ISSN : 2233-5609

Publisher: Kim Joon-Han Published by POSCO Research Institute

Editing Director: Kim Chang-Do Editor-in-Chief: Yoon So-Jin

Printed by Jeong-Moon Printing Co., Ltd. Date of lssue: April 25, 2012

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Registration number: 강남바 00092 Registration date: December 16, 2010

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Contents Spring l 2012 l Vol. 06

Column 04 In pursuit of building India-Korea synergy 004 S.R. Tayal A new era of trilateral cooperation among Korea, China, and Japan 008 Shin Bong-kil Two perspectives on the Indian market 012 Kim Joong-keun

The Chinese economy in 2012 15 China’s growth engine remains strong in 2012 017 Han Jae-hyun Managing “China’s variables” is key to the Korean economy 025 Shim Sang-hyung

India suffering from reckless 33 resource development India, the world’s third largest iron ore exporter, suffering from shortages 035 Imm Jeong-seong Worsening power shortages in India due to coal production disruption 043 Imm Jeong-seong

Tenth anniversary of China’s 51 accession to the WTO Chinese companies facing qualitative changes enter foreign markets 053 Furong Jin The changed international trade order over the last decade 061 Ku Ki-bo India in the pursuit of food 67 security India in urgent need of a stable food supply 069 Kim Mi-su India needs a Second Green Revolution 077 Kim Chan-wahn

Issue analyses 85 Two years under CEPA, time to speed up the tariff reduction schedule 087 Cho Choong-jae The fall in China’s real estate prices controlled by policies 095 Chung Cheol-ho Tata Group names a young successor: talent trumps family relations 103 Lee Dae-woo China’s dash for space development 109 Lee Joo-ryang

Corporations 117 Why does Korea lack prospering Chinese-run companies? 119 Kim Chang-do The global strategies of Ewha Glotech, a Korean textile machinery manufacturer 125 Kim Eung-ki

Culture 129 From everyday life to politics, the power of Indian astrology 130 Chung Ho-young The culturology of China’s urban development 135 Jang Soo-hyun In pursuit of building India-Korea synergy COLUMN

S. R. Tayal Former Ambassador of India to the Republic of Korea (2008-11)

uring my three years’ stay in Korea, the relations between India and Korea have had a quantum jump. A Strategic Partnership between India and Korea was announced during D President Lee Myung-bak’s visit to India in January of 2010. A Comprehensive Economic Partnership Agreement (CEPA) also became operational in the same month. There is a tangible desire among the people, governments, and the corporate leaders of both countries to enhance bilateral trade and exchanges. It is good to note that investments are flowing both ways with the Mahindra Group taking over Ssangyong Motor Company in November of 2010 with an investment of more than USD 400 million. The people of Korea are known for their passion and focused approach to meet their objectives. The work ethic of both Korean executives and workers is praiseworthy. I found the management of Korean companies to be very outcome-oriented. Korean executives have to deliver and meet the targets; otherwise they are shown the door.

004 POSRI Chindia Quarterly�Spring 2012 The South Korean global “The future of India-Korea profile has been growing and its economic relations is bright. All acceptance in the international the bilateral arrangements and

community is very high. This is instruments for facilitation of reflected in the unanimous re- trade and investment are in “ place. election of UN Secretary General Ban Ki-moon. The successful hosting of the G-20 summit in November of 2010 added to the stature of Korea as a mature and globally responsible player. Korea and India have a similar world view, and both countries follow a democratic polity with a robust private sector. Commercial relations are also developing well. However, there is a need for better understanding of each other’s culture and psychology. Concrete efforts are being made in this direction. A festival of Korean culture is being held in India and a festival of Indian culture is being held not only in Seoul, but also in other major cities of Korea this year, with numerous cultural performances and programs. India has opened an Indian Cultural Centre in Seoul, and the Government of Korea also plans to open a cultural centre soon in New Delhi. To enhance the understanding of Korean governance and polity amongst India’s decision-makers, we have been encouraging groups of Indian administrators, defense officials, and executives to come on study trips to Korea. Mid-level officers of the premier Indian Administrative Service, officers from the National Defense College, and the trainees of senior executive programs of several Indian Institutes of Management have been coming to Korea for two to three weeks. They have found this exposure very educative. It is time that the Korean side deputes groups of Korean executives and government officials, as well as officers of the armed forces, to visit India for study tours. The experience of India in the growth of

005 Spring 2012�POSRI Chindia Quarterly information technology, higher education, particularly of management and engineering, green revolution, Operation Flood for enhancing milk production, etc., would be very informative to Korean executives and officials. With the rising number of foreigners in Korea’s population, India’s successful experiment in harmonious living in a multi-religious, multi- ethnic, and multi-linguistic society would also be instructive. A recent development is the presence of a small but growing number of Indian students in many of the important public and private universities in Korea. These students are here on scholarships for doctoral or post-doctoral research, and would be an important bridge between the student community and faculty of Korea and India. These students would also be an important resource for both Indian and Korean companies. The success of Korean brands in the Indian market is well-known. Both in the consumer goods industry and in plants and equipment, Korean companies have made huge inroads in the Indian market. Indian companies have a definite competitive advantage in sectors like information technology, pharmaceuticals, and chemicals, and also in some agricultural products. However, the industry associations in Korea are very stern and sometimes make the entry of competitive foreign companies difficult. I am disappointed that India’s world-famous IT companies have also been unable to penetrate the Korean market because of cultural and linguistic barriers. India’s generic drugs manufacturers have also found entry barriers to be high. The way to go forward is to identify areas of convergence and synergy between Korean and Indian businesses. Now that Korean companies are winning numerous engineering and construction contracts in the Middle- East, it is time for them to leverage the capacities of Indian companies, which have long experience in operating in Middle-Eastern countries. There are immense possibilities for harnessing skilled manpower and professionals

006 POSRI Chindia Quarterly�Spring 2012 from India to design as well as execute projects in third countries. As Indian architects and engineers think and work in English, their communication with the end-user is fast and easy. Korean companies need to look at India not only as a market for their goods and services but also as a partner for co-production and as a base for manufacturing. Manufacturing equipment and materials in India to meet the rising demands of the Indian market, as well as for export to South Asia and the Gulf countries, would bring the desired economies of scale. I am happy to see this thinking in large Korean corporations. Doosan Heavy Industries has established a boiler making facility near Chennai. Hyundai Heavy Engineering is working to establish a facility for manufacture of transformers in the State of Gujarat in western India. Our challenge is now to create conditions for the entry of mid-level Korean companies in India that have a turnover of USD 50-100 million. The fast developing Delhi-Mumbai Industrial Corridor offers an opportunity for the creation of a free economic zone (FEZ) tailored to Korean small and medium companies. The DMRC is a new railway corridor, between Delhi and Mumbai, which will have a number of industrial estates along the route. Both the industries and developers of India and Korea need to work together for such an FEZ. The corporate leaders as well as business associations have constant dialogue to explore new opportunities. We, in the government, are ready to encourage and assist this process.

007 Spring 2012�POSRI Chindia Quarterly A new era of trilateral cooperation among Korea, China, and Japan COLUMN

Shin Bong-kil Secretary General of the Trilateral Cooperation Secretariat

n September 1, 2011, the Trilateral Cooperation Secretariat (TCS) opened its office on the 20th floor of S-Tower at Gwanghwamun, overlooking Deoksu Palace. The TCS is an O international organization with diplomatic privileges and immunities, established upon conclusion of an agreement by the governments of Korea, China, and Japan, and the ratification of the National Assemblies of the three countries. Compared to other international organizations, such as the UN Secretariat, the EU Secretariat, and the ASEAN Secretariat, the TCS is currently a rather small organization, with only three member countries; however, its presence as an international organization is strong, because its member countries are at the center of the world’s attention. After holding summit meetings every year since 1999, leaders of the three countries finally agreed to establish a permanent Secretariat on May of 2010 in order to manage and develop trilateral cooperation more effectively and systematically. It is meaningful that Korea, China, and Japan have

008 POSRI Chindia Quarterly�Spring 2012 participated equally in the establishment of the Secretariat. The three Asian countries equally bear the operating costs of the TCS, and alternate taking the seat of Secretary General for two-year terms. When one country takes the seat of Secretary General, the seats of Deputy Secretary General go to the other two countries. The TCS employs an equal number of staff members from each nation. Many people wonder exactly what roles the TCS will play in the future. The TCS has been given a wide range of roles and responsibilities. Setting a concrete agenda is not as easy as it sounds. Given that it took almost sixty years to establish the European Union, it will take the TCS significant time to produce tangible results. For the past several months, the TCS has been busy recruiting employees and equipping itself with the basic administrative systems of an international organization. The TCS is establishing a website that will function as an information and communication center for trilateral cooperation. The TCS is also continually creating content related to trilateral cooperation with help from relevant departments of the three governments. The TCS is preparing itself to explore new cooperative projects. Since the Fukushima nuclear accident in March of 2011, disaster management has emerged as a matter of common interest for the three countries. The TCS is planning to establish a Trilateral Network for Disaster Management under its control to build open channels of communication among parties concerned. In addition, the TCS is examining a plan to supervise joint disaster table-top exercise. Moreover, there is discussion of a major role for the TCS in implementing the CAMPUS Asia Project, a credit transfer and exchange program among Korean, Chinese, and Japanese universities. This is a

009 Spring 2012�POSRI Chindia Quarterly “Also, what is most important similar concept to the ERASMUS to trilateral cooperation is program, which is already in squarely facing the unfortunate operation in the European Union.

history shared by the three Concluding free trade

Northeast Asian countries, and “ agreements among the three seeking true conciliation. countries is also an issue worthy of attention. Free trade does not only mean simple trade liberalization, but has implications for security. These projects are relatively non-political. In its early years, it seems inappropriate for the TCS to handle politically sensitive issues such as North Korea. However, the issue of North Korea and the Korean peninsula is one that Korea, China, and Japan must address for peace and mutual prosperity in the Northeast region. Also, what is most important to trilateral cooperation is squarely facing the unfortunate history shared by the three Northeast Asian countries, and seeking true conciliation. At the very least, they must acknowledge one another’s history, and move toward a path of harmony. Many issues, including historical accuracy and territorial disputes, are standing in the way of trilateral cooperation. Curbing emotional nationalism around the Korean peninsula is also a concern of the TCS. From a general perspective, trilateral cooperation is an irreversible current of the times. An increasing need for regional cooperation among the three countries is arising from the need to alleviate conflicts of interest and jointly respond to various issues. This is an unavoidable reality. Therefore, the role of the TCS will naturally expand. A large calligraphic writing of the character 夢 (dream) hangs on the wall of my office. My dream as the first Secretary General of the TCS is that as time goes by, the TCS will be able to solidify its position as an

010 POSRI Chindia Quarterly�Spring 2012 international organization working for peace and mutual prosperity in the Northeast Asian region. Currently, the establishment of a permanent Secretariat is seen a small step; however, I am sure that in the future it will be recognized to be a giant leap, opening a new era of peace and mutual prosperity among Korea, China, and Japan.

011 Spring 2012�POSRI Chindia Quarterly Two perspectives on the Indian market COLUMN

Kim Joong-keun South Korean Ambassador to India

teve Jobs dropped out of college after just six months, and traveled to India. The religious and philosophical guru he had wished to meet, Neem Kairolie Baba, had already passed away; S what awaited Jobs was only poverty, disease, and danger. When faced with the reality of poverty, he found that the spiritual world he had been in search of was mere fantasy. He later wrote, “Thomas Edison did a lot more to improve the world than Karl Marx and Neem Kairolie Baba put together.” This realization was reportedly one of his indirect motivations for founding Apple. The Economist predicted about a year ago that India would outpace China and become the world’s fastest-growing economy by 2013. The British magazine pointed out two reasons: demography and democracy. While China’s workforce will soon start aging, India will continue to benefit from a young and growing workforce. One would easily agree that a young workforce is an asset for India, but he might wonder whether democracy will become a driving force for the development of the Indian economy. The

012 POSRI Chindia Quarterly�Spring 2012 Indian government’s policies are “The current situation in India being challenged by the courts and by may seem chaotic. However,

public opinion. In addition, I believe that India is moving corruption, substandard infrastructure, toward a bright future. “ political populism, and bureaucracy stand in the way of development. A series of anti-corruption movements sprang up in India last year. The Indian government proposed the Anti-Corruption Law to Parliament, but failed to pass the law amidst resistance from the opposition parties. The Indian government, which has been trying to pass the Anti-Corruption Law for the last 40 years, has failed yet again: for the moment, the legislation of this law has lost its impetus. Upon closer look, despite the rapid growth to which the world is paying attention, the situation of the Indian economy is not all positive. The service industry has been propelling India’s economic growth, while the manufacturing industry, which should be the main pillar of economic growth, is contributing only 16% to industrial production. Due to a lack of funds to invest in large-scale production facilities and insufficient investment in transportation infrastructure, the manufacturing industry is not growing quickly. In addition, opposition to land expropriation has long been a problem for any large-scale investment project. How did India realize a growth rate comparable to that of China for the last decade despite such chronic problems? In a meeting with non-resident Indians (NRI’s) two years ago, Prime Minister Manmohan Singh compared the Indian government’s slow decision-making to an elephant. “It is probably true that India is a slow- moving elephant, but it is equally true that with each step forward it leaves behind a deep imprint,” he said. “There is a price that we pay in trying to

013 Spring 2012�POSRI Chindia Quarterly carry all sections of our people along in national development. This is the only way we know to accommodate the enormous diversity of opinions and interests in our country. It is also this characteristic that makes our democracy so vibrant,” he asserted. India’s democracy, as described by The Economist, shows such political and economic resilience. Another power making the future of India bright is the diversity of Indian society. India’s demographics are so diverse that India has 22 official languages, and 16 languages printed on currency notes. India embraces all of the world’s major religions, including Hinduism, Islam, Christianity, and Buddhism. Knowledge-based society is powered by creativity, and creativity can only blossom in a land that recognizes diversity. India’s outstanding position in the software field is a good example of the power of India in knowledge-based society. In a recent press interview, an Indian journalist asked my opinion on India’s various problems, including corruption. I could neither agree nor disagree with the journalist’s position. I replied, “If the Indian market worked properly, South Korea’s turn would not have come. European, American, and Japanese companies would have swept through the Indian market.” I added, “Companies in advanced countries hesitated to enter the market for many reasons, so South Korean companies were able to break in through niche markets. The strength of Korean people and companies is their boldness and willingness to take on challenges. That is why South Korean companies are doing well in the Indian market.” Doing business in India is hard. However, the Indian market surely has limitless potential. If South Korean companies prepare meticulously and are timely in entering the Indian market, India can be a land of opportunity.

014 POSRI Chindia Quarterly�Spring 2012 The Chinese economy in 2012

�China’s growth engine remains strong in 2012

�Managing“China’ s variables” is key to the Korean economy

:: The Chinese economy in 2012

China’s growth engine remains strong in 2012

Han Jae-hyun Economist of the Research Department, The Bank of Korea

Henry V’s marriage to Catherine of Valois took place in London just three weeks after the inauguration of the Forbidden City. Twenty-six thousand guests were entertained in Beijing, where they ate a ten-course banquet served on dishes of the finest porcelain; a mere 600 guests attended Henry’s nuptials and were served stockfish (salted cod) on rounds of stale bread that acted as plates.

An excerpt from 1421: The Year China Discovered the World by Gavin Menzies

This quote plainly shows that the national power and wealth of China overwhelmed that of Europe in the past. China maintained its global status as the strongest economy up until the early 19th Century, but the Chinese economy contracted following invasion by Western Powers, abrupt power shifts, and internal wars. However, China has emerged as one of the G2 since its accession to the WTO in 2001, and hosting the 2008 Summer Olympics. China’s status in the global economy is undeniable. The world already seems to have changed from a world of Pax Americana to a world of Pax Chimerica.

017 Spring 2012�POSRI Chindia Quarterly ○● China’s growth engine remains strong The European sovereign debt crisis shows no signs of settling down. The American economy, the world’s largest consumer market, has failed to recover from the downturn that followed the US-led financial crisis. The black cloud cast over the global economy is not disappearing quickly. Perhaps because of these circumstances, the world is paying attention to the path of the Chinese economy, which has continuously achieved an economic growth So far, the Chinese economy has suffered many ill effects accumulated rate of over 9% and has the in the process of rapid growth, but its world’s largest foreign foundations and potential are strong exchange reserves, despite the enough to overcome these effects rapidly changing global and move forward. environment. The world is watching closely, with worry and anticipation, at how well China will play its role as a lifesaver of the global economy. In short, despite many uncertainties, the Chinese economy is expected to maintain its robust economic growth in 2012 and perform its duty relatively well as an axis of the world economy. So far, the Chinese economy has suffered many ill effects accumulated in the process of rapid growth, but its foundations and potential are strong enough to overcome these effects and move forward. First, China continues to enjoy relatively good export growth. China’s overall export growth is slowing down due to the economic uncertainties of the EU, China’s largest export destination, and the USA, but its export growth rate of 2011 was 20.3%, due to continuously growing exports to emerging economies. This figure is lower than the 2010 figure of 31.3%, but higher than negative numbers in 2009, and the 2008 figure of 17.2%. While growth rates of exports to the EU and the USA stood at only 14.4% and

018 POSRI Chindia Quarterly�Spring 2012 :: The Chinese economy in 2012

14.5%, respectively, growth rates of exports to emerging countries were relatively high at 23.1% for ASEAN, 23.5% for India, 31.4% for Russia, and 30.2% for Brazil. China’s export growth is expected to fall from its current rate of above 20% to below 20% in 2012, but China’s efforts to expand exports to emerging economies are expected to complement sluggish exports to advanced countries. Second, China’s financial condition is relatively sound. China’s debt-to- GDP ratio was 43.5% in 2010, much lower than that of other countries: the USA at 94%, Japan at 199%, France at 94%, the UK at 82%, Brazil at 61%, and India at 56%. This means that China has enough economic power for any unexpected event. The Chinese government, which has been leading China’s economic growth, has the power to respond to downside risks at any time, in case the downside risks become so great that China is unable to achieve its target growth rate. Third, China’s demographic, with its record high working-age population (15-64 years), is favorable to economic growth. The dependency rate, a ratio of the number of dependents (aged 0-14 and over the age of 65) to the working population, is expected to rise in China by around 2015. Up until then, China is expected to enjoy an ample supply of workers. Finally, China’s efforts for structural reform for qualitative growth and its strategy to bolster domestic demand by empowering the middle class are expected to have gradual effects. The Chinese government has already established the policy foundation in the 12th Five-Year Plan to promote consumption over investments. China has implemented various policies to boost consumption. In September of 2011, China raised the monthly personal income tax threshold from RMB 2,000 to RMB 3,500; China has cut import tariffs for 730 types of products, including household and medical products, from January of 2012. This year, in the second year of the 12th Five-Year Plan, a wide range of policies promoting consumption are

019 Spring 2012�POSRI Chindia Quarterly expected to be implemented. Subsequent domestic demand expansion is expected to sufficiently offset the effects of export reductions.

