“The Unsinkable Aircraft carrier” Is Floating Away

Taipei – The U.S.’ 50-year-old alliance with [Formosa] Taiwan is eroding slowly but surely in the face of Beijing’s siren call and growing indifference of the Obama Administration.

Yet at a moment when U.S. strategy ostensibly calls for a ”pivot” toward Asia the de facto alliance could never have been more critical. Should Beijing manage to pull off a political union with Taiwan, the possibility of the People’s Liberation Army operating from the Island’s bases would be a ‘break out’. It would open the First Island Chain of the Continent for China’s access to the Pacific, endanger Japan which has always considered Taiwan essential to its security, and infinitely complicate American efforts to maintain freedom of the seas in what is becoming the world’s most important commercial artery.

That is still a long way from happening, given the 23-million Taiwanese’s hard-fought liberal democracy where a vast majority favours the current de facto independence from its 1.3-billion Mainland neighbour. Still, at least for the moment with Beijing having learned sweet talk works better than threats, the undercurrent is strong from across the 100-mile-wide Taiwan Strait. That pull is more economic for Taiwanese than cultural – including for the offspring of the two-million Mainlanders who fled to the Island the Communists with defeated Nationalist Kuomintang Generalissimo Chiang Kai-shek in 1949

In fact, since Maximum Leader Deng Hsiao-ping opened the Mainland to foreign investors and technology exporting to third markets, there has been a reverse invasion. With its sophisticated economy based on the 50-year Japanese Occupation and more than $1.6 billion in American economic aid [and another $2.5 I billion in military], the Taiwanese have taken on a panache of modernity for Mainlanders. A million Taiwanese managers and workers oversee a billion dollars in their own investment and often supply the essential cutting edge of other foreign multinationals’ operations.

But now new forces are at work. Increasing labor and energy costs are forcing Taiwan Mainland manufacturing out of China to Southeast Asia and other low-wage countries as far as afield as Mexico, Brazil .and South Africa. As the Mainland struggles to move into higher technological products, Taiwan’s historic transferring role is imperilled by a drop in direct foreign investment in the Island brought on by competition from the Mainland itself and other export-oriented economies. There has also been a lethargic response by government in cutting regulation – some of it inherited as baggage of  bitter memories of inflation and economic warfare which played a principal role in the Nationalists’ defeat in their last years on the Mainland. That’s true despite Taiwan’s almost too slick media campaign to welcome foreigners.

Pres. Ma Ying-jeou, now serving a second and last permitted term after his Kuomintang [KMT] Party returned to power, is being blamed in some quarters. His typically KMT statist approach followed the opposition Democratic People’s Party’s previous freewheeling if scandal-plagued eight-year pro-business environment. Ma, who has backed off his unpopular proposal to reach some sort of political arrangement with Beijing, has dived in popularity. But it was not before the two political parties, his KMT and the Mainland Communists, had met to reinforce the “one China” policy. And it was not before he initiated agreements which brought new integration for the Taiwan and Mainland economies.  

Ma argued his new arrangements, strongly urged by the multinationals, were necessary to open Southeast Asian markets to Taiwan exports. Only closer relations with the Mainland would prevent Beijing threatening those dealing with Taiwan with curtailment in dealings with the Mainland. Ma also claimed the new more direct communications with the Mainland would help the domestic economic scene. GDP is dipping and by Taiwan standards unemployment is high, especially for its large crop of highly educated young.

But with Taiwan’s trade already 40% with the Mainland, the implications become increasingly plain – especially since some insist Ma got taken in the negotiations. There has been no significant improvement in the Taiwan economy. And Ma’s program of continuing subsidies has boosted the debt ten times since he took office. Rising prices are also bringing new complaints.

Furthermore, despite holding tourism to 7,000 a day – to prevent an illegal problem with some 50 million Mainlanders who have expressed a desire to visit —  the opposition claims Ma has opened the door to infiltration and manipulation. There are signs pro-Communist investors have moved into the media through front investors.  

It’s still a long way to the 2016 presidential elections but a wide field of DPP opposition candidates is hopeful. Significantly, a Taiwan expert in a Beijing university think tank was emphatic on warning a DPP victory might end the current low priority he said Beijing gives “the Taiwan problem”

Meanwhile, though the Obama Administration – having moved quickly in its first few months to transfer longstanding promised arms to Taiwan – has continued Washington’s policy of holding back on state-of-the-art fighters although approving a long-standing promise to upgrade F16s. Island strategists have always seen control of the air over the Strait  as their first line of defence. Frequent and loud Beijing complaints about U.S. arms transfers have usually been enough to slow or bloc them. Now, of course, there are budget restraints in both Taiwan and the U.S.

American policy on Taiwan has fluctuated violently during the 50 years of the alliance with little regard to party lines. In the early years, the U.S. half-heartedly supported Chiang’s threat to retake the Mainland – even to black operations in northern Thailand and Mustang in the Himalayas with remnant KMT military. Then came a period of leashing Chiang, only to be followed by the Taiwan Strait Crisis of 1958 when Washington hinted at nuclear weapons if Beijing tried to take the Strait islands closer to the Mainland than Taiwan. Then came  Pres. Richard Nixon and Henry Kissinger’s “opening  to China” with only the leadership of Sen. Richard Stone [D., FL] and the Congress’ Taiwan Relations Act turning  back Pres. Jimmy Carter’s implicit threat to dump Taiwan altogether. In 1996, when China conducted provocative missile tests to try to influence Taiwan’s first direct presidential election, Pres. Bill Clinton ordered two carriers to the Strait as a clear message to Beijing.

