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China’s Resource Security, More Supply Chain Diversification, How to Not Win Friends and Influence Policy
News Brief (1/12)
The article of the week is from the Financial Times. China is actively hardening its economy in the event of US sanctions and is prohibiting companies in strategic sectors from listing on its stock exchanges.
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The regulator’s move to refresh the listings guidance underscores Beijing’s efforts to make the country’s equity exchanges serve its national agenda, said analysts. “The Chinese government doesn’t want a market-based stock market,” said Larry Hu, an economist at Macquarie Group in Hong Kong. “It wants one that helps the authority carry out industry policy.
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China’s Resource Security
VERMILION: Last week China’s Minister of Natural Resources stated that China needs to double down on its resource and energy security (CN), especially in the context of a “special situation” (CCP speak for conflict with Taiwan). We will likely see an uptick in Chinese mineral and resources deals in the coming years.
China is making a bigger bet on the huge Simandou iron ore mine in Guinea, which it sees as crucial as it tries to reduce reliance on Australian ore amid geopolitical tensions.
The mine – located in the Simandou mountain range of southern Guinea’s Nzérékoré region – is said to have the world’s largest untapped iron ore reserve of high quality, with an estimated 2.4 billion tonnes.
The deposits have drawn Chinese multinationals including China Baowu Steel Group, the country’s largest iron and steel producer
Erik Hedborg, principal analyst at commodities consultancy CRU Group, said that since Baowu is China’s largest steelmaker and also a state-owned company it can be seen as a representative of the Chinese steel industry.
“With the company taking interest in Simandou, it is clear that the project has gained significant interest from the Chinese steel industry and from the Chinese authorities,” Hedborg said.
He said when Simandou started producing at full capacity it would become the world’s third-largest exporter of iron ore, behind Australia and Brazil, and would make up nearly 10 percent of the global export market.
Afghanistan's Taliban government is to sign a contract with a Chinese firm to drill for oil in the country's north.
It would be the first major energy extraction agreement with a foreign firm since the Taliban took control of Afghanistan in 2021.
The oil extraction agreement would see Xinjiang Central Asia Petroleum and Gas Company (CAPEIC) drilling for oil in the Amu Darya basin, Taliban spokesperson Zabihullah Mujahid said.
"The Amu Darya oil contract is an important project between China and Afghanistan," China's ambassador to Afghanistan Wang Yu told a news conference in the capital Kabul.
A Chinese state-owned company is also in talks over the operation of a copper mine in the east of the country.
VERMILION: Coverage of this event was limited. It seems that many people forget that the Taliban is still a terrorist organization.
Indonesia’s government has approved the first phase of its development of the Tuna offshore gas field in the South China Sea, Reuters reported yesterday, just over a year after a protracted stand-off with China over disputed waters near the Natuna islands.
The announcement was made yesterday by SKK Migas, the country’s upstream oil and gas regulator, which said that the field would require a total investment of around $3.07 billion.
Located in the South China Sea close to the maritime border between Indonesia and Vietnam, the Tuna field is expected to produce 115 million standard cubic feet per day by 2027, Reuters quoted SKK Migas spokesperson Mohammad Kemal as saying. Much of this will reportedly be exported to Vietnam.
VERMILION: This event is particularly important because the “Tuna Field” lies near Natuna, which marks the end of the First Island Chain (FIC). Indonesia’s unwillingness to work with China on this project increases China’s sense of energy insecurity and denies them an excuse to dominate the region.
SYDNEY, Jan 9 (Reuters) - A venture headed by China's Tianqi Lithium (002466.SZ) made an A$136 million ($94.07 million) bid to buy Australian lithium developer Essential Metals (ESS.AX), in a big test of Australian regulators' appetite for Chinese-led foreign investment.
Tianqi Lithium Energy Australia (TLEA), which is 51% owned by Shenzhen- and Hong Kong-listed Tianqi Lithium Corporation and 49% by Australian miner IGO Ltd (IGO.AX), set the bid at 50 Australian cents per share.
The bid was supported by Essential's board which recommended shareholders vote in favour of a deal. An independent expert's report on the offer will be delivered in March.
China's ban on Australian coal seems to be lifting. Reuters reported last week that China Energy Investment Corp had placed an order to buy the commodity from Australia in one of the first deals since 2020.
The bid for Essential was announced as companies race to capitalise on booming lithium prices and demand for the mineral, a key component of electric vehicle batteries, amid a global push to reduce carbon emissions.
VERMILION: Australia needs to work with allies to find alternative export markets and should block Chinese attempts to purchase companies that mine critical resources.
