China condemns arms deal

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WASHINGTON / NEW YORK - China condemned the United States' Wednesday announcement that it will upgrade Taiwan's aging F-16 fighter jets, saying the potential deal will harm its "core interests" in Taiwan and damage China-US military ties.

In Beijing, Vice-Foreign Minister Zhang Zhijun summoned US Ambassador Gary Locke to lodge a strong protest against the deal, according to China's Foreign Ministry. In Washington, Chinese Ambassador to the US Zhang Yesui made his case against the potential deal.

Zhang Zhijun told Locke that the question over Taiwan is a matter of China's sovereignty and is always "the most important and most sensitive core issue" in China-US relations.

The $5.8 billion package includes retrofitting 145 of Taiwan's F-16A/B fighter jets with advanced radars and weaponry. If the deal goes through, and it likely will, it amounts to more than $12 billion in weaponry to Taiwan from the US in only two years.

According to Reuters, Taiwan's "defense ministry" said in a statement that it would continue to press for 66 newer F-16s to replace its old fighter jets that are more than 30 years old.

China sees Taiwan as a renegade province and calls any US arms sales to the self-ruled island a major hindrance to Sino-US ties.

In his protest against the deal, Zhang said the new arms sale violates three historic Sino-US joint communiques, specifically the August 17 Communique.

China has interpreted the August 17 Communique as a promise from the US that it will not seek to carry out a long-term policy of arms sales to Taiwan.

"The wrongdoing by the US side will inevitably undermine bilateral relations as well as exchanges and cooperation in military and security areas," Zhang said.

He urged the US side to stop arms sales to Taiwan, halt military relations with Taiwan and work with China to stabilize Sino-US relations. US Assistant Secretary of State for East Asian and Pacific Affairs Kurt Campbell, in a briefing with reporters about the arms deal in New York, said that "Over the decades the US has made unwavering commitment to the peace and stability across the Straits and we will continue that. That's strong and resolute".

Daniel Russell, special assistant to US President Barack Obama and senior director on Asia at the White House, said at the briefing that it is a "critical strategic principle" for the US to support Taiwan's defense.

"Preserving peace and stability across the Taiwan Straits is fundamentally and profoundly in the interest of the United States and our allies and partners," he said. "That progress in dialogues and diplomacy across the Straits has been a major contributor to that stability. And the US strongly supports efforts on both sides."

US arms sales to Taiwan have long been a source of tension for both cross-Straits ties and China-US relations.

Beijing broke off military ties last January over the US' plans to sell Taiwan more than $6 billion worth of arms. "The US has been supporting the improved relationship cross the Taiwan Straits, but we should be sensitive (to the arms sales to Taiwan)," said J. Stapleton Roy, the former US ambassador to China.

But John Feffer at the Institute for Policy Studies said he expected that the upgrade will not seriously damage bilateral relations.

"The Obama administration made a decision to push for an upgrade rather than the sale of the actual planes in order to minimize friction with Beijing. This is not an easy decision for the administration to make, given the huge profit associated with arms sales and the jobs connected to the production of F-16s," he said.

China's Foreign Minister Yang Jiechi is currently in New York attending the 66th session of the United Nations General Assembly. He is also expected to have a series of bilateral and multilateral meetings, though a Thursday meeting with Secretary of State Hillary Clinton was cancelled. No reason was given for the cancellation.

Zhang Yuwei in New York contributed to this story.

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Biz groups fire back at yuan bill

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NEW YORK - A group of 51 United States business and farm groups, including the US Chamber of Commerce and the Business Roundtable of corporate chief executives, said a bill aimed at pressuring China to appreciate its currency would have major adverse effects.

The bill has been gaining momentum in the US Senate due to fears that the US is losing too many manufacturing jobs only a year after the Senate had killed a similar bill.

In a letter that the group of powerful business executives wrote to Senate majority leaders Harry Reid (D-Nev) and Mitch McConnell (R-Ky), they said, "Legislation that would increase tariffs on imports from China is unlikely to create any incentive for China to move expeditiously to modify its exchange policies. Rather, it would likely have the opposite effect and result in retaliation against US exports into China."

Reuters reported that Reid said Tuesday: "The first major jobs bill we're going to have is (to) send a message to the Chinese, where we've lost 2.8 million jobs during the last eight years, and that is we're going to do something about Chinese currency. And we're going to do that quickly".

Pressure for action on a currency bill has been building for months for another reason: The White House has begun to push to win approval of free-trade pacts with South Korea, Panama and Colombia, Reuters reported. US lawmakers believe the trade pacts could lead to further job losses.

