Tag / China

by Frank Maduri

NBA Controversy With China Deepens

The National Basketball Association, (NBA), has been in the news this past week due to a controversy with China. The rift began over a “tweet” on the Twitter social media platform from the General Manager of the NBA’s Houston Rockets, which was a message siding with the protestors in Hong Kong.

The Chinese government was obviously upset by the message and the publicity that it received, which spiraled into the NBA being in an international situation with China, their biggest international market. The Chinese took immediate action by severing major corporate sponsorships with the NBA.

The timing made matters worse, as the NBA was set to play exhibition games in China, and the Los Angeles Lakers and Brooklyn Nets were in the process of preparing to play those games where other media events were cancelled because of the controversy.

The games themselves were played, but the China showcase had a different feeling to it, the players described a tension to the media outlets from the U.S. which were covering the events. Then, Lakers star and the NBA’s most recognizable player, LeBron James, entered the fray by saying that the Rockets GM, Mr. Morey, was “misinformed” which furthered fueled the fire in the situation.

The relationship between China and the NBA, which has been so strong over the years, frayed in a matter of hours. The league and its franchise player found themselves in the middle of a geopolitical incident, and a debate framing up free speech contrasted to the tightly controlled, state-run Chinese society. American politicians got involved, and James Harden, the league MVP and member of the Rockets, joined the exchange by siding with Mr. Morey and his right to free speech.

LeBron James was squarely in the middle of the fray, with people and American politicians criticizing his comments because of the money he receives from his lucrative lifetime endorsement contract with Nike, and the huge sales that China has contributed over the years.

The Commissioner of the NBA, Adam Silver, commented to Time magazine that the fallout economically from the deepening rift with China is already significant. The sponsorships and other business relationships as far as merchandising and distribution of NBA content in China is extremely valuable to the league.

The President did not get involved, making a statement paraphrased by the belief that the NBA has to decide how to proceed with their relationship with China. The partnership with China is so significant to the NBA that teams are concerned that the revenues are going to shrink so much that the salary cap is going to decrease for next season. The Rockets alone, according to a credible source estimate, could lose $25 million this season alone.

The league has maintained a policy where they encourage their players, coaches, and other employees to be free to express themselves; yet this situation puts them squarely at odds with the two largest economies in the world. The protests in Hong Kong center around having better representation for that region of the country within the Chinese government, more freedoms of expression and access to media/social media, as well as the treatment of religious minorities.

The Chinese media outlet CCTV removed NBA games from their airwaves and they remain off the broadcast schedule, that TV outlet reaches hundreds of millions of people and has been airing NBA games for 30 years. The NBA is being hammered by American politicians and being cast as caring more about money than democracy and human rights. Whether or not they are doing that is now in the court of American public opinion.

The NBA has literally dribbled itself into a corner and finds itself trapped in a situation that will invariably result in damage to their brand. The situation also brings into focus the complicated relationship of doing business in China. The way forward is unclear, and the regular season tips off in one week. What happens next is anyone’s guess, but above and beyond basketball is the situation in Hong Kong and the need for a peaceful resolution to that situation that respects the individual rights of all people.

by Frank Maduri

Tip Of The Iceberg: Syngenta Settlement With Corn Farmers

The settlement that was announced last week and awaits the approval of the court system involving a class action lawsuit by corn farmers against the agricultural chemical juggernaut, Syngenta, is just the tip of the iceberg involving international concerns over genetically modified crops.

The suit dealt with a strain of modified corn that Syngenta sold to the farmers under the guise that it was going to be grown for export to China. However, the big issue was that China had not approved that strain of GMO corn and Syngenta did not get approval prior to negotiating the deal with the farmers.

Ultimately, China rejected the import of millions of tons of the genetically modified strain of corn called Agrisure Viptera. This tremendous amount is what caused the settlement numbers in this case to multiply significantly.

The settlement is over $1.5 billion and, according to Reuters, would be the largest class action settlement for an agriculture case in American history. This whole case represents a larger problem with the conglomerates running the seed industry, with GMO containing products, and with the import and export of certain staple crops within the food supply.

