China monthly review: Focus on financial crisis and problems with US during October

This year’s National Day, which Chinese celebrate every October 1, marks 59 years since Mao Zedong declared the birth of the People's Republic of China in Tiananmen Square. Unfortunately, the festivities were a prelude to many problems which China has faced during October 2008.

The financial crisis and its impact on growth, combined with the milk scandal, were perhaps the most serious situations faced by China last month. Troubles with the US also dominated headlines.

The crisis and new regulations

Though dominated by the financial crisis, October began in China’s case with the announcement that the country's third-quarter growth reached 9%. It was lower the second quarter’s 10.4% and was the first time in four years that growth was not double figure.

To mitigate the effects of the recession, the People's Bank of China (PBC) announced its second cut in interest rates. According to PBC officials, the drop came in order to accelerate the domestic economy in the face of global financial worries. The 0.27% cut resulted in a 6.93% current interest rate.

Among the tangible effects of the crisis was the closing of 52.7% of China’s toy factories, largely due to production costs, a stronger Yuan and tougher safety standards for toys. Smart Union, a factory which closed its doors, left 7000 jobless and caused strong protests for non-payment of wages.

In another sector, China’s Minister of Industry and Information Technology ordered telephone companies to share their networks. The move is part of a restructuring plan aimed at reducing costs and avoiding duplication, in order to facilitate the arrival of 3G telephone services to the country. In this way the phone companies can better employ their networks, and prepare for 3G’s launch in China.

China appears to be moving towards a new stage of regulatory reform, whereas the Third Plenary Session of the XVII Central Committee of the Communist Party decided to allow the free transfer of land use rights, aimed at increasing productivity in the agricultural sector. Land reform also responds to the goal of doubling farmers’ per capita income by 2020, and levelling the economic conditions in the interior with those of the economically successful coastal areas.

Conflict with U.S.

In early October, China announced it was cancelling all diplomatic and military exchanges with the United States due to the American sale of weapons and military equipment, totalling $ 6.4 billion, to Taiwan.

The People's Republic, which views the island of Taiwan as part of its national territory, flatly rejected this support by the U.S. military. And to prove it cancelled several scheduled visits by the Armed Forces, meetings on the proliferation of weapons of mass destruction and announced it will not participate in the exchange of humanitarian assistance with the Americans.

Three days after the above incident, another issue pitted China against the United States. Beijing requested the US, in observance of the United Nations Charter and Security Council resolutions, return 17 Uyghur prisoners detained in Guantanamo, in order that they might face justice in their Chinese homeland.

The controversy grew when US courts blocked a district judge’s order to release the prisoners. The district found that there was no evidence that the Uyghurs represented a threat to the US. The prisoners have been in custody seven years and the Pentagon itself had declared that they were not considered "enemy combatants", to be kept in custody only until a third country offered to take them.

The milk scandal

The effects of September’s contaminated milk scandal are still being felt in China, since authorities had to continue with measures aimed at normalizing the situation. 5,000 safety inspectors are deployed throughout the country, auditing of dairy factories.

At the same time, China’s Ministry of Agriculture, along with the Ministry of Finance, drew up a rescue plan to grant subsidies to dairy farmers suffering from declining demand in the wake of the scandal.

Additionally, the government launched a law to ensure dairy product chain supply monitoring and legislated acceptable melanin levels in dairy products. This figure, taken from Hong Kong’s extant limit, is equal to limited amount that can normally leach out of containers.

The situation reached such intensity that Prime Minister Wen Jiabao admitted the government’s partial responsibility for the incidents in an interview for Science magazine.

International relations

The new president of Pakistan, Asif Ali Zardari, recently spent four days in China, during his first state visit abroad. After his meeting with Hu Jintao, President Zardari stated China would help Pakistan build two more nuclear stations aimed at solving the energy shortage in the Islamic country.

China has already helped Pakistan to build nuclear plants, including one that is already in operation. Another is under construction, with two more in the works. Nuclear cooperation for domestic energy production is also subject to IAEA oversight, added the Ministry of Foreign Affairs in China.

Another Pakistan-China agreement involves the launching of a telecommunications satellite. It was designed and will be launched for the Pakistanis by China Great Wall Industry Corporation (CGWIC) in 2011.

Beijing also has an official visit from Vietnamese Prime Minister Nguyen Tan Dung, who announced a new border agreement between the two countries. Relations between China and Vietnam have been strained in recent months due to recent disputes over oil and gas rights, borders. Though this agreement does not completely resolve all the trouble spots, it does create a common framework for the resolution of border conflicts. It also includes measures to demarcate the 1350 kilometers of China-Vietnam border.

South America and Chile

Chinalco, the Chinese mining concern, announced plans to invest $250 million annually in Peruvian goods and services as part of the Tromocho mining project in Peru. This is added revenue that will the Peruvian government receive for a total of $7.6 billion in tax revenues during the 36-year lifespan of the mining project, which will require investment of close to $2.15 billion.

As far as Chile is concerned, in the midst of crisis and low commodity prices, China is seizing the opportunity to increase its imports of copper from Chile. Copper purchases spiked 20% during September, as compared the previous month.

But at least there is the good news that Chilean firm, Moly Met, will conduct the first Chilean industrial investment in China, in the form of a molybdenum treatment plant worth $70 million. The plant will be built in the Chinese province of Inner Mongolia, an area rich in molybdenum deposits, and may be operational by 2011.

Despite this, experts call for caution because China is going through a clear import slowdown, which caused last month’s steel products to decline by a million tonnes since August. Another example is the decline in shipments of Chilean cellulose to the Asian giant.