In recent weeks, a trend in the US Democratic primaries has been the increased tough talk on globalization and its effects on America’s manufacturing sector. This is a topic - surprise, surprise - that strikes chords in states like Ohio. Senators Obama and Clinton have been one-upping each other in speeches and debates on the virtues of protectionism and the evils of NAFTA (though Obama reportedly sent signals to the Canadian government to reassure them that, hey, it’s all just campaign talk to win the nomination - pandering is the name of the game**).

So where do the candidates stand on China? We learn from The Nation’s Campaign ‘08 blog (via the China Law Blog*) that, when asked by a coalition of labor, agricultural and environmental groups what they would do about “China’s unfair advantage over Ohio workers and manufacturers,” Obama said:

“I recognize that China’s currency manipulation and domestic subsidies gives it an unfair trade advantage and has led to U.S. job losses. The Bush administration has utterly failed to address this growing threat to U.S. businesses. I am committed to tackling this problem and ensuring that all trade manipulations are addressed by the U.S. government. I have cosponsored tough legislation in the U.S. Senate to overhaul the U.S. process for determining currency manipulation and authorize new enforcement measures so countries like China cannot continue to get a free pass for undermining fair trade principles. I have also supported proposals to increase tariffs on Chinese goods in order to offset the advantage their goods receive due to currency manipulation. As president, I will immediately adopt a strong program to push the Chinese toward voluntary reform – a goal that is possible with the right leadership in Washington.”

Manipulation talk. “Tough” legislation. A “strong program” to “push the Chinese” toward “voluntary reform.” So far, sounds like a typical member of Congress to me, albeit with the slightly mixed image of pushing someone to do something voluntarily.

Here’s what Mrs. Clinton said:

“The Bush administration has failed to make China play by the rules. Consequently, our workers – particularly those in manufacturing states like Ohio – have paid a price. That is why as President, I will crack down on China’s unfair trade practices. I have co-sponsored the Currency Exchange Rate Oversight Reform Act, which will require the administration to take definitive steps to stop China and other countries from harming American interests by undervaluing their currencies. And because currency manipulation is contributing to the trade deficit, I have also co-sponsored legislation that will require the administration to address the ballooning trade deficit. As President, I will make enforcement of trade agreements a priority. To that end, I will appoint a trade enforcement officer and double the enforcement staff at the Office of the United States Trade Representative. The current staff is too small to monitor and enforce the increasingly complex trade agreements.”

Her answer, true to form, is wonkier and emphasizes specific experience more than Obama’s, but it sounds like the same tune to these ears.

Do either (or both) of them mean what they say? No word so far on whether Team Obama has slipped a back-channel note through to placate Hu Jintao (although if he did, that sounds like something that the Chinese, unlike the Canadians, would keep to themselves for now). To be sure, this was almost certainly not aimed at a Chinese audience, but people in the PRC will be taking note of what these candidates say. Or at least they will at some point - certainly after they’re through being bombarded with news reports from the National People’s Congress.

The pattern in past elections has been that candidates who talk tough on China soften their tone once they get into the White House (see: Clinton, William J.). Will that hold true this year? It will be interesting to watch, especially around Olympics time, when George W. Bush comes to Beijing (as a “sports fan,” he helpfully points out). Campaign talk is one thing, but if the (hopefully nominated by then) Democratic candidate goes too far in denouncing Bush’s visit - say, by getting caught up in “genocide games” rhetoric - well, that might be harder to take back.

* Geeky aside to China Law Blog’s Dan Harris: We love your blog, but we love our RSS reader as well. Please, oh please, consider a feed not powered by the blocked-in-China Feedburner.

** Update: According to Canada’s own Globe and Mail, Obama isn’t the only one seeking to reassure the neighbors to the north:

Mr. Brodie, during the media lockup for the Feb. 26 budget, stopped to chat with several journalists, and was surrounded by a group from CTV.

The conversation turned to the pledges to renegotiate the North American free-trade agreement made by the two Democratic contenders, Mr. Obama and New York Senator Hillary Clinton.

Mr. Brodie, apparently seeking to play down the potential impact on Canada, told the reporters the threat was not serious, and that someone from Ms. Clinton’s campaign had even contacted Canadian diplomats to tell them not to worry because the NAFTA threats were mostly political posturing.

Here’s a curious statistic: China is the world’s top exporter of creative goods, accounting for US$61 billion worth in 2005.

Don’t believe it? Take it up with the United Nations Conference on Trade and Development (the catchily acronymed UNCTAD), which published these figures ahead of a big meeting in April to discuss the increased influence of creative industries in world economies.

