Overheating worries grow as China's growth surges in 1st quarter

BEIJING - The signs of a surging economy are everywhere: flashy luxury cars, glitzy shopping malls, expensive restaurants and construction cranes in many neighborhoods.

For most Chinese, this is a good thing. It means more jobs, higher incomes and rising affluence. But China's leaders, fearful of accelerating inflation and the risk that all this investment could collapse in a debt crisis if borrowers go bankrupt, are trying to apply the brakes.

How well they succeed is taking on an increasing global importance, as yesterday's slide in stock prices in Asia and then Europe demonstrated. The reaction came after Beijing reported its economy expanded in the first quarter a sizzling 11.1 percent from the same quarter a year ago and that inflation was the highest in two years.

Stocks later stabilized in the United States - unlike the panic selling on Feb. 27 that sent the Dow Jones industrial average plunging 416 points in the worst one-day rout since the Sept. 11 attacks. But the "China effect" on investors around the world remains palpable, due in large part to just how important trade with China has become for most nations.

Yesterday, the State Council in China vowed that it would take steps to keep the economy from overheating. It has said the same thing several times in the past year, to little avail. The economy keeps exceeding growth expectations, even though interest rates have been increased three times in the last year and curbs have been imposed on investments in real estate, the auto industry and other fields.

The latest evidence that the restrictions haven't taken hold: Beijing reported yesterday that fixed-asset investment countrywide grew a stunning 23.7 percent during March.

But the real shocker for investors was the news that the consumer price index in March rose 3.3 percent, its highest since hitting 3.9 percent in February 2005. China has said it wants to keep inflation under 3 percent for the whole year after it increased 1.5 percent in 2006.

It has Chinese economic officials worried.

"If this type of fast growth continues, there is the possibility of shifting from fast growth to overheating. There is that risk," Li Xiaochao, spokesman for the National Bureau of Statistics, said at a news conference.

China's Cabinet also quickly stepped in after the announcements. A statement posted on the council's Web site following a meeting chaired by Premier Wen Jiabao said the government would work to "reduce the country's large trade surplus, limit rapid growth in house prices and maintain basic price stability."

While China's leaders want rapid growth to reduce poverty, they are trying to slow an investment boom in real estate and other industries where they worry that overspending on unneeded factories and other assets could ignite inflation or a debt crisis.

The news comes amid increased trade tension between Beijing and Washington, with the U.S. threatening to impose punitive tariffs on Chinese goods if it doesn't end currency controls blamed for contributing to the trade gap. Last year, the United States reported a record $232.5 billion trade deficit with China.

Asian markets fell ahead of the report in anticipation that the numbers would be stronger than expected and prompt Beijing to raise interest rates or take other measures to slow growth in China, a major regional trading power.

The nervousness was increased because Beijing delayed the release of the figures by five hours without an explanation.

As it turned out, quarterly gross domestic product did beat forecasts for 10.3 percent growth, according a poll of economists by Dow Jones Newswires. It was the highest growth rate since the second quarter of last year, when growth reached 11.5 percent, the fastest in a decade.

Shanghai's benchmark index - which had set records for most of the past two weeks - tumbled 4.5 percent, while stocks in Japan fell 1.7 percent and those in Hong Kong dropped 2.3 percent. European markets also opened lower.

Economists projected that another rate increase is coming soon. No forecasts for the full year were given by the statistics bureau, but Stephen Green, chief economist at Standard Chartered Bank in Shanghai, wrote in a report that first-quarter growth was higher than his "bullish expectations" and that he had raised his forecast for 2007 GDP growth to 10.6 percent from 9.6 percent.

The statistics bureau said urban disposable incomes climbed 19.5 percent in the first quarter, while rural incomes went up 15.2 percent, the biggest increase in a decade. The state-run Xinhua News Agency announced last week that China's foreign reserves, already the world's largest, had climbed past $1.2 trillion, and Li said first-quarter growth in the value of exports was up 27.8 percent, compared with an increase of 18.2 percent in the value of imports.

China send WHO H5N1 virus samples

China is preparing to send the latest samples of human bird flu virus to the World Health Organization (WHO), the Ministry of Health (MOH) said Thursday. The announcement came days after the WHO complained China was not sharing samples of the H5N1 strain of the bird flu virus since May 2006 even after several requests.

"As requested by the WHO, we will send two recent samples of the virus and one from a Beijing patient who was infected in 2003," an MOH official surnamed Ma said.

Five new cases have been reported in China, apart from the 2003 one that came to light only last year, since it last shared a bird flu virus sample with the WHO.

"The process of handing over the samples is still underway, and 'biological safety' has prompted the MOH to ensure that they are dispatched safely and smoothly," a ministry statement said.

Given the extreme caution with which dangerous virus samples are handled and the strict, time-consuming procedures on both sides, the handover usually takes several months, Chinese Center for Disease Control and Prevention's press officer Wang Lin said.

Though it's not mandatory for member states to share virus samples with the WHO, China has always sent them to the world health body. It has already sent six samples of the human bird flu virus, along with all the relevant information, to WHO's designated laboratories. Two of them were dispatched in December 2005 and the others in May 2006.

Upholding the principle of openness, transparency and cooperation, the government has always worked closely with the international community as part of the global effort to prevent a bird flu epidemic, the MOH statement said.

WHO communications team leader Joanna Brent said she had been confident of China's quick and positive response because the virus has undergone a change and posed a greater risk to humans. SOURCE: Government of China

China's carmakers grab local sales, vie with partners

SHANGHAI (Reuters) - China's unsung home-grown car makers could capture 40 percent of their domestic market, the world's second biggest, within 3-4 years, industry executives say, as they roll out own-brand models using both their own and acquired technology.

But the major global automakers scrapping for market share in the world's fourth-biggest economy should still have room to grow as the local brands target the cheaper end of the market.

Chinese car firms such as state-controlled SAIC Motor Corp. and privately-run Geely Automobile Holdings Ltd. are ramping up their R&D investment, hoping to emulate at home the success of Japanese and South Korean rivals such as Toyota Motor Corp. across global markets.

Local brands already account for around a quarter of China's car sales -- a market that roared ahead at 30 percent last year.

Ziliang Wang, vice president of Geely, which makes cars aimed at the lower-end of China's market but which aims to be selling 1 million cars a year, matching General Motors' local venture's output target, says local firms could be selling four cars in every 10 by 2010.

"We're seeing incredible growth from the locals. Will they start to pose a problem for the foreign brands? They already are," said Ashvin Chotai, director of Asian Automotive Industry Research at Global Insight.

Ambitious Chinese carmakers, who have been turning out Buicks and Santanas with foreign partners for years, are working harder than ever to develop own-brand models to compete head-on with cars made at the joint ventures.

Some are already dipping a toe in overseas markets, too.

SAIC, China's biggest car maker with tie-ups with both GM and Volkswagen, last year introduced its first own-brand sedan, the Roewe 750, based on technology acquired from the now-defunct MG Rover and priced to compete with Toyota Motor Corp.'s locally-made Camry.

At this week's Shanghai Auto Show, SAIC is unveiling a mid-range Roewe W2 concept car as well as a new fuel-cell car, and plans another 30 or so models over the next few years.

