Oil Prices May Complicate China’s Monetary Policy -World Bank Economist

By Ian Talley

Published March 30, 2011

Oil Prices May Complicate China’s Monetary Policy –World Bank Economist

World Bank Working With China To Achieve High-Income Status

WASHINGTON -(Dow Jones)- High oil and food prices may complicate China’s carefully-balanced monetary policy, creating new problems for Beijing’s management of the country’s potential real estate bubble, one of the World Bank’s top economists warned Tuesday.

Hans Timmer, director of the bank’s Development Prospects Group, said needed attention to rising commodity price inflation is creating difficulties for authorities attempting to prevent ballooning asset prices. If popped, those market bubbles could cause a raft of financial and economic problems.

Higher oil prices–rising on fears of supply disruptions in the Middle East and North African petroleum exporters–on top of higher food prices could spark an upward inflation spiral, Timmer said.

“They not only reduce real income…but they start increasing all sorts of other prices and can create price spirals,” Timmer told Dow Jones in an interview.

“That is something that the Chinese are very concerned about because it would potentially disturb the very deliberate and slow tightening, which is much more focused on the asset markets,” he said.

After flooding the country with cheap credit to ward off the impacts of the global financial crisis, Beijing is now tightening monetary policy with an eye on preventing asset bubbles in its fast-growing economy. Economists say Chinese companies–in particular the massive state-owned enterprises–used essentially government-sponsored free credit to invest in real estate, seeking to capitalize on the future re-valuation of houses, land and commercial spaces. With rapidly rising real estate prices, economists worry there could already be a real estate bubble.

“It’s a fine-tuning process…and is very difficult to get right,” Timmer said, “because you want to curb investment in unproductive markets, but not in productive ones.”

The problem is that total amount of liabilities created in the cheap-credit period is unknown, he said. “The danger is when you are indeed successful in stopping the increase in asset and real estate prices, because it may be that some of these liabilities are actually based on the fact that [cheap credit] will continue,” Timmer said. That’s what happened in the U.S., he added: “You are looking at the collapse of the housing market, the real estate market, which then causes all kinds of problems.”

If China’s central bank suddenly starts tightening, targeting a specific inflation rate, “then you can really mess up in your asset markets,” Timmer said.

Given China’s stellar growth rate and mountainous reserves, the country has been able to absorb most pockets of bad loans, and will likely be able to if that growth continues apace.

“But if you have a sudden reversal of all these trends, you have a tricky situation,” he said, adding that it’s even more difficult “when it’s all in the shadows and informal lending arrangements aren’t in the open.”

“That is our big concern and is why the maturing of these financial markets are very important,” he said.

In the long term–looking more to a twenty-year horizon–the World Bank is working with the Chinese on a report about studying the potential transformation of the burgeoning nation into a high-income earning economy. Recent decades are littered with examples of the growth of strong developing nations stagnating when they hit the so-called “middle-income trap.”

Timmer says the World Bank predicts international Chinese corporate investment–including both state-owned enterprises and private companies–will be a main vehicle for the economy’s’ development into the high-income bracket of countries.

“It will be a very different change in the interaction with the world, because it means that China wants to have good bilateral or even multilateral investment agreements,” he said. “That transformation will be difficult, because it also means the Chinese government will have less control over their own companies and over China’s capital account,” Timmer said.

China will also move up the value chain and start competing with more highly developed manufacturing companies. That could likely spark new kinds of protectionism “which could be much more fierce than they currently encounter,” he said. Also, the country will need to develop its service sector, though “it’s not obvious that they will have a cost advantage..they will have to learn,” Timmer said. The only way to do that is to open up their borders investment by international service sector firms, he said.

China set to be top economy by 2030

Updated: 2011-03-24 07:01

HONG KONG / BEIJING – The World Bank’s chief economist said on Wednesday that China’s economy will probably become the world’s biggest by 2030, when it will be twice the size of the United States, if measured in terms of purchasing power parity (PPP).

“China could maintain GDP growth of 8 percent over the next 20 years, which will make it the world’s biggest economy,” said Justin Lin, senior vice-president and chief economist at the bank. He added that by 2030 the Chinese economy may be approximately the same size as that of the US at market exchange rates in terms of nominal GDP.

