June 11, 2012.

Haro,

Ayam taking the liberty of sending you this long article for your reading pressure - if you are interested to reach such!

This Aussie friend of mine - Dr Alan McPhate is in his 80s, once Presbyterian - and now still active as a humanist, and much involved in his local cummunity projects. I have known him since my Melbourne University days - some 50 years ago hahahahahah! - and he is still up todate on world affairs, especially China and its huge impact on Aussie land, as China is the largest buyer of Aussie coal and iron ore.

He picks my brain to comment on this and that subject - and I oblige, do some research and write - to ward off the A-Z Hammer Disease (you know it as "Alzheimer"!) for starters, and keep myself updated as well! My Next Life: I will do my PhD (permanent head damage) on Public Policy and International Affairs!

If not interested, please delete and 1000 Apologies.

Eu Ming

---------- Forwarded message ----------
From: Eu Ming Yeow
Date: Mon, Nov 5, 2012 at 11:19 PM
Subject: Re: China's Econmy
To: Alan McPhate


Hi Alan,

Sorry for this late reply.

I have been trying to build an internet/online website business lately, and, from an illiterate computer guy like me, and going through the rather difficult/not easy to understand mechanics for me, on how to build this website! I am nearly done - and let's see whether it is so easy to make $ while in your pyjamas, hahahaha!

China' Economic Growth: Hard or Soft Landing?:

Bloomberg:

In August 2012 review, it remarked that China's 7.6% p.a. growth rate in Q2 was the slowest pace of growth in three years.

Bloomberg also stated that State-owned enterprises and banks continue to produce huge misallocation of resources and priorities, and that no effort has been made to build a market that promotes increased domestic consumption.

The Shanghai Composite Index (SHCOMP) is down 13% so far for Q3 2012.

HSBC Survey:

Very closely watched as HSBC is next door, based in Hongkong.

According to HSBC in their September 2012 report, China's manufacturing activity contracted for an 11th straight month to September 2012, as factories struggled with weak demand and hard-to-sell inventories., underscoring broader economic weakness and shrinking demand in key overseas markets.

The key Purchasing Managers' Index (PMI) is closely watched as it gauges nationwide manufacturing activity, a key sector of China, the world's second largest economy. HSBC estimated the PMI for September to be 47.8 - anything below 50 points indicate contraction.

Tsinghua University Beijing (China's top university):

According to Tsinghua University's think tank, the Centre For China In The World Economy (CCWE) forecasts in September 2012, China's economy is expected to grow by 7.7% in the first three quarters of 2012, while for the whole year, the growth rate will be 7.8%.

China still has potential for rapid growth in the medium and long term, and urbanization will be the greatest boost for the country's future development, according to this report.

The CCWE estimated that China's GDP will grow by 8.2% y-o-y in the first half of 2013, while the whole of 2013 will be 8.0%. Inflation rate is estimated at 2.8% ths year, while for the coming years, consumer prices will grow by 3-5% annually.

Li Daokui, head of CCWE, reckons there is no hard-landing risk in the short term, but the next three to five years will be a difficult period for China's economy, during which the global economic and financial situation will remain turbulent. Economic adjustments in the U.S. will recur a few times, he added, and these will bring new waves of economic and financial turmoil to the rest of the world. Li is also a former advisor to China's Central Bank.

Moran Zhang of Nomura Securities:

In his September 2012 analysis, MZ is bullish on China, and expects the economy to rebound, stronger than expected!

He said that leading indicators in the housing sector picked up strongly in August 2012, e.g. land sales improved sharply, and new housing starts growth also improved to 14% y-o-y in August - from a 27% decline in july 2012. Property sold improved to 2.2% y-o-y in the January to August 2012 period - against a-0.5% decline in the January to July period in value terms. Hence, these three indicators performed well, and he is of the view that there is a good chance that housing investments will rebound in the coming months, which is earlier than the market expects.

Housing and infrastructure investments combined account for half of the total fixed assets investment, which in turn accounts for nearly half of GDP. If both improved in Q4, China will then see a visible rebound in GDP growth to 8.8% he estimates.

The consensus forecast for 2012 GDP, on a quarterly basis, expects growth to slow down from 7.6% in Q2 to 7.5% in Q3, before recovering to 7.7% in Q4.

As stated, Zhang disagrees with this consensus view, and estimates Q4 to be 8.8%! - mainly because he estimates fixed asset investment (FAI) growth will be 21% y-o-y by December 2012 against 20.2% in August on same y-o-y basis, while consensus expects FAI growth to slow down to 19.5%.

