Platt Perspective on Business and Technology

China and its transition imperatives 22: an August 25, 2015 update concerning the explosions at Tianjin

Posted in macroeconomics by Timothy Platt on August 25, 2015

I recently wrote a quick posting (on August 16, 2015) to go live the next day, concerning a still rapidly unfolding disaster that had just taken place in China at their Port of Tianjin (see China and its transition imperatives 21: an August 17, 2015 update concerning the explosions at Tianjin.

I wrote there about the already emerging details as to what happened, with massive toxic chemical-releasing explosions taking place in the dockside facilities of that busy industrial port. And I at least briefly noted how this would impact upon China’s already severely slowing economy, as their one political Party and its leadership, and their government leadership have sought to limit the impact of their still unfolding economic bubble burst.

To repeat one detail from that posting here, I noted how China had just significantly devalued their currency in three stages on consecutive days, in order to improve their international trade position by making it easier for their manufacturers to competitively sell in foreign markets, and to improve their balance of trade as a measure of their overall economic strength. Then right after taking those steps, one of their largest and most important port facilities, essential for making that work, became severely compromised, and both in direct fact and for creating concern of chemical exposure to anything shipped out through it.

I stated at the end of that posting that I would follow-up on it here, “and both to offer a detailed update on this specific disaster and to more fully discuss how this event impacts on China’s economy as a whole.” And I begin that with the explosions and toxic chemical releases themselves and with an update on that.

It has now been publically stated that this disaster began in warehouse and attached facilities owned and operated by a Chinese business named Rui Hai International Logistics, that was operating under official license to store hazardous materials, but that has since been declared to be an illegal, black market enterprise. They were holding very large amounts of a wide range of chemicals in this facility that were both highly toxic, and highly dangerous to keep in proximity to each other, and both for risk of fire or explosion if they were to mix, and for their potential to release toxic gasses. And an accident happened, and the first of at least eight explosions, that all took place in rapid succession took place. I have already noted that these explosions released at least 700 metric tons of sodium cyanide into the immediate environment of the port and its surroundings – and into at least portions of the city of Tianjin. Since then, massive fish kills have been reported in nearby waters, and there has been a significant outcry of concern from members of the public, and particularly because of environmental and health risk from chemical exposure (see, for example: New Concerns in Tianjin Blast After Dead Fish Are Found and Fear of Toxic Air and Distrust of Government Follow Tianjin Blasts.) Sodium cyanide itself is extremely poisonous and exposure to even minute amounts of it can quickly kill an otherwise healthy adult human, or children or the older and more frail adult, or farm animals or pets or wildlife. So far any word of injury or of deaths from chemical exposure outside of the roughly two mile radius, immediately impacted-upon disaster site has been limited from public access. And sodium cyanide was only one of the chemicals that were uncontrollably released into the environment in this event, and in large quantities. It is absolutely certain that there is a great deal more news concerning this and the outcome of these chemical releases that has yet to more widely publically come out.

As a government ordered and orchestrated effort to restore public confidence, some caged rabbits were put down on the ground in their cages in a more devastated part of the blast zone from this incident and photographed while there to show that they were still alive. But they did not eat any greenery from that area or drink any of the groundwater from there, and they were photographed immediately, rather than after they had had a chance to breathe in the chemically contaminated dust so prevalent there for any significant period of time. So this would qualify more as a publicity measure than as proof that this area has now become safe again.

For a partial accounting of what was known of this event after one week, see One Week After the Tianjin Blasts: What We Know. I just add that a great deal of the crucial details that were already coming out from on-the-scene investigations at that point in time, are not included there. This event as a whole is much worse than has been officially reported so far, and longer-term findings from the results of the chemical contamination and exposure coming out of it will simply add to that assessment. And of course, there is also the matter of physical damage to essential port facilities too.

Now let’s turn to the issue of longer term impact upon China’s economy. And I begin that with Rui Hai International Logistics. Officially, at least until the night of August 12, 2015 this was a legitimate business that was founded in 2011 and that has operated under government issued licenses. As with many if not most businesses in China and even ones that operate significantly in their black market economy, it has had a public face and at least a small official, white economy presence. But now, it has been formally and officially declared in China to be an entirely illegal, black market operation.

