China

[G M]

China has exploited the opportunities the GWOT made possible. Probably going to exploit Obama's fcukup's to an even greater degree, such as becoming Saudi's new patron.

[Body-by-Guinness]

China’s Crackdown and America’s Response: Supporting Liberty in Distant Places
Published on April 11, 2011 by Dean Cheng WEBMEMO #3221

As the “Jasmine Revolution” continues to unravel traditional power structures in the Middle East, Chinese authorities have been cracking down on dissidents and activists on a scale not seen in over a decade. On the eve of the next round of Strategic and Economic Dialogue talks, and with much less experienced Asia team members for the U.S.—many of whom have no China experience—there will be great pressure to overlook these harsh measures. But doing so would not help the dissidents but instead betray American ideals.

Reasons for the Crackdown
Western media has noted the arrest of Ai Weiwei, an internationally recognized artist. But other reports indicate that a host of activists, human rights lawyers, and dissidents have been detained. Reports suggest that at least 20, and perhaps between 50 and a hundred people have been arrested or have otherwise disappeared.[1]
Part of this effort is almost certainly in reaction to developments in the Middle East. Very clearly, the Chinese authorities are worried that the winds of popular discontent and demands for political reform will blow through China. This is likely exacerbated by possible similarities in the domestic situation in China and parts of the Middle East. These include increasing frustration with corruption and growing disparities between urban and rural populations. Both of these are likely factors in the mounting number of “mass incidents” reported throughout China, now likely exceeding 100,000 a year.

Less widely recognized is the issue of urban unemployment. In the Middle East, there is a large population of underemployed, educated youth in the cities. Officially, this is much less of a problem in China, where urban unemployment at the end of 2010 was only 4.1 percent. Yet Chinese articles nonetheless document a similar phenomenon of underemployed and unemployed youths congregating in cities such as Beijing, Nanjing, and Chongqing. Often referred to as “ants,” they are believed to number anywhere from a million to 3 million.[2] Like the urban youth in Tunisia and Egypt, they constitute potential tinder for any kind of popular movement against government controls—educated yet dissatisfied.

The current crackdown may be further motivated by the upcoming plenary meeting of the Chinese Communist Party (CCP). It is reported that this meeting may determine the makeup of the next Politburo Standing Committee, the true Chinese leadership. Instability in the streets not only may disrupt the plenum but would potentially also introduce unpredictable factors into the various factions’ maneuvering for power and advantage. For all the involved parties, there is likely to be great interest in limiting the potential for embarrassing incidents.

Don’t Get Your Hopes Up
Several recent Chinese publications provide additional food for thought regarding this crackdown. The Twelfth Five Year Plan (2011–2015) shows that Beijing will spend more on internal security forces than on the military.[3] In addition, the 2010 Chinese defense white paper, which was released only last week, prominently notes that a major task of the Chinese military is to “maintain social harmony and stability.”[4] The People’s Armed Police, part of the Chinese armed forces, is given this task on a day-to-day basis, but it is important to remember that the People’s Liberation Army is the armed wing of the CCP. There should be no doubt that, if necessary, the Party will use every available means to enforce its will.

Meanwhile, Global Times, part of the People’s Daily newspaper system published by the CCP, editorialized that Ai Weiwei’s arrest was not for his dissidence but for his violation of Chinese laws.[5] The editorial highlights a growing trend in Chinese suppression of dissidents: the aggressive use of the law as a rationalization for punishment. As one Chinese official warned foreign journalists who were assaulted by police, for those who seek to make trouble for China, the law is not a shield and offers no protection.[6]

This attitude of rule by law rather than rule of law should disabuse those optimists who had looked to Wen Jiabao’s speeches as presaging some kind of fundamental political reform or even the stirrings of democracy. That even high-profile dissidents can be legally punished simply for pushing the limits highlights how concepts of “legal warfare” apply not only internationally but domestically.