Here, he cites China's powerful economic planning body - the National Reform and Development Commission - recent announcements of approvals for several huge infrastructure projects, including 25 subways and 13 highways, and the estimated costs of these, by analysts, at more than 1 trillion yuan (USD 158 billion), roughly a quarter of the total size of the massive stimulus package unleashed in response to the global financial crisis in 2008!

Pieter Bottelier, Carnegie Endowment For International Peace, in International Economic Bulletin 26 July, 2012 issue:

China's economy is slowly becoming more normal, he said. Growth in the coming years will likely be both robust and more sustainable, while the structural reforms that are central to the 12th Five Year Plan (2011 - 2015) will become somewhat easier to achieve, he added.

The greatest risk facing China today, he said, is stagnant political reform, including the promotion of the rule of law. Without progress on this front, the social inequality and perceived unfairness that the current political system has generated could jeopardise long-term economic prospects.

The oncoming changes in political leadership that will come with the crucial 10/11/2012 key Congress meeting is expected to cement strategies for further/future economic growth, but political "correctness" is not expected to change at all - the top leadership will still be nominated and elected accordingly.

(Pieter Bottelier, former chief of the World Bank's resident mission in Beijing, is a non-resident scholar in Carnegie's International Economics program, and Senior Adjunct Professsor of China Studies at the School of Advanced International Studies (SAIS) at Johns Hopkins University).

China's Official Growth Rate of 7.4% for Q3 2012 Announced:

China's National Bureau of Statistics said GDP grew 7.4% in Q3 July-September 2012 - representing a sharp slowdown for China, with 9.2% in 2011, and average annual rate of near 10% for three decades. This growth was the seventh straight quarter slowdown.

The government targets growth of 7.5% for full year - reduced in 2012 from the previous 8% target - and the consensus forecast of economists polled by Reuters is that it will deliver on it, with an expansion of 7.7%.

China's Problematic Coal Plan:

In March 2012, China's powerful National Development and Reform Commission released its long-awaited 12th Five Year Plan (2011 - 2015) for its coal industry, which is to curb China's national coal production and consumption at around 3.9 billion tons by 2015.

China has long relied on domestically abundant coal - which accounts for 95% of the country's proven fossil reserves - to fuel its booming economy. Currently, coal still accounts for nearly 70% of China's national energy consumption and about 80% of its electricity production. In 2009, carbon emissions from Chinese coal combustion alone exceeded total U.S. carbon dioxide emissions! Thus, China ia facing tremendous pressure - arising from the destructive environmental effects of the coal consumption spike - to accelerate the peaking of its national coal production and consumption.

China produced 3.24 billion tons of coal in 2010, and capping national coal production at 3.9 billion tons by 2015 corresponds to an annual coal supply growth rate of 3.8%. Assuming that the coal supply to GDP elasticity during this 12th Five Year Plan period is identical as the previous one at 0.59, China's coal production target can be translated into an average annual GDP growth rate of 6.5% by 2015. Since China's annual GDP growth goal has been set at 7.0% for these next five years (against the much higher growth rates quoted above), capping China's coal production at around 3.9 billion tons by 2015 seems to be a reasonable, achievable, government target.

However, few key facts may fundamentally alter the intended impact of the Coal Plan:

(a) Beijing has decided to slow down China's rapid economic expansion in order to achieve a more sustainable and efficient economic growth during this 5YP - its political intentions here coinciding with a widely-accepted consensus among economists that Chinese GDP growth will likely be lower in this near- to medium-term than it was in the previous decade.

(b) The quality of China's coal statistical reporting has become increasingly questionable in recent years, which leads to legitimate concerns over the credibility of any government-issued coal industry targets. For example, after two revisions in 2006 and 2010, China's national coal production in 2000 was updated to 13.88 billion tons, which is 39% higher than the originally reported production level of 9.98 billion tons!

To make matters worse, the statistical discrepancy between national and provincial coal consumption (especially local governments' strong desire for double-digit growth!) keeps widening, reaching 18.1% in 2010!

(c) As China's economy rebalances towards a much more sustainable form of growth, it automatically means this growth will be less commodity-intensive.

(d) Surging Chinese hard commodity purchases in the past few years fuelled not just growing domestic needs but also a rapidly growing inventory. Such high inventory levels will not be able to support the lower level of economic growth as generally agreed by consensus will happen during this period.

