As I understand, much of the merchandise sold by dollar stores is imported from China. My worry would be that this source of cheap wares could dry up because of a substantial appreciation in the yuan over the next several years.

The preconditions are in place: China has a huge surplus in its balance of trade and more than a trillion of U.S. dollars in foreign currency reserves. This creates a huge imbalance for the world economy and China itself. Trade frictions and protectionist measures are on the rise, as are calls for China to unpeg its currency.

Then there is the advice in many investment guides to avoid IPOs:

“Most new issues are sold under ‘favorable market conditions,’ – which means favorable for the seller and less favorable for the buyer.”
Benjamin Graham, The Intelligent Investor

“…the major sellers of stocks in IPOs are the managers of the companies themselves. They try to time their sales to coincide with a peak in the prosperity of their companies or with the height of investor enthusiasm for some current fad.”
Burton Malkiel, A Random Walk Down Wall Street

“…investing in IPOs is much akin to playing the lottery …. For 29 out of 33 years [1968 to 2000], IPO portfolios underperformed a small stock index.”
Jeremy Siegel, The Future for Investors

“The returns on …IPOs … are ghastly. In 1991, academician Jay Ritter objectively confirmed … that the shares of new companies are a raw deal for everyone but the underwriters. He found that from 1975 to 1984, IPOs returned 10.4% … while the market returned 17.4%…. Ritter’s conclusions have since been confirmed by others ….”
William Bernstein, The Four pillars of Investing

“New issues are typically well promoted…. My experience is that you can buy nine out of ten new issues at a lower price a year or two later. Companies usually go public only when they can get a high price at the outset…. Because of this I generally avoid new issues ….”  Stephen Jarislowsky, The Investment Zoo.

But there may be an exception to the rule. The first wave of IPOs that come out after a recession/bear market (like now) may be able to outperform, according to some academic research.

 Update: Thicken my Wallet did a post on IPOs on Oct. 7. The title is ‘Why catching IPO fever will make you sick’

Q2/09 results won’t be out for another two weeks, but Neil Meader, research director at gold consultancy GFMS, says it wouldn’t be surprising to see India back to its usual spot – at the top.  For the past few years India jewelry consumption has been moving sideways thanks to high gold prices, says Meader.  Meanwhile, China’s consumption been steadily growing.  As for India’s dishoarding, Meader said that was very unusual behaviour and would probably not be repeated in future quarters.

While China’s definitely been narrowing the gap with India as the world’s largest gold consumer, Neader said it would very premature to say that India is any immediate danger of losing its golden status.

Finally.

“At a time when the worldwide economy is still deep in recession and we’ve seen a significant drop in global trade,” Mr. Obama said, “I think we have to be very careful about sending any protectionist signals out there.”

He’s referring to a provision in Waxman-Markey, which passed the House on Friday. It would penalize exports from countries that do not accept limits on global warming pollution by requiring the president to impose a “border adjustment” or tariff on certain goods from countries that do not act to limit global warming emissions.

The provision was, natch, designed to appease Rust Belt state lawmakers concerned about job losses in their high-carbon industries. (The New York Times reported the provision was “inserted at midnight the day before the bill passed.” That doesn’t give the full picture. Though the specific wording may have gone in at that time, aspects of this kind of thinking have been in place since this bill was first drafted, back in March of this year.)

Even if Obama has to spend a bit of political capital here, he’s smart to finally speak out against this particular bill’s efforts to move the goalposts on trade. Such barriers are designed to help American high-carbon industries adjust to a low-carbon future, largely at the expense of those who export to the U.S. Should the bill pass the Senate with this provision intact, it would wreak serious havoc on the business models of most high-carbon industries exporting to the U.S., upending global export flows at just the moment recovery is starting to kick in.

But perhaps it’s finally dawning on Obama that the optics of pulling this kind of trick could destroy America’s credibility as a global leader. It’s beyond absurd for the world’s second biggest polluter – and the country that uses up 24% of the world’s resources annually – to make this kind of move, now that it’s finally decided it wants to go green.

Of course, cautions about sending out protectionist signals come a tad too little too late for this President, given his decision to allow Buy American riders in stimulus spending to be enforced at the state and local levels of government back in February is now inspiring retaliatory measures around the globe. (Canada’s anti-Buy American effort, details of which I’ll be covering off in the upcoming issue of the print edition of Canadian Business, is relatively mild in comparison with the Buy China trade bazooka that that country pulled out a week and a half ago.)