As long as the CCP remains in power, there will be little meaningful movement toward democracy. The CCP has little incentive to cede power. Indeed, recent events in the Middle East only underscore, from the Party’s perspective, that loss of power ultimately leads to exile and at worst to civil war—a very zero-sum view. Belief that democracy is “just around the corner” is, of course, foolish. But, as Wu Bangguo emphasized at the recent National People’s Congress, “We will never simply copy the system of Western countries or introduce a system of multiple parties holding office in rotation.”[7]

Recommendations
The U.S. should:
Retain the Tiananmen Square sanctions. Leaving aside the national security implications of the Tiananmen sanctions, it is important that the leadership in Beijing recognize that its actions have consequences. In particular, when a government turns its guns on its own people, it must know that this will be deemed unacceptable behavior and that it will not change simply with the passage of time. In this regard, Washington should also persuade its allies to keep those sanctions in place. Otherwise, they would have little meaning and less impact.

Link ideals and individuals. Supporting human rights is not only a matter of speeches and resolutions—it has individual faces as well. Foreign attention is often the only protection for many dissidents. It is also one of the most powerful means of assuring them that their struggle is not forgotten or ignored. American officials from the President to the Secretary of State to the Ambassador and embassy staff should not shy away from championing dissidents in their official dialogues, private discussions with Chinese officials, and public statements.

Support the study of legal warfare as a weapon of future conflict. Some Western scholars look at China’s efforts to create a judicial system—and especially a national code of laws—as somehow presaging a shift from Party rule to the rule of law. But Chinese actions make clear that the law will be increasingly used as an instrument of justifying various measures by the state, not as a means of ensuring justice. Just as the American military in the 1930s began to prepare for future conflicts by developing naval and land-based aviation, American policymakers today should be supporting efforts at studying the potential for legal warfare, both offensively and defensively. Military lawyers should incorporate the study of foreign—and especially Chinese—laws and legal warfare into their training.

What Does the U.S. Stand For?
The exceedingly dim prospects for democratic reform in China does not mean that the United States should abandon its support for it. Support for democracy worldwide is a fundamental American tenet, elemental to American ideals and principles. Both rhetoric and action are necessary.

Dean Cheng is Research Fellow in Chinese Political and Security Affairs in the Asian Studies Center at The Heritage Foundation.

http://www.heritage.org/Research/Reports/2011/04/Chinas-Crackdown-and-Americas-Response-Supporting-Liberty-in-Distant-Places

[Body-by-Guinness]

China’s Fear
The Arab Spring has the Communist Party leadership on its toes.
10 April 2011

“Mohamed Bouazizi” is not an easy name to pronounce in Chinese. Ding Yfan, a well-known scholar and my official Communist Party contact in Beijing, tries anyway. Ding’s job is to answer “honestly” the questions of visiting Western intellectuals. Even before I raise the subject of the Arab uprisings—set in motion by Bouazizi’s self-immolation in Tunisia last December—Ding seeks to convince me that such revolts couldn’t happen in China. Unlike citizens in the Arab world, he insists, the Chinese are getting richer and therefore aren’t discontented. His reasoning is purely Marxist: only economics could drive a revolution, not ideas, and certainly not the hunger for freedom.

The Chinese are indeed getting richer. That’s particularly obvious in Beijing, which abounds with luxury shops and restaurants where millionaires’ children exhibit their new wealth. The nation’s economic expansion—powered by a 10 percent growth rate every year for the last 30 years—has given birth to an immensely rich class, which now tends to reproduce itself and holds both political power and economic influence. But while the Chinese Communist Party was becoming a wealthy oligarchy, the peasants of the eastern and central provinces might as well have been living in the Middle Ages. Now, thanks to migrations from the countryside to big construction sites and the industrial sector, Chinese peasants (or their children) are slowly entering the modern economy, even if salaries remain low.