Lin made the remarks at the China Economic Development Forum in Hong Kong.

In 2010, China overtook Japan to become the world’s second-largest economy. It has set a target of 8 percent for GDP growth for this year. The country is also aiming to record average annual GDP growth of 7 percent in each of the next five years.

Lin said that by 2030, the country’s per capita income, measured in terms of PPP, may reach 50 percent of the per capita income in the US.

“It is imperative for China to address structural imbalances, by removing the remaining distortions in the financial, natural resources and service sectors to complete the transition to a well-functioning market economy,” Lin said.

The concentration of income in the corporate sector and the wealthier section of society is contributing to the rising disparity in incomes and other imbalances in the economy, he said.

“China still has huge potential to maintain strong growth, as the country’s urbanization rate is likely to reach 70 percent by 2030 from the current 47 percent,” said Zheng Xinli, vice-president of the China Center for International Economic Exchanges.

Zheng said that the total GDP of Brazil, Russia, India, China and South Africa will account for 47 percent, or possibly more than 50 percent, of the global economy 20 years from now.

“But rising inflation and accelerating capital inflows are prominent problems facing these countries in the short and medium terms, especially China,” said Zheng.

Yi Gang, deputy governor of the People’s Bank of China, the central bank, said in Hong Kong on Wednesday that he was confident the government will be able to keep consumer price inflation at, or below, 4 percent this year.

“The inflation figure will rise to as high as 5 percent in May or June this year, but because of the higher base figure of the second half of 2010, inflation in the second half of this year will cool,” Yi said. “So throughout the whole year, we will be able to meet the government’s 4 percent target.”

Yi said he is “comfortable” with the current level of interest rates, and that raising them excessively would attract “hot money” inflows.

China’s consumer price inflation rose to 4.9 percent in January and February from 4.6 percent in December. It hit 5.1 percent in November, a 28-month high. A drought in some major grain-producing areas, together with increases in international grain and oil prices, has led to growing concerns about rising inflation.

To mop up excessive liquidity and help curb increasing inflation and asset bubbles, the central bank has raised reserve requirements for banks nine times since the beginning of 2010, and hiked interest rates in February for the third time since October.

Stephen Green, senior economist with Standard Chartered Bank, said in a research note that the central bank will raise interest rates twice more in the first half, increasing them by 25 basis points each time, and economic growth will slow as a result of tightening measures.

China Reportedly Plans Strict Goals to Save Energy


Published: March 4, 2011

HONG KONG — With oil prices at their highest level in more than two years because of unrest in North Africa and the Middle East, the Chinese government plans to announce strict five-year goals for energy conservation in the next two weeks, China energy specialists said Friday.

Bejing’s emphasis on saving energy reflects concerns about national security and the effects of high fuel costs on inflation, China’s export competitiveness and the country’s pollution problems.

Any energy policy moves by Beijing hold global implications, given that China is the world’s biggest consumer of energy and largest emitter of greenhouse gases. And even the new efficiency goals assume that China’s overall energy consumption will grow, to meet the needs of the nation’s 1.3 billion people and its rapidly expanding economy.

As a net importer of oil, China tends to view its energy needs as a matter of national security. And so, even as Beijing tries to quell any signs of the Arab world’s social unrest striking a political chord with Chinese citizens, the government is also intent on not letting similar upheaval impinge on its energy needs.

Zhang Guobao, who was China’s longtime energy czar until his retirement in January and is still a power broker on energy issues, said Friday that China must undertake an “arduous” task to protect its security. “Oil security is the most important part of achieving energy security,” Mr. Zhang told the official Xinhua news agency. “Preparations for alternative energies should be made as soon as possible.”

China has placed a big bet on renewable energy, emerging as the world’s biggest and lowest-cost manufacturer of wind turbines and solar panels. But the country remains heavily reliant on coal for its electricity. And its oil imports are surging after auto sales have surpassed the American market in each of the last two years.

China has also moved ahead of the United States as the biggest buyer of oil and natural gas from Saudi Arabia, which has so far avoided social upheaval but is on Mideast analysts’ watch lists. That oil is shipped in tankers that travel along sea lanes controlled by India and the United States, which adds to Beijing’s jitters.

Iran, hardly a bastion of stability, is another large supplier of crude oil to China.

