China and Russia sounded the alarm about the state of the global economy at a summit on Saturday and urged Asian-Pacific countries to protect themselves by forging deeper regional economic ties.
Chinese President Hu Jintao said Beijing would do all it could to strengthen the 21-member Asia-Pacific Economic Cooperation (APEC) and boost prospects of a global recovery by rebalancing its economy, Asia’s biggest.
Russian President Vladimir Putin said trade barriers must be smashed down. He is hosting the event on a small island linked to the Pacific port of Vladivostok by a spectacular new bridge, a symbol of Moscow’s pivotal turn to Asia away from debt-stricken Europe.
“It’s important to build bridges, not walls. We must continue striving for greater integration,” Putin told APEC leaders seated at a round table in a room with a view of the $1 billion cable-stayed bridge, the largest of its kind.
“The global economic recovery is faltering. We can overcome the negative trends only by increasing the volume of trade in goods and services and enhancing the flow of capital.”
China’s Hu told business leaders before the summit the world economy was being hampered by “destabilising factors and uncertainties” and the crisis that hit in 2008-09 was far from over. Beijing would play its role, he said, in strengthening the recovery.
“We will work to maintain the balance between keeping steady and robust growth, adjusting the economic structure and managing inflation expectations,” he said.
Hu spelled out plans for China, whose economic growth has slowed as Europe’s debt crisis worsened, to pump $157 billion into infrastructure investments in agriculture, energy, railways and roads. Hu, who steps down as China’s leader in the autumn after a Communist Party congress, promised continuity and stability for the economy.
Putin, who has just begun a new six-year term as president, said on Friday Russia would be a stable energy supplier and a gateway to Europe for Asian countries, and also pledged to develop his country’s transportation network.
Gazprom, Russia’s state-controlled gas export monopoly, signed an agreement with Japan to develop plans for a $7 billion liquefied natural gas plant on Russia’s Pacific coast, underscoring Moscow’s eastward shift.
The relative strength of China’s economy, by far the largest in Asia and second in the world to the United States, is key to Russia’s decision to look to the Pacific Rim as it seeks to develop its economy and Europe battles economic problems.
APEC, which includes the United States, Japan, South Korea, Indonesia and Canada, groups countries which account for 40 percent of the world’s population, 54 percent of its economic output and 44 percent of trade.
APEC members are broadly showing relatively strong growth, but boosting trade and growth is vital for the group as it tries to remove the trade barriers that hinder investment.
“It is absolutely clear that the most important region for economic growth this decade – and probably the next decade – will be the Pacific,” said Mexican President Felipe Calderon.
The European Union has been at odds with both China and Russia over trade practices it regards as limiting free competition. Cooperation in APEC is also hindered by territorial and other disputes among some of the members.
Putin, 59, limped slightly as he greeted leaders at the summit. Aides said he had merely pulled a muscle. Underlining Putin’s good health, a spokesman said he had a “very active lifestyle.”
Discussions at the two-day meeting focused on food security and trade liberalisation. An agreement was reached before the summit to slash import duties on technologies that can promote economic growth without endangering the environment.
Breakthroughs are not expected on other trade issues at the meeting, from which U.S. President Barack Obama is absent. He has been attending the Democratic Party convention and Washington is represented by Secretary of State Hillary Clinton.
Clinton said after talks with Foreign Minister Sergei Lavrov that the U.S. government was working with Congress to pass legislation needed to upgrade trade ties with Russia, which recently joined the World Trade Organisation.
Tensions persisted between the two former Cold War foes over Iran and Syria, however, and Clinton had only a short meeting with Putin late on day one of the summit, which culminated in a lavish firework show over Vladivostok’s harbour that was reported in the Russian media to have cost nearly $10 million.
Also missing the summit was Australian Prime Minister Julia Gillard, who went home after learning her father had died.
Geography Rules: Why Mongolia’s China Mining Strategy is a Mistake
In May 2012, the Mongolian parliament passed a law requiring parliamentary approval for foreign investors to take a stake larger than 49% in enterprises in strategic sectors such as mining or for investments by state-owned enterprises. The timing of the law — passed shortly after an attempt by the China Aluminum Company (“Chalco”) to purchase a majority stake in coal producer SouthGobi Resources SGQ.T +8.37% – suggests it was specifically designed with China in mind.
