Tag Archives: china

The Bloody Battle for Chip Hegemony

Intel chip. Image from wikipedia

China’s Tsinghua Unigroup Ltd., a state-owned firm is spending $24 billion to build the country’s first advanced memory-chip factories. It’s part of the Chinese government’s plan to become a major player in the global chip market and the move is setting off alarms in Washington.  When Unigroup tried to buy U.S. semiconductor firms in 2015 and 2016, Washington shot down the bids. It is considering other moves to counter Beijing’s push.

China is aiming “to take over more and more segments of the semiconductor market,” says White House trade adviser Peter Navarro, who fears Beijing will flood the market with inexpensive products and bankrupt U.S. companies.  Unigroup’s CEO Zhao Weiguo says he is only building his own factories due to Washington’s refusal to let him invest in the U.S. “Chinese companies have faced discrimination in many areas,” of technology, he says. “Abnormal discrimination.”

Semiconductors—the computer chips that enabled the digital age and power the international economy—have long been among the most globalized of industries, with design and manufacturing spread across dozens of countries.

Today, the industry is riven by a nationalist battle between China and the U.S., one that reflects broad currents reshaping the path of globalization. Washington accuses Beijing of using government financing and subsidies to try to dominate semiconductors as it did earlier with steel, aluminum, and solar power. China claims U.S. complaints are a poorly disguised attempt to hobble China’s development. Big U.S. players like Intel Corp. and Micron Technology Inc. find themselves in a bind—eager to expand in China but wary of losing out to state-sponsored rivals…

The new semiconductor battle marks a shift toward nationalism, trade battles and protected markets…The U.S. estimates China will eventually spend $150 billion [on developing s its indigenous semiconductor industry]  a figure equal to about half of global semiconductor sales annually.

Though Republicans and Democrats are at odds on many economic policy issues, they’re unified on this. An interagency working group on semiconductors, started by the Obama administration in 2015, has continued meeting under President Donald Trump. The group is weighing policies to make it more difficult for China to scoop up U.S. technology, according to people involved in the discussions.

One idea is tightening the rules covering U.S. approval of foreign investments to make it tougher for Chinese firms seen as security risks. Other options include trade sanctions, stricter export controls and added federal research spending

The U.S. views China as its biggest semiconductor challenge since Japan in the late 1980s. The U.S. triumphed then through trade sanctions and technological advances. Japanese firms couldn’t match U.S. microprocessor technology, which powered the personal computer revolution, and fell behind South Korea in low-margin memory chips.

China has advantages Japan didn’t. It is the world’s biggest chip market, consuming 58.5% of the global $354 billion semiconductor sales in 2015 according to PricewaterhouseCoopers LLP. That gives Beijing power to discriminate, if it wants, against overseas suppliers…Beijing’s semiconductor program shifted into high gear in 2012, when the value of its chip imports surged past its bill for crude oil for the first time…

Nearly 90% of the $190 billion worth of chips used in China are imported or produced in China by foreign-owned firms…The top 10 chip vendors in China by revenue are foreign.

“We cannot be reliant on foreign chips,” said China’s vice premier, Ma Kai in 2017…Beijing created a $20 billion national chip financing fund—dubbed the “Big Fund”— and set goals for China to become internationally competitive by 2030, with some companies becoming market leaders.  Local governments created at least 30 additional semiconductor funds, with announced financing of more than $100 billion. If all these projects are realized, the global supply of memory chips would outstrip demand by about 25% in 2020, estimates Bernstein Research, pushing prices down and battering profits of semiconductor companies globally… Beijing has been consolidating 600 small Chinese chip makers, many unprofitable, into a handful of larger companies China wants to compete internationally.

When the Big Fund financed an acquisition blitz, Unigroup was in the lead, bidding in 2015 for memory-chip maker Micron Technology, and then for a 15% stake in data storage firm Western Digital Corp.Some bids were so overvalued U.S. government officials joked the Chinese were willing to pay an “espionage premium.”  After a Chinese plan to buy a Royal Philips NV semiconductor-material unit fell apart, Phillips sold the unit to a U.S. private-equity group for about half the earlier price. Philips declined to comment.

The bids spooked Washington and the industry. In private meetings, Micron, Intel and others warned they faced an “existential threat” from China, say industry and government officials. The companies feared they were trapped in a prisoner’s dilemma. Each company was under pressure to sell to China for fear its competitors would sell if it didn’t.

In July 2017, Germany approved restrictions on foreign technology purchases, aimed at China, and the European Union also is considering barriers… The U.S. Committee on Foreign Investment in the U.S (CFIUS), an interagency review group, made clear most proposed acquisitions wouldn’t pass muster.

According to Rhodium Group, only about $4.4 billion in Chinese semiconductor acquisitions were completed since 2015. Unigroup’s bid for Micron fell apart. South Korea, Taiwan and Japan also blocked Chinese acquisition bids…

Mr. Trump proposed a 13% decrease in federal funding for basic research to $28.9 billion in fiscal year 2018, but semiconductor lobbyists say they hope to eke out an increase for chip-related research.

Chinese chip executives argue South Korea is a bigger threat to the U.S. chip industry due to its advanced technology.