○● Sufficient capacity for risk management Despite robust growth prospects, the Chinese economy has some risk factors to consider, particularly early this year. First, there are some worries about the possibility that China’s real estate prices are going to fall dramatically. Its real estate prices surged thanks to rapid economic growth, but in 2011 they exhibited signs of falling following a variety of tightened investment restraint policies. In January of 2011, second-hand house prices fell compared to the previous month in 3 out of 70 cities, but in February of 2012, the figure reached 45. Meanwhile, the surge in housing supply and burdensome stocks for real estate developers in 2012- 2013 are likely to drag real estate prices down. Given that the real estate sector and related sectors account for about a quarter of China’s GDP, a sudden fall in real estate prices could result in a hard landing for the Chinese economy. Fortunately, however, China’s real estate prices are not likely to decline suddenly. Demand for new houses continues to rise because of rapid urbanization and the trend toward nuclear families; the increasing demand is expected to prevent real estate prices from falling dramatically. For example, China’s urbanization rate at the end of 2010 was 49.7%, lower than the world average of 55%. China’s urbanization rate, which increases by 1 percentage point each year, will create a continuous demand for real estate for the next several years. Moreover, if real estate prices sag due to unexpected internal or external shocks, the danger of the price fall leading to financial instability and economic slump is limited. Chinese banks’ bad- debt allowance increased from 155% at the end of 2009 to 278% at the end of 2011, showing that Chinese banks have enough capacity to handle losses. In addition, derivatives in China are not mortgage-backed;

020 POSRI Chindia Quarterly�Spring 2012 :: The Chinese economy in 2012

therefore, real estate slowdown is less likely to spread to the financial market─another factor that makes a hard landing for the Chinese economy an unfounded fear. Moreover, being aware of the risk of a plunge in real estate prices, the Chinese government is highly likely to adjust the strength of stability policies for the real estate market, depending on the downside risk of the economy. However, the Chinese government needs to maintain related regulations in order to ensure reasonable housing prices and prevent speculation. The Chinese government seems to think it can handle the situation. The second risk is the possibility that local government debt, accumulated in the process of rapid growth, could lead to insolvencies of local governments and the financial sector. At the end of 2010, China’s local government debt was at 26.7% of the GDP, RMB 10.7 trillion. Of this, 79.5%, RMB 8.5 trillion, was borrowed from banks, meaning local government debt could easily result in bank insolvencies. According to an estimate, non-performing bank loans account for as much as 20-30% of total

2012 China economic forecast

Economic forecast institution Economic growth rate (%)

IMF (Mar. 2012) 8.2 Global Insight (Mar. 2012) 8.2 World Bank (Jan. 2012) 8.4 The average for 8 IB’s (Mar. 2012) 8.4 CASS (Mar. 2012) 8.5 State Council of the PRC (Mar. 2012) 8.5

Note: Dates inside parentheses refer to forecast months

021 Spring 2012�POSRI Chindia Quarterly local government debt. Moreover, the income structures of local governments are weak, evidenced by the fact that 30-40% of their revenues come from the sale of land use rights. As the real estate market condition is directly related to local governments’ budget balances, a real estate market freeze could be a deadly blow to local government finances. Fortunately, local government debts are not likely to suddenly drag down China’s robust economic growth or cause bank insolvencies. As stated earlier, China’s real estate market has little chance of freezing, and the central government has economic power. Moreover, the Chinese government is actively trying to address the local government debt issue using various microeconomic policies. The Chinese government also tries to secure revenue in a transparent and legal manner─for example, by the introduction of the property tax and resource tax, and through approvals for the issuance of local bonds.

○● Above 8% economic growth rate expected Despite various internal and external risk factors, the Chinese economy is expected to continue to grow above 8% in 2012 by focusing on domestic demand over exports as its growth strategy, and by enhancing swift macro control capacity based on sound finances. This figure is much lower than China’s average economic growth rate (10.6%) for the last decade (2002- 2011), but it is in the range of 8-9%, which the Chinese government considers the necessary economic growth rate for employment and social stability. In 2012, China is expected to focus its efforts on offsetting contracting overseas demand with expanding domestic demand. The Chinese government will actively continue to implement financial policies to benefit high-consuming, middle-to-low income classes in order to reduce dependency on exports and promote domestic consumption. These policies will include raising minimum wage requirements, providing more

022 POSRI Chindia Quarterly�Spring 2012 :: The Chinese economy in 2012

affordable housing units, and expanding social security benefits, such as medical and pension benefits. Given that the capacity of China’s monetary policies to respond to downside risks has increased thanks to the slowdown in inflation, China is highly likely to adopt easy monetary policies. After having cut banks’ reserve requirement ratio by 0.5 percentage points in February of 2012, China’s central bank is expected to cut the ratio several times again this year. Given that the Chinese economy still has the characteristics of a state- led and planned economy, China’s potential for continuous growth depends on the direction of government policies.

023 Spring 2012�POSRI Chindia Quarterly

:: The Chinese economy in 2012

Managing “China’s variables” is key to the Korean economy

Shim Sang-hyung Senior Business Analyst of POSCO Research Institute

urrently, the business world seems more uncertain than at any time in the past. This year, with presidential elections scheduled in major advanced countries, including South C Korea, global power dynamics are expected to change dramatically, as they did last year during the Arab Spring, a democratic wave that swept through the Middle East. In addition, increased risks related to North Korea, the ongoing European sovereign debt crisis, and the possibility of a hard landing for the Chinese economy are deepening uncertainty about the global economy. South Korea in particular cannot help but pay keen attention to China, its largest trade partner and largest export destination.

○● South Korea under the direct influence of the course of the Chinese economy For all of 2011, Korea listened attentively to news of rising inflation

025 Spring 2012�POSRI Chindia Quarterly rates in China. China’s inflation rate increased to 4% from the end of 2010, and remained above 5% in the first half of 2011. It exceeded 6% during June and September. The problem is that inflation in China directly led to inflation in Korea, and tight monetary policies enacted by the Chinese government to curb inflation directly influenced Korea’s exports along with economic slowdown. Korea’s inflation rate increases by 0.64 percentage points for every 1 percentage point increase of the Chinese inflation rate. Given that Korea imports more than 52% of all imported household products and 67% of all imported vegetables from China, China’s rising inflation has a significant impact on commodity prices in Korea. A 1 percentage point reduction in China’s economic growth translates into a 2 percentage point reduction in Korea’s exports to China, and a reduction of Korea’s GDP of between 0.22 and 0.37 percentage points, according to the Bank of Korea and the Korea Institute for International Economic Policy (KIEP). In particular, capital goods (intermediate goods) account for a high percentage of Korea’s exports to China; therefore, if the Chinese economy, in which investment contributes significantly to growth, slows down, Korea’s exports are directly influenced. The policies of the Chinese government, which strongly influence the course of the Chinese economy, also have a direct impact on Korea’s exports to China. After China passed all-out stimulus packages in 2009, Korea’s exports of construction and mining equipment increased by as much as 109% in 2010. However, after China tightened monetary policies last year, Korea’s exports of construction and mining equipment increased by only 14.8%, as of November of 2011. Korea’s exports of auto parts increased by about 40% in both 2009 and 2010, but the increase rate fell by 18.7% last year. This slowdown in Korea’s exports to China reflects the decrease in the rate of increase in car sales in China, from 40% to 5%, following the phasing out of subsidies and tax breaks for car buyers in 2011.

026 POSRI Chindia Quarterly�Spring 2012 :: The Chinese economy in 2012

○● An opportunity to increase domestic demand and fierce competition for exports to emerging markets It is widely agreed that China’s economy will enjoy a soft landing in 2012, with an economic growth rate of mid-8%; however, a slowdown of 1 percentage point or more in economic growth compared to 2010 seems inevitable. Investment is expected to slow down slightly in every economic sector, but consumption will continue to increase with the implementation of new supportive government policies. As large-scale investment in infrastructure has ceased for the time being, and policies continue to curb real estate prices, investment in construction, especially the construction of housing units for low income households, will continue. This year, in the The course of the Korean economy must correspond to China’s long-term policies, construction equipment including the expansion of consumption, and construction materials and the nurturing of the service industry sectors, Korea’s exports to and new strategic industries. China and the sales of Korean companies having a presence in China are expected to fall, as they did in 2011. However, China is expected to continue empowering the middle class to increase consumption, and to continue policies that allow wage rises and tax breaks. Under these circumstances, Korea’s consumer product exporters, and Korean companies located in China that produce final goods for local consumers, will enjoy relatively stable operation, while seeking to expand their presence in the Chinese market. However, companies whose business model is based on the assumption of low wages in China, producing and processing in China and exporting to a third country, will face challenges such as slowing exports and falling profitability, in line with the trend of a rising yuan. The trend of wage increases seen last year in China has continued this year.

027 Spring 2012�POSRI Chindia Quarterly With the economies of European countries and other advanced countries tumbling, China’s export increase rate is very likely to fall, from 21.1% last year to about 10% this year. Because the yuan appreciated by 5.1% in 2011, and is expected to appreciate by more than 3% in 2012, China’s export competitiveness will diminish, while price competitiveness will decrease due to wage rises. This could be a favorable situation for Korean products competing with Chinese products in the global market, but the problem is that Chinese companies are targeting emerging markets, including ASEAN, India, Russia, and Brazil, in response to stagnation in the markets of advanced nations. In limited emerging markets, Korean and Chinese companies are expected to have price and non-price competition. A more fundamental risk for Korean companies is that China is rapidly losing its charm as “the factory of the world,” and its potential to emerge as “the market of the world” is being delayed, as China tries to shift its growth method to focus more on domestic demand─ the main objective of its 12th Five-Year Plan. If China’s rapid economic growth rate were to suddenly slow, and China became caught in the middle-income trap, the Korean economy and companies would be at great risk. Korea should continuously monitor China’s economy and expand its efforts to diversify the countries it invests in and cooperates with.

○● Opportunities in the service industry and consumer goods exports What is the appropriate strategy for success in the Chinese market? According to cumulative statistics on trade between Korea and China, as of November of 2011 intermediate capital goods accounted for 57% of Korea’s exports to China, and raw materials accounted for 30%, while consumer goods accounted for only 6%. In particular, as the China’s economy started to show signs of slowdown in 2011, the increase in Korea’s capital goods exports was less than half of the increase in Korea’s

028 POSRI Chindia Quarterly�Spring 2012 :: The Chinese economy in 2012

South Korea’s exports to China (Jan.-Nov. 2011) (Unit: USD 100 Mil.)

Raw Capital Consumer Immediate Durable Non- Total materials goods goods consumer goods durable goods goods

Exports 1,225.5 460.3 694.4 70.6 8.0 52.2 10.4 (YoY) (15.9%) (29.8%) (7.4%) (24.8%) (63.8%) (22%) (16.5%)

Share 100.0% 37.6% 56.7% 5.6% 0.7% 4.3% 0.8%

Imports 795.8 283.2 351.4 161.2 30.3 70.8 60.1 (YoY) (22.4%) (30.5%) (16.5%) (22.3%) (19.7%) (21.5%) (24.7%)

Share 100.0% 35.6% 44.2% 20.3% 3.8% 8.9% 7.6%

Source: Trade statistics of the Korea International Trade Association (KITA) (www.kita.net)

total exports. On the other hand, exports of raw materials rose by 24.4% in 2010, and by 30% as of November of 2011. These figures can be interpreted to mean that exports of intermediate goods to Korean and global companies with a presence in China decreased, while exports of raw materials to Chinese companies increased. Therefore, it is necessary to acknowledge the strategic limitations of using China as a base for production, processing, and export. Korean companies should expand consumer goods exports, aiming at China’s domestic market. The immediate consumer goods market, including food and beverages, will likely expand in line with the trend of high-income Chinese consumers seeking safe, high-quality foods. In addition, durable goods, such as cars, furniture, and high-end home appliances, and non- durable goods, such as high-end clothing and toys, should be considered strategic products with potential for increased export to China.

029 Spring 2012�POSRI Chindia Quarterly The course of the Korean economy must correspond to China’s long- term policies, including the expansion of consumption, and the nurturing of the service industry and new strategic industries. According to statistics on non-residential consumption in Korea for the third quarter of 2011, released at the end of last year by the Bank of Korea, the surge in the number of Chinese and Japanese tourists, and their increasing expenditures in Korea, contributed to the country’s gross domestic product (GDP) growing by 0.3 percentage points. In 2011, the number of Chinese visitors to Korea rose by 74.1% from the previous year, and in the third quarter of 2011, the number rose by 38% year-on-year. Chinese tourists have superior purchasing power overseas, as evidenced by the fact that Chinese tourists have the world’s third largest overseas consumption. The Korean economy would benefit from strategically developing infrastructure, services, and cultural content related to the tourism industry in order to attract Chinese tourists and increase their consumption in Korea.

○● Korean companies must manage paradoxes A trade-off is when one thing is gained at the cost of another. There are many trade-offs in business management. In this hyper-competitive era, choosing appropriate trade-offs is not enough to secure a competitive edge. We have entered the paradox management era: companies must create alternative options that unravel contradictions by effectively synthesizing all trade-offs. In order to achieve conflicting goals, for example preserving the value of a design or brand while maintaining a reasonable price, it is imperative to think outside the box in all areas of management. In explaining paradox management, Taoist philosophy often comes into play. The world is composed of yin and yang; the balance of yin and yang is not static, but ever-changing. When this idea is applied to management, there is no one solution to a problem, and one should overcome the changing environment by combining various factors in a creative way. The concept of

030 POSRI Chindia Quarterly�Spring 2012 :: The Chinese economy in 2012

paradox is deeply rooted in the minds of the Chinese people, and they excel at managing paradoxes. The Chinese word for paradox is maodun (矛盾), which refers to the coexistence of a spear that can pierce any shield and a shield that can block any spear. In order to succeed in the Chinese market, Korean companies must manage paradoxes, including high-quality at reasonable prices, and global standards with local responsiveness.

031 Spring 2012�POSRI Chindia Quarterly

India suffering from reckless resource development

�India, the world’s third largest iron ore exporter, suffering from shortages

�Worsening power shortages in India due to coal production disruption

:: India suffering from reckless resource development

India, the world’s third largest iron ore exporter, suffering from shortages

Imm Jeong-seong Senior Business Analyst of POSCO Research Institute

ast year, JSW Steel, India’s second largest private steelmaker, based in India’s southern state of Karnataka, expanded its capacity to 10 million tons. However, it could not celebrate the L expansion. In July and August of 2011, the Supreme Court ordered the suspension of mining and transportation of iron ore in Karnataka, and JSW Steel took a direct hit. In September, the Court asked the National Mineral Development Corporation (NMDC), a state-owned miner, to annul all long-term contracts with steelmakers in Karnataka and start selling only through e-auctions. In October, the Central Bureau of Investigation (CBI) searched JSW Steel’s offices on suspicion of illegal iron ore procurement, sending JSW Steel into a panic. The operating rate of JSW Steel, which has no captive mines as do Steel Authority of India Ltd. (SAIL) and Tata Steel, dropped to 30-40%. JSW Steel took emergency measures that pushed its operating rate to 63% in October and 84% in December. However, it could not avoid net deficits of INR 6.7 billion in the second quarter (July to September) of 2011.

035 Spring 2012�POSRI Chindia Quarterly In East and South India, small-scale steelmakers without captive mines and sponge iron makers are on the brink of bankruptcy. The All Orissa Steel Federation (AOSF) has warned that if the problem is not solved soon, all of its 300 member companies in the steel industry will be forced to shut down in the next three to six months. This is also true for the 105 sponge iron makers in Chhattisgarh. Approximately 20 sponge iron makers have been shut down since October of 2011, and others are reducing their production by up to 60%. This is attributed to the government of Orissa ordering dozens of iron ore mines to shut down in order to combat illegal mining and prohibiting the transportation of iron ore between states.