For example, data from the China Coal Transport and Distribution Association showed that coal inventories at Qinhuangdao Port rose to 9.3 million tons on June 17, 2012, the highest since 2008.

Coal mining in China is mainly concentrated in the country's northern regions - a "coal belt" that stretches from Heilongjiang, Shanxi, Inner Mongolia to Xinjiang, along with a couple of areas in Sichuan and Guizhoou. From these Northwestern regions, the coal then clocks up thousands of kilometres traversing China's web of highways to reach the coal production factories dotted across the country.

Desertification is particularly severe in the Northwest "coal belt" where the wind picks up dust - coal ash, a waste product - and sends it all over the country. Every four tons of coal burned produced one ton of coal ash. And each year, without fail, Beijing is attacked by these severe and notorious dust storms.

The most dangerous pollutant to be released from coal is CO2. China is now the world's largest emitter of greenhouse gases, and carbon emissions is the main contributor to climate change.

As stated, the 12th Five Year Plan places a cap of 3.9 billion tons of coal use by 2015. But key provinces usage of coal keeps increasing, making Beijing's controls weaker, and one analyst goes so far as to say that by 2015, he expects coal prices to collapse, China's purchases will certainly be lower in view of forecasted and expected lower economic growth during this period.

Iron and Steel Plan in China's 12th Five Year Plan (2011-2015):

China intends to restructure the iron and steel industry sector under this new 5YP as follows:

(a) The steel sector's growth rate is set to slow during this 5YP period, with growth forecasted at 5 to 6% per annum, against 22% growth in the 10th Five Year Plan (2001 - 2005), and 11% in the 11th FYP (2006 - 2010).

(b) Rapid growth of China's steel sector in the past 10 years has led to over-capacity, heavy pollution, and a fragmented industry structure. In the last decade, the steel industry grew at an average annual rate of 17%, reaching around 600 million tons of crude steel output in 2010.

(c) Total steel capacity in China is estimated at 720-750 million tons per year. According to one estimate, around 100 million tons of steel capacity is unnecessary!

(d) Small steel players will be forced to close or agree to M&A, since these small players also impede progress on 5YP environmental targets, are less efficient and cause more pollution per unit of production than larger companies.

(e) China's Top 10 steel producers are expected to expand through M&A, and will represent 60% of the country's total steel output by 2015, up from 48% in 2010.
These 5YP initiatives are consistent with the "Development Policies for the Iron and Steel Industry" released in 2005. This law aims to increase the output of the top 10 steel groups to 70% of the nation's total by 2020 through M&A.

(f) China plans to relocate steel companies to coastal regions and interior waterways like:

***** Caofeidian Port in Hebei Province;
***** ZXhanjiang in Guangdong Province

so as to reduce logistic costs and for environmental reasons. Production based in these areas will represent 40% of the total output by 2015.

(g) *** Steel sector growth is expected to slow to 5-6% p.a. during this 5YP;
*** The government's 5YP target of building 36 million units of affordable housing will help
contribute to increased steel demand;
*** Property and infrastructure are China's dominant steel users, accounting for over 50% of steel use - this pattern will likely remain in place.
*** Specialty steel for railways, nuclear farms and wind plants will see increased usage during this 5YP, e.g. the 25 new subways and 13 highways to be built during this period.

(h) Pricing of iron ore, a key steel input, has been a contentious issue between China's steelmakers and the world's Big 3 miners.

From 2005 to 2010, China's reliance on imported steel ore has been steadily increasing (over 60% of the total in 2010). A key goal of this 5YP is increasing the proportion of domestic iron ore production to 45% by 2015.

China's steel industry is the largest in the world, but has been frustrated by its inability to win price concessions for iron ore with the world's big three miners - Vale, BHP Billiton and Rio Tinto.

Rising iron ore prices have placed pressure on local steel company margins. The average profit margin of China's 77 largest steel companies slipped below 3% in 2010 - a sharp decline from the 8% profit margins seen during the 2001 to 2005 period.

Two solutions are proposed here during this 5YP:

*** expand domestic iron ore porduction faster;

*** purchase equity in overseas companies, and China's target is purchasing 40-50% of iron ore from its own overseas assets, up from the current 15%. However, political considerations and so-called "national security" questions will dogged and block such China purchases in too many cases.

(i) Iron ore generates the most revenue for London-based Rio Tinto and Melbourne-based BHP. China is the largest customer for both companies, providing 31% of sales to Rio and 28% to BHP in the last 5 years.