Even if no Chinese version of Mohamed Bouazizi surfaces, the Middle Eastern uprisings have shown Chinese authorities how dangerous the Internet can be. Ding quotes Mao Zedong: “A spark can set fire to the whole meadow.” Bouazizi was that spark, and the Internet spread the fire, from Tunisia to all parts of the Arab world, including countries with growing economies. Economic growth generates hope, but hope can sometimes make a society more unstable and demanding precisely because the situation is improving—just not as quickly as people would like. Alexis de Tocqueville, looking back at the French Revolution, saw that dynamic at work: because freedom and prosperity had expanded throughout France, he argued, the French wanted everything, right there, right then.

In his own way, Confucius expressed this same sentiment 25 centuries ago: “Only subsistence societies are stable,” he wrote, “because their living conditions are equal for all.” In China, repression has become ever more severe: the Internet is censored, and connection speeds have been slowed. Dissident intellectuals face prison sentences of 11 years on average; lawyers who challenge the government in civil affairs vanish without warning. At the first sign of riot or strike, the police send peasant leaders or workmen to reeducation work camps for three-year sentences. Liu Xia, the wife of imprisoned Nobel Prize winner Liu Xiaobo, has been missing since January; the wife of democratic militant Hu Jia, also in prison, is forbidden to leave her house. And on April 3, artist and dissident Ai Weiwei was arrested and detained in Beijing.

It’s possible to miss this increased repression with the naked eye. The tourist, the entrepreneur, and the tradesman (and the rock musician, like Bob Dylan, who visited recently) can choose to ignore those social tremors that don’t affect their business—as long as the tremors don’t trigger an earthquake. Liu Jiming, a Beijing-based political scientist and free-market philosopher who bravely took over his friend Liu Xiaobo’s work, thinks, contrary to Ding Yfan, that China numbers millions of Mohamed Bouazizis. Everywhere, Chinese peasants try, like Bouazizi, to escape poverty and, as in the Arab world, see their small businesses destroyed by the Chinese police because they lack proper authorization (usually obtained by bribing a bureaucrat). The difference, according to Liu, is that China’s immense size makes a mass movement difficult. Even with the galvanizing potential of the Internet, it’s not easy to turn isolated rebellions into a general mutiny against the Communist Party.

Another important distinction between China and the Arab world is the ruthless efficiency of the Chinese police. Nothing works more effectively against a revolution than a powerful police force. But a general revolution will happen anyway, Liu believes, sooner or later. Only wealth allows the Communist Party to maintain its power. When economic growth slows, the Party will lose its grip on the police, the army, and the feudal landowners and apparatchiks, whose loyalty to the regime is purely financial. Unlike leaders in the Arab world, Chinese Communist leaders understand their society well. They know that they’re not popular with the people—but they remain feared.

And in fact, economic growth has slowed—down to 8 percent so far this year—and inflation has jumped to around 10 percent for basic food products. Can the Party retain legitimacy faced with these constrictions? It will not be able to rely on popular faith in Marxism, which no one believes in anymore. It is taught in schools and universities only as a compulsory, antiquated catechism—as is Confucianism. The thought of Confucius has been integrated into the school curriculum as part of the Communists’ effort to connect the past with the present, as if the Party incarnated an eternal China. For the Chinese, Confucius remains the father of all morality, the advocate of respect for authority and social order. The Party has thus erected a kitschy statue of Confucius in Tiananmen Square, not far from the tomb of Mao Zedong and next to the National History Museum, which is hosting a new exhibit extolling the continuous success of Party leaders since 1949—an exercise in pure propaganda. Chinese cultural centers overseas have been renamed Confucius Institutes. Confucianism, then—or more precisely, the superficial vulgate that has replaced its complex writings—has unanimous support among the Chinese. But despite the Party’s best efforts, it’s not likely that many ordinary Chinese link Confucianist morality with the Communist princes who govern their lives. It’s better for the Party’s sake if the people don’t read Confucius too closely, Liu Jiming says: his criticism of corrupt leaders and social inequality would only undermine the current apparatchiks.