However, given what’s at stake here, Obama’s action Sunday is better than nothing.

Q) In your book, you say the big monetary ease in 2001-2003 played a role in the formation of the housing bubble. Will the big easing in monetary policy in 2009 lead to another bubble?

A) First, we have to get through a difficult period and produce a recovery in the economy. After that happens, the Federal Reserve will need to rein in liquidity to keep inflation from becoming a problem. Then the risk remains of creating another bubble like the ones seen over the past ten years. This time, though, I don’t see it happening because I believe central bankers have learned from the financial crisis that they need to conduct monetary policy with an eye on more than just wage and price changes. They’ll also be looking at leaning against excessive risk taking and rising asset prices before they get too far out of line.

Q) In your book, you say the Savings and Loan crisis of the late 1980s and the recession of 1990-91 coincided with the beginning of Japan’s descent. Is China’s investment boom and “heady rates of growth” similarly at risk now that they can’t rely as much on exporting to U.S. and other developed countries?

A) China is definitely feeling the pinch. I was in Hong Kong recently and people there were remarking on how the air was so clean these days. It appears that the factories nearby in China had curtailed production substantially. But the drop-off in exports has led to the Chinese authorities launching a huge fiscal stimulus to build infrastructure and keep the economy running. They appear to be in the midst of replacing export-led growth with consumer-driven growth.

Q) If China is replacing export-led growth with domestic-sourced growth, could this mean U.S. interest rates might ratchet upwards since China won’t have as great a need to peg its currency and thus won’t be buying U.S. dollars as much as before and parking them in U.S. treasuries?

A) I see domestic stimulus by China and other emerging countries as a good thing. For thirty years, the U.S bailed out the world economy by easing its fiscal and monetary policies in response to downturns, which stimulated exports from Asia and elsewhere. We can’t do this again because it will worsen already tenuous structural imbalances. Asia and other emerging countries have to engineer their own growth. China’s fiscal stimulus will help the global economy recover in a way that should reduce structural imbalances such as chronic trade deficits and surpluses. China may buy fewer U.S. treasuries but other buyers will emerge – just the mix of owners will change.

With today’s revelation, China is now the fifth-largest holder of gold by country, surpassing Switzerland, Japan and the Netherlands. It is the seventh-largest holder of gold in the world, with the International Monetary Fund and the SPDR Gold Trust exchange traded fund holding more. China is the world’s largest producer of gold.

China is expected to buy more gold with its almost $2 trillion in savings as it builds reserves and tries to build the country’s buying power. With the IMF’s decision last year to sell 403 tonnes of gold from its holdings, this could be an opportunity for China to boost its gold holdings quickly. IMF gold sales, however, need ratification from its member countries, including the United States.

With the suspicion confirmed that China has been buying gold and will likely continue  to do so this just adds to the gold bug’s case for investors to continue to flock to the safe-haven metal.

The issue du jour? How protectionism has crept into draft climate change legislation in the United States. How it’s likely to affect Canada. And how best to head it off—before it becomes law, and real damage is done to our economy.

Last week, Page’s round table released a new report on how Canada needs to tackle the issue of climate change. Entitled Achieving 2050—A Carbon Pricing Policy for Canada, it sensibly rejected much of the Canadian federal and provincial governments’ efforts to date—including the piecemeal provincial approach and the federal government’s favouring of “intensity” targets on only the largest emitters.

Instead, Page’s report favours one clear national standard to price carbon across the country. (This is a solution Canadian Business’s editorial board has long preferred.)

Page has been at pains to stress that Canada’s future economic health depends on making these changes—as quickly as possible. And it comes not a minute too soon.

Like Page, everyone who exports energy and manufactured goods to the U.S. should be paying close attention to the wording of draft legislation tabled by Congressmen Henry Waxman of California and Edward Markey of Massachusetts on March 31 of this year.

That’s because the current wording of the new bill, titled the American Clean Energy and Security Act 2009, has major implications for Canada.

Under the segment titled Transportation Efficiency, for example, the bill proposes what amounts to a low-carbon fuel standard across the United States. If implemented in current form, that move would likely cut exports of oilsands syncrude out of the U.S. marketplace.

