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"...public opinion deserves to be respected as well as despised" G.W.F. Hegel, 'Philosophy of Right'

China: a rising power « Previous | |Next »
July 14, 2009

There is a lot anti-China feeling circulating in Australia at the moment. These arise from the arrest of Rio Tinto's executive Stern Hu and others over the recent iron ore trade negotiations, in which an aggressive Rio has endeavoured to keep this year's iron ore contract price cuts to 33 per cent. The allegations are that the four Rio Tinto employees paid for detailed government trade and manufacturing data to give Rio Tinto executives an edge in iron ore negotiations with Chinese state-controlled steelmakers.

Michael Stutchbury in his column in The Australian:

Humiliated by rejection, Chinese state security has locked up one of Australia's top iron ore negotiators in its cells for the alleged theft of state secrets and taken possession of the computer hard drives from Rio Tinto's Shanghai offices. And it has refused to indulge in reasonable dialogue with the Rudd government over the matter. Talk about many ways to skin a cat!

Stutchbury's column is entitled Magic dragon grows into menacing bully even though China frames resource security in national security terms. China takes its resource security seriously and Chinese firms have encountered difficulties when trying to take large stakes in Western oil and mining companies.

MoirChinaHu.jpg

Rowan Callick observes that China's arrest of Rio Tinto executive Stern Hu for stealing state secrets:

amounts to a strategic throw of the dice. Beijing is upping the stakes in its relationships with Australia and with the broader industrialised world. It is confident that the ball is in its court, that it is becoming the prime actor not only in the economic world but increasingly in the diplomatic world, too.

China and India are quickly becoming the world's new economic powerhouses and China’s state has a de facto monopoly on most of China’s outward investment for national security reasons.

Though China’s economy may have expanded over the last year ---China almost certainly produced a bigger stimulus program than any other major economy---that expansion clearly hasn’t fed through into more Chinese demand for US, European or Japanese goods. It is only in commodities, where Chinese demand — and Chinese stockpiling — has had an impact. However, China is the only country amongst those that relied heavily on exports for growth (Japan, Germany etc) to have avoided large economic downturns. China has reflated its domestic economy as world demand slowed.

China has the upper hand, given the increasing concern about the sustainability of the United States’ large external current account deficit. The globalization of finance which resulted in a world where the poor financed the rich, not one where the rich financed the poor. This “financing" flow was essentially a government flow. Despite the talk of the triumph of private markets over the state a few years back, the capital flow that defined the world’s true financial architecture over the past several years was the result of the enormous accumulation of foreign exchange reserves in the hands of the central banks of key Asian and oil-exporting economies, especially China.

China is now the largest of the U.S. creditors and its willingness to absorb U.S. Treasurys could be key to the success of the U.S. fiscal stimulus and banking sector rescues. China is worried that the US will deal with its unsustainable fiscal path via inflation and debasement of the value of the dollar via depreciation. Consequently, China is flexing its muscles on the question of the global reserve currency system dominated by the dollar.

| Posted by Gary Sauer-Thompson at 8:34 AM | | Comments (20)
Comments

Comments

Nouriel Roubini in his The Almighty Renminbi? in the New York Times says:

Traditionally, empires that hold the global reserve currency are also net foreign creditors and net lenders. The British Empire declined — and the pound lost its status as the main global reserve currency — when Britain became a net debtor and a net borrower in World War II. Today, the United States is in a similar position. It is running huge budget and trade deficits, and is relying on the kindness of restless foreign creditors who are starting to feel uneasy about accumulating even more dollar assets. The resulting downfall of the dollar may be only a matter of time.

He says that decline of the dollar might take more than a decade. This means that:
The United States must rein in spending and borrowing, and pursue growth that is not based on asset and credit bubbles. For the last two decades America has been spending more than its income, increasing its foreign liabilities and amassing debts that have become unsustainable.

The US dollar would be replaced by the Chinese renminbi. This could eventually become a means of payment in trade and a unit of account in pricing imports and exports, as well as a store of value for wealth by international investors.

This incident must be disturbing for other businesses dealing with China who've had no problems with negotiations so far. If it is an exercise in muscle flexing it comes with risk from an Australia perspective.

On the other hand, an awful lot of China's global dealings are with governments, rather than private businesses. Access to resources in exchange for aid or infrastructure or military hardware.

Australia appears to be a bit of a useful idiot in this case, if it's less to do with China Australia relations and more to do with a much bigger message. The carry on about human rights violations is laughable.

