Yesterday, we reported that China wants to be a market of 20m cars in 2012. We didn’t predict that, just reporting the news, ma’am.

A hue and cry ensued:  “Can’t be!”

Commentator ohsnapback, who’s forte is lawyering, a much more complex field than economics, prognosticated an immediate burst of the Chinese bubble, with a mega tonnage of more than 100 times of our housing bubble.  The argument was promptly defused. After all, China doesn’t borrow money. They lend it. Mostly to the U.S.

Then, commentator ra_pro rolled out the really big ordnance: “As I said many times previously: Demography is Chinese destiny as it is Japan’s.” If people would only stop prattling on about demographics, and would check their data first. (Read More…)

Representatives Kevin Brady (R-Texas) and Dan Boren (D- Oklahoma) are tired of Obama’s punitive tariff on Chinese tires. They called for a government report on the economy-wide effects of the measure, Reuters reports.

“I am concerned that the administration’s tire tax will cost us jobs in the United States and raise prices for tires for hardworking Americans,” Brady said. (Read More…)

News that GM is selling a control-shifting single share in GM Shanghai to its Chinese partner SAIC was the toads-from-heaven flourish at the end of an epic week for the RenCen. The day after the last of GM’s lifer CEOs left the building, Opel’s CFO followed suit. One management re-organization and a rough LA Auto Show later, came this symbolic surrender of GM’s largest market for a measly $85m. Accompanied by news that The General would buy out Suzuki’s stake in CAMI for an estimated $46.5m, no less. Oh yeah, and something about India. Freshly-minted CEO and notorious rattlesnake killer Ed Whitacre isn’t about be accused of not trying to shake things up. The only question is where will everything land?

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It’s been year since we blogged Chinese press reports that China’s SAIC might buy GM. It turned out to be one of many Chinese rumors that followed. We became the target of hate mongering—some idiots even accused us of driving down GM’s and Chrysler’s stock price. Duh, buyout rumors usually drive prices up. At the time, the GM stock was worth at least a little money: the market cap of GM was less than Mattel.  Months later, the stock was worthless. GM and Chrysler went bankrupt. Instead of the Chinese owning GM and Chrysler, the American taxpayer ended up holding the barf bag.

It took a year and six days to dawn on CNN Money that a Chinese-owned GM might not be such an outlandish idea after all. “A Chinese-owned GM, it could happen,” headlines CNN Money today.
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If right-wingnut Glenn Beck needs a China hater on the tube, he usually calls Gordon G. Chang. Chang is always good for talking bad about China. In 2001, Gordon Chang published a book titled. “The Coming Collapse of China.” In it, he predicted that China would implode by 2006, if not earlier, due to the mass of non-performing loans in Chinese state banks. Much to the chagrin of Chang, China is still standing. It must give Chang heart palpitations that the Chinese economy grew more than three times since he penned his doomsday book. To add injury to irony, instead of a China syndrome caused by the meltdown of  Chinese banks, a non-performing global financing firm called Lehman Brothers started a chain reaction in 2008 that brought the world financial system to the brink of nuclear winter.

China ranks as the world’s third largest economy since it passed by Germany in 2007. China is likely to overtake Japan to become the world’s second largest economy, either this year or by 2010. In the world of Gordon Chang, all this growth must be as real as a Gucci bag at China’s notorious fake markets.
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A year ago, the 21st Century Business Herald reported that SAIC might buy GM and Dongfeng might buy Chrysler. TTAC was the first to break the story in the USA. As a result, our servers melted down, and we were accused of driving down GM’s and Chrysler’s stock price. Usually, buyout rumors drive prices up. But GM and Chrysler had only one way to go: Down. Months later, GM and Chrysler went bankrupt. They became a ward of the US government. Chrysler was given away to Fiat. GM was trimmed down to the barest minimum and is still owned by the US government. And the China story turned out to be a myth.

Following this, stories of Chinese car companies buying US car companies became a regular staple. Up to now, it is mostly talk and little action.
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President Obama paid his outstanding union dues and slapped a 35 percent punitive tariff on Chinese car and light truck tires exported to the USA. The new duty will take effect on September 26 and comes in addition to an existing 4 percent duty, Reuters reports. Everybody, except for the United Steelworkers, agrees that this is one of the most boneheaded decisions of the new administration.

No American tire manufacturer supported the case. Cooper Tire even publicly opposed it. No wonder: US tire companies are the biggest offenders (in the eyes of the United Steelworkers), having moved most if not all of their budget segment tire production to low labor cost overseas sites. Chinese tires are not in the USA because China wants to rape and pillage the market. Chinese tires are here, because US tire companies set up joint ventures in China to make what the market demands: Tires for less.