US lawmakers from both parties have complained for years about China's undervalued currency. They have said that the yuan's exchange rate makes it hard for many US companies to compete.

The Economic Policy Institute (EPI), a nonpartisan think tank in Washington DC, on Sept 19 released an updated study claiming the growing US trade deficit with China cost 2.8 million jobs between 2001 and 2010.

Erin Ennis, vice-president of US-China Business Council (USCBC), which represents American companies that do business with China, said the report is based on "the faulty assumption that every product imported from China would have been made in the US otherwise".

"Much of what we import from China replaces imports from other countries, not products we make in the US today," Ennis said. "Rather than having a single-minded focus on China's currency, we should focus our efforts on addressing Chinese policies that keep US companies out of its market."

Exports to China outpaced US exports to the rest of the world, a trend that began in 2000 and has continued through 2010, according to a recent USCBC report.

"The nearly $76 billion increase in exports to China during 2000-2010 exceeded growth in every other market for US goods and farm products," Ennis said.

The group, in its letter urged the US Senate to: "oppose currency legislation and instead work with and vigorously call on the administration to develop a robust bilateral and multilateral approach to achieve tangible results, not only on China's exchange rate policies, but also on other Chinese policies that are harming American economic interests".

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Blaming job losses on China a 'distraction'

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NEW YORK - China said on Wednesday that it has behaved reasonably in imposing anti-dumping and anti-subsidy duties on imports of chicken products from the United States.

On Tuesday, the US filed a case with the World Trade Organization (WTO) against the tariffs.

However, the Chinese Ministry of Commerce said that duties on imports of US poultry are in line with WTO rules.

China will thoroughly study any request from the US on trade consultation and deal with the issue properly, according to a statement on the ministry's website.

Up to US 300,000 jobs are under threat after China imposed the duties on imports of US chicken boiler products, comprising various cuts of chicken, US Trade Representative (USTR) Ron Kirk claimed on Tuesday.

Huo Jianguo, director of the Chinese Academy of International Trade and Economic Cooperation, said it is "unconvincing" for US officials to link potential job losses with the poultry issue.

"For a long time, the prices of US chicken broiler products sold in China were lower than the cost of production, according to our findings," Huo said. "It has damaged the profit margins of domestic producers."

An earlier statement from the ministry said that its investigation indicated that the US has subsidized soybeans and corn for its poultry industry, thus harming Chinese producers.

The US-China Business Council (USCBC) said on Tuesday that blaming widespread US job losses on China is a distraction from the real challenges facing the US economy and its trade relationship with China.

Referring to an updated study released on Monday by the Economic Policy Institute (EPI) - "Growing US Trade Deficit with China Cost 2.8 Million Jobs Between 2001 and 2010" - USCBC Vice-President Erin Ennis said that the report "is still based on the faulty assumption that every product imported from China would have otherwise been made in the US. As USCBC has said in response to previous versions of the EPI report, this assumption is decades out of date."

"The key is to make sure our companies and workers stay competitive and remain global leaders in manufacturing - and that means sensible innovation, education, tax, healthcare, and energy policies," Ennis said. "The answer is not to build walls around the US to isolate ourselves from our growing export opportunities with China - especially given the continued difficulties facing the US economy," she said in a statement.

In 2009, China initiated anti-dumping and countervailing investigations on US imports of chicken broiler products. It imposed duties a year later.

WTO rules permit member countries to impose duties on imports of merchandise that are found to be dumped or subsidized, if those imports cause injury to the domestic industry.

US officials have claimed that before the imposition of duties, the US was China's largest supplier of chicken broiler products with more than 600,000 tons exported in 2009. US exports of these products to China are down 90 percent since the duties came into effect.

They cited industrial sources as saying that the US poultry industry will have lost some $1 billion in sales to China by the end of the year.

US exports to China in 2010 were valued at a approximately $90 billion, up 32 percent from the previous year. China remains the third-largest export market for US goods, after Canada and Mexico, and has been the fastest-growing market for US goods over the past decade.

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China calls for further Sino-US sci-tech co-op

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BEIJING - State councilor Liu Yandong met US Energy Secretary Steven Chu on Wednesday, calling for further Sino-US science and technology cooperation.

"Under current rapid growth of science and technology and ever-deepening globalization, strengthening science and technology cooperation between China and the US accords with the development momentum of the two countries' bilateral relations, " Liu said.

Sino-US cooperation in clean energy, cultural and educational exchanges, and science and technology have achieved remarkable progress in recent years, she added.

Liu noted that the China-US joint clean energy research center has become the highlight of the two countries' cooperation in science and technology and provided a new model and path for further cooperation.