After Unigroup’s plan to acquire Micron fell apart, it hired Charles Kau, the former head of Micron’s Taiwan joint-venture, and other experts from the island. It announced it would build its own memory chip facility—the mammoth Wuhan factories—at about the same price it would have paid for Micron.  Unigroup now has a new plan for Micron. It says it no longer wants to buy the firm, recognizing the chances of regulatory approval in the U.S. are nil, but says the two should work together to battle market leader Samsung Electronics Co. The combination of Micron technology and Chinese capital would help both companies take on the South Koreans, says Mr. Zhao, the Unigroup CEO.

Micron says the Federal Bureau of Investigation has begun investigating whether Micron employees in Taiwan who went to work for other firms, including Unigroup, have taken Micron technology with them.”

Excerpts from Bob Davis and Eva Dou. CHINA’S NEXT TARGET: U.S. MICROCHIP HEGEMONY, Wall Street Journal, July 28, 2017

Greek Debt Unsustainable: the Wikileaks Cables

Greek protests in front of Greek parliament

2011 Euro-crisis, Wikileaks Cables

Discussing the Greek financial crisis with her personal assistant on 11 October, German Chancellor Angela Merkel professed to be at a loss as to which option–another haircut or a transfer union–would be best for addressing the situation. (The term “haircut” refers to the losses that private investors would incur on the current net value of their Greek bond holdings.) Merkel’s fear was that Athens would be unable to overcome its problems even with an additional haircut, since it would not be able to handle the remaining debt. Furthermore, she doubted that sending financial experts to Greece would be of much help in bringing the financial system there under control. Within the German cabinet, Finance Minister Wolfgang Schnaeuble alone continued to strongly back another haircut, despite Merkel’s efforts to rein him in, while France and European Commission President Jose Manuel Barroso were seen to be in favor of a gentler approach. European Central Bank President Jean-Claude Trichet was solidly opposed, with IMF Managing Director Christine Lagarde described as undecided on the issue. Finally, Merkel believed that action must be taken to enact a Financial Transaction Tax (FTT); doing so next year, she assessed, would be a major step toward achieving some balance in relief for banks. In that regard, the Germans thought that pressure could be brought to bear on the U.S. and British governments to help bring about an FTT.

Euro-crisis Wikileaks Cables: EU Summit: Germans Prepared to Oppose Special Solutions for Greek Financial Crisis

…German Chancellery Director-General for EU Affairs Nikolaus Meyer-Landrut provided on 14 October, 2011 an overview of what Berlin planned to ask for and would be prepared to support. First, the German government wanted solutions that work within the context of current European legislation; accordingly, it would not agree to giving the European Financial Stability Facility (EFSF) a banking license, establishing a joint EFSF-European Central Bank Special Purpose Vehicle, or any other measures that would require legislative changes among the member states. On the other hand, the Germans would support a special IMF fund into which the BRICS (Brazil, Russia, India, China, and South Africa) nations would pool funds for the purpose of bolstering eurozone bailout activities. Meyer-Landrut also believed that a resolution of the Greek crisis will require greater private-sector involvement than was first thought, and that the eurozone must look beyond the technical aspects of a deal and focus instead on the actual progress that Greece will have to make, as regards both legislation and implementation. It was his further opinion that a full-term team will have to be ensconced in Athens for the purpose of monitoring the situation.

A Golden Opportunity: Russia and China Collaboration

china-russia-map (1)

Relations between China and Russia have been growing closer since the end of the cold war. Both, for different reasons, resent America’s “hegemony” and share a desire for a more multipolar world order. Russia, a declining great power, is looking for ways to recover at least some of its lost status; whereas China, a rising power, bridles at what it sees as American attempts to constrain it…..

But there have been occasional tensions. Russia played a key role during the 1990s in helping China to modernise its military forces. Russia was able to preserve a defence-industrial base that would otherwise have withered from lack of domestic orders. But since the middle of the last decade, irked by China’s theft of its military technology and its consequent emergence as a rival in the arms market, Russia’s weapons sales to its neighbour have slowed.

Russia is also wary of becoming little more than a supplier of natural resources to China’s industrial machine—a humiliating position for a country that until recently saw China as backward. As long as Russia could sell to Europe all the gas required to keep the Russian economy growing, it could put deals with China on hold. These included plans for two gas pipelines from Siberia into China that were announced in 2006 and then quietly dropped as the two sides bickered over prices.

All that has changed. The Ukrainian crisis is, as Russian media put it, forcing Russia to “pivot” its economy towards Asia in an effort to lessen the impact of Western sanctions by finding alternative markets and sources of capital. For China it is a golden opportunity to gain greater access to Russia’s natural resources, at favourable prices, as well as to secure access to big infrastructure contracts that might have gone to Western competitors and to provide financing for projects that will benefit Chinese firms.

But China abstained from voting on the UN Security Council resolutions condemning Russia, while Chinese media have given Russia strong support. China has quietly welcomed a new cold war in Europe that might distract America from its declared “rebalancing” towards Asia.

Striking evidence of the new closeness between China and Russia was a $400 billion gas deal signed in May 2014 under which Russia will supply China with 38 billion cubic metres (bcm) of gas annually from 2018 for 30 years. At China’s insistence, the gas will come from new fields in eastern Siberia and will pass through an as yet unbuilt pipeline—the better for ensuring that it will not be diverted elsewhere. Other deals have followed. The biggest was a preliminary agreement signed in November 2014  for Russia to sell an additional 30 bcm a year through a proposed pipeline from western Siberia. In every instance it is probable that China was able to drive a hard bargain on price.