China is not the only exporter of budget tires to the USA. According to the Wall Street Journal, 43 percent of the tires sold in the USA are imported. Only 11 percent are imported from China. The far larger share is imported from low labor cost countries such as Malaysia, India, or Central Europe. What the boneheaded decision does is simply shift tire production from China to other low cost producing countries. These countries can take advantage of 11 percent of the tires effectively removed from the US market. The low cost producers can raise their prices until the market settles. The American consumer will bear the cost. Not a single new job is created in US tire companies. Jobs will be lost at tire distributors and dealers. This decision achieves nothing for America except higher prices and troubles with China.

The American Consuming Industries Trade Action Coalition wrote in a letter to the US Trade Representative John Kirk: “The absence of tires from China in the market will raise costs to downstream consuming industries, including automobile manufacturers, will limit consumer choices and affect most seriously those with the fewest resources. Thus, these tariffs will be the most regressive of taxes.”

“Those with the fewest resources” (i.e., the poor) are easiest sold on buying the import-restriction Kool-Aid. They drink it in big gulps: Imports bad for jobs. When they find out that fewer low cost imports mean higher prices, that they still have no jobs, and that their welfare check buys much less, then it’s too late.

The complaint by the US Steelworkers does not allege unfair trade practices. No longer needed. In US law, there is a special anti-China provision, called section 421. The Hong Kong Trade Development Council explains the complicated law in the most succinct way: “Under Section 421, the USITC determines whether a specific product from the mainland is being imported into the U.S. in such increased quantities, or under such conditions, as to cause or threaten to cause market disruption. ‘Market disruption’ is defined as rapidly increasing imports, either absolutely or relatively, so as to cause or threaten to cause material injury to a U.S. domestic industry. If the USITC makes an affirmative determination it proposes a remedy, which the president may or may not implement.”

The USITC is the United States International Trade Commission, “an independent, quasi-judicial federal agency that provides trade policy advice to both the legislative and executive branches of government.” The USITC is often called the International Trade Commission to give it a fake supranational flair. It’s pure US government.

“Market disruption” is a vague concept. If anyone feels disrupted by Chinese imports, they can petition the USITC. If the USITC accepts it and takes it to the president, and if he signs it, no more Chinese imports. Under Bush, for all his failings, every section 421 petition that reached his desk was rejected: He had to decide on strategically important goods such as wire hangers, steel pipe, brake drums and rotors and “pedestal actuators,” a component used in scooters for the disabled. All voted down.

Obama approved the first 421 petition that was put before him. China and US companies are rightly afraid that this will trigger a flurry of section 421 cases. “Multinational companies such as Caterpillar Inc., Citigroup Inc. and Microsoft Corp. have urged Obama to refrain from curbing imports, saying it could lead to a “downward protectionist spiral,” writes Bloomberg.

The United Steelworkers based their complaint on the allegation that Chinese tires had cost a paltry 5,000 union jobs over a number of years. Which of course is bunk. The jobs were lost because US consumers increasingly refuse to buy the high priced tires, and because US tire companies have reacted to consumer demand and moved their production elsewhere. Only one fourth of the tire imports comes from China.

Understandably, the Chinese are deeply upset. China’s state-run news agency, Xinhua, writes, “This ruling came at a time when the U.S. economy is at an uncertain turning point from the worst recession since World War II.” Officially, China exercises restraint. “Observers said that the president needs his people to help make domestic reform smoother,” is as low as Xinhua wants to publicly stoop.

The verbiage from China’s Ministry of Commerce is stronger: “China expressed strong dissatisfaction and is resolutely opposed to this,” said China’s Ministry of Commerce (MOC) spokesman Yao Jian. “This does not comply with WTO agreements on subsidies. The U.S. used an incorrect method to define and calculate the subsidies, which has resulted in an artificially high subsidy rate, hurting Chinese firms’ interests.”

What China is likely to do is threefold:

One, China will drag the USA in front of the WTO. China will have the tacit or open support from other low-cost countries, including the EU (many low cost countries, such as Poland or Romania are EU members.) The world will also love to slap around a country that demanded free trade as long as free trade was good for America. Note that China mentioned “subsidies.” The bail-outs will come on the table also. WTO proceedings can drag on forever.

Two, China will take some tit-for-tat measures. On the table is a hefty tariff on US auto imports to China. During the first half of the year, China imported more than $1 billion worth of automobiles from the US. China could buy fewer Boeings and more Airbusses. If things get really bad, China could put a dent in the Chinese growth of the automotive ward of the state, GM. Europe will love it all.