Liu said he hoped the two sides would promote pragmatic cooperation in science and technology innovation, clean energy, environment and healths so to further the bilateral relationship.

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US calms concerns over Chinese investments

US Under Secretary of State Robert Hormats talks about Chinese investment at the Foreign Press Center in New York on Monday.

NEW YORK - The United States welcomes Chinese direct investment but is worried over the role of State-owned enterprises, according to a top State Department official.

While addressing concerns that the US discriminates against Chinese direct investment, Robert Hormats, the under secretary for Economic, Energy and Agricultural Affairs at the State Department, said on Monday that only a very small portion of Chinese investments in the US has raised national security issues and is forwarded to the Committee on Foreign Investment in the United States (CFIUS).

"We are very welcoming of Chinese investment. (But) we have to figure out the right way of doing it and creating the right environment," Hormats said.

He said what the US needs to do is to find a way of working together with the Chinese in a more effective fashion, such as designing and establishing dialogues to create a welcome attitude toward Chinese investments in the US.

Apart from the US-China Strategic and Economic Dialogue, Hormats believes a much richer dialogue is needed between American state governors and Chinese provincial leaders.

"The hope is that governors and provincial leaders can sit down and talk about improving our political environment, so there is a more receptive environment toward Chinese investment in this country," said Hormats, who will lead a US governors' delegation to Beijing next month.

"American governors are very good at promoting trade and attracting foreign investment and having such sub-level dialogue is very helpful," he said.

He also noted the importance for Chinese investors to understand the American investment environment.

Over the next few months, the US government will stress in a more direct way the opportunities for foreign countries and foreign companies to invest in the US, Hormats said.

A report released a few months back by the New York-based Asia Society expressed concern that politicizing Chinese direct investment in the US will deny many potential benefits for Americans.

Refuting the argument that the US should turn inward because of its current economic doldrums, Hormats cited what Secretary of State Hillary Clinton said earlier that in the current environment, the very worst thing Americans could do is to turn inward and to turn away from the global economy.

"Our view is exactly the opposite. We need to work more with other countries around the world to strengthen cooperation. We want to enable American companies to take advantage of the global economy," he said.

Hormats said the US is every pleased that US exports to China are increasing.

A recent US-China Business Council report said that US exports to China grew four times faster in the past decade than its exports to the rest of the world. The overall growth of US exports to China hit 468 percent from 2000 to 2010, averaging 19 percent a year.

Hormats said what the Chinese government is trying to do in its 12th Five-Year Plan (2011-2015) in reducing dependence on exports, increasing imports and domestic consumption is consistent with what the US wants to do - to have a better balance in trade between the US and China.

Hormats acknowledges the US must improve its savings and investment balances, including increasing domestic savings, borrowing less andconsuming less or at least in a more sustainable pace.

"The Chinese government has correctly underscored this is something that will be constructive for the United States to do," said Hormats, whose experiences in dealing with China goes back to the Nixon administration.

Hormats, however, expressed deep concern over the emerging model of state capitalism in the world that he said "has the potential to dramatically change the global economic system that has facilitated the prosperity of the US and countless other countries around the world".

"How we respond to this changing landscape will have enormous implications for our prosperity and security here at home and our influence around the world as well as the way the global economy functions," he said.

While pointing out that the US' goal is not to question whether countries can and should establish state enterprises, Hormats said the basic point is to make sure that there is a level playing field between private companies and state enterprises.

"The decision as to whether the support for state enterprises distorts trade or gives those state enterprises artificial advantage over private enterprises in the US or elsewhere is, however, a concern for the US," he said.

Hormats emphasized that the goal is not to do this in a confrontational way but to emphasize common interests between the US and other countries.

"We see a multipolar world with a lot of economic powers around the world. It's also a multi-partner world. We see more and more opportunities for partners with other countries on a variety of things," he said, citing examples of US-China cooperation on new sources of energy and electric cars.

"Our two largest economies have a lot to gain by working together. We are always going to have big issues because we are big economies. But there is a huge amount of effort on both sides trying to work through these issues in a constructive way," he said.

Health summit focuses on China

NEW YORK - Harvard University, with help from the Chinese Ministry of Health and the United States Department of Health and Human Services, will hold its first annual Harvard America-China Health Summit on Wednesday and Thursday.

The summit is expected to gather more than 500 health policymakers, experts and leaders from NGOs and the health industry from both China and the US, said Liu Yuanli, founding director of the Harvard School of Public Health (HSPH) China Initiative that is responsible for organizing the summit.

