; in August, it ordered a cut to the excess reserve requirement ratio. A report issued by the Board of Governors of the Federal Reserve System on October 12 said the United States will keep the interest rates low and might start the second round of quantitative easing monetary policy, which means the Fed buys treasury securities and institutional bonds to inject liquidity into the market, to spur an economic revival.
Japan: The Bank of Japan, the country's central bank, slashed its benchmark interest rate from 0.1 percent to 0.1-0 percent to hold back the yen's appreciation. It is the third time for Japan to have a zero interest rate after 1999-2001. At the same time, Japan's central bank pledged to build a temporary fund of up to $60 billion to buy government bonds which is similar to the U.S. quantitative easing monetary policy.
Europe: The Bank of England decided to keep its key interest rate at 0.5 percent—the lowest level in history. The European Central Bank announced it would keep the key interest rate at 1 percent—also the lowest in history.
Australia: On October 7, contrary to most economists' forecast of an interest rate hike of 25 basis points, the Australian central bank announced to keep the current 4.5 percent rate to offset the Australian dollar's fast and passive appreciation against the U.S. dollar.

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Feeding China
China is expected to reap a bumper harvest this autumn, but grain security remains a long-term concern
By HU YUE

PLENTY TO HARVEST: Farmers reap rice in northeast Heilongjiang Province. The country has maintained a steady growth rate in grain output in the past six years (WANG JIANWEI)
Despite sweeping natural disasters, China is on track to achieve a bountiful harvest for this autumn's grain yield, which usually accounts for three fourths of the annual output, said Minister of Agriculture Han Changfu.
With the autumn harvest secured, winter planting is already underway across the country, said Han.
China's grain output, including rice, wheat and corn, amounted to 530.8 million tons in 2009, the sixth consecutive year of growth. The output for this year, according to Han, will be no less than last year and is likely to hit a new record.
The Ministry of Agriculture (MOA) anticipated that the acreage planted for autumn grain would increase by around 870,000 hectares to 76.6 million hectares this year.
But vigorous efforts are still needed to strengthen grain supply and quality, said Han.
The news dismissed worries about food shortages given heavy summer rainstorms across the country and the severe drought in the southwest that disrupted agricultural production.
In a recent report, the MOA said grain output harvested this summer fell for the first time in seven years to reach 123.1 million tons, down 0.3 percent, or 390,000 tons, from a year ago. In addition, the per-hectare yield dropped 0.4 percent year on year to around 4.49 tons, and the situation was even worse in disaster-stricken southwest Yunnan and Guizhou provinces.
However, winter wheat, which usually makes up around 80 percent of the total annual wheat output, stood at 108.8 million tons this year, about 1 million tons more than last year, said MOA spokesman Chen Mengshan.
In another move, the China National Grain and Oils Information Center in September predicted the country would yield 169 million tons of corn in 2010, representing a year-on-year growth of 3.1 percent thanks to increased planting.
The only cause for concern was rice, which accounts for half of the country's grain output, said Jiang Heping, a senior researcher at the Chinese Academy of Agricultural Sciences, in an interview with Capital Week magazine.
At least 92 percent of the increased 76.6 million hectares was planted with corn, leaving little space for rice, he said.
In addition, the spring sowing of rice was delayed by seven to 10 days in many provinces because of the winter freeze earlier this year, he said.
That means the crops will face more risks of an early frost, said Jiang.
Recouping the losses
Before the relentless rains had stopped pouring water over many regions of China this summer, worries were proliferating about the country's grain security.
Torrential rains washed away homes and triggered overwhelming mudslides that claimed hundreds of lives. The disaster also cast an ominous shadow over the agriculture sector as the storms devoured vast areas of farmland. The State Flood Control and Drought Relief Headquarters said more than 9,700 hectares of crops had been devastated by August 10, with direct economic losses totaling 209.6 billion yuan ($31 billion).
Before this, a prolonged drought ravaged southwest China, drying up farmland and leaving people in desperate need of drinking water.
On top of the natural disasters came the international grain crisis. On August 5, Russia, the world's third largest wheat producer, ordered a ban on grain exports after a severe drought destroyed crops and as wildfires spread across the country. This ignited panic in the commodities markets, sending wheat prices to record highs.
Many fret the price surge may filter into China through trade links. From January to June, the country's wheat imports more than doubled to 845,000 tons year on year, while rice imports soared 44.3 percent.

