Concerns mount regarding Chinese economy

David Ignatius is one of the more balanced commentators you’ll find, so when he write a piece stressing “warning signs” in China, it’s worth a read.

The government in China is trying to address the staggering amount of corruption, yet this effort seems to be having a destabilizing effect. Also, there are tons of bad loans in China and what appears to be a massive real estate bubble.

All of this spells trouble, and recent real estate sell-offs and bond sale cancellations have observers worried.

China pushes its economic leverage

Chinese woman working on laptop

The rise of China and its impact on economies all over the world isn’t a new story, but this overview in the New York Times is worth reading. The tone is one of looking at the downside of China’s economic empire and the unwillingness of desperate partners like European nations to assert themselves. But there is an upside, as China can provide much needed capital to struggling countries, and this also gives China a huge stake in stability around the world. There are certainly concerns on issues like the environment and human rights, but one needs to look at the big picture as well. Fortunately, President Obama’s foreign policy is aimed at engaging but also containing China, and he has been willing to use our own leverage in this relationship.

Challenges for shale gas in China

drilling rig at sunset

The shale gas fracking boom in the United States has been a game-changer for the US economy and energy needs. Now other countries are looking to exploit this potential in their own country, and the potential in China is huge. That said, there are also many challenges to making this a reality in China.

In China there’s a giddy feeling that the next energy gold rush is about to begin. Beneath the mountains of Sichuan province, the deserts of Xinjiang, and elsewhere, China contains twice the shale- gas reserves as the U.S., says the U.S. Energy Information Administration. China’s national planners enthusiastically back boosting natural gas production, which accounts for just 4 percent of the country’s total energy mix now. The government wants to double that share by 2015. “There’s a lot of exuberance,” says Zhou Xizhou, who leads the research firm IHS Cera’s China Energy practice. “In Beijing, if you work in energy, you probably receive a shale-gas conference notice every week.”

The impact of a shale-gas boom in China will be enormous, with the potential benefits and likely environmental costs perhaps even greater than in the U.S. So far, though, the output in China has been a trickle because of the challenging geography and the monopolistic structure of China’s oil and gas sector. While about 200,000 of the horizontal wells used in fracking have been drilled in the U.S., China has about 60. China has 1,275 trillion cubic feet of shale-gas reserves, compared with 637 trillion cubic feet for the U.S.

The U.S. shale-gas revolution was launched largely on the flatlands of Texas, North Dakota, Pennsylvania, and other accessible areas. In China’s mountainous Sichuan basin, “the formations seem to be more faulted and folded, which makes it more difficult and less economic to drill long horizontal well bores,” says Briana Mordick, an Oil & Gas Science Fellow at the Natural Resources Defense Council and formerly a geologist at Anadarko Petroleum.

It will be interesting to see how this develops. Some environmentalists hate the fracking boom, while others acknowledge that new natural gas tends to replace the much dirtier coal as an energy source, which is a huge plus for the environment. China’s future coal plans have terrified the rest of the world. If they can figure out fracking, perhaps the net gains in carbon emissions can be mitigated.

Caterpillar gets duped in China deal

Well, this is embarrassing.

Caterpillar, based in Peoria, Ill., disclosed on Jan. 18 that it had uncovered “deliberate accounting misconduct” at Zhengzhou Siwei Mechanical & Electrical Manufacturing Co., a maker of roof-support equipment for underground coal mines that it had acquired last June. Siwei is a subsidiary of ERA Mining Machinery, a Hong Kong-listed firm controlled by a shell company whose principals are two American entrepreneurs in China. Caterpillar paid about $700 million for ERA but said earlier this month it was writing down the value of that company by $580 million. “It’s disappointing,” Oberhelman said. “But how we respond defines us.”

Of course this stuff doesn’t only happen in China. Fraud occurs everywhere. But you would think that a company like Caterpillar would be a little more careful here.

Gambling revenues continue to grow in Macau

China’s march towards a modern economy continues unabated, even with reports of a recent slowdown. While the country is still held back by the restrictive policies of the government, censorship and corruption, many changes are afoot that will transform the culture over time. While Internet access is somewhat restricted, Chinese citizens can find information and entertainment if they are determined to do so. They can communicate through social networking, play online games or track poker on Party Poker Television. There’s only so much the government can do to hold back the desires of the Chinese people. They want the brands we have and want to play the games we play. Consumerism is a very powerful force, as people around the world want access to what Western citizens have. With the Internet, they can see what others have, and that influences behavior. Just look at the Middle East and see what social media and online access can do to a restrictive culture.

With gambling, the government has actually accelerated the cultural shift with the support of the massive growth in Macau. Gambling revenues continue to grow rapidly even with a slowdown looming in the overall Chinese economy. Given the size of Macau’s gambling presence this is still impressive growth. The casinos in Las Vegas aren’t happy about it, as the Asian high rollers no longer have Vegas as their primary destination. Macau is closer and bigger.

This isn’t lost on the Chinese people, who now have their own glittering destination for gambling. Naturally, this helps fuel the growth of games like poker in China. The poker popularity explosion is around 15 years old in the United States, but can you imagine the growth of this game as over a billion Chinese people become exposed to the game with the hype surrounding Macau and access to online gaming sites?

Things like this might seem trivial, but small things like poker and gambling can have a huge impact on culture. People demand the right to enjoy entertainment options once they are exposed to them. You can’t put that genie back in the box.

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