China’s gross domestic product grew 7.8 percent in 2012, its slowest pace since 1999. China’s growth slowdown appears to have bottomed and for the fourth quarter of 2012 China’s economy grew at 7.9 percent, slightly ahead of the expected 7.8 percent. Many analysts questioned the health of the apparent recovery and the limited progress in rebalancing the economy away from investment toward consumption.
In spite of the improvement in the Chinese economy, the construction and mining sectors have remained relatively weak. Caterpillar€˜s China operation has had some difficulties, and it now turns out Caterpillar has to deal with not only a weak economy but also what it says was outright fraud.
In 2011 Caterpillar announced the acquisition of ERA Mining Machinery for up to $886 million. Late Friday afternoon, on the eve of a three day weekend, Caterpillar issued a news release saying that it had “uncovered deliberate, multiyear, coordinated accounting misconduct†in ERA’s operations.
Another month, another Chinese fraud, a cynic might quip. What makes this scam so remarkable is that a huge multinational with decades of experience in China was fooled, possibly because of! a “distracted board of directorsâ€, and that the principal shareholders of ERA â€" Emory Williams, the former President of the American Chamber of Commerce in Beijing and James E. Thompson III, heir apparent to the Crown Shipping fortune â€" are prominent Western expatriates.
Caterpillar has not publicly accused Mr. Williams or Mr. Thompson of misconduct but the release says that “Caterpillar’s investigation of these matters is ongoing and any other comment at this time is not appropriate.â€
SIGNIFICANT INCOME INEQUALITY may be hampering China’s rebalancing from investment-led to consumption-driven growth. For the first time since 2000 the Chinese government has released official estimate of the country’s Gini Coefficient, a measure of income inequality. According to National Bureau of Statistics, China’s 2012 Gini coefficient was 0.477, similar to the 2011 United States Gini figure. The bureau also reports that the measure has declined since 2008.
There was much skepticism about the official calculations and a separate report released last month by researchers from a Chinese University claims that China’s Gini was actually 0.61 in 2010. Most likely it is somewhere between 0.477 and 0.61, and regardless of the true number it is clear that income disparities, along with a slower economy, air pollution, unsafe food, among many issues, are an increasing source of frustration for its citizens.
China’s new leadership is clearly feeling pressure, and it is tempting to conclude that the increasingly dangerous dispute between China and Japan over the Diaoyu/Senkaku Islands is driven in part by Beijing’s need to distract its populace from problems at home. However, the risks of a conflict to the leadership in Beijing are immense. If China were to fight and lose any clash with the Japanese, the Communist Party could face an immediate and terminal legitimacy crisis.
The hope is that things will not escalate beyond patrols and rhetoric given the deep economic ties between Japan and China as well as the danger of U.S. involvement in any clash given the U.S.-Japan security relationship. Both sides continue to talk, though mostly past each other, and a prominent Japanese politician arrived in Beijing on Tuesday carrying a letter to Xi Jinping from Prime Minister Shinzo Abe of Japan.
As the politicians talk, growing numbers of ships and aircraft are maneuvering in a relatively small area around the islands, significantly heightening the risk of accidents. A 2001 collision between a Chinese fighter jet and a U.S. spy plane in the South China Sea resulted in the death of the Chinese pilot, several days detention for the U.S. crew and the loss of U.S. equipment. The crisis ended peacefully after Washington sent expressions of regret that Beijing trumpeted in domestic media as an apology.
It is hard to believe that a similar mishap involving Chinese and Japanese would end so quickly or peacefully. China’s relentless media campaign since last summer, the anti-Japanese teachings so prevalent in the Chinese education system, and the imperative of any new leadership to not look weak, especially toward the Japanese, could mean that if there is some sort of an accident, especially one that results in the death of Chinese, Beijing may have so painted itself into a corner that it will have respond with force.
THE COSTS OF A CONFLICT could be asronomical, but history is rife with miscalculations that have repeatedly demonstrated you can not rule out irrational actions in the heat of nationalism.
Even if this round of the dispute is resolved peacefully, the underlying problems will remain, the Chinese-Japanese relationship has corroded further and China, Japan and their neighbors will want to increase military spending to prepare for future, inevitable disputes.
Mistrust between China and the United States has increased. China blames the United States for giving the islands to Japan to administer and believes that with the U.S. security umbrella Japan would no longer dare to challenge China.
A Xinhua commentary on Inauguration Day declared that “Obama could build a l! egacy by ! boosting trust with China.†Xinhua’s suggestions may be difficult for President Obama to accept, but his handling of the Diaoyu/Senkaku Islands crisis and the overall U.S.-China relationship in his second term will likely define a significant part of his foreign policy legacy.
