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Brazil’s Corruption Crisis

You couldn’t make this stuff up.

Next Sunday, President Dilma Rousseff of Brazil faces an impeachment vote in the lower house of Congress. The charge? That she manipulated government accounts to make the deficit look smaller than it really was before the last election.

But that’s ridiculous. Governments always try to downplay the deficit before an election. I’ve covered dozens of elections, and at least one-third of the time it later came out that the government had been hiding how bad the financial situation was. It’s naughty, but it’s not a hanging offence.

Never mind. The knives are out for Dilma Roussef in Brazil, and if she loses the Congressional vote this weekend she is heading straight for impeachment. That would mean that she would be suspended for 180 days even if she ultimately survived the process. So who would take over while Rousseff is on trial?

Vice-President Michel Temer, of course, and he would be more than happy to do that. In fact, a recently leaked audio tape reveals him rehearsing the speech he would make after Rousseff was suspended. “Many people sought me out so that I would give at least preliminary remarks to the Brazilian nation, which I am doing with modesty, caution and moderation…” he modestly begins.

Rousseff was furious, accusing Temer of betrayal (he only led his party out of her coalition government last week), and she now talks about him as the chief conspirator in a coup plot against her democratically elected government. But she shouldn’t worry too much about Temer, because he is also facing impeachment, on the very same charge of cooking the government books to hide the scale of the deficit.

Who would take over if Temer was also impeached? The speaker of the lower house of Congress, Eduardo Cunha, is next in line – but he is facing money-laundering and other grave charges connected with an immense scandal in the state-owned oil company, Petrobras. (His secret Swiss bank accounts hold over $5 million.)

So the job of running Brazil would go to the speaker of the Senate, Renan Calheiros – except that he is also being investigated on the same charges. Indeed, more than 150 members of Congress and government officials are currently facing charges of bribery, corruption and money laundering as part of the “Operation Lava Jato” (Car Wash) investigation into the affairs of Petrobras.

This is not some banana republic. This is Brazil, a country of 200 million people with the sixth biggest economy in the world. Yet the entire political class is under suspicion of criminal behaviour, apparently with good reason, and day after day the streets are full of angry demonstrators.

Brazil has been fully democratic for the past three decades, yet Rousseff now worries openly about a coup. Some of the anti-government demonstrators are openly calling for a military takeover. This is a country in meltdown – but why now? Because the economy has gone belly-up.

The global economy was booming when Rousseff’s Workers Party first came to power in 2003 under the leadership of Luiz Inácio “Lula” da Silva, and Brazil’s economy was booming with it. There was money then for huge social spending – enough to lift 40 million Brazilians out of poverty – and Lula was beloved by all.

But the Crash of 2008 had already taken the bloom off the rose before Dilma Rousseff succeeded Lula in 2011, and Brazil’s export-dependent economy has taken a terrible beating since then. It was growing at 3.5 percent annually under Lula. It was already down to 2.2 percent in Rousseff’s first term, but it shrank at the rate of 4 percent annually in 2014 and 2015.

It’s mostly not Rousseff’s fault, although she could have done better. China, Russia and South Africa have seen similar declines as commodity prices plunged and exports dwindled.

Indeed, among the BRICS, the big, fast-growing economies of the former Third World, only India has escaped. And this collapse in growth is why opinion polls show that 68 percent of Brazilians now want to see Rousseff removed from power.

There is unquestionably a major political crisis in Brazil, but it may not be quite as bad as it looks. The latest head-count suggests that the vote in the lower house of Congress may not produce the two-thirds majority of votes that is needed to impeach Rousseff.

Even if it does, Rousseff can appeal to the Supreme Court. If that fails, the Senate must vote on impeachment – and if it also votes yes, Rousseff can appeal to the Supreme Court again. And so far the military show no signs of wanting to seize power again.

So Rousseff may still be lumbered with the miserable and deeply unpopular task of running a large and boisterous country that is going through a severe cyclical economic downturn for another two and a half years. She’ll probably be glad when her term is up.
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To shorten to 725 words, omit paragraphs 11 and 12. (“The global…2015”)

China: Another Chairman Mao?