○● Reining in illegal mining, a direct blow to supply India is blessed with the perfect natural conditions for the development of its steel industry. First of all, it has high iron ore production. In 2010, India was the world’s fourth largest iron ore producer, with 212 million tons, and the world’s third largest iron ore exporter after Australia and Brazil. Although in limited amounts, India produces its own coking coal, which is used for fuels for iron making. The country also has the world’s fourth highest demand for steel materials, at 60 million tons. Amidst such favorable conditions, steel production increased and India emerged as the world’s fourth largest steel powerhouse. However, the severe supply shortage of iron ore in recent years is threatening the development of the steel industry. In September of 2011, mining production decreased by 7.1% year-on-year; mineral production from April to November of 2011 decreased by 2.5% year-on-year. What caused the decrease in the domestic supply of iron ore in India? The first cause was the all-out efforts of the central and state governments to eradicate illegal mining. Corruption related to mineral exploitation has been a chronic problem for many decades. When large-scale illegal mining scandals broke out beginning in 2008, public opinion became

036 POSRI Chindia Quarterly�Spring 2012 :: India suffering from reckless resource development

unfavorable, and the Indian government began to take countermeasures. The Karnataka Chief Minister and other ministers either resigned or were arrested. In the end, the Supreme Court resorted to taking special measures ─prohibiting the mining and transportation of iron ore. The government of Orissa refused to renew 70 mining leases, and more than 200 applications for Indian steelmakers are preparing in mining leases are currently their own ways for iron ore shortages. While looking for ways to import iron pending. Only 116 out of a ore, JSW Steel and Essar are trying to total of 600 mining leases in find ways to develop and produce the state are currently in iron ore overseas. effect, while 242 mines have been suspended, and 158 others have been temporarily closed. In order to prevent any potential illegal mining activities, the government of Orissa is trying to digitalize mining-related affairs, and has ordered mine operators to submit documents stating iron ore transactions. Illegal mining is a serious problem not only in Orissa and Karnataka, India’s largest and second largest iron ore producing states, but also in Goa, India’s fourth largest iron ore producing state. With virtually no in-state steelmakers, Goa exports most of its iron ore. One NGO claims that 43% of the iron ore produced in Goa in 2010 was illegally extracted. In order to control rampant illegal mining practices, the CBI is probing into illegal mining, and the Supreme Court has appointed various commissions and organizations to find out the reality of the situation. Based on the reports, the Supreme Court is expected to hear the case in full. Environmental issues were another cause of the decrease in the domestic supply of iron ore in India. So far, the Ministry of Environment has canceled the mining leases of state-owned iron ore companies in Karnataka and delayed allocation of new mining leases for environmental reasons. The

037 Spring 2012�POSRI Chindia Quarterly Production and export of Indian iron ore (Unit: 1 Mil. Ton)

1996 2000 2005 2008 2009 2010

Production 68.2 80.8 165.2 222.1 218.9 212.0 Exports 29.5 37.5 89.3 95.6 111.8 97.6 Share of exports 43.3% 46.4% 54.1% 43.0% 51.1% 46.0%

Source: Steel Scenario Yearbook 2011

Supreme Court banned all mining activities in the state for fear of severe environmental damage. The Supreme Court commissioned the Indian Council of Forestry Research and Education (ICFRE) to carry out an environmental impact assessment; the report released by the ICFRE recommended restricting iron ore mining in the state to 30 million tons per year. As the state’s iron ore production was 48 million tons, the state is expected to take measures to reduce production. Another report concluded that the state of Goa, where tourism is the major industry, should restrict the production of iron ore to 20 million tons for the next five years in order to preserve the ecosystem and lessen negative social impact. As production in 2009 was 31 million tons, Goa is expected to take measures to reduce production. Particularly in Chhattisgarh, Naxalite activities and resident protests are wreaking havoc on iron ore mining and transportation. The chairperson of SAIL said that Rowghat Iron Ore Project (with about 500 million tons of reserves) is being delayed in Chhattisgarh because of threats from the Naxailtes. If this project fails to stay on schedule, SAIL’s plan to expand the capacity of Bhilai Steel Plant, its largest steel plant, will be hampered. The operation of the 450km Kirandul-Kotavalasa (K-K) Line is often suspended due to local Naxalite activities, and iron ore slurry pipelines installed by

038 POSRI Chindia Quarterly�Spring 2012 :: India suffering from reckless resource development

Essar Steel have been damaged by Naxalite attacks. The 267km pipeline connecting NMDC iron ore mines in Chhattisgarh to the pellet plant in Andhra Pradesh has been attacked as many as fifteen times since 2005, and has been out of operation since October of 2011. Recently, NMDC’s production and transportation of iron ore were suspended for almost ten days. This is attributed to protests for better railway connectivity, staged by a group of youths under the ruling party of Chhattisgarh, Bharatiya Janata Party (BJP), and to the Ministry of Railways’ refusal to provide rakes to NMDC for security reasons.

○● Companies going overseas due to government restriction of exports After the operating rate of JSW Steel dropped to 30-40%, the Supreme Court took temporary measures. The Supreme Court ordered the state-owned NMDC to supply one million tons of iron ore per month to Karnataka-based steelmakers, and directed the sale of existing stocks of about 25 million tons of iron ore across many mines through e-auctions (up to 1.5 million tons per month). By the end of last December, seventeen e-auctions had taken place, selling 11.27 million tons of iron ore. JSW Steel has purchased 7.1 million tons of iron ore in e-auctions, only 40% of which has been provided due to poor distribution. In the past, JSW Steel bought iron ore from NMDC at INR 2,880 per ton on a long-term contract basis, but nowadays the reserves are auctioned for a much higher price, between INR 3,300 and 4,330 per ton. This is the main reason for JSW Steel’s decrease in profits. What is worse, iron ore stocks for e-auction are expected to run out within three to four months. If the ban on mining is not lifted, steelmakers in Karnataka will have difficulty continuing their operations. The Indian government has raised the export tax on iron ore. The Orissa Chief Minister and various commissions and organizations demanded a sharp increase in the royalties the government charges mining

039 Spring 2012�POSRI Chindia Quarterly companies on iron ore, and a total ban on iron ore export in order to eradicate illegal mining. Finally the central government accepted these demands. In 2011, the Indian government increased export duty on iron ore lumps from 15% to 20%, and increased export duty on iron ore fines from 5% to 20%. On December 30, 2011, it announced plans to increase all export duties on iron ore to 30%. Given that the Indian government had previously reduced export duty on iron ore lumps to 5%, and reduced export duty on iron ore fines to 0%, in order to boost iron ore exports, the recent increase in export duty shows the severity of India’s iron ore shortage. Due to the increase in export duty, the export ban, and problems with distribution in some states, iron ore exports declined by nearly 30% between April and November of 2011. The recent increase in export duty is expected to drag the country’s total annual exports for the fiscal year of 2011-12 below 50 million tons. Indian steelmakers are preparing in their own ways for iron ore shortages. While looking for ways to import iron ore, JSW Steel and Essar are trying to find ways to develop and produce iron ore overseas. These attempts are attributed to the fact that in India it is very difficult to procure prospecting licenses and mining leases. Even if they are granted, companies face many challenges, such as a long approval process, additional approvals for environment and forest diversion, and strong resident resistance. Tata Steel was the first steelmaker to enter foreign countries in 2008, followed by private and state-owned steelmakers. Even SAIL, which has numerous captive mines, is rushing to secure overseas iron ore mines. The most notable plan within this trend is a plan by a consortium of seven Indian steel producers, led by SAIL, to discover 1.8 billion metric tons of iron ore reserves in Hajigak, Afghanistan. The Indian consortium won a bid for mining rights last year, and finalized an agreement in March of 2012.

040 POSRI Chindia Quarterly�Spring 2012 :: India suffering from reckless resource development

○● Waiting for the right time to enter the Indian market The issue of illegal mining became a main item on the agenda of the Indian government last year amidst the turmoil of the enactment of the Anti- corruption law. The issue is a barometer, measuring the government’s dedication to eradicating corruption, and affects the results of ongoing State Assembly elections and Lok Sabha general elections scheduled to be held in 2014. The Indian government’s efforts to increase transparency by modifying systems, including laws and regulations, will help to improve the business environment in the long term. However, the issue will not be resolved soon considering India’s distinctive administrative process. Therefore, Korean companies intending to enter the Indian market need to adjust their timing when entering the market, taking into consideration the schedule of modifications of systems within their fields. If companies enter India prematurely in order to secure market share, raw materials, or supply channels, they might end up involved in the chaos.

041 Spring 2012�POSRI Chindia Quarterly

:: India suffering from reckless resource development

Worsening power shortages in India due to coal production disruption

Imm Jeong-seong Senior Business Analyst of POSCO Research Institute

ndia faced a severe power crisis in October and November of 2011. In the National Capital Territory of Delhi, and in the states of Maharashtra, Andhra Pradesh, and Karnataka, power failures have I become more frequent and longer than ever before. According to statistics released by India’s Central Electricity Authority in January of 2012, the current coal stock at India’s 89 thermal power stations is down by 35%, from 12.7 million tons a year ago to 8.3 million tons. Half of the 89 stations have stocks sufficient to sustain operations for seven days, while 26 power stations have stocks that can support operations for only four days. This is a critical situation for India, where 70% of the electricity consumed is generated by thermal power plants. In particular, Raichur Thermal Power Station in Karnataka has repeatedly suffered from fuel shortages since last year. As of January 3, Raichur Thermal Power Station had less than one day’s coal stock and its operating rate was only 70%. This power plant, with a capacity of 1,720㎿, is responsible for supplying 35% of the state’s total electricity.

043 Spring 2012�POSRI Chindia Quarterly ○● Prime Minister Manmohan Singh presiding over emergency meetings Showing just how serious the situation is, on January 18, Prime Minister Manmohan Singh met the heads of major private power firms, including Tata Power, Reliance Power, Jindal Power, and Essar, to hear their troubles. He pledged to make addressing power shortages a priority. He stated that he would respond promptly to short-term issues, including coal supply, and prepare action plans to solve the problem within one month. He also promised to come up with a comprehensive plan to be discussed at another meeting within three months. The meeting in January was attended by the Ministers of Power, Coal, and Environment, and the Deputy Chairperson of the Planning Commission, showing clearly how seriously India is taking the electricity crisis. Since the economic reform of 1991, the Indian government has preferentially opened the electricity sector to private investment, but has failed to ease power shortages. The Indian government has implemented a plan to construct Ultra Mega Power Plants (UMPP’s), with 4,000㎿ capacities, in order to achieve an economic growth rate of 9%. Project operators, mostly private conglomerates, have been selected for four out of the sixteen UMPP’s in the pipeline. However, discontent is mounting throughout the industry, as the feasibility of the UMPP projects has deteriorated for many reasons: fuel supply shortages due to stagnant domestic coal production, and lower-than-expected domestic gas production; burdensome import costs due to surging international coal prices and abrupt rupee depreciation; delayed environment and forest clearances; and insufficient financing. The Sasan UMPP in Madhya Pradesh, the first UMPP project awarded to a project operator (Reliance Power), delayed the start of its commercial operation from the end of 2011 to January of 2013. Tata Power started Mundra Project in Gujarat on the assumption that it could get coal from

044 POSRI Chindia Quarterly�Spring 2012 :: India suffering from reckless resource development

Indonesia, but the project lost steam when the Indonesian government raised coal export prices in keeping with an increase in international coal prices. Prime Minister Manmohan Singh urged the companies involved to not be discouraged and to continue their projects, saying that he would do his best to solve their problems. The Indian government is actively addressing the issue, because India, which has a major fiscal deficit, cannot achieve its goal of expanding power generation without private investment.

○● Abundant production, insufficient supply India is well-known for its abundant natural resources. India has the fourth largest coal reserves in the world after the USA, Russia, and China. India is the world’s third largest coal producer after China and the USA, and the third largest coal consumer. India’s coal imports rank fourth in the world, after Japan, China, and Korea, because increases in production have recently fallen far short of increases in domestic consumption. India imports coking coal, which is used for steel making, because of its insufficient reserves, but it also imports a great deal of non-coking coal for power generation, because domestic coal production has been stagnant. The Prime Minister’s Office is worried about the gap between coal demand and coal production in the fiscal year 2011-12. With coal demand at 696 million tons and the target of coal production at 554 million tons, the difference of 142 million tons will have to be made up through imports. Why does coal-rich India suffer from insufficient coal supply? Ignoring unseasonable weather and temporary strikes, the primary reason is the disrupted production of Coal India Ltd. (CIL), the world’s largest coal producer, which accounts for 80% of India’s coal production. In 2010, CIL produced 431 million tons of coal, far short of its production target of 460.5 million tons; in 2011-12, it is expected that CIL will be able to achieve neither its original production target of 447 million tons, nor its adjusted target of 440 million tons, due to heavy monsoon rains and delayed

045 Spring 2012�POSRI Chindia Quarterly environment clearances. Coal production from April to The Indian government plans to take December of 2011 declined by more multifaceted measures to stabilize power supply and demand. approximately 9 million tons However, easing power shortages year-on-year. will not be easy because power State-owned CIL changed the demand continues to grow. 50-year-old pricing system as of January 1, 2012, after failing to faithfully fulfill its responsibility to supply coal, causing grumbling within India’s coal industry. The Ministry of Coal claimed that CIL had changed the pricing system according to the Roadmap for Coal Sector Reform, and the effects of the price increases would not be too dramatic. However, coal-consuming industries, including power generation and cement, are arguing that coal prices will go up by 20- 30% depending on coal grade, and as much as 50% in some cases. The Ministry of Power has officially requested that the Ministry of Coal postpone application of the new pricing system. In addition, CIL, which has about 360,000 employees, is negotiating with its labor union in order to renew their collective agreement. While CIL management has proposed a 10% salary increase, labor has asked for a 30% increase. Even if management and labor compromise, the price of coal is bound to rise. Another fundamental problem is delays in environment and forest clearances. The chairperson of CIL claimed that 168 of its projects are pending at the federal and state levels. Of these, 67 projects are greenfield and the remaining are ongoing expansion schemes. Their estimated production totals 200 million tons of coal per annum. CIL’s chairperson added that according to the stipulated procedure, forest clearances should be granted within 300 days, but the process is taking as long as six years in some cases. In other words, it is fair to say that the main culprit in the power crisis is

046 POSRI Chindia Quarterly�Spring 2012 :: India suffering from reckless resource development

the Ministry of Environment. Recently, the Ministry has denied approvals for forest land diversion for the development of coal blocks designated for Reliance Power’s Sasan UMPP. The Ministry is trying to avert the public’s ire over the nation-wide power crisis, saying that environment clearances should come before coal block allocation. Distribution and security are also major reasons for the insufficient coal supply in India. When the threat of UMPP projects stopping became a nation-wide issue, the Ministry of Coal and the Ministry of Railways pointed the finger at each other. The Ministry of Coal blamed an insufficient supply of railway rakes, while the Ministry of Railways claimed that coal piled at a pithead made it hard to transport coal by railways. (CIL revealed that it had a huge pithead stock of 70 million tons, nearly two months of production, as of April of 2011.) In addition, the chairperson of CIL argued that delays in creating new lines covering the 50-100 kilometers between mines in Jharkhand, Orissa, and Chhattisgarh and existing lines is hampering the expansion of coal production. Transportation of coal in these areas depends on road only; therefore coal production stands at just 25-30 million tons. If all railways are connected, annual coal production is expected to increase to 400 million tons, according to CIL’s chairperson. Problems such as insufficient harbor facilities to handle rising coal imports and poor distribution networks for plants are also standing in the way of a smooth supply of coal. What is worse, Maoists (Communist guerrillas) and coal mafia groups active in mountain areas with coal blocks often impede coal excavation and transportation. Finally, a rush of applications for allocation of coal blocks and delays in development also make the power crisis worse. CIL has a monopoly on India’s coal production (81%). Coal blocks is allowed, only for power generation, for six designated sectors, including private power generation, steel, cement, fertilizer, and sponge iron. By the end of 2010, 112 coal blocks were allocated for the private sector. Of these, only 28 coal blocks

047 Spring 2012�POSRI Chindia Quarterly India’s coal production and imports (Unit: 1 Mil. Ton)

Annual 2000 2005 2007 2009 2010(e) growth rate

Domestic coal production 314 407 457 532 540 5.6% Coking coal imports 11 17 22 23 40 11.9%

Non-coking coal imports 10 22 28 44 72 22.5% Total coal imports 21 39 50 73 110 18.0%

Source: Ministry of Coal, India; World Coal Association (WCA)

(with a total production output of 34 million tons) have come into operation, for various reasons. This is far short of the annual production target of 140 million tons by March of 2012. About 100 new applications for allocation of coal blocks were in the pipeline from January to July of 2011; since 2008, about 1,000 applications for coal linkage have reportedly been pending at the Ministry of Coal.

○● Ongoing power supply disruption India starts its 12th Five-Year Plan on April 1, 2012. The Ministry of Power plans to carry out 129 power generation projects (with a total capacity of 142,200㎿), 86 of which (with a total capacity of 91,100㎿) are private projects. Short supply of domestic coal and surging international coal prices are expected to upset this bold plan for power generation expansion. If the current situation continues, coal shortages are expected to increase to 170-270 million tons by 2017. Given that five-year plans after the 1990s, when there was no trouble with coal supply, achieved only half of their production targets, the prospect of the proposed expansion of power supply is all the more uncertain.

048 POSRI Chindia Quarterly�Spring 2012 :: India suffering from reckless resource development

As a result of the disruption of India’s domestic coal supply, not only private enterprises but also state-owned companies have rushed to acquire assets in overseas coal blocks. Companies, including Tata, Reliance, and Essar, acquired coal companies in Indonesia, while infrastructure companies, including Lanco Infratech and Adani, acquired coal companies in Australia. In 2008, five state-owned firms in the steel, power generation, and resource development sectors established International Coal Ventures Ltd. (ICVL), a joint venture to buy coal mines overseas, but it has achieved no tangible results to date. The Indian government plans to take more multifaceted measures to stabilize power supply and demand. It will expand hydroelectric power generation, develop new and renewable energy, increase the efficiency of power grids, reexamine the electricity pricing system, and take other necessary measures. However, easing power shortages will not be easy because power demand continues to grow. Under these circumstances, Korean companies preparing to enter the Indian market will have to take into consideration various factors that will affect them directly and indirectly, including the costs of installing and operating their own power plants, installation of power supply stabilizers, and facility malfunction and wear.

049 Spring 2012�POSRI Chindia Quarterly

Tenth anniversary of China’s accession to the WTO

�Chinese companies facing qualitative changes enter foreign markets

�The changed international trade order over the last decade

:: Tenth anniversary of China’s accession to the WTO

Chinese companies facing qualitative changes enter foreign markets

Furong Jin Research Fellow of China’s Regional and Provincial Research Group Korea Institute for International Economic Policy (KIEP)

t the China International Fair for Investment and Trade (CIFIT) held in September of 2011 in Xiamen, Fujian province, dozens of countries, including Jordan, Lithuania, A the UAE, South Korea, Brazil, Ecuador, and Russia, set out to attract Chinese money. Local governments of the United States, including the State of Oregon and the City of Houston, set up exhibit booths and actively sought to attract Chinese investments. A senior official of the U.S. Department of Commerce suggested that the USA would welcome investment by Chinese enterprises. Countries around the world are competing to attract Chinese firms, due to continuing concerns about the recovery of the global economy amidst the ongoing European sovereign debt crisis. Economic instability around the world, especially in Europe, is creating new challenges and opportunities for Chinese firms investing abroad.

053 Spring 2012�POSRI Chindia Quarterly ○● From “state-owned” to “privately-owned” As Chinese companies went overseas in earnest in the 2000s, some distinctive characteristics of these companies became evident. One is that the percentage of state-owned companies, which had dominated overseas investment, has gradually declined, and private investment has become increasingly active. The contribution of investment by the public sector to foreign direct investment (based on stocks) declined by 15 percentage points, from 81% at the end of 2006 to 66.2% in 2010. It is true that state-owned companies still have a competitive edge over private companies in terms of scale and experience. However, private companies are expected to become the main player in China’s overseas investment in the long term by increasing their competitiveness and through the Chinese government’s supportive policies. The rise of private companies is clearly shown by the successful entry of private companies, such as Wanxiang (萬向) and Yang Guang (陽光), into overseas markets, and by Geely Motors’ acquisition of Volvo.