Syngenta is now owned by ChemChina, in a merger that was well publicized recently and heavily debated because of the implications of Chinese ownership of a company which supplies products which are integral to the American food supply.

It should be noted that ninety percent of the U.S. corn crop supply is genetically modified.

This sadly, is one piece of a giant patchwork of international export deals involving GMO staple food sources, not only corn. It includes wheat, soybean, and sugar beet crops as well. It is nearly impossible to find a mainstream food product without the “made with genetic engineering” disclaimer on the label.

The international laws around GMO food products make for even more unknown variables. There are certain countries that do not require the disclosure of ingredients that are GMO containing and do not label crop sources that are genetically engineered.

The push for organic foods and organic staple crops is making a resurgence in some parts of the world but the main issue is that the farmland is already tainted from GMO seeds that it is very difficult to impossible to use that land for organic crops.

The seeds are already genetically altered for so many crops that even if a farmer used organic products to preserve and sustain the crops they would inherently contain GMOs. The most effective way to deal with GMOs is at the seed level and growing less crops of corn for ethanol use.

However, this also is easier stated than put into tangible action. The agricultural seed industry is dominated by a few conglomerates: Monsanto, DuPont, and Syngenta. Monsanto controls over one quarter of the entire seed industry globally, and those three companies account for almost half of the entire global seed industry, which is a staggering figure.

That level of control into the hands of so few companies is a setback to any substantive progress being made with non-GM seeds. Then, consider further that all three of those enormous companies are in transition: Monsanto is in merger talks with Bayer, DuPont has merged with Dow, and Syngenta was merged with ChemChina in a $43 billion deal.

Some companies have taken the “Safe Seed Pledge” promising to not use GMO ingredients in their seeds, but they are used in smaller scale amounts for gardening and not for mass production. The scale up for the demands of the food supply make the reductions in GMO crops problematic.

The genetically modified trend is growing to impact fish and other livestock as well. It is presenting some moral and ethical questions along the way.

In a time period where social media and the internet has made for increased transparency, the international trade deals and ambiguous labeling laws for genetically engineered or modified foods make it incredibly difficult for people to know what they are eating.

The import of genetically modified ingredients is a whole other avenue where food products could become infiltrated with GMOs. The link between certain ingredients and genetic modification has been well established and internationally it is difficult to find alternate sources.

The United States got into the GMO crop scenario so deeply it is going to be hard to reverse course at this point. The European Union, by contrast, does not allow the sale of GMO food and produces it on a small percentage of their farmland for export purposes only.

The settlement by Syngenta over the failed exports to China is just one trade deal gone wrong. It is just one piece to the puzzle, it is the tip of the iceberg in a maze of deals centered on GMO products. The rest of those pieces will fall in future and the public questions about GMOs will continue and sadly the answers are not very promising.

by Frank Maduri

The Complexities of a Global Economy Reliant on China

(This post originally was submitted to a subscription-only financial investment site. I have included it here on my blog in order to reach a wider audience.)

 

The first two weeks of 2016 have proven that the global economy being so reliant on China can wreak havoc on the stock markets of all the major indexes in the world. The uncertainty which is pervading Wall Street regarding the future of the Chinese economy and their currency is the underpinning for the rapidly declining performance of the US financial markets.

 

The second issue with the global economy is the precipitous drop off in the price of oil. The price for a barrel of crude oil is now down to below $30.00 and this huge price decrease on a commodity as vital as oil is great for consumers paying less at the pump to fill their cars, but it is detrimental to the overall economic outlook.

 

The rationale behind the drop in oil prices is tied to two main factors. First, it is a matter of basic supply and demand: the world has too much oil and far less demand for this resource. The United States alone has contributed to this situation with the abundance of laws clearing the way for the rise in hydraulic fracturing, or fracking, in huge swaths of land called shales or shale plays. The result of fracking created conditions in the market where oil was entering the system from several new entry points in different states that previously did not contribute to the oil supply. This added to the increasing supply quantities.