Opening the National People’s Congress in Beijing last Saturday, Prime Minister Li Keqiang set China’s growth target for the coming year at 6.5-7 percent, the lowest in decades. Only two years ago, he said that 7 percent was the lowest acceptable growth rate, but he has had to eat his words. He really isn’t in charge of very much any more.

The man who is taking charge of everything, President Xi Jinping, is now turning into the first one-man regime since Deng Xiaoping in the 1980s. The “collective leadership” of recent decades has become a fiction, and Xi’s personality cult is being vigorously promoted in the state-controlled media.

Xi has also broken the truce between the two major factions in the Chinese Communist Party, who might be called the “princelings” and the “populists”. Xi, as the son of a Communist Party revolutionary hero who ended up as vice-premier, is princeling to the core. His centralising, authoritarian style is typical of this privileged breed.

The populists, like Li Keqiang, are generally people who grew up poor, usually in the interior, not in the prosperous coastal cities. They rose to prominence more by merit than by their connections, and they are more alert to the needs of vulnerable social groups like farmers, migrant workers and the urban poor. Most of them have come up through the Communist Youth League, and are known in Chinese as tuanpai (“the League faction”).

Frightened by the non-violent demonstrations that challenged the Communist Party’s monopoly of power in 1989, for almost three decades these two factions have carefully shared power and never attacked each other in public. Xi has now broken that non-aggression pact, authorising open attacks on the “mentality” of the Communist Youth League in the media.

The friction between the factions has grown so great mainly because the Chinese economy is stumbling towards a crisis. Neither faction has a convincing strategy for avoiding the crisis, but each has come to believe that the other’s political style – authoritarian for the princelings, populist for the tuanpai – will make matters worse.

The Communist Party’s dictatorship is founded on an unspoken contract with the population: we will provide constantly rising living standards, and in return you will not question our authority. But no economy can grow at 10 percent a year forever, or even at the currently advertised rate of 6.5-7 percent.

In fact, China’s growth rate actually collapsed about seven years ago, but it has so far been hidden by a binge of debt-fuelled investment. When most of the world went into a deep recession after the financial crisis of 2008, the Chinese regime artificially kept the country’s growth rate up by raising the proportion of GDP devoted to investment in infrastructure to an incredible 50 percent.

In the following five years, China was building a new skyscraper every five days. It built more than 30 new airports, subway systems in 25 cities, the three longest bridges in the world, more than 10,000 km (6,000 miles) of high-speed railway lines, and 40,000 km. (26,000) miles of freeways. Tens of thousands of high-rise residential towers went up around every city.

But the new towers remain largely empty, as do many of the freeways. These are investments that produced jobs at the time, but will not produce an adequate return on investment for many years, if ever. And to finance all this, the government let the country’s debt burden explode, from around 125 percent of GDP in 2009 to 220 percent now.

All of this investment has been counted in the GDP figures, but up to half of it, or maybe even more, is bad debts that will eventually have to be written off. If only half of it is bad debts, then China’s GDP growth in the past five years has really been around 2 percent, not 7-8 percent.

The crisis can be disguised for a while longer by printing more money, which the regime is doing. But that is putting downward pressure on China’s currency, the yuan, which is currently over-valued by around 15-20 percent. Devaluation would give a temporary boost to China’s exports, but it could also trigger an international trade war that would drag everybody’s economy down.

So at the moment China is spending $90 billion in foreign exchange each month to keep the value of the yuan up, but even with its immense foreign exchange reserves that is an unsustainable long-term policy. Sooner or later there is going to be a “hard landing”, and the regime’s very survival may be at risk.

There is no evidence that President Xi Jinping has a better strategy for mastering this crisis than the rival faction, but the storm is obviously approaching and he is battening down the hatches.

In his view, that means taking absolute power and building a personality cult of a sort that has not been seen in China since the demise of Mao Tse-tung. He is certainly not a vicious megalomaniac like Mao, but he clearly believes that he will need total control to get through the storm without a shipwreck.
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To shorten to 725 words, omit paragraphs 9 and 10. (“In the…now”)

Oil Downturn

“The market can stay irrational longer than you can stay solvent,” said John Maynard Keynes (or maybe it wasn’t him, but no matter). At any rate, that was the eternal verity the Saudi Arabians were counting on when they decided to let oil production rip – and the oil price collapse – in late 2014.