The increasing need to secure energy supplies after easing COVID-19 restrictions has pushed China to gradually resume Australian coal imports and urge domestic miners to boost their already record output.
The lifting of the unofficial ban on Australian coal imports, which were halted in 2020 in a fit of Chinese pique over questions on COVID's origins, is the clearest sign yet of the renewed ties between them.
The resumption is also a reminder of their economic interdependence as Australia's raw materials play a crucial role in fuelling the export-oriented economy of China, the world's biggest coal consumer and producer.
Chinese utilities and steelmakers will now have access to better quality Australian coal, while Australia, which used to be the second-largest coal supplier to China, could recover some of its market share lost to suppliers including Russia and Mongolia.
China's state planner this week allowed three central government-backed utilities and its top steelmaker to resume coal imports from Australia. Mine workers sickened by COVID this winter at key coal hubs in Shanxi and Inner Mongolia has cut output, traders said.
Beijing wants to avoid a repeat of nationwide blackouts from coal shortage in late 2021. China, the world's biggest coal producer and consumer, relies on coal to generate nearly 60% of its electricity.
VERMILION: Beijing is willing to set aside its diplomatic quarrel with Canberra for practical gains.
More Supply Chain Diversification
VERMILION: As we stated in our previous news brief, companies are beginning to actively move their supply chains out of China and this trend is only accelerating. As this continues, it is likely that Beijing will develop retaliatory measures. An example of such could be the prohibition of selling goods made by companies that removed China from their supply chains.
Chinese state media appears to be downplaying concerns that countries such as India could steal China’s crown as the so-called world’s factory in the short term, despite transnational firms diversifying their supply chains away from the world’s second-largest economy.
“India, or any other single country in the world, is unlikely to completely replace China’s position as ‘world factory’ in the short term,” Shanghai Academy of Social Sciences researcher Hu Zhiyong was quoted as saying by the state-owned Economic Daily on Friday.
“It’s even more difficult for India to undertake the difficult task of transferring part of China’s industrial chain.”
Hu also contended that many multinational companies remain wary of investing in India, partly due to its government’s tariffs on foreign-made parts.
The world's third-largest computer maker by shipments told suppliers late last year that it aims to "meaningfully lower" the amount of China-made chips it uses, including those produced at facilities owned by non-Chinese chipmakers, three people with direct knowledge of the matter told Nikkei Asia.
Dell's goal is to have all chips used in its products produced in plants located outside China by 2024, they said.
The move is the latest example of how the tech war between the U.S. and China is accelerating electronics makers' efforts to diversify production away from Asia's biggest economy.
"The goal is quite aggressive. The determined shift involves not only those chips that are currently made by Chinese chipmakers but also at the facilities in China of non-Chinese suppliers," one person with direct knowledge of the matter said. "If suppliers don't have responding measures, they could eventually lose orders from Dell."
Dell's domestic rival HP has also started surveying its suppliers to gauge the feasibility of moving production and assembly away from China, sources said.
In addition to chips, Dell has asked suppliers of other components such as electronic modules and print circuit boards, and product assemblers to help prepare capacity in countries beyond China, like Vietnam, sources added.
India is expected to assemble up to 50 per cent of Apple’s iPhones by 2027, up from fewer than 5 per cent at present, to be on par with the scale of production in mainland China, according to a new report.
“The speed of supply chain migration to India will be accelerated in the future because of the need to diversify risks in light of uncertainties in China’s pandemic control,” said Luke Lin, analyst at the research unit of tech-focused Taiwanese daily newspaper DigiTimes, in a report published on Tuesday.
India, which surpassed the UK last year to rank as the world’s fifth-largest economy, is already predicted to account for up to 25 per cent of total iPhone production by the end of 2023, and as much as 40 per cent by 2025, the report said.
China, where up to 85 per cent of iPhones globally were produced last year, is at risk of losing its dominant role as a manufacturing hub for Apple devices because of US-China decoupling moves, according to Lin. He expected India and Vietnam to be “the biggest beneficiaries” of Apple’s efforts to shift more of its manufacturing supply chain outside China.
VERMILION: Apple has made many statements over the years about shifting supply chains and this process is immensely complicated and expensive.
How to Not Win Friends and Influence Policy
VERMILION: In the wake of its rapid opening up, China is trying to restart its economy and win back foreign investors. In the midst of this effort, they have blocked transit for individuals from Japan and South Korea, have stepped up military activity around Taiwan, ignored requests for calls around deconfliction in the South China Sea, struck a deal with the Taliban (still terrorists), and have stated that Germany is on the wrong side of an ideological conflict. While they will likely be successful in their short-term economic goals, their unyielding aggressive behavior will without a doubt further the development of an anti-China coalition.