 

The second component to the drop in oil prices is the decreasing demand from emerging economies in other parts of the world including, and most importantly, the Chinese economy. The slowing growth of manufacturing and other factors in China have a chain reaction effect where the world’s largest emerging market needs less oil.

 

In addition, a factor that is certainly contributing this issue and will continue to be in the coming months is the freedom of Iran from economic sanctions and their subsequent reentry into the oil market. The broader issue is that Iran has not made any money from their oil supply due to the international sanctions levied because of their nuclear program; so any revenue it makes from the sale of oil is gravy to them. This will translate into a commodity pricing battle between Iran, Saudi Arabia, Libya, Iraq, and other Middle Eastern countries who are in dire need of liquid cash so they have turned on the oil faucet, so to speak.

 

The evidence of the impact of these new Middle Eastern players (Libya, Iran, and Iraq) is demonstrated by the dip in oil prices below the $30.00 threshold. Many economists will attribute this to an overabundance of supply of oil because a couple of reputable studies show that American demand has not diminished and that Americans are driving more now on average than in the past several years.

 

Fuzzy Math

 

The root cause of the issue revolving around a global economy that is reliant on China is that the accounting practices in that Asian powerhouse have been consistently under scrutiny for being unreliable in the best case scenario. This inherent unreliability coupled with inconsistent practices in quality control as well as variability in their supply chain all equals what Wall Street cannot handle: unpredictability.

 

That unpredictability coupled with the turbulent valuations surrounding the Chinese currency, the yuan, and the result is the wild swings in the trading activity across all the major stock indices from the start of 2016. The data coming out of China, financial or otherwise, is so completely unreliable and lacks so much credibility that the integrity of the entire financial marketplace is vulnerable to the deficits we have witnessed in the first two weeks of this year.

 

Some economists and financial market analysts will tell you that China is a growing economy with an emerging middle class which was bound to hit some “bumps in the road” and that this was expected. My take is slightly different in that I do not think our entire global economic future should be underpinned by the performance (or lack thereof) in China. I know it may seem naïve but I feel like it must change, it is a fundamental flaw in the global system.

 

Other economists and experts predict that it is precisely because of this widespread reliance on China and products manufactured and exported from there all over the world, that the global system will collapse worse than it did in 2008. In that case, if the first two weeks of this New Year are any indication, we might be in for that situation playing out exactly in that manner.

 

Elbow Room

 

The other notion that is prevalent in some circles of the financial realm at this point is the thought process that the Chinese yuan might be trying to elbow its way into the top currency spot in the world.

 

I find even the mention of this so fraught with concerns because of all the issues with the currency valuation in China at this point. The recent decline in the overall growth of the Chinese economy will have a reverse effect in that I believe it will drive investors back to the American economy and to invest in the US dollar. The US dollar is, and will remain, the top currency in the world based on the stability of our democracy and our economy, even in the event of a recession or a downturn.

 

It is time for us as investors and for the world economies involved to look at China with caution and to prepare your portfolio strategy accordingly for both the short term and the long term investment objectives. In the end, this year is showing us what most of us already knew, we cannot trust the information coming out of China and we need to embrace different practices when evaluating their economy in the future.

 

 

 

by Frank Maduri

China Floods International Steel Market

I was running at the gym yesterday morning and watching Fox Business channel where I saw that the Chinese are flooding the international market with surplus levels of steel because of the downturn in demand in their country. China produces more steel than the rest of the world combined which is an astonishing figure, and the influx of Chinese steel at a lower price has had a dramatic effect on the Western economies.

 

The production of steel in China has caused the amount of steel imported into the United States to increase by 34% in February 2015. This massive influx has triggered layoffs at U.S. Steel and Nucor, among others in American steel marketplace. Overall, the U.S. steel industry has seen 22 companies declare Chapter 11 bankruptcy protection.