Worse yet, says Page, is the creeping protectionism embedded in the bill’s current wording—particularly the segment titled Ensuring Domestic Competitiveness. “The gist of the bill is that if any U.S. company complains that this program puts them at a competitive disadvantage, it will become eligible for rebates from the U.S. government that will allow it to continue to compete,” Page explains.

The bill goes on to state that if…

….the President finds that these rebates do not sufficiently correct competitive imbalances, he would be directed to establish a “border adjustment” program, under which foreign manufacturers and importers would be required to pay for and hold special allowances to cover the carbon contained in U.S. bound products.

What this amounts to is new tariffs on goods from countries whose climate change legislation is deemed by the U.S. to be somehow inadequate to its own standards. Explains Page: “This represents both a direct threat for products from the oilsands, and a threat to any Canadian product that represents a high fuel intensity — steel, cement, auto parts.” You can read a draft summary of the bill here.

Page acknowledges that we don’t yet know what kind of an economic hit this legislation is likely to represent. And it’s also important to stress that the legislation remains in draft form. Powerful entrenched constituencies in the United States — ranging from the coal mining industry, to advocates for those on low incomes, to consumer groups, to the Department of Defence—will be working overtime to get these bills changed.

But Page insists that the threat is real. “The protectionist elements of this are really aimed at China,” he says. “Canada’s getting caught in the downdraft.”

In Page’s view, the best way to head off the impact of this legislation is by bringing Canada’s climate change legislation in line with what the U.S. is considering. But that, of course, is likely to mean major economic pain and dislocation for businesses and consumers right across the country. So his report recommends a series of measures to offset that pain.

For example, it suggests the government continue with an idea Alberta is already implementing: that the proceeds from the sale of pollution credits at auction go towards a technology fund. That fund would then invest in technologies—carbon capture and storage, thermal power, energy-efficient technologies and renewables—that can help bring down the carbon content of Canada’s fuels and products.

Another likely offshoot: spiking oil prices, as high-carbon fuels are legislated out of the fuel supply. So Page’s report recommends some funds from the sale of credits be spliced off to help low-income Canadians most at risk from higher oil prices.

As for possible job losses: though the report doesn’t comprehensively tackle job training, Page says his group is closely following initiatives such as the Green Jobs corps currently championed by the White House’s green jobs czar Van Jones (see yesterday’s blog post—Meet Mr. Jones.) “The infrastructure program in the last federal budget should be looking at the green jobs area,” Page says.

Toronto-based cleantech investor Andrew Heintzman has also been watching these developments. He applauds Van Jones’ green jobs training idea in theory, but points out “you can’t put training for green jobs in place without clear markets for those jobs in the first place.” That’s why he’s been investing in cleantech start-ups.

Heintzman also serves on Ontario Premier Dalton McGuinty’s task force for greening Ontario’s economy. He acknowledges when it comes to finding clear leadership on climate change policy, Canada’s approach has been a bit of a mishmash. Ontario has feed-in tariffs to encourage the use of renewable energy. B.C. has a carbon tax. Alberta’s working with a form of cap-and-trade — capping emissions on the largest polluters and investing the sales of pollution credits into a tech fund. And as for booming Saskatchewan, well, according to an article published this morning in the Globe and Mail, that province’s environment minister Nancy Heppner said recently that it just doesn’t make economic sense for the province to attempt to meet its climate change targets— at least not for this year.

It adds up to a policy of madly off in all directions. And with Canada’s greenhouse gas emissions continuing to skyrocket, it clearly isn’t working.

“What amazes me is that we aren’t further along with this process yet,” Heintzman says. “We’ve known this was coming.”

Pragmatists hope that Page’s recommendations—which some in the oilpatch applaud for their clarity—will help Canada get its act together on the climate change file. For as Page sees it, some form of emissions reduction is going to have to happen in Canada, and it’s going to be painful anyway. Might as well figure out a clear policy now, to help businesses and consumers mitigate the pain—before the economy gets slammed with new green tariffs down south.

Shanghai, 2:15 p.m.

For those delegates who clamoured aboard the buses on Wednesday afternoon, the tour of Chongqing’s New North Zone was a highlight of the trade mission, vividly demonstrating China’s economic development—and may have hinted at some underlying and unacknowledged challenges posed by the global financial crisis.