Mongolia’s fear of China is understandable, but the Mongolian government is making a strategic misstep by in effect categorically rejecting Chinese investment in its mining sector. It can discriminate against Chinese investors, but it cannot change the fact that Mongolia is landlocked and cannot export sufficient mineral volumes via Russian routes to break its dependence on China.
By excluding Chinese direct investments in mines, Mongolia simply trades one form of influence for another. This is because even if coal and copper are mined by American, Australian, Canadian or Mongolian firms, the minerals will naturally flow to China—and in many cases move via Chinese-owned marketing firms such as Winsway, which is nowpartially-owned by Chalco. If Ulan Bator moves to curtail mineral flows to China, it will simply be embargoing itself.
What are the factors driving Mongolia’s dependence on the Chinese mineral market?
The most obvious, and most important, is geography. Mongolia is far from the ocean and high transport costs render most of its mineral production uncompetitive in the international export market if exported through routes other than China. Russia’s Pacific Ports are more than 4,000 km from coal and copper deposits in the Southern Gobi desert, while the Chinese border is less than 300 km from these reserves — and only 40 km in the case of the giant Ovoot Tolgoi coal project.
Even for coal from Northern Mongolia, the combined transport cost and port fees for shipment through a Russian Pacific Coast port can exceed US$100 per tonne, which renders thermal coal sales cost-prohibitive and makes coking coal uncompetitive against coals from Australia and other seaborne suppliers to the East Asian market.
Another factor is Mongolia’s status as the low-cost supplier for many commodities China needs. Mongolia already exports coal to China, which took 99% of Mongolian coking coal exports in 2011, according to local sources. The country’s mines are also poised to export copper, gold, and fluorite, and—further in the future—electricity, uranium, and possibly potash and oil.
A slowdown that depresses global commodity prices will make Mongolian commodities even more price-competitive in the Chinese market because Mongolian mines tend to be low-cost producers and because they do not have to ship long distances to reach the Chinese market. Australian coal and Chilean copper must traverse thousands of km to reach China, while Mongolian coal and copper can move as little as 40km and be in China.
In addition, Mongolian producers are likely to receive increasingly favorable pricing for coal they sell into China because the production costs of miners in Shanxi—the heart of China’s domestic coking coal production and much of its thermal coal output as well—have been rising quickly in recent years. For instance, data from Yanzhou Coal, one of China’s major underground miners, shows that the cost of goods sold (which broadly reflects production costs) rose by 32% between 2008 and 2011 at its Shanxi subsidiary and continues to rise in 2012.
Finally, Russia has no economic interest in becoming a transit route for competing Mongolian mineral exports. Unlike China, Russia does not actually need the coal and copper Mongolia wants to move to market. Indeed, Russia is an exporter of most of the minerals Mongolia is, or will be, exporting.
Russian miners do not want competition from Mongolian minerals. For instance, steadily declining coal consumption in Russia and Europe has reoriented Russian coal producers toward the Asian market and filled the Siberian rail lines and Far Eastern coal ports almost to capacity. Politically well-connected Russian coal exporters like SUEK and Mechel will fight hard, and most likely successfully, to keep large volumes of Mongolian coal off Russian rail lines and out of their Pacific Coast export terminals.
With seven major coal projects in Siberia and the Russian Far East aiming to bring as much as 80 million tpy of coal production capacity online by 2020 and Russia’s Pacific coal export terminal capacity likely to grow by less than 30 million tpy, severe capacity constraints will remain and Mongolian coal miners wanting to use Russian routes will either be left in the cold or forced to accept cut-rate prices even lower than those offered by Chinese traders.
On the company-level, a handful of firms may be able to bypass China and use Russian routes to reach the seaborne market. For instance, in the coal sector, an Australian-listed miner with deposits in Northern Mongolia, tells us that it believes it can secure rail and port capacity to market some production through Russia. But even if true in practice, this will be the exception that proves the rule. On the national level (and likely on the company level for any producer wishing to move more than a few million tonnes per year), Russian rails and ports are likely to prove an inhospitable place for Mongolian mineral exports.
