Carlos H. Conde

Archive for October, 2008

The melamine stain: One sign of a worldwide problem

By Thomas Fuller
International Herald Tribune
Published: October 12, 2008

Carlos Conde contributed reporting from Manila, Janesara Fugal from Bangkok and Carmen Ng from Hong Kong.

BANGKOK: Is there more tainted food out there?

The far-flung recall of products contaminated with melamine – dozens of brands of infant formula in China, Cadbury chocolates in Australia, Lipton green tea in Taiwan and Nabisco Ritz cheese crackers in South Korea among them – has shaken the confidence of consumers and provided a window into what some describe as disturbing aspects of the increasingly globalized food manufacturing industry.

The melamine scandal has heightened fears that the food business is racing ahead of the ability of governments to detect health-threatening contamination, whether accidental or deliberate.

The physical toll of the milk scandal has been largely contained to China: the four children who died and almost all of the 54,000 who were sickened by the melamine were on the Chinese mainland.

But melamine has been found in products as far away as the Netherlands and the United States. And recalls far from China affected food made by Chinese companies and multinational brands.

Now shoppers are stopping in supermarket aisles to read labels more closely. They are shunning Chinese brands and choosing international name brands instead. But even then, they are wary.

“People used to have more confidence in international brands,” said Yang Fan, a specialist on the food industry at the Shanghai offices of Euromonitor, a market research company. “Now the multinationals have similar problems.”

Shan Cheung, a Hong Kong housewife, said she tossed out all her Lipton tea packages, Cadbury chocolates and cookies when she heard that some of those brands had found small amounts of melamine in their products. “Now I look very carefully if the food I am buying are made in China,” she said, and she avoids it.

Worrying for consumers both inside and outside China is the sense that processed foods may contain tainted ingredients no matter how trusted the brand. When contamination occurs, they cannot be sure of the provenance of the ingredients – and, ultimately, whether foods are safe.

Big food companies, like Nestle, Kraft and Danone, say that while they do not use Chinese milk in their products outside of China, they use other Chinese ingredients for goods sold around the world.

“It’s difficult sometimes to try to figure out how a certain product has been assembled and where a problem may have come from,” said Peter Hoejskov, a specialist in food quality and safety at the regional headquarters here of the Food and Agriculture Organization, a UN agency. “The globalization of food production is definitely an issue.”

Chinese companies are major suppliers of common ingredients and additives, like citric acid and many types of vitamins. The country is the world’s largest exporter of seafood, most of it from fish farms, and a major exporter of chicken, fruits and vegetables. In the medical field, China sells large quantities of penicillin and paracetamol, an aspirin alternative, overseas.

Chinese products have been failing food inspections for years. Hundreds of Chinese shipments have been stopped by inspectors in Europe, the United States and Asian countries in recent years because they contained banned chemicals or were unfit for consumption, government data show.

In the European Union alone, Chinese fish and shrimp were rejected because they contained fungicides, antibiotics or other banned drugs; dried fruit and vegetables were found to have more than the allowable level of the preservative sulfite; peanuts had excessive levels of fungus-related toxins; and packaged foods tested positive for heavy metals that leached from their packaging.

Although only the world’s eighth-largest exporter of food, China ranked in first place last year for the number of hazardous imports detected by regulators in the European Union. China had 352 notifications, its highest level ever, compared with 191 for the United States, which is the world’s largest agricultural exporter.

On Friday, the Chinese government announced measures intended to improve the quality and safety of dairy products as well as new regulations on the breeding of cows and the production and sale of dairy products. It also called for tougher penalties for who people who violate safety standards, according to Xinhua, the official state news agency.

China is not alone in struggling with tainted food. The European Union’s annual report on food safety found contamination in foods exported from well over 100 countries.

Hoejskov said the scale of production involved in the food industry had greatly increased the monetary incentive to cut corners and adulterate food.

“There is a lot of cheating,” he said. “Sometimes you discover it and sometimes you never discover it.”

One of the difficulties for regulators is knowing what to look for – and having the manpower to carry out the tests. In the case of the Chinese milk scandal, Fonterra, a New Zealand company that owns a large stake in one of the manufacturers that distributed tainted baby formula, says it never occurred to them to check for melamine.

“Melamine is not something you would be reasonably expected to find in milk,” a spokeswoman for the company said. “We have only recently become aware of one dairy company in the world who routinely tests for melamine.”

Melamine, a white powder used to make plastics, was added because it duped the instruments used to measure protein, creating the false impression that diluted or poor-quality milk was up to standard.

Governments often do not have adequate resources to carry out more than basic, random testing. The Food and Drug Administration in the United States only has the capacity to examine 1 percent of all shipments into the country, according to a report last year by the Congressional Research Service, a nonpartisan U.S. government agency.

The problem can be more severe in poorer countries.

Quirino Marquinez, the president of the Consumer Union of the Philippines, a private nonprofit group, said the country’s food inspection agency “only takes action if someone complains or if the media reports about food products that are defective or pose serious threat to public health.” The agency, he said, “needs to be more proactive.”

