FACTBOX-Five political risks to watch in China

FACTBOX-Five political risks to watch in China
01 Feb 2010 16:16:25 GMT
Source: Reuters

By Chris Buckley

BEIJING, Feb 1 (Reuters) - China weathered the global economic downturn with robust growth, but key political risks facing the country in 2010 reflect worries that trade imbalances and economic overheating could undermine that success.

Sovereign 5-year credit default swaps for China are trading at a spread of 81.67 basis points, well below the weighted average spread of 134.40 for countries in the Thomson Reuters Emerging Asia Index. Of all the countries in the index, only Singapore is perceived as having a lower risk of sovereign default, with a spread of 43.33.

Following is a summary of the key risks to watch for China:

* TRADE AND CURRENCY DISPUTES

Friction with the United States, the European Union and other major economies over trade imbalances and the level of the yuan has the potential to expand into sharper confrontation that could unsettle investors and capital markets. With China's exports rising again and foreign exchange reserves expanding, Beijing faces international pressure to let the yuan appreciate. Chinese officials worry that economic recovery remains fragile and say they will not make any big moves on the exchange rate.

Rising disquiet about Chinese trade policy in the United States could be magnified by U.S. Congressional elections later this year. Washington is also likely to make more anti-dumping complaints against goods made in China in 2010. [ID:nN07201061]

Most analysts believe China and other major economies have too much to lose to risk a major escalation of these disputes. But markets are sensitive to any sign, however ill-founded, that the strains are reducing China's appetite for U.S. Treasuries.

What to watch:

-- The rhetoric on trade from Washington and Beijing. Both sides want to avoid any serious economic dispute but also protect domestic industry and maintain popular support at home. Watch for signs that positions are hardening, that the U.S. Congress is increasing pressure that could shift policy, or that tit-for-tat trade measures could expand. [ID:nLDE60Q21F]

-- Hints of a change in China's currency policy. Although the central bank has tweaked its description of how it manages the currency, market expectations for yuan appreciation remain muted. Most expect China to keep the currency on a tight rein at least until at least mid-2010 to cement economic recovery.

-- Developments in the latest Sino-U.S. tussle, over planned U.S. arms sales to Taiwan. Expectations that chillier relations would make China less receptive to pressure to let the yuan appreciate are already being reflected in offshore one-year dollar/yuan NDFs , which now imply a 2.45 percent appreciation of the yuan in the next 12 months, down from expectations 3.02 percent last Friday. [ID:nN17145323]

* THE INTERNET AND FALLOUT FROM THE GOOGLE DISPUTE

Google Inc has threatened to pull back from China if its concerns about censorship and hacking are not resolved, and its complaint has exposed broader disquiet among companies and governments about Beijing's business and investment policies. So far, other hi-tech multinationals have avoided following Google's public challenge to the Chinese government. [ID:nN20159275]

China has said it does not want the dispute to hurt broader commercial ties, adding that Google and other companies remain welcome as long as they accept the country's laws and policies.

But with Washington pressing Beijing over Internet censorship, and Beijing countering with harsh press criticism of U.S. policy, Western firms, especially in sensitive sectors such as the Internet, media and telecommunications, face uncertainty.

What to watch:

-- Beijing could strengthen enforcement of rules intended to ensure international Internet companies obey censorship controls and other policy restrictions. [ID:nTOE60E05Q]

-- Chinese media's harsh criticism of U.S. Internet policy could embolden some officials to protect domestic companies or sectors against foreign competition. Watch out for reports of foreign business deals in China that are slowed or shelved.

* SOCIAL STABILITY

China's Communist Party has so far maintained general authority and control despite some fears that that the global crisis could spark unrest among laid-off workers.

Outbreaks of discontent have remained brief and localised, and recent economic data point to robust growth into 2010.

But with the Party and global markets treating social stability as a crucial issue, even limited challenges to the Party's control can produce outsize reactions.

If the recent rapid economic growth cannot be sustained, as a burst of government-backed credit shrinks, joblessness and investor disquiet could rise as government spending wanes.

China's recent rapid growth has been accompanied by heady rises in real estate prices and signs of inflation, which could also add to disquiet among residents struggling to pay bills.

Ethnic tensions in Tibet and Xinjiang have distracted the central government and drawn international concern, but have not seriously threatened national stability. [ID:nSGE60306K]

What to watch:

-- Emergence of any regional- or national-level protest movements. So far, protests in China tended to be directed at local officials. Strict controls make it difficult for any organised movements to form beyond the local level.

-- Signs that urban public concerns about inflation and housing costs are congealing into broader discontent. That is unlikely to turn into mass protest, but it could spur faster moves to cool economic overheating. [ID:nSGE60O00K]

* THE ENVIRONMENT

During the Copenhagen conference on climate change in late 2009, China's position on greenhouse gas emissions emerged as a key factor shaping the negotiations. Some Western politicians said Beijing was combative and inflexible in the final, tense days of the conference, undermining hopes for a stronger deal.

China and other big developing countries say rich nations were at fault for not offering bigger greenhouse gas emissions cuts of their own and not giving enough help to poor nations. Talks on a binding international climate change pact continue in 2010, putting China's positions on emissions and environmental governance under international scrutiny. [ID:nLDE5BI03P]

China's rapid growth causes many environmental problems, and citizens are concerned about health problems caused by pollution.

What to watch:

-- China's position on emissions and fighting climate change. Beijing is unlikely to offer steeper reductions on greenhouse gas emissions growth than those it announced last year. Carbon market investors will look for flexibility on other contentious issues, like international verification and funding for poor countries.

-- Investors will look for opportunities that arise from growing investment and government spending in clean and renewable energy, which is set to receive more government backing in 2010.

-- Increasing environmental activism and stricter enforcement of standards could force some industrial projects to be halted.

* CORPORATE BEHAVIOUR UNDER SCRUTINY

Business and politics are closely intertwined in China, and commercial negotiations and disputes can become embroiled in wider political and diplomatic friction.

China's investigation of four employees of Australian mining giant Rio Tinto on accusations of unlawfully obtaining commercial secrets has underscored those worries. Claims that the company illicitly gained intelligence about iron ore has prompted calls from Chinese officials and media for closer scrutiny of foreign companies in sensitive sectors.

What to watch:

-- Developments in the Rio case, and comments from Chinese officials and state-run media about the case's implications. (Editing by Andrew Marshall)