The Saudi objective was to keep the oil price low enough, long enough, to drive American shale oil producers out of business and preserve the OPEC cartel’s market share. (The Organisation of Petroleum Exporting Countries controls only 30 percent of world oil production, which is already very low for what was meant to be a price-fixing cartel.)

The end of sanctions against Iran and that country’s push to raise production and regain its old market share put further downward pressure on the oil price. So did the slowdown in China’s economy.

High-cost shale-oil producers in the United States are really hurting (US oil production this year will be down by 700,000 barrels a day), but the OPEC producers are hurting too – and it looks like the Saudis just blinked.

On Tuesday Saudi Arabia, Russia, Venezuela and Qatar announced that they would freeze their oil production at the January level. Most other OPEC members are expected to follow suit, and since Saudi Arabia and Russia (not an OPEC member) are the second- and third-largest oil producers in the world, the freeze will affect almost half of the world’s oil production.

That will not be enough to rescue the economies of OPEC countries and Russia from their current crisis. (All their economies are actually shrinking, and Saudi Arabia has gone from a budget surplus amounting to 13 percent of GDP in 2012 to a deficit of 21 percent last year.) Freezing production will not get the oil price back up when the current global production level is at least 2 million barrels a day higher than global demand.

In fact, the oil glut is so great that the world is running out of places to store the excess production. US and European oil storage facilities are full, and people are already talking about buying tankers as floating storage. Since the beginning of this year the oil price, as high as $115 a barrel less than two years ago, has dipped down into the $20s several times.

Not only will the new production freeze not solve this problem; it won’t really even freeze production. If there’s one thing that OPEC members do well, it is to cheat on their production figures and pump more oil than they admit. As for Russia, it broke the last deal it made with OPEC about freezing production, and it will probably do it again.

Ineffective as this deal is, it illustrates the mounting panic in the major oil producers as the prospect of a long period of very low oil prices opens out ahead of them. Saudi Arabia and Russia are edging towards a direct military confrontation in Syria – the Russian air force backs the Assad regime, and the Saudis are talking about sending ground troops to fight it – but the oil price transcends such issues.

So what conclusions may we draw from all this? First, the price of oil will stay down. In the short run it may even go lower: Morgan Stanley analysts say that oil “in the $20s” is possible if China devalues its currency further, and Standard Chartered Bank predicts that prices could hit just $10 a barrel.

The production freeze might allow the oil price to return to the low $40s in the medium term, if Chinese demand does not collapse entirely and if the producers keep their promises. That price would enable most of the fracking operations in the United States to stay in business, but it would still fall far short of balancing the budgets of Russia and Saudi Arabia. They can’t really afford to have a full-scale war over Syria.

Second, OPEC members with large populations and national budgets that depend heavily on oil revenues (more than 75 percent) face the prospect of major civil unrest or even revolution. This includes Nigeria, Algeria, Venezuela and Angola. Iran and non-OPEC member Mexico face lesser political risks, but they are not negligible.

Finally, a prolonged period of low oil and gas prices will hit the whole array of climate-friendly energy and transportation technologies, from wind-farms to electric cars. Energy costs still matter, even if governments can rectify the balance to some extent with carbon pricing and other regulatory measures. But coal, the most polluting of the fossil fuels, still faces early extinction, since its main rival for power generation is ever cheaper gas.

A ruthlessly rational OPEC leadership (i.e. a Saudi Arabia run by competent economists and strategists) would just end the cash hemorrhage and reduce the political risk by cutting production sharply and getting oil prices back up. But the great gamble to break the US frackers by driving them into bankruptcy was not an ownerless, free-floating policy that somehow took root in OPEC soil.

