China’s Control Challenge

China is experiencing problems with its moon rover, Jade Rabbit. The problem is emblematic of a larger problem that ails China. It is not so much about the quality of the output, but what the Xinhua news agency called “mechanical control abnormality”. 

The rapid growth of the economy in size and complexity means that the control that the state once exercised is increasingly difficult to maintain.  This is evident in the shadow banking sector, which accounts for  more than half of the total lending in China.  The loss of control can be seen in the volatility of money market rates in China.
It is also evident it is crackdown on dissent.  A prominent activist was sentenced to four years in prison over the weekend for “gathering a crowd to disturb public order.”   Human Rights Watch reports that some 50 activists have been arrested over the past 9 months.
While the US State Department expressed “deep disappointment” over the arrests, but US officials are likely more disappointed by China’s response to the 2012 import duties imposed on China’s solar power products ostensibly for dumping, ie., selling below cost of production.  Last week, the US Commerce Department announced a new investigation in response to accusations that China is exploiting loopholes in the 2012 duties.
 The October 2012 duties were only applied to solar panels with cells made in China.  Chinese solar panel producers appeared to have simply outsourced the cell manufacturing to Taiwanese companies, but continued to produce the other solar panel components on the mainland.    The US International Trade Commission (ITC) is expected to make a preliminary ruling on February 14 on whether China and/or Taiwan’s practices are causing material; injury to US companies (though note it was a US unit of a German solar panel manufacturer who first requested the new investigation).
The ITC judges whether harm is inflicted or could be inflicted by the imports.  If this is answered in the affirmative, then the Commerce Department will make two rulings.   The first involves the charge of improper state subsidies and could be decided by the end of Q1.  The second issue  related to the dumping charge and is expected to be decided by the end of Q2.
Chinese officials responded angrily over the weekend.  Indeed, research cited by the Financial Times confirmed that the Chinese manufacturer share of the US solar panel market fell to 49% last year from 57% in 2012.
While domestic competitors to Chinese manufacturers may be helped by an increase duties on imports, others who buy and use China’s solar power equipment will be hurt by higher new action.  The Solar Energy Industries Association warned that effective duties that raised the price of low-cost equipment would adversely impact the growth of the industry.

China is desperately trying to asset its control over its territorial disputes in the South and East China Seas.  The US has tried to rein in Japan to avoid a confrontation.  The US reportedly has made three requests to Japan.  First, it has asked that Japanese officials refrain from antagonizing its neighbors by visiting the war shrine.  Incidentally, a Nikkei poll (conducted Jan 23-26) found the Japanese public nearly evenly divided on the issue with 45% supporting Abe’s visit and 43% objecting to it.   Second, the US has asked Japan to reaffirm its apology for its colonial past.  This is apparently a reference to Prime Minister Murayama’s 1995 contrition that ” “colonial rule and aggression (…) caused tremendous damage and suffering,” and  expressed his “remorse and (…) heartfelt apology.”
Third, the US has been pressing Japan to return some 300 kilograms of mostly weapon-grade plutonium that was given to Japan for research purposes during the Cold War.  The highly concentrated plutonium could be used to produce an estimated 40-50 nuclear weapons.
Meanwhile, China is seeking to take control of cross-strait relations with Taiwan.  Earlier today, for the first time a date has been agreed upon for the head of Taiwan’s Mainland Affairs Council will meeting the head of China’s Taiwan Affair Office for February 16.  It is the first official meeting of its kind.   It is the most recent sign of a rapprochement between China and Taiwan, which in 1996 saw China launch missiles into the Straits of Taiwan.  Often in the past, communication between the two went through non-government organizations.

This piece is cross-posted from Marc to Market with permission.