But the ripple effect has been barely felt, said Zhang Xiaoqiang, Vice Chairman of the National Development and Reform Commission (NDRC).
Despite the recent increase in imports, China relies on foreign markets for barely 1 percent to meet its demands for wheat, he said.
Beside this, the government has extensive reserves of grain and is capable of keeping food prices under control, he said.
China's grain inventory-to-consumption ratio is now more than 40 percent, well above the international security line of 17-18 percent.
Meanwhile, a string of government measures have also helped shore up the agricultural industry, said Zhang.
The Chinese Government this year distributed 15.5 billion yuan ($2.3 billion) in subsidies for farmers to purchase agricultural machinery, compared with 70 million yuan ($10.4 million) in 2004. It also bumped up the minimum purchase price of rice and wheat.

A new season
While a bumper harvest is on the way for this year, the long-term grain safety is far from guaranteed given an expanding population and the growing living standards.
China expects its annual grain consumption to reach 572.5 million tons by 2020, and to maintain a food self-sufficiency rate of 95 percent, at least 540 million tons of grain output will be needed, said Zhang Ping, Chairman of the NDRC.
The goal is actually not within easy reach given the country's limited cultivated land, scarce water and relatively weak agricultural technologies.
To ensure sustainable grain supplies, China has enacted strict policies to protect arable land and also set a "red line" to guarantee its arable land never shrinks to less than 120 million hectares. But the country is already edging dangerously close to that line, with just 121.7 million hectares available by the end of 2009, according to data from the Ministry of Land and Resources.
In the past 13 years, China has lost 8.2 million hectares of arable land due to urbanization and forest and grassland replanting programs, as well as damage caused by natural disasters. The country's per-capita arable land is now a minimum 0.092 hectare, only 40 percent of the world's average.
It's urgent now to curb decreases in arable land, which is crucial to grain security, said Zheng Fengtian, a professor at the Renmin University of China.
A lack of irrigation is also stretching the nerves of policymakers. The Ministry of Water Resources said water shortages to the agricultural sector stand at a dizzying 30 billion tons annually.
"This is the result of the drought climate in north China and the fragile irrigation infrastructure," said Zheng. "Many irrigation facilities in the countryside are either outdated or broken."
But the biggest question was how to encourage the farmers to plant more crops, said Ma Wenfeng, a senior analyst at the Beijing-based Orient Agribusiness Consultant Ltd.
Due to relatively low grain prices, Chinese farmers earn much less than urban employees. That is why many chose to leave their land fallow and seek jobs in the cities, he said.
The number of migrant workers across the nation had amounted to 23 million by the end of 2009, climbing 1.9 percent year on year, said the National Bureau of Statistics.
In the next 20 years, another 400 million rural residents may migrate to cities, leaving even fewer farmers in the fields, said Zuo Xuejin, Executive Vice President of the Shanghai Academy of Social Sciences.
In response, it is necessary to boost farmers' incomes and further strengthen subsidies for them to buy machinery and fine strains of crops, he said.
NDRC Chairman Zhang Ping suggested that the country should further strengthen its grain production capacity by improving agricultural infrastructure and expanding the use of high-yielding strains.
Efforts are also needed to press ahead with modern farming technologies and bolster the farmers' ability to fight natural disasters, he said.
Zhang said China has established an initial emergency response system for grain security, and reinforced the production, storage, transportation and distribution of food and grain in emergency situations.
It would also be helpful if China could foster a number of international competitive grain processing enterprises, said Li Guoxiang, a researcher at the Rural Development Institute of the Chinese Academy of Social Sciences.
That would be instrumental in sustaining domestic grain supplies and fending off the impact of global price fluctuations, he said.