 

The cumulative effect of the market flooding by China has led to the discussion both in Europe and the United States of whether a tariff should be instituted on steel. This is due to the fact that Chinese steel is made far cheaper than the rest of the world primarily because of the dramatically lower labor costs.

 

I disagree with the editorial in Forbes on this subject, while some of the information in the article there is sound, the author is against the implementation of a tariff on Chinese steel. The main rationale for that position being that he maintains that with the escalating costs for companies to manufacture products in the United States they should be entitled to access to materials such as steel at a cheaper cost to them.

 

I disagree with this position for two reasons: the impact it has on the American middle class worker, and I believe it is unfair for any country to dump excess products into the market and essentially undercut a particular industry, in this case the steel industry. This maneuver by China to flood the marketplace with surplus steel has hurt the American steel industry at a time when our country needs to keep as many manufacturing jobs as we possibly can. It has caused the layoff of the average American laborer which will have a profound effect on the already shrinking middle class in this country and will impact entire families as well.

 

The implementation of a tariff would be at least a prohibitive measure to safeguard the marketplace against this type of surplus flooding. It would allow American companies to level the playing field in their competition with emerging Asian economies.

 

In Our Defense

 

In all the commentaries and reports on this topic I have not seen anyone else mention an important aspect of this situation which is the fact that the U.S. government does not allow parts from China to be used in a Defense Department contract. The cheaper steel from China would not be able to be used in any of the products procured for the defense purposes of our country. Therefore, the American steel companies will have to produce to serve those contracts with a decreased labor force due to the market conditions changed by China’s actions within the marketplace over a period of years.

 

The lack of a duty or tariff on steel also means that the Defense Department could be paying more for domestic steel which is an issue that effects all taxpayers since we are footing the bill. Other Western nations are feeling the same effects to their respective domestic economies due to the activity of the Chinese companies handling of the supply dumping of steel.

 

The reports that I have read regarding the analysis and testing done on the quality of Chinese steel is that it is substandard when compared to other steel sources in the market and that is part of the rationale behind why certain companies and the Federal government will not use it for the defense contracts.

 

In India, also an emerging world economy, their steel production companies are asking the Indian government to impose a tariff to offset the impact of the influx of Chinese steel imported into their marketplace.

 

In the end, the tariff should be adopted in order to preserve fair market competition regarding the commodity of steel so that the Chinese companies will be forced to think twice before dumping excess product and disrupting the market conditions in the future.

 

(Some background information courtesy of Fox Business News, Forbes, WSJ.com, and Economic Times.com)

 

by Frank Maduri

China – New Claims of Sovereignty

China, Japan, and the U.S. in the South China Sea

 

The most recent actions by China in their attempt to assert their claims to territory in and around the South China Sea has heightened tensions in the region in an unnecessary manner. The latest attempt of the new Chinese prerogative of territorial expansion deals with a small island chain that has large potential regional security consequences.

 

Here at “Frank’s Forum” I have stayed away from posting content on foreign policy in the past because it is not one of the areas my blog was set up to cover. However, this issue is one of high importance and the ramifications for the United States regarding their relationship with both China and Japan are so far reaching that I had to include this commentary.

 

If nothing else, I hope to raise awareness on a very important topic effecting a huge area of interest for the United States in Southeast Asia.

 

The Chinese government announced an “air defense zone” for the airspace surrounding the islands they call Diaoyo about 200 miles off their coast in the South China Sea. This announcement included a provision that any planes travelling within it would have to notify the Chinese government.

 

The United States made headlines by flying two B-52 bombers through that airspace without any notification to Beijing. This was seen by many as an indication by the United States that they will not accept China’s new attempts at expanding their sovereignty into that part of the Western Pacific.

 

The more troubling issue here is that China is trying to stake a new territorial claim on islands that Japan believes are within their sovereign holdings. The United States is essentially trapped in the middle because they are bound by treaty to come to the defense of Japan in the event of a threat on Japanese territory or interests.