Nanjing Automotive Group, based in a gritty industrial suburb in east China, last month produced its first China-made MG cars aimed at the home and export markets. Nanjing stunned the automotive industry in 2005 by snapping up assets of failed British car make MG Rover for little more than $100 million.

FAW Car Co. Ltd. has revamped its "Red Flag" sedan, reviving China's first own-brand car that used to be reserved for state leaders and distinguished foreign guests.

Others such as Chery Automobile Co., which partners DaimlerChrysler in China, and Geely, are quietly adding medium and higher-end models while building volume at the lower end of the market.

Chery outsold Shanghai-GM in March, the first Chinese firm to overtake the Detroit giant's flagship venture in a month's sales.

"Chinese carmakers have good reason to take pride in the achievement as they are gaining strength in the domestic market," said Matthew Kong, associate director with Fitch's corporate team in Beijing.

MULTINATIONALS UNFAZED

The big global players, seeing a squeeze at the bottom of the market and limited by law to producing for China's market only in partnership with a local firm, in which they cannot own more than 50 percent, are mostly focusing on the more lucrative luxury and super-luxury cars sought by China's newly affluent.

And industry experts say the fast-expanding market is big enough for everyone -- as long as the market keeps growing at double-digit rates.

"With a market this big, it's only natural for at least a few national brands to rise up and be competitive and strong. That's the way it should be," said Toyota executive vice president Yoshimi Inaba.

"For us to thrive here, it's much better to have strong local competitors."

Car-buying trends show that as household incomes grow faster than ever, consumers are willing to pay a premium for quality and style, which gives the edge to foreign marques.

Most sales of Chinese compacts such as the Chery QQ are in China's vast inland provinces, while foreign models such as the Honda Accord and VW Passat are more popular in the wealthier coastal regions.

But GM's Asia Pacific President Nick Reilly noted consumers were still buying GM's entry-level Chevrolet Spark despite a price tag $1,000-$1,500 higher than the equivalent Chery, because of quality and brand image.

And local firms' profits remain small.

Honda Motor's southern China venture posted a 2005 profit of almost $600 million, 60 times that of Chery.

"Local brands are growing in volume, but that has not been matched by earnings," said Chen Guangzhu, a member of China's state-backed auto industry consulting committee.

"When they will catch up with foreign brands in profitability, I really don't know."

Bullet trains join fastest in the world

Brand new homemade high-speed trains CRH are seen at a railway station in Jinan, East China's Shandong Province, April 12, 2007. The CRH trains which could run at least 200km per hour, will serve on high speed routes between major cities after the sixth nationwide railway speedup from April 18.

A train designed to run at a speed of 200 km per hour left east China's Shanghai for Suzhou early Wednesday morning, ushering in a high-speed era for the world's fastest growing economy.

 

Nationwide, 140 pairs of high-speed trains with a speed of 200 km per hour or a faster speed will begin to hit the railways on Wednesday. The number will increase to 257 by the end of this year.

Numbered D460, the train left Shanghai on 5:38 a.m. and is expected to arrive in Suzhou 39 minutes later.

With today's sixth railway speedup, China will join the ranks of countries with high-speed rail services.

Trains will be able to run at speeds of up to 200 kph on some 6,003 km of track, and on some sections, the maximum speed will increase to 250 kph.

"That length (6,003 km) exceeds the total amount of rail lines capable of accommodating trains at that speed (200 kph) in nine European countries," said Vice-Minister of Railways Hu Yadong.

"And raising the speed to 200 kph on so much track in only one move is also rare in the world."

As of today, trains will be able to run at speeds of up to 160 kph on 14,000 kilometers of track and up to 120 kph on 22,000 km of track.

The 6,003 km of track capable of accommodating the fastest speeds will serve both high-speed passenger and heavily loaded cargo trains, which travel at slower speeds.

Railway operators will have to address the speed gap between the two kinds of trains to make sure they both run safely.

He Huawu, the ministry's general engineer, said the ministry had drafted an operational chart to allow trains to run at an interval of "only five minutes".

He added that it was rare for a rail operator to run such a tight schedule.

He also noted that in addition to the speed gap between passenger and cargo trains, the two have "totally opposite requirements for tracks". For example, high-speed passenger trains require a much smoother track than a heavily loaded cargo train, He said.

Other transportation experts have doubted the wisdom of running the two kinds of trains on one rail network.

"A heavily loaded cargo train's destructive power is the same as that of an overloaded vehicle on the expressway," Nanfang Weekly quoted an expert as saying.

However, He said railway authorities had adopted advanced technology to resolve any problems.

The country's rail system has reportedly benefited from several upgrades, including an advanced safety control system that includes 60-kg steel rails as well as the latest sleeper cars, the strongest switches available and anti-friction devices. The signal system has also been upgraded.

The system allows the authorities to maintain tighter control of high-speed trains, Initial experiments and a trial run have both yielded positive results.

He also said the ministry had set up systems for testing and monitoring, facilities management and emergency responses.

And for the first time, the ministry has installed advanced track that relies on laser technology.

"I can say that China's railway infrastructure and rail track technology have both reached an advanced level," He said.

Impact on airlines

A highlight of the sixth speedup is the use of Electric Multiple Units (EMU), or multi-car electric trains, on intercity routes. These high-speed speed trains will connect cities in the three delta areas and major city clusters. The system also links regional centers, such as Beijing and Shanghai.

The development will cut travel time by 20 to 30 percent on average. Passenger transport capacity should increase by at least 18 percent, while cargo transport capacity should rise by 12 percent.

The ministry's goal is to give passengers a faster and more comfortable travel experience and thus keep people using trains for intercity travel.

But Wu Wenhua, a researcher with the National Development and Reform Commission's Macro Economy Research Institute, said that because rail and air travel have competing advantages, the sixth speedup might not have a big effect in terms of dividing the travel market.

"Railways have definite advantages in short and middle-distance transport, which is between 400 and 1,000 km," said Wu, who headed a research project on what effect the speedup would have on airlines.

"But the picture is not as optimistic as the Ministry of Railways would like to think because railways will not be able to compete with airlines in long-distance transport, usually 1,000 km and above."

Raw passenger figures for 2005 from the General Administration of Aviation in China and the Ministry of Railways show both train and air travel is increasing, and nine times as many people take the train as fly. But that is as low as the ratio has ever been.

Ultimately, the future of travel in this country will look something like trains getting most of the short and middle-distance business, but planes used more for long-distance travel, Wu said.

Further speedups ahead?

Two-hundred-fifty kph is the fastest speed that can be reached on the existing tracks, said Hu Yadong at a recent press conference.

However, on sections where the speed will remain comparatively low, there will be room for further speedups, Hu said. The ministry has no timetable for further increases.

Still, it is looking ahead by building passenger rail lines capable of running high-speed trains at 300 kph and beyond to further expand the country's railway transport capacity.

These faster passenger rail lines will mostly parallel existing rail lines, but will be used only for passenger transport.

For example, the Beijing-Shanghai high-speed passenger rail line has been designed to run trains at a speed of 300 kph, with a possible maximum speed of 350 kph.

Though the project has not started construction yet, Nanfang Weekly reported that the electric multiple units to be used on such lines are being built. Such trains will be coded CRH3. CRH stands for China Railway of High Speed.