Chongqing is a huge, 82,400 square-kilometre municipality of some 31 million people—although, if memory serves, only two or three million live in fully urbanized areas, so it’s also home to the most densely populated rural population in China. Still, its economic development is a priority for the country, because of its strategic location as a gateway to the underdeveloped west and southwest of China, and because it is situated along the Yangze river, 2300 km from Shanghai, making it a key inland transportation hub.

How is this for a stat: through the first nine months of 2008, Chongqing’s GDP growth was 15.3%. And this: by 2012, the local government hopes to have doubled GDP to nearly 1 trillion RMB ($175-billion Canadian).

The New North Zone (NNZ) is a 157.5 square-kilometre economic development area with industrial parks and some real estate development—high-end villas with golf courses, as well as low-rent apartment blocks—but the first stop was the Cuntan Inland Port. The delegates crowded around two large table models of what eventually will be built, with little coloured lights to demarcate the various stages of development. The scale, like so many things in China, was hard to comprehend. Only a small part of the model showed what exists now. It’s currently handling about 700,000 TEU (twenty-foot equivalent unit is a standard measure of cargo capacity of container ships), but will eventually handle 8 million. By comparison, Prince Rupert handles half a million TEU.

“Premier McGuinty, this is a model for Hamilton,” called out one delegate in jest. McGuinty smiled and said, “Done,” making a motion with his hand as if he was signing the deal.

In fact, delegates from Manitoba were keenly interested, because they are at the early stages of planning an inland port of their own.

After returning to the buses for slow pass through the caverns of containers stacked six high—the facility seemed eerily quiet—the buses made their way, with police escort, through one of the four automotive industrial park areas.

Clearly, it was a work-in-progress, as we drove past new glass towers rising next to low-slung shacks and rubble-strewn lots. “As you know, China is building a harmonious society,” said the tour guide (oh yes, we’d certainly heard that a few times already), motioning to a block of modern buildings out the window. “These are apartments for farmers after we take use of their land, and also provide job training.” I thought that was an interesting way to phrase that.

As we get off the bus to go into the Ford-Changan JV auto manufacturing plant, André Desmarais, chairman of Power Corp. and honorary chair of the CCBC who is carrying on family dynasty’s close connection to China, spoke up to the disembarking delegates. “Just so you know, everything you just saw wasn’t built eight years ago,” he said. “It was all farm land.”

A woman behind me commented, “Terrifying, in a way.”

But what struck many people on the tour was that while there were many buildings already constructed, more than a few looked empty, and the cranes poised over unfinished buildings were not moving. It did not appear to be a hive of activity.

Indeed, the manager of the Ford-Changan plant acknowledged that production had been cut back. But he also said, “We only produce for the domestic market and I can’t talk about our future plans.” Ontario Premier Dalton McGuinty, whose province’s auto sector is already getting hammered, remained stoic, with a frozen tight smile.

Chongqing is already known for its auto production, and plans are for it to continue expand in this NNZ. But it’s not all heavy industry. Software outsourcing is also a focus, as is biomedical industry, and electronics. Just how quickly China is advancing in its expertise in science and technology was laid bare by our next stop: Haifu.

Haifu is a medical research company that has patents on a revolutionary and promising ultrasound device that could quickly and painless destroy cancerous tumours. The procedure doesn’t yet meet Western standards, but only because it hasn’t been tested, and that is quickly changing as a British hospital is undergoing research with the Haifu system. Siemens also wants to partner with Haifu.

A made-in-China medical treatment breakthrough? Yes, it’s possible. And in Chongqing, of all places. Then again, the city’s 57 universities and colleges graduate 150,000 new students every year.

One final thought: according to the NNZ brochure, 32 Fortune 500 companies have invested nearly a US$1 trillion in the NNZ. Of the logos printed in the brochure, I recognized none as Canadian.

Off to catch a flight, but I may post more next week as I pull together my story.

Shanghai, 12:30 p.m.

I got a chance to sit down briefly with New Brunswick Premier Shawn Graham this morning, just before he and his entourage jetted off to Beijing en route to Hebei province to visit a school using the New Brunswick education curriculum.