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A Sour Milk Rivalry
A libel scandal involving Mengniu taints its image and deals a blow to China's dairy industry
By LAN XINZHEN

HARD TO CHOOSE: The Mengniu scandal is expected to taint the dairy maker's reputation and cast yet another shadow over the country's dairy industry (GUO CHENG)
Mengniu, with the 2008 milk contamination incident still fresh in people's memories, has brought China's dairy industry into the spotlight again—this time the attention focused on a bitter rivalry.
Police in Hohhot, capital of the Inner Mongolian Autonomous Region, held a press briefing on October 22 over a Mengniu-initiated smear campaign against its rival, Yili.
Police said An Yong, a product manager of Mengniu's liquid milk department, worked with a Beijing public relations agency in July to spread accusations on the Internet that an element called fish oil docosahexaenoic acid (DHA) contained in Yili's QQ Star Children's Milk was harmful to consumers. Four suspects including An have been detained, and another two suspects remain at large.
The briefing was believed to have helped dismiss worries about Yili products, though it will take time for consumer confidence to recover.
Malicious competition
Yili and Mengniu, both headquartered in Hohhot, are the top two companies in China's dairy industry. They have reportedly been competing in most aspects of their business operations, from raw milk sources to distribution channels.
Founded in August 1999, Mengniu, with total assets exceeding 14.1 billion yuan ($2.1 billion), has an annual dairy production capacity of 6 million tons and nearly 30,000 employees. In recent years it has witnessed rapid growth and expanded its presence across China. Mengniu's products are now exported to a number of countries, the United States and Canada included.
In the first half of this year, Mengniu topped all competitors to rake in net profits of 618.8 million yuan ($92.4 million), followed by Yili's 345 million yuan ($51.5 million).
While Mengniu led the liquid milk market, Yili kept the top position in milk powder. But the competition heated up when both made forays into infant milk production.
In 2006, Yili's latest product QQ Children's Milk became a market hit. Mengniu followed suit by releasing its Star of Future Children's Milk in 2008. The two products bore significant resemblances, but in terms of market share, Yili enjoyed evident advantages.
An's online attack was aimed at devastating the rival product's reputation and driving up Mengniu's sales.
The Hohhot police confirmed that An hired the Beijing Bosse PR Consulting Co. Ltd. to plot the online sabotage. On its official website, the PR company called itself a think tank of Mengniu, and stressed it provided important consultant support for Mengniu on its path of fast expansion.
The police revealed that Bosse's deputy general manager Xiao Xuemei and three other employees jointly hammered out a plan to maliciously attack Yili's reputation. The DHA element was an easy target, since it helps infant brain development. Mengniu would also be able to differentiate itself since Yili's DHA comes from fish oil and Mengniu's from algal oil. The libel campaign focused on allegations that DHA from sea fish could lead to premature sexual development and that DHA from algal oil was much safer.
The online campaign, at a cost of 280,000 yuan ($41,791), was executed by a Beijing Internet marketing company, which took a variety of measures to spread the rumors, including posts on forums, blogs and websites. It even initiated a public letter-signing campaign among netizens to refuse fish oil DHA.
The Hohhot police said that the online posts drew a considerable amount of negative attention to Yili and that the most-read article had recorded more than 200,000 hits.
Far-reaching implication
Mengniu has denied any involvement in the dirty tactics and insisted that An acted without the company's knowledge or permission.
"We are deeply sorry for the negative impact on Yili and the consumers," said the company in a statement on October 22. "Without first consulting his supervisor, An worked with the partner PR agency and spread accusations online that the fish oil in Yili's baby milk was harmful to human health. He should take responsibility for the consequences."
The statement went on to say An was a former employee of Yili before coming to Mengniu in 2005 and that he had already been fired.
"We will learn from this incident, strengthen internal management and improve employee education to prevent this from happening again," said Mengniu.
However, in the statement Mengniu also went on the offensive. It claimed that Yili had spent more than 5.9 million yuan ($880,597) between 2003 and 2004 hiring PR companies to launch media attacks against Mengniu.
In response, Yili accused Mengniu of trying to distract public attention from the scandal. "This case is still unsolved," the Beijing News quoted an anonymous PR manager of Yili as saying. "Why did they bring up things that happened several years ago? Is it to confuse the public?"
The furore underscores the brutally competitive nature of the country's dairy market, already heavily hit by the Sanlu melamine scandal in 2008 that put thousands of babies in hospital and forced Sanlu to shut down.
The malicious competition will hurt the health of the industry, said Wang Dingmian, a dairy expert and former Executive Director of the Dairy Association of China.
The enterprises must first learn how to honor their social responsibility and seek consumer recognition by branding and marketing, instead of attacking each other, he said.
Tan Guiqiu, a professor at the China University of Political Science and Law, believed it is urgent now to curb this malicious competition. The illegal marketing tactics destroy the reputations of not only rival companies, but also the whole industry, and dented consumer confidence.
"The competition between Chinese dairy makers will allow foreign companies to swoop in," said Chen Lianfang, a senior analyst at the Beijing-based Orient Agribusiness Consulting Ltd.
A mature brand, especially in food production, should pay more heed to its product quality than just maintaining a brand name. Meanwhile, efforts are also needed to strengthen supervision over online marketing tactics and create a healthy business environment, said Chen.