Once the fast cars are completed, passenger and cargo transportation will be divided and the railways' transport capacity can be further enhanced, the ministry said.

Rapid growth rate may force China rate hike

BEIJING - China's economy grew at a blistering 11.1% annual pace in the first quarter on the back of booming investment and exports, fuelling speculation that interest rates would need to rise again soon.

The growth rate announced yesterday was broadly in line with the 11% forecast by economists in a Reuters poll but it marked an acceleration from 10.4% in the fourth quarter of 2006.

Global stocks and the yen sank as the data exacerbated expectations of a rate rise. Chinese stocks lost 4.5%, the sharpest drop since Feb. 27 when the Shanghai Composite Index lost 9%, roiling world markets.

Premier Wen Jiabao followed the release with a prompt warning on the need for Beijing to take timely steps to keep the world's fourth-largest economy on an even keel. "We need to prevent the economy from shifting from relatively fast growth to a state of overheating and to prevent big ups and downs," Mr. Wen said on the government's Web site.

"We will work hard to keep basic stability in the overall level of prices," he told a regular Cabinet meeting.

The strong data prompted a number of economists to predict that the central bank would take further tightening steps soon. The People's Bank of China, in an effort to rein in an investment boom, has already raised interest rates once and increased banks' required reserves three times this year.

"This is very strong. It means more tightening. I think there will be at least two more rate hikes and the reserve ratio will have to go up to 12% from 10.5%," said Chris Leung, China economist at DBS Bank in Hong Kong.

The National Bureau of Statistics said that annual consumer price inflation reached 3.3% in March, the first time it has gone above 3% -- the central bank's comfort level--in more than two years.

China's stock markets had been braced for a high inflation figure, expecting it could herald another rise in interest rates, which the central bank last lifted in mid-March.

The figures prompted some analysts to raise their forecasts for full-year growth.

Standard Chartered increased its 2007 GDP growth forecast to 10.6% from 9.6%. JPMorgan upped its forecast to 10.8% from 10%.

"Another big number proves that China's supertanker economy is still nowhere near slowing," Stephen Green, an economist with Standard Chartered in Shanghai, said in a note to clients.

Statistics agency spokesman Li Xiaochao told reporters the economy might be on its way toward overheating, potentially heralding further tightening.

"Whether we need to raise interest rates depends on whether our economy will turn to overheating from fairly fast. If this happens, interest rates need to be raised. If this does not happen, then there is no need to raise them," Mr. Li said.

He also said that China faced more inflationary pressures due to uncertainties over food prices and likely moves by Beijing to further deregulate controls over utility prices, driving up the prices of water and electricity.

But to some the figures, which included a pick-up in annual growth in urban fixed-asset investment to 26.8% in March from 23.4% in the first two months, already clearly signalled that growth was running too fast.

"I think it is overheating. Today they announced 11.1% first-quarter growth. This is a sign of not controlling the economy well," Hiroshi Watanabe, Japan's Vice-Finance Minister for International Affairs, said in Abu Dhabi.

European Commission spokeswoman Amelia Torres, on the other hand, said the accelerating growth was positive news for European exporters, adding that the EU hoped China's domestic demand would grow progressively.

An Eye for An Eye?

Joel Martinsen at Danwei.org has briefed a recent Chinese media response to the alleged "Anti-China" sentiment of the West that was printed by the official Glabal People magazine. The magazine summarizes those western "attacks" as stemming from absurd theories like "China Threat", "China Collapse", "China Split" and "Yellow Peril".

There is an old Chinese saying says, "If you did a bad thing to other, other will do the same to you".

If I were not mistaken. Was there once an anti-American sentiment raging in China during the whole pre-reform period? U.S. was then considered as the paramount enemy (among other imperialists) of the world (and of China of course).

"Imperialism is the highest stage of Capitalism", according to Lenin. And, it is so corrupted that it is at the verge of collapse. These were printed on the textbooks and widely advertised on the mass media in China.

"Proletariat of the World Get United!" and "Down with the American Imperialism!" were the two most frequently used propaganda slogans found on Chinese mainstream media, if not every day at that time.

China is becoming softer and behaves more like a gentleman now. But to most in the west, the same Communist regime is still running the nation which was extremely agitative sometimes before. And, the worst of all is that this same country is more-and-more becoming a tiger instead of a panda, in terms of both economic and military strength.

The feelings of the west to a "face-lifted" China are certainly complicated, especially to those who know a little bit about the political ideology of Communism. The cause of Communist Party(s) is to turn the whole world "Red", as the rule of Marxism implies.

The Chinese Communist elites might think differently now. Well, I dont know. It is just a wild guess based on what they are preaching inside (and outside) for a harmonious society (and, world).

If the regime really meant what it said, then it is better not to act so childishly like what Global People has done. Time itself will tell.

"An Eye for An Eye" will not help to improve the image of China, and the West too.

China 2007 Q1 GDP growth about 11%

China's GDP growth in the first quarter is expected to accelerate to about 11 pct, due to rapid growth in consumption and exports, according to a research report released by the State Information Center (SIC) and published in the official China Securities Journal.

The SIC, affiliated with the State Council, or cabinet, previously forecast first quarter growth of 10.2 pct year-on-year.

The new projection, if realized, would make GDP growth in the first quarter the highest since the second quarter of 2006, when growth hit 11.5 pct.

It could also raise concerns in Chinese policymaking circles that the economy is again at risk of overheating despite a series of government administrative and policy measures to curb growth, suggesting additional action is necessary.

The official report said the upward adjustment in the forecast was based on new data from January and February.

Consumption growth has continued to accelerate while export growth remained strong, the SIC said. On the other hand, investment growth is falling back into a reasonable range and its structure is improving, it added.

Despite the rapid growth of the money supply and credit, consumer prices have remained 'normal', indicating the the economy can continue to grow rapidly without generating high inflation, the report added.

CHINESE INVESTORS IGNORE BUBBLE TALK TO OPEN NEW ACCOUNTS

Chinese retail investors are rushing to open new share-trading accounts at a faster rate than ever before, in spite of increasing signs of a resurgent bubble in the mainland market.

In the past week alone, more than 1m new accounts have been opened, taking the total for the past four months to in excess of 10m �C more than the previous four years combined.

The wave of new money has led the Shanghai and Shenzhen markets to consistently hit record highs, having bounced back from an 8.8 per cent correction on February 27, which many blamed for a global sell-off.

However, analysts warned that current price levels were unsustainable and the market could be approaching another correction.

"This is definitely a bubble in the making �C for the vast majority of stocks positive earnings growth has been priced in until 2009," said HSBC equities analyst Steven Sun. "At the height of the last stock bubble [in 2000-2001] we saw investors opening 2m accounts a month which is half the current rate."

"Any money getting into the market now is not smart money and is coming from the kind of people who can least afford to lose it," said Fraser Howie, author of a book on the Chinese stock markets. "That has to have the government worried about social stability."

The rush to join the Chinese stock frenzy comes after the market rose more than 130 per cent last year and a further 40 per cent so far this year. The benchmark Shanghai Composite Index rose 0.01 per cent yesterday to hit another record high.