○● Surging M&A investment Another characteristic of Chinese companies entering foreign markets is surging M&A investment. China’s foreign investment through M&A’s declined slightly during the global financial crisis, but overall it has been on a steep rise since 2000. China’s overseas M&A value, which was only about USD 600 million in 2000, rose to USD 29.7 billion in 2010, a 54.7% increase year-on-year. This figure represents 43.2% of China’s total overseas investment in 2010. China’s outbound M&A volume and value in 2011 hit unprecedented highs, at 207 deals for USD 42.9 billion. In particular, M&A’s in North America and Europe accounted for nearly half of China’s outbound M&A’s. This phenomenon is attributed to the fact that China, which regards technology acquisitions, brand reinforcement, market development, and

054 POSRI Chindia Quarterly�Spring 2012 :: Tenth anniversary of China’s accession to the WTO

foreign natural resources as main objectives of international expansion, prefers M&A’s to greenfield investment in order to have technologies and business know-how in the manufacturing and service sectors transferred quickly from advanced countries, and secure distribution channels, Private companies are expected to become the main player in natural resources, and China’s overseas investment in energy. the long term. China’s outbound M&A’s have always focused on the natural resources and energy sectors. Last year, too, they were the predominant sectors for M&A investment. What draws attention here is that the share of M&A volume in these sectors fell from 44% in 2010 to 42% in 2011, while that of the consumer goods and manufactured goods sectors rose from 22% to 35% in the same period. This means that Chinese companies shifted their focus to the manufactured goods and consumer goods industries, and China started to transform itself into a consumption- driven economy.

○● Increasing investment in Europe and North America The sharp rise in China’s foreign investment has occurred in every part of the world, but is mostly concentrated in Asia. China’s investment in Asia peaked at 77.9% of China’s foreign investment in 2008, but this figure declined to 65.2% in 2010. After Asia, South America is China’s second largest investment destination. China’s investment in South America accounted for about 40% of China’s total outbound investment until 2006, but since then it has dwindled rapidly. China’s investment in Africa was relatively high until 2008, but has declined for the last two years. In contrast, China’s investment in Europe and North America has drastically increased since the global

055 Spring 2012�POSRI Chindia Quarterly China’s FDI by investor (based on stocks at the end of 2010)

Collectively-owned enterprises 0.2% Foreign invested companies 0.7% Taiwan, Hong Kong, Macau enterprises 0.1% Equity joint ventures 1.1% Others 0.5% Privately-owned companies 1.5%

Shareholding companies 6.1%

Limited liability firms 23.6%

State-owned enterprises 66.2%

Source: Ministry of Commerce, 2010 Statistics of China’s absorption of FDI

financial crisis. China’s outbound investment by region, excluding Hong Kong and tax havens such as the Cayman Islands and the Virgin Islands, is concentrated in Asia (South Korea, Indonesia, Singapore, and Mongolia), North America (the USA and Canada), Europe (Russia, Germany, and the UK), Africa (Nigeria and South Africa), and the Pacific Region (Australia). These countries either have overseas Chinese networks, or are resource-rich or advanced countries, reflecting that China’s motivation for overseas investment is the securing of natural resources, and the enhancement of technology and brand images.

○● Recent focus on investment in the service sector Until 1990, China’s outbound investment was mainly focused on the agricultural and mining sectors. Since then, it has been diversified into trade, manufacturing, transportation, finance, real estate, medicine and hygiene, tourism, hospitality, advisory services, science and technology development,

056 POSRI Chindia Quarterly�Spring 2012 :: Tenth anniversary of China’s accession to the WTO

China’s FDI by industry (Unit: %) Service Manufacturing Mining Agricultural (%) and forestry 100 27.0 80 48.3 66.9 54.5 21.9 60 75.6 86.1 71.8 84.1

13.7 4.3 40 48.3 18.6 4.0 20 32.7 40.3 8.0 13.7 3.2 23.6 6.8 15.3 10.4 8.3 2.9 5.3 0.9 0.9 1.0 0.3 0.6 0.8 0 2003 2004 2005 2006 2007 2008 2009 2010

Source: Ministry of Commerce, Statistics of China’s absorption of FDI by year

and other areas. Currently, Chinese money reaches across all industries. Since 2000, China’s investment in resource development has declined, focusing more on the service sector. In 2003, mining accounted for the largest share of China’s foreign investment, at 48.3% of China’s total outbound investment, but in 2010, this figure decreased sharply to 8.3%. In contrast, the share of China’s foreign investment in the service sector soared from 27% to 84.1% in the same period. China’s investment in the service sector is mainly focused on leasing, finance, retail and wholesale, and transportation business. While China’s inbound investment is concentrated in manufacturing, China’s outbound investment in manufacturing is quite low.

○● M&A’s-a springboard to globalization It has been thirty years since China began its open policy based on “bring in” strategy (引進來), which focuses on attracting foreign investment, and almost ten years since China implemented “go out” strategy (走出去), a strategy to encourage Chinese enterprises to invest overseas. In this time,

057 Spring 2012�POSRI Chindia Quarterly China has achieved annual economic growth rates of over 9% on average. Currently, China is the second largest economic power, and is one of the G2. China’s industrial structure is being upgraded day by day. The impact of China’s overseas investment on the Chinese economy is generally considered positive. China has been able to avoid production disruptions by securing overseas natural resources to supplement scarce domestic natural resources, and to optimize and upgrade its industrial structure by offshoring overproducing industries. Moreover, China has been able to increase the competitiveness of its companies by acquiring state-of- the-art technologies and management experience from advanced countries through M&A’s. These steps have had a positive impact on China’s economic growth, as evidenced by the algorithm between foreign investment and GDP. China’s home appliance sector has been one of the most successful sectors in foreign markets. Although some home appliance companies have had a difficult time going overseas, it is fair to say that the home appliance sector exemplifies the ten year history of Chinese acquisitions overseas. With market dominance and brand power in China, Chinese companies, including Haier (海爾), TCL, Lenovo ( ), Kongka (康佳), and Haixin (海 信), are actively seeking opportunities in the global market. Haixin is first in market share for color televisions in South Africa, and Kongka is one of the top companies in the color television sector in Australia, the Middle East, and Southeast Asia. After the acquisition of German PC maker Medion, Lenovo has emerged as one of the top three PC providers in Germany. This is the biggest acquisition for Lenovo after its acquisition of IBM’s PC Division. In the IT sector, Huawei (華爲) has performed well in the UK. In the transportation sector, China, which has seen rapid growth in the railway industry, is advancing a large-scale project to build high-speed railways in the USA. In the natural resources sector, China National Offshore Oil

058 POSRI Chindia Quarterly�Spring 2012 :: Tenth anniversary of China’s accession to the WTO

Corporation (CNOOC), which failed to acquire Unocal in 2005, has succeeded in acquiring small stakes in US-based energy companies since 2010. It seems that the USA is actively attracting foreign investors and gradually opening up its natural resources sector to Chinese investors, in order to create jobs and hasten economic recovery. However, China’s overseas investment is not going well in certain sensitive sectors, including the agricultural sector and the state-of-the-art technology sector. Moreover, Chinese companies are still lagging behind in providing quality logistics services and establishing sales and service networks, and the brand, scale, and quality of Chinese products are inferior to those of prestigious multinational companies in advanced countries. Now is the right time to overcome this situation and ensure stable development.

059 Spring 2012�POSRI Chindia Quarterly

:: Tenth anniversary of China’s accession to the WTO

Changes in international trade order over the last decade

Ku Ki-bo Professor of World Commerce Department Soongsil University

ne of the most outstanding events in the history of world trade is China’s accession to the World Trade Organization (WTO). Before its accession to the WTO, China feared that O the WTO would strike a blow against China’s economy, figuratively describing the country as “dancing with wolves.” Ten years on, there is no trace of such fear. China’s status as a great trading nation has significantly improved after the US-led financial crisis that began in late 2008. As China’s neighbor, South Korea is one of the countries that feel China’s changing status most directly. South Korea’s relatively fast escape from the global financial crisis was partially attributed to the soaring increase in South Korea’s trade surplus with China. How explosively has China’s trade increased since joining the WTO in December of 2001?

061 Spring 2012�POSRI Chindia Quarterly ○● Six-fold increase in trade over the last decade Over the last decade, China’s total trade has increased six-fold, from USD 500 billion to USD 2.97 trillion. China’s annual trade growth, which was only 7.4% in 2001, surged to 21.8% in 2002, and to 35% in 2003-2004. This figure declined slightly in 2005-2007, but still remained high, at 23%. Due to the US-led financial crisis, China’s trade growth rate fell into the red in 2009, but it soon recovered to 34.7% in 2010. A notable fact is that after China’s import growth rates exceeded export growth rates in 2003 and 2004, China is becoming one of the largest importers, in addition to becoming one of the largest exporters. In 2005- 2007, the Chinese government’s policy to curb economic overheating lowered the country’s import growth rate to less than 20% and raised the export growth rate to 30%, resulting in a massive balance of trade surplus. Influenced by the US-led financial crisis, China’s export growth rates and import growth rates were less than 20% in 2008, and were in the red in 2009. Bolstered by the recovery of the global economy, both export and import growths were high in 2010. China’s trade surplus exceeded USD 100 billion in 2005, peaked at USD 295.5 billion in 2009, and stood at USD 183.1 billion in 2010. The list of China’s top trade products has changed. China’s top export products in 2010 were highly advanced: computers (1st), mobile phones (2nd), machinery (3rd), and parts (4th). Its top import products were mainly raw materials and high-tech products: oil (1st), computer processors and memory chips (2nd), steel (3rd), and LCD and optical equipment (4th). The textile industry, a particularly labor-intensive industry, was off the top ten export list. As China’s export products have become more sophisticated, trade has shifted from inter-industry to intra-industry. China’s major export products, such as electronics products, semiconductors, machinery, parts, and steel, are also its major import products.

062 POSRI Chindia Quarterly�Spring 2012 :: Tenth anniversary of China’s accession to the WTO

Trend in China’s trade

(Unit: USD 100 Mil.) 35,000 Trade 30,000 Exports

25,000 Imports Trade balance 20,000

15,000

10,000

5,000

0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Source: China Statistical Yearbook by year; http://www.kita.net

○● Asian countries’ rising status as trade nations For the last ten years since China’s accession to the WTO, world trade has experienced rapid and significant changes. First, as China and other Asian countries have rapidly increased trade, their status in the world trade is also rising. The top ten trading countries in 2010 include four Asian countries: China, Japan, South Korea, and Hong Kong. Second, major Asian countries’ largest trading partner changed from the USA to China. China overtook the USA to become South Korea’s largest trading partner in 2003. In 2009, the share of South Korea’s trade with China was 20.5%, larger than the shares of its trade with Japan (10.4%) and the USA (9.7%) combined. The share of South Korea’s exports to China was relatively high, at 23.8% in 2009 and 25.1% in 2010. Third, Asian countries, including South Korea, Taiwan, and ASEAN countries, have largely expanded trade surplus with China. According to statistics released by Korea Eximbank, South Korea’s trade surplus with

063 Spring 2012�POSRI Chindia Quarterly China was USD 34.5 billion in 2009 and 45.3 billion in 2010. China is gradually changing from an exporter into an importer. For the two-year span, South This trend will develop even Korea recorded USD 79.8 faster in the future. billion in trade surplus with China (USD 117.7 billion according to China’s statistics). Taiwan’s trade surplus with China was USD 77.5 billion in 2009 and USD 65.3 billion in 2010─USD 142.8 billion in total for the two years (according to China’s statistics). Last, with worsening trade imbalance among trading nations, trade clashes are occurring more frequently, the pressure on yuan appreciation being one example. In particular, China, the world’s second largest trading nation, runs a large trade surplus, while the USA, the world’s largest trading nation, runs a large trade deficit. This trend has been going on for quite a while. In 2010, China’s trade surplus hit USD 183.1 billion, and the USA recorded a trade deficit of USD 633 billion.

○● China, the next largest importer China became South Korea’s largest investment destination and largest trading partner many years ago. China is not only an important trading partner for South Korea, but also a great trading nation, influencing the world economy. Over the last decade, the contribution of China’s trade to global exports has increased significantly, from 4.3% in 2001 to 9.2% in 2010. China’s share of global imports also rose, from 3.8% in 2001 to 9.2% in 2010. China’s rapid progress has changed the rankings of the world’s top trading nations. In 2001, China’s trade was far short of that of the USA and Germany, and USD 240 billion less than that of Japan. However, in 2010 China became the world’s second largest trading nation after the USA, with

064 POSRI Chindia Quarterly�Spring 2012 :: Tenth anniversary of China’s accession to the WTO

Changing hierarchy among top trading nations

(Unit: USD 100 Mil.) 35,000 30,000

25,000 China 20,000 USA 15,000

10,000 Germany 5,000 0 Japan Exports Imports Trade Exports Imports Trade 2001 2001

Source: Korea Statistical Information Service (KOSIS); http://kosis.kr

only USD 270 billion less trade than the USA. In terms of exports, China became the world’s number one. How will China influence the structure of world trade? First, in a few years, China will surpass the USA to become the world’s largest trading nation. In 2010, China’s exports were USD 300 billion greater than those of the USA, and China is rapidly closing the gap in imports between the two countries. China’s trade surged by 5.9 times over the last decade, while the USA had only a 1.7-fold increase in the same period. Second, China is gradually changing from an exporter into an importer. This trend will develop even faster in the future. As China has emerged as one of the largest importers, countries within and outside of Asia have an increasing dependence on trade with China. Naturally, China’s say in the global trade order is increasing, making way for changes in trade rules that have so far been US-centered. Finally, even though the US dollar is still a dominant settlement currency, the euro and yuan are expected to emerge as new settlement currencies. Since July of 2009, China has been trying to extend yuan trade settlement especially for Asian countries. It is also extending yuan trade

065 Spring 2012�POSRI Chindia Quarterly settlement with Russia, South America, and the Middle East. As the world’s preference for Chinese yuan is increasing, and a yuan trade settlement system is being settled, the international status of the yuan is expected to improve. With such big changes in the structure of world trade, South Korea must modify its strategic trade policies. First of all, South Korea should reconsider its policy for importing cheap Chinese products in order to stabilize commodity prices in Korea. Taking into consideration China’s steep wage rise, yuan appreciation, and sophisticated industrial structure, Chinese products have limitations in stabilizing commodity prices in Korea. Second, South Korea needs to establish a more systematic policy for trade with China. As China’s import market becomes larger, finding out China’s major import products and focusing on promoting those products is important. Finally, South Korea must systematically approach and conclude a free trade agreement with China before too late. Since China and Taiwan concluded the Economic Cooperation Framework Agreement (ECFA), South Korea’s exports to China and Korean companies having a presence in China have suffered a heavy blow. The Korea-China FTA is crucial in order to increase South Korean companies’ presence in the massive import and domestic markets of China.

066 POSRI Chindia Quarterly�Spring 2012 India in the pursuit of food security

�India in urgent need of a stable food supply

�India needs a Second Green Revolution

:: India in the pursuit of food security

India in urgent need of a stable food supply

Kim Mi-su Business Analyst of POSCO Research Institute

he Indian economy tumbled in 2011 with double digit food inflation rates. Food price is a very sensitive issue in India, where a large portion of the population is poor and there is T severe economic inequality. In 1998, a sharp increase in the price of onions, one of India’s staples, led to the downfall of the governing party. A term was even coined: “Onion Policy.” Since its independence, India has been striving to ensure a stable supply of food for its people, forming the basis of India’s food security. India reached 100% self- sufficiency in food grain production in the 1970s during its Green Revolution. However, inefficient distribution systems and inferior storage systems stand in the way of addressing fundamental problems. Food inflation is occurring all over the world. With the economic development of developing countries comes an increase in national incomes; with changes in lifestyle, the demand for food increases, too. Food

069 Spring 2012�POSRI Chindia Quarterly prices and a stable supply of food have become a global issue. For example, as the Chinese suddenly started consuming squid like never before, squid prices surged in Korea. Decreases in agricultural production due to climate change have led to fluctuating food supplies, making food prices even more unstable. Some people blame grain derivatives or grain futures trading for a further rise in food prices. Food security has become a hot-button issue at a global level.

○● Food security means more than food supply According to the UN’s Food and Agriculture Organization (FAO), food security exists when “all people, at all times, have physical, social, and economic access to sufficient, safe, and nutritious food to meet their dietary needs and food preferences for an active and healthy life.” According to the World Health Organization (WHO), “Food security is built on three pillars: food availability, food access, and food use.” Food availability ensures “adequate food supply through production and imports.” Food access means “having sufficient resources to obtain appropriate foods for a nutritious diet.” Food use measures “appropriate use based on knowledge of basic nutrition and care, as well as adequate water and sanitation.” Food security is not just about providing sufficient quantities of food; it includes nutrition provision through basic sanitation facilities, including the intake of balanced nutrition and access to clean drinking water.

○● Unstable food supply due to falling production and rising demand India achieved agricultural breakthroughs during its Green Revolution, but its production rates and productivity in agriculture have recently declined. Agricultural growth rates stood at 3-4%, but started to decrease after 2000. The average annual growth rate between 2000 and 2004 was only 2%, and it was 1.6% in 2008. The situation worsened in 2009, when

070 POSRI Chindia Quarterly�Spring 2012 :: India in the pursuit of food security

Yield of food grains (Unit: kg/ha)

2001 2010

India China World India

Rice 2,862 6,074 3,837 2,240 Wheat 2,693 3,907 2,665 2,938

Corn 1,834 4,854 4,472 1,959 Sugar cane 66,508 69,556 65,293 68,596

Source: Ministry of Agriculture, India, Agricultural Statistics at a Glance the agricultural growth rate was only 0.2%. Punjab and Haryana, India’s representative grain belt, show no exception to the decrease in growth rates. In 2001, India’s agricultural productivity in sugar cane and wheat was on par with the world average, but its productivity in rice and corn was far below the world average. After nine years, in 2010, things had not changed dramatically: India’s agricultural productivity was still far below the global average. This is attributed to the fact that agricultural productivity in India is greatly affected by monsoons due to out-of-date agricultural technologies and substandard infrastructure. In 2009, grain production dropped by 7% because of severe droughts; in 2010, when precipitation exceeded normal levels, grain production rose by 8%. Agricultural production in India is fluctuating greatly because the country lacks infrastructure that can offset drought or flood-induced troubles. Only 42.9% of Indian farmland has irrigation facilities; even worse, the level of irrigation varies state by state. In Punjab and Haryana, irrigation facilities are in place in 90% of the farmland, while in Asam and Karnataka, less than 10% of farmland is irrigated. The supply of power needed for the use of pumps is also inadequate. Like irrigation facilities, power supply varies state by state.