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Crisis Focus: Asia at the Helm

As the global economy transforms from a developed country-centric to a more developing-focused model in the post-crisis world, Asia is emerging as a new economic powerhouse. Its policy choices are important for the continent's own sake, and also for the global economy as a whole. Dominique Strauss-Kahn, Managing Director of the IMF, noted this shift in a recent speech in Shanghai. Edited excerpts follow:
The 19th century belonged to Europe; the 20th century to the United States. The 21st century, as we are coming to realize, can be the Asian century. But with that comes great responsibility—to lead, to guide, and to take ownership of the collaborative agenda. Asia is now a major economic region, and being at the center means being responsible for the whole. Asia has an important voice in world affairs through the G20, and also through the IMF, which is in the process of giving more influence to dynamic emerging markets.
Asia's economic performance over the past few decades has been nothing short of remarkable. Driven by rapid and steady growth, the region now accounts for about one third of the global economy, up from just under one fifth in 1980. If current trends continue, Asia's economy could be as large as the United States and the EU—combined—by 2015.
Of course, growth must benefit everybody. And Asia has made tremendous progress with poverty reduction, with China alone pulling hundreds of millions of people out of poverty over the past few decades. Such a feat has never before been accomplished in the history of human civilization.
And when the global financial crisis hit, Asia proved remarkably resilient, bouncing back stronger and faster than anywhere else. Asia didn't make the mistakes of other countries by piling up debt or using complex financial engineering that magnified risk. Banks had built sizeable capital cushions, followed prudent lending practices, and had limited exposure to toxic assets. Policymakers had internalized the lessons of the past, embracing sound macroeconomic and prudential policies.
Thanks to solid foundations and a quick and forceful policy response, Asia has become the launching pad of the global economic recovery. But this comes with challenges of its own.
Cooperation is really the great legacy of this crisis, and is the main reason why the Great Recession did not become a second Great Depression.
This spirit of cooperation must be maintained. Without it, the recovery is in peril. Today, the risk is that the single chorus that tamed the financial crisis will dissolve into a cacophony of discordant voices, as countries increasingly go it alone. This will surely make everybody worse off.
The great challenges of today all require a cooperative solution—especially if we are to achieve strong, sustainable, and balanced global growth in the years ahead.
We must make the financial sector safer and more stable, and put the banks back in the service of the real economy. Many of these problems emanate in the advanced countries beyond Asia, and these countries need to take the lead in fixing these problems.
Much progress has been made on the regulatory front, especially with the Basel III rules on the quantity and quality of bank capital. But these rules only apply to a subset of the financial system. Reforms must deal with risks in all financial institutions, not just banks—we learned this lesson the hard way during the crisis.