With the Obama Administration’s ostensive “pivot” in U.S. strategy toward Asia and particularly northeast Asia, Taiwan’s strategic importance takes on new dimensions. Haunted by the history of the 1930s with Nazi Germany and the Japanese militarists, the argument Washington needs an enemy or that by taking counter measures it may be creating an enemy ring hollow. Despite China’s complaints of attempts to bloc its emergence as a world power,, any strategy to counter Beijing’s mushrooming military expenditures against an unseen enemy, bellicosity of senior officers and its obviously enlarging space and potential and active cyber warfare, maintaining Taiwan’s de facto independence as well as more effective multilateral cooperation among U.S. bilateral allies in the region becomes a high Washington priority. Given current trends on the Island, that may become increasingly difficult.



China: charisma to the rescue?

In a troubled world, the obstacles to continued growth and stability in Communist China are staggering compared to the crises of the Euro and Sequestration. Most foreign observers are either wilfully blind to the growing evidence or facing a possible period of worldwide economic decline, they still hope growth in China [and perhaps India] will be the salvation. It won’t.

Meanwhile, in Beijing, Hong Kong – and Taiwan – there is a theory the new Fifth Generation of leadership just formally taking the helm will steer China toward reform and continued spectacular growth. It revolves around what many view as the charismatic personality of Pres. Xi Jinping, the new No. 1 in Beijing.

Xi went on something close to the baby-kissing tour of an American politician leading up to the November meeting of the National People’s Congress and his formal installation March 5. It’s tapered off a bit now. But the media are still full of stories about how he has a jocular, down-to-earth style that fascinates, and there are official photographs to prove it with adoring, smiling faces surrounding him.

Somehow, these proponents of a charismatic personality as a solution to China’s problems have nostalgia for the good old days of Chairman Mao and his smiling countenance. Never mind that he was a monster. New studies by Chinese dissidents now calculate the loss of life during his man-made famine during the so-called Great Leap Forward [1958-61] by new tens of millions – yes, tens of millions. Hong Kong China scholar Father L. Ladany’s 30 million figure, was ridiculed at the time, but estimates now have reached 60 million. Note too this regime which is so demanding of others to acknowledge their sins in World War II and before has yet to take responsibility for this holocaust created by The Great Helmsman.

The trouble with the charisma hypothesis is that even were it to prove out, ultimately it doesn’t solve problems. Beijing has them in spades.

Environmental pollution is not just [at latest count] more than 6,6 00 piglet carcasses dead from some not quite identified virus floating down the Huangpu River threatening Shanghai’s water supply. Other late scandals include everything from pork that glows in the dark with a blue light to the use by Beijing restaurants of cooking oil rescued from the gutter. Increasingly, there are direct economic consequences from pollution: for example, in some instances factories have been forced to close, either because they were spewing pollutants into nearby water supplies, or because their contribution to air pollution was making it poisonous. The recent record air pollution in Beijing blocked vision beyond a few hundred feet. Mainland pollution even drifts into Hong Kong and recently residents of Japan’s southern island of Kyushu were warned to stay indoors because winds had brought it across the Yellow Sea. [“Yellow” because of the steady flow of sand from China’s Gobi Desert increasingly creeping up on Beijing from the west].

Then there is the falling gross domestic product [GDP]. Never mind that GDP is the sum total of economic activity, and in China this means literally including the building of ghost cities capable of housing several hundred thousand people. They stand empty because the central planners and State Owned Enterprises [SOEs] that still command the economy and monopolize its credit resources didn’t take residential jobs into consideration. They join the hundreds of thousand of empty apartments, too expensive for most buyers, but one of the few investment possibilities for savers who get actual negative interest on their bank holdings.

Statistically speaking – and that too opens questions with regional figures not adding up to national sums and electricity consumption figures belying the official GDP counts – growth is dropping below what had been considered acceptable limits. That is, it is falling under the 8% annual growth which conventional wisdom held was necessary to preserve stability in a still growing population of 1.3 billion.

That stability is already under attack. So-called “mass incidents”, outbreaks of local violence throughout the country, have accelerated to the point the government no longer issues statistics about them. They have arisen in the past over land grabs by local authorities — often cropland — without proper compensation to the peasants whose livelihood is undermined. No one yet suggests this opposition has national leadership or, indeed, that the incidents are linked in any kind of movement to overthrow the regime. In fact beyond their local support, most Chinese apparently see them as disruptive. Too many people remember the chaos of the decade-long Great Cultural Revolution [1976-86] which only Mao’s death and calling in of the military got under control. “Luan”, unmitigated discord, is a threat hanging over China and a weapon of the regime used to blackmail the population to accept arbitrary government without the rule of law. Intellectuals remember it as what happened historically when a ruling dynasty crumbled slowly into anarchy.

Outgoing Prime Minister Wen Jaibao warned if reforms aren’t made another Cultural Revolution might be in store. Yet so far, while juggling bureaucracies – including folding the notoriously corrupt railway ministry where billions had been embezzled – the new leadership has not yet adopted a promised anti-corruption law. To do so, some observers suspect, would open the operations of the government and the SOEs to adverse publicity they could not hide. Furthermore, there is the argument that massive corruption is so much a part of the system, it could not function without it.

The problem, too, is that corrupt practices so permeate the regime almost all members of the Communist Party hierarchy are involved. The exposure of the enormous fortune amassed by Wen’s family by The New York Times dramatized the issue, and made a mockery of Wen’s calls for reform.

But, ultimately, one has to put two questions: is Xi all that different from the mediocre apparatchiks who have preceded him in office? Is it possible a Chinese leader could make it to the top in Communist Party, hiding as a mediocrity, and then blossom once he had escaped the head-lopping that takes place on the way up? Possibly, but not very likely it would seem.

In fact, many of the problems facing Xi and his buddies in the Standing Committee of the Politburo – now reduced to seven from nine to make it more efficient – are seemingly beyond China’s control. The remarkable growth and prosperity of the past two decades for millions of Chinese living in the coastal cities was based on two pillars: a rapid expansion of exports and expanding infrastructure of monumental dimensions.