Russia’s weakness was also clear in its recent decision to resume high-tech arms exports to China. In April it agreed to sell China an air-defence system, the S-400, for about $3 billion. This will help give China dominance of the air over Taiwan and the Senkaku islands (Diaoyu to the Chinese, who dispute Japan’s claim to them). In November 2014 Russia said it was prepared to sell China its latest Sukhoi-35S combat aircraft. Initially it had refused to sell any fewer than 48, in order to make up for losses it calculated it would suffer as a result of China’s inevitable pilfering of the designs. Now it has meekly agreed to sell only 24.

But problems ahead are discernible. One is that both countries are competing for influence in Central Asia, once Russia’s backyard (Mr Xi was due to head there before proceeding to Moscow). Mr Putin wants to establish his Eurasian Economic Union partly to counter growing Chinese economic power in Central Asia, through which China wants to develop what it calls a Silk Road Economic Belt. China is using the Shanghai Co-operation Organisation (SCO), of which Russia and Central Asian nations are also members, to boost its security ties in the region as well: it often holds counter-terrorism exercises with its SCO partners.

Russia and China: An Uneasy Friendship, Economist, May 9, 2015, at 37.

Who is Afraid of China? the silk road dreams

Silk Road, image from wikipedia

Xi Jinping, China’s president, is leading the new charge. In September 2013 he outlined plans to reinvigorate the ancient Silk Road with a modern network of high-speed rail, motorways, pipelines, ports and fibre-optic cables stretching across the region. The economic highway he envisages follows three routes: one running from central China through Central Asia and the Middle East; a maritime route extending from the southern coast; and a third branching out from Yunna…Countries bordering on China are wary of its ambitions. They are concerned partly about China’s economic clout, fretting that it will derive disproportionate benefits from the links. (Many of the goods, such as drugs and guns, which Laos and Myanmar have to trade are illegal.) Chinese goods, they worry, may flood their markets and drown their own nascent industries. China enjoys the electricity generated by dams that raise the risk of flash floods downstream. Neighbours grumble that China’s emphasis is on laying tarmac and iron rather than sharing technical know-how, and that it often uses Chinese workers rather than their own citizens.

Stretching the Threads: The New Silk Road, Economist,  Nov. 29, 2014, at 41

Ports for Sale– China Buys

 

Piraeus Container Terminal (PCT) built by China in Greece 2009

The old port of Colombo, Sri Lanka took centuries to reach its present capacity. China will have almost doubled it in under 30 months. Operated at full capacity, it would make Colombo one of the world’s 20 biggest container ports.  In the eyes of some Indians, Colombo is part of a “string of pearls”—an American-coined phrase that suggests the deliberate construction of a network of Chinese built, owned or influenced ports that could threaten India. These include a facility in Gwadar and a port in Karachi (both in Pakistan); a container facility in Chittagong (Bangladesh); and ports in Myanmar.

Is this string theory convincing? Even if the policy exists, it might not work. Were China able to somehow turn ports into naval bases, it might struggle to keep control of a series of Gibraltars so far from home. And host countries have mood swings. Since Myanmar opened up in 2012, China’s influence there has decreased. China love-bombed the Seychelles and Mauritius with presidential visits in 2007 and 2009 respectively. But since then India has successfully buttered up these island states and reasserted its role in the Maldives. Besides, China’s main motive may be commerce. C. Raja Mohan, the author of “Samudra Manthan”, a book on Sino-Indian rivalry in the Indian and Pacific Oceans, argues that China’s port bases partly reflect a desire to get easier sea access for trade to and from west China.

State-owned firms are in charge of most of China’s maritime activity, and their motives are at least partly commercial…China’s maritime interests already reflect its status as the world’s largest exporter and second-largest importer. Many of the world’s biggest container ports are in China. It controls a fifth of the world’s container fleet mainly through giant state-owned lines. By weight, 41% of ships built in 2012 were made in China.

The next step is to own and run ports. Hutchison Whampoa, a buccaneering, privately owned Hong Kong conglomerate, has long had a global network of ports. The pioneer among mainland firms was Cosco Pacific, an affiliate of state-owned Cosco, China’s biggest shipping line. In 2003-07 it took minority stakes in terminals in Antwerp, Suez and Singapore. In 2009 it took charge of half of Piraeus Port in Greece. It has invested about $1 billion abroad. China Merchants Holdings International, a newcomer, has spent double that. It invested in Nigeria, as well as Colombo, in 2010. Last year it took stakes in ports in Togo and Djibouti. In January it bought 49% of Terminal Link, a global portfolio of terminals run by CMA CGM, an indebted French container line.

The pace is quickening. In March another firm, China Shipping Terminal, bought a stake in a terminal in Zeebrugge in Belgium. On May 30th China Merchants struck a multi-billion deal to create a port in Tanzania. Even the more cautious Cosco Pacific is thinking about deals in South-East Asia and investing more in Greece.