I wanted to talk to him in particular, moreso than Manitoba Premier Gary Doer, PEI’s Robert Ghiz, or Quebec’s former premier Pierre Marc Johnson (who stood in for the campaigning Jean Charest) for a couple reasons. One reason was New Brunswick approached this trade mission with distinct aggressiveness, but another was that he came to China with fresh eyes, on his first international trade mission. Although this mission was first championed by Charest, and Ontario Premier Dalton McGuinty—who was not available for comment outside of one press conference—lead the premiers until the final day in Shanghai, Graham and New Brunswick businesses played an outsized role here.

The New Brunswick business delegation signed contracts worth $85 million. Only 13 companies were selected for its provincial delegation, but they had been carefully chosen, and Business New Brunswick did a lot of advanced reconnaissance to find good potential matches. And word from the companies was that they were very pleased with the potential fit of the Chinese counterparts.

(That experience was not commonly shared by other business delegates. Executives exchanged a lot of business cards exchanged, and held plenty of quick, polite conversations, but it was a lucky break when they made an even modestly fruitful connection. In one bizarre moment in Chongqing, a business delegate from Ontario had five youthful female Chinese interpreters helping him talk with a representative of a Chinese waste management company, which was in no way related to his own industry. Why so much help? Many of the business delegates chose to not attend the session as scheduled, and there were many interpreters with little to interpret.)

As Graham put it, “we punched above our weight.”

This was clearly an eye-opening experience for Graham himself, just being on an international stage and meeting with moderately high-ranking Chinese government officials. He says he mostly stuck to “ waving the New Brunswick flag,” to promote the litany of energy-related initiatives proposed or now underway in the province—everything from a new $7 billion oil refinery to a liguid natural gas plant, and from refurbishing the nuclear generating station to developing new expertise in green energy technologies like tidal and wind power. “New Brunswick is transforming itself from a traditional resource-based economy into an energy player for the northeastern seaboard, and Chinese companies can benefit from that growth, either by partnering with New Brunswick-based companies or using that cheap energy source to develop businesses abroad, and that was the message that I was bringing to these players.” And his message certainly seemed more targeted than the other premiers. He said he is going to follow-up on invitations he’s made for Chinese officials to visit New Brunswick. Should be interesting to see where that leads, if anywhere.

One moment that struck home for Graham was in Chongqing, at the Wednesday night gala. Bo Xilai, the Communist Party chief for the 31-million-strong municipality and a rising political star who is now a member of the CPC’s politburo, spoke by most accounts warmly and freely (in fluent English) about building stronger ties between China and Canada. As Graham tells the story: “He stood up, and pointed directly at me and said, ‘You’re the next generation of leader in Canada. You’re a young leader, and it’s so important now, with the foundation that’s created today, that we build on that for the future. Because you will have a long history in politics in New Brunswick and we want to build on that success.’ That for me, was an important reminder to never take these relationships for granted, and that it’s a long-term relationship.”

As for his impressions of what he saw in China, he said he was amazed at the growth of the middle class. “Typically when you think of the Chinese you think of very hard working people, but living in poverty-like conditions. That’s simply not the case,” he said. “This is a middle-class that’s growing very rapidly, and the face of China is changing. That’s why it’s so important that Canadian-based or New Brunswick-based companies be here at the start of this market development. Because it used to be that China needed Canada. Well, that’s no longer the case. It’s Canada needing China.” That is something I’ve heard a lot from other delegates, too.

It should be noted, however, that the delegation visited three prosperous cities that are the largest in the country, stayed in fancy hotels, and saw places that were being targeted for economic development. Hundreds of millions of Chinese continue to live day-to-day, as the trade mission heard from professor Fan Gang, director of the National Economic Research Institute in China.

But what surprised Graham most? “How much English was spoken here,” he said. “When you have key political leaders giving a speech in English, it just goes to show how much they want to participate in our market by making these efforts to speak the English language. And it reinforces for me the importance of now starting to learn Mandarin.”

Coming from the premier of a bilingual province who does not have a very strong ear for even the French language, that’s a little funny. It’s probably not a disingenuous sentiment, though—and one that many Canadians visiting China share.

Shanghai, 10:10 a.m.

I had a chuckle this morning, my last in China, at my horoscope in the English-language China Daily newspaper: 

Pisces – One of your better assets is your ability to communicate effectively. You’re not only good at gathering facts but also at disseminating them to those who will put them to fruitful uses.