Both of these phenomena are in trouble. Despite huge subsidies including a manipulated currency, the long-term outlook for exports is poor what with the continued crisis in the European Community and a slow American recovery. Furthermore, rising wages and other problems – there have been strikes – are threatening the low wage end of the Chinese exports which are moving off to Southeast Asia and other cheap labor countries. In some instances, with the digital revolution creating new economies, some manufacturing is moving back to Japan and the U.S. [In the American case, of course, the shale gas revolution which has chopped energy costs in the U.S. is encouraging such movement.] China is, of course, trying to move up the manufacturing chain to less labor intent products but the dependence on foreign technology [including the stealth of intellectual property] has probably crippled it own research and development. The government, despite announcement of new stimulus for the economy, has begun collecting currency in circulation because of the threat of inflation. Most local governments are in deep debt, unable to borrow even from government banks usually amenable to Party influence.

All this may just wipe that smile off Xi’s face, charisma or no charisma.



Breaching China’s great wall of arrogance

Outgoing Joint Chiefs Chairman Admiral Mike Mullen’s bumbling replies to questions by “automated” university students during a mid-July Beijing visit were symptomatic of total disarray in U.S. China policy. Instead of clear-cut defense of no military takeover of Taiwan, with its 25 million the only free society in Chinese history, the Admiral backed into a defense of U.S. policy as if the Taiwan Relations Act were an impediment Washington leadership had difficulty overcoming.

He did not forthrightly defend traditional American support for freedom of the seas in the face of Beijing’s outrageous claims on Southeast Asia waters with their gas and oil prospects through which much of world commerce – including China’s vast exports – flows freely courtesy of the U.S. Navy. Nor did he condemn Beijing’s support for the world’s most hideous tyranny in North Korea. For Pyongyang is not only a threat to regional peace with its buildup of weapons of mass destruction but worldwide through its nefarious exports – in league with the Chinese — to pariah states.

Supplicants for months, Washington’s aim with the Mullen visit was facilitating liaison between U.S. and Chinese military to reduce possibilities of accidental clashes and ventilate Beijing’s rapidly escalating but ultra secret military buildup. But Beijing’s generally boorish response – except for a promise of a Mideast anti-piracy exercise where China has been odd-man out in coordinating multinational operations – inevitably promises more misunderstanding.

That was despite Adm. Mullen carrying a major concession in Washington’s continued refusal to meet Taipei’s request to purchase additional fighter aircraft and submarines. U.S. arms for Taiwan’s defense has become the pretext for Beijing’s rejecting military courtesies, while it pursues a double-edge strategy of economic integration with the Island while positioning one of the world’s largest missile arrays opposite it just across the Strait.

Adm. Mullen’s performance again demonstrates Washington’s lack of a strategic framework given China’s centrality in a rapidly changing world coupled with Beijing’s growing arrogance. Minor but indicative: on the eve of his journey, Adm. Mullen publicly accused the Pakistan government of murdering a journalist. Even had he proof, going public in the Obama Administration’s ill-conceived current media campaign against the Pakistanis only further aggravated relations with Islamabad. Essential as Pakistan is for Washington’s pursuit of the Afghanistan War and worldwide counterterrorism campaign, he played into Beijing’s efforts to exploit U.S.-Pakistan frictions in pursuit of its own alliance with Islamabad against India.

Adm. Mullen’s confusion epitomizes not only the lack of a coherent official U.S. policy toward “a rising China” but parallels increasing difficulties by American entrepreneurs in hot pursuit of the Chinese shirttail. [“If we could only persuade every person in China to lengthen his shirttail by a foot, we could keep the mills of Lancashire working round the clock”, an 1840s British commentator wrote.] Foreign businessmen increasingly must choose between the mythical unquenchable market for investment and trade or eschew exposure to an economy without the rule of law.

As Beijing’s domestic political crackdown intensifies, spurred by fear of contagion from rising popular revolt in the Middle East and Southeast Asia, and the insecurity of next year’s Communist Party leadership generational succession, commercial relations with foreigners are deteriorating. The media focuses on the larger economic issues: China’s perilous growing dollar hoard through its manipulated currency, protected markets and subsidized exports. But increasingly foreign companies are threatened with death by a thousand cuts.

For example, Beijing backed off price blackmail with its rare earths monopoly when faced with sanctions in the World Trade Organization where Washington’s aggressive sponsorship facilitated Chinese entry on unfulfilled promises of compliance. But after announcing exports at last year’s level of its highly contaminating metals production essential for information technology hardware worldwide, Beijing’s arbitrary customs voided contracts.

Even more threatening, suddenly the whole vast, abysmally corrupt, network of foreign investors’ ownership in Chinese companies through local middlemen held corporately in overseas tax havens has come under “scrutiny”. The Chinese had winked at such arrangements for decades as a device to entice but manipulate direct foreign investment. Now these arrangements are being used to freeze out foreign participation in company expansion with transferred technology. Coupled with expanding theft of intellectual property – the latest, French, German and Japanese high-speed rail know-how – Beijing looks to feel there are no holds barred in their seduction of foreign businessmen faced with a worldwide markets slowdown.



  A vicious circle tightens

The globalized economy’s undertow is ripping all around the world.

Even the economic optimists’ two darlings, China and India, are now troubled. Seen as the world’s growth machine [along with a now overheated Brazil] in a period of advanced economies’ stagnation, their downturn produces a universally grim world outlook.

India, now the world’s largest population, had promise to overtake China – perhaps more stable with its veteran private sector and representative government. But inflation threatens with food almost half its consumer index rising to more than 9 percent last month. Prime Minister Manmoham Singh, after all a graduate of Soviet-style Indian planning, has his foot on the brake and gas pedal at the same time. Reserve Bank of India rates force lending for preferred firms to 13 percent and notorious paper-shuffling babus [clerks] hobble initiative, sending Indian coal companies, for example, despite some of the world’s largest reserves, chasing projects from Australia to North America. A spate of influence peddling scandals, including $16-billion in telecommunications, further clouds the scene.