China Shipping Terminal has small stakes in facilities in Seattle and Los Angeles, according to Drewry, a consultancy. But the experience of Dubai’s DP World suggests that America would not roll out a red carpet. In 2006 DP abandoned plans to buy American ports after a political backlash. Some Americans worry that China wants to take over the Panama canal.

Chinese firms may also subscribe to a supersized vision of the industry in which an elite group of ports caters to a new generation of mega-vessels. These will be more fuel-efficient and link Asia and Europe (they can just squeeze through the Suez Canal). After a decade of hype these behemoths are now afloat. In May CMA CGM received the Jules Verne, the world’s largest container ship. It can handle 16,000 containers and has a 16-metre (52-feet) draft. In July Maersk, a Danish line, will launch an 18,000-container monster. It has ordered 20 from Daewoo, in Korea. China Shipping Container Lines, the country’s second biggest firm, has just ordered five 18,400-container vessels from Hyundai.  Some ports may struggle to cater to these ships. Some of China’s new terminals may try to exploit that. Cosco Pacific is building a dock at Piraeus that can handle mega-ships. Colombo is deep enough for ships with an 18-metre draft. Its cranes can cope with ships 24 containers wide. Nothing in India compares with that…

After political tensions in the South China Sea, China Merchants has withdrawn from a port project in Vietnam. But Cosco’s Piraeus investment, once controversial, is a success, with profits rising and the firm winning plaudits for investing and creating jobs for Greeks.

China’s port strategy is mainly motivated by commercial impulses. It is natural that a country of its clout has a global shipping and ports industry. But it could become a flashpoint for diplomatic tensions. That is the pessimistic view. The optimistic one is that the more it invests, the more incentive China has to rub along better with its trading partners. This, not deliberate expansionism, is what the locals are betting on in Colombo.

China’s foreign ports: The new masters and commanders, Economist,  June 8, 2013

Bay of Bengal: ports against fishing

Strait_of_Malacca. Image from wikipedia

Bangladesh’s Chittagong, has… become a bottleneck. The Bangladeshis are modernising it… China is putting $200m towards upgrading the airport at Cox’s Bazar, the country’s southernmost tip, to attract investment and tourists.

Myanmar’s …new government, keen for foreign inflows to help rebuild the economy, has been approving projects that sat idle for years. Sittwe is one, but it looks small compared with the Dawei project on Myanmar’s Tenasserim coast… a deepwater port, industrial zone and highways to connect it with distant Bangkok, estimated to cost $8.5 billion.Thailand’s rulers dabbled for centuries with the idea of building a canal across the Kra isthmus, which would link their own gulf directly to the Andaman Sea and save days of costly shipping through the Strait of Malacca. Dawei should do the trick…. The Japanese are taking advantage of Myanmar’s opening to build a riverine port called Thilawa, south of Yangon.

The Chinese are exploring ways round their own Malacca-strait dilemma. They have been building new oil and gas pipelines across the whole of Myanmar starting from a new port-terminal at Kyaukphyu, near Sittwe….China’s activity in the Bay of Bengal is purely “defensive” [some say] but Indians versed in the “string of pearls” theory, which sees Chinese-built ports encircling India, will not be much comforted.

Amid the sometimes airy speculation, it is relatively easy to predict the effects on the repurposed waters of the bay. Yugraj Yadava, the director of an environmental watchdog in Chennai, says increased shipping is already eroding traditional livelihoods and polluting the sea. About 31% of the world’s coastal fishermen live and work on the Bay of Bengal, and they stand to lose huge tracts to the port-builders (and to rising sea levels, too). Mr Yadava says the bay still has some of the world’s healthiest natural fisheries, but they are under threat, not least from non-native species that stow away in long-haulers’ ballast.

Collisions between fishing vessels and commercial ships are becoming more frequent, as are snagged nets. All this will probably accelerate in the next few years. Before the Bay of Bengal falls victim to its new-found popularity, it might be good if some of its beneficiaries were to build a transnational maritime authority, to limit the damage.

Excerpts, The Bay of Bengal: New bay dawning, Economist,Apr. 27, 2013, at 40

The Flight of Gold: what Afghanistan, China and Iran have in common

gold

Packed into hand luggage and tucked into jacket pockets, roughly hewed bars of gold are being flown out of Kabul with increasing regularity, confounding Afghan and American officials who fear money launderers have found a new way to spirit funds from the country.  Most of the gold is being carried on commercial flights destined for Dubai, according to airport security reports and officials. The amounts carried by single couriers are often heavy enough that passengers flying from Kabul to the Persian Gulf emirate would be well advised to heed warnings about the danger of bags falling from overhead compartments. One courier, for instance, carried nearly 60 pounds of gold bars, each about the size of an iPhone, aboard an early morning flight in mid-October, according to an airport security report. The load was worth more than $1.5 million.

The gold is fully declared and legal to fly. Some, if not most, is legitimately being sent by gold dealers seeking to have old and damaged jewelry refashioned into new pieces by skilled craftsmen in the Persian Gulf, said Afghan officials and gold dealers.  But gold dealers in Kabul and current and former Kabul airport officials say there has been a surge in shipments since early summer. The talk of a growing exodus of gold from Afghanistan has been spreading among the business community here, and in recent weeks has caught the attention of Afghan and American officials. The officials are now puzzling over the origin of the gold — very little is mined in Afghanistan, although larger mines are planned — and why so much appears to be heading for Dubai.