071 Spring 2012�POSRI Chindia Quarterly In Himachal Pradesh where India needs to increase agricultural the situation is good, more productivity and growth by increasing than 90% of farm households investment in agricultural technologies and infrastructure. have access to electricity; however, only 10% of farm households in Bihar have electricity. If this situation continues, India will not meet the most basic requirement for food security: food availability. India’s production rates for cooking oil, beans, and wheat are among the world’s highest, but production is far short of demand; therefore, India is largely dependent on imports. If India continues to depend on imports, the Indian economy will not be free from the fluctuating global prices of agricultural products. This will have a negative impact on India’s current account.

○● Lack of food securityㅡa threat to India’s growth potential According to the Global Hunger Index (GHI) 2011, released by the US- based International Food Policy Research Institute (IFPRI), India ranked 67th out of the 81 countries with the worst food security, far below Sri Lanka (36th), North Korea (51st), and Pakistan (59th). The GHI combines three equally weighted indicators: the proportion of the undernourished as a percentage of the population (undernourishment); the prevalence of underweight children under the age of five (child underweight); and the mortality rate of children under the age of five (child mortality). Compared to other countries, India showed high numbers for the second and third indicators. For these indicators, India’s numbers were even worse than those of Bangladesh, which was in 70th place. The prevalence rate of underweight children under the age of five in Bangladesh was 41.3%, lower than India’s 43.5%. The mortality rates of children under the age of five in Bangladesh

072 POSRI Chindia Quarterly�Spring 2012 :: India in the pursuit of food security

2011 Global Hunger Index

Country Rank Undernourishment (%) Child underweight (%) Child mortality (%)

China 4 10 4.5 1.9 Sri Lanka 36 19 21.6 1.5 North Korea 51 33 20.6 3.3 Pakistan 59 26 27.5 8.7 India 67 21 43.5 5.6 Bangladesh 70 27 41.5 5.2

Note: The GHI ranks 81 developing and underdeveloped countries. According to 2011 GHI scores, Gabon ranked 1st, Mauritius and Paraguay 2nd, and China 3rd. Congo ranked last. Source: IFPRI

and North Korea were 5.2% and 3.3%, respectively, far better than India’s rate of 5.6%. In addition, the National Family Health Survey (NFHS) released by the Indian government in 2005 showed that 56% of Indian women suffered from anemia. These figures indicate that the nutrition status of the Indian population is very poor, considering India’s economic development. In particular, nutritional deficiency is more serious in the population below the poverty line. According to a 2005 World Bank report, India is home to roughly one- third of the world’s poor. India’s Planning Commission, which establishes medium and long-term plans, set a new poverty line that reflects India’s economic and social development. According to the Commission, in 2004- 05, the poverty rate was 41.8% in rural India, 25.7% in urban India, and 37.2% for the country as a whole. The population below the poverty line struggles more with food access and food use than with food availability. They suffer from unstable

073 Spring 2012�POSRI Chindia Quarterly employment, so they have no fixed income, and in many cases they lack absolute income for buying commodities as needed. Moreover, they live in areas with inadequate water supply and sewage systems. They have a low education level, hence they lack basic information on nutrition and sanitation. Women and children who are physically weak are more likely to suffer from the aftereffects of nutrition deficiency. Nutrition deficiency among people, including women and children, has a negative impact on a country’s potential economic growth. Healthy women giving birth safely, and children growing up with a balanced diet, are directly related to the management of a country’s labor resources. Labor resources are a key factor of India’s potential economic growth. Therefore, India has to pay close attention to the nutrition intake of its people.

○● More investment in agricultural infrastructure The Indian government recently released the National Food Security Bill in an effort to address food security at a national level, and the Cabinet approved the Bill. The Bill prescribes that the poor are provided with food subsidies or free meals depending on their economic status. The Bill is being positively received because it increases food access for those below the poverty line. On the other hand, some people are criticizing the Bill for wasting government money, making the deficit-stricken Indian economy even worse. Before preparing fundamental food security measures, India needs to increase agricultural productivity and growth by increasing investment in agricultural technologies and infrastructure. India must produce policies for managing and utilizing natural resources, including farmlands, and water and forest resources. It also has to improve the public distribution system, which has been ineffective, and develop an effective storage system. In addition, India needs to expand the ongoing National Rural

074 POSRI Chindia Quarterly�Spring 2012 :: India in the pursuit of food security

Employment Guarantee Act in order to ensure stable income for the population below the poverty line to allow them to purchase sufficient food. India also needs to educate the public about sanitation in order to improve its nutritional supply.

075 Spring 2012�POSRI Chindia Quarterly

:: India in the pursuit of food security

India needs a Second Green Revolution

Kim Chan-Wahn Professor of the Graduate School of International and Area Studies Hankuk University of Foreign Studies

ecent scenes on the street of India, commonly known as a country of vegetarians, often make me wonder. In front of Raju’s Butcher at Kingsway Camp, Old Delhi, people usually R wait in line in the evenings to buy meat. The butcher’s shop is crowded with customers who want to cook meat curry or other meat dishes for dinner. Every morning and evening, there is a crowd of customers at Kumar Dairy, which sells milk, cheese, and dahi (Indian yogurt). At some point, there was a sharp increase in the number of people in big cities who consume meat and dairy products. With their increasing income since the economic reform of 1991, the urban middle class has been consuming more animal protein; naturally, the demand for natural sources of vitamins, such as fruits and vegetables, is also growing. The increasing demand for meat, eggs, milk, fruits, and vegetables pushed up their prices, which in turn, became a main force behind the recent

077 Spring 2012�POSRI Chindia Quarterly surge in food prices in India. In Through the Second Green Revolution, 2010, food prices in India surged the Indian government plans to by more than 15% on average. respond to the increasing demand for Grain production has been good animal protein and processed foods, and to increase household incomes in for the last two years because rural areas. India has received enough precipitation from benign monsoons. However, food prices have increased due to the rising demand for foods other than rice, wheat, and other staple foods. As a result, some people have raised their voices in support of a “Second Green Revolution” in order to address food inflation.

○● The changing vegetarian country The Second Green Revolution aims not only to maximize yield per cultivated area and modernize storage and processing facilities. It also focuses on maximizing yields of beans, fruits, vegetables, fish, meat, and eggs, rather than rice and wheat, which were the target food grains of the First Green Revolution. Through the Second Green Revolution, the Indian government plans to respond to the increasing demand for animal protein and processed foods, and to increase household incomes in rural areas, closing the gap between urban and rural areas. The Indian government has determined that the country needs to take revolutionary measures to change its agricultural structure in order to respond to the ever-changing eating patterns resulting from economic development, and to increase supply of protein from animal sources. Currently, the per capita consumption of animal protein is far short of supply in India. The National Institute of Nutrition in India has recommended the consumption of 180 eggs and 11㎏ of meat per capita per year. Presently, the per capita availability of eggs and meat in the country is low: 42 eggs and 1.6㎏ of meat. Availability in big cities is significantly

078 POSRI Chindia Quarterly�Spring 2012 :: India in the pursuit of food security

India’s import trends for high value-added processed foods (Unit: USD 1 Mil.)

2005~2010 HS Products 2005 2006 2007 2008 2009 2010 Annual Code growth rate

Meat, fish, and 16 1.8 1.4 3.0 3.6 3.9 3.6 14.7% seafood preparations

17 Sugars and confectionary 177.1 26.7 44.4 155.7 1,318.0 671.2 30.5%

Cocoa and cocoa 18 25.5 30.0 47.4 52.6 79.9 128.5 38.2% preparations

Cereal, flour, starch, milk 19 28.3 26.5 31.3 30.3 30.6 38.0 6.1% preparations and products

Vegetables, fruits, nuts, etc. 20 22.0 31.2 38.7 38.3 47.3 64.8 24.2% food preparations

Miscellaneous edible 21 24.3 25.7 42.8 56.5 56.0 88.4 29.4% preparations

Beverages, spirits, 22 218.5 111.5 144.3 195.4 296.4 257.4 3.3% and vinegar

16-22 Total 497.4 252.9 351.9 532.4 1,832.0 1,251.9 20.3%

Source: Ministry of Food Processing Industries, India

better than that in rural areas. Average consumption in urbanized rural areas is twenty eggs, and that in underdeveloped rural areas is only five eggs. Given that only 20% of the Indian population is vegetarian, the current consumption level of animal protein in India is quite high. With an estimated 40% of the Indian population (approximately 600 million) living in urban areas within the next decade, rapid urbanization is expected. Consequently, the imbalance between the rate of change in eating patterns and food supply is expected to become even greater.

079 Spring 2012�POSRI Chindia Quarterly ○● Changing lifestyles driving up demand for processed foods Demand for processed foods in India is also rising. With an increasing demand for processed foods, India annually imports a great deal of food from other countries. India imported processed foods worth USD 500 million in 2005, but this figure increased by 20.3% annually to USD 1.25 billion in 2010. The increasing demand for processed foods is expected to contribute to the growth of the country’s food processing industry. By 2014, India’s food processing industry is expected to account for half of the country’s entire food industry. In order to meet the rising demand for processed food, India designated the food processing industry a priority sector in 1999, and allowed foreign investors to invest up to 100% equity without prior approval under the automatic route. In addition, the Indian government exempted the fruit and vegetable processing industry from excise duties from 2000, and from income taxes from 2004. India intends to nurture the food processing industry, not only to prepare for changing demands in line with rising income, but also to reduce the level of loss of agricultural products, which

The structure of the Indian food processing industry

Organized 25% Unorganized 42%

Small scale industries 33%

Source: Ministry of Food Processing Industries, India

080 POSRI Chindia Quarterly�Spring 2012 :: India in the pursuit of food security

currently stands at 25-35%. It also aims to modernize the multi-layered distribution structure for agricultural products by promoting the food processing industry, thereby protecting the interests of farmers and consumers. However, stumbling blocks lie ahead in the development of India’s food processing industry. The biggest challenges are inefficient distribution channels and the lack of facilities for managing the quality of agricultural products in a sanitary manner. An absolute majority (75%) of entrepreneurs in the food processing industry is small in terms of their production, and largely concentrated in the unorganized segment (home-based small-scale industries). The organized, or modernized, sector accounts for only 25%.

○● Turning eyes to agricultural innovation The Indian government is showing sensitivity in the securing of animal protein and the nurturing of the food processing industry, as well as in ensuring the food security of non-traditional staples, including corn and

Key statistics for India’s food and food processing industries (Unit: USD 1 bil.) 2010~2013 2014 India’s food industry 2002 2006 Average (Forecast) (Forecast)

Food industry 175 200 250 300

Food processing industry 70 (40%) 85 (43%) 110 (44%) 150 (50%) (Contribution to the food industry)

Organized sector in the food processing industry 13 (8%) 23 (11%) 37 (16%) 60 (20%) (Contribution to the food industry)

Source: Ministry of Food Processing Industries, India

081 Spring 2012�POSRI Chindia Quarterly India’s First Green Revolution

The First Green Revolution refers to a policy, started in the mid- 1960s with support from the United States, for increasing food grains production in India, which was dependent on US aid. The Indian government introduced high-yield varieties of seeds in order to increase production of staple foods, including rice and wheat. It also increased the use of chemical fertilizers, insecticides, tractors, and water pumps, and provided farmers with education and training. India’s First Green Revolution started in fertile lands with abundant agricultural water: in Punjab and Haryana in the north, and in Uttar Pradesh in the west. Later on, in 1973, the First Green Revolution spread to southern India, to Andhra Pradesh, Karnataka, and Tamil Nadu, and then to West Bengal, Bihar, Assam, Orissa, Madhya Pradesh, and Rajasthan in 1983. As a result, India attained food self-sufficiency in the 1970s. In 1987, when it faced severe droughts, India did not have serious difficulty with food supply. India’s population growth rate was 2.1%, but food production increased at a rate of 3%, enabling the country to keep more than 30 million tons of food reserves. The First Green Revolution brought not only increased food production, but also the development of farm-related industries and job creation. Representative beneficiary industries included the tractor, chemical fertilizer, and water pump industries. With an increase in farmers’ incomes, the consumer goods industry, including radios, watches, and bicycles, also thrived. The First Green Revolution had its drawbacks. As the Revolution first focused on fertile lands with abundant water resources, it widened the gap between the rich and poor, and aggravated inequality, even in rural areas. In addition, the use of chemical fertilizers and insecticides led to the acidification of fertile land.

082 POSRI Chindia Quarterly�Spring 2012 :: India in the pursuit of food security

sugar cane. With the global trend of food shortages, the Indian government is postponing the development of bio-fuel that uses corn, sugar cane, and other agricultural products. India’s stance was reaffirmed by recent remarks by Finance Minister P. Chidambaram. He asserted that “The conversion of crops into bio-fuel is the single biggest reason for the current food crisis, and it is foolish to expand bio-fuel, even gradually.” The Indian government believes that it is inhumane to expand the conversion of crops into bio-fuel in the face of severe food shortages. In the future, important challenges that India must deal with in its economic reform include the reformation of the agricultural sector, which has been disregarded, and ensuring food security. Given that the Indian economy is recently suffering from inflation pressure, the Second Green Revolution remains an important task for India’s economic reform. In order to deal with economic challenges, policies for the development of the rural labor force should focus on providing surplus rural workers with education and training to allow them to work in the urban service industry.

083 Spring 2012�POSRI Chindia Quarterly

Issue analyses

�Two years under CEPA, time to speed up the tariff reduction schedule

�The fall in China’s real estate prices controlled by policies

�Tata Group names a young successor: talent trumps family relations

�China’s dash for space development

:: Issue analyses

Two years under CEPA, time to speed up the tariff reduction schedule

Cho Choong-jae Team Leader of South Asia Team Korea Institute for International Economic Policy (KIEP)

ll is well”. Kim Jong-hoon, former trade minister and “ current representative of Korea to the Joint Committee of the Korea-India Comprehensive Economic Partnership A Agreement (CEPA), closed his address with this remark at a committee meeting held in a New Delhi hotel in January of 2011. Indian participants responded with smiles and applause, but the response of Korean participants was unsure. Any Indian would recognize “All is well” as a famous quote from Three Idiots, India’s biggest blockbuster ever, in which Rancho, the protagonist, played by Aamir Khan, says this to himself whenever he faces difficulties.

○● Smooth sailing trade between Korea and India Borrowing the words of Mr. Kim, all seems well for the Korea-India Comprehensive Economic Partnership Agreement, in the third year since its effectuation. Most importantly, amidst the tumbling global economy, trade and investment between the two nations has produced positive outcomes. In

087 Spring 2012�POSRI Chindia Quarterly terms of trade, Korea’s trade with India since the Korea and India must expedite the schedule for tariff reduction and set a effectuation of the CEPA is more challenging target for their growing faster than Korea’s trade. total trade. For 2011, Korea- India trade is expected to surpass USD 20 billion for the first time. Korea’s exports to India from January to November of 2011 exceeded USD 11.6 billion, surpassing its exports to India for the entirety of 2010, USD 11.4 billion, while Korea’s imports from India for the same period were USD 7.3 billion, far higher than the total for 2010, USD 5.6 billion. As trade between Korea and India has rapidly expanded, the two Asian countries’ relationship as trade partners has also improved. In 2010, India outpaced Germany to become Korea’s seventh largest export destination. India was the tenth largest export destination for Korea in 2008 and 2009, but became the seventh largest in 2010. Based on statistics from January to November of 2011, India’s ranking fell to ninth place, but the country is highly likely to enter the top five within a few years. The gap between Korea’s exports to India and its exports to Vietnam and Indonesia, which are currently ranked higher than India, is not more than USD 600 million, and the gap with Taiwan is not huge, at USD 5 billion, suggesting that India will likely surpass those countries soon. Excluding Korea’s exports to Singapore and Hong Kong, mostly conducted through intermediary trade, it is almost certain that Korea’s exports to India will surpass exports to most other nations, making India one of Korea’s five largest export destinations within a few years. For India’s part, its trade with Korea has dramatically expanded since the Korea-India CEPA was signed: Korea became India’s eleventh largest export destination and ninth largest import supplier in 2010. Excluding oil-

088 POSRI Chindia Quarterly�Spring 2012 :: Issue analyses

producing countries that are larger import suppliers to India, including the UAE, Saudi Arabia, Iran, and Nigeria, Korea is India’s fifth largest import supplier. Direct investment between the two countries has become more active since the Korea-India CEPA became effective. According to statistics from Korea EXIM Bank, Korea’s direct investment in India decreased from USD 240 million in 2009 to USD 180 million in 2010, and then recorded an all- time high of USD 330 million for the period from January to September of 2011. The number of new Korean companies in India was 44 in 2009, 53 in 2010, and 48 between January and September of 2011. Particularly in 2011, the size of investment increased with each new Korean company established in India. India’s direct investment in Korea also expanded in 2011. According to statistics from the Ministry of Knowledge Economy of Korea, India’s reported direct investment in Korea, which was only USD 3.37 million in 2009, surged to USD 370 million in 2010, and recorded USD 4.09 million for January to September of 2011. Although Mahindra & Mahindra’s acquisition of Korean SUV maker SsangYong played a part in pushing up the reported investment in 2010, India’s overall investment in Korea is certainly on the rise.

