Lisbon China File 1 (0.1), 19 April 2009

Editor: Daniel Alvarenga dgalvarenga@gmail.com

Analysis – a Mixed Set of Signs from China’s Economy – Uncertainty at a High

China’s dollar reserves are now increasing at a much slower pace than in the past, this trend adds to Washington’s nervousness and economic concerns. Indeed, China’s foreign-exchange reserves witnessed their smallest rise in eight years as exports keep going down and Foreign Direct Investment drops. Such trend further presses the United States to be swift and decisive in adapting and adopting an alternative economic growth model. One that no longer remains dependent on uncontrolled overspending by its consumers at home and on China’s purchase of its treasury bills abroad. Add to this Beijing’s increasingly watchful eye over its currency exchange rate, unfavourable to the United States, and we got ourselves a potential escalation of an ongoing “trade war”. Debates will become more frequent and “louder” as the United States gets more nervous and China more assertive in their respective economic diplomacies and policies. China has put in place its very own contemporary version of the “New Deal” with a US$586billion dollar stimulus package directed at its internal market. It was the most generous stimulus packages of any country in the world when measured relative to size of the economy. Through large construction and public projects China seeks to more effectively shield itself from the global downturn and achieve greater self-reliance for its economic system. This bet has already yield some initial positive results with consumer spending rising 15 percent in the first quarter of this year. The country’s trade surplus keeps improving despite a 17 percent drop in exports in March thanks to an even greater drop in imports (25.7 percent). At the same time some of this money has been leniently lent to somewhat inefficient industries and projects which don not always deserve to receive their share of the financial package. These inefficiencies are something that China’s policy-makers need to watch carefully in the coming months and correct where possible for the sake of the stability of future economic growth. On another positive note, figures for bank lending in China are once again rising as the credit crunch squeeze seems to be easing, at least internally. The concern remains however that much of these fluxes of liquidity are going into stocks, asset-led inflation and speculative capital instead of going to the real economy. The medium-term availability of this capital will show to what extent China and its investors have been attentive and learning their lessons from global recession. At the end of the day even if the second half of the year is expected to be stronger for China with more investment and more spending there is much that escapes its hands and sphere of influence. China might aim to quickly restore its export capacity and maintain the competitiveness of its businesses, it can even do everything right and put all the right policies in place but there is not much the country can do if the rest of the world economy keeps spiralling down.

Daniel Alvarenga

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China International

China says N.Korea Talks Alive

Xu Guangyu – It’s a difficult situation, but I think China will remain restrained and low key, China will wait until the United States has a new proposal on the table. Link

China plans $10b ASEAN investment funding

Lee Kuan - China is going to take the opportunity of this crisis to further establish itself in Asia. All this will have a huge political and diplomatic impact in the region, in addition to the economic impact. Link

China wary of US-Myanmar “détente”

Jian Junbo - The US will quickly find it is difficult to engage Myanmar. So at this moment China is not worried about the US's seemingly rapid penetration of the Southeast Asian region. Although possible, geopolitical competition is not imminent. Link

Forging Asia’s missing links

Fidel Ramos- it was at last year’s Boao Forum that Chinese President Hu Jintao began to express public optimism about the positive trends in Mainland China-Taiwan relations. That rapprochement was possible because Taiwan’s then newly elected vice president was given permission by China to attend the forum, where he was able to meet informally with President Hu. Link

China at Home

Slower Growth Masks the Good news in China

Willy Lam – The Leadership will be happy that the economic downturn has not been as bad as anticipated. Link

Signs Suggesting China’s recovery remains fragile

Tao Wang – We believe China’s stimulus-led recovery is well underway but lending is growing so fast Beijing’s next move should be taming credit growth to reduce risks of wasteful investment and bank bad debt. Link

China Foreign Exchange reserves at US$1.95 trillion

Andy Xie – Inflow through buying properties and speculation was a big part of foreign exchange increase in the past few years, and we are seeing a bit of unwinding as new money is not coming in. Link

China and CPLP

Mozambique refurbishes Maputo Airports with sights on 2010 World Cup

Angop – A new US$75 Million contract has been signed with a Chinese company for the renovation of the airport in Maputo to be ready to welcoming greater influx during the 2010 World Cup in South Africa. Link

Greater frequency in flights from Angola to China

The Angolan Air Transporter TAAG has increased the number of flights to Beijing to 3 flights a week, evidence of growing economic ties between the two countries. Link

Angola eyes more loans from China

Severim de Morais - Angola is set to secure more loans from China to rebuild infrastructure and diversify its economy away from oil according to the Angolan Finance Minister Severim de Morais. Link

China File Extra

China’s Growing Role in UN Peacekeeping - International Crisis Group – This report explores and discusses a particular dimension of China’s growing engagement with the institutions of international governance. China now has over 2,000 peacekeepers serving in ten UN peacekeeping operations, making it the second largest provider of peacekeepers among the five permanent members of the UN Security Council. Link