China Redux

Chinese state-run oil company Sinopec was the target of a large-scale attack at an oil field in eastern Ethiopia on Tuesday morning. 74 workers were killed, including nine Chinese and 65 Ethiopians; another seven Chinese workers were kidnapped. The Ogaden National Liberation Front, an ethnic Somali group aligned with insurgents in Somalia, claimed responsibility for the massacre, according to the AP (full story here).

The attack was apparently motivated by a desire to punish China for its investments in Ethiopia; the group issued a warning last year saying that “any investment in the Ogaden area that also benefited the Ethiopian government ‘would not be tolerated.’”

It is also worth noting that the Ogaden National Liberation Front is not a radical Islamist group. According to its website, the ONLF is a “grassroots social and political movement founded in 1984 by the Somali people of Ogaden who could no longer bear the atrocities committed against them by successive Ethiopian regimes.” It is seeking the creation of an independent state for ethnic Somalis in the volatile Somali Regional State of Ethiopia, which Somalia lost control of in 1977.

Today’s attacks mark at least the second time this year that Chinese oil workers in Africa have been killed or kidnapped by militants. In Nigeria, nine Chinese oil workers were kidnapped in January, and two more in March (two workers are still being held).

Today’s unfortunate incident introduces another element of risk into China’s forays in Africa. The initial risk centered on the outpouring of negative international opinion and perceptions resulting from China’s business deals with Sudan and other unsavory regimes (for more on this, see earlier post here). The new risk calculus must also take into account the fact that China is now a bona fide target for militants in the region, which see it as a colonial or mercantilist oppressor working in unison with opposition regimes. If China decides to maintain its investments in Ethiopia, Nigeria, and elsewhere in Africa, the costs will grow, since it will need to provide more substantial resources to protect its workers and investments. At what point are the costs of doing business prohibitive, i.e. the risks fail to justify the rewards? Chinese leaders are likely asking themselves that very question right now.

The irony here is that China does not understand how it has been cast in the role of oppressor. Here is President Hu’s remarkable words from a speech delivered in in Pretoria on February 7 (which I argued here would go down as a milestone in Chinese history):

“For more than 100 years in China’s modern history, the Chinese people were subjected to colonial aggression and oppression by foreign powers and went through similar suffering and agony that the majority of African countries endured,” Hu said according to a transcript released by South African officials. He added: “China has never imposed its will or unequal practices on other countries and will never do so in the future.”

Of course, China’s problem in Africa is not with partner governments; it’s with the people themselves, a great number of which consider their political representatives to be illegitimate rulers. That’s not a problem easily solved — another world power is still struggling to manage that divide. It won’t go away easily, either. China will want to reconsider its strategy for foreign investment in Africa and elsewhere, or risk more days like this one.

For more on China’s expansion into Africa and its risks, see Edward Cody’s piece in the Washington Post here.

Barack Obama delivered the first major foreign policy address of his Presidential campaign today at the Chicago Council on Foreign Relations. Here are the lone references to China in the speech, as prepared for delivery (for a list of Obama’s five key points, see this NYT post):

And as we strengthen NATO, we should also seek to build new alliances and relationships in other regions important to our interests in the 21st century. In Asia, the emergence of an economically vibrant, more politically active China offers new opportunities for prosperity and cooperation, but also poses new challenges for the United States and our partners in the region. It is time for the United States to take a more active role here – to build on our strong bilateral relations and informal arrangements like the Six Party talks. As President, I intend to forge a more effective regional framework in Asia that will promote stability, prosperity and help us confront common transnational threats such as tracking down terrorists and responding to global health problems like avian flu.

In this way, the security alliances and relationships we build in the 21st century will serve a broader purpose than preventing the invasion of one country by another. They can help us meet challenges that the world can only confront together, like the unprecedented threat of global climate change.

And on the environment:

We should push for binding and enforceable commitments to reduce emissions by the nations which pollute the most – the United States, the European Union, Russia, China, and India together account for nearly two-thirds of current emissions. And we should help ensure that growth in developing countries is fueled by low-carbon energy – the market for which could grow to $500 billion by 2050 and spur the next wave of American entrepreneurship.