“We are investigating it, and if we find this is a way of laundering money, we will intervene,” said Noorullah Delawari, the governor of Afghanistan’s central bank. Yet he acknowledged that there were more questions than answers at this point. “I don’t know where so much gold would come from, unless you can tell me something about it,” he said in an interview. Or, as a European official who tracks the Afghan economy put it, “new mysteries abound” as the war appears to be drawing to a close.

Figuring out what precisely is happening in the Afghan economy remains as confounding as ever. Nearly 90 percent of the financial activity takes place outside formal banks. Written contracts are the exception, receipts are rare and statistics are often unreliable. Money laundering is commonplace, say Western and Afghan officials.  As a result, with the gold, “right now you’re stuck in that situation we usually are: is there something bad going on here or is this just the Afghan way of commerce?” said a senior American official who tracks illicit financial networks.

There is reason to be suspicious: the gold shipments track with the far larger problem of cash smuggling. For years, flights have left Kabul almost every day carrying thick wads of bank notes — dollars, euros, Norwegian kroner, Saudi Arabian riyals and other currencies — stuffed into suitcases, packed into boxes and shrink-wrapped onto pallets. At one point, cash was even being hidden in food trays aboard now-defunct Pamir Airways flights to Dubai.

Last year alone, Afghanistan’s central bank says, roughly $4.5 billion in cash was spirited out through the airport. Efforts to stanch the flow have had limited impact, and concerns about money laundering persist, according to a report released last week by the United States Special Inspector General for Afghanistan Reconstruction.  The unimpeded “bulk cash flows raise the risk of money laundering and bulk cash smuggling — tools often used to finance terrorist, narcotics and other illicit operations,” the report said. The cash, and now the gold, is most often taken to Dubai, where officials are known for asking few questions. Many wealthy Afghans park their money and families in the emirate, and gold dealers say more middle-class Afghans are sending money and gold — seen as a safeguard against economic ruin — to Dubai as talk of a postwar economic collapse grows louder. But given Dubai’s reputation as a haven for laundered money, an Afghan official said that the “obvious suspicion” is that at least some of the apparent growth in gold shipments to Dubai is tied to the myriad illicit activities — opium smuggling, corruption, Taliban taxation schemes — that have come to define Afghanistan’s economy.

There are also indications that Iran could be dipping into the Afghan gold trade. It is already buying up dollars and euros here to circumvent American and European sanctions, and it may be using gold for the same purpose.  Yahya, a dealer in Kabul, said other gold traders were helping Iran buy the precious metal here. Payment was being made in oil or with Iranian rials, which readily circulate in western Afghanistan. The Afghan dealers are then taking it to Dubai, where the gold is sold for dollars. The money is then moved to China, where it was used to buy needed goods or simply funneled back to Iran, said Yahya, who like many Afghans uses a single name.

Excerpt, MATTHEW ROSENBERG, An Afghan Mystery: Why Are Large Shipments of Gold Leaving the Country?, NY Times, Dec. 15, 2012

Rio+20 Earth Summit; agenda and prospects

The Rio+20 United Nations Conference on Sustainable Development is much bigger than its [three] predecessors — Stockholm in 1972,-

A Continent for Sale through Queensway

According to The Economist,

Angola…is a partner in a syndicate founded by well-connected Cantonese entrepreneurs who, with their African partners, have taken control of one of China’s most important trade channels. Operating out of offices in Hong Kong’s Queensway, the syndicate calls itself China International Fund or China Sonangol. Over the past seven years it has signed contracts worth billions of dollars for oil, minerals and diamonds from Africa.

These deals are shrouded in secrecy. However, they appear to grant the Queensway syndicate remarkably profitable terms. If that is right, then they would be depriving some of the world’s poorest people of desperately needed wealth. Because the syndicate has done deals with the regimes in strife-torn places, such as Zimbabwe and Guinea, it may also have indirectly helped sustain violent conflicts…

The syndicate is built on links forged during the cold war. It is largely the creation of a man known as Sam Pa. Though he uses several names, he was born Xu Jinghua. After attending a Soviet academy in Baku four decades ago, say people who have looked into his career, he traded with Angola during its civil war, which lasted from 1975 to 2002 and over the years was a proxy battleground for several outside powers, including China, America, Cuba, the Soviet Union and South Africa. Mr Pa is a private and rarely photographed person. His name appears in few syndicate documents. He is believed to exert control through Veronica Fung, who may be a member of his family. She controls 70% of a core company, Newbright International. The two frequently travel in Africa, using the syndicate’s fleet of Airbus jets. They are said sometimes to bypass customs.

Mr Pa has several Chinese partners, according to a 2009 American congressional report. The daughter of a Chinese general, Lo Fong Hung, married to Wang Xiangfei, a well-connected banker, controls 30% of Newbright. Mrs Lo is the public face of China International Fund and China Sonangol. She is listed as a director of dozens of interconnected companies. The business’s operations were initially entrusted to the head of a privatised engineering firm from the mainland, Wu Yang. Later, African partners took over.