What exactly are creative goods? According to UNCTAD:

Creative products can be exclusive or mass-produced, since they are at the crossroads between the artisan, service and industry sectors.

They’ve broken products into categories like:

Cultural heritage: Crafts, traditional cultural expressions, festivals and cultural sites

Creative services: Architecture, advertising, research and development, cultural and recreational services

Design: Furniture, interior, graphic fashion, jewelry and toys

All sounds a bit vague, doesn’t it? These definitions have led UNCTAD to name Italy the top creative goods exporter among developed nations, and Europe as a whole as the world’s top source of such goods, accounting for US$149 billion, or 44% of the world total.

Where does the United States stand on this list? The US is a textbook case of a creative economy, and surely few countries can match its cultural reach? Apparently, however, American creative output pales in comparison to China’s, coming up to just US$25.5 billion in 2005.

Surely there must be a problem with the methodology here. Can the US, which pumps out the movies, music, software, clothing and other stuff consumed by people everywhere, really export three-times fewer creative goods than China? That’s a strange conclusion to reach.

Some of this is explained by this AFP report on the figures. Merely manufacturing a product that falls into the ‘creative goods’ category counts toward that country’s total.

At present, a fashion product by a French designer which is made in China would count as Chinese, said Edna dos Santos-Duisenberg, chief of Unctad’s creative economy and industries programme.

This is a fairly controversial methodology, but the paper’s authors didn’t highlight it. Instead, it looks like they’re downplaying it by saying it’s just a starting point for further studies. But this starting point is already directing us down the wrong path.

It’s never good sign when someone stares past your shoulder while you’re trying to interview them. The finer points of economics are, well, fine, and so when I fail to grasp the nuances it’s understandable that those well-schooled in numbers might turn away in despair.

This appeared to be happening earlier today during an audience with an economist high up in Hong Kong’s International Finance Centre… until the economist shouted, “Hey, look at that!” I turned to the window behind me and saw a large bird of prey (I’ve since been informed it may have been a kite) sitting on the sill outside.

This may be a regular occurrence for those who pay a chunk of change for space at IFC but neither the economist or myself can call the building a home so it was a bizarre twist to an otherwise routine conversation about Southeast Asia’s fear of being overwhelmed by China. In a way, it was quite apt. (All we needed was for the bird to start circling menacingly above a small mouse called ASEAN…)

Needless to say, we both reached for our mobile phones…

Highlights from the last week of China business news.

Inflated figures
China’s third-quarter macro figures came out last week. The trade surplus in October continued to surge, which for once is actually surprising. Expensive commodities worldwide meant that the value of imports was up 25.5% from a year ago, but export growth still outpaced it, leaving the month’s trade surplus at US$27.05, a record high. The central bank said GDP rose 11.5% in the first three quarters, compared to a total increase last year of 11.1%. On the other hand, inflation rose 4.1% in the first three quarters, compared to a 1.5% rise in 2006. Goldman Sachs analyst Hong Liang raised a warning about inflation again (she did this a few months ago at the height of the pork shortage too), saying that the monthly CPI could hit 7% this year. The central bank has done the only thing it can do: raise interest rates. The reserve requirement rate will go up for a ninth time this year, to 13.5%, effective November 26. Central bank governor Zhou Xiaochuan has pledged to fight inflation, but how exactly he plans to do this is anyone’s guess. Goldman predicts two more rate hikes by year’s end.

Planning a buying spree
Remember all that talk about a gush of Chinese capital outflows? Well, it’s definitely in the works. China National Offshore Oil Corp, which reduces to the rather cute acronym CNOOC, was linked to acquisitions in Australia and Nigeria this week. There was a rumor that CNOOC wanted to take over Shell’s stake in an oil project in Australia’s Northwest Shelf region for US$450 million, which was later curtly denied by the Chinese company. Now, a new story has surfaced, saying CNOOC wants to hand over US$900 million to Shell, again, but this time for almost 50% in two Nigerian offshore blocks. No comment from CNOOC.

But commodities acquisitions aren’t really news - banking buy-ins, however, are. The FT broke the news - citing anonymous sources - that China’s top three banks, Bank of China, ICBC and China Construction Bank, approached Singapore’s Temasek Holdings to buy its 17% stake in Standard Chartered. The contacts were “informal and discreet,” which could mean anything, really. In any case, no deal is on the cards - Temasek isn’t selling, and Standard Chartered isn’t keen on having its independence questioned by having the Chinese as its largest stakeholder. An ICBC official denied that any such offer to Temasek took place. Lastly, the much-ballyhooed China Investment Corp revealed that it’s a cornerstone investor in China Railway Group’s Hong Kong listing. The sovereign fund will take US$100 million, the biggest institutional stake, in the H-share offering. This is its second move after buying into Blackstone months ago.