Retail investors began returning to the stock market in large numbers last May, following a five-year bear market, and since then the pace of new account openings has steadily accelerated. The figures for new accounts are considered a rough proxy for new retail investors entering the market, although there have been cases in the past where individual traders have opened thousands of accounts using fake identifications. There is also an element of double-counting in the figures, as many investors open accounts in both Shanghai and Shenzhen.

Even as retail investors continue to pile in to the market, foreign investors have become increasingly cautious about mainland shares and one international fund manager said he now had more of his Chinese assets in cash than at any time since the government first allowed foreigners limited access to domestic stocks. Foreign investors are restricted to buying a combined $10bn in locally listed stocks.

Prior to the February correction, Beijing had tried to cool market sentiment, publishing prominent editorials in the state-controlled press warning of the risks involved in stock investments. However, since then the government has been conspicuously quiet, leading many investors to assume the leadership has granted its tacit approval to the ongoing bull run.

"We expect the government to come out with more measures to cool the market soon," said JPMorgan chairman of China equities Jing Ulrich

Rich Chinese Fancy Luxury Cars

Ma Chenguang paced around a shiny Range Rover in a downtown Shanghai Jaguar dealership, checking under the hood and sliding into the front seat before declaring that he would take one.

Mr. Ma, a 37-year-old steel trader, is paying nearly $219,000 for a jet-black model with a turbo-charged engine to replace the Mercedes he has been driving. "I want a change," he says.

A Mercedes is parked in downtown Shanghai as a street cleaner passes by. [Photo: wsj.com]

So do other rich Chinese.

In the 1990s, many in China considered Volkswagens high class. But today, well-to-do Chinese are hankering for Bentleys, Ferraris, Mercedes, Audis, deluxe Cadillacs and even Rolls-Royces, reflecting the nation's growing wealth -- and a new boldness about showing it off.

Luxury cars entered the Chinese market more than a decade ago, but demand was confined to a sliver of the privileged class -- usually high-level bureaucrats and officials -- who had the connections and the money to import the cars from Europe and the U.S. Hardly any high-end vehicles were produced locally.

Lately, though, there has been a boom in luxury-car sales. Showrooms are sprouting across China, and car companies are organizing owners' clubs and hawking fancy branded merchandise to foster brand identity.

Fueling the demand for high-end cars is a growing pool of entrepreneurs and "sea turtles," the Chinese nickname for citizens who have returned to China after years of living overseas. The newly rich are leading the way in casting off decades-old qualms about displaying wealth.

The Chinese who can afford luxury cars still form a tiny community amid the nation's 1.3 billion people. But they wield enormous spending power. And, as the income gap between China's rich and poor grows, those at the top of the economic pyramid have ever more money to shop.

Chinese children admire an Audi A6. [Photo: wsj.com]

China is such a hot market that BMW AG is planning the world premier of a new high-end car at the Shanghai auto show, which begins next week. DaimlerChrysler AG will be showcasing its high-performance Mercedes-Benz AMG sedans, which will sell for up to $375,000. Other luxury-car makers will also be out in force.

"The rapid growth of affluence in China and the increasing desire for individuality and expressiveness" are making China "the most dynamic market in the world," says Ulrich Walker, chairman and CEO of DaimlerChrysler's Northeast Asia operations.

Since 2004, luxury-car sales in China have more than doubled, says Yale Zhang, an auto-industry analyst with CSM Worldwide. In the first quarter, sales of Audis were up 27% from the same period a year earlier. BMW's first-quarter sales were up 34% to 10,177 vehicles, while Mercedes-Benz sales climbed 16%. The company's largest sedan, the S Class, accounted for about 44% of the vehicles sold.

Mercedes has experienced such a sharp run-up in demand that DaimlerChrysler decided to start manufacturing E Class sedans in China. The first cars started rolling off the assembly line in a factory on the outskirts of Beijing in late 2005. The company will start making C Class sedans in China later this year.

In a sign of how far wealth -- and the desire for the high life -- has spread here, Rolls-Royce recently opened a showroom in Chengdu, an inland city in southwestern China where incomes are still 30% below those in major cities like Beijing and Shanghai.

While still a small part of the population, China's super rich are likely to multiply. Richard Lee, who owns a Ferrari dealership in the northeastern city of Dalian and is a shareholder of the company that imports the Italian sports car into China, reckons there are half a million Chinese with disposable incomes of at least $1 million, the target clients for luxury car companies. And that 0.038% of the population is growing at some 20% a year.

A Rolls-Royce on display in China, where sales of the car rose more than 60% last year. [Photo: wsj.com]

Before Chinese consumers dared to splurge on expensive cars, they were already spending their money on Gucci and Louis Vuitton, fashion labels that entered the Chinese market in the 1990s. Their stores -- and the massive amounts of advertising they did in local magazines -- helped to expose the Chinese to the notion of luxury and high-end living, Mr. Lee says.

The most exclusive car brands are among those experiencing the fastest growth. Jenny Zheng, Rolls-Royce's general manager for greater China, says the company's China sales jumped more than 60% last year from the year before. She says China overtook Japan for the first time in 2006, though she declined to cite actual figures. Globally, the brand has sold 805 cars, each one tailor-made to the owner's demands, she says.

Rolls-Royce's Chinese clients fork out at least $647,000, the cheapest price tag. Most owners want black cars in order to emulate the style of high officials, Ms. Zheng says. Some corporate customers have even asked to have the name of their company's chairman embossed discreetly on the side of their car.

Ferrari, too, has ventured out of the coastal cities. Its latest showroom is Mr. Lee's in Dalian. This region is often labeled China's rust belt, but Mr. Lee says that even here people are getting richer and are quickly shedding their fear of showing off.

Indeed in much of China, having a fancy car has become a critical part of maintaining face. One construction company owner, who gave his name only as Mr. Jiang, says he drives an Audi A8 in part because of the impression it makes on clients. "It's a symbol of my business," he says.

Engineers and designers for General Motors Corp. labor to make Buicks and Cadillacs sold in China more luxe than their North American counterparts. Cars have leather upholstery, lacquered wood trim and technical bells and whistles, such as in-seat TVs and remote controls for the audio and video systems. This week, GM launched the Park Avenue sedan, the top of its Buick line, here. The price tag: $65,000 and up.

Anita Yan doesn't own a car, but she markets Cadillacs to those who can afford one -- or sometimes even two. She says most of her clients are entrepreneurs with established businesses. Very few are salaried workers.

Though wealth is becoming conspicuous, some clients still want to remain low key. Ms. Yan says some people who drop by her showroom aren't actual customers. Instead, they're relatives or employees of clients sent to pick out a car. The owners don't turn up until the day of payment.

Mr. Ma, the steel trader, is blasé about his newly purchased Range Rover. "A lot of people can afford this kind of car these days," he says. "It's nothing special. I just like it."

Chinese Fakes: Tough to Police

 

The country is being told to crack down on piracy of products and intellectual property, but the problem is a global one that will be tough to stamp out

 

On Apr. 6, Beijing announced that it would lower the threshold for the number of bootleg copies seized that would trigger criminal charges. The move is part of an effort to prosecute sellers of pirated CDs and DVDs. But it probably won't impress U.S. motion picture and recording industry executives, who have been lobbying Washington to put more pressure on China to combat rampant piracy and counterfeiting. U.S. Trade Representative Susan Schwab said the U.S. will file two formal complaints with the World Trade Organization on Apr. 10 alleging that China is not doing enough to protect intellectual property. The second case concerns market barriers that the U.S. contends keep American books, films, and music out of China. "Piracy and counterfeiting levels in China remain unacceptably high," Schwab said Apr. 9 in announcing the new cases: "Inadequate protection of intellectual property rights in China costs U.S. firms and workers billions of dollars each year."