Although the Queensway syndicate has sometimes been suspected of being an arm of the Chinese government, there is little evidence of that. Indeed, it has often been the butt of criticism from Chinese officials. More likely it was set up to take advantage of a new strategy by the Chinese government, known as the “going out” policy. In 2002, after decades of commercial isolation, China started encouraging entrepreneurs to venture abroad. Short of contacts, Mr Pa teamed up with Hélder Bataglia, a Portuguese trader who had grown up in Angola and had links to Latin America. Together in 2004 they visited Néstor Kirchner, the president of Argentina, and Hugo Chávez, the president of Venezuela. Mr Chávez welcomed them on his weekly television show “Aló Presidente”, where Mr Pa grandiloquently declared: “This is an historic day because we are taking part in your programme.”…..

In late 2004 Mr Pa travelled to Angola. He knew President José Eduardo dos Santos, having first met him as a student in Baku and later traded with his guerrilla army. Mr Pa’s new partner, Mr Bataglia, also knew the guerrillas from having supplied them with food during the civil war. They were joined by a third trader, Pierre Falcone, a French Algerian who has long enjoyed close links with the Angolan elite and particularly the president.

Together the men persuaded the Angolan elite to channel their fast-expanding oil exports to China through a new joint venture, called China Sonangol. Mr Vicente, boss of Angola’s Sonangol, became its chairman. Contracts, signed in 2005, gave the company the right to export Angolan oil and act as middleman between Sonangol and Sinopec, one of China’s oil majors.

China Sonangol threw itself into the business, according to Angolan oil ministry records and applications for bank loans backed by oil shipments. The official statistics are incomplete, but good sources have concluded that almost all of China’s imports of oil from Angola—worth more than $20 billion last year—come from China Sonangol. By contrast, China’s state-owned oil companies have no direct interest in Angolan oilfields, one of their two biggest sources of crude. Their names do not show up on the map of concessions.

By 2009 the syndicate was trading a lot of Angolan oil and decided to expand to other African countries. Mr Vicente, both head of the Angolan state oil company and of China Sonangol, flew to Guinea in 2009 to arrange a deal for the syndicate. One of the people he met was Mahmoud Thiam, Guinea’s minister of mines, whose government had come to power the same year in a coup. Mr Thiam is an American citizen who studied at Cornell University and had previously worked as a Wall Street banker at Merrill Lynch and UBS.

With Mr Thiam’s support, the syndicate won the chance to become a partner in a new national mining company. This would control the state’s share of existing projects and, much more important, gain control of future projects in what is a relatively undeveloped mineral territory. Guinea contains the world’s largest reserves of bauxite and its largest untapped reserves of high-grade iron ore. Under a contract signed by Mr Vicente, the syndicate got an 85% share in a venture called the African Development Corporation. The government received the other 15%. The venture won exclusive rights to new mineral concessions in Guinea, including the right to negotiate oil-production contracts in the Gulf of Guinea. In return, the syndicate promised to invest “up to $7 billion” in housing, transport and public utilities, according to the government of Guinea (GDP $4.5 billion).

Ultimately this deal foundered on a Guinean election, but at the time the Queensway syndicate was so pleased that it reportedly gave Guinea’s military ruler a helicopter as a present. Mr Thiam began to travel with representatives for the syndicate—though in a response to our questions (and as the only person to reply to us) he says he was representing the Guinean government’s shareholding in the joint venture and he denies ever having become one of its employees. Mr Thiam went to Madagascar for the negotiation of a deal modelled on the one he made on Guinea’s behalf. Simultaneously, he carried on as mines minister for another year.

Around the same time, Zimbabwe also caught the syndicate’s eye. Mr Pa met Happyton Bonyongwe, the head of the Central Intelligence Organisation (CIO), the country’s notorious secret police, which helps to keep Robert Mugabe in power. Mr Pa’s plane frequently showed up at the Harare airport and he bought properties in the capital, including the 20-storey Livingstone House. His two original partners, Mrs Fong and Mrs Lo, became directors in a new company, called Sino-Zimbabwe Development Limited, which received rights to extract oil and gas, and to mine gold, platinum and chromium. In return, the company publicly promised to build railways, airports and public housing. These pledges were valued at $8 billion by Mr Mugabe’s government.

By 2009 the Queensway syndicate spanned the globe from Tanzania and Côte d’Ivoire to Russia and North Korea and on to Indonesia, Malaysia and America. It had bought the JPMorgan Chase building at 23 Wall Street in New York.

Nobody should begrudge an entrepreneur commercial success. And China needs the raw materials that the Queensway syndicate can supply. However, there are three worries about the syndicate’s conduct.  The first is personal gain. The terms under which China Sonangol buys oil from Angola have never been made public. However, several informed observers say that the syndicate gets the oil from the Angolan state at a low price that was fixed in 2005 and sells it on to China at today’s market prices. The price at which the contract was fixed is confidential, but Brent crude stood at just under $55 a barrel in 2005; today it is trading above $100.

In return for Angolan oil, the syndicate promised to build infrastructure, including low-cost housing, public water-mains, hydroelectric plants, cross-country roads and railways, according to the government. The country desperately needs such things, to be sure. But their value is unlikely to exceed several billion dollars. That looks like a poor deal for the Angolan people.