New Delhi’s geopolitical rival, China, has turned its back on its 25-year strategy to prevent destabilization of one-party dictatorship with maximum growth. With incipient inflation, Communist leadership enters a generational succession next year trimming its investment-led behemoth’s sails. Widespread civil violence – despite enormous expenditures for the most elaborate hi-tech suppression machine in the history of authoritarianism – jeopardizes any new tactics. In fact, all the Chinese boom’s contradictory chickens simultaneously are coming home to roost: vast overexpansion of infrastructure feeding the boom [along with subsidized exports] has produced marvels for photographers but a real estate bubble including, literally, empty new cities. There’s growing resentment over second class citizenship and lack of services among more than 200 million migrant labor from rural areas stampeded to coastal cities employment. Declining foreign markets, roaring imported commodity prices [ironically brought on in part by speculation on “unlimited” Chinese demand], wage pressure, competition from export-led cheap-wage producers, monumental corruption, all now threaten “the Chinese model”. Consumption continues to decline as a percentage of domestic product mocking talk of redirecting a growth strategy. A combination of nonconvertibility and hot money chasing an undervalued yuan demonstrates how empty talk of it as an international reserve currency is. Beijing’s capacity for foot in mouth disease is epitomized in its increasing hoard of dollars and Treasury debt [again on the upswing] while officials continuously publicly denigrate the dollar.

So much for “the emerging markets”.

Turning to the developed world, there, too, crises are escalating.

A bureaucratic hassle over the Euro with divergent views in Berlin, Paris, Brussels and Frankfurt is turning into a dragged out effort to save the 17 European Union members’ common currency. Meanwhile other integration efforts — a free labor market and common defense and foreign policy — are faltering. A Greek default could produce a European banking crisis [even contagion for North America]. In other words, a fiscal and monetary crisis is turning into a major political upheaval threatening accepted European patterns. Half-baked intervention in Libya, dragging in NATO and the U.S., was announced in idealistic terms by Europe’s leaders. But it encapsulates European concerns – unlike the increasingly hot American debate over Obama Administration’s opting for “a war of choice”. For Europe “Libya” is linked directly to falling birthrates and need for imported labor and unemployed North African, Middle Eastern and Black African youth almost literally swimming the Mediterranean at a time Muslim immigrant assimilation is increasingly questioned.

Europe faces, too, the fact the world’s window to the U.S. consumer maw which supplied the post-World War II economy not only with unlimited markets but revolutionary technology has a “closed for repairs” sign with no reopening time indicated. Whatever happens after decades of drunken sailor’s spending, there will be no substantial U.S. economic strategy in place until after November 2012. Current Washington debate, if it can be dignified with that title, over raising the debt limit and reducing government spending, is simply a foretaste of the pain necessary to get the U.S. economy – perhaps now sliding into a double-dip recession — back to its historic miraculous production of jobs and expanding markets.

It’s going to be a long hot summer and a grim fall — despite the American sideshow of political shenanigans with the curtain only temporarily coming down on the first [Weiner] scene.


On China

Rate This
I haven’t read Dr. Henry J. Kissinger’s latest book, On China. But as someone who for most of his adult life has lived in China’s shadow, including reading, thinking, exchanging ideas with students of that civilization, I was interested. But now I leave evaluating the work to scholars, as some have already done
That’s come about because I heard the good doctor recently laying out a strategy for “accommodation” with China. One could excuse the cacophony of bromides — many fallacious — Dr. Kissinger trotted out in this wide-ranging NPR interview. Time was short, the interlocutor unskilled, and the subject matter vast.
But here is the crux of what Dr. Kissinger had to say:
“…through thousands of years of Chinese history, I know no example where outside pressures about the domestic structure of China produced domestic changes in, in [cq] China. …”
This is stultifying, a misconception so wrong it puts into question any analysis Dr. Kissinger might otherwise make. In fact, although obviously a most original civilization, China nevertheless – like all other societies – has been impacted, often in revolutionary fashion, by outside forces. Space prohibits even an outline of such convoluted episodes. But let me cite three chronologically dispersed examples:

·        In the first century of the Common Era, Indian Buddhism entered China. It not only upended Chinese metaphysics but introduced such everyday artifacts as bridges, tea and the chair. [The Impact of Buddhism on Chinese Material Culture, John Kieschnick, Princeton University Press, 2003]

·        As a result of a humiliating defeat by the British in the First Opium War [1839-42], Taiping, a heterogeneous Christian sect, led two decades of bloody revolt. Before it was subdued [by China’s “alien” imperial rulers, the Manchu, with the help of foreign military] state levies shifted from land to trade and military power from central armies to regional warlords. Slavery, polygamy and foot-binding were banned if not eliminated. Most importantly, the Taping reaction to foreign intervention ended China’s isolation.

·        In 1949, after decades of Japanese invasion, the Chinese Communists established a unified government modeled on the USSR to be massively aided for almost two decades by Moscow. While conventional wisdom now holds the Chinese Communists have shed all but the rhetorical trappings of Marxist-Leninism, its economy remains largely in government hands, a complete break with China’s centuries of market economics [That concept, ironically, was passed to Europeans as laissez-faire by late 16th century European Jesuits in Beijing!]

·        In the first century of the Common Era, Indian Buddhism entered China. It not only upended Chinese metaphysics but introduced such everyday artifacts as bridges, tea and the chair. [The Impact of Buddhism on Chinese Material Culture, John Kieschnick, Princeton University Press, 2003]

·        As a result of a humiliating defeat by the British in the First Opium War [1839-42], Taiping, a heterogeneous Christian sect, led two decades of bloody revolt. Before it was subdued [by China’s “alien” imperial rulers, the Manchu, with the help of foreign military] state levies shifted from land to trade and military power from central armies to regional warlords. Slavery, polygamy and foot-binding were banned if not eliminated. Most importantly, the Taping reaction to foreign intervention ended China’s isolation.