Here's a quick guide to the central issues involved:

Is the problem of counterfeiting getting better or worse in China?

Chinese authorities have made honest efforts in recent years to improve enforcement, stepping up police raids on rogue manufacturers, tightening controls at customs to prevent exports, and making it easier to prosecute counterfeit producers and distributors. But counterfeiters are growing more sophisticated about how they manufacture and distribute knockoffs, especially exploiting extensive global supply networks. There's also evidence that as China clamps down, production of the knockoffs is shifting to India and Russia.

Have foreign companies successfully used Chinese courts to protect their brands?

The Quality Brands Protection Committee (QBPC), a coalition of foreign and domestic companies seeking intellectual-property rights protection, says that it has received 22 submissions from members detailing successful criminal prosecutions against counterfeiters. A few years ago, there were none. Lawyers also say that foreign companies are now using Chinese courts to fight each other over patents that they have registered with China, which is strong evidence of their faith in the Chinese legal system.

Would the problem of piracy in China improve if the foreign copyright owners had greater access to the Chinese market?

The U.S. will probably call for greater market access under the WTO as well. China only allows the legal importation of 20 foreign movie titles a year, and has restrictions on musical recordings, too. Yet the prevalence of tens of thousands of different titles of bootlegged DVDs and CDs, which sell for less than a dollar, is evidence there is enormous demand. "The market wants to watch all the movies from Hollywood," says Anthony Chen, an intellectual-property rights lawyer with Jones Day in Shanghai. "There is no alternative for customers; it's not a question of price but availability."

If counterfeiting is a global problem, is targeting China alone a sufficient approach?

Law enforcers and brand owners say that only a multilateral approach will be effective. Though China is ground zero for much of global product piracy, worldwide distribution is controlled by international syndicates. Thanks to the Internet, a foreign buyer can now send specifications for a counterfeit Calloway golf club, a Nokia ( NOK) mobile-phone battery, or a pair of Nike ( NKE) sports shoes to a Chinese manufacturer without having to set foot in the country. Still, as one member of the QBPC who requested anonymity puts it, "The bad guys develop skills much faster than law enforcement, so while there are stronger and stronger efforts, the collaboration is lagging behind the counterfeiters."

What is the likely outcome of a U.S. complaint filed with the WTO?

The U.S. has only filed three complaints with the WTO against Beijing since China joined the organization in December, 2001. First, the U.S. must formally ask for consultations with China before asking the WTO to make a judgment, a process that could take several months. Still, trade tensions with China are continuing to escalate in the face of a yawning gap with the U.S. and other major trading partners. So Washington may also appeal to the WTO to ensure greater access to China's market for foreign music and movies (see BusinessWeek.com, 4/4/07, "Rough Road Ahead for U.S.-China Trade").

Is the nature of counterfeiting changing?

It is no longer confined to imitation watches, handbags, and auto parts. Executives on the ground in China say that as mainland manufacturers move up the value chain in legitimate goods, so do counterfeiters who are making sophisticated electrical components and machinery aimed at the industry, not at the end consumer.

Will the new, stiffer laws imposed on sellers of pirated products help solve the problem?

Probably not. Many retailers no longer display their wares openly. They now resort to the use of catalogs. And despite several high-profile crackdowns at Silk Street Market, Beijing's best-known counterfeiting locale, this practice continues unabated.

China Trade Surplus Dip Is No Omen

The 38% decline in March likely was a function of a pre-tax surge in winter exports; China's first-quarter surplus still nearly doubled.

 

Sometimes Chinese economic data will surprise economists and traders by diverging slightly from consensus forecasts. Yet it is quite rare for the money pros to be off by $13 billion. That's pretty much what happened on Apr. 10, when China reported that its March trade surplus fell 38% year-on-year to $6.87 billion, while most economists were expecting a jump to $20 billion.

Coming at a time when U.S.-China trade relations have hit a nasty stretch, and U.S. Trade Representative Susan Schwab has just filed two formal complaints with the World Trade Organization alleging China is not doing enough to protect intellectual property, one might be tempted to view this as a promising development.

Not really, says Shanghai-based Standard Chartered senior economist Stephen Green. He thinks the falloff instead reflects the fact that Chinese exporters front-loaded a lot of international sales during January and February ahead of moves by Beijing to start reducing export-tax rebates on some Chinese products in March.

Not a Meaningful Number

"In February, everyone was bringing everything forward," Green said in a phone interview. He also points out that China's first-quarter trade surplus still came in at $46.5 billion, roughly double the $23.3 billion figure for the comparable time frame in 2006. While Chinese exports grew only 6.9% year-on-year in March, Green thinks monthly export growth will quickly resume its hyperspeed double-digit growth.

"In our view, this number will do nothing, zilch, nada, to address political concerns in the U.S. about China's overall trade surplus," Green explained to clients in a research note circulated soon after the trade data were released. China's first-quarter export performance was so supercharged, says Green, that the mainland's economy probably clocked 10.6% growth in gross domestic product in the January-March period.

The U.S. noted a record $232.5 billion trade deficit with China last year, and that has strengthened the hand of trade hawks in Washington who are urging the Bush Administration to take a more confrontational approach with Beijing.

U.S. Files Piracy Complaints

On Mar. 30, the U.S. imposed countervailing duties on imports of glossy paper manufactured in China (see BusinessWeek.com, 4/4/07, "Rough Road Ahead for U.S.-China Trade"). And on Apr. 9, U.S. Trade Representative Susan Schwab announced plans to file two formal complaints with the World Trade Organization alleging that China is not doing enough to protect intellectual property.

The second case concerns market barriers that the U.S. contends keep U.S. books, films, and music out of China. "Piracy and counterfeiting levels in China remain unacceptably high," Schwab said Apr. 9 in announcing the new cases, "Inadequate protection of intellectual-property rights in China costs U.S. firms and workers billions of dollars each year" (see BusinessWeek.com, 4/9/07, "China Fakes: Tough to Police" ).

China is trying to cool off its export machine with tax policies and tighter bank lending, but few expect any meaningful drop in the country's trade numbers any time soon. Chinese export industries are big employers, and this still-developing economy needs all the jobs it can generate.

More Surplus, More Jobs

China created about 11.8 million new jobs in urban areas in 2006, mainly in manufacturing, construction, and services. However, the Chinese government estimates that it must create 25 million new jobs. "Millions of migrants from the countryside, new graduates, and laid-off workers still went without work," according to a recent Asia Development Bank study on China's economic outlook.

That's one reason China is unlikely to tolerate the kind of dramatic appreciation of the yuan that some in the U.S. are calling for to cut the country's trade surplus down to size. It would be too destructive to job growth and perhaps cause political unrest. Green with Standard Chartered is forecasting a modest 4% appreciation of the Chinese yuan against the dollar this year.

