China pays high price for growth at all costs

MUCH has been said about China's phenomenal growth over the past three decades. Academics and politicians the world over dissect the Chinese model for lessons in national development.


By Ching Cheong, Senior Writer

The recent riots in Inner Mongolia and the spate of riots in other Chinese cities now provide fresh lessons - on the high human and environmental costs that the model entails. The Mongolian troubles also cast doubts on its sustainability.

The unrest at the end of May was the worst in 30 years in the northern Chinese region. Thousands of ethnic Mongolians took to the streets to protest against the death of a herder who had been run over by a truck driven by an ethnic Han.

Beyond the immediate cause, the riots were the result of pent-up resentment boiling over. It was a signal from the Mongolians that there are limits to how far their lands can be exploited and their interests ignored.

On the face of it, Inner Mongolia - also known as the Neimenggu Autonomous Region - has done well. Each year, from 2002 to 2009, its gross domestic product (GDP) grew 18 per cent on average.

Its GDP jumped from 160 billion yuan (S$30.7 billion) in 2001 to 1.16 trillion yuan last year, a growth rate unheard of anywhere else in China. Per capita income also surged, from about 7,200 yuan in 2002 to 33,000 yuan in 2008.

And yet, growing prosperity did not bring about greater happiness.

Quite the opposite, as a recent study by the China Economic Weekly (CEW) has revealed. The study focuses on the 'gold content' of China's GDP for 2010. Developed by Professor Yang Kaizhong, director of the Institute of Regional Economics of Beijing University, the gold-content index is a proxy for measuring happiness. Gold content is derived by dividing per capita disposable income by per capita income. A low 'gold content' would suggest a poor outcome, with a low yield of happiness despite a high per capita income that's fuelled by a lively growth rate.

Significantly, the study found that despite having the country's fastest economic growth, Inner Mongolia has the lowest gold content of GDP. The discrepancy between its theoretical and actual level of income reflects the siphoning off of a substantial amount of its GDP. Simply put, the local people failed to reap the benefits of its extraordinary growth.

Worse still, the huge mining operations - for coal, natural gas and rare earths - have destroyed vast tracts of the region's grasslands and endangered the traditional way of life for nomadic Mongol herders, who have long depended on the pasture lands to feed their animals. Coal is often mined using the cheap but environmentally destructive open cast method. From 1999 to 2004, coal output in Inner Mongolia increased by 168 per cent, way above the national average of 63 per cent.

The death of the Mongol herdsman Mergen in Xilinhot city created such an uproar because he, along with a group of 20 others, had tried to stop coal-hauling trucks from ruining the grazing lands. He died after one of the trucks hit him.

To Mongolian protesters, Mr Mergen had died trying to protect not only the environment but also a tradition under threat. Ethnic Mongols now make up less than 20 per cent of the region's population of 24 million and fear cultural loss under the Han Chinese.

Nor is social unrest uncommon in other parts of China. A parallel can be found in the case of Zhejiang village chief Qian Yunhui who died last year after being hit by a lorry. As he was campaigning against illegal land seizures before his death, this led many villagers and Chinese netizens to openly voice their suspicions that his death was not the simple accident officials made it out to be.

The China model is anchored on certain views propounded by Deng Xiaoping, who is widely credited as the chief architect of China's economic reform.

One - 'development is the hard truth' - is taken to mean that economic growth is paramount. To encourage development, Deng was ready to tolerate income disparity. His remark that one should 'allow some people to get rich first' has opened the way to greater social injustice by its apparent tacit approval.

To promote growth, one needs political and social stability. Deng's comment that 'stability overrides all things else' has evolved into a strong argument against dissenting views.

But too rigid an adherence to Deng's prescription can lead to the idea that the China model means development at all costs, never mind its consequences to the people and to the environment.

The recent crisis in Inner Mongolia is a wake-up call to China that it's time to refine its developmental model.

chingcheong@gmail.com

Why China is still betting on the euro

THE deadline is now July 3. That is when the European Union's finance ministers meet again, and by then the Greek Parliament should have passed legislation mandating €28 billion (S$49 billion) of spending cuts and tax rises over the next five years. If it goes through, each of the 10 million Greeks will ultimately be about €2,800 poorer.