·        In 1949, after decades of Japanese invasion, the Chinese Communists established a unified government modeled on the USSR to be massively aided for almost two decades by Moscow. While conventional wisdom now holds the Chinese Communists have shed all but the rhetorical trappings of Marxist-Leninism, its economy remains largely in government hands, a complete break with China’s centuries of market economics [That concept, ironically, was passed to Europeans as laissez-faire by late 16th century European Jesuits in Beijing!]

Dr. Kissinger’s formulation is no blooper.
It underpins his proposed strategy for dealing with Beijing’s growing power. It equates to his 1970s call for “détente” in The Cold War. That was to be an acceptance of Soviet power for a hoped for extended period of relaxed tension. That strategy proved precarious until Moscow imploded in 1990 — in no small part as a result of confrontation tactics by Pres. Ronald Reagan.
Historical analogies are misleading and often dangerous but marginally useful. China today does constitute a somewhat similar problem. While no sane person in the West and Japan advocates military engagement, not to recognize American interests are jeopardized by an increasingly powerful hostile China is to ignore reality.
That indeed, has been until now Washington’s modus operandi:
·        The U.S. has made great efforts to bring China into the highest world councils with Beijing responding by courting pariah regimes threatening peace and stability.
·        Washington has pursued free trade and investment with China while Beijing responds with unfair trade practices, protection for state corporations and markets, and financial manipulation.
·        Washington has sought open exchange of military information and lent security for an expanding China trade, but Beijing rejects transparency and secretly pursues a rapid military buildup against an unidentified enemy.
·        These American policies have strengthened the power and influence of a highly vulnerable Chinese regime, one facing great economic ambiguities and unpredictable political challenges.
Washington is now reexamining how to restrain what could well be a new aggressive formidable power. It must not repeat the long prelude to World War II when East Asia storm signals were largely ignored – incidentally, then too involving a burgeoning commercial relationship [with Japan].
That requires extensive, intensive and knowledgeable debate about Beijing’s capacities and goals — and America’s abilities to meet them
Dr. Kissinger contributes little to this gargantuan undertaking.


Rolling the dice in China

When scientists get further along with epigenetics, they may discover the Chinese have two unique DNA: a gambling gene, and another for hospitality. The first, of course, explains why Macau is odds-on favorite for replacing Vegas as No. 1 world gambling champion. The second suggests why few escape the lure of a Chinese campaign to win visitors’ hearts and minds.

Looking at a new determined shift in Beijing’s economic strategy, one has to chalk it up to that gambling gene. Intoxicated with turning into “the world’s factory”, Beijing plans to sail right past their successful collaborative development with foreign multinationals. Its new strategy literally amends Maximal Leader Deng Hsiao-ping’s dying instructions two decades ago to hide their capacities until they had achieved his four modernizations.

One can only chalk up Western businessmen naiveté to that second suspected Chinese gene, the ability to vamp any visitor. Of course, Frederick Engels, Karl Marx’s more literary companion, explained it all more than a century ago. He foresaw that on the way to the gallows, the capitalists’ greed would drive them to compete with one another to sell the rope to their executioners.

From mid-summer last year Chinese authorities – as a muddled but highly informative U.S. Chamber of Commerce report concludes – shifted from defense to offense. Years of studying their acknowledged total dependence on foreign technology has culminated in proposing 16 new megaprojects. With them they aim:

1] To provide new opportunities for stealing foreign technology. Now, before any technology can be introduced into China, it must be intensely “studied” — in fact, stolen even before it enters the market. Another is increased allocation of “patents” to Chinese firms with virtually no verification, making it virtually impossible to pursue legal indemnification for losses.

2] To restore the primacy of the SOEs, the state-owned enterprises, those giant behemoths notorious for their inefficiency and corruption but powerful political entities. Massive funds [$25 billion] — out of the huge 2008 stimulus package, originally aimed at warding off contagion from the world financial crisis – have been allocated to the SOEs to produce “indigenous innovation”

3] To continue to ensnare foreign companies, Beijing will suggest in return for continued tech transfers, they will get a share of the growing Chinese markets. They will also be offered participation in new technologies in China using government funds. But increasingly “import substitution”, that protectionist policy which crippled much of the third world before “globalization” became fashionable, is government policy.

Beijing’s new turn is loaded with risk. The history of Chinese innovation during the current boom is miserable. Eighty percent of China’s major firms do not have R&D at all. One reason may be it has been so easy to rent or steal needed foreign technologies. But there may be even more important – if difficult to evaluate – cultural factors.

Although China was historically leader in basic scientific development, simply said, the Europeans picked up on those breakthroughs to initiate the industrial revolution leaving China behind. Why? The answer to this question is perennial among scholars. One answer lies in China’s intense bureaucratization, in part arising from the need for huge collective enterprises – largely for water control. Another, of course, is Chinese learning has always put the emphasis on rote memorization and an inordinate, even religious, respect and adherence to what has gone before. It may be no accident, as the Communists used to say, now bereft of its Marxist-Leninist-Maoist dogma Beijing is turning back to Confucianism. [A statue of Confucius was recently installed in Tien An Mien square alongside a huge portrait of his greatest adversary, Mao Tse-tung.] With its emphasis on ritual, Confucianism represents the antithesis to the restless European [Greek] mind. An even greater threat to the new effort to produce originality may be the all pervasive corruption permeating Chinese life today which means vast sums promised R&D will go astray.

China is also taking other risks. Despite an intense campaign, Beijing has not been able to lure home more than a few prominent scholars among more than 62,000 Chinese in the U.S., many in technological research. With ties in both cultures, they have been critical to transferring technology. The new Beijing strategy may jeopardize that relationship as American business, reluctantly, and the U.S. government becomes increasingly cautious about China deals.

True, economic development in East Asia was always full of warfare over intellectual property. Japan, Taiwan and South Korea have been major culprits. But the Chinese pour salt in the wound by offering products overseas based on stolen technology. Thus California’s former Gov. Arnold Schwarzenegger was talking to the Chinese about proposed federally subsidized high-speed rail based on their theft from three foreign companies that had cooperated in creating them in China. At the moment, Washington is grappling with the proposed purchase by Huawei, a Chinese entity with military connections, of an American IT company with the Pentagon as a client.