Singapore boosts its guanxi
China and Singapore indulged in a week of cozy relationship-building, with top officials of both countries meeting here and in the land of the Merlion. Singapore’s Lee Kuan Yew told Singapore’s newspaper, the Straits Times, that the man tipped to be Hu Jintao’s successor, Xi Jinping, belonged to the “Nelson Mandela class of persons,” upon meeting him for the first time in China. Meanwhile, Premier Wen Jiabao spoke candidly at a conference in Singapore, saying that illegal money flows threatened China’s stability and that his government would have difficulty reaching the environmental targets they set for themselves. This culminated in the announcement that China and Singapore would build an “eco-city” together in Tianjin, that hot economic development zone the central government is now so keen to promote. It brings to mind another Singapore-China project, the Suzhou Industrial Park, which was started when China was still trying to encourage industry in the Yangtze River Delta. More eco-cities are a good idea, because hopefully it will mean hearing less disturbing news, like the report this week about China’s increasing appetite for nuclear energy, and how it has just signed a landmark deal with Kazakhstan to buy the uranium it needs to build 40 new nuclear power plants by 2020.

You can also get the weekly news by e-mail. Just subscribe here.

Official reactions to the many recent recalls of foods and other goods made in China over the last few months have fluctuated between two main approaches:

1) stressing the need for better quality and safety standards to redeem the international image of the “made in China” brand (internally) and 2) accusing the countries lodging the complaints of trade protectionism of the worst sort (externally).

The accusations, it seems, get more intense when the company declaring the goods unsafe is a trade competitor, as this article from the Washington Post on trade complaints made to China by Southeast Asian countries suggests: (more…)

Do we see positive signs for the trade balance in the latest CLSA Purchasing Managers’ Index (PMI)? Although the manufacturing sector continued to expand thanks to a steady stream of new orders, most of the demand came from the domestic market. Export orders saw only a modest rise, which is seen as evidence that the removal and reduction in tax rebates on a wide range of exports is having its desired effect.

New orders were certainly at nothing like the levels recorded in May and June when manufacturers were rushing to get business done ahead of the tax changes.

These changes were brought in ahead of this summer’s round of US-China trade talks in Washington - an attempt to appease the hawks who were squawking about China accounting for the largest portion of America’s record trade deficit. Removing the tax rebates would push up export prices as suppliers moved to protect their profit margins, thereby making Chinese goods less financially attractive. Less exports means a lower trade surplus.

This is how the theory goes and, according to the CLSA figures, there may be some truth behind it: Output prices are at their highest in a year. However, the key driver of the price inflation is believed to be a spike in input prices. Respondents to the CLSA survey pointed to oil, steel, foodstuffs and transportation as areas where they are experiencing significant cost increases.

The verdict for foreign buyers in China is not a happy one. “Profit margins will collapse in China if any weakness in top line sales emerge over the next few months on the back of a global credit crunch,” said CLSA Chief Economist Dr Jim Walker.

Highlights from the last week of China business news: Mattel toy recalls escalate the product safety issue; China’s forex reserves are safe - for now.

(more…)

Highlights from the last week of China business news: Paulson’s latest visit (no prizes for guessing what he talked about. Starts with an R and ends with a ‘enminbi’); state-owned steel and auto giants get leaner, but not without dieting problems.

(more…)

Reader Gerd Heinz responds to an item in our daily briefing yesterday about EU Consumer Commissioner Meglena Kuneva’s threat the EU, China’s top trading partner, could block Chinese exports if their safety standards don’t go up: (more…)

The European Union Chamber of Commerce put on a rather good seminar this morning in Shanghai on the clean development mechanism (CDM) and how it’s implemented in China. (Go to the UN’s CDM page for all the details)

The CDM event assembled a well-informed panel of speakers. Dr Wang Yong and David Arthur, of top environmental consultancy firm ERM, bookended the presentations, while Peter Corne, a lawyer with Eversheds, took the middle slot.

The highlights:

-Shanghai is especially susceptible to rising sea levels because the city has sunk. From 1921 to 1965, the city sunk 2.6 meters, although that rate has decreased in recent years.

-Wang Yong: “Global warming is here and now”

(more…)