By Gwynne Dyer

That is why they are rioting in the streets these days in Athens. But unless the European finance ministers approve the plan, Greece will not get the next €12 billion instalment of the current EU-International Monetary Fund (IMF) bailout package next month, and it will default on its gigantic debt.

As the IMF warned recently: 'A disorderly outcome cannot be excluded.'

It was hinting that the euro itself might crash, taking the European, or even global, economy down with it - and yet China seems strangely untroubled.

Used-car salesmen know that if you don't give the customers credit, they won't buy your cars. For the past decade China has operated on the same principle, lending the United States government money in order to keep the American dollar high and the orders for Chinese goods flowing. Beijing now holds US$1.15 trillion (S$1.43 trillion) of US Treasury bills - but as of late last year, it has stopped expanding its US dollar holdings.

This makes sense, given that the US budget deficit is 11 per cent of gross domestic product. The US is so deeply indebted that it may be tempted to inflate its way out of its problem, and no one wants to be sitting on a pile of a trillion US dollars when the value of the currency collapses. What is astonishing is that China is now buying large amounts of euros instead. So what do the Chinese know that the pundits don't?

They know there is nowhere to hide. Holding euros is risky, but holding US dollars is riskier, and the pound and the yen are only marginally safer. China has to put its money somewhere, and it calculates that the euro is not quite as bad a bet as it seems. Even though Greece certainly will default at some point, and probably quite soon.

Greece can never repay the €300 billion it owes, no matter how harsh the austerity measures it forces on its own population. If it still had its old currency, it could make the debt shrink by printing more drachmas and inflating the currency, but it's stuck with the euro.

Like other Mediterranean countries that joined the euro zone, it has a less efficient economy than the big northern European countries that dominate the currency. It used to stay competitive by letting inflation rip, thus making its exports cheaper in foreign markets. But the European Central Bank keeps the euro's inflation rate low, so now it cannot do that.

It's a trap. The euro's low inflation rate meant a low interest rate, so although Greece could not keep its econ-omy competitive, it could borrow money very cheaply. And since the euro's value is backed by much stronger economies, the banks were willing to lend Greece large sums. Ridiculously large sums, in fact. So large that Greece can never pay them back.

Didn't the banks realise this? Of course they did - but they reckoned that the richer countries in the euro zone would cover Greece's debts in order to preserve the integrity of the currency. That is what is happening now.

The banks stopped lending Greece money after 2008, and the EU stepped in to prevent a default. The enormous sums that it and the IMF are now lending Greece (at a high interest rate) are immediately handed over to the foreign banks that let the situation get so far out of hand in the first place. But the political price extracted from Greece for this bailout is savage cuts in the country's budget and a soaring unemployment rate.

A lot of Greeks don't see why they should pay such a high price for this charade. They are far from blameless - they cynically milked the EU system for a long time - but their rage is entirely understandable. So at some point Greece will decide to default on its debt.

The money the EU and the IMF are currently giving to the banks by laundering it through Greece will then have to be shovelled directly into their coffers by the financial authorities, embarrassing though that is. And Greece, using heavily devalued drachmas, will still face a long period of austerity and falling living standards, but at least it will be in charge of its own fate.

The euro will survive all this because everyone knows the default is coming, and is quietly making arrangements to contain the damage. China is putting its money in the right place.

The writer is a London-based independent journalist.

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Is the Three Gorges Dam to blame?

'We failed to think of all the impact that the dam might bring about when designing the dam.' Mr Wang Jingquan, who works for an agency affiliated with the Yangtze River Water Resources Committee

'The drought would have been more severe without the dam.'

By Grace Ng, China Correspondent
CONFLICTING SIGNALS

Mr Liu Xuefeng, an official at the State Flood Control and Drought Relief Headquarters

A dead turtle on a dried riverbank of the Yangtze River under the Jiujiang Yangtze River Bridge in Jiujiang, Jiangxi province on Thursday. Critics say the Three Gorges Dam exacerbates the shortage of water downstream and inflicts huge ecological damage. -- PHOTO: ASSOCIATED PRESS

BEIJING: A top Chinese environment official insisted yesterday that the worst drought in 60 years across central and southern China is caused by a lack of rain and not the controversial Three Gorges Dam.