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MARKET WATCH NO. 44, 2010
GREEN CABS: Dalian's first batch of new energy taxis hit the road on October 26. China is pushing forward a pilot program to promote new energy vehicles in 13 cities including Dalian, Liaoning Province (ZHANG CHUNLEI)
Numbers of the Week
4.1 %
China's urban unemployment rate stood at 4.1 percent at the end of September, down from 4.2 percent at the end of June, said the Ministry of Human Resources and Social Security.
349.8 billion kwh
China's power consumption in September fell 12 percent month on month to 349.8 billion kilowatt-hours, said the National Energy Administration.
TO THE POINT: Export deals experience year-on-year increases at the Canton Fair, though uncertainties still linger. Soaring coal prices put cost pressures on thermal power generators. Fierce competition rocks the foundation of China Mobile's market dominance. Chinese automaker BYD goes on a bumpy ride as its sales go through a free-fall. The Export-Import Bank of China ties up with the Inter-American Development Bank to finance trade between China and Latin America and the Caribbean region.
By HU YUE

Export Outlook
Are Chinese exporters faring well? The latest session of the China Import and Export Fair, known as the Canton Fair, a bellwether for the trade climate, could offer some clues.
The first phase of the Canton Fair's fall session witnessed export deals worth $21.15 billion, up 12.3 percent from the fair's last session in April, said Canton Fair Deputy General Secretary Liu Jianjun. The number of foreign buyers totaled 98,000, down 5.5 percent.
Despite showing signs of recovery, the hard-hit export sector has yet to fully regain its lost ground due to costs inflation, a stronger yuan, and simmering protectionism, said Liu.
The Guangdong Fenglu Aluminum Co. Ltd., for example, has suffered painful losses from restrictions imposed by the developed countries, Chen Nuansen, a marketing manager of the Chinese company, told the Nanfang Daily.
The U.S. Government is likely to slap 137-percent anti-subsidy duties on Chinese aluminum profiles, dealing a heavy blow to the exporters, he said.
"While our orders from the traditional Western markets dry up, the emerging markets in the Middle East and Southeast Asia are bursting with vitality," said Wu Jianfeng, export manager of Guangzhou Hongyu Group.
In addition, it is easier to gain a foothold in the emerging markets where distribution channels are not deeply entrenched and local competition is not insuperable, he said.
Thermal Power Pinch
China's thermal power generators are facing chilly headwinds as coal prices skyrocket.
The steam coal price at Qinhuangdao Port, an industry benchmark in the country, climbed around 7 percent in October, as a nationwide winter freeze pushed up demand.
There's no sign in sight that the price surge will slow in the fourth quarter, said Song Zhichen, an energy researcher at the CIC Industry Research Center. This means the thermal power generators will have to bear a heavier burden of costs, and even the risk of losses, he said.
The pressure has already been felt. Huadian Power International Co. Ltd. said it incurred a heavy loss of 384 million yuan ($57.3 million) in the third quarter due to higher costs. The company is a listed arm of China Huadian Group, one of the country's five largest electricity providers.
By contrast, coal miners are faring well. The Shandong Province-based Yanzhou Coal Mining Co. Ltd., for example, reported net profit of 3.68 billion yuan ($549.3 million) for the third quarter, soaring 227 percent year on year. Its coal prices averaged at 682.2 yuan ($101.8) per ton in the third quarter, up 25.3 percent from one year earlier.
In an attempt to soothe the profit woes, the National Development and Reform Commission in September proposed to raise on-grid tariffs in seven provinces by 15-25 yuan ($2.2-3.7) per megawatt-hour.
"Last year, the generators offset much of the pressure by turning to cheaper imports," said Song. "But that is no longer an option for this year since international prices are also hovering at a high level."
China's coal imports more than tripled from the previous year to reach 130 million tons in 2009, making it a net importer for the first time.
China Mobile Slowdown
China Mobile, the world's largest telecom operator by subscribers, is losing steam as a maturing market and intensifying competition eat into its profits.
The company raked in a net profit of 29.6 billion yuan ($4.4 billion) from July to September, representing a modest growth of 3.5 percent year on year, down from 6.8 percent in the second quarter.
Revenues grew 7.8 percent to 352.6 billion yuan ($52.6 billion) in the first nine months as the company added 41.47 million new customers, bringing the total customer base to 569 million.
"We are experiencing a slowdown in growth because of the widening penetration of mobile services and an increasingly competitive market," said a China Mobile statement. "In addition, most of our new users live in the countryside, where customer spending is typically lower."
The average revenue per user—a key barometer for long-term growth prospects—slipped to 72 yuan ($10.6) in the first three quarters from 75 yuan ($11) a year earlier.
In an attempt to keep its dominant position, the company plans to increase spending on handset subsidies this year to 15.5 billion yuan ($2.3 billion) from 11.7 billion yuan ($1.7 billion) in 2009. This has helped consolidate the customer foundation, but has also undermined profit margins, said Jin Tang, an analyst at the Shanghai-headquartered Shenyin & Wanguo Securities Co. Ltd.