Mongolian politicians and portions of the voting public support resource nationalist policies in a large part out of fear that Chinese traders are exploiting the country’s isolation and forcing Mongolian miners to sell at unfair prices. The politicians’ statements and actions imply that they can secure better prices. Yet resource nationalism—particularly for a country that presently has relatively little leverage vis-à-vis China and cannot develop its minerals independently—typically proves a self-defeating path that leaves the populace worse off and angry for the wear.
The paradoxical reality is that continued resource nationalism will blunt Western mining companies’ desire to invest in Mongolia and make Chinese capital the “funds of last resort.” Ulan Bator’s antagonistic stance toward China is also counterproductive because it could help foreclose the opportunity for Mongolia to export resources via Chinese ports. Chinese ports are the only route through which Mongolian resources such as coal could reach international markets at a low-enough cost to remain price competitive.
Ultimately, China appears to seek secure, well-priced mineral supplies from Mongolia, not a re-enactment of the Qing Dynasty period of political domination. If Ulan Bator can establish political and regulatory stability and create a fair investment regime that leaves space for Chinese capital, Chinese consumers will be able to absorb the large volumes of Mongolian mineral exports they need at prices sufficient to propel robust economic growth for years to come.
Hu urges Asia-Pacific nations to help ensure peace in region
RUSSKY ISLAND, Vladivostok – Chinese President Hu Jintao yesterday urged all Asia-Pacific nations to help ensure peace in the region, amid a series of territorial rows that have inflamed nationalist tensions.
“To maintain peace and stability as well as the sound momentum of economic growth in the Asia-Pacific, it is in the interest of all countries in the region, it is our shared responsibility,” Hu told the Asia-Pacific Economic (APEC) summit.
The Chinese leader issued the call while Foreign Affairs Secretary Albert del Rosario confirmed Hu would be holding talks with President Aquino on the sidelines of the APEC summit.
De Rosario said the meeting between Aquino and his Chinese counterpart will definitely push through, and is just awaiting the “final” schedule.
“It will take place. The format has been finalized. We’re still waiting for a final date and time as to when the meeting will take place,” he told Manila-based reporters covering the APEC summit here.
Del Rosario said the bilateral meeting would most likely happen today before Aquino returns to Manila late in the afternoon.
Del Rosario also believes the meeting will not be that of a pull aside.
“I think that a reasonable time will be allocated for the meeting,” adding that “there is no pre-agreed agenda of the meeting” between the two leaders.
Aquino and Hu are among the world leaders attending this year’s APEC summit here in Russia, but US President Barack Obama will not be around due to the forthcoming presidential elections. US Secretary of State Hillary Clinton is representing Obama.
Del Rosario also confirmed that among the topics that will definitely be discussed is the raging issue of the West Philippine Sea.
“I’m very sure that it will be. It’s a subject that’s always in a discussion between the Philippines and China,” he said.
The Chinese leader’s call for cooler heads before the APEC came a day after he raised West Philippine Sea (South China Sea) disputes in separate talks with Vietnam President Truong Tan Sang and Brunei’s Sultan Hassanal Bolkiah.
China claims nearly all of the West Philippine Sea as its own. But Vietnam, Brunei, Malaysia, the Philippines and Taiwan also have overlapping claims, and the disputes have for decades made the sea a potential military flashpoint.
Vietnam and the Philippines have accused China of ramping up a campaign of intimidation recently to enforce its claims to the West Philippine Sea, causing a rapid decline in diplomatic relations.
The US has angered China by lobbying hard for a code of conduct among nations involved and insisting that freedom of navigation in the strategic sea was in its interest.
China was also embroiled in an arguably even more hostile row with Japan, another APEC member, over competing claims to islands in the East China Sea.
Philippine and Chinese ships were locked in a standoff for about three months at a shoal in the West Philippine Sea after Philippine authorities accosted Chinese fishermen poaching endangered giant clams, corals and sharks. Both countries claim the rich fishing grounds.