In Angola accusations of personal enrichment percolate up towards the top of the state structure. In 2006 the head of the external intelligence service, General Fernando Miala, alleged that $2 billion of Chinese money intended for infrastructure projects had disappeared. He claimed that the funds had been transferred to private accounts in Hong Kong by senior officials, though without naming people mentioned in this article. The general was swiftly sacked, tried and imprisoned (he may, however, now be about to make a comeback to government).

Parts of the Angola-China oil trade appear to be contaminated by conflicts of interest. The Angolan president’s son is said to be a director of China Sonangol, the main trading partner of the state oil company. The Economist’s requests for comment to the companies went unanswered. As well as running both the state oil company and its main customer, Mr Vicente is a director of private shell companies linked to the syndicate. Although these may exist for tax purposes, a report on foreign corruption, prepared last year by the American Senate, reveals that Sonangol was deemed so corrupt in 2003 that Citibank closed all its accounts. The report also says that Mr Vicente personally owns 5% of Sonangol’s house bank which has assets worth $8.2 billion. According to the IMF and the World Bank, billions of dollars have disappeared from Sonangol’s accounts. At one point, Sonangol awarded Mr Vicente a 1% ownership stake in the company he chairs. He was forced to give it back after a public outcry in Angola.

In Guinea criticism is focused on the former mines minister. An unpublished 2009 WikiLeaks cable quotes an American mining executive, whose company stood to lose business in Guinea because of the syndicate, complaining that Mr Thiam has “personally benefited from promoting [the] China International Fund”. Mr Thiam denies this. As a former Wall Street banker, he already had money before he returned to the country of his birth.

The second complaint about the Queensway syndicate is that in Africa it has failed to meet many of the obligations it took on to win mining licences. Zimbabwe is still awaiting even a fraction of its promised infrastructure. Guinea never received the 100 public buses that were meant to arrive within 45 days of the 2009 deal.

The situation in Angola is more complicated, though also disappointing. Chinese contractors have built some housing and railway lines and the projects were at first financed by the syndicate. Signs saying “China International Fund” appeared on construction sites. But in recent years they have been replaced by those of other Chinese companies. According to Western diplomats and Chinese businessmen, the syndicate stopped paying bills for more than eight months in 2007. All work stopped, 2,000 Angolan day labourers were fired on the Benguela railway project and only a Chinese cook remained on duty. Western diplomats suspected the syndicate was banking on being bailed out by the Angolan government, which had staked its legitimacy on infrastructure development. Soon enough, the government issued treasury bonds worth $3.5 billion to finance the projects. Subcontractors are now paid directly by the Angolan state.   Six years after the syndicate arrived more than 90% of the residents of the capital, Luanda, remain without running water. Meanwhile, the syndicate has continued to prosper.

The third complaint against the Queensway syndicate is that its cash props up certain political leaders and thereby fuels violent conflicts. For instance, in Guinea the syndicate came to the rescue of the junta. In September 2009 government men went on the rampage, raping women by the score and massacring more than 150 protesters in a sports stadium, which triggered EU and African Union sanctions. A month later, the syndicate signed its minerals deal, transferring $100m to the cash-strapped junta. Bashir Bah, a member of the opposition, condemned the deal. “First of all it is immoral, and second of all it is illegal,” he said.

The deal caused outrage even inside the government. The prime minister, Kabine Komara, a relatively powerless figure, protested about ministers’ conduct to other officials. A memo from the prime minister’s office, dated November 26th and leaked to Global Witness, declared: “The council of ministers did not discuss or bring up the question of creating a national mining company. What’s more it is not acceptable that a foreign company could become a shareholder in such a company, as it would grant the company, ipso facto, the ownership of all the current and future wealth of the country.” Mr Thiam denies any knowledge of Mr Komara’s complaint.

According to international institutions, the military leaders, who backed Mr Thiam, needed the syndicate’s money if they were to hold on to power. A World Bank official told Western diplomats the junta would “sell the country short on mining revenues and tell the international donors to get lost”. The junta eventually fell and, following elections last year, the minerals deal is now in limbo.

In Zimbabwe the situation is even more egregious. The finance minister, an opposition member of the governing coalition, has blocked extra funding for the CIO, presumably because it backs Mr Mugabe. And yet, it is suddenly flush with cash. In recent months it has reportedly doubled the salaries of agents, acquired hundreds of new off-road vehicles and trained thousands of militiamen who are now in a position to intimidate voters during next year’s elections. Several sources who have looked at the deal concluded that the money came from Mr Pa. They say he struck a side deal with the CIO that gives him access to Zimbabwe’s vast diamond wealth—controlled in part by the CIO. The diamonds were for some years banned from reaching international markets because of global industry prohibitions over violence routinely inflicted on Zimbabwean miners. Yet, Mr Pa is said to buy them and apparently makes payments directly to the CIO, bypassing government coffers.

Little is certain about China Sonangol and China International Fund. Our repeated questions to the companies and their representatives went unanswered. The documents and witnesses we tracked down around the world paint an incomplete picture. But they raise questions of immense public interest.

Oversight of the Queensway syndicate’s businesses is almost non-existent. A decade ago Mr Vicente forbade foreign oil companies in Angola to publish even routine data, on threat of ejection. Since then Sonangol has published some information on its operations. But oil contracts are treated as state secrets. Revenues from deals with the syndicate go to an opaque agency controlled by the president whose accounts are off-limits even to government ministers. Although Sonangol scores reasonably for some criteria, such as revenue, in rankings by Transparency International and Revenue Watch, two lobbies for corporate openness, it still receives bottom rankings for safeguards against corruption.