○● Prompt reduction necessary for conventional tariff rates without practical benefits At the first meeting of the Korea-India CEPA Joint Committee, held one year after the effectuation of the CEPA, the two countries agreed to upgrade the CEPA for their mutual benefit, considering the changed conditions since the CEPA was signed, and agreed, in principle, to conclude an agreement on co-production of broadcasting programs to enhance bilateral cooperation in the audio-visual sector. Also, the two nations agreed to simplify visa procedures, start a project for the construction of a POSCO steel plant in India as soon as possible, and hold the second meeting in Seoul. The Korea-

089 Spring 2012�POSRI Chindia Quarterly Korea-India trade

14,000 (Unit: USD 100 Mil) 11,435 11,634 12,000 Exports Imports 10,000 8,977 8,013 8,000 7,325 6,600 6,581 5,533 5,674 6,000 4,598 4,624 4,142 3,632 3,641 4,000 2.853 1,850 2,112 2,000 1,255

0 2003 2004 2005 2006 2007 2008 2009 2010 2011 (1~11) Source: KITA net

India CEPA is a “troubleshooter” that solves various problems of economic cooperation, while increasing trade and investment between the two countries. However, there are challenges that must be dealt with first in order to further increase the effectiveness of the CEPA. First of all, the timetable for tariff reduction should be expedited. This year marks the third year of the Korea-India CEPA, but certain CEPA tariff rates are still higher than Most Favored Nation (MFN) tariff rates. For the period between January and August of 2011, among the top 50 product categories of Korea’s exports to India, classified by the 6-digit HS code, seven had tariff rates higher than their MFN rates; these seven items accounted for 17.3% of total exports of Korea’s top 50 product categories exported to India. If all of Korea’s exports to India are taken into consideration, the number of items with tariff rates higher than their MFN rates, and their share in total export value would be much higher. Fortunately for Korea, this phenomenon exists to a lesser degree for Korea’s imports from India, and the share of high-tariff items in the total value of Korea’s imports from India is very small. Among the top 50 items

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Korea imports from India, only three items fall under this category, and their share is only 1.5% of Korea’s total imports from India. This, in turn, causes Korea’s actual concession level to become lower than that of India. In other words, if conventional tariff rates of the CEPA are equivalent to or higher than MFN tariff rates, exporters and importers find no reason to utilize the CEPA conventional tariff rates, causing the side effect of lower concession levels. The Korea-India CEPA adopted preferential tariffs in order to increase access to each other’s markets; however, this original purpose became irrelevant for certain trade items after India continued to cut its MFN tariff rates, which had been used to set the standard conventional tariff rates for the CEPA. In 2006, when Korea and India started negotiating, the two countries used the MFN tariff rates to set the standard conventional tariff rates, as of April 1, 2006. As the two countries continued negotiations, however, India continuously lowered its MFN tariff rates in order to open up its markets. According to statistics from the World Trade Organization (WTO), India’s average MFN tariff rates for non-agricultural products declined from 16.4% in 2006 to 10.1% in 2009. Naturally, a gap was created between the CEPA preferential tariffs and India’s MFN rates.

○● Lower tariff rates to ease trade imbalances Another challenge of the Korea-India CEPA is the worsening trade imbalances between the two nations. In 2010, Korea’s trade surplus with India exceeded the USD 5 billion threshold for the first time, to a record USD 5.7 billion. More than USD 5 billion of surplus is anticipated again for 2011. Trade imbalance diminishes the positive effects of expanding trade between Korea and India, and is an important challenge that must be addressed in the medium-to-long term. The trade imbalance is a rather serious issue, especially for India. India’s trade deficit with Korea was only about USD 300 million in 2000, but recently surged to more than USD 5

091 Spring 2012�POSRI Chindia Quarterly billion. In addition, India’s snowballing deficit is often pointed to as one reason for the rupee’s depreciation. In fact, India’s total trade deficit for 2011-12 is projected to reach a record USD 150 billion. What are the solutions to these problems? Can an alternative policy increase market access by lowering conventional tariff rates to below MFN rates, in line with the original purpose of the CEPA, at the same time addressing trade imbalances between Korea and India? There is, in fact, one easy alternative, which is to lower the CEPA conventional tariff rates earlier than originally scheduled, speeding up the timetable for conventional tariff reduction. The current timetable for tariff reduction is set for a period of up to 8 years for Korea, and up to 10 years for India. Eight years after CEPA became effective, only 12% of tariffs will have been eliminated or reduced in Korea, but 78% will have been eliminated or reduced in India, according to the current timetable. The acceleration of tariff reduction requires greater concessions from India than from Korea; however, the prospect of such concessions will not be terrible for India; tariff reduction will not only increase trade, but also improve the trade balance of India at a greater rate than that of Korea. Comparing the effects of tariff reduction on the two countries using SMART, a simulation tool developed by the World Integrated Trade Solution (WITS) of the World Bank, India shows a greater increase in exports compared to Korea. The faster the tariff reduction, the greater the effects appear to be. Based on the MFN tariff rate for 2009, if both countries equally applied a 10% tariff reduction on all non-agricultural products, a rate similar to the current concessions, the increase in India’s exports is projected to reach about USD 590 million, whereas the increase in Korea’s exports is projected to remain at about USD 180 million. If a 50% reduction is applied to both countries, the projected exports of India and Korea are about USD 2.8 billion and USD 900 million, respectively. These results show that the more the tariff rates are reduced, the greater the effect India will feel, and the

092 POSRI Chindia Quarterly�Spring 2012 :: Issue analyses

more trade imbalances will be eased. Such a phenomenon can be attributed to the characteristics of the different trade items between Korea and India. Korea’s exports to India are mainly composed of auto parts, parts for cordless phones and other electronic and electric components, most of which are supplied to Korean companies with a presence in India, and which are more greatly affected by local demands than to tariffs. On the other hand, most of India’s exports to Korea, including light oils and preparations, and cotton products, have high elasticity of demand. Therefore, as a result of tariff reduction, export of Indian products will increase at a greater rate compared to Korean products. For the above reasons, it is imperative that Korea and India seriously consider reducing the current CEPA conventional tariff rates. The two Asian nations should also raise their trade target. The current target of “USD 30 billion by 2014” seems too low, considering the trade potential of the two countries. This target reflects an even lower increase rate than was achieved by Korea and India before the CEPA was signed. Korea and India must expedite the schedule for tariff reduction and set a more challenging target for their trade.

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:: Issue analyses

The fall in China’s real estate prices controlled by policies

Chung Cheol-ho Head of Beijing Office, POSCO Research Institute

he real estate market in China is cooling rapidly. According to Sales Prices of Residential Buildings in 70 Medium and Large- sized Cities, released by the National Bureau of Statistics of T China, cities where housing prices fell outnumbered cities where housing prices increased for two consecutive months from October of 2011, for the first time since the 2008 global financial crisis. Moreover, the average sale price index of commodity housing (商品房) in November of 2011 was 98.82 points, the lowest level since April of 2009─a 15% reduction from the peak in December of 2009.

○● Real estate market on the decline The outlook of the real estate market is worse in big cities than the rest of the country. In Beijing, housing sales declined in 2011, and housing inventory recorded the highest after the global financial crisis. According to the Xinhua News Agency, the average price of new apartments in Beijing

095 Spring 2012�POSRI Chindia Quarterly declined to RMB 13,173 per square meter, an 11.3% drop year-on-year. In Shanghai, early buyers of condos have protested discounts offered to later buyers, demanding compensation from real estate developers. In southern and northern China, where real estate prices have been high, an increasing number of cities are facing declining real estate prices. The real estate downturn is spreading from big coastal cities to the entire country. The real estate downturn in China naturally causes worry about a hard landing for China’s economy. The US-led financial crisis of 2008 originated from the bursting of the US housing bubble. The financial crisis in the PIIGS countries (Portugal, Ireland, Italy, Greece, and Spain), which are at the center of the European sovereign debt crisis, also started from housing bubbles. If China’s housing bubble bursts, causing a hard landing for China’s economy, the global economy will likely to fall into a second crisis. The real estate market has a significant impact on China’s economy. The fixed asset investment reaches nearly 50% of GDP, and investment in real estate development accounts for about 20% of all fixed asset investment. The real estate market is closely related to the industries of steel, home appliances, and construction equipment, and has a great impact on job creation. The sale of land use rights accounts for nearly 40% of local government revenues, making real estate development a major source of taxation.

○● Localized housing bubbles in big cities How serious is the real estate bubble in China? The price-to-income ratio is commonly used as an indicator of housing overvaluation. The proper range for price-to-income ratio recommended by the United Nations and the World Bank is 3 to 6. Recently, the average price of residential housing is 4.3 times the nominal GDP per household across China, well within the proper range. A comparison between housing prices and wages produces similar results. China’s real estate prices surged rapidly beginning in 2003, and the

096 POSRI Chindia Quarterly�Spring 2012 :: Issue analyses

average price of commodity housing rose 2.13 times by Even though there is little chance of 2010, while the average China’s economy landing hard due wage of urban workers rose to real estate downturn, the course of China’s real estate sector remains 3.1 times in the same period, an important risk factor for the surpassing the increase rate Chinese economy. of real estate prices. In Japan, the average wage increased twofold during the period of high real estate appreciation from the mid- 1970s to the early 1990s, but housing prices rose 2.5 times. In the USA, wages rose 1.5 times between 1990 and 2008, while housing prices increased threefold. Narrowing the target of evaluation, however, the real estate bubbles in large Chinese cities are more apparent. According to analysis by the Bank of Korea, the price-to-income ratio of 35 Chinese cities was 7.3, which is beyond the recommended range, as of September of 2011. In particular, the price-to-income ratios of Beijing, Shenzhen, and Shanghai were far above the proper range, at 14.0, 13.0, and 10.2, respectively. As of February of 2011, the price-to-rent ratios of Beijing and Shanghai were 49.8 and 37.7, respectively, far higher than those other major cities of the world: New York (21.3), London (23.2), and Tokyo (23.1). Although the real estate bubble may not be identifiable across China, localized real estate bubbles certainly exist especially in big cities.

○● The fall in real estate market controlled by policies What lies ahead for China’s real estate market? What will be its impact on the economy? Major forecast institutions predict that China’s real estate prices will likely continue to fall this year. Standard & Poors (S&P) forecasts a 10% drop in China’s real estate prices due to discounts offered by real estate developers suffering from liquidity shortages. Barclays

097 Spring 2012�POSRI Chindia Quarterly China’s real estate prices

80 60 40 20 0 -20 -40 -60 2007.8 2008.2 2008.5 2008.8 2009.2 2009.5 2009.8 2010.2 2010.5 2010.8 2011.2 2011.5 2011.8 2007.11 2008.11 2009.11 2010.11 2011.11 Note: Cities with increased housing prices - Cities with decreased housing prices Source: National Bureau of Statistics of China

Capital, a global British investment bank, forecasts that China’s home prices will fall by 10-30%. The outlook that China’s real estate prices will go down is gaining ground. However, a systemic meltdown of China’s real estate market is unlikely. The recent fall in China’s real estate prices was largely controlled by policies. If the real estate market declines severely, the Chinese government will likely turn it around through stimulus packages. Since April of 2010, the Chinese government has taken measures to stabilize real estate prices. Real estate prices skyrocketed when market liquidity, supplied by the Chinese government in order to boost the economy after the global financial crisis of 2008, flowed into the real estate market. In 2011, the Chinese government implemented strict policies to curb speculation. It increased down payments on mortgage loans for second- home purchases from 50% to 60%, and introduced property tax in 36 cities on a pilot basis. In addition, the increase of the required reserve ratio (RRR), implemented to stabilize commodity prices, and the rise in mortgage interest rates triggered financial troubles for real estate developers, many of whom were pushed to the brink of bankruptcy. Nevertheless, if excessive contraction of the real estate market threatens

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China’s real estate index

120.00 115.00 110.00 105.00 100.00 95.00 90.00 2008.7 2009.1 2009.4 2009.7 2010.1 2010.4 2010.7 2011.1 2011.4 2011.7 2008.10 2009.10 2010.10 2011.10 The national real estate climate index The average sale price index of commodity housing

Source: National Bureau of Statistics of China

a hard landing for China’s economy, the Chinese government will take action to save the declining real estate market. In fact, last year, as inflation pressure eased and the economic growth rate slowed, the Chinese government cut the required reserve ratio. The Chinese government is expected soon to implement easy monetary policies, including a further cut in the required reserve ratio. As for real estate policies, the Chinese government is expected to ease purchase limits and lending regulations depending on circumstances.

○● Low possibility of a crisis similar to the US subprime mortgage crisis The chance of China’s real estate market following the course of the US subprime mortgage crisis appears slim. China’s mortgage market is dominated by four major state-owned banks, and their loan-to-value ratio (LTV) is less than 60% on average, much lower than American banks’ 85% during the subprime mortgage crisis. Bad loan ratio of China’s banks was 18% in 2008, but declined to 1% in March of 2011. According to the simulation result released by Fitch Group, one of the top three credit

099 Spring 2012�POSRI Chindia Quarterly Comparison between China’s housing prices and wages

600 500 400 300 200 100 0 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Urban worker wages Average prices of commodity housing

Note: Wages and housing price index (1997=100) Source: National Bureau of Statistics of China

rating agencies, Chinese banks’ bad loan ratio is projected to remain below 5% in the hypothetical situation that China’s residential mortgage insolvency rate increases from 1% to 30%. In other words, the impact of the mortgage insolvencies on the financial system would be limited. China’s real estate loans amount to about 14.1% of its GDP, much lower than 72.4% in the USA. Demand for real estate is relatively stable in China. In 2011, China’s urban population exceeded its rural population for the first time. China’s current urbanization rate is 51.27%, far lower than those of the UK, Germany, and Korea, all of which have over 80% urbanization rates. In China, the population between the ages of 30 and 54, the typical age of home buyers, exceeds 500 million; the population between the ages of 20 and 30 is nearly 240 million. A sharp decline in demand for real estate seems highly unlikely.

○● Real estate downturn leaves worries about low growth Even though there is little chance of China’s economy landing hard due to real estate downturn, the course of China’s real estate sector remains an

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important risk factor for the Chinese economy. In the year 2012, China faces uncertainties of external variables, such as the European sovereign debt crisis and unstable oil prices. On the domestic front, unstable commodity prices and excessive debts of local governments hinder the possibility of strong stimulus packages. Especially with the upcoming change in leadership in October of 2012, the Chinese government cannot easily alter its policy principles that prioritize stable commodity and housing prices. If China’s economy shows an unexpected economic slowdown, the aftereffect will be enormous in Asia, especially in South Korea, which depends heavily on exports to China. It is imperative that those industries with high dependency on exports to China and companies with large investments in China pay extra attention to the possibility of an unexpected slowdown of China’s economy.

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:: Issue analyses

Tata Group names a young successor: talent trumps family relations

Lee Dae-woo Business Analyst of POSCO Research Institute

n November 23, 2011, the board of directors of Tata Sons, the holding company for Tata Group, announced its appointment of Cyrus Pallonji Mistry as deputy-chairman O and chairman-designate of the company. In the history of the chairmanship succession of Tata Sons, Mistry, 43, is the second not named Tata to take charge of the Group, after Nowroji Saklatvala in 1932. Tata Group reportedly conducted 14 rounds of interviews with candidates from within and outside of the Group.

○● Cyrus Mistry, young brother-in-law of Ratan Tata Cyrus Pallonji Mistry, born in 1968, is the youngest son of Pallonji Mistry, the chairman of the infrastructure construction giant, Shapoorji Pallonji Group. He is an Irish Parsi, descendants of Zoroastrian refugees from Persia who sought asylum in India centuries ago. Pallonji Mistry is the single largest individual shareholder (18.4%) of Tata Sons, the only larger

103 Spring 2012�POSRI Chindia Quarterly shareholders being Tata Trust and other affiliates of Tata Group. Because India does not allow dual citizenship, Cyrus Mistry has held only Irish citizenship, by virtue of being born to an Irish mother. Cyrus Mistry will become the first foreign-national chairman of Tata Group. Before being appointed the next chairman of Tata Group, Cyrus Mistry was the president of Shapoorji Pallonji Group, and had been a

If the global economy shows director of Tata Sons since 2006. His slowing momentum at the end elder sister, Aloo, is married to Noel of this year, Cyrus Mistry’s Tata, the 55-year old half-brother of management ability will be put Ratan Tata. to the test right away. After studying at a Mumbai high school, Cyrus Mistry graduated from Imperial College in London with a BE in civil engineering and he holds a master of science in management from the London Business School. Cyrus Mistry is known to be low-profile, like his father, and to have a decisive personality. The Pallonji family first formed a relationship with Tata Group when Mistry’s grandfather bought shares of Tata Sons. The fourth chairman of Tata Group, J.R.D. Tata, had a thorny relationship with his brother Darab Tata. After Darab Tata sold his shares to Pallonji Mistry, the Pallonji family became involved in the corporate governance of Tata Sons. The Pallonji family and Tata Group formed a family tie through the marriage between Noel Tata and Aloo Mistry.

○● A preference for young blood The Indian press is busy explaining Cyrus Mistry’s background, praising his skills and his eligibility as Chairman of Tata Sons. However, some media suggest that there have been other factors that influenced the appointment of Cyrus Mistry.

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Noel Tata, the incumbent president of Tata International, was considered the frontrunner for the chairman’s post. Cyrus Mistry suddenly emerged as a dark horse and won the race. Cyrus Mistry was initially a member of the five-member selection committee for the new chairman. This added to the speculation about how Cyrus Mistry came to be Tata Group’s heir apparent. One leading theory is that Cyrus’s father, Pallonji Mistry, the largest individual shareholder of Tata Sons, influenced the selection process. Some people guess that Chairman Ratan Tata did not wish for his half-brother, Noel Tata, to become the next chairman, and Noel Tata, realizing that he would not become chairman, backed his brother-in-law, Cyrus, in order to secure his footing. The official explanation of the appointment, reported in the media, was that Ratan Tata preferred young blood for his successor. Ratan Tata was named successor to the chairman at the age of 44, and was elected chairman of Tata Group when he was 54. The new chairman-designate had to be young, passionate, and have the potential to become a visionary for the Group. Being Parsi was another important criterion (the Tatas are Parsi). Older candidates and non-Parsi candidates were excluded from the race, and Cyrus Mistry turned out to be the person best fit for the post.