It is encouraging to hear Senator Obama take a measured yet firmly optimistic tone on the future of US-Chinese security relations. Obama’s reference to “a more effective regional framework” in Asia suggests he would likely pursue security cooperation and integration at the expense of the Bush Administration’s current hedge strategy towards China.

All in all, not a lot to go on here vis-a-vis China. Nonetheless, these remarks provide an important glimpse into the candidate’s directional views towards China. The issues surrounding US-Chinese relations are not likely to win the election, but could sabotage one’s chances. I expect Obama and his aides to navigate this issue in a smart, pithy manner. Iraq is the seminal foreign policy issue of the 2008 campaign, and Obama will see no reason to force a shift (at least, at this point in time).

But Iraq, like Vietnam, will one day fade into the recesses of American’s minds. When that happens, sometime during the administration of the next President of the United States, there will be China, first and foremost. Judging by his limited remarks today, Senator Obama would be well-suited to negotiate that relationship.

On Friday, Chinese PC-maker Lenovo announced that it was relocating and cutting a total of 1,400 jobs. Of the 1,400 jobs affected, 650 will be eliminated and 750 will be moved to Brazil, China, India, and Slovakia, according to Reuters (via the NYT here). Lenovo, which purchased IBM’s PC division for $1.2 billion in 2005, is based in China.

According to the Financial Times, workers will be hardest hit in Raleigh, North Carolina, where roughly 20 percent of the current jobs will be cut or relocated. In explaining the relocation of jobs in emerging markets, Lenovo cited the desire to be “closer to [its] suppliers and manufacturing operations.” Which is another way of saying that the company is seeking lower-wage labor to help it compete more effectively.

Expect to hear from Democratic Presidential candidate and former North Carolina Senator John Edwards on this matter. Edwards has gained a strong following among Democrats and Independents seeking to protect American jobs from the forces of the global labor market. The Lenovo cuts are part of a larger trend of manufacturing job losses across the US, and I’m curious to hear Edwards’ ideas on this issue, which has the potential to shape the 2008 election.

As if things couldn’t get any worse for Yahoo this week, the World Organization for Human Rights (WOHR) is suing the web giant for its alleged role in the arrest of Chinese dissidents. The human rights group claims that Yahoo assisted the Chinese government with torture when it passed along user information that resulted in state arrests.  Yahoo has acknowledged turning over data to local authorities — as have several very prominent web companies — but Yahoo is the lone company named in this suit.

Web companies such as Yahoo contend they have little choice but to surrender information, since company employees could be subject to civil and criminal sanctions if they ignore local laws. Yahoo says it will to continue offering services in China in part because the Internet has the power to enable change. Yes, it’s also the hottest market on the planet. But I don’t find this line of argument disingenuous. I may be naive and idealistic, but I do believe the Internet will prove to be transformative for Chinese society. There are ironies and paradoxes in all this, but at the end of the day, there still does not exist any reliable way to control the distribution of information over the Internet.  If this condition persists, then the network should eventually prevail.  [For more information on China's efforts to restrict blogging, see my earlier post here].

One of the only ways to reliably limit undesired information is to cut it off at the source, which is the heart of the matter in this case. Yahoo allegedly turned over information that led to the arrests, and torture, of the information purveyors. My feeling is that the burden of proof (of prior knowledge and intent on the company’s part) is incredibly high in this case. But even assuming that the suit is dismissed, the WOHR will have achieved its goal of publicizing the issue. And it will make companies like Yahoo pay much closer to attention to some atypical opportunity costs of doing business in China.

On another front, the other bad news for Yahoo this week: first quarter profits were down some 9 percent, dashing investors hopes that the much-hyped Panama project would prove a quick fix to the company’s search engine woes. Oh, and archrival Google just reported 69 percent profit growth for the quarter.

For more on the human rights story, see the Associated Press, “Human rights group sues Yahoo over actions in China,” via the San Jose Mercury News.