'We believe that (the drought) is primarily caused by prolonged lower rainfall,' said Mr Li Ganjie, Vice-Minister for Environmental Protection, in a terse response to a question about whether the world's largest hydroelectric project has contributed to the latest dry spell.

His comment, made at a press conference on China's environmental issues, is the latest and supposedly most authoritative in a series of conflicting official statements on whether the dam is to blame for severely depleted downstream lakes.

The 183m-high dam, which provided 84 billion kilowatt hours of electricity last year, has been widely criticised for changing the levels of regional water tables.

Besides exacerbating the shortage of water downstream, critics say, it inflicted a huge ecological impact on fish and plant populations while displacing 1.4 million people.

On Thursday, a Chinese official admitted that the planners of the dam had failed to anticipate its impact in lowering water levels in two of the country's largest freshwater lakes. This raised the risk of them drying up during droughts.

Mr Wang Jingquan, who works for an agency affiliated with the Yangtze River Water Resources Committee, told local newspaper Xinmin Evening News that the reservoir behind the dam, which stored water from the river, cut off supply to the two lakes.

'We failed to think of all the impact that the dam might bring about when designing the dam,' said Mr Wang.

His comments come two weeks after China's Cabinet admitted that there were 'urgent problems' linked to the dam, including the negative impact on downstream water supplies.

It vowed to restore order and address these issues within the next eight years. But in subsequent days, various newspapers cited local officials claiming that the dam is not at fault and is instead helping to alleviate the drought.

Among them was Mr Liu Xuefeng, an official at the State Flood Control and Drought Relief Headquarters, who said on Thursday that the dam has played an important role in increasing the downstream flow of the Yangtze River.

He told the Beijing Daily that from May 20 to 24, the dam accelerated its discharge rate to 10,000 cubic metres per second, and even higher - to 12,000 cubic metres per second - on May 25.

'The drought would have been more severe without the dam,' he said.

Local media has also weighed in on the debate, with People's Daily Online columnist Li Hong lauding the State Council for acknowledging the dam's possible problems.

Financial magazine Caijing argued that the high-profile government project is indeed not a key cause of the drought, but the Chinese public has blamed it anyway to vent their anger over the government's failure to control environmental problems. China's massive development projects, many driven by state giants, have taken a huge toll on its environment, sparking public concern and social unrest.

Last week, protests erupted in Inner Mongolia over damage to traditional pastureland caused by coal mining. Local herders have raised animals there for centuries.

Vice-Minister Li said yesterday that the government will limit development projects in Inner Mongolia and other environmentally vulnerable areas.

'If local enterprises had indeed breached environmental-protection laws, I believe the local government and environmental authorities will certainly mete out serious punishment,' he added.

He also vowed to clamp down on heavy metal pollution from mines and other factories, which has led to entire villages being struck by lead poisoning.

While some of China's environmental indices such as air quality in cities improved last year, the country's 'overall environmental situation is still very grave', Mr Li noted.

'We have entered a period where sudden incidents impacting the environment or pollution accidents are occurring frequently.'

graceng@sph.com.sg

Islands or rocks? Depends on who you ask

In the evolving dispute about islands and rocks, the Asean claimants are likely to maintain that they have sovereign rights and jurisdiction over the natural resources in and under the waters in the Spratly Islands... They will not claim an EEZ from any of the geographic features in the Spratly Islands, and will maintain that many of the disputed features are not islands, and that those which are islands are in fact, only rocks.


By Robert Beckman, For The Straits Times

Philippine soldiers walking on the beach of Pag-asa in the Kalayaan island group, one of the islands occupied by Filipino forces in the disputed Spratly Islands. -- PHOTO: ASSOCIATED PRESS

SOVEREIGNTY over the Spratly Islands in the South China Sea is contested by China, Malaysia, the Philippines, Vietnam, Brunei and Taiwan in whole or in part. Diplomatic notes submitted to the United Nations Secretary-General by the Philippines and China in April have set the stage for an evolving dispute between some Asean claimant states (Malaysia, the Philippines and Vietnam) and China relating to the legal status of the features comprising the Spratly Islands.