The Australian was gungho on Monday in attacking China.This editorial says:

China has undermined its claim to be a modern industrialised nation and a safe place to do business with its authoritarian handling of spying and bribery allegations that have landed senior Rio Tinto iron ore executive Stern Hu, a Chinese-born Australian, in prison without charge. .. China has muddied the waters between commercial-in-confidence dealings and state security, making a mockery of its longstanding, expedient claims that state-owned enterprises operate at arms length from the state....The real lesson of Mr Hu's case is that China's embrace of enterprise and trade cannot obscure its serious flaws. As British author Will Hutton wrote in The Writing on the Wall, the communists' system is "structurally unstable, a halfway house between capitalism and socialism". As such, it is subject to abuse for political ends.

And Greg Sheridan went on about "China's crude tactics of intimidation" and "the bottom line is clear - if Hu is not released, our relationship with China is shattered" etc etc

It should be noted that Rio Tinto is a pretty huge and hungry corporation that is not famous for ethical business practices. Maybe they really have been spying on the Chinese and maybe after the latest iron ore negotiations and takeover bid, the Chinese are jack of putting up with Rio's crap.

It is just as likely a scenario as the one that is portrayed in the Australian media.

Also, China's rate of economic growth has slowed considerably, so while it's not a recession per-se, it sure feels like it to the 20 million or more Chinese workers who lost their jobs.

It's always the workers who get fucked over. Frankly, I'm delighted to see a senior executive in the slammer, just on the principle of the thing.

Great thread.
Great commenting on different aspects of an obscured issue-exactly the thing we seek of the "Australian" and get the reverse of.
Re Nan's comment re Stutchbury, Lateline conducted a fruitful conversation involving one Paul Monk, a rightist by my lights, think tanker and the more nuanced Hugh White. Added to Julie Bishop's airhead nonsenses and it is obvious that the Tories are just going to do the typical tabloid sloganeering beat up, as typified by Monk's bellyaching about China not as "authoritarian", which is the term this writer would have employed, but as "communist",( in name only, surely!! ) with all the emotional ideological baggage that that entails.
White, in factm responded well to a comment from Monk by recalling how poorly we responded to David Hicks situation during the Howard era and that we do not know yet all the facts as to the specific issue: tub thumping is nonsense until its appropriate, if at all.
Better to understand China than demonise it, I'd say.
In the mean time far more productive examining the underlying IR, financial/currency, commercial and economic factors, as Garry and the rest of you have done.

What do the Liberal Party and The Australian (same thing really) expect Rudd to do? Do they seriously expect him to get up on telly and start bagging China and making demands? What do they imagine would be the consequences of that?

"It should be noted that Rio Tinto is a pretty huge and hungry corporation that is not famous for ethical business practices" Excellent point.

Paul,
my interpretation of these events centres around the assumption that the Chinese state is trying to act in its own national and commercial interests. It is no different from other nation states in this.

The state is endeavouring to fully exploit the leverage that the crisis and global recession have provided the Chinese customers over Rio Tinto and other produces to reduce the record prices at the height of the boom to more than the reduction in prices recently agreed to by the Japanese and Korean mills, which averaged about 37 per cent.

What is wrong with that? Didn't Rio maximize the prices last year to record levels to increase its cash flow to payoff debt and fend off the BHP Billiton takeover?

Brent,
China wants to bring its own steel mills into line so that it can create the countervailing power needed to impose its own pricing framework on the producers--Rio Tinto, BHP Billiton, Vale etc-- in order to protect its own national interest.

That interest is to reduce the cost of supply of the raw materials it needs while there is a global recession.They want a price cut of at least 40per cent, and they have refused to accept the iron ore price settlement forged by the Japanese Steel Mills. The current standoff means that there might not actually be a 2009 benchmark settlement with China.

I was thinking further about this whole 'iron to china' issue while I was working today. Now, China has a national interest in getting it as cheap as it can, and good luck to them, but as a seller, Australia has an interest in getting the best possible price. We should be getting together with other big iron countries (Brazil?) and see what we can do.

If OPEC can work for the oil countries, the Australian interest should be to work with other countries to get the best prices for our commodities. But for that to be of real benefit, we need to change the whole extraction system with mining companies so that the benefits go to all Australians and not just Rio shareholders.

These are just musings made while doing my wage slave job and I've not done any actual research on this, just throwing it out there to see what people think....