Beijing’s gamble if successful would insure continued giant leaps forward but like Mao’s infamous economic plays, this one could prove catastrophic.


The Mother of All Bubbles?

Posted on March 21, 2011 by yeoldecrabb| Leave a comment | Edit

Rate This

When Prime Minister Wen Jiabao trotted out his litany of promised reforms to the annual rubber-stamp parliament in early March, they reconfirmed growing suspicions of the Chinese economy’s fragility. Now more veteran observers are joining that little band [including this writer] who has predicted an implosion of the jerry-built system. Granted that some of us have been saying it for several years. But like most human and economic events, not only when but what would trip such a crash is rarely predictable [as was the case for the U.S. credit markets implosion].

Wen characteristically predicted the gross national product would grow by 8%. That is the magic number Chinese leadership – shorn of any other raison d’etre for the regime except rapid growth – has pulled out of the hat. Chinese and foreigners conventionally accept it as the minimum necessary to provide additional employment to ward off social instability. But like all GNP figures – but especially in China where “creative accounting” is a highly developed art form – it has limited validity.

I remember accompanying Prime Minister Jawaharlal Nehru many years ago to the old undivided Bihar, among India’s poorest states. Nehru, surrounded by thousands partaking of his darshan [“spiritual enrichment”], often oblivious to his stream-of-consciousness monologue, made a startling admission. He could not understand, he said, why he saw such poverty in Bihar while the per capita GDP statistics showed it one of India’s richest states. Common sense gave you the answer: Bihar by then already had India’s giant new steel mills. [Nehru called them “our modern temples”.] Not only was their product exaggerating the local per capita income count but its workers were recruited elsewhere nullifying benefit for local subsistence farmers and tribal hunter-gatherers.

Today China’s huge growing inequalities which Wen as always promised to eliminate are a function of what remains a still largely government-owned and mismanaged economy. Experts may argue over the extent China is an export-led economy. But three-quarters of those exports are from multinational companies assembling imported Taiwanese, Japanese, South Korean and other high value components. While producing jobs, they contribute minimally to the livelihood of most Chinese. For despite the vast migration into the cities – which regime policy rationalizes as strategy since it has no solution to a rural, agricultural sector it has shortchanged for more than two decades – no respite is in sight for growing regional and class disparities. And the highly publicized “Gucchi culture” of the coastal cities – increasingly the world’s largest market for luxury goods — represents only a small proportion of 1.3 billion Chinese.

Fewer world mainstream media maven are still pushing the idea Chinese growth would save the rest of the world from the continuing ravages of a universal recession. Since last fall when Beijing announced a somewhat bogus huge half trillion stimulus package [almost half was already committed funds to infrastructure projects decades out like the South-North Canal], there had been that hope. But the highly celebrated increase in intra-Asian trade depends on ultimate markets in the U.S. and the EU – both now deflated with stagnating if not increasing unemployment. China does rally the world commodities markets with energy and ore purchases albeit only as its steel inventories grow. [Beijing’s inexperience in negotiating with oligopolies is part of that mix.] Its vast foreign exchange holdings appear an unparallel asset – until it’s recalled they represent, largely, U.S. debt as counterpart for Chinese currency circulating in a rigidly protected and therefore limited consumer market.

After almost six months with foot on both gas and brake, Beijing has decided to slam the brakes, unable to “sterilize” stimulus funding even with the help of Chinese housewives’ phenomenal high household savings.

Not only are there signs of inflation, but the four major commercial banks – under political pressure from the semi-bankrupt State Owned Enterprises – were again tossing out vast loans likely never to be repaid. Instead of producing higher consumption over a broader market, estimates had 20% of the additional liquidity going into stocks despite unjustified dividend ratios. Real estate – including one infamous whole city in Inner Mongolia – for various reasons goes unsold and unoccupied. Like glorious Beijing Olympics white elephants, new skyscrapers were added to already untenanted silent towers a decade old in Shanghai’s Pudong “financial” district. Millions of motorcars have been sold with large government subsidies – but the cost of their operation including increasing imported energy is a calculation Beijing’s planners will soon have to face.

For all the talk of “capitalism with Chinese characteristics”, the economy remains run top-down in ghost-like Soviet fashion. True, the small private sector, even with its limited access to capital, produces most new jobs. But they are dependent largely on foreign markets which have not yet, and may not for the foreseeable future, return to their former glory.

Hang on for the Chinese to be mugged by reality. And the impact will hit its Asian trading partners hard too with unanticipated consequences for the West.



A new turn in the U.S.-Japan alliance?

Obscured by the earthquake-tsunami-nuclear-threat tragedy, and Mideast crises, there have been subtle Western Pacific geopolitical shifts.

With little publicity in U.S. [or for that matter, the left-leaning Japanese mainstream] media, American military forces played a magnificent role in rescue and early clean-up of the Japanese tsunami.

Grotesquely incompetent Japanese politicians – at any moment there may be another revolting door prime minister – have obscured this along with their studied refusal to honor their own high-performing Self Defense Forces. This is the ruling Democratic Party of Japan [DPJ] core recruited from a 60s generation vociferously opposed to the American alliance and reconstitution of a civilian led Japanese military. It’s taken three years of provocation by Beijing – now seemingly at least temporarily abated – to force full recognition of the growing threat posed by a rapidly arming China, and its obstreperous North Korea ally.

In sharp contrast was the public’s stoic response to 30,000 lives lost with destruction of whole towns and villages. But a 15.3% factory output drop has imperiled Japan’s “just on time” internationally linked export assemblies. Already a ¥4 trillion [$50 billion] extra budget has been voted. Japan’s central bank has doubled its asset-purchases, injected record amounts into money markets and unveiled a one-year lending program.