The most important issue at stake is: Who has the right to explore and exploit the natural resources in and below the waters surrounding the islands? While the dispute is ultimately about rights to these natural resources, it is being structured as a legal dispute on the interpretation and application of Article 121 of the 1982 United Nations Convention on the Law of the Sea (Unclos).

Article 121 provides that an island - defined as 'a naturally formed area of land above water at high tide' - can in principle generate the same maritime zones as land territory. These include a 12 nautical mile (nm) territorial sea; a 200 nm exclusive economic zone (EEZ); and a continental shelf.

Some of the Spratly Islands features claimed and occupied by the claimants do not meet the definition of an island. They are either below water at high tide, or above water at high tide only because of reclamation works or the presence of man-made structures. Such features are not even entitled to a 12 nm territorial sea.

Paragraph 3 of Article 121 creates an exception for certain categories of islands by providing that 'rocks which cannot sustain human habitation or economic life of their own' shall have no EEZ or continental shelf. Many of the features in the Spratly Islands may fall within this category and are thus entitled to only a 12 nm territorial sea.

The diplomatic notes submitted to the UN Secretary-General by the Philippines on April 5 and China on April 14 are the latest in a series of diplomatic notes relating to the Joint Submission of Malaysia and Vietnam dated May 6, 2009. In their joint submission to the Commission on the Limits of the Continental Shelf, Malaysia and Vietnam claimed an extended continental shelf beyond the outer limit of their 200 nm EEZ claims in the South China Sea.

On May 7, 2009, China responded by diplomatic note, maintaining that it has indisputable sovereignty over the Spratly Islands and their adjacent waters. China also asserted sovereign rights and jurisdiction over the 'relevant' waters in the South China Sea, attaching the infamous nine-dashed line map to its diplomatic note.

The Philippines responded on April 4 this year, stating that Unclos provided no legal basis for any claim to sovereign rights and jurisdiction over 'relevant' waters (and the seabed and subsoil thereof) within the nine-dashed lines outside of the claims to waters that are 'adjacent' to islands as defined in Article 121.

Although the language in the note is ambiguous, it seems to suggest that China has no legal basis for claiming sovereign rights and jurisdiction over any resources in or under the waters within the nine-dashed line outside of the waters adjacent to the islands.

On April 14 this year, responding to the note of the Philippines, China reiterated its traditional position that it has indisputable sovereignty over all of the Spratly Islands and their adjacent waters. It also asserted its sovereign rights and jurisdiction over the relevant waters as well as the seabed and subsoil thereof. However, it did not mention the nine-dashed line map, and it stated - for the first time - that the islands are entitled to a territorial sea, EEZ and continental shelf. China appears to be clarifying its claims and justifying them under Unclos.

In the evolving dispute about islands and rocks, the Asean claimants are likely to maintain that they have sovereign rights and jurisdiction over the natural resources in and under the waters in the Spratly Islands. They based this claim on their 200 nm EEZ and extended continental shelf claims measured from their land territory or archipelagic baselines. They will not claim an EEZ from any of the geographic features in the Spratly Islands, and will maintain that many of the disputed features are not islands, and that those which are islands are in fact, only rocks.

This strategy would give the Asean states undisputed sovereign rights to explore and exploit the natural resources in and under most of the waters in the Spratly Islands. The only areas where they will not have sovereign rights and jurisdiction over the hydrocarbon resources will be in the 12 nm territorial sea adjacent to islands, so long as the dispute continues as to who has sovereignty over those islands.

To protect its interests, China will need to maintain that at least some of the features are 'islands' which are entitled to an EEZ and continental shelf of their own. Such a position will produce a substantial overlap in the EEZ claimed by China from these islands and the 200 nm EEZ and/or extended continental shelf claimed by the Asean claimants from their land territory or archipelagic baselines.

One difficulty China will face is its own earlier position on islands and rocks. In discussions at the UN on the right of Japan to claim an EEZ and continental shelf from the island of Okinotorishima, China argued that small, remote, uninhabited features should not be given an EEZ or continental shelf of their own. The Asean claimants are likely to maintain that this argument should also apply to the small geographic features in the Spratly Islands as well.

The writer is Director of the Centre for International Law and an Associate Professor at the Faculty of Law, NUS, as well as an Adjunct Senior Fellow at the S. Rajaratnam School of International Studies, NTU.