Monks was on his firmest ground discussing just that issue: free markets and the nation state. The illusion as I see it, deals with whether we are really that much different from China, that is, bottom up democratic in a meaningful sense.
Is there any such thing as "Australia", in other words?
Or do twenty odd million odd people actually just live here like fleas on a cat, divorced and alienated from actual decision making processes made in places like London, Tokyo, Shanghai Washington and New York with local interests from Collins st and Martin Plaza also operating shop fronts for interests inamicable to the interests of so many others.
Hence, I found Monks' emotive description of oligarchic China as
"communist", when I perceive organic communism to be the purest form of bottom-up democracy, unconsciously contraditory when you could say that like China,"democratic" Australia adopts only the form of democracy whilst remain ing inamicable to its substance. What are we really?
A colony of an empire under seige from other empires sedated on food, circuses and apathetic from lack of information and mental stimulation; contractors here merely to haul the riches of the country out of the ground to benefit elites in China and the West, ultimately almost as stateless as refugees(look t he unemployed!) or migant workers and shortly due to awaken from our private "dreamtime" not unlike the previous sunburnt tenants two hundred years ago.
The most recent thread here;"surveillance..." points to our actual fate, as we are incorporated into a sort of stasis state ranging from global feudalism to democracy, as the global system battles its own impulses to dominate and yet operate freely, able to maturely deal with adversity and unwelcome news like the purportive looming ecological disaster.
We think we are the centre of the known universe?
Not likely.
We are a small company town at the margins out in the boondoggles and our "freedom" is ultimately as illusory as the Chinese people, apart from our full bellies.
We have been lucky, but lets have no illusions as ours, or Chinas, or the globes actually state or the imperatives of states as fixed objects in a world of states within states,and often covert states at that, for all the frame work of laws that curently exist to mediate this.

Brent,
in a market society such as Australia the negotiations re raw materials are done by companies--not the state. The Australian state only really steps in when a Chinese company wants to invest in Rio. In China the state has stepped in to take charge--which indicates how important resource security is for the Chinese state.

Rio Tinto has been leading the negotiation and it has refused to dip below the price reduction the Japanese and Koreans have accepted. It has walked. It is strange that the price of iron ore is done on a yearly basis, when most are things are bought and sold with spot prices. I wonder why?

Tradition?

Paul,
I guess that Monks sees China as a totalitarian state and the not the market society that many took it to be.

The Asian concept of 'face' roughly translates as honour or respect.

Screeching and howling in the tabloids doesn't improve matters in the slightest. Surely that's not too difficult for self-serving our mob to understand? Could it be that this "outrage" is less about Stern Hu than it is about political point-scoring?

"Could it be that this "outrage" is less about Stern Hu than it is about political point-scoring?"

Golly. Surely not.

Bishop and Turnbull's public yellings on the topic are obviously for domestic consumption, regardless of the broader consequences.

China's actions probably have some domestic logic as well.

China is also very sensitive about how it is portrayed in foreign media.

I suspect that China misunderstands the dynamics here, where public perceptions impact on political action. Where attempts to control information in other countries does not work in China's favour. Where being seen to be just can be more important than being seen to be strong. Does that sound reasonable?

Lyn,
re Bishop and Turnbull--their rhetoric is confected outrage to appeal to their electoral base since they know dam well that there is little that Rudd + Smith can do. No doubt they are also forcing Rudd to show that he is not a Sinophile who turns the other check and lacks moral fibre etc etc.

News Ltd thunders away at a weak Rudd being too soft and for not acting tough on China, which needs to be put it in its place. China is a thug and a bully in the way it uses its power. Jennifer Hewett writes in The Australian that:

The Rudd government is clearly in an awful predicament over this, with no simple or quick exit available. The Chinese government has behaved in a way that totally undermines any claim it is developing a sophisticated modern economy. That is a deliberate if self-defeating choice.

What if the Chinese security apparatus uncovers evidence that executives from all 16 Chinese steel mills participating in iron ore price talks have been bribed/corrupted by Rio Tinto executives?

It is a national security case for China and so Australia has very little leverage. That means Hu might not see a Chinese courtroom for another year and that, barring a guilty plea, his fate might take two years to decide. He has limited consular access and no access to a lawyer. The prospect of a successful diplomatic interruption to this gloomy process is very, very small.

The News Ltd noise machine is using the Hu event to continue to bash Rudd--he's weak. He needs to be tough. China has 'slapped Australia in the face' and so on.

"What if the Chinese security apparatus uncovers evidence that executives from all 16 Chinese steel mills participating in iron ore price talks have been bribed/corrupted by Rio Tinto executives?"

There's a decent possibility that that's the case. Corruption isn't exactly unknown in China. So if it turned out this really is about corruption, should China be praised for doing something about it, or condemned for picking on an Australian company?

"So if it turned out this really is about corruption, should China be praised for doing something about it, or condemned for picking on an Australian company?"

The latter. It is fear of China's growing power in the world economy that is underneath The Australian's commentary. They do not like the shift in power away from the US and a unipolar world.

Peter,
and in doing so they've embraced a chauvinistic nationalism that creates fear about an authoritarian/totalitarian China dominating the world. The West must resist.

Free Chapelle Corby!

There ought to be a law etc etc.