Well, I hope so, since it’s my livelihood. The horoscope was, however, a gentle reminder to post again. The last two days have had very full schedules and my focus has been on my “gathering facts” asset, not the dissemination. But since I have a few hours to kill before riding the super-fast maglev (magnetic levitation) train to the Pudong International Airport, I might as well post some stories.

Besides, after four days of rushing around and shaking many hands, I’m now feeling under the weather. That turn of phrase is a little misleading, though, considering I’m in a hotel room on the 58^th floor of the 88-floor Jin Mao Tower—one of the tallest building in all of China, even taller than the Empire State Building in New York, and second only to its new neighbor, the 101-floor, 492-metre World Financial Centre—and Pudong is encased in fog, rain and, judging by my sinuses, pollution. I feel like I’m not so much under the weather as inside the weather.

More to come.

Beijing, 11 p.m.

The first full day of the trade mission is wrapping up with a 500-person gala banquet at the Kerry Center Hotel’s glittering ballroom, under massive, sparkling chandeliers shaped like inverted pyramids. At the head table: the four premiers of Ontario, Manitoba, New Brunswick and Prince Edward Island, as well as Quebec delegation leader Marc-Pierre Johnson; four vice-governors of Chinese provinces; honorary chairman Andre Desmarais of Power Corp., and Wan Jifei the head of the China Council for the Promotion of International Trade. The gushing speeches are over, for now. The networking, however, never stops completely.

All day the speeches, as expected, were replete with messages of friendship, mutual opportunity and cooperation, and how the global financial crisis makes clear the extent to which economies are now interconnected, and how bilateral trade is more important than ever. And Ontario Premier Dalton McGuinty, who took over as leader of the trade mission after Quebec Premier Jean Charest pulled out to likely call a snap election, also earned points from the Chinese by reiterating that the Canadian delegation was laying the foundation for Prime Minister Stephen Harper to visit China. While Chinese media were on hand to snap photos and videotape, this event seemed to hold more significance for Canadians than the Chinese.

Nevertheless, it was all very warm and congenial. The Chinese are unfailingly polite and gracious, and are appreciative of respectful efforts at cooperation.

The necessary photo ops were up next, with a series of underwhelming memorandums of understanding signed simultaneously—everything from mineral exploration deals to batteries for electric cars, and from flight training to education curriculum sharing—followed by the Canadian and Chinese partners of each paraded on stage for a picture with the politicians. The estimated values of these agreements always sound good, but the deals are quite preliminary and largely little more than a show of cooperation.

No less congenial was the panel that followed, moderated by Asia Pacific Foundation President Yuen Pau Woo, and featuring professor Fan Gang, director of the National Economic Research Institute, and Jay Myers, president of the Canadian Manufacturers & Exporters. But these two economists did offer something other than just glad tidings: economic predictions. Myers, for instance, forecast that exports would fall 15% next year, leading to a 1-2% decline in GDP—and that’s if credit markets stabilize—and that he worries about contagion from the U.S. housing market collapse.

As for, Fan, he laughed at the suggestion he could forecast anything more than one year out, and then predicted global growth of just 1% next year, and that this year, China would grow more than 9%, but slip to 8% growth next year. (Mind you, the commonly accepted GDP growth threshold necessary to keep its population employed and supportive of the government is right around that mark.)

Most interestingly, however, was Fan’s analysis of China’s economy. He points out that while a stock market did burst, it hasn’t had a big impact on domestic consumer confidence in China because 70% of the population is still low-income, and because the bubble was so short lived—only a couple of years—the wealthy never translated it into over-spending behaviors.

Fan also laid out one of China’s economic structural challenges. Saving rates are 50% of GDP, with consumption accounting for 35% of GDP and the final 15% coming from government spending. While the global economy falters, so do China’s exports, which is what it relies on for growth. Despite being home to 1.3 billion people, however, consumption is low—not because people save, but because 70% of the people spend 90% of their income just getting by day-to-day. In that scenario, encouraging people to spend more has little effect. So the problem China faces is restructuring the economy so more of the wealth residing in companies can find its way into the pockets of its citizens.

A good chunk of the rest of the morning was taken up by the vice-governors presenting promotions of their provinces (Hebei, Henan, Shandong and Hunan), which together have a population of 315 million people, about the same as all of North America.