As Liu points out, Confucius does not encompass the entirety of Chinese thought, whether classical or contemporary. Lao-Tse, the old master of Confucius, was in his time an advocate of complete anarchy; no Western political philosophy is as suspicious of power as Taoism. We could, Liu concludes, quickly sum up 2,500 years of Chinese culture as a dialogue between Lao-Tse and Confucius—between Taoism’s individual freedom and Confucianism’s enlightened despotism.

Jiming and his fellow dissident intellectuals (who must remain anonymous) have no illusions about their influence in today’s China. It is not philosophers, they concede, who will bring down the Party, but a mutiny from the Chinese Bouazizis. Confronting the Party head-on, they now believe, leads nowhere but jail, because the Party is physically too strong. Political manifestos, like the one that landed Liu Xiaobo in prison, are now a bit outdated. Manifestos belong to the old world of political struggle. Intellectuals have come to believe that real change today will rise from social unrest, not from ideological proclamations. This means that the main role for Chinese activists is to convey news of local rebellions—which occur nearly every day, somewhere, in this vast and restless country—with the hope that disseminating the images and information on the Internet will build links among local dissidents and eventually converge in a national movement.

Intellectuals now believe that their true role will come after the movement is underway: preparing the alternative institutions of civil society, formulating a confederation of provinces, and creating the democratic institutions that would govern them, so that democracy—not chaos or some other tyranny—could replace dictatorship. The Chinese democrats see that the Arab world, because it has not prepared itself for such a transition, could move from one tyranny to another. They appeal to Westerners—Europeans and Americans—for methodological guidance: how to build a democracy while avoiding the chaos that revolution so often brings? They believe that the Chinese people know well what democracy means. But as the Arab revolts demonstrate all too plainly, the path from revolution to democracy is never clear.

Guy Sorman, a City Journal contributing editor, is the author of Empire of Lies: The Truth about China in the Twenty-First Century and other books.

http://www.city-journal.org/2011/eon0410gs.html

[DougMacG]

Interesting read on a story about censorship in China, where Google was helping the Chinese censor and Hillary removed the section of her book that bragged about her confronting China about women's rights in order to sell her book in China.

Bob Dylan went through all the Chinese censors screening his work to play there last week and still slipped through some protest messages according to this story,
http://www.getreligion.org/2011/04/dylan-works-around-chinas-bosses/ Opening with these words:
Gonna change my way of thinking, make myself a different set of rules
Gonna put my good foot forward, and stop being influenced by fools.
So much oppression, can’t keep track of it no more...

[G M]

As a native english speaker, I can't understand WTF he's saying, so I'm pretty sure he could give a long speech about democracy in China without tipping off his gov't minders there.

[G M]

Monday, April 11, 2011 - 23:15
Beijing March New House Prices Plunge 26.7% M/M: Press

BEIJING (MNI) - Prices of new homes in China's capital plunged 26.7% month-on-month in March, the Beijing News reported Tuesday, citing data from the city's Housing and Urban-Rural Development Commission.

Average prices of newly-built houses in March fell 10.9% over the same month last year to CNY19,679 per square meter, marking the first year-on-year decline since September 2009.

Home purchases fell 50.9% y/y and 41.5% m/m, the newspaper said, citing an unidentified official from the Housing Commission as saying the falls point to the government's crackdown on speculation in the real estate market.

Beijing property prices rose 0.4% m/m in February, 0.8% in January and 0.2% in December, according to National Bureau of Statistics data.

The central government has launched several rounds of measures since last year designed to cool the housing market, though local government reliance on land sales to plug fiscal holes mean enforcement hasn't been uniform.

The NBS is expected to release March house price data on April 18.

beijing@marketnews.com ** Market News International Beijing Newsroom: 86-10-5864-5274 **

[Crafty_Dog]

Well, that sounds rather significant!