This year marks the third year since China reformed its healthcare system to provide universal health insurance by 2020. For the US, this is the second year since the country passed the Patient Protection and Affordable Care Act to expand access to coverage to close to 32 million Americans by 2014.

Chinese Health Minister Chen Zhu and Julio Frenk, dean of the Harvard School of Public Health, will be two of the keynote speakers at the event.

The summit aims to establish an understanding of major health industry challenges and opportunities in China, the US and around the world. The conference will cover four major topics: healthcare system reform, public health (addressing chronic diseases), human resources in the industry and new technologies.

The HSPH China Initiative is a collaboration between the Chinese Ministry of Health and Tsinghua University. It has been carrying out research on China's healthcare reforms since 2005.

"We want to bring Harvard's strengths to bear on helping meet some of China's urgent needs in health sector reforms and development," said Liu, who worked on Healthy Beijing 2020 to develop China's first 10-year plan for combating diseases and improving public health.

The HSPH China Initiative was created in the aftermath of the SARS crisis, which served as a wakeup call to deficiencies in China's healthcare system, Liu said.

Today, an aging population and diseases pose some of the biggest challenges in China's healthcare system.

He said that China can learn from the US' healthcare challenges by not letting private insurance play a dominant role.

"America is the world's highest health are spender (more than 17 percent GDP). Yet, its health status and insurance coverage is poor relative to its income. This inefficiency and inequity problem stems largely from the fragmented nature of its healthcare system - healthcare is mainly financed by profit-seeking private insurance schemes," he said.

"On the other hand, America is the most innovative country in the world. China can learn and adopt some of the useful American inventions."

Liu said there is no doubt that China will effectively carry out its reform of its healthcare system.

But who is in the driver's seat?

BEIJING - China is stuck in a policy vacuum. While consumer price index (CPI) growth moderated to 6.2 percent in August from 6.5 percent in July, the current level remains stubbornly high and well above the annual target of 4 percent, meaning policy loosening is unlikely. Declining CPI simply means that further tightening can be put on hold, for now.

However, the decision on what to do next is not the People's Bank of China's to make. At a time when inflation is beginning to moderate and vigilance is still needed, the central bank is no longer in the driver's seat of China's economy. What may be even more worrying for Chinese authorities is who is. It's not the usual suspects of the State Council, China's Cabinet, or even the Politburo Standing Committee, China's top leadership. Right now, it is the US Federal Reserve.

The big day for China, just like the rest of the world, is Sept 21, when the Federal Reserve next meets to discuss whether it will implement new policies to support growth in the world's largest economy. Over the past year foreign currency inflows have been the biggest variable affecting China's monetary policy decisions, and any sign of a new round of quantitative easing could mean that China will have to continue to tighten policy, rather than loosen it.

However, the idea of further tightening is a frightening one for the government because the growth in M2, the main indicator for money supply, fell to 13.5 percent year-on-year in August, the lowest it has been since May 2005 and the fifth straight month it has been below the government's full-year target of 16 percent. With the growth in the money supply continuing to decline and long-term bank lending remaining anaemic due to concerns over the health of local government balance sheets, China's monetary conditions are no longer accommodating to growth.

While all of this is certainly a headache for Chinese policymakers, the real predicament can be found elsewhere. It is too easy to forget that the real story of inflation is not 6.2 percent versus 6.5 percent. It is not what the Federal Reserve or People's Bank of China will do. The real story of inflation is what is happening to the cost of food for ordinary people. While the headline numbers show that food prices rose 13.4 percent year-on-year in August, this does not paint the full picture.

Food prices on the street are rising fast. In Beijing, the price of the egg pancake I eat every morning for breakfast has risen from 2 yuan (0.23 euro) last year to 2.5 yuan. The cost of every item in the State-owned enterprises canteen where I eat lunch has risen by somewhere between 20 percent and 50 percent.

Outside Beijing the situation is worse. I recently spent a weekend in Shangqiu in Henan province, one of the main agricultural provinces in central China. There, price rises are even more severe. Apples are now 3 yuan a jin (a standard measurement in China equal to 500 grams), and eggs have risen to 4.2 yuan a jin, both about 50 percent higher than a year ago. Even the price of rice, a staple of every meal, has risen by more than 60 percent.

To make matters worse, many companies, including State-owned enterprises, have made promises of wage increases that they have yet to fulfill, meaning wage growth has not kept pace with the increase in food prices. So while the government and its many commentators can discuss monetary policy until the cows come home, what China really needs is higher wages.

The author is a financial analyst at the London brokerage house North Square Blue Oak.