China's Emerging Car Industry

 Less than 10 years ago, China's annual car production did not match the output of a single large auto company in a developed country, but recent years have seen quite a transformation. Domestic companies like Geely, Chery and Changfeng have learned quickly, expanding production capacity and developing new models.

Yet China is home to almost as many automakers as the United States, Japan and Europe combined. Like so many industries here, the fat needs trimming.

It seems clear which companies will lead the way. Chery Automobile, based in Wuhu, Anhui province, now exports cars to 29 countries. Last year the company produced 305,000 cars and exported 50,000. Chery cars are expected to hit the European market later this year.

Geely Autos is another company looking to export to Europe as soon as this year. The firm was the first from China to appear at the Frankfurt Motor Show (in September 2005) and is now re-engineering its cars to comply with EU auto import regulations. Brilliance Auto, which is collaborating with BMW, also made an impressive display at the Geneva Auto Show earlier this year. Its BS6 model is already being sold in Germany.

Foreign challenge

The domestic players also have competition from abroad as foreign automakers are starting to export cars from China through their joint ventures. Volkswagen plans to export its China-made vehicles to 84 countries by 2009 and Honda is already exporting to Europe from China.

The government has made it an official goal to compete as a global auto player, even enshrining it in the 11th Five-Year Plan. A quality-control licensing system is in its initial stages, though details are scarce as of yet.

Eight auto export manufacturing bases have been established to help automakers expand globally. They include Shanghai, where both GM and VW have joint ventures; the northeastern city of Changchun, headquarters for major automaker FAW; Chongqing (Chang'an Auto); Wuhan (Dong Feng Group); Xiamen (Golden Dragon); Wuhu, (Chery); Taizhou (Geely); and Tianjin, where Toyota has a joint venture with FAW.

It isn't just exports that have a promising future. Last year China overtook Japan as the world's number two market for automobiles, with total vehicle sales rising 25% in 2005 to 7.2 million. The number of cars in Shanghai reached the previous 2020 estimate by the beginning of 2005. Beijing had over 22,000 new car registrations in the first 18 days of 2007, total hit almost 2.9 million. All of these vehicles are clogging the roads and polluting the air, and yet only a tiny fraction of the population is on the road.

Same old game

Copyright infringement has become as endemic in the auto industry as it is throughout China's export economy. There have been multiple suits brought by American and European automakers against Chinese companies - often their own joint-venture partners.

In addition, the hand of the state is ever-present. The US is considering a suit against China at the WTO for, among other things, subsidizing its auto parts industry.

Regardless of whether the US claims are justified, China has become a major global auto parts supplier and this trade will continue to grow. Of the world's top 100 auto parts suppliers, 70% have a presence in China. There are about 1,200 foreign-funded or jointly-invested parts manufacturers in China holding 50% the market. Among them are brands such as Delphi, Bosch, Visteon and Wanxiang, China's largest maker of auto parts. There are about 5,000 domestic spare parts manufacturers.

Factor in the positive prospects of other auto-related industries - repair, road transportation, insurance, finance and rental - and it becomes clear why the expectations, and the stakes, for this industry have soared so high.

 

CHINA MOVES TO EXPLAIN $136BN FOREX SURGE

China has taken the unusual step of trying to explain the recent surge in its foreign exchange reserves after they rose by the equivalent of $1m a minute in the first quarter of this year, or by more than half the total increase of 2006.

The explanation yesterday by Wu Xiaoling, a deputy governor of the People's Bank of China, prompted a number of analysts to firm up their expectations that the central bank would introduce further monetary tightening measures.

Economists also expect first-quarter economic growth figures, due to be released on Thursday, to put more pressure on the PBoC. Goldman Sachs, in a note to investors, yesterday said it expected gross domestic product growth for the first quarter of 2007 to accelerate to 11.2 per cent, up from 10.4 per cent in the final three months of last year.

China has already increased six times in less than a year the amount it requires commercial banks to keep on deposit with the authorities, to control liquidity in the financial system. It has increased interest rates three times during the same period.

Beijing supports fast growth but has been increasingly worried about the political, environmental and structural economic impact of the current model, which is driven by high net exports and energy-intensive heavy industry.

Speaking at a seminar in Guangzhou, southern China, on Sunday, Ms Wu said the first-quarter rise in foreign exchange reserves of $135.7bn (�00bn, £68bn) to $1,202bn was caused by a number of factors beyond the sharp rise in the trade surplus, which had already been made public.

Ms Wu said the unwinding of swap agreements between the central banks and Chinese commercial lenders had resulted in foreign exchange coming back on to the PBoC's books.

Some of the funds raised in huge offshore initial public offerings by Chinese banks and other enterprises had also been brought back onshore, driven by the desire to take advantage of the rising renminbi.

CHINA'S STOCK EXCHANGES

Stock exchanges are no strangers to rivalry �C just ask London and New York. Beijing, however, appears to have taken competition to new heights by reportedly ordering all but the biggest issuers to spurn Hong Kong and stay home.

Chinese regulators clearly have an interest in promoting the home markets, which are now on a roll. The Shanghai B-share market rose 130 per cent last year and together with the country's two domestic currency A-share markets recently overtook Hong Kong in terms of market capitalisation. Diverting more initial public offerings to the domestic markets means more choice for local shareholders, who are largely prohibited from investing overseas. More paper also helps mop up the funds pouring into the home market. And, unpalatable as it may be, Chinese regulators have no qualms about dictating where companies should go to raise funds.

This (unofficial) policy also cuts into Hong Kong's biggest client base. Last year, mainland IPOs accounted for almost 90 per cent of the $43bn worth on the Hong Kong exchange. Trading in shares of Chinese entities made up almost one-third of market turnover. But Hong Kong is less vulnerable than the numbers suggest.

For starters, listing fees comprise only one-tenth of total income and the bulk of that comes from annual payments. More pertinently, Hong Kong has stolen a march on fast-growing derivatives �C it is home to one of the world's biggest equity warrants markets �C and is staying ahead through innovation. A new retail-friendly derivative instrument launched in June was responsible for 83 listings and $1.5bn of turnover by the end of the year. Besides, as the caveat for $1bn-plus issuers suggests, China cannot afford to dispense with Hong Kong just yet. That could only happen when China has a fully convertible currency. Until then, Hong Kong can bank on hosting issuers needing to tap international investors

China and India: The two differ in business as much as they do in politics

The excitement among investors over the prospects of the "Brics" �C the big emerging markets of Brazil, Russia, India, China and South Africa �C has begun to metamorphose into a more realistic enthusiasm for "Chindia". China and India, after all, are by the far the largest and fastest growing of the five.

China, with 1.3bn people, and India, with 1.1bn, happen to be the world's most populous nations. Both economies are growing exceptionally fast, and both are increasingly dependent on imports of energy and raw materials.

Even some of the obvious differences that do exist are simply a matter of timing. Because China started growing earlier and grew faster, India is poorer and the average Indian still has only half as much income as the average Chinese.

The Indian economy, meanwhile, is starting to become more like China's. Jonathan Anderson, head of Asia-Pacific economics for UBS, notes that India, with low savings rates and resulting low investment, used to look more like Latin America than east Asia. Now its savings rate is approaching 30 per cent, and exports are rising as a share of gross domestic product.

Mr Anderson told the Foreign Correspondents Club in Hong Kong recently: "India is looking like a tiger." His talk was appropriately entitled: "India, the next China? Or China, the next India?"