BYD Struggles
While China's auto market booms, BYD Automobile Co. Ltd. is barely trudging along.
The Shenzhen-based company generated a net profit of 11.34 million yuan ($1.7 million) in the third quarter, less than 1 percent of a year ago.
A former manufacturer of rechargeable lithium and nickel batteries, BYD has been a pioneer in exploring new energy vehicles. It was even considered a rising star when U.S. investor Warren Buffet in September 2008 paid $230 million for a nearly 10-percent stake in the company.
Chen Huanyu, an analyst at the Guotai & Jun'an Securities Co. Ltd., attributed the downturn to a drop in auto sales. BYD sold 33,085 vehicles in September, down 24.9 percent year on year. Total sales for this year are estimated at 600,000 units, down from the original forecast of 800,000 units.
Part of the reason was many dealers of the company bowed out of its sales network or joined rival manufacturers, said a report by the Beijing Youth Daily.
Weighing down the performance was also the relatively high comparison base last year when the market thrived, said Yin Guohui, an analyst at the BOCOM International Holdings Co. Ltd.
The gloom may ease later this year, but a substantial turnaround is unlikely, said Yin.

Latin American Trade
The Export-Import Bank of China (China Eximbank) and the Inter-American Development Bank (IDB) have committed to financing up to $200 million worth of trade activity between China and Latin America and the Caribbean (LAC) region over the next two years.
The partnership will be a groundbreaking initiative to support increased trade activity since trade is a fundamental economic driver of both LAC and China's economies, said Luis Alberto Moreno, President of IDB.
China-LAC trade grew at an average annual rate of 31 percent from 2000 to 2008. Even during the global economic meltdown, the bilateral trade maintained its dynamism, and amounted to $121.5 billion in 2009, 12 times that of 2000.
In January 2009, China became a member of the IDB, the world's largest regional development bank and the main source of multilateral finance for the LAC region.
HR Seminar
The Career International Inc. held a seminar on October 26 in Beijing with a number of experts and researchers offering fresh insight into the latest trends in career development and human resource management. Career International is a leading recruitment solution provider based in Beijing.
"Human resource management has evolved far beyond employee performance evaluation and training," said Lu Lingmin, former PR manager at the Baidu Inc., at the seminar. "The focus is now strategy design for corporate development and coordination between various parts of the organization."
An Ran, a senior manager of Career International, said multinationals are increasingly outsourcing their recruitment process so they could focus on their core businesses.

