China's delight at beating the United States in the Olympic medal tally finds no
gleeful echoes when it comes to Wall Street's financial crisis. The Chinese are
not crowing over the U.S. mortgage-induced meltdown; rather, they worry how it
will affect them. "We don't want to see America go down because we depend on
them," says Xu Zhaohui, a middle-school teacher.

     So are China's banks at risk of contagion? China's banking sector is "one of the
healthiest in the world," says Jing Ulrich, Chairman of China Equities at JP
Morgan. Chinese banks are awash with liquidity, sitting on bank deposits from
thrifty savers totaling $7 trillion. Banking analysts were not alarmed that
China's two biggest retail banks had $280 million worth of exposure to bankrupt
Lehman Brothers. Nor is there much sign of the domestic mortgage market
triggering an identical, system-wide collapse. Although home ownership levels
are as high as 80 percent in some cities—a sign of China's passion for
property—many homebuyers pay cash. Ulrich says mortgage-holders seldom buy
beyond their means, so a wave of defaults is unlikely, even in a slowing
economy.

     America's pain may even provide a useful lesson on the dangers of debt.
Mortgages are new here, introduced just 10 years ago, and some worry that
housing loans are eroding thrifty traditional habits. "Chinese people used to be
unwilling to spend beyond their means," says college administrator Sun Huili.
"People need to think about what's happening" in America, she warns. Thirty-six
year old consultant Kelly Yu takes a more pessimistic view: "It's a good warning
for the Chinese economy, but I believe China will make the exact same mistake in
future". In her view, "Chinese are so crazy about wealth" that reckless
speculation is inevitable.

          China is suffering its own real-estate slump as a glutted luxury sector fails to
find buyers. Ulrich predicts there'll be some busts, but thinks the medium-term
impact could be healthy, finally pushing developers toward affordable housing
for the masses. That may be so, but real-estate speculation has become a
middle-class obsession. Xu owns three apartments, for instance. That means
short-term instability is sure to make people nervous. Just following TV news on
"unstable markets would really scare average people," says Yu, who advises
companies on corporate social responsibility. Economists are upbeat about
China's ability to ride out the U.S. financial crisis, but ordinary Chinese are
not economists, and they're fearful.

         -- from Newsweek's Sept. 30 Web exclusive "Shades of Schadenfreude". To read the entire piece click http://www.newsweek.com/id/161649

Could a New Zealand dairy trader have done more to explose China’s tainted-milk scandal?

Truth be known, few China-watchers were startled to learn that dairy giant Sanlu Group, based in Hebei province, had sold baby formula tainted with the industrial chemical melamine. Last year we saw thousands of U.S. pets sickened or killed by melamine-spiked pet food made in China. Since then we’ve seen headlines about Chinese exports of adulterated toothpaste, toys with toxic lead paint, food tainted with poison dyes, tires that shred.

Nor was it all that surprising to learn that Sanlu had covered up the scandal since December 2007. After all, last year the Beijing’s quality watchdog chief Li Changjiang had called Western news reports “demonizing so-called unsafe Chinese products” a “foreign plot” akin to a new kind of trade protectionism. Last week Li was forced to resign because of the melamine contamination, which has killed four Chinese babies, sickened another 53,000, and triggered import bans and recalls in dozens of countries.

What is startling, however, is the involvement of a major Western player. Forty-three percent of Sanlu was owned by the New Zealand dairy cooperative Fonterra, which isn’t exactly an obscure little Kiwi mom-and-pop operation.

Fonterra is the biggest dairy products exporter on the planet, responsible for more than a third of the world's traded dairy goods. It had three representatives on the seven-member board of Sanlu and yet its executives say they were unaware of the mass poisoning until Aug. 2. Nor did Fonterra manage to persuade its local counterparts to go public until six weeks later.

Even then, it was the New Zealand government that informed China’s central government. “I can’t think of a bigger consumer scandal involving a foreign firm in China,” says Paul French, chief China analyst for the Shanghai-based consumer consultancy Access Asia, “Fonterra apparently believed all the ‘doing business in China’ books in which foreign executives are taught not to let their Chinese partners lose face.” (French cited one such book that describes “saving face” as “more important than life itself”.)

The Sanlu scandal proves that even long-time China traders can be naive about the opaque and cutthroat business environment here. Fonterra has been operating on the mainland for two decades. Its website proudly cites “long-term trust-based relationships” with Sanlu, which was a long-term customer before becoming a joint-venture partner in 2005.

     If the weather holds, China plans to celebrate another milestone on its long march to the moon this week in a PR extravaganza that will rival its Olympic performance a few weeks ago. Fittingly, a Long March II-F rocket will take off from the Jiuquan launch center in Gansu province carrying three astronauts on China's third mission to low Earth orbit. After a live broadcast of the launch and heartwarming made-for-TV linkups between the crew and their families, the ruggedly handsome Zhai Zhigang will open the hatch and emerge into outer space. It will be China's first spacewalk and another step in its ambitious plan to build its own space station by 2015 and—if the rumors are true—to put astronauts on the moon by 2020.

      The display will no doubt be lauded as yet another indication that China is ready to join the ranks of the world's space titans, Russia and the United States. But are these missions cause for worry in Washington and Moscow? The Soviet Union performed the first spacewalk in 1965 when Aleksei Leonov stepped out of a Voskhod II capsule, and the United States did it later that year when Ed White left his Gemini capsule. Although the ability to launch payloads can also be used to lob bombs, the military implications of a manned program are virtually nil: nobody has yet figured out what humans can do in space that robotic weapons can't do better.

       China sees its spacewalk as a way of proving that it belongs with the United States and Russia in the top tier of space-faring nations. But its true opponent in this space race is not the West so much as its Asian neighbors—India in particular. India has in recent years transformed its space program from a utilitarian affair of meteorological and communications satellites into a hyperactive project that seems designed to make a splash on the world stage. Its robotic-exploration program is scheduled to launch a probe on Oct. 22 that will orbit the moon for two years. And Japan is considering expanding its well-established (if less ambitious) space program—which includes research on the International Space Station and a respectable commercial satellite business—and exploring military applications. Against this backdrop, Beijing's dominance is not unshakable. Just as the Soviet Union's launch of its Sputnik satellite back in 1957 was only a fleeting victory, China's recent accomplishments have provided merely the opening salvos in a modern-day Asian space race.

     To read the complete article go to http://www.newsweek.com/id160037