It’s early to know whether the tragedy will reawaken “yamato damashii!” – that remarkable ethos to overcome adversity characterizing Japan since its rapid emergence as a world power beginning only 150 years ago. But recuperating the $300 billion loss might reinvigorate the world’s third largest economy suffering two decades of deflation. Prejudicing this hope, of course, is the rating agencies’ downgrading of the huge and growing government debt [if held almost exclusively in yen at low rates], the most rapidly aging and declining population in the industrialized world, and lack of dynamic leadership.

Much depends on whether growing internal strife within the DPJ will produce a long hoped for political realignment introducing younger blood and new ideas. Luckily, the DPJ’s campaign against Japan’s powerful bureaucracy has been mostly talk. In fact the legendary bureaucrats performed well in this unprecedented emergency – certainly compared with corrupt utilities management in bed with the politicians.

Backed by public appreciation of American efforts and repeated Chinese provocations – the latest an attempt to corner the rare earths markets on which Japan’s movement toward advanced technology so heavily depends – muffled calls have arisen for strengthening the U.S. alliance. Tokyo’s concern is enhanced by Taiwan’s new formal economic integration with Mainland China and the possibility political domination could follow despite Pres. Ma Ying Jeou’s protestations to the contrary. [Ironically, Taiwan, whose native islanders have fond memories of the relatively benign Japanese 50-year occupation, 1895-45, made the largest contributions after the U.S. to disaster aid.] Tokyo has always seen Taiwan as critically strategic to its defense. And the Obama Administration’s continued foot-dragging on weapons for Taipei has certainly been noted even as they constitute a major issue between Washington and Beijing.

Any expansion of Japanese-U.S. military collaboration will come up against both countries’ budgetary constraints. Rapid American technological progress – with Japan as a junior partner especially in anti-missile defense — could compensate partially for more cutbacks likely in military spending by U.S. Secretary of Defense-designate Leon Panetta, noted for his dovish views.

But this confluence of events has led to whispered speculation the expensive – and strategically dubious — U.S. Marine move from Japan’s southern island of Okinawa to Guam might be shelved. That Marine “fire brigades” could arrive within two hours off the quake area operating from the aircraft carrier USS Ronald Reagan was demonstration of why the Ryukyus chain historically has played such an important role.

This year’s just approved military construction contains another $246 million, added to a $1.2 billion down payment already appropriated, on an estimated $4 billion for transferring 8,600 U.S. Marines from Okinawa. The Japanese government has pledged another $6 billion.

To halt the plan, Tokyo would have to confront local opposition to Okinawa facilities expansion, difficult for the DPJ with its leftwing constituencies. But even if a U.S. diplomat was fired recently for saying so publicly, the Okinawans’ half century blackmail of both Tokyo and Washington is wearing thin. A stronger Tokyo team might just call their bluff, cancel the Guam transfer, and put those yen into reconstruction, producing welcome savings for Japanese — and American — taxpayers. Only a hint of a rainbow on the horizon but…



Worrying: a Japanese-Chinese dust-up

Nothing should make the world so nervous as conflict between the two East Asian behemoths, China and Japan. Their long history of curiously incestuous but bitterly conflicted relations dominates history in their part of the world.
That is why even a minor clash between a Chinese fishing boat and small Japanese coastal security craft has turned into a major flashpoint, exciting not only their two capitals but Washington as well.

We may never know the exact details of the episode. But in early September a Chinese fishing craft [and there are fishing boats and fishing boats] bumped two Japanese Coast Guard speedboats. The episode took place in rich tuna grounds among rocky uninhabited islands which stretch southward in the East China Sea from the Japanese main home islands and the Ryuku chain [including Okinawa heavily loaded with U.S. bases] and to Taiwan.

These islands, called the Senkakus by the Japanese, Diaoyu by the Chinese, are claimed by both. They have taken on new importance because of speculation there may be oil and gas deposits beneath them. The argument over their sovereignty and control is an expression of China’s growing economic and military power which recently has seen estimates of the Chinese gross national product surpass Japan as the world’s No. 2 economy.

The “normal” routine in such encounters is that the Japanese take the fishing boats into custody, eventually return them to either their Mainland or, often, Taiwanese homeports. But this time, apparently, the fishing boat captain attempted to make a run for it, but was captured. Tokyo almost immediately released the crew and the ship but held on to the commander to be tried locally under Japanese law.

Beijing howled. Its government media repeated highly chauvinistic claims as it has recently done for other contested [with Southeast Asian nations] islets in the South China Sea. Stock Chinese Communist phrases placed them on a par with Beijing’s sovereignty over troubled Tibet and Singkiang.

An hours-old new Tokyo cabinet first stood its ground. Then, it caved. A local magistrate released the ship’s captain rationalizing the collisions were “deliberate, but not pre-meditated.” Earlier Tokyo versions had the two “bumps” occurring at different intervals, indicating the unlikelihood that they were accidental. And the question hanging in the air was whether the ship’s captain was acting on instructions or a rogue mariner who had taken it on himself to try to intimidate the smaller Japanese craft.

Whatever, behind the scenes, a complex political and diplomatic scramble was going forward. Washington, which in some Japanese circles had been seen as less than responsive in recent international issues to Tokyo’s concerns, especially on the North Korean threat, seemed to shift its position. Only weeks earlier Washington had made a point of removing these disputed islands from the umbrella of the U.S.-Japan Mutual Defense Treaty. But Vice Pres. Joseph Biden in a public address placed U.S.-China relations as subsidiary to concerns of the Japanese alliance.

A State Dept. spokesman used diplomatese to explain that Washington made a distinction between areas under Japanese control and sovereignty – but did reaffirm the application of the Treaty in any defense of Japanese territory against aggression [presumably including China]. [A few weeks earlier, suddenly, Sec. of State Hillary Clinton had forthrightly denounced similar China’s South China Sea claims, backing the Southeast Asians in seeking negotiations with Beijing.]