============

China and the End of the Deng Dynasty
April 19, 2011


By Matthew Gertken and Jennifer Richmond

Beijing has become noticeably more anxious than usual in recent months, launching one of the more high-profile security campaigns to suppress political dissent since the aftermath of the Tiananmen Square crackdown in 1989. Journalists, bloggers, artists, Christians and others have been arrested or have disappeared in a crackdown prompted by fears that foreign forces and domestic dissidents have hatched any number of “Jasmine” gatherings inspired by recent events in the Middle East. More remarkable than the small, foreign-coordinated protests, however, has been the state’s aggressive and erratic reaction to them.

Meanwhile, the Chinese economy has maintained a furious pace of credit-fueled growth despite authorities’ repeated claims of working to slow growth down to prevent excessive inflation and systemic financial risks. The government’s cautious approach to fighting inflation has emboldened local governments and state companies, which benefit from rapid growth. Yet the risk to socio-political stability posed by inflation, expected to peak in springtime, has provoked a gradually tougher stance. The government thus faces twin perils of economic overheating on one side and overcorrection on the other, either of which could trigger an outburst of social unrest — and both of which have led to increasingly erratic policymaking.

These security and economic challenges are taking place at a time when the transition from the so-called fourth generation of leaders to the fifth generation in 2012 is under way. The transition has heightened disagreements over economic policy and insecurities over social stability, further complicating attempts to coordinate effective policy. Yet something deeper is driving the Communist Party of China’s (CPC’s) anxiety and heavy-handed security measures: the need to transform the country’s entire economic model, which carries hazards that the Party fears will jeopardize its very legitimacy.


Deng’s Model

Former paramount leader Deng Xiaoping is well known for launching China’s emergence from Mao’s Cultural Revolution and inaugurating the rise of a modern, internationally oriented economic giant. Deng’s model rested on three pillars.

The first was economic pragmatism, allowing for capitalist-style incentives domestically and channels for international trade. Deng paved the way for a growth boom that would provide employment and put an end to the preceding decade of civil strife. The CPC’s legitimacy thus famously became linked to the country’s economic success rather than to ideological zeal and class warfare.

The second pillar was a foreign policy of cooperation. The lack of emphasis on political ideology opened space for international maneuver, with economic cooperation the basis for new relationships. This gave enormous impetus to the Sino-American detente Nixon and Mao initiated. In Deng’s words, China would maintain a low profile and avoid taking the lead. China would remain unobtrusive to befriend and do business with almost any country — as long as it recognized Beijing as the one and only China.

The third pillar was the primacy of the CPC’s system. Reform of the political system along the lines of Western countries could be envisioned, but in practice would be deferred. That the reform process in no way would be allowed to undermine Party supremacy was sealed after the mass protests at Tiananmen, which the military crushed after a dangerous intra-Party struggle. The People’s Liberation Army (PLA) and the People’s Armed Police would serve as Deng’s “Great Wall of steel” protecting the Party from insurrection.

For three decades, Deng’s model remained mostly intact. Though important modifications and shifts occurred, the general framework stands because Chinese-style capitalism and partnership with the United States have served the country well. Deng also secured his policy by establishing a succession plan: He was instrumental in setting up his immediate successor, Jiang Zemin, and Jiang’s successor, current President Hu Jintao.

Hu’s policies have not differed widely in practice from Deng’s. China’s response to the global economic crisis in 2008 revealed that Hu sought recourse to the same export- and investment-driven growth as his predecessors. Hu’s plans of boosting household consumption have failed, the economy is more off-balance than ever, and the interior remains badly in need of development. But along the general lines of Deng’s policy, the country has continued to grow and stay out of major conflict with the United States and others, and the Party has maintained indisputable control.


Emergent Challenges

Unprecedented challenges to Deng’s model have emerged in recent years. These are not challenges involving individuals; rather, they come from changes in the Chinese and international systems.

First, more clearly than ever, China’s economic model is in need of restructuring. Economic crisis and its aftermath in the developed world have caused a shortfall in foreign demand, and rising costs of labor and raw materials are eroding China’s comparative advantage even as its export sector and industries have built up extraordinary overcapacity.