Yet some of the differences between the two are so vast that they undermine any attempt at a common analysis. China is a Communist dictatorship, while India is the world's largest democracy. China's population growth will stop in the next two decades, while India will have to find jobs for hundreds of millions of young job seekers as the number of its inhabitants exceeds China's and heads towards 1.6bn.

Chinese leaders typically hand down orders for economic reform from the top, organise the rapid building of infrastructure and cater for the urbanisation that comes with economic growth.

Indian governments generally resist reform, prevaricate over investing in infrastructure and �C sentimental as they are about a non-existent ideal of rural Indian life �C refuse to cater for the tens of millions of rural migrants flooding into the cities.

When considering these attitudes, and the fact that China is a manufacturing power exporting nearly $1,000bn a year or seven times as much as India, it is tempting to conclude that China is destined for success and India for failure. The reality is more complex and more interesting, largely because of the way politics interacts with markets and with the private sector.

Indian financial markets are lively and robust (though not immune to bubbles), whereas Chinese markets are small and highly constrained by the limitations of the country's private sector and tight government controls.

India's leading private companies have carved out niches in sectors such as information technology, pharmaceuticals and financial back-office outsourcing that would normally find a place in a much more advanced economy. And they have reacted to onerous labour regulations by developing capital-intensive businesses that would not normally exist in a country with low-cost, surplus labour.

As a result, a cohort of the best Indian companies boasts an international competitiveness that allows them to make outward investments in developed economies �C and not just in the natural resources sector, where Chinese state companies are also eager buyers. Even if one excludes Tata's contested $10bn bid for Corus, the European steel group, overseas acquisitions by Indian companies will more than double to this year from last year's $4.5bn.

"Currently, the Indian model is generating more companies ready to move to a global scale of operations," says Gordon Orr, Greater China chairman of McKinsey, the consultancy. "The advantage of the Indian model has been the emergence of a few large-scale, capital-intensive companies early on."

In China �C although outsiders imagine a rampant capitalist sector thriving under the benign guidance of a nominally Communist government �C domestic private companies remain constrained by the need to work with powerful provincial governments and the state-owned enterprises that dominate all the key sectors of the economy.

"Private firms say: 'We can only be the concubines of the state-owned enterprises or the mistresses of the multinationals," comments a Chinese economist, who asked not to be named. Asked why the private sector could not be unleashed for the benefit of all, the economist replied: "It would be good for the economy, but not for the party."

Foreign investors say the Communist Party still has an ambivalent attitude towards private companies. It regards their main roles as giving support to state-controlled companies and providing employment for millions of workers �C which is why light industrial activities such as furniture-making are favoured activities.

With a couple of exceptions �C the jury is still out on Lenovo's acquisition of IBM's personal computer business �C Chinese brands have so far failed to make a big impact in foreign markets.

Struggling to make themselves heard among the many bullish analysts, a few sceptics have sounded warning notes.

India, they say, will be hamstrung by populism, a reluctance to open its economy and infrastructure bottlenecks.

China's growth will be stunted by its dependence on the US and other uncertain foreign markets (one of the disadvantages of openness) and by the Communist Party's refusal to allow the rise of a real free-market economy.

"It's taken for granted that China will grow fast unless there is political trouble," says Diana Choyleva of Lombard Street Research. "Even on economic grounds, that's not so clear."

In the race to become developed economies, China and India have very different challenges and can hardly be said to be on the same track. They might end up in the same place. But if they do, it will take a long time and each will have achieved success by a very different route.

CHINA WARRANTS MARKET IS BIGGEST

Less than 18 months after the first warrant was issued on China's stock exchanges, the country now boasts the world's biggest market for the financial instrument.

Chinese investors' love affair with warrants was an accidental outcome arising from a set of last-gasp stock market reforms and has been stoked up by a speculative fever that may not last.

Like options, warrants allow investors to buy a security at a future date for a fixed price. Warrants can also be bought and sold in their own right, making them potential objects of speculation as well.

According to data compiled by Goldman Sachs, warrant turnover on the Shanghai and Shenzhen stock exchanges reached $221.2bn over the first 11 months of 2006, against $207.8bn in Hong Kong.

Hong Kong's full-year turnover came in at $230bn, with incomplete statistics for China suggesting its final figure would exceed $244bn.

This is in spite of only 27 warrants being traded in China compared with more than 2,000 in Hong Kong.

Zhu Huacheng, derivative products analyst with Xiangcai Securities, said China warrants could change hands up to 150 times before exercise, compared with just 10 times in more mature markets. Warrants were embraced in China to help listed state-owned enterprises out of an awkward bind. Listed state companies had two classes of shares, one that could be traded on stock exchanges and the other that could not.

To realise the value of their non-tradeable "state shares", state-owned enterprises needed to render them tradeable. This required approval from minority shareholders, who feared dilution from the release of a large overhang of state shares.

To win their minorities over, state companies gifted investors free bonus shares and, in some cases, free warrants as well. In Hong Kong and other markets, investors buy warrants issued by independent third parties, such as investment banks.

Cheril Lee, executive director and head of Goldman's securitised derivative products in Hong Kong, said the market's momentum would depend on further initiatives from China's regulator, which has not yet given blanket approval for third-party issues but approves them on a one-off basis.

"It seems like they are quite supportive of warrants," Ms Lee said. "If the regulator allows third party warrants the market can stay [at current levels]."

A better way for Japan to live with its neighbours

In recent years foreign observers have reported increasing nationalistic pride in Japan. Such growing sentiment is rooted in frustration over gaps between Japan's security policy and the reality of today's world, and between contemporary Japan and its wartime past.

Japan's humiliation during the 1991 Gulf war first revealed the gap between the constraints of its pacifist constitution and the demands of the post-cold-war world. Despite its $13bn (€9.9bn) contribution, Japan was criticised for its inability to participate in the operations of the coalition forces. Meanwhile, controversy over Japan's wartime past - exemplified by the Yasukuni shrine, which honours 2.5m war dead, including 14 Class A war criminals - has loomed over its relations with neighbours, creating an opening for a harmful strain of nationalism.

The situation today is entirely different from that of the postwar era, when phenomenal economic growth was a source of national pride, absorbing many of the frustrations about external affairs. The rise of China and tensions vis-à-vis North Korea have deepened Japan's uncertainty about its contemporary surroundings. Domestic political developments in recent years have exacerbated the problem and fostered a policy-making process that is increasingly influenced by populism. Such capitalisation on popular frustrations can have dangerous consequences, particularly in foreign policy.

Japan's close relationship with the US has also contributed to nationalistic sentiments. The US has played an invaluable part in Japan's development as a member of the international community, yet its role as security guarantor has allowed Japan to avoid dealing with its contemporary contradictions. If these persist, they will not only damage Japan's national interest but may undermine the Japan-US relationship.

As the international community has increasingly faced non-traditional threats such as terrorism and the proliferation of weapons of mass destruction, the regional and global security environment has become more complex. This has brought the contradiction between Japan's pacifist constitution and its 60-year-old security policy, dependent on US military might, to the fore.