Many of you have written about the horrific Virginia Tech shootings, and the fallacious rumor that the shooter was Chinese.  Here is James Fallows’ take on the Chinese media’s reaction — and the American media’s complicity.  Fallows begins:

It was Tuesday night China time when the authorities in Blacksburg, Virginia, identified the gunman as a young Korean. For the previous 12 hours, the worst traits in the Chinese media had been brought out by an even-worse lapse by part of the U.S. media. One — and as far as I can tell, only one — journalist in the U.S. identified the killer publicly and quickly as a student from China who had recently been given his visa in Shanghai. During the long night after the shooting U.S. time, which was daytime Tuesday in China, that report was picked up — surprise! — by Fox news and a few smaller U.S. outlets, and, via web news sites, it quickly made its way to China.

What the Chinese media did next was bad in a predictable way.

For the complete article, click here.

Deja vu. Chinese investors — many of them regular citizens hoping to hit the jackpot — are ignoring the lesson of February’s correction in the Chinese markets (read post here) and rushing back into the circus. Money is pouring in from all directions, as the FT reports: “In the last week alone, more than 1m new accounts have been opened, taking the total for the last four months to more than 10m – greater than the previous four years combined.”

The carnival-like atmosphere is just one reason to stay away from the Chinese markets — here are a few more. There was a roughly 9 percent correction in the Shanghai and Shenzhen markets in February. But the Chinese markets are still up 40 percent so far this year, after rising more than 130 per cent last year after a prolonged bear market. From an expert at HSBC:

This is definitely a bubble in the making – for most stocks, positive earnings growth has been priced in until 2009,’ said Steven Sun, HSBC equities analyst. ‘At the height of the last bubble [2000-01], we saw investors opening 2m accounts a month, which is half the current rate.’

While the number of accounts opened alone should not define a bubble, it certainly should raise a red flag for sensible investors.

It’s a sad story, really. “Any money getting into the market now is not smart money and is coming from the kind of people who can least afford to lose it,” said Fraser Howie, author of a book on the Chinese stock markets (via the FT). “That has to have the government worried about social stability.”

Is it just me, or does it seem as if there’s a lot of complacency, i.e. people are more or less resigned to a boom-bust cycle? Is the government taking action to cool the market? Aside from limited public warnings on the risks of investing, I have not heard of any movement to address market conditions.

UPDATE: Just hours after after I posted this story, the Shanghai Composite Index dropped 4.5 percent (it was 7% percent lower at one point) on news that China’s economy grew 11 percent in the first quarter of the year, raising concerns that the  government would seek to raise interest rates to curb overheating.  Just as in February’s market correction, the Nikkei felt the repercussions and lost nearly 2 percent, along with other Asian markets (Singapore, Hong Kong, Thailand), which roiled European markets, which will lead the Dow way down to start the day.

Taliban fighters in Afghanistan favor Chinese-built versions of Honda motorbikes for executing attacks. NPR’s Soraya Sarhaddi Nelson interviews a mechanic who fixes bikes for Afghans as well as Taliban fighters (he charges the latter a premium).

It can be dangerous business, but lucrative: the Chinese-made bikes break down at least once a month, so there’s plenty of work to go around.  Trade sanctions, anyone?

Sometimes you become so consumed by your enemies, that you forget about your friends. That’s the message I took from Singaporeean Prime Minister Lee Hsien Loong’s interview with the Wall Street Journal here (subscription may be required). The unbalanced concentration of diplomatic and military resources on Iraq and Iran has led the US to neglect Southeast Asia. According to Lee, America risks losing its regional influence to a rising China which has gone to great lengths to strengthen its reputation with Singapore, Thailand, and other key area actors.

It would be easy to take a cynical view of Lee’s sudden concern for US power in Southeast Asia; the Journal interview comes just weeks before scheduled talks with President Bush early next month. Is Lee setting the table in hopes of winning greater security support, trade concessions, or the like from the Bush Administration, a staunch Singaporean ally already wary of China’s growing economic and political heft? Yes, probably. Does that mean his comments need not be taken seriously by the president and his team? Absolutely not. They should serve as a wake-up call.

Singapore is Washington’s closest security partner in Southeast Asia. In addition to hosting various American military operations, including a naval logistics comand center, Singapore has been and will continue to be a key ally in the fight against terrorism, a serious concern in parts of Southeast Asia. On the economic front, in 2003, the United States and Singapore succesfully negotiated a landmark free trade agreement.