But behind the havoc, a fundamental reset is taking place in Xi’s foreign and economic policies. According to Chinese officials and government advisers, Beijing is putting together policies aimed at improving diplomatic ties that have soured badly and boosting a deeply strained economy.
The motivation behind the intended resets — the success of which remains uncertain — derives from a confluence of different economic, social and foreign policy stresses that have reached critical levels, the officials and advisers add.
Several of the new policies and plans represent a fleshing out of the “spirit” of the 20th congress of the Chinese Communist party in October, the most important set-piece event in the Chinese political calendar for five years that established the tone for a series of long-range objectives.
After months of fierce internal politics, Xi secured an unprecedented third term as leader of the CCP and was able to pick a ruling politburo composed exclusively of loyalists. With the congress behind him, Xi is now attempting a course-correction.
From an economic perspective, the main goals are to restore robust growth to China’s slowing economy, improve the lot of hundreds of millions of Chinese rural workers, stabilise the ailing property market and shore up a crisis afflicting the finances of scores of local governments, the officials and government advisers say.
Beijing has suspended port visas and visa-free transit for Japanese and South Koreans in retaliation for Covid-related curbs on travelers from China.
A day after announcing the suspension of regular visa applications for Japanese and South Korean citizens on Tuesday, Beijing also shelved port visas – those applied and granted immediately at the border – and its visa-free transit policy, which allows visitors from the two countries to stay in China for up to six days.
The restrictions were the first retaliatory measures Beijing has taken in response to curbs on Chinese travelers imposed by more than a dozen countries since December.
Japan on Wednesday criticised China’s pause on visa applications for Japanese citizens as “lacking reciprocity”.
Japan has asked travelers from China to provide negative results from a PCR test taken within 72 hours before departure. It has also cancelled flights from China to certain Japanese cities.
The Japanese mission in China asserted that such measures were because of the Covid-19 pandemic and that China’s claims of discrimination were “untrue”.
“However, China has restricted visa issuance for political reasons unrelated to the Covid-19 pandemic. We are regretful for this and have protested through diplomatic channels, demanding that China withdraw this measure,” the office posted on Twitter on Wednesday.
Vermillion: With soaring Covid cases in China, many countries will have to choose between either protecting themselves from potential outbreak or facing Beijing’s wrath.
The Supreme Court in the Philippines on Tuesday declared the country's 2005 energy exploration agreement with Chinese and Vietnamese firms was illegal, ruling the constitution does not allow foreign entities to exploit natural resources.
The decision, on an agreement that expired in 2008, could complicate efforts by China to revive oil and gas exploration talks with the Philippines in areas of the South China Sea that are not in dispute. The court gave no explanation for why the ruling came 14 years after a petition was filed.
China and the Philippines have sparred for decades over sovereignty and natural resources in the South China Sea, which led to a landmark arbitration case in 2016 won by Manila.
Efforts to find a legally viable way to work together on energy exploration have repeatedly hit walls.
The previous Philippine government in June last year abandoned the latest attempt, citing constitutional constraints and issues of sovereignty.
Philippine President Ferdinand Marcos Jr, ahead of a visit to China last week, said his country must find a way to exploit its untapped energy reserves in its exclusive economic zone, even without China's expertise.
China claims jurisdiction over almost the entire South China Sea and the risk of energy activities being disrupted have made it tricky for the Philippines to find foreign partners, despite an arbitration court clarifying what Manila's entitlements were.
Its Supreme Court on Tuesday voided what was a deal between state-run Philippines National Oil Company, China National Offshore Oil Corp and Vietnam Oil and Gas Corporation covering a 142,886 square kilometre (55,169 square mile) area of the sea.
It ruled it was illegal because the constitution stipulates the Philippines state must control and supervise activities and companies involved must be majority Philippine-owned.
VERMILION: Beijing has repeatedly used the promise of joint exploration as a diplomatic olive branch, but now the gas-starved Philippines will likely pursue SCS exploration on their own. The ruling has essentially ended Beijing’s hopes that joint exploration could help in salvaging their claims in the South China Sea. This will raise the risk of conflict with Chinese vessels that regularly contest UN-recognized Philippine waters.
Not Enough Hours in the Day Links:
Matsu authorities chided over alleged smuggling - Taipei Times
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