The syndicate itself is even more opaque. Who ultimately benefits by how much from the lucrative deals is not clear from public records. The syndicate’s corporate structure is fiendishly complex. Individual companies are not vertically integrated—it is not a group in the usual sense. There is no holding company, though the same people keep cropping up as directors in the records of affiliated companies, which are often owned by shell companies registered in lightly regulated tax shelters. Final beneficial ownership is impossible for an outsider to establish.

All this means that the syndicate taints China’s “going out” policy, a cornerstone of the country’s rise in recent years. When the policy works, African resources are swapped for aid, commercial financing and payments in kind such as public infrastructure. But with the syndicate, billions of dollars meant for schools, roads and hospitals have apparently ended up in private accounts. Rather than fixing Africa’s lack of infrastructure, Chinese entrepreneurs and Africa’s governing elites look as if they are conspiring to use the development model as a pretext for plunder.

Excerpts, China International Fund: The Queensway syndicate and the Africa trade, Economist,Aug. 13, 2011, at 21.

 

The Future of Nuclear Industry after Fukushima:unbeatable renaissance

US investors have been far too focused on the domestic policy toward nuclear power plants and the long lead time required building new reactors. But the reality is that the nation has only one new reactor under construction right now and nine in advanced stages of planning. Compare that to the 27 reactors under construction in China and the 50 additional reactors in advanced stages of planning.  While the US has growth stories of its own, the growth story for nuclear power, much like the growth story for oil and natural gas demand, is centered in the emerging markets.

61 reactors are under construction around the world, with a total maximum capacity of 65 GW. Furthermore, as Jim Fink describes in his recent Investing Daily article, Investing in Nuclear Power Remains a Compelling Choice , in addition to the 61 nuclear reactors under construction right now, 150 more are planned to come online over the next 10 years.

China is home to almost half of all nuclear power capacity (measured in GW) under construction. If we add in India, Russia and South Korea, the total jumps to well over 80 percent. The US, France, Canada and other developed markets are building reactors, but these projects account for only a tiny share of the 65 GW of capacity under construction.

Emerging markets have been even more vociferous in their defense of nuclear power. Five days after the earthquake crippled the Fukushima Dai-ichi plant, China halted approvals for new reactors until a safety review could be conducted and new safety plans put in place. But inspections are already winding down, and the country plans to release its new safety plan and resume approvals in August. Senior Chinese officials have indicated that the country will meet its target of 70 GW of nuclear power capacity by 2020 despite the post-Fukushima freeze.  China can rightfully claim that its fleet of reactors is among the safest in the world because the country is building third-generation plants such as the Westinghouse AP1000, an advanced reactor that can be cooled without access to external power sources. This feature would have prevented the partial meltdown at Fukushima.

Russia also ordered a safety review of its nuclear power plants, but the government has unequivocally stated that it will not abandon nuclear power and will continue to build new power plants. Russia also continues to build plants in other nations, including planned Russian-designed reactors in Turkey and Belarus. In fact, the latter deal was inked after the earthquake hit Fukushima Dai-ichi.

Russian Prime Minister Vladimir Putin has long been a proponent of nuclear power and has criticized Germany’s anti-nuclear stance on several occasions. For example, at a conference in late 2010, Putin chided German business leaders about the country’s plan to gradually phase out its nuclear reactors, observing that “The German public does not like the nuclear power industry for some reason” and adding “I cannot understand what fuel you will take for heating.” He followed up this comment with an incisive joke: You do not want gas, you do not develop the nuclear power industry, so you will heat with firewood?…Then you will have to go to Siberia to buy the firewood.”

But Germany’s decision to accelerate the closure of its nuclear plants will have Russian gas producers laughing all the way to the bank: Germany will need to import more natural gas to offset lost nuclear power capacity and provide baseload power to support the country’s growing dependence on renewable energy sources. Germany already imports more than half of its natural gas from Russia.  Russia’s aggressive build-out of nuclear plants in recent years is partly motivated by a desire to free up more natural gas for export. Ironically, this means that Russia is building nuclear power plants to support Germany’s efforts to shut down its domestic reactors.

Finally, India also ordered a safety review of its nuclear reactors, but Prime Minister Manmohan Singh has emphasized repeatedly that India must make use of nuclear power to meet its growing demand for electricity and emissions targets. Singh stated that safety standards for new Indian reactors would be world-class and that the country stands by its target of increasing nuclear capacity from about 5,000 megawatts ( MW ) today to 20,000 MW by 2020. Singh stated that further expansion is possible after 2020, though no firm decisions have been made.

In the immediate aftermath of Fukushima, many speculated that the Fukushima disaster would strangle the global nuclear renaissance. This jaundiced projection hasn’t come to fruition. Countries that were already anti-nuclear have hardened their stance, but the growth story is intact in China, India, Russia and other emerging markets. In short, the worst accident since Chernobyl has had a surprisingly modest impact on the global nuclear power industry.

Elliott Gue, Developing Markets Driving Growth for Nuclear Energy, NASDAQ, Aug. 3, 2011