And while Russia in the current geopolitical context is looking like a relatively secure supplier of energy, a large pipeline to China from Russia, completed this winter, so far supplies only 3 percent of China’s crude oil.

An important feature of the five-year plan is its call to double the share of natural gas in Chinese energy consumption, to 8 percent in 2015 from 4 percent last year, according to Fatih Birol, the chief economist of the multilateral International Energy Agency in Paris. This will make China a natural buyer of large quantities of Russian gas, making it a competitor to Europe, which already relies heavily on gas from Russia.

According to an estimate last year by Wood Mackenzie, a global energy consulting firm, China imports three-fifths of its oil, and is on track to pass the United States in the percentage of imported oil by 2015. China had been a net exporter as recently as 1992, before the demands of its economic boom created an insatiable energy appetite at home.

As part of its effort to curb oil demand, the Chinese government has already been pursuing an aggressive program to develop electric cars, although these would run at least initially on a national grid that still relies heavily on coal.

China aims to limit energy consumption in 2015 to four billion metric tons of coal or its equivalent in other fuels, Mr. Zhang said. An energy specialist in Beijing said that he had also been told the same figure by several people.

Even a goal of four billion metric tons of coal or its equivalent represents an annual increase of 4.24 percent from last year’s consumption of a little more than 3.2 billion tons.

No decisions have been made yet on how the almost entirely state-owned energy sector would allocate the limits by city, province or electric utility. This is already causing considerable anxiety within China, said the specialist, who insisted on anonymity because of the government’s sensitivity about goals that have not yet been announced.

“It’s a political target, it’s being taken without a lot of internal consultation,” he said, before adding a Chinese proverb to describe the unhappy reaction of power producers and users already briefed on the new policy: “It’s like a whole lot of ants are being thrown in a hot wok.”

The Chinese economy has repeatedly grown considerably faster than government forecasts. But the government has come much closer to its energy goals because it owns all of the electricity distribution systems. And it has controlling stakes in the oil, gas and electricity companies and many coal mining companies.

The last five year-plan, which ended on Dec. 31, called for the country to reduce by 20 percent the energy it used per renminbi of economic output in 2010, compared to 2005. To try meeting that goal, Beijing required the governments of every province and city to achieve 20 percent improvements. Local officials, in turn, set similar goals for the 200 largest companies in each province and city.

But China fell badly behind its goal in late 2009 and early last year. The government’s economic stimulus program, in response to the global financial crisis, produced huge spending on highways, high-speed rail lines and other infrastructure that required lots of steel and cement, which are energy-intensive to produce.

Premier Wen Jiabao responded last May by starting a national campaign to improve energy efficiency, and soon vowed an “iron hand”to enforce compliance. By September, the government was ordering production lines to close at 2,000 factories.

The campaign reached extremes last autumn and early winter, with some town officials shutting off electricity and heat to businesses, homes and even hospitals in desperate bids to avoid censure for missing their goals.

Despite the measures, the government fell slightly short. Senior officials initially said in January that the country had “basically” met the 20 percent goal. But statistics issued since then show an improvement of only 19.1 percent over the last five years.

Meeting the new target of no more than four billion metric tons of coal or its equivalent, will require further improvements in efficiency if the economy expands 7 percent a year in the coming years.

Much greater efficiency gains would be needed if the economy grows even faster, as most economists predict. The Chinese economy expanded 10.3 percent last year.

Mr. Wen and others for years have resisted setting total energy consumption goals and only issued efficiency goals — precisely because overall consumption goals could require drastic measures to meet if the economy surges.

There was no immediate explanation available on Friday, other than troubles in the Arab world, for why the government had now decided to embrace an overall target.

The goals in China’s new five-year plan are consistent with the International Energy Agency’s “new policies” plan for climate change, a middle course that represents an improvement from current policies, Mr. Birol said. But he noted that the Chinese goals did not go far enough to meet what the agency considers necessary to prevent world temperatures from rising by more than 2 degrees Celsius, an increase that many scientists fear as potentially leading to very broad environmental changes.

Mr. Zhang and other Chinese officials have made little mention of climate change, which has ranked far behind energy security as a priority in Chinese policy making.