○● Concerted efforts toward globalization Chairman Rattan Tata will resign in December of 2012, and the young new chairman, in his mid-forties, will appear on the front lines. Tata Group is one of the largest conglomerates in India, and has over a hundred years of history. The Group operates in dozens of business areas, from tea to automobiles, with more than a hundred affiliates. Under Ratan Tata, Tata Group has grown rapidly, and has become a global company, with a presence in foreign markets in Europe, Asia, and Africa. As a result of the globalization of its businesses, Tata Group’s organization has become more complex. Under such circumstances, Tata

105 Spring 2012�POSRI Chindia Quarterly Tata Group’s revenues (Unit: USD 1 Bil.) 83.3 67.4

62.5 Average annual growth rate 15.1% 21.9

14.2 10.4 9.0 8.7 8.9 5.8 6.0

1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2011 (Year) Source: Tata Group website

Group is in need of fresh, young leadership with the ability to break through challenges. The selection of a young successor to Ratan Tata shows Tata Group’s determination to look beyond the status quo and make a more concerted effort toward globalization. Tata Group has expanded significantly under the leadership of Chairman Ratan Tata; however, it is facing headwinds in many of its businesses, as it went through two global financial crises. Tata Steel is still suffering from the aftereffects of the acquisition of British steel company Corus Group, and is making great efforts to increase efficiency in its steel plants in Europe. Tata Motors is also facing difficulties in management, because Nano, an ambitious project of Ratan Tata, has not taken off. At first, Tata Motors expected an explosive demand for Nano, but with increased raw materials costs around the world, maintaining the target price of INR 100,000 has become taxing. In addition, Tata Motors had to relocate its plant due to opposition from local residents and, as a result, experienced falling sales due to quality issues. Only Tata Consultancy Service (TCS), dubbed the cash

106 POSRI Chindia Quarterly�Spring 2012 :: Issue analyses

cow of Tata Group, is doing relatively well despite the US-led financial crisis and the European sovereign debt crisis. Tata Group’s selection of the next chairman is meaningful in that a system for the selection and nurturing of successors is being established. Ratan Tata has himself been ready to resign according to the retirement age of 70 imposed on Tata Group executives. (He initially planned to retire at 70, but delayed his retirement until 75, because the Group had found no suitable successor.) Cyrus is the second non-Tata to head Tata Group. If the first case was rather experimental, this second case shows that Tata Group’s succession culture, putting greater emphasis on talent than on family relationships, is taking root. Many companies have trouble selecting successors due to conflicts over whether family relationship or ability is a more important selection criterion, which leads to various causes for dissonance. Only time will tell whether Cyrus Mistry will bring good results for the company as the new chairman, but Tata Group has selected its successor without major conflicts. Tata Group has set a good example for other large corporations by prioritizing talent in the selection of its next chairman.

○● The year 2012 and the fate of Tata Group Before the passing of the crown, Ratan Tata will likely quicken the training of his successor. Ratan Tata has already been making public appearances with Cyrus Mistry. They were seen together at the Delhi Auto Expo, held in January. However, perhaps because of his low-profile personality, Cyrus Mistry did not interact actively with others, save for at a few events at which he gave speeches. This year appears to be the appropriate time for Cyrus Mistry’s management training. The global economy will face sudden changes this year, according to how the European sovereign debt crisis worsens or subsides. If the crisis becomes more serious, a credit crunch equivalent to

107 Spring 2012�POSRI Chindia Quarterly Chairmanship succession of Tata Group

First chairman: Jamsetji Nusserwani Tata (1887~1904) Second chairman: Sir Dorabji tata (1904~1932) Third chairman: Sir nowroji Saklatvala (1932~1938) Fourth chairman: J.R.D. Tata (1938~1991) Fifth chairman: Ratan Tata (1991~2012) Sixth chairman: Cyrus Mistry (2012.12~)

that of 2008 will likely emerge. Under such circumstances, Tata Group will face a crisis, as it did in 2009 when it faced many serious challenges, such as putting up stock as collateral for a loan. If the global economy shows slowing momentum at the end of this year, Cyrus Mistry’s management ability will be put to the test right away. If Tata Group overcomes the crisis successfully, the transition will guarantee safe sailing. If it is not successful, Tata Group will not be free from criticism for an untimely transition of chairmanship. In many ways, the end of this year will serve as an important turning point for the future of Tata Group.

108 POSRI Chindia Quarterly�Spring 2012 :: Issue analyses

China’s dash for space development

Lee Joo-ryang Associate Researcher of Science and Technology Policy Institute (STEPI)

n November of 2011, China’s unmanned spacecraft Shenzhou-8 (神 舟) successfully docked with the space laboratory module Tiangong- 1 (天宮) in space, more than 343㎞ above the earth’s surface. Until I then, the USA and the former Soviet Union were the only two countries that had successfully linked two objects moving through space at 28,800km/h, ten times faster than a bullet, within an allowable margin of error of 18㎝. The successful docking demonstrates that China’s space technology is on par with that of the USA and Russia. After becoming the world’s third country to send a manned spacecraft into orbit in 2003, and launching a lunar probe in 2007, China has made another shocking breakthrough, dubbed “Chinese Sputnik,” with this successful docking. This breakthrough for China did not happen overnight. It was the result of a half-century’s efforts since Qian Xuesen (錢學森), the father of Chinese space technology, presented in 1956 a report titled Opinions on Establishing China’s National Defense Aeronautics Industry, and Mao Zedong (毛澤東)

109 Spring 2012�POSRI Chindia Quarterly advocated in May of 1958 that China produce its own man-made satellite, as had the USA and the former Soviet Union.

○● Chinese Sputnik China has been putting on a spectacular space show each year since it launched its first unmanned spacecraft, Shenzhou-1, in November of 1999. Investing USD 1.5-2.0 billion in space development annually, the country has succeeded in launching eight manned and unmanned spacecraft and two lunar probes, space walking, launching a space station module, and docking a space flight to the International Space Station (ISS). China’s recent success in docking proves the feasibility of China’s plan to build a large space station by 2020, magnifying the concerns of nations competing with China. Pax Britannica refers to the period of relative peace in Europe when it was controlled by the British Empire in the 19th century, and Pax Americana refers to the state of relative international peace overseen by the USA since the Second World War. The world is now transitioning into Pax Sinica, which refers to the time of global peace maintained by China’s control over the economy. This phenomenon also applies to space development.

○● The result of a half-century’s efforts Changzheng (長征) is a family of rockets China developed using its own technology. The first of the series was built in 1965. Changzheng-3, a space launch vehicle developed to deliver spacecraft to geostationary transfer orbit, is highly regarded for its sophisticated technology. Currently, China is developing Changzheng-5, a next-generation heavy lift launch system. For the launching of Changzheng-5, China is constructing its fourth satellite launch center in Wenchang, Hainan, the others being in Jiuquan, Taiyuan, and Xichang. Wenchang Satellite Launch Center, which is scheduled to be completed in 2013, plans to launch 10 to 12 state-of-the-art satellites within

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a year of completion, including manned spacecraft and orbit satellites. A series of five weather satellites, called Fengyun (風雲) are in operation. In particular, Fengyun-3A, which was launched in 2008, became well-known after presenting highly accurate weather forecasts during the Beijing Olympics. The Yaogan (遙感) Series, which China developed as earth observation satellites, is used for scientific experiments and land resource surveys. China signed an agreement with Brazil in 1988 to jointly develop the China Brazil Earth Resource Satellite (CBERS), and three CBERS satellites were launched from 1999 to 2007. In recent years, China has also stood out in the fields of manned spacecraft and space exploration. China launched its first manned spacecraft, Shanzhou-5 in 2003. Shenzhou-7 was launched in 2008, making China the world’s third nation to succeed at space walking. China’s lunar exploration program consists of three phases: orbiting, landing, and returning. China has already launched Chang’e-1 (嫦娥) lunar orbiter in 2007, which has transmitted images of the entire lunar surface and investigated the distribution of chemical elements on the surface.

○● The dual purposes of scientific advancement and military agendas Space development has two purposes: commercial and military applications. Examples of commercial uses include viewing soccer games held on the opposite side of the earth via satellite, predicting the course of typhoons minute by minute, and developing light and durable new materials to adapt to extreme conditions. Some key products that were commercialized as a result of space development include heat-resistant fire- fighting gear, memory foam that recognizes the shapes of objects, Lasik surgery, microwave ovens, sugar content meters, Post-it notes, and Tang juice mix.

111 Spring 2012�POSRI Chindia Quarterly Military applications are also an important purpose of space development. During the Iraq War, the USA was able to observe the movements of the Iraqi troops using satellites with high-resolution imaging, and to hit targets without error using state-of-the-art weapons systems that utilize the Global Positioning System (GPS). Japan deployed a radar reconnaissance satellite independently from the USA, after North Korea fired its long-range ballistic missile Taepodong-1 in 1998, to monitor nuclear experiments in North Korea. As examined above, space development technologies are important not only for the survival and strategy of a nation. A high value-added industry, space development improves people’s lives, and is at the core of national security and competitiveness. For these reasons, countries around the world have significantly increased their investment in space development since the 2000s. In 2009, the world spent USD 68 billion on space development, a 10% increase year-on-year. This trend of increasing investment in space has continued for over a decade since 2001. Space development first began with military purposes during the Cold War Era, but shifted gears to focus on commercial purposes after the Cold War. A noteworthy fact is that space development around the world has been shifting back, with increased emphasis on military purposes, since 2000. Of the world’s total investment of USD 68 billion in space development, 53% was in the commercial sector, and 47% was in the defense sector. The world’s commercial space development budget in 2009 was USD 36 billion, a 9% increase year-on-year, while investment in space development for military purposes was USD 32 billion in 2009, a 12% increase from the previous year. In 1990, the world’s total space development budget was USD 27.82 billion, 29% of which was military space development budget. In 2009, the share of military space development increased to 47% of the total space development budget. Defense space budget has been increasing continuously since 2001.

112 POSRI Chindia Quarterly�Spring 2012 :: Issue analyses

○● Wary eyes on China’s space development Space development goes hand in hand with defense technology development. Satellite and rocket technology, and missile technology, are like two sides of a coin. Some people say that missile technology is sideways rocket technology. China’s space development puts an especially high priority on military purposes. China’s military authorities, who are readying stealth fighters and aircraft carriers, are deeply involved with space development. The General Armament Department of the People’s Liberation Army (PLA) is, in fact, conducting China’s space development project, As the ISS, which is jointly operated providing funding and by the USA and Russia, is scheduled for decommissioning in 2020, China manpower, including is expected to be the only nation their own astronauts. The operating a permanent manned chief commander of space platform. China Manned Space Engineering Project is Chang Wanquan (常万全), a general of the People’s Liberation Army, the current director of the PLA General Armament Department, and a member of the Central Military Commission of the People’s Republic of China. For this reason, nations around the world are casting their wary eyes on China’s breakthroughs in space technology, while congratulating China. The people of South Korea, one of China’s nearest neighboring countries, have reason enough to worry. In 2007, China shot down one of its old weather satellites with a ballistic missile and proved its ability to attack military satellites. China’s recent success in docking has military significance: China has the technology to set a satellite in exact orbit and make fine adjustments to the velocity and position of a satellite in space. Since the early 2000s, China has been working on the Bei Dou (北斗; the Big Dipper) Project, a Global Navigation

113 Spring 2012�POSRI Chindia Quarterly Satellite System (GNSS) that will keep the USA’s GPS in check. As the ISS, which is jointly operated by the USA and Russia, is scheduled for decommissioning in 2020, China is expected to be the only nation operating a permanent manned space platform. Space stations can easily be used for military purposes. Therefore, China’s space development will surely cause increasing tension among neighboring nations. China’s Communist authorities are hoping that space development will help improve the nation’s international status. For this reason, China has launched many of its spacecraft on National Day (the anniversary of the nation’s foundation). During the years of Deng Xiaoping (鄧小平) and Jiang Zemin (江澤民), space development plans were used to promote patriotism.

○● South Korea in need of a transnational system for the advancement of science and technology China’s first successful docking deserves much praise. It advanced the hopes and dreams of space development and extended human activities from the earth to faraway space. In the meantime, South Korea’s first test rocket, Naro, failed to reach orbit after liftoff. South Korea must face this reality and examine the lessons it can learn from China’s success. Space development is a major scientific field. It requires medium- to long-term plans and huge investment over a long time. A national system is necessary to make a comprehensive compilation of research outcomes in each field and manage them effectively. At a time when the average annual income of South Korea is over USD 20,000, and the national strategy for developing science and technology is shifting from imitation to creation, a major scientific field requires a growth engine. Because independent development in science and technology has limits, related scientific fields must come together to set and pursue lofty goals in order to achieve shared breakthroughs. South Korea should carefully examine China’s space

114 POSRI Chindia Quarterly�Spring 2012 :: Issue analyses

development history, especially the implications of China’s recent success in docking, to determine whether South Korea’s strategies for advancing science and technology are fragmentary or shortsighted. South Korea could utilize the insight gained from this reflection to create its own growth engine.

115 Spring 2012�POSRI Chindia Quarterly

Corporations

�Why does Korea lack prospering Chinese-run companies?

�The global strategies of Ewha Glotech, a Korean textile machinery manufacturer

:: Corporations

Why does Korea lack prospering Chinese-run companies?

Kim Chang-do Senior Business Analyst of POSCO Research Institute

n any big city around the world, there is a sizeable Chinatown, an ethnic enclave of Chinese expatriates. Based on a network of ethnic Chinese people, Chinese-run companies are active in local I businesses in most cities. However, excluding Chinese restaurants, there are few Chinese companies in Korean cities. Why are there no notable Chinese-run companies in Korea?

○● The ethnic Chinese community in Korea, formed in the late 19th century According to Biographical Records of History (史記) by Sima Qain (司 馬遷), Korea and China have been exchanging with each other since the Yin Dynasty (B.C.E 1600 - B.C.E 1046). However, it was as late as the end of 19th century when the ethnic Chinese community was properly formed in Korea. In order to guard against the encroaching Japanese imperialist influence over Korea right after the Im-ou (壬午) military rebellion in 1882,

119 Spring 2012�POSRI Chindia Quarterly the Qing Dynasty stationed battalions composed of roughly 4,000 soldiers and 40 traders in Korea, under the command of Admiral Wu Changqing (吳 長慶) of the Guangdong Navy. These traders settled in Korea, and became the origin of the ethnic Chinese (huaqiao) in Korea. The Treaty for the Development of Private Maritime and Overland Commerce between Joseon and Qing (朝淸商民水陸貿易章程), signed in September of 1882, and the Protection Rule for the Chinese Trader (保護淸商規則), enacted in November of 1884, laid the foundation for ethnic Chinese to settle in Joseon. In 1885, the Qing Dynasty dispatched Yuan Shikai (袁世凱), who later became Emperor, to Joseon. Yuan Shikai actively supported Chinese trading firms, including Tong Shun Tai (同順泰). His support was instrumental in the growth of Chinese merchants in Korea. As a result, the number of huaqiao surged on the Korean peninsula. In 1907, the number of Chinese living in Joseon increased to 3,661, and their residencies expanded to many cities, including Hanseong, Incheon, Daegu, Mokpo, Masan, and Wonsan. The prospering huaquiao economy was hit by the Wanbaoshan Incident (萬寶山) in 1931. Following the allegation of the Korean press that Chinese farmers had killed Koreans in Wanbaoshan of Manchuria, angry Koreans attacked and inflicted damage on Chinese merchants and residents across Korea. At this time, a great number of Chinese fled Korea. The report soon turned out to have been intentionally distorted by the Japanese, who tried to make mischief between Korea and China. The conflict between the two countries was settled rapidly, and the overseas Chinese population in Korea expanded again, recovering its 60,000-threshold by 1936.

○● The withering of the huaqiao economy due to government regulations In 1945, commercial activities of Chinese merchants in Joseon returned to full swing. As Korea seriously lacked commodities after it was liberated

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from Japanese colonial rule in 1945, consumer goods from Chinese cities, including Shanghai, Hong Kong, Qingdao, Tianjin, and Dalian, flooded into Korea en masse. Chinese merchants prospered until mainland China founded a Communist government in 1949. Korea’s imports from China in 1948, handled by 13 Chinese trading companies, exceeded 20% of Korea’s total imports. When the Korean War broke out on June 25, 1950, the ethnic Chinese doing business in Gyeonggi Province in Korea were hit hard, and many of them returned to Hong Kong and Taiwan. The population of huaqiao declined sharply to 23,000 in 1954. Afterwards, as government regulations discriminating against ethnic Chinese were strengthened, the population of huaqiao reached a plateau, remaining in existence only through natural increase. It was the Park Chung-hee regime that delivered the huaqiao community in Korea a deadly blow. Many ethnic Chinese people lost their lands and houses after a law preventing foreign ownership of real estate was enacted in 1961. The currency reform of 1962 inflicted damage on Chinese people living in Korea, who preferred to keep their money in cash. Under the currency reform, each Chinese household was allowed to exchange only a limited amount of money. In the 1970s, stronger restrictions on Chinese people living in Korea led to the gradual demise of their commercial activities, including Chinese restaurants. These restrictions included estimated taxation, price control on Zhajiangmian, Chinese noodles with black bean sauce, and prohibiting Chinese restaurants from selling rice dishes. In 1976, under the order of the Minister of Culture and Education, Korean nationals studying in Chinese schools in Korea were transferred to Korean schools, secluding Chinese schools from Korean society. As a result, ethnic Chinese became marginalized, and their commercial activities declined even further.

121 Spring 2012�POSRI Chindia Quarterly ○● Chinese-run companies expected to emerge in Korea in the near future Following the forging of diplomatic relations between Korea and China in 1992, Chinese Koreans who had been barely surviving totally lost their footing in Korea. Since then, people from mainland China have formed new huaqiao communities. As bilateral exchanges became active, an increasing number of Chinese entered Korea. The number of Chinese visitors to Korea (including ethnic Koreans with Chinese nationality) reached 1.72 million in 2010, with an average annual growth rate of 26% for the past seven years. By November of 2011, the total number of Chinese residents in Korea was 1.89 million, reaching an all-time high for the second consecutive year. With an increasing number of long-term Chinese residents, there are signs of Chinatowns forming. There are currently 309,571 Chinese national long-term residents with work visas in Korea. Of them, 15,436 are ethnic Chinese (the Han race), and the rest are Chinese Koreans. In recent years, the number of Chinese who became naturalized Koreans has increased rapidly; this number was 80,556 for the period between 2004 and November of 2011. Most of them are ethnic Koreans with Chinese nationality, but an increasing number of Han Chinese are being naturalized. In addition, the

Huaquiao population across Joseon in the 1930s (Unit: #, %)

Year Total no. Gyeonggi Pyeongbuk Hamnam Hambuk

1930 67,794 11,571 (17) 16,771 (25) 8,216 (12) 6,399 (9) 1931 36,778 6,026 (16) 9,937 (27) 3,382 (9) 5,307 (14) 1936 63,981 12,745 (20) 19,766 (31) 6,140 (10) 6,315 (10) 1937 41,909 3,648 (9) 19,287 (46) 5,748 (14) 6,315 (15)

Note: Numbers inside parentheses refer to percentage Source: The Joseon Governor General Office, Yearbooks of Joseon Governor General Office, 1930-1937

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number of Chinese professionals working for universities, corporations, securities companies, and research institutes in Korea is also on the rise. If they settle in Korea securely and create new communities, they will be able to find new business opportunities in Korea, utilizing their networks in mainland China and in foreign countries, as ethnic Chinese do in Southeast Asia and the Americas. The ethnic Chinese population in Korea will make every effort to ally itself with the capital in China and overseas Chinese communities. Chinese capital is rushing into Korea. China’s holdings of South Korean bonds have greatly increased, from KRW 1.87 trillion at the end of 2009 to KRW 6.57 trillion in 2010, and to KRW 10 trillion in 2011. China ranks fourth in the Korean bond market, following the USA, Luxembourg, and Thailand. The reason Chinese money is making its way to Korea is that China regards the Korean financial market as relatively advanced, with growth potential and profitability, and culturally close to China. In particular, under China’s diversification strategy for its foreign investment and foreign exchange reserves, following the global financial crisis, China’s rising investment in Korea is expected to maintain the status quo. By all accounts, it is only a matter of time until relatively successful ethnic Chinese businesses appear in Korea.