With China’s growing influence in Asia, governments in the region are also sometimes afraid to anger Beijing. Officials at the Thai food and drug administration said in interviews that they had discovered mushrooms imported from China with unacceptably high levels of mercury. But they declined to disclose the full list of Chinese products barred from the country.

“I hesitate to give you this information as I’m afraid that it will affect the relationship between Thailand and China,” said Jureeporn Boonyawongwiroj, the director of the Bureau of Food Quality and Safety. “When I was in China last time, they complained to me about this,” she said.

China’s melamine scandal has been particularly damaging to consumer confidence because it comes after Beijing said it had tightened regulations and heightened vigilance in the wake of problems with tainted dog food, also made in China, that sickened or killed thousands of dogs worldwide last year, and other tainted products.

In July 2007 the government carried out the execution of the head of the food and drug safety agency who was convicted of taking bribes in return for approving drugs. Regulators also closed 180 food manufacturers that it said had been using banned dyes, hydrochloric acid and formaldehyde in candies, seafood, pickles and cookies.

“This whole system is broken,” said Bing Zhang, a consultant based in Shanghai for AT Kearney and co-author of a report on food safety in China last year.

“The root cause is a combination of factors – the intense competition for profits and a general lack of tracing and monitoring,” he said.

Fruit, vegetables and most meat in China are not required to go through a cold distribution chain, said the Kearney study.

Almost 80 percent of retailers do not monitor temperature of products during shipping and two-thirds did not check temperature when they receiving goods, the study found.

In recent weeks, Cadbury withdrew candy bars from shelves in Hong Kong and Australia after it found trace amounts of melamine in them.

Unilever recalled Lipton Green Milk Tea from the Taiwan market because the product used Chinese-made milk. H.J. Heinz Co. recalled a batch of baby food in Hong Kong because it showed trace levels of melamine. In all of these cases, the levels of melamine were too low to make people sick. But the companies sought recalls to avoid further public relations damage.

The Chinese government now says recent testing of the Chinese milk supply shows no sign of melamine contamination.

There are some signs that the Chinese food industry is cleaning up its act. The European Commission said it had recorded a decline in quality problems with Chinese food imports in the second half of last year. It is also working with Chinese regulators to improve their monitoring techniques.

Yet the Food and Drug Administration in the United States has maintained an “import alert” on certain types of seafood – shrimp, catfish, basa, dace and eel – coming from China.

As of April 2007, China had the third-highest rate of import refusals in the United States, after Mexico and India.

Posted on October 15, 2008, and filed under Stories, The New York Times / International Herald Tribune | Comments

Asia, too, feels the pain

By Keith Bradsher
The New York Times
Published: October 10, 2008

Choe Sang-Hun in Seoul, Carlos H. Conde in Manila, Thomas Fuller in Bangkok, Anand Giridharadas in Mumbai and Hilda Wang in Hong Kong also contributed reporting.

HONG KONG: Can a region like Asia – with more than $3 trillion in foreign exchange reserves, high savings rates, mostly well-capitalized banks and minimal exposure to American mortgage-backed securities – run into trouble during a global financial crisis?

The answer Friday was a resounding yes.

Stock markets plunged from Tokyo to Mumbai. Real estate prices are tumbling from Seoul to New Delhi. The economy in Singapore has tipped into recession, and there is growing evidence of a recession in Japan, where an unlisted insurer and a real estate investment trust filed for bankruptcy Friday.

From UBS to Morgan Stanley, investment banks have been warning in the past week of a global economic downturn. For Asia, that sounds uncomfortably like a forecast that economic slowdowns in the United States and Europe will cripple demand for Asia’s exports and pull the region down into recession as well.

What went wrong? As the biggest beneficiary of the rise in global trade, Asia depends heavily on exports to the West. Everything from corporate earnings to real estate prices depends on a steady inflow of dollars and euros.

Growth in exports has slowed to a crawl or started declining across most of the region when calculated in local currency terms and adjusted for inflation. And that is even before Western stores have had a chance to cut back their orders in response to the sort of steep declines in sales that American retailers announced on Wednesday.

India announced Friday that industrial production in August was 1.3 percent higher than a year earlier. That was a drastic deceleration from July, when the growth rate was 7.4 percent.

In Korea, exporters are suddenly struggling.

“The problem is the global recession – people don’t buy consumer electronics, this means less exports and fewer dollars for us,” said Choi Hae Pyong, an electronics parts manufacturer south of Seoul. “It’s like walking in a thick fog.”

As long as the region kept exporting and kept saving the proceeds, investors bid up real estate and share prices that now seem to have a long way to fall.

Matthew Au, a luxury real estate broker in Hong Kong, said that this past week had been even worse than the days after the Tiananmen Square killings on June 4, 1989, which briefly shattered business confidence here.