Theoretically, the answer has been to boost household consumption and rebalance growth — the Hu administration’s policy — but this plan carries extreme hazards if aggressively pursued. If consumption cannot be generated quickly enough to pick up the slack — and it cannot within the decade period that China’s leaders envision — then growth will slow sharply and unemployment will rise. These would be serious threats to the CPC, the legitimacy of which rests on providing growth. Hence, the attempt at economic transition has hardly begun.

Not coincidentally, movements have arisen that seek to restore the Party’s legitimacy to a basis not of economics but of political power. Hu’s faction, rooted in the Chinese Communist Youth League (CCYL), has a doctrine of wealth redistribution and Party orientation. It is set to expand its control when the sixth generation of leaders arrives. This trend also exists on the other side of the factional divide. Bo Xilai, the popular Party chief in Chongqing, is a “princeling.” Princelings are the children of Communist revolutionaries, who often receive prized positions in state leadership, large state-owned enterprises and the military. This group is expected to gain the advantage in the core leadership after the 2012 transition. Bo made himself popular by striking down organized-crime leaders who had grown rich and powerful from new money and by bribing officials. Bo’s campaign of nostalgia for the Mao era, including singing revolutionary songs and launching a “Red microblog” on the Internet, has proved hugely popular. It also has added an unusual degree of public support to his bid for a spot on the Politburo Standing Committee in 2012. Both sides appeal to the inherent value of the Party, rather than its role as economic steward, for justification.

The second challenge to Deng’s legacy has arisen from the military’s growing self-confidence and confrontational attitude toward foreign rivals, a stance popular with an increasingly nationalist domestic audience. The foreign policy of inoffensiveness for the sake of commerce thus has been challenged from within. Vastly more dependent on foreign natural resources, and yet insecure over prices and vulnerability of supply lines, China has turned to the PLA to take a greater role in protecting its global interests, especially in the maritime realm. As a result, the PLA has become more forceful in driving its policies.

In recent years, China has pushed harder on territorial claims and more staunchly defended partners like North Korea, Iran, Pakistan and Myanmar. This trend, especially observable throughout 2010, has alarmed China’s neighbors and the United States. The PLA is not the only institution that seems increasingly bold. Chinese government officials and state companies have also caused worry among foreigners. But the military acting this way sends a particularly strong signal abroad.

And third, Deng’s avoidance of political reform may be becoming harder to maintain. The stark disparities in wealth and public services between social classes and regions have fueled dissatisfaction. Arbitrary power, selective enforcement of the law, official and corporate corruption, and other ills have gnawed at public content, giving rise to more and more frequent incidents and outbursts. The social fabric has been torn, and leaders fear that it could ignite with widespread unrest. Simultaneously, rising education, incomes and new forms of social organization like non-governmental organizations and the Internet have given rise to greater demands and new means of coordination among dissidents or opposition movements.

In this atmosphere, Premier Wen Jiabao has become outspoken, calling for the Party to pursue political reforms in keeping with economic reforms. Wen’s comments contain just enough ambiguity to suggest that he is promoting substantial change and diverging from the Party, though in fact he may intend them only to pacify people by preserving hope for changes in the unspecified future. Regardless, it is becoming harder for the Party to maintain economic development without addressing political grievances. Political changes seem necessary not only for the sake of pursuing oft-declared plans to unleash household consumption and domestic innovation and services, but also to ease social discontent. The Party realizes that reform is inevitable, but questions how to do it while retaining control. The possibility that the Party could split on the question of political reform, as happened in the 1980s, thus has re-emerged.

These new challenges to the Deng approach reveal a rising uncertainty in China about whether his solutions are adequate to secure the country’s future. Essentially, the rise of Maoist nostalgia, the princelings’ glorification of their Communist bloodline and the CCYL’s promotion of ideology and wealth redistribution imply a growing fear that the economic transition may fail, and that the Party therefore may need a more deeply layered security presence to control society at all levels and a more ideological basis for the legitimacy of its rule. Meanwhile, a more assertive military implies growing fears that a foreign policy of meekness and amiability is insufficient to protect China’s access to foreign trade from those who feel threatened by China’s rising power, such as Japan, India or the United States. Finally, a more strident premier in favor of political reform suggests fear that growing demands for political change will lead to upheaval unless they are addressed and alleviated.