BHP CEO Marius Kloppers estimate China's steel output will climb to 1.1 billion tons by 2025. Rio Tinto, the second biggest, is spending at least $15.6 billion to expand its iron ore operations to meet demand from China. BHP, Vale and Rio Tinto control about 67% of the total seaborne trade of iron ore, according to a Bloomberg estimate.

(j) Iron ore prices will fall about 19% before finding a "long term, sustainable" level as China's economy slows, said the CEO Neville Power of Fortescue Metals, Australia's third biggest producer. The price will drop to about $110 per metric ton, he said on 03 June 2012.

(k) Baosteel Group, China's third largest mill by output, and Wuhan Iron, the fourth largest, won approval in May 2012 to build $21 billion of new plants, to boost its output to 53 million tons and 45 million tons respectively, and help push China's economic growth engines.

China's southern province of Guandong, where Baosteel's new project will be, at Zhanjiang port, is home to the Chinese units of Japanese carmakers including Honda Motor Co. and Toyota Motor Corp - need more than 50 million tons of steel products a year!

Marc Jacques - author of "When China Rules The World: The End Of The Western World And The Birth Of A New Global Order". Publisher: Penguin, 848 pages.

This is the updated and second edition of Marc Jacques widely-acclaimed book on China. The first edition was subtitled: "The Rise Of The Middle Kingdom And The End Of The Western World". This second edition, suggesting an evolution, is subtitled: "The End Of The Western World And The Birth Of A New World Order." Sure to sell!

Jacques' chief arguments remain intact: that China will be dominant economically and culturally, it will not essentially be Westernised, and China will be ascendant despite multiple challenges. China's ascendancy would result from both its own efforts and the decline of the West simultaneously.

In this edition, he cites The Economist projection that the Chinese economy will become the world's biggest by 2018. Now the IMF predicts it will be in 2016.

Unlike many China pundits, particularly critics, Jacques believes China will not succumb to the weight of its own promise. He does not accept that China has to westernise or democratise before it can fully develop and prosper.

Jacques also rejects the alarmist Western notion that today's China is re-arming aggressively. He finds Chinese defense expenditure as a proportion of GDP falling between the 1970s and 1990s, and since then, only keeping pace with GDP growth.

He attributes Western spurning of this information and its stubborness to a mixture of unfamiliarity, ignorance, prejudice, denial, stereotyping, racism and Cold War ideology against a non-western country that is communist, at least in name.

He does not see China as a global superpower because it is historically absorbed in its own internal governance, as it is a very difficult country to govern.

Despite its 800+ pages, the book has sold a quarter of a million copies (and counting) in its first edition and in a dozen languages! His critics have yet to match that kind of appeal in whatever they have to say!

China's Next Leader - Xi Jinping (currently Chinese Vice President):

Xi Jinping is expected to take over as head of the Communist Party of China (the ruling party) in the 10 November 2012 Beijing session and become President in 2013.

Xi Jinping spent much of his youth living in a dug-out cave as his home in the remote northern community centre of Liangjiahe, China, a tiny community of cave dwellings dug into hills and fronted by dried mud walls with wooden lattice entryways. He spent seven years here, toiling alongside villagers by day and sleeping on bricks by night, in stark contrast to his pampered early years in Beijing.

He was born into the communist elite, but in the choatic years of Mao Zedung's disastrous Cultural Revolution , and after his father fell out of favor with Chairman Mao, he was sent to this rural hinterland to learn peasant virtues at age 15.

He has an elite, educated background with links to communist China's founding fathers that are a crucial advantage in the country's politics.

He has a daughter at Harvard University under an assumed name. Tall, heavyset and married to a popular folk singer in the military, Xi is at ease in groups, in contrast to China's typically stiff and aloof leaders, such as current President Hu Jintao.

A Xi administration is expected to pursue a more forceful foreign policy, based on Beijing's belief that its chief rival Washington is in decline, and that China's rise to global pre-eminence is within reach.

After a brief spell in charge of Shanghai, he was brought to Beijing and handed the high-profile task of overseeing the 2008 BeijingOlympics. He is also in charge of managing relations with the former British colony of Hong Kong, now part of China.

He has made half a dozen trips to the US, but not known to have visited his daughter at Harvard, and China watchers are of the view that Xi will be more asseretive in dealings with U.S. than that under Hu.

Sorry Alan, 1000 Apologies for these long long notes, but hopefully, it gives you a better picture of China, its coal and iron and steel industry position vis-a-vis Australia's coal and iron ore positions.


Best Regards, Ming