“I’ve been through June 4th, the 1997 financial crises and SARS, but this time around, the decline in housing prices has been the most abrupt,” he said. “Sellers of properties are now more willing to consider offers which come in 20 to 30 percent below their asking prices.”

As global financial markets increasingly look to each other for direction, lack of confidence in financial institutions and housing markets in the West has also proved contagious in Asia. The Asian news media, often focused on economics instead of potentially touchy political issues, have been full of reports in the past three weeks about failing banks and falling real estate prices, and that has fed through into local markets.

An outflow of Western investment has also played a role in Asia’s decline now, although foreign investment has become less important in much of the region as Asia has become a formidable saver in its own right.

In Malaysia, foreign investors held nearly a third of Malaysia’s national debt until they started selling this summer to raise money so as to cover losses in other markets.

In Korea, foreign investors sold $29 billion in the first nine months of this year. This was an important reason why the country’s foreign exchange reserves have slipped to a still formidable $239.7 billion last month from $264.2 billion in March.

Many in Asia now despair of help from the West, and are looking to Beijing.

“The United States is beyond saving – our only hope rests with China,” said Dick Chen, a middle-aged manager in a pin striped blue shirt and carrying an ultraslim modern mobile phone who watched the markets with dismay after lunch in a trading room of Tai Fook Securities in Hong Kong.

Can China save Asia? For the past six years, the Chinese economy has been like an enormously powerful hound that has charged ahead despite every obstacle. Worried that the economy may overheat and accelerate inflation, Beijing officials have run a budget surplus, repeatedly raised interest rates and even required banks to deposit a remarkable one-sixth of their entire assets as reserves at the central bank to slow lending.

Now Beijing is trying to loosen the leash it has had on the economy by cutting interest rates and taxes and lowering reserve requirements. But the government is finding the economy already looks a little out of breath as exports slow.

Economists see annual growth slowing from 12 percent a year ago to 8 or 9 percent this winter. That is still respectable by most countries’ standards, but a shock for many Chinese, particularly workers losing their jobs in factories producing mainly for export markets.

For Asia, this is the crisis that was never supposed to happen again.

The region was deeply scarred by the Asian financial crisis of 1997 and 1998.

Dozens of banks failed after lending too much with too little capital, while profligate governments found that they had borrowed too much overseas and could not repay their debts.

That led to a rapid contraction of credit that bankrupted many industrial companies and caused a steep decline in economic output and a surge in unemployment – the same fate that may now await the United States and Europe, many economists and investors fear.

Southeast Asian economies have never entirely recovered. After a drop of nearly 10 percent on Friday, the main index of the Thai stock market closed at 452, a quarter of its high in 1994.

Most of Asia emerged from that crisis with more cautious banks, stricter financial regulation, a tighter rein on government spending and a strong determination to accumulate. But while Asia broke its dependence on capital flows from the West, the dependence on exports remained.

Yet Asia’s frugality over the past decade has given the region a lot more room to maneuver than most Western countries.

South Korea and India are often cited by economists as the two most vulnerable economies in Asia.

South Korea is drawing attention because its trade deficit, by the broadest measure possible, was $4.7 billion in August, after mostly surpluses before that. Korean exports of manufactured goods have slumped even as the cost of its oil-dominated imports have surged – although falling oil prices now will help.

The South Korean won showed the steepest decline of any Asian currency against the dollar on Friday morning, falling more than 3 percent.

But the won soared on Friday afternoon, with a gain for the day of 6.3 percent. The reason? Widespread rumors that the government would start spending part of the country’s huge foreign exchange reserves to prop up the won.

The South Korean government only owes $334 million in foreign debt repayments by the end of next year, or 0.14 percent of foreign exchange reserves, according to a recent study of emerging market debt by ING. Big Korean exporters like Samsung, hobbled for lack of foreign currency reserves in 1997, have hoarded formidable reserves of dollars.

Corporate debt repayments are a little larger, and also harder to calculate. But since all of Asia only owes $31 billion in debt repayments through the end of last year, South Korea’s share is tiny relative to its foreign reserves.

India was one of the few countries in Asia to escape the financial crisis a decade ago, because it was just starting to embrace international markets then. It did not adopt the same tight bank regulatory standards and tough fiscal policies as the rest of Asia after that crisis.

That has prompted some economists, like Ajay Kapur at Mirae Asset and Takahira Ogawa at Standard and Poor’s, to express particular concern about India’s preparedness for the current crisis. While India has $295.3 billion in foreign exchange reserves, it is running a large government budget deficit and a large trade deficit while its banks have lent very aggressively to a real estate sector that is now tumbling quickly.

With an election expected early next year, Indian leaders have been much more upbeat about their country’s prospects than most Asian leaders.

Policy makers in India have also subscribed to the idea that their economy has “decoupled” from Western economies, an idea that most economists and policy makers in Asia rejected many months ago.

“India is not from any other planet,” said a posting on an Indian web site this week. “This common logic is ignored by our policy makers.”

Posted on October 15, 2008, and filed under Stories, The New York Times / International Herald Tribune | Comments

 
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