In short, the US needs Singapore nearly as much as Singapore needs the US. But one would be excused for not knowing it. Take the example of the Bush Administration’s rough handling of the Association of Southeast Asian Nations, or ASEAN. Secretary of State Condoleeza Rice snubbed the forum in 2005 when she decided not to attend its regional meeting — the premier gathering of ASEAN foreign ministers — marking the first time an American Secretary of State sent her deputy to the meeting since it was first held in 1994. No matter that it was only one meeting in just one year (or that the deputy sent by Rice, Robert Zoellick, was both well-respected and powerful); it’s the message that’s still being talked about today. In this case as in others, America’s absence of leadership is China’s gain. For example, just this year, China signed an important new trade agreement on services with the ASEAN countries.

Singapore shares the Bush Administration’s preoccupation with fighting terrorism and with hedging against China. Singapore would prefer that China not become the region’s hegemonic force, which is why it is aligned with the United States. But Singapore — like some other ASEAN nations — is slowly losing confidence in the ability of the US to lead economically and politically in the region. This void will gladly be filled by China unless the US can redirect critical resources — political, economic, and military — towards building stronger relationships in Southeast Asia.

In recent years, China’s policies towards Africa have generated major trade and resource gains on that continent. China’s love affair with Africa has, at the same time, earned the scorn of the international community and MSM (see here). But what about the Middle East? Roughly 55 percent of all of China’s oil comes from the Middle East, yet China’s interest in the Middle East is far less widely reported.

Jon Alterman, Director of the Middle East Program at CSIS, has published a fascinating note on “China’s unease” with the Middle East that provides a window into China’s current and future role in the region. In Alterman’s view, the Middle East “is a place where China can really get hurt.” Beijing views the Middle East as “the graveyard of great powers” — a phrase once reserved for Afghanistan. More importantly, China lacks any real capability to project power in the region; no Chinese naval vessel has ever made a call in a Middle Eastern port (which I still find more than a little surprising).

Thus, China must rely on the United States to ensure safe passage for its oil imports. Alterman believes this situation is likely to persist for a very long time — decades, at the least. In the event of a confrontation, the US could easily cut off Chinese energy imports from the region. But China also benefits from the very vulnerability it concedes: China “is happy to piggyback on the security the United States provides them for free,” Alterman writes. Chinese businesses have made significant inroads in the Middle East without parallel investments (in security and diplomacy, for example) from the Chinese government.

As Alterman explains, it is this confluence of factors that has led China to generally support US policies in the region, including economic sanctions on Iran. It turns out China does not have much of a choice in the Middle East.

For the full note, Middle East Notes and Comment: China’s Unease, click here.

China’s stock of foreign exchange reserves soared to $1.2 trillion in the first quarter of the year (China already was the largest holder of foreign reserves). Two things worth noting about this:

1. The rate of foreign reserves growth: the first quarter increase of $135.7 billion is equal to more than half of China’s total foreign growth reserve in all of 2006 ($247.3 billion).

2. The reason behind a substantial portion of the first quarter increase is still unexplained. About $60 billion of the $135.7 billion increase can be attributed to the first quarter trade surplus and to foreign direct investment. The source of the remaining $75 billion is unknown. Some obervers believe that Chinese financial institutions are bringing funds back home after storing them offshore, which is certainly plausible.

But that’s not the point.  Thomas Barnett explains why the case of the mysterious reserves is cause for concern:

Bigger point: the lack of transparency overall on Chinese monetary regulation and general reporting. China’s getting too big to be that opaque. Bad for us, bad for them, bad for business.

A good example of reality that’s China freedom deficit is less dangerous to us than its rules deficit. Too many rules on politics, not enough sensible ones on markets.

Lack of transparency is even more dangerous when the size of China’s foreign reserves is so great — and growing at a rapid rate. The silver lining is that China and the US share a mutual interest in a stable dollar. The problem is that without better information, there’s no telling how the markets will react. And as China’s reserves rise, the greater impact any glitch, misstep, or miscommunication might have.