 

Regional Shakeup

 

The Japanese have long claimed those same islands, which sit 200 miles from Okinawa, and refer to them as Senkaku or “pinnacle points”. Japan also claims the airspace around the islands, and will not back down from the Chinese and their aggressiveness regarding this claim.

 

Japan is in a difficult position because they view the islands as their territory and if they escalate the situation with China it could result in potentially volatile military or political repercussions. However, if Japan decides to back away from these islands, it will only serve to embolden China in their desire to extend their sovereignty to the rest of the South China Sea. That will result in the potential for instability throughout the entire region.

 

Furthermore, the foreign policy officials from the U.S. State Department are concerned that this air defense zone creates conditions for an accidental incident such as Chinese jets shooting down a Japanese or U.S. plane in that air space. That would initiate a cascade of military activity that would be a serious problem for stability between these very powerful countries.

 

At the center of this entire tug-of-war for territory is the high yield potential of oil and gas reserves contained in the waters surrounding the Senkaku islands. China is dealing with a vastly growing population, which carries with it an increasingly high demand for more energy.

 

Conversely, Japan is trying to rebound their economy from a terrible recession, and they need to make use of any resources potentially available to them to grow their industrial capacity and economic output.

 

Caught in the Middle

 

The United States finds itself caught in the middle of two very important international partners in China and Japan. The experts on this subject feel that this latest incident with the B-52 bombers, and China sending their lone aircraft carrier to that area of the South China Sea for the first time, will not result in military action by any party involved.

 

Vice President Joseph Biden is in the region on a very timely official trip to Japan, China, and Southeast Asia. The Vice President will attempt to ease the tension caused by China in their unilateral declaration of this protected air space surrounding that chain of islands.

 

Mr. Biden was in Japan first, where he met with Prime Minister Shinzo Abe regarding this matter and several other foreign policy items. The threat of the air defense zone by China is expected to be a key issue. Many foreign policy experts believe that this expansionary exercise by China is being carried out in order to test the new Japanese leader.

 

However, Mr. Abe has shown a willingness to stand up to China and their territorial assertion regarding these islands. Then, at the same time, the prime minister is looking for the United States to be more demonstrative in their support of Japan in the case of this sovereignty claim for the Senkaku Islands.

 

Washington seems to have developed a position that takes the high ground in this circumstance. The United States does not want to get involved in a territory dispute between China and Japan for obvious reasons, and the White House has maintained that they recognize the claim of those islands by Japan but that the two countries need to work out a resolution.

 

Vice President Biden met with Chinese President Xi Jinping for over five hours yesterday, according to the Associated Press, and the Chinese made no concessions on the air defense zone. At this point no consensus was reached in a pathway forward to help ease tensions in this volatile region. Beijing feels that the U.S. has sided with Japan on this matter and has ignored the aggressive tactics of Tokyo towards Chinese territory recently.  Washington is trying to ride the middle ground here between two regional allies in Japan and China respectively, and trying to deescalate the tension which exists between the two nations.

 

The United States may be forced into a situation where that stance may become untenable, and the White House may have to change their strategy here to lead these two nations to explore a diplomatic solution to this issue.  The State Department may have to intercede to avoid a further escalation in the region because the United States is bound by treaty to defend Japan. A policy of indecision could result in an act of aggression by China against Japan, which is not a military situation that anyone wants to be involved in at this point.

 

The Sino-Japanese relationship has been fraught with problems for many years dating back to the two wars between them and then the brutal Japanese occupation of China during World War II. The Chinese government has requested on several occasions, including recently, for a formal Japanese apology for this brutality and Tokyo has refused to comply.

 

 

In the interests of all sides involved in this matter, we have to hope that the United States is successful, or else this situation may get heightened further, and has the potential to go beyond just saber rattling.

 

However, China is looking to expand their sovereign reach, and this is probably just the first step in that new functional imperative. It is critically important for the stability of the region that the U.S., Japan, and other nations determine a strategy for how they will address these expansionary efforts by China in the future. The consequences of ignoring these attempts could be detrimental on many levels.