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Economic Engines for the Next Five Years
China should prioritize domestic consumption and investment as the main drivers of its economic growth

Li Yining, a renowned economist with Peking University (XINHUA)
China is among the first countries to emerge from the global financial crisis. But how should China seize this opportunity to promote its economic growth momentum? What will drive China's economic growth in the next five years, and what macro policies should China adopt? Li Yining, a renowned economist with Peking University, recently shared his views with Beijing Daily. Edited excerpts follow:
Picking up from a gloomy economy first in the wake of the global economic crisis means more business opportunities for China. As a result, China should make use of this chance to reshape its development structure, create new name brands, and continue independent innovation.
China should prioritize domestic consumption and investment as the main drivers of its economic growth, rather than exports amid the fierce competition in the international market.
The following areas should be the major engines driving China's economic growth in the next five years:
Industrial upgrades
In line with the guiding proposal for formulating the nation's 12th Five-Year Program (2011-15), China should upgrade its industries in the context of the international market and make efforts to play a full role in such hi-tech industries as new energy, new materials, biotechnology, and environmental protection.
The new energy industry is expected to promote the automobile industry, transportation and other traffic facets, while new materials will facilitate renovation of the real estate and equipment manufacturing industries.
Biotechnology will prop up many industries, such as agriculture, aquaculture and medicine. It will also promote medical treatment, which will improve people's health and prolong people's lives, and further prompt development in many sectors.
China should take a digital road to make use of the Internet and apply the Internet of Things, with an aim to increase work efficiency and stimulate further development in many industries.
Originality should be encouraged in novel industrial design, so as to make China's manufacturing industry more advanced.
Urban-rural integration
The Chinese Central Government urged the acceleration of urbanization at a recent working conference since China's urbanization process is slow. The urban population increased from 20 percent in 1949 to only about 45 percent in 2009, which is far from the requirement for domestic consumption expansion.
Assuming an annual increase in the urban population of 1 percentage point, the proportion of the Chinese population living in cities will grow to 75 percent in 30 years. That means over 10 million people will move to the cities every year, including workers, elderly people and children, which requires the large-scale construction of houses, schools, hospitals and other facilities. Urbanization is therefore the largest potential market in China, expected to offer numerous jobs and opportunities for enterprises. The next five years should be a period of rapid urbanization, which will help drive the country's economic growth.

Forestland reform
China launched the reform of tenure in collective forests in June 2008, devolving collective forestland to rural households and allowing them to manage forestland. The reform has produced good results.
Thanks to the reform, some farmer migrant workers found employment by developing the forest economy after they were laid off during the global financial crisis last year. They invited their peers to join their forest businesses of breeding chickens and planting herbs and mushrooms in the forests they manage.
Since the Central Government stipulated that the forest and trees managed by farmers could be mortgaged, forest farmers have become rich. They are able to move out of their homes and build new houses of their own, which also serves as an economic growth engine.

Environmental protection
Low-carbon economy serves as both an opportunity and a challenge for China, because China has not yet mastered the core technology of the environmental protection industry. The current concept of environmental protection is broad, including desert control and afforestation as well as water and soil treatment. In a narrower sense, environmental protection means equipment, instruments and the manufacture of production materials related to environmental protection.
China should base efforts to develop a low-carbon economy on its own national conditions. If China were able to make some breakthroughs in environmental protection technology, then China would not only create production value, but also have a say in this regard.
Domestic consumption expansion
Creating more jobs and increasing residents' income in proportion of national income is key to expanding domestic consumption. The decline in people's income in recent years has not benefited consumption. The salaries for all working people should be elevated. Farmers' income should also be increased by promoting the industrialization of agriculture.
Addressing the housing issue is another aspect of expanding domestic consumption. The government must provide low-rent housing for low-income families and affordable housing for middle-income families. When people have new houses, they also buy furniture and household electric appliances, forming another force to drive up domestic demand.