Containing the Risks

These emerging trends have not become predominant yet. At this moment, Beijing is struggling to contain these challenges to the status quo within the same cycle of tightening and loosening control that has characterized the past three decades. Though the cycle is still recognizable, the fluctuations are widening — and the policy reactions are becoming more sudden and extreme.

The country is continuing to pursue the same path of economic development, even sacrificing more ambitious rebalancing to re-emphasize, in the 2011-15 Five-Year Plan, what are basically the traditional methods of growth. These include massive credit expansion fueling large-scale infrastructure expansion and technology upgrades for the export-oriented manufacturing sector, all provided for by transferring wealth from depositors to state-owned corporations and local governments. Modifications to the status quo have been slight, and radical transformation of the overall growth model has not yet borne fruit.

In 2011, China’s leaders also have signaled a swing away from last year’s foreign policy assertiveness. Hu and Obama met in Washington in January and declared a thaw in relations. Recently, Hu announced a “new security concept” for the region. He said that cooperation and peaceful negotiation remain official Chinese policy, and that China respects the “presence and interests” of outsiders in the region, a new and significant comment in light of the U.S. re-engagement with the region. The United States has approved China’s backpedaling, saying the Chinese navy has been less assertive this year than the last, and Washington has since toned down its own threats. China’s retreat is not permanent, and none of its neighbors have forgotten its more threatening side. But China has signaled an attempt to diminish tensions, as it has done in the past, to avoid provoking real trouble abroad (while focusing on troubles at home) for the time being.

Finally, the security crackdown under way since February — part of a longer trend of security tightening since at least 2008, but with remarkable new elements — shows that the state remains committed to Deng’s general deferral of political reform, choosing strict social control instead.

The Deng model thus has not yet been dismantled. But the new currents of military assertiveness, ideological zeal and demand for political reform have revealed not only differences in vision among the elite, but a rising concern among them for their positions ahead of the leadership transition. Sackings and promotions already are accelerating. Unorthodox trends suggest that leaders and institutions are hedging political bets to protect themselves, their interests and their cliques in case the economic transition goes wrong or foreigners take advantage of China’s vulnerabilities, or ideological division and social revolt threaten the Party. And this betrays deep uncertainties.


The Gravity of 2012

As the jockeying for power ahead of the 2012 transition has already begun in earnest, signs of vacillating and conflicting policy directives suggest that the regime is in a constant state of policy adjustment to try to avoid an extreme shift in one direction or another. Tensions are rising between leaders as they try to secure their positions without upsetting the balance and jeopardizing a smooth transfer of power. The government’s arrests of dissidents underline its fear of these growing tensions, as well as its sharp reactions to threats that could disrupt the transition or cause broader instability. Everything is in flux, and the cracks in the system are widening.

One major question is how long the Party will be able to maintain the current high level of vigilance without triggering a backlash. The government effectively has silenced critics deemed possible of fomenting a larger movement. The masses have yet to rally in significant numbers in a coordinated way that could threaten the state. But the regime has responded disproportionately to the organizational capabilities that the small Jasmine protests demonstrated, and has extended this magnified response to a number of otherwise-familiar spontaneous protests and incidents of unrest.

As security becomes more oppressive in the lead up to the transition — with any easing of control unlikely before then or even in the following year as the new government seeks to consolidate power — the heavy hand of the state runs the risk of provoking exactly the type of incident it hopes to prevent. Excessive brutality, or a high-profile mistake or incident that acts as a catalyst, could spark spontaneous domestic protests with the potential to spread.

Contrasting Deng’s situation with Hu’s is illuminating. When Deng sought to step down, his primary challenges were how to loosen economic control, how to create a foreign policy conducive to trade, and how to forestall democratic challenges to the regime. He also had to leverage his prestige in the