The afternoon was reserved for breakout sessions, two of which focused on just the environmental protection and aerospace sectors, followed by moderated matchmaking between companies from common industries.

And this, of course, is the real point of the trade mission: for Canadian businesses to meet potential Chinese business partners. Certainly there were plenty of Chinese attendees rushing up and thrusting their business cards into the hands of Canadian counterparts. One Canadian attendee likened it to speed dating, where business cards are quickly exchanged, followed by a halting attempt at conversation in English: “Is there a match? No. Then move on.” More promising are the arranged one-on-one meetings that take place in quiet rooms away from the hubub. Even then, though, it is more a case of good luck than strategy when meetings bear fruit.

Tomorrow afternoon, following a conference on energy and the environment, the trade mission flies to Chongqing, the world’s biggest metropolitan area, located at the confluence of the Jialing and Yangzi rivers in the Western mountainous province of Sichuan.

I’ve only just arrived in Beijing, and it is early evening now, but the level of pre-Olympic development is apparent even in the dark. The new international airport is a stunning piece of architecture, and the Beijing Central Business District, near the Olympic Bird’s Nest stadium and home to the new CCTV Headquarters and the World Trade Center, is now a crowded series of brightly lit towers. When I was here four years ago, this was all just starting to be developed.

Last night, he was honoured by the Canadian International Council as “Globalist of the Year.” (The CIC is the think-tank backed by Jim Balsillie, co-CEO of RIM; last year, it named OECD secretary general Angel Gurria as globalist of the year.)

Siwei, 73, has represented China at the World Economic Forum in Davos for the past three years. He speaks softly, but his words carry weight. For instance, in late 2007, he made some remarks that were widely interpreted as a signal China would start diversifying out of its U.S. currency reserves, sparking a run on the greenback.

Speaking at last night’s event and, previously, at the annual conference of Centre for International Governance Innovation in Waterloo, Ont., over the weekend, Siwei was very careful with his words when talking about China’s currency reserves and the deepening economic crisis.

But on the latter topic, he did make a few predictions.

For one, he suggested that China’s GDP would grow next year by between 5.5% and 10%. That, to many, might seem wildly optimistic on the upper end.

On the other hand, Siwei, who called himself a “prudent optimist,” wasn’t all sweetness and light before the crowd of business, political and academic luminaries last night.

For one thing, he suggested that he thought the subprime crisis would work its way through the global financial system by the end of 2009.

For another: The good news is that Siwei figures the world economy will recover. The bad news is he doesn’t see it happening before the end of 2011.

Prudent, indeed.

I wonder if Ms. Cooper and the growing chorus of similar voices are seeing all the warts of the beast they live close to and fewer of the blemishes on the beasts living further afield. While the U.S. certainly has its problems, so do other countries around the world — we perhaps don’t see them as much because of the distance and language barriers.

Take the economic miracle in China. It seems to me to be based in large part upon the suppression of market forces, which is not usually a lasting formula — especially for wrestling hegemony away from the U.S. Like Mother Nature, it’s not nice to fool with market forces. They release a lot of unintended consequences that grow and fester and eventually win out, undermining edifices built without regard for them.

Chinese exports are surging because appreciation in the Yuan has been held far below market levels by printing up scads of Yuan to buy up mountains of U.S. dollars. Supplementing this intervention are currency controls that restrict Yuan convertibility.

Any country can do this sort of thing and put up an impressive run for a time. Japan tried it in the 1980s and early 1990s. But most don’t do it, at least for very long, because it leads to an inflation problem — as highlighted by China’s current annual inflation rate near 8%. And again, this performance would look worse without market interventions: if oil prices in China weren’t subsidized below world levels, the inflation rate could be well into double-digit territory, closer to 15%.

Running the printing presses to suppress currency rates, oil prices, and other things is a recipe for galloping inflation and escalating wages, which, by raising the structure of domestic costs, eventually offsets the competitive edge due to artificially low exchange rates. And currency controls spawn black markets that in time defeat the intent of controls while having other negative side effects.

Current events supporting oil include the threat of a strike on Iran by Israel and turmoil in Nigeria. And with the U.S. driving season entering its peak period, prospects for a correction certainly do not appear to be in store just yet.