A senior administration lawmaker said Chinese-Filipino taipans could help ease tensions between the Philippines and China over the territorial dispute in the West Philippine Sea through backdoor bilateral talks.
Ang Kasangga party-list Rep. Teodorico Haresco urged the government to continue aggressively seeking an accord with China on the Spratlys dispute, citing that one of the courses of action of Aquino, “which is to look to the US as a potential ally in evolving a diplomatic solution, is correct.”
Haresco earlier warned the economic slowdown in China could worsen tensions in the West Philippine Sea as Beijing would fuel nationalist sentiments to divert attention from domestic problems.
Haresco pointed to signs that China’s economy is supposedly slowing down.
“Bloomberg reports that among China’s five largest banks, overdue loans have jumped by 27 percent,” Haresco said.
“Trade figures are also down due to the debt crisis in Europe and the earthquake in Japan; these are traditionally strong trading partners of China,” he said.
Bloomberg has noted that manufacturing figures have contracted further as of August, and financial institutions like ANZ Banking Group and Bank of America have revised their growth forecasts for China downward, from eight percent to 7.6 percent.
So far, China has yet to institute immediate steps toward cushioning the impact of a GDP growth shortfall, Haresco said.
“We should expect interest rate cuts and increased government spending in infrastructure,” Haresco said.
“But we should be wary if that spending goes into China’s military-industrial complex.”
Haresco said as of 2012, military projected spending was reported at over $100 billion. “But this is probably a conservative estimate,” he said.
“China probably spends up to four percent of her GDP (gross domestic product) on security, so this is closer to about $450 billion,”he said.
He said China has always managed to meet the Communist Party’s economic growth projections since 1998, after the Asian financial crisis. However, flagging economic performance indicates that outgoing Premier Wen Jibao may fail to meet the economic growth target for the first time since he assumed office in 2003.
“In striving to meet the minimum eight percent growth rate, or at least diverting the nation’s attention from the woes that falling economic growth will bring, nationalism _ through the first island chain _ could become China’s new buzzword. The cement that would bind the whole country is pride in their past 25 years of achievement,” Haresco said.
‘Misunderstanding’ of US role?
Meanwhile, Denny Roy, a senior research fellow at the Honolulu-based East-West Center, noted a “widespread misunderstanding about the US rationale for America’s diplomatic intervention in the territorial dispute to which the US is not a party.”
“Although US officials have named several specific US concerns about China’s policies and activities in the South China Sea, the US concern most widely understood and repeated is the potential threat to ‘freedom of navigation’: the PRC (People’s Republic of China) might be moving toward imposing restrictions on foreign ships sailing in the South China Sea. This, however, is not the real issue. It is really about bullying,” Roy said in his article that appeared in the East-West Center’s bulletin.
He said the US government should be working on “making the world safe from unlawful international coercion” in the South China Sea.
“Ironically, the Chinese have begun practicing what Beijing’s diplomats have for decades condemned as ‘hegemonism’ or ‘power politics’ – strong countries forcing their self-interested preferences onto smaller countries,” Roy said.
He pointed out “China’s claims are both unusually expansive and intentionally vague” and its actions to assert ownership over the South China Sea and its tiny “islands” are stronger than those taken by the other claimants.
These acts include threatening and damaging foreign ships, declaring a fishing ban for part of the year in half of the South China Sea and arresting foreign fisherman who do not comply, he said.
“China’s actions are threatening because China is big. No other state in Southeast Asia can match the military power China is able to project into the South China Sea. China’s massive economic weight, rapid growth rate, and commitment to strengthening its military forces ensure that the gap will only grow larger in the future,” Roy said.
“Some observers see the China-US contention over the South China Sea as simply a squabble between two great powers that are both seeking regional domination, with each acting in its respective hegemonic self-interest rather than in defense of some higher principle,” he said.
“In this case, however, US intervention is clearly aligned with the interests of the Southeast Asian countries, which seek to avoid domination by China or any other great power. China is trying to implement a might-makes-right order, while the United States is trying to ensure that smaller countries do not get steamrolled. This is the real issue, and US officials should make it clear,” he added.