Macroeconomic policy
China's annual economic growth should remain at 8 percent in the long run. If growth exceeds 9 or 10 percent, production material prices will soar.
To cope with existing inflation, China needs to set up an early-warning mechanism. Tight monetary policy, which incurs additional unemployment, is not the only way to restrain inflation.
China should adopt detailed, flexible fiscal and monetary policies in line with the real situation, so as to maintain stable economic growth.

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Chinese Private Enterprises to Expand
Going global and the low-carbon economy will be the development trends of Chinese private enterprises for the next 20 years
By ZHANG ZIXUAN

SPOTLIGHT: Rupert Hoogewerf, founder and compiler of the Hurun Rich List, addresses the fourth Hurun Rich List Summit held in Beijing on October 29, 2010, about the future of China's private sector (SHI BOSEN)
For video please click here
In the natural course of business expansion, Chinese private businesses are looking overseas for new markets for their products and services, said Rupert Hoogewerf, founder and compiler of the Hurun Rich List, at the fourth Hurun Rich List Summit.
One of the best examples of a Chinese company going overseas, Hoogewerf said, was Li Shufu and his Geely Group when they bought the Volvo brand on August 2, 2010.
The expansions are driven by two motivators: many of China's private businesses are the bigger in the Chinese market and need new areas to develop; and some are already world leaders in particular sectors.
But branching out is not without its problems, as many private enterprises have run into obstacles in their internationalization efforts, especially when it comes to the investment environment in some countries, said Hoogewerf in an exclusive interview with Beijing Review.
The Hurun summit and 12th anniversary of the rich list was held in Beijing on October 29, 2010. The theme of this year's summit was "Outlook of the Chinese private economy in the next 20 years."
According to Hoogewerf, the biggest challenge for Chinese companies expanding abroad hasn't been breaking into a foreign market, but managing foreign staff. Chinese management styles don't translate well or provide a conducive work atmosphere for foreign workers. This will likely change in two decades' time as working with international staffs becomes integrated into Chinese management training methods.
The low-carbon economy, Hoogewerf said, is also a trend private enterprises will have to focus on. "Together with social responsibly, it is being addressed by every company," Hoogewerf said, adding that while these efforts may seem slow or non-existent, they are actually going along "much faster than people think."
Many private enterprises have already made their products much more environmentally friendly, a business move that will allow them to maintain their competitive edge and keep their eco-aware customer base.
"The government is the No. 1 stake holder in some of these companies, and many of them have worked very closely with the government on different projects. So these companies are and will be addressing the low-carbon issue much more now that it has become a government priority," said Hoogewerf. "Eventually, low-carbon initiatives will be more than something that's nice to have, it will be something you must have."
For the summit, the organization invited Chinese economic leaders who appeared on the rich list to offer their insight on China's development over the next two decades. The billionaires discussed the influence of domestic demand and the internationalization of China's private sector, as well as the growing low-carbon economy.
Zong Qinghou, Board Chairman and General Manager of the Hangzhou-based Wahaha Group and the richest man in China, and Chen Guangbiao, Chairman of Huangpu Investment Group, widely regarded as the most charitable man in China, highlighted the outlook of the next 20 years for China's private sector and the importance of the development of the low-carbon economy, respectively.
"The low-carbon economy needs publicity, and we need to make everyone realize the benefits of living a low-carbon life," Chen said. "We also need to take action now. Each person has the obligation to contribute to his or her own low-carbon career, and entrepreneurs must take steps to stop environmental pollution and ecological destruction in their pursuit of profits."