But after August, Chinese authorities should let domestic prices rise closer to world levels, adding to “demand destruction” occurring elsewhere in the world. Chinese authorities ought to take such measures now but don’t want to risk having social unrest mar the hosting of the summer Olympics. Tougher measures will have to wait until after.

The piece details the changing strategy behind the acquisitions: Chinese firms remain focused on obtaining raw materials needed to power China, but are also now working on strategic deals in a number of industries, for varied reasons that include desire to help these companies globalize, to get access to new markets and to obtain critical skills.

One point that stood out to me was McKinsey’s forecast for government ownership levels in publicly traded state-owned enterprises. According to its research, while the state is currently the majority owner in many of these companies, the management consultant expects that to change. The Chinese government’s stakes are shrinking, and if McKinsey’s prediction proves true, those pieces will be almost nonexistent by 2012. This, Luedi writes, means that “their shareholders will increasingly hold them accountable for the value created (or destroyed) by their overseas acquisitions.” He continues: “That will further reduce fears that they might act on behalf of the government. It will also make them obtain access to funds through conventional channels, such as market-rate equity issuance or debt.”

As reported May 12 by the Associated Press, Chinese inflation rebounded in April to 8.5% on a year-over-year basis, just shy of the 12-year high of 8.7% established earlier this year. In recognition of the inflation peril, the Chinese central bank this week boosted bank reserve requirements by 50 basis points to a record high of 16.5%, promising more hikes along with interest rate increases.

Sooner or later, China will succeed in bringing its galloping inflation problem under control. But it has built up so much momentum that stopping it will probably require a substantial contraction in the Chinese economy … just like it did in the U.S. and Canada during the 1970s. Developed economies learned the value of a price-stability target from that era; China and the emerging economies appear to still be on the learning curve in that department.

A contraction in China will likely add another squeeze on the global economy on top of the credit crunch and sky-high prices for energy and other commodities. One casualty could be the current commodity boom itself. And as substantial appreciation in the Chinese Yuan would seem to be a virtual certainty, companies benefiting from importing cheap products from China, particularly Wal-Mart, could face more of challenge.

In it, the authors (Hari Bapuji and Andre Laplume of the Asper School of Business in Winnipeg and Paul Beamish of the Richard Ivey School of Business in London, Ont.) survey toy recalls between 1992 and 2006.

Their main finding: Chinese-made toys are as safe as toys made anywhere.

China accounted for 86% of the $17 billion in toys imported to the United States in ’06, and the authors note that while recalls of Chinese-made toys have increase, other countries have a worse track record.

The survey also found that in fact Chinese-made toy recalls are more often the result of design problems (ie the fault of the toy company, not the factory) than of manufacturing problems. It noted, however, that the latter were on the rise.

Just in time for Christmas…

Well, recent toy recalls from companies like Mattel, over the use of lead paint in toys produced in China, have contributed to what were already long-standing suspicions about the safety and quality of products produced in the Middle Kingdom. No doubt, such findings haven’t done much to repudiate the fearmongerering of those here in Canada and the United States who would like to see trade with China shut down, for their own reasons.

In response to all this, the Chinese government has vowed to clean up the offending factories and, well, get the lead out by Christmas. It has also urged greater co-operation with western governments to normalize product safety standards.

This is all good, of course. But I wonder how much of the burden the world should place on China in all this.

After all, is it really any surprise to anybody that such mishaps occur in a country where manufacturing costs are so low, where plants and workforces are so flexible, and where domestic environmental standards in general are so poor?

More to the point, should it be any surprise to the Western companies that manufacture over there? Surely, those companies have a duty to their customers to spend the extra dough and ensure their Chinese plants, and Chinese-made products, meet the safety standards of the countries in which their customers live. It is, in short, their ultimate responsibility. To expect government in China to do this legwork for them is simply naive.

And Western-based companies outsourcing to China have an added reason to enforce product standards there: instilling, among the businesses and business people they work with, a concern for product safety and a respect for environmental considerations. As lawsuits pile up and customers question product integrity, this is purely a matter of self-interest.

Granted, the Chinese government in typical high-profile fashion is cracking down on companies that pollute. But this is the heavy hand. A better long-term solution is for western companies is to see to it that their Chinese partners recognize the need for best practices–and start to use them.