In light of domestic and foreign expectations for Japan to contribute internationally and assume a greater role in its own security, the country has enacted measures that authorise it to deal more directly with regional contingencies. Examples include the guidelines for Japan-US defence co-operation in 1997 and the anti-terrorism special measures law of 2001. A debate has also begun over revising Article 9, the "no war" clause of the constitution, to permit the use of force.

To respond adequately to non-traditional threats, Japan needs to discard the fictions and taboos constraining its security policy and articulate how and when it might use force - not as a means of resolving international disputes, but as part of the international community's collective self-defence.

Moves to reconcile the contradictions in Japan's security policy are best complemented by efforts to improve ties with east Asian neighbours and help build a more peaceful, prosperous and co-operative region. History has been one obstacle. Japan should not forget its past, but a focus merely on historical issues will exacerbate tensions. All sides must stop politicising history.

China's future role in east Asia also looms large over discussions about regional co-operation. China is in trans-ition. Japan must engage it as a great power and encourage it to align its interests with the rest of the region.

The key to building a prosperous and stable east Asia is to strengthen a sense of regional community by identifying areas of common interest - such as energy, the environment, income disparities, Aids and piracy - and working jointly on them step by step.

Intra-regional economic co-operation is making quick progress and the potential for further expansion of econ-omic ties should be emphasised.

The rise of nationalistic sentiment has become one of the challenges facing Japan as it debates its identity in the post-cold-war world. A two-pronged approach - revising outdated security policies and building an east Asian community - can help bridge the gaps that give rise to these sentiments, so that nationalism can be channelled in a constructive direction. This wouldenable Japan to live up to its potential as a respected leader in the region and in the world.

THE GLOBETROTTING GLOBALISATION GURU

When Paul Tiffany was teaching at Sasin Graduate Institute of Business Administration, Thailand's premier business school, one December, colleagues asked him on which beach he would be spending Christmas.

His response was that - au contraire - he would be running business seminars in Istanbul over the break.

The global demand for gritty but voguish business strategies is now big enough to keep even a workaholic ronin such as Prof Tiffany as busy as he wants to be. And that is likely to last as long as globalisation, defined as the triumph of free markets, endures, he says.

When the pace of globalisation - "the coming together on a platform of common values" - picked up after the fall of the Berlin Wall, so did the demand for people capable of decoding free markets and the US business model.

"America may notbe everybody's favourite country these days, but the world remains in awe of American business techniques," he says.

When a strategist at a recent investment seminar talked of the "esoteric"markets, Malta, Iceland and Turkey, that jolted even Prof Tiffany, who realised he had lectured in all three places in the previous 12 months. He works out of Berkeley's Haas School of Business,but will also teach this year in Shanghai, Beijing, Singapore, Kuala Lumpur,Thailand, Norway, Denmark and Switzerland, among other places.

"America is still the fount of management concepts. I don't want to sound arrogant, but the sheer depth, breadth and flexibility of the American economy, its constant search for profit and cost reduction, makes it so dynamic, so innovative, that much of the rest of the world is still playing catch-up," he says. "The American management model has become, de facto, the global model."

The urbane Prof Tiffany is no supporter of red, raw capitalism: he regrets corporate America's reluctant environmentalism, dislikes Washington's close ties to the energy industry and admits that free market capitalism is not always pretty.

But the widening realisation that international capital favours ruthless efficiency - "China can make it cheaper" - is acting as a scourge to complacency and tradition. The European Union's elaborate social system and Asian oligopolies alike are being shaken.

"I teach at Berkeley, which means you must quote Marx at every lecture. For Marx, capitalism was modernisation. And that means standardisation and commoditisation. That's what we're seeing - the suppliers are the lowest-cost producers wherever they are."

As a management trainer in corporations as diverse as Axa, Deutsche PostWorldNet, Crisco and Siam Cement, Prof Tiffany is keenly aware that ambitious organisations can now take little for granted.

Neither the Asian family-owned company that resists restructuring, nor the "socially responsible" European firm, may be comfortable with US-style cold-bloodedness, but they will both be increasingly at risk from more "rational" competitors, he argues.

That seems, de facto, to be the attitude of businessstudents from Beijing to Boston: "They want to learn the same things. They ask the same questions. They even dress the same."

Any "American model" lecturer who ventures forth with a few bright beads of basic capitalism to wow the locals will be quickly and rudely disabused. "You have to dig deep to keep them interested. Everyone's heard about the latest management fashions before you walk through the door."

But reading about something and experiencing are not the same thing. "International strategy" may seem premature to some students outside the west. Prof Tiffany was, for example, forced to abandon a course on the management of technology and innovation ("which I really liked") in Bangkok because the students did not find it relevant.

Pedagogic ability remains vital everywhere. "How can I say this without sounding conceited? I think I teach well. I've got good stage skills, a certain flair. You can be the smartest guy on the block, but if you can't communicate . . . "

The business education industry is now so "modern" that every MBA programme syllabus looks similar and the best business schools promise high-powered networking to justify their fees. This leads Prof Tiffany to argue that executive MBA programmes are becoming the flagships for the business schools.

"The typical MBA students don't really have the seasoning and the breadth of experience to leverage the insights someone like me can provide. But when students are in their mid-30s, with 10-15 years' experience behind them, they can get so much more out of a programme," he comments.

In the knowledge economy - using the terms of the management writer Peter Drucker - corporations must nurture their most valuable asset, their people, with continuous education, he says. "This is happening. The concept of lifelong learning has really taken root in the best firms, and I think the number of people being put into EMBAs signals that."

He never puts on a special act for international audiences: "They are paying you to be yourself. As an American professor I'm very open and interactive, which is refreshing and appreciated."

Nevertheless, he adds, "You can't expect Harvard-style participation from students in places like Asia. You have to adapt. Cold calling in class can upset people and I'm much more likely to break the class into groups to tackle problems." Students like personal stories and anecdotes almost everywhere: "Get off the textbooks. They love insider-type talk. A bit of reality."

No one has discovered what triggers innovation and the subject needs careful handling in the classroom, he says. The Anglo-Saxon societies that reward individual achievement have proved fecund (Berkeley's campus holds more Nobel Prize winners than Japan), but the creative impulse could shift elsewhere.

He finds it faintly alarming that the "Dummies" series of textbooks has been such a hit in the US, which is interesting, considering he himself is the author of the popular Business Plans for Dummies, now in a dozen languages. He also wrote "a real book", The Decline of American Steel.

The purpose of a corporation is to make profit, he tells his students - "Period. End of story." - and the greatest threat to profit is competition. Business people will inherently do, therefore, whatever they can to minimise competition. Free trade must always be protected from its components.

Yet, disconcertingly, cracks are now appearing in the global free trade system. His most interesting discussions with students happen these days, he says, when he asks them to imagine a fallback position after a breakdown of free trade.

"Globalisation happened because a single countryhad the will and the patience to act as enforcer. To say 'Eat your spinach! I know you don't like it, but it's good for you!'

"In the 19th century it was Great Britain. After the second world war it has been the US. Could it be China in the future?"

Prof Tiffany likes to sober up his students by reminding them that, historically, great powers have appeared and faded like comets. He also likes reminding students that the world was more tightly knit, more globalised, 100 years ago thanit is today.

"Is Iraq the beginning of the end of American power? Can you hedge against a crash in free trade? These are interesting questions."