Zhou Yongkang, one of the nine members of the Politburo Standing Committee that runs China and the top law enforcement official of the Chinese Communist Party, is an oil engineer who spent most of his career rising to the top of the country’s oil industry. He retains considerable influence over energy policy even though his job now is crushing internal dissent.

Most recently, Mr. Zhou has overseen efforts to round up dissidents and make sure that the “Jasmine Revolution” does not spread from the Arab region to China. Premier Wen and other top officials have also warned recently that rising prices for many commodities pose a threat to social stability.

Bayer shifts PC business to China; plans €1 billion investment there in plastics

By Matt Defosse
Published: December 9th, 2010


In an acknowledgement that the majority of the world’s polycarbonate demand stems from plastics processors in the Asia/Pacific region, and will for years to come, one of the leading suppliers of the materials, Bayer MaterialScience, is shifting the headquarters of its global polycarbonate activities from the company HQ in Germany to Shanghai. The company is investing more than €3 billion in its Shanghai facility on a number of projects, with at least a third of that in its plastics, coatings and adhesives business unit.

Bayer’s polycarbonate (PC) is marketed under the Makrolon brand name. This new €1 billion in announced capital expenditures for Bayer’s Shanghai plant will significantly expand the company’s polyurethane (PUR) and PC capacities in China, as the supplier aims to increase its group sales in Greater China to around €5 billion by 2015. About half of those sales are to be driven by its MaterialScience group, the name for its plastics, adhesives and coatings business. To put that in perspective, Bayer MaterialScience’s total FY 2009 sales were €7.5 billion, of which Greater China sales were €2.1 billion. The MaterialScience unit accounted for €1.2 billion.

Among projects green-lighted with the investment will be a more-than-doubling, to one million tones/yr, of its capacity there for the polyurethane precursor material, methylene diphenyl diisocyanate (MDI). Also, capacity for PC will increase to 500,000 tonnes per annum from the current 200,000 tonnes/yr at the Shanghai site.

The company said its investment also would be used to significantly strengthen its research and development activities in China, and fund the move of the headquarters of its PC business unit from Leverkusen, Germany to Shanghai. “The expansion of our capacities in China is an important step in strengthening our presence in the emerging economies,” stated Bayer AG’s management board chairman, Marijn Dekkers. Added Patrick Thomas, CEO of Bayer MaterialScience, “For us, it is strategically important to hav

e the necessary capacities in the Asia/Pacific region to meet constantly rising demand.”

In terms of sales, China is the second most important country in the world for Bayer MaterialScience, behind the U.S. and ahead of Germany. The company already had announced a €2.1 billion investment in Shanghai as part of a long-term project lasting until 2012. Together with the newly announced expansions, this means a total investment of more than €3 billion. Five separate projects are planned to increase production capacity at the Shanghai Chemical Industry Park. For PC, a new facility is scheduled to be built with a capacity of 200,000 tonnes/yr, and the capacity of the existing PC plant there will be increased by 100,000 to 300,000 tonnes/yr. According to Bayer the Asia/Pacific region currently accounts for around 60% of the world’s total polycarbonate market, with the greatest demand coming from China. The plastic is used predominantly in the automotive, electrical and electronics, and construction industries.

In addition to the new MDI plant with an annual production capacity of 500,000 tonnes, it also intends to expand the capacity of its present MDI facility from 350,000 to 500,000 tonnes/yr. Also planned is an investment in HDI production. HDI is used to make high-quality surface coatings. There are plans to expand the capacity of the existing HDI production to meet short-term market demand and the addition of another further 50,000-tonnes/year HDI facility is also planned.

These announcements come on the heels of the recent news that Bayer plans to invest by 2012 about €110 million in PC compounding, PC sheet extrusion and PUR systems houses in China.

Price Increase

Nov 10, 2010 8:46 AM EST

A jump in petroleum import prices pushed October U.S. import prices to the biggest gain since April, but the rise was less than forecast, a government report showed Wednesday.

Import prices climbed 0.9% last month as muted capital and consumer goods prices partly offset a 3.3% increase in petroleum prices, the Labor Department said. Analysts polled by Reuters were expecting import prices to rise 1.2%.

Export prices increased a greater than expected 0.8%. Export prices had been forecast to expand 0.5%.

Associated Press