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:: Corporations

The global strategies of Ewha Glotech, a Korean textile machinery manufacturer

Kim Yeung-ki ([email protected]) President of BTN Ltd.

hung Byung-sik, President of Ewha Glotech, faced many challenges as he led his company in pioneering the Indian market. “There were no opportunities at first. If Indians were C dissatisfied with our price, they would not even give us the chance to explain the advantages of our products. We had a very difficult time.” Ewha Glotech, specializing in a single product line, is now a leading textile machinery manufacturer. Various types of textile machinery are needed in the textile industry, for production processes from spinning yarn to adding the final touches to products. Including textile applications in other industries, such as paper making, construction, and footwear, there are several hundred types of textile machinery. However, Ewha Glotech has been manufacturing only dryers and stenters, as post-fabric processing machinery, for the last half century. With revenue of KRW 51 billion in 2010, Ewha Glotech had the largest market share in the Korean market. Since its entry into the Chinese

125 Spring 2012�POSRI Chindia Quarterly market, the company has expanded its exports to include over thirty countries. Ewha Glotech is a poster-child in the Korean textile machinery industry. However, Ewha Glotech’s entry into the Indian market was an uphill battle.

○● Patience is a virtue Indi’s textile industry has a long history, and India’s domestic market for textiles is huge. India has a large workforce; abundant natural materials, such as raw cotton, wool, and leather; and raw materials for synthetic fabrics, such as chemical fibers. Since the abolition of textile quotas by the World Trade Organization (WTO) in 2004, India has been standing out in the global market. However, its long history means that many facilities are obsolete. With the growth of the textile industry, demand for the replacement or expansion of facilities is mounting. Therefore, the Indian market is a worthy target for textile machinery sales. As China began to lose its attractiveness as a textile machinery market, Ewha Glotech looked to India as an alternative market. However, the Indian market was not easily accessible. For two years after Ewha Glotech signed its first contract with a sewing factory in Hyderabad in 2005, it sold only two units in India. However, Ewha Glotech was relentless in looking for further opportunities in the Indian market, and its efforts eventually paid off. The company received fifteen orders in India worth USD 3 million in 2010. Considering the time and effort spent, the result was not 100% satisfactory; however, the result is significant, given that the Indian market has long been occupied by local companies and international joint ventures, and German and other European companies have a long-established presence. With the help of Indian market experts, Ewha Glotech received its first order within one year of its advance into the market. The company hired specialists and analyzed product standards and price trends. The analyses

126 POSRI Chindia Quarterly�Spring 2012 :: Corporations

showed that low-end products from the bottom two quality levels accounted for half of the Indian market; higher quality products at mid-range prices had a 40% market share; and expensive, high quality products had a 10% market share. Ewha Glotech identified targets suitable for its product standards and pricing, and ventured out to find customers. Even though Ewha Glotech managed to sell only a few machines in India for the first three years, it acquired enough information in the process to be confident in its selection of target market. The Korean textile machinery manufacturer collected information on Indian textile companies through a liaison office in Mumbai, and implemented marketing strategies for target companies. Unlike consumer goods that buyers can try before purchasing, the purchase of textile machinery entails a series of thorough investigations. Ewha Glotech employed locals at low-cost to contact target companies in order to increase its corporate awareness in the Indian market. After identifying target companies, Ewha Glotech began immediately to educate Indian customers about its products, and then waited patiently for a response, as Indians would do. After a long period of building trust, Ewha Glotech’s exports to India finally exceeded USD 1 million in 2008, and reached USD 3 million in 2010.

○● Going beyond India, aiming for a 20% global market share In 2009, 85-90% of Ewha Glotech’s sales came from exports. This means that sales of textile processing machinery had reached their limit in Korea. Moreover, the Chinese market, which once accounted for the largest part of Ewha Glotech’s sales, contracted after 2009 due to overcapacity, tariff reduction for the modernization of the domestic textile industry, and rising yuan. These events put Ewha Glotech in a tenuous position. In order to avoid a crisis, the company is eager to enter textile producing countries from India to the Middle East and Africa. Because of existing networks between India’s textile industry and Middle Eastern and African textile

127 Spring 2012�POSRI Chindia Quarterly industries, entry into the Indian market is key to accessing the Middle Eastern and African markets. Given its position as an export-driven company, Ewha Glotech has set a goal of “reaching sales of USD 20 million in India, and a 20% global market share in five years.” Despite over a decade of experience in the Indian market, Korean companies still find doing business in India challenging. “We should not ignore problems, nor complain of Indian corporate culture, which is different from ours. We should maintain a positive attitude and approach Indian culture patiently,” said Chang Tae-yeop, Senior Managing Director of Ewha Glotech. Ewha Glotech’s marketing strategy is directly controlled by its headquarters. Even though it is a small-to-medium-sized enterprise, Ewha Glotech has a liaison office in Mumbai and service centers in its strategic market areas, Surat and Delhi. This allows the company to pursue sales and provide customer services over the long term by directly contacting Indian customers, who have particular demands. Local offices and service centers handle most everything, including customer education, infrastructure inspection at factories using Ewha Glotech machinery, service before delivery, trouble-shooting, parts delivery, and service after delivery. These efforts have naturally improved Ewha Glotech’s corporate image. This case shows that a company can understand and conquer the Indian market through patience. Ewha Glotech has recently succeeded in developing energy-saving and environmentally friendly products. Now the company is ready to compete with global powers, such as Germany, in India’s premium market, which demands the highest quality products. The pursuits of Ewha Glotech are indicative of the path that must be taken by many Korean SME’s, for whom globalization is the only possible strategy for survival and growth.

128 POSRI Chindia Quarterly�Spring 2012 Culture

�From everyday life to politics, the power of Indian astrology

�The culturology of China’s urban development From everyday life to politics, the power of Indian astrology

Chung Ho-young, Ph.D.c. Department of Sociology, Jadavpur University

ll human beings want to know their fate and block misfortune. It is a common trend in India and Korea for women to opt for cesarean sections in the hope of having A babies on auspicious dates. The difference between the two countries is that India uses Hindu astrology and Korea uses the Four Pillars of Destiny. Few countries are as deeply intertwined with astrology as India is. In India, there are even television channels that broadcast Hindu religious events or the fortune-telling of panelists all day long. Moreover, only a fraction of Indians believe that astrology is superstition. Even the educated class are not ashamed to ask astrologers about their fate.

○● Is astrology science? Among the many hypotheses on the birth of Indian astrology, the hypothesis that Hindu astrology began after the conquest of India by

130 POSRI Chindia Quarterly�Spring 2012 :: Culture

Alexander the Great in the 4th Century B.C.E is the most plausible. Indians regard Hindu astrology, which originated in the Middle East and Europe, as an important part of religion and culture, and even as science. On February 3, 2011, the Mumbai High Court dismissed a public interest litigation (PIL) filed by NGO Janhit Manch that questioned the validity of astrology in order to control the damage caused by con artists who proclaim themselves to be gurus. “The High Court has already considered the issue and ruled that astrology is science. The court had in 2004 also directed the universities to consider if astrology science can be added to the syllabus,” observed the judges of the High Court. Those who make the most use of the influence of astrology on the Indian people are politicians. When India’s most revered spiritual leader, Sathya Sai Baba passed away in April 2011, many politicians, including Sonia Gandhi, President of the Indian National Congress (INC), Prime Minister Manmohan Singh, and Bharatiya Janata Party (BJP) leader Lal Krishna Advani, released public condolences. Supernatural power is not important in proving that a guru is genuine. Confucius did not have any supernatural powers. However, Rasputin, a wicked Russian priest, had healing powers. In the Korean culture, there is no tradition of following someone as a religious leader or guru just because he has supernatural powers. However, Sathya Sai Baba has many Indian followers. Not only L. K. Advani from right-wing political party BJP, but also Sonia Gandhi and Manmohan Singh from secular party INC, had to offer their condolences on the death of the spiritual leader for political purposes.

○● The “saint” in scandals Sathya Sai Baba was a “saint” who was involved in many scandals. He claimed to be a reincarnation of Sai Baba, the Saint of Shirdi village, who died in 1918. Sathya Sai Baba claimed that he had the power to make pure gold, silver, sapphires, and other jewels out of thin air. He did not hoard the

131 Spring 2012�POSRI Chindia Quarterly jewels for himself; he used them to help others. People who revered him as a spiritual guru made donations to him. When he died, he left INR 400 billion of wealth. Sathya Sai Baba had an estimated six million followers across the globe. Hollywood stars Goldie Hawn and Brooke Shields are known to be among his followers. A series of photos revealed that Sathya Sai Baba’s manifesting jewelry out of thin air was nothing but trickery. An experiment revealed that the “green diamond” he made was not real diamond. Many sexual abuse allegations were made against him by young boys. However, his devotees did not believe these allegations. Sai Baba, of whom Sathya Sai Baba claimed to be a reincarnation, is believed to have filled a dry well with water, turned water into oil to light the lamps of temples, and performed other miracles. However, Sai Baba was not as lavish as Sathya Sai Baba, who rode in a golden carriage donated by his devotees. Many followers of Sathya Sai Baba do not even question his dying eleven years prior to the date he prophesized.

○● Religious blessings bestowed upon villains The worst problem is Sathya Sai Baba’s relationships with politicians. He once blessed L. K. Advani, the leader of BJP, who spearheaded the massacre of three thousand Islamists under the name of the historically unproven Ayodhya legend. Following the arrest of Advani, Sathya Sai Baba foretold that Advani would be released soon, and blessed his future. Through this blessing, Advani was able to politically absorb Sathya Sai Baba’s influence on the public, whose lives were dependent on religion. It is ironical to give the title “saint” to a man who blesses a politician that conducts mass murder. However, unlike in other religions, the idea that gods bless villains is common in Hinduism. The ancient Sanskrit epic Ramayana, a must read for understanding Indian culture, has an anecdote illustrating that if a villain sincerely holds memorial services for a Brahman

132 POSRI Chindia Quarterly�Spring 2012 :: Culture

and practices religious austerities, he will become more skillful at committing wicked acts. There are other anecdotes showing the materialistic and temperamental characteristics of Hinduism: the evil King Ravana tyrannizes his country, Lanka, by the grace of Brahma, the Hindu god of creation; the invading King Vishwamitra, who plunders the Holy Cows, practices extreme asceticism and accumulates power under the blessing of Lord Shiva. Sathya Sai Baba, the self-proclaimed god in saffron-colored clothes and an afro, did more than ride in a big golden carriage carried by his devotees in a holy parade. He was also an NGO activist who built schools, hospitals, and charitable institutions. Influential Hindu clergy such as Sathya Sai Baba concurrently involve themselves in religion and NGO’s. Their NGO activities lure the faithful to make donations, and are deeply intertwined with real politics.

○● The religion-NGO-politics nexus Anna Hazare, the symbol of India’s current anti-corruption movement, also shows how politicians are related to men of religion. As soon as Anna Hazare’s anti-corruption movement began, Hindu clerics expressed their support one after another. The clerics included Baba Ramdev, a star yoga guru who is directly tied to Hindu-nationalist organization Rashtriya Swayamsevak Sangh (RSS), the most powerful religious support group for BJP. Therefore, conjecture has been made that BJP is one axis of Anna Hazare’s anti-corruption movement. Anna Hazare once lavished praise on Narendra Modi for being a clean politician. Modi is a BJP member and Gujarat Chief Minister, who is directly responsible for genocide in Gujarat. Amidst mounting criticism, Hazare withdrew his support for Modi, saying that he had not been aware of Modi’s corruption. Anna Hazare claimed that he was irrelevant to politics and would not enter politics. In fact, he came to be deeply engaged in politics as his team led a movement to vote out corrupt

133 Spring 2012�POSRI Chindia Quarterly politicians. The politicians they targeted to vote out of office were members of the current ruling party, INC. Indians depend on religious leaders in their private lives as well as for their political choices. One should not entirely deny the food for the soul offered by Indian religious gurus. However, believing that all spiritual gurus in India are genuine truth-seekers without connection to worldly matters is misguided, and results from the prejudices of Orientalism.

134 POSRI Chindia Quarterly�Spring 2012 The culturology of China’s urban development

Jang Soo-hyun Professor, Division of Northeast Asian Cultural Industries Kwangwoon University

ince the Chinese economic reform, the Beijing cityscape has changed rapidly on a tremendous scale. Whenever I visited Beijing, I felt that the city was constantly under construction, S perhaps partly due to the fact that Beijing spurred its urban development in preparation for the Beijing Olympics. Districts have been reorganized by area and industry to modernize the city, and new roads and building complexes have been built. Large-scale development projects, such as the ultra-modern Central Business District (CBD) in Chaoyang District (朝陽區), have been carried out in various parts of the city. Beijing’s appearance has changed so significantly that it is quite difficult for one to find his way using a map that is only a few years old. One exception is the area around the Forbidden City, where many historic sites can be found, and the scenery remains much unchanged from the past. An ancient city, Beijing has maintained its status as the capital city for hundreds of years, through a number of dynasties. Beijing has designated dozens of

135 Spring 2012�POSRI Chindia Quarterly buffer zones centering on old castles near the old palace in order to prevent haphazard development or alteration.

○● Historical remembrance vs. redevelopment As Beijing went through total redevelopment according to urban development plans, hutongs (胡同), narrow alleys or streets, to which many Beijingers feel a deep sentimental connection, also became a target. Traditional houses jumbled together on both sides of narrow hutongs were pulled down, and modern apartments and buildings were constructed in their place. Certain hutong neighborhoods were recognized as tourist attractions, thanks to their connection to neighboring historical sites, and their redevelopment was limited to restoration. In Sanyanjing (三眼井) Hutong, for example, old, dilapidated zayuans (雜院; subdivided courtyard houses) were replaced by siheyuans (四合院; courtyards enclosed by four houses) built according to tradition. At a glance, the kind of redevelopment that occurred in Sanyanjing appears to be contributing to the preservation of cultural assets by restoring tradition, but it is not without criticism. The building of new siheyuans is not true preservation of tradition, but merely construction of artificial replicas. Large-scale redevelopment has destroyed the uniqueness of each hutong and made all hutongs look identical. Whatever method is chosen, overall redevelopment disturbs the lives of residents, and thus should be avoided if possible. Developers often forget that hutongs, as they are now, are valuable cultural heritage of our time.

○● The rebirth of decrepit urban areas as creative spaces Recently, it has become popular across China to select a neglected building or space that is representative of a certain period, and convert it into space for art and culture. A case in point is the 798 Art Zone, which has recently become a popular attraction. The 798 Art Zone is a

136 POSRI Chindia Quarterly�Spring 2012 :: Culture

decommissioned factory in northeast Beijing, with hints of industrialization from the Socialist Era and a Bauhaus-influenced architectural style. After artists moved in one by one to make use of the defunct factory buildings, which had been neglected since the early 2000s, an autogenous art zone was created. With the wave of redevelopment sweeping through, the 798 Art Zone was once targeted for demolition. Since the Chinese government put the creative industries on the main agenda of its 11th Five-Year Plan, however, it has gone through a complete makeover. Bolstered by government support, ranging from administrative management to space renewal, refurbishment, and financing, the 798 Art Zone has become one of China’s best art districts. Currently, the 798 Art Zone houses approximately two hundred cultural institutions and private art studios involved in various fields of art, including painting, photography, sculpture, advertising, and publication. They hold annual art festivals and cultural events, drawing attention from the art world around the globe. In Shanghai, M50 on No. 50 Moganshan Road (莫干山路) is the best- known art zone. M50 used to be a factory complex along the banks of the Suzhou River (蘇州河) that housed factories from the 1930s to the 1990s. Since one artist converted the empty space of a factory into an art gallery in 2000, many Chinese and foreign artists, and experts in the cultural industry, have trickled in. M50 houses about 140 separate spaces, used as galleries and studios, and for various other purposes. It hosts about 300 art exhibitions each year. Recently, 1933 Lao Chang Fang ( ), also in Shanghai, has been gradually drawing attention. Originally a slaughterhouse built by the British in 1933, the building has a unique structure. After being abandoned for a long time, 1933 Lao Chang Fang was converted into a space for the creative industries in 2006, and has emerged as a new cultural attraction.

137 Spring 2012�POSRI Chindia Quarterly ○● Hoping for genuine art zones Big cities like Beijing and Shanghai have been continually creating new art zones, utilizing spaces and buildings that have kept the values of eras past. Caochangdi (草場地), Songzhuang (宋庄), and Art Base 1 (1號店) in Beijing; and Bridge 8 ( ), 800 Show (800秀), Cool Dock (�碼頭), and Red Town ( ) in Shanghai are good examples. Influenced by the success of the 798 Art Zone, art zones for the creative industries are springing up across China. In major cities across China, a new breed of art zones, bringing together art and capital, are being created, such as the Chengdu Contemporary Art Centre, a West Lake art complex in Hangzhou, and the Art District Xi’an (西安). Converting buildings and spaces with valuable memories from the past into beautiful art spaces is worthy of praise. It not only preserves the precious historical and cultural assets of cities, but also boosts public interest in and understanding of art. However, there is growing criticism that the 798 Art Zone has degenerated into a tourist attraction or a shopping center. Art zones can easily become overrun by commercial interests rather than embodying pure artistic values. It is my sincere hope that these art zones will not turn into false art zones inundated by knockoffs and cheap goods, but remain beautiful places where artistic spirit and historical remembrance are delicately intertwined.

138 POSRI Chindia Quarterly�Spring 2012

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