Emerging Markets : Accidents Highlight Structural Issues

The head of Chinas State Environmental Protection Agency (SEPA) resigned in early December after an explosion at a chemical plant in the northeastern city of Jilin exposed weaknesses in environmental policy, government accountability and safety regulations. The November 13 explosion killed six repair workers and dumped tons of dangerous chemicals into Chinas Songhua River.

Government officials, however, did not notify the public of the dangerous pollutants until eight days later when a decision to shut off drinking water in the downstream city of Harbin sparked rumors and panic. The accident and subsequent government cover-up have added weight to calls for stronger environmental protection and government transparency. The central government has promised to investigate, but the December 7 death of one of Jilins deputy mayors, rumored to be a suicide, will likely complicate that investigation.

An explosion at a coal mine in the city of Tangshan killed at least 74 workers on December 8. The explosion was the latest in a string of mining accidents, the most serious of which was in the northeastern province of Heilongjiang in late November and killed 171 workers. Chinas mining industry is the most dangerous in the world, with almost 3,000 deaths in the first half of 2005. Strong demand and high coal prices have thwarted government efforts to shut down illegal mines and enforce safety standards.

International pressure on Chinas exchange rate regime is again intensifying, despite a minor revaluation in July. In the first 10 months of 2005 Chinas trade surplus soared to over $80 billion, a sevenfold increase over the same period in 2004. Chinas trading partners charge that the skyrocketing surplus shows the currency is undervalued. The G-7 released a statement in early December calling for more flexibility in the yuans exchange rate. Chinas central bank appears unfazed, however, recently buying billions of yuan with a pledge to sell them back in one year at a price of 7.85 yuan to the dollar, indicating that the bank expects only minor appreciation.

The worlds two largest airplane manufacturers both inked billion-dollar agreements with the Chinese government. Airbus and China announced a deal in early December to produce 150 jets for $9 billion. The deal comes only weeks after Boeing signed an agreement, during US president George W. Bushs visit to China, to build 70 planes for $4 billion. The long-standing competition between the two companies for Chinas promising market is likely to intensify as booming tourism and strong economic growth push up demand.