I first began writing about China’s black, white and grey markets and economies in early 2011, in the context of China’s rare earth minerals mining and processing businesses (see for example: The China Conundrum and its Implications for International Cyber-Security – 3.) And a key point that I raised there, coming out of a succession of postings to that series beginning with its Part 3, was that the majority of this industrial sector, and of China’s capacity to bring in foreign revenue from its rare earth minerals was in effect owned by black market participants ( see my directory page Ubiquitous Computing and Communications – everywhere all the time, postings 69 and loosely following for that series’ Parts 1- 23.)

Black market and overall black economy participants can be found in many if not most business and industry sectors in China and as active participants in them. That said, I do not know if this particular business: Rui Hai International Logistics, was black market or even just grey market at all. True, China’s black market businesses are notorious for cutting environmental safety and health protection corners to increase their profitability, but many openly active white economy businesses in China do that too. As of now, this business has been egregiously and undeniably caught for its hazardous practices and for their consequences so it has been legally declared, even if entirely ex post facto, to have been black market and illegal.

There is already a hunt underway for political scapegoats in governmental response to this – who may in fact have turned a knowing but blind eye to illegality in how those hazardous chemicals were stored and handled, or who might not have even known that this company existed (see for example: Chinese Report Details Role of Political Connections in Tianjin Blasts.) And it is likely that Huang Xingguo, the mayor and acting Communist Party Secretary of Tianjin will be publically tried and at the very least publically chastised for what happened there. And other accusations and other publically visible trials will follow, as this event is used as a tool for further addressing any possible dissention among the ranks, to China’s more senior leadership or its rulings and actions.

And all of this brings me to a set of what are at least potentially important questions. The business at the center of this Tianjin disaster was an at least now, officially black market and illegal enterprise that was openly operating on a massive scale in a crucially sensitive port facility, holding tremendous levels of very highly toxic compounds there, and all of that unsafely. And this was and I add still is a port facility that is crucially important to China’s economy if it is to rapidly and smoothly recover, and in a way that is supportive of their one Party and their current national leadership and its policy.

• What does all of this unfolding news have to say about both the levels of local and provincial, and national corruption in place, and about China’s capability to safeguard its critical infrastructure?
• And what does all of that have to say about China’s capacity to recover its open marketplaces and its white economy, and in ways that can instill widespread confidence and credibility in their systems?
• And what impact is this event likely to have on China as its leadership seeks to reestablish their own credibility as well as their country’s strength and standing?

I cite in this context the already high rate of tax avoidance shown by China’s citizens and even before the recent economic downturn that everyone there is now facing, and how further loss of confidence in even just one of either their economy or their government and its effectiveness in meeting basic needs, would exacerbate that trend. China has a centrally planned and managed, Party controlled economy (and for both its open white economy and ultimately for its more hidden grey and black economies too.)

• What would happen to that if (when) a still larger percentage of what at least nominally would constitute its tax base income, were to divert into their country’s grey economy as off-the-books, unreported income and never reach their government coffers?

Ultimately, this is going to be at least as significant to China and its effort to restore its economy, as is the overt damage to this one crucially important port facility – and more so.

I am certain to continue to follow this still unfolding complex of news stories in upcoming installments to this series. Meanwhile, you can find this entire series and all of its postings at Macroeconomics and Business as postings 154 and loosely following for Parts 1-12 and for a supplemental posting: Part 12.5. And see Page 2 to that directory for a second, continuation supplement Part 12.6 and for Parts 13-21 (plus Part 19.5 and Part 20.5.) And you can find other, China-related postings and series at those directory pages, and at Ubiquitous Computing and Communications – everywhere all the time too.

Addendum Note: I nominally finished writing this posting yesterday, on August 23, 2015 but add a quick update to it here. Monday August 24, 2015 is already coming to be known as Black Monday in China for the one day 8.5% drop that has just taken place in China’s Shanghai Stock Exchange (SSE) composite index (see for example this August 24 news item: Guide to China’s Market Turmoil.) China’s economy is not going to disappear out of all of this, but it has not even come close to hitting bottom yet as that country as a whole enters what is likely to become a true and deep depression.

Addendum Note 2: The Shanghai Stock Exchange lost another 7.6% in value for Tuesday’s trading, bringing its overall loss to 22% over the past three trading days. I am going to post another installment to this series in approximately 10 days where I will discuss the SSE and whether it in fact is a true stock market or not. And in the course of that, I will further discuss how China’s government and its Communist Party seek to actively control their economy and on all levels. I add this second update note on August 25, 2015 at approximately 10:30 PM Eastern Time.

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