Three, Chinese President Hu Jintao will give Obama a tongue-lashing when they meet in Pittsburgh at the G-20 Summit September 24-25. Obama will be gently or not so gently reminded that America’s largest creditor deserves a little better treatment, or the money could be moved elsewhere. Timothy Geithner will also be reminded that his announcement in June that “Chinese assets are very safe” is bunk. The greenback is on its way down. A EURO bought $1.46 today and it’s heading toward $1.50. Come to think of it, a falling dollar is the best protection against cheap imports from all corners of the world: The lower the dollar, the more expensive the imports. A truly free market needs no section 421.

Forbes writes: “The current round of disputes will undoubtedly end up in a trade war, and China, a country extraordinarily dependent on exports, will surely be the biggest loser.”

Don’t bet on it.

America is already involved in two shooting wars which it couldn’t afford would China not buy its bonds. America cannot afford two shooting wars and a trade war with its largest creditor.

China is becoming the new America, while America is becoming the old China. Jack Perkowski thinks it’s happening right now. Jack is an Old China Hand and a colleague in the automotive parts business. He’s an American and a Yale graduate. Fifteen years ago, he came to China and started ASIMCO, an auto component manufacturing company. In January, Perkowski left the company. The global decline in the business didn’t spare ASIMCO. Perkowski is a true Lao Wai, which literally translates into “Old Foreigner” in Mandarin. From one of the first in China, we inherited a lot of his experience. Some is chronicled in Perkowski’s book Managing the Dragon, which made the bestseller lists. Most is regularly updated in Perkowski’s blog that goes by the same name. In a recent post, he left us some interesting thoughts. Some may find them revolting, even seditious.

During my time here, China has become the third largest economy in the world, the world’s largest market for cars, computers, cell phones and a host of other products, and the country has accumulated $2 trillion of foreign currency reserves. China is now the single largest investor in the United States, unthinkable in 1994 when China had less than $50 billion of reserves.

As the single largest creditor, is China worried about where the U.S. of A. are going? Perkowski sure thinks so:

Given all that has transpired, the leaders at Zhongnanhai must be scratching their heads, wondering what their counterparts in the United States are up to. It began with Enron, Worldcom, Tyco and a host of accounting scandals. In a flash, the financial statements of Chinese companies were just as believable and just as transparent, if not more so, than those of U.S. companies. Then it was Bear Stearns, Lehman, AIG, Bank of America, Freddie Mac, Fannie Mae, Citicorp and the meltdown of the U.S. financial industry. Hoping to learn how to develop its own financial system, China encouraged investments in its state-owned banks by leading U.S. players. Maybe they aren’t such good examples to follow after all?

While China is trying to divest itself from state-owned companies, what is China’s largest debtor doing? Just the opposite.

But the sharp left turn that the Obama Administration has taken since coming to power must really have China’s leaders wondering. Not just the banks, but now large industrial companies, are owned by the U.S. government, and the United States is doing what any government does when it owns companies—it meddles, and political, not economic, considerations are taking precedence.

The takeover of the car industry by the US government reminds Perkowski of the bad old days in China. The courts ignoring the law? Employment for the working masses trumps turning a profit? Where does one still find these egregious practices?

Rather than let the bankruptcy system work as it has over the years to restructure companies, billions of dollars, much of which will never be recovered, have been pumped into General Motors and Chrysler, two companies that represent less than 30 percent of the U.S. automobile market and have been losing market share to foreign-owned companies that now also happen to manufacture in the United States-all in the name of saving the jobs of the United Auto Workers, whose support played an important role in getting the current administration elected.

Central planners deciding the direction of the companies? Heads of state-owned enterprises serving at the pleasure of party bosses?

An administration-appointed car czar, not the company’s board of directors, has fired the General Motors chairman and CEO and installed a new CEO, president and chairman. General Motors is told what plants it cannot close and where its offices should be located. Barney Frank personally called the General Motors CEO to reverse a decision to close a GM distribution facility in his district, and President Obama himself assured Detroit’s mayor that GM’s headquarters would remain in Detroit, rather than move to a neighboring suburb. Undoubtedly, the Obama Administration and Congress will tell their management appointees what types of cars GM should produce. Toyota, Honda, Nissan, Hyundai and their U.S. workers must be delighted with this turn of events.

At least we can find solace in the fact that there still is justice in America. Perkowski is beginning to have his doubts.

As for the vaunted ‘rule of law’ that the United States has been known for, ask the GM and Chrysler secured bondholders what they think. And as for manufacturing statistics—Americans are being told that the administration will ‘save or create’ 600,000 jobs this summer, a statistic that the Wall Street Journal has labeled an ‘immeasurable metric.’

I there anything that doesn’t remind Perkowski of the times before Deng Xiaoping? Yes. China was never ruled by Russian Emperors, who were famous for mistreating their serfs:

A newly appointed pay czar (there are now more than 20 such ‘czars’ in Washington) will now review the compensation of the top 100 managers of any company that has received support from the government.

So what does Perkowski suggest?

Somewhere along the line, the United States picked up that socialist economic playbook that Deng Xiaoping was smart enough to throw away. Perhaps the U.S. should ‘follow Deng’ and go back to what got the United States, and now China, to where it is today?

China’s central government clearly isn’t enthralled with Tengzhong getting intimate with Hummer. If you want to get a feel for how they really feel, all you need to do is read Xinhua, their official news agency. Xinhua speaks for China’s government—with plausible deniability if something goes wrong. As far as Hummer goes, every single day Xinhua has sown FUD (fear, uncertainty, doubt) about the marriage.

Today’s Hummer Deathwatch, Xinhua style, opens as follows:

“General Motor’s Hummer is considered as an exaggerated and extreme example of a disregard for the environment and there are significant brand negatives for the Chinese company Tengzhong to buy it.”

Xinhua carefully selected “a U.S. financial expert” to say that: one Richard L. Wottrich, managing director, international, at Dresner Partners, an investment banking firm based in Chicago.

In case you’ve never heard of Wottrich (neither have I), Xinhua furnishes a flattering feature list of his achievements: “Wottrich has initiated merger and acquisition transactions in China and has delivered speeches at several influential events such as “2005 Summit of CEOs and Career Managers of Chinese and Foreign Enterprises” in Beijing and the Greater China Business Conference at the Kellogg School of Management, Northwestern University, in 2008.”

After establishing his bonafides, they let Wottrich go postal on the presumptuous planned amalgamation:

“The vehicle is too big, uses too much gas, and is viewed as a toy for the rich. These are rather significant brand negatives for the Chinese company Tengzhong to consider.”

“Hummer is a difficult brand name to reconcile with current global conditions and political thought.”

“The brand is based upon the High Mobility Multipurpose Wheeled Vehicle (HMMWV or Humvee), a military 4WD motor vehicle manufactured by AM General. It is an essential part of the landscape of war in Iraq and Afghanistan.”

“The final consideration is brand name development and new products. What market will Tengzhong focus on? The mature and stable Western markets have the negative views of Hummer mentioned. If they target developing countries, this becomes a symbol of wealth obtainable by few.”

In other words: Bu hao, no good. Give up, already.

Just in case someone hasn’t received the message, Xinhua reminds its readers: “The Hummer and other large vehicles have been a drag on the U.S. auto industry since fuel prices spiked in 2008 and the recession deepened. GM said it sold 5,013 Hummers worldwide in the first quarter, down 62 percent from the 13,050 that it sold in the same period of the previous year.”

What if someone doesn’t put credence in Wottrich? In a separate article, the second so far today on a quiet Saturday morning in Beijing, Xinhua presents an array of Chinese experts who say the deal is a dumb idea. Their crown witness: The Hummer dealer in Tengzhong’s hometown Chengdu.

“I had never heard of the company and was surprised at the news,” said Yang Cheng, general manager of Sanhe Hummer Sales Center, one of the two branches that sold Hummer in Chengdu, capital of Sichuan Province.

“Producing gas-guzzling brands is against the current trend toward energy-saving and emission-reduction,” Zuo Xiaolei, an economist with China Galaxy Securities told Xinhua Saturday. “Meanwhile, the company has no experience in producing passenger vehicles, adding difficulties for the company to manage the brand.”

“Wang Yukun, a researcher with the Yangtze River Delta Research Institute under Beijing-based Tsinghua University, said it would be hard for the buyer to “digest” Hummer.”

“Tengzhong plans to maintain the current management team for Hummer and develop more energy-efficient models, but it is just their fantasies. If the current team could prevent the brand from slumping in any way, they would have done so before,” Wang told Xinhua.

“It’s difficult for a company to digest something dumped by others,” Wang said.

That’s as close to “Tengzhong eats what GM secrets” as you will ever get in the officious Xinhua. Someone—or many—in Beijing are clearly displeased with Tengzhong. My prediction: The formerly unknown Tengzhong company managed to receive buzz from Hummer and can now go back to making cement mixers and bridge pontoons. With so much flak from Beijing, this deal will go down in flames.

Government Motors is launching a barrage of press releases in an attempt to shock and awe all naysayers. All is fine with its Asian operations, they are insulated from the bankruptcy of the mother ship, it’s great business as usual. As far as China (GM’s second largest market behind the United States) is concerned, business never has been better! It seems everybody is counting on the Chinese consumer to bail out the US government’s bailout.

GM China’s Prez, Kevin Wale, opened the salvo in China Daily: “General Motors Corp.’s fast-growing China operation will be unaffected by the parent company’s bankruptcy. Plans to open a new factory within five years will not change, even as GM closes US facilities.” Gettelfinger will be thrilled.

And, yes, “GM China is sticking with a five-year plan to double annual sales to 2 million units and roll out 30 new or updated models.”

More good news: Yesterday, GM China released their May sales—way before anybody else in China. Sales rose 50 percent over May 2008, Gasgoo reports. The Buick New Excelle, based on the Opel Astra Delta II platform, is selling especially well. So is the Buick New Regal, based on the Opel Insignia. And the Chevy Cruze, also a Delta II descendant.

Wale isn’t worried by the fact that many of his moving models are based on Opel technology: “The technology for the vehicles we sell is held by General Motors, and I don’t see any implications from the new structure in Europe.” Magna and its Russian partners may have a different opinion.

The Dept. of The Treasury even denied that there might be a secret deal to keep Opel and Magna out of the U.S.A. and China. “Newspaper accounts that Treasury is insisting that Opel stay out of the U.S. or Chinese markets are incorrect. The U.S. government strongly supports free markets,” Treasury spokeswoman Jenni Engebretsen said.  Treasury keeps a backdoor open: If Magna and GM cut their own deals, then that’s their own business, an unnamed Obama administration official said to Reuters. I zee nozzink, especially not the Sherman act.

GM China sent a statement to Gasgoo, claiming that “the court supervised reinvention of GM in the United States will have no substantial impact on Shanghai GM, and Shanghai GM will continue its normal business operations as usual.” The statement insists that the intellectual property rights of products produced by Shanghai GM will be included in the New GM, and that GM’s joint ventures in China are not included in the court filings. Kudos for the euphemism of the day: Court supervised reinvention. Sure beats extraordinary rendition (a.k.a. “impromptu concert”.)

Readers of Bloomberg are told that GM “did not include its international operations in a filing for bankruptcy protection.”

Readers of the Wall Street Journal receive the same good news: “It is absolutely business as usual in China,” the WSJ cites Kevin Wale. “None of General Motor’s operations outside of the U.S. are included in the Chapter 11 filing, including GM China, our joint ventures and our other China operations.”

TTAC’s B&B know better. A court document filed Monday with the United States Bankruptcy Court Southern District of New York, made available through TTAC’s resident court reporter, Justin Berkowitz, names the following Chinese companies as part of the General Motors bankruptcy: Pan Asia Technical Automotive Center Company, SAIC GM Wuling Automobile Ltd., Shanghai General Motors Corporation, Shanghai GM, Shanghai GM (Shenyeng) Norsom Motors Co. Ltd., Shanghai GM Dongyue Motors Co. Ltd., and Shanghai GM Dongyue Powertrain. That’s only a partial list of GM’s international operations named in the filing.

The list presented to the court was obviously done with care, and wasn’t just a cut & pastie from the latest Sarbanes-Oxley filing. GM Europe, handed over into the care of a trustee appointed by the German government, isn’t there. Also missing is GM’s Australian unit, GM Holden Ltd. Holden “expects to be part of the new GM and will not cut jobs,” Holden’s managing director Mark Reuss said to Bloomberg. Whether the listed companies will finally end up in a “Good GM” or “Bad GM” doesn’t change the fact that they are all included in the filing.

The list of GM’s 50 largest unsecured creditors, also filed on Monday, reads like a Who’s Who of the parts business. Delphi is owed $111 million. Bosch is owed $66 million. Lear Corp. is owed $44 million. Renco Group is owed $37 million. Johnson Controls is owed $32 million. Denso is owed $29 million. TRW is owed $27 million. Magna is owed $26 million. American Axle is owed $26 million. Continental AG is owed $15 million. Tenneco is owed $15 million. Yazaki is owed $14 million. International Components Corp. is owed $12 million. Visteon is owed $10 million. And the list goes on. No wonder that companies on that list have already declared bankruptcy themselves, or are listed as bankruptcy risks. Thousands of smaller suppliers are affected. According to CNN Money, “a vast network of companies outside Detroit are bracing for impact. Suppliers to the auto goliaths are going to feel the aftershocks of the industry’s titanic shift.”

Business as usual? Viewed through the eyes of GM, it probably is business as usual.