All that bucked up the Japanese, not the least the new Japanese foreign minister, Seiji Maehara, a power in the heterogeneous ruling Democratic Party of Japan [DPJ]. Maehara, who just arrived at the post largely because of internal politics of the DPJ, unlike many of his former socialist and pacifist Party colleagues, is seen as a hawk on China and one of the most stalwart supporters of the American alliance. But some Japanese explained the capitulation as “advised” by Washington.

Meanwhile, Beijing had added important pressures to its propaganda. China is now Japan’s number one trading partner and an important export and reexport market market at a time of downturn in the Japanese economy. Although denied later, the Chinese reportedly halted shipments of “rare earths” – on which China temporarily has a world monopoly. These minerals are critical to many electronic products, the heart of Japanese high tech exports. [Beijing later denied any such ban – perhaps with recognition that a Colorado company as well as others are beginning to stir to break Beijing’s temporary monopoly with North American and perhaps African production.]

Four Japanese working for a company which has been engaged in a long-term project to “demobilized” chemical warfare sites in China built by the Japanese during World War II were arrested, ostensibly for espionage. [The Japanese company specializes, among other things, in “unmanned construction” projects which permit operations in dangerous areas by remote control.] Beijing canceled bilateral meetings which characterize Japanese-Chinese relations in an effort to keep a complex and convoluted economic, political and cultural relationship on an even keel.

As this is written, the saga continues. Beijing is demanding an “apology” – an issue that takes much more precedence in East Asian cultures than perhaps in the West where “face” is critical – and compensation.


Chinese numerology

Not only does traditional Chinese culture value certain numbers as auspicious and others as inauspicious largely based on a hononyms – e.g., four is similar to the word for death – but the supposedly revolutionary Communists have fallen into similar beliefs. The Soviet Union’s Dictator Nikita Kruschev used to fly into a frenzy when his Chinese Communist comrades insisted on gathering Party dictum in collections of numbered lucky “dos” or forbidden “don’ts”.

One has to believe that the present Magic 8, the rate of mknimum desired growth for the gross national product [GDP], has fallen into that cagegory.

An 8 percent annual growth rate is the arbitrary figure that Chinesehave chosen [and some foreign economists have accepted] to indicate as the minimum required to keep the economy growing at a level to absorb China’s huge perennial unemployment and underemployment.

Of course, with growing – if censored — outbreaks of “events, demonstrations and rioting, among increasingly hard pressed workers and rural inhabitants, the figure has taken on new urgency. The recent race riot in Urumchi, the capital of the farwestern province of Singkiang, is attributable, in part, to a new in-migration of Han Chinese trying to escape the worsening economic conditions in the once booming Coastal cities.

Beijing official staitisticians are prattling now about how the GDP has recovered from a collapse in the last quarter of 2008 and first quarter of 2009. The official 6.1 percent growth rate in the first quarter of this year has been questioned by some oldtime observers, who believe China might actually have gone into negative growth. But the half trillion dollar stimulus package announced last fall has done the trick, the official line runs, and China is emerging from the sharp drop in activity brought on by the worldwide credit crunch and recession and the resulting fall in Chinese exports.

Of course, this requires announcing that the economy in the second quarter again gained 7.9 percent growth rate – a 15 percent plus leap over the official first quarter. And that would mean, with even more rapid leapfrogging ahead, that the year could end with a little over the Magic 8, the official spokesmen are saying.

What is curious about all this is the alacrity with which the Western mainstream medium’s correspondents in Beijing and Shanghai are following the leadership’s cue. You would have thought that the faster-than-expected delivery of quarterly data would have made all and sundry just a little suspicious.

But the world media, and the foreign businessmen whose rice bowl is threatened, are all promoting the official figures – even if there is some muted skepticism expressed about where and how the stimulus money is being fed into the economy. Some have even volunteered the caution that such spending as occurred in the first quarter – more than lending by the government banks than during the whole year of 2007 – cannot be maintained.

Even cheerleader Morgan Stanley admits that much of the stiumulus is going straight into stock market speculation, perhaps 20 percent of the funds disbursed this year according to some estimates. Ten of 13 sectors in the MSCI China Index are above their long-term price-to-earnings averages, the favorite bank for Beijing’s managers points out. Chinese companies are investing excess cash into stock and real-estate markets as they did in 2007. And, in fact, some of recent land auction winners have been cash-rich companies with no previous real-estate business now buying up what everyone admits is inflated real estate.

The mother of all bubbles may be being blown in China.

“The Rmb1,530bn [$224billion] in new loans in June brought total new lending in the first half of the year to Rmb7,400bn, or almost one quarter of our estimated 2009 GDP,” Wang Tao, UBS prognosticator, said in Beijing. “We now expect total new lending in 2009 to reach Rmb9,000 billion, a speed of re-leveraging unprecedented in China’s history.”

Yeah, and maybe in anyone else’s history

There is also the question of the possibility of non-performing loans – that is, bad lending – in which China’s four government banks have always excelled.

According to official figures, again, bank lending and fiscal spending has driven fixed-asset investment, the prime engine of growth, up 33.5 percent in the first half of the year compared with the same period in 2008. Car sales rose by an alleged 48 percent – fed by a hefty subsidy — and purchases of homes by more than 80 percent. In June new banklending was said to have been more than four times larger than a year earlier.

The Obama stimulusaters can only be green with envy.

Despite some openly expressed criticism as to the possibility of inflation, Prime Minister Wen Jiabao appears to be continuing to encourage monetary policy be kept fairly loose. But exports which had fueled the boom for two decades remains weak.

The government obviously fears premature tightening could derail the recovery. And with an eye on politics, there is also the important 60th anniversary of Communist Party rule coming up in October.

But even the always China-boosting Economist of London leads a recent piece with the question, “Is China’s economic stimulus too much of a good thing?”

How do you say “too good to be true” in Mandarin?

sws-07/29-2009 Asia Investor/ [Number 243]


Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s