It was a specific strategy that was conceived and promoted by particular powerful individuals, most notably high-ranking Saudi individuals. They would lose a great deal of face if they had to abandon it, so it will be with us for a while yet.
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To shorten to 725 words, omit paragraphs 3, 7 and 8. (“The end…economy”; and “In fact…again”)

Salami Tactics and the Climate

Salami tactics are useful when dealing with problems that are too big to resolve in one go. Muster all your resources and deal with one aspect of the problem. Come back later, when your resources have grown, and hack off a different piece. Repeat as necessary, until the problem disappears.

Salami tactics are driving the make-or-break climate summit that opens in Paris on 30 November. Over the next dozen days more than 150 countries will make binding pledges to cut their emissions of carbon dioxide and other “greenhouse gases”.

This is better than what happened last time, at the disastrous Copenhagen summit in 2009, where only the developed countries were willing to make any promises at all.

Even China, now the biggest emitter in the world, was refusing to accept any limits on its emissions on the grounds that the small group of countries that industrialised early (basically the West plus Japan) were historically responsible for 80 percent of the greenhouse gases in the atmosphere. The Copenhagen summit broke up in disarray, with nothing of substance accomplished, and we had to wait six years for another kick at the can.

Now both the United States and China, the two biggest hold-outs last time, are making concrete offers to control their emissions. That’s crucial, because together they account for 40 percent of global emissions.

The conference must also come up with acceptable ways to monitor the emission cuts everybody is promising to make and to discipline the laggards and the cheats. But let’s be optimistic, and assume that the summit can even agree on a mechanism to transfer $100 billion annually from the rich countries to the poor countries to help them cut their omissions.

That still won’t save us from runaway warming and all the calamities that would entail.

Late last month the United Nations did an analysis of the 146 national plans for emissions cuts (including those of all the big countries) that had already been submitted. Unfortunately, the numbers don’t add up.

If all the promises are kept, global emissions will slow down – but the world still end up in the year 2100 with an average temperature 2.7 degrees Celsius higher than it was in the late 19th century. Yet all the governments going to Paris have acknowledged that the average global temperature must never exceed two degrees C higher.

What can they be thinking? Unlike the media and most of the lay public, the governments understand that plus 2 C is already catastrophic. If we stay there long enough, all the ice on the planet eventually melts and the sea level rises by 70 metres.

Even in the much shorter term plus 2 C means massive storms, widespread desertification, the loss of the world’s coral reefs and a crash in fish stocks due to ocean acidification. Food production worldwide will plummet, and there will be massive, unstoppable refugee flows as hunger and wars devastate the more vulnerable countries.

The governments also know that exceeding plus two or maybe even just getting near it will trigger the “feedbacks”: an ice-free Arctic Ocean absorbs the Sun’s heat rather than reflecting it, the melting of the permafrost zone releases of enormous amounts of carbon dioxide into the atmosphere, and the warming of the oceans releases even more.

At that point the warming moves beyond human ability to control. The feedbacks, once started, are unstoppable. Even if human beings ultimately get their own emissions down to zero, the feedbacks will still take us up to plus four, plus five, maybe even plus six degrees eventually.

The governments know all this, and yet they have still come up with total promised cuts in emissions that deliver us to an average global temperature of plus 2.7 degrees C by the end of the century. What CAN they be thinking?

They think that they are going as far as they can safely go without committing political suicide. Every government must contend with huge vested interests at home that will be hurt by the shift away from fossils fuels and towards renewables. If governments go too far too fast, they risk being destroyed by the backlash.

Okay, so they are doing all they can politically – but what about the future of the human race? Well, you see, even inadequate cuts in emissions will increase the amount of time it takes for us to reach plus 2 C. And the governments secretly think that we can use that extra time to come back for another conference in three or five years’ time and agree to bigger emissions cuts.

Those further cuts will give us still more time before we reach plus 2, and we use that time for another round of cuts. Like Xeno’s arrow, we get closer and closer to the target (which we must never hit) but never quite reach it. Warming certainly reaches plus 1.8 C or something like that, but it never quite hits plus two.

Salami tactics. Although there is also a whiff of Russian roulette to this way of doing business.
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To shorten to 725 words, omit paragraphs 4 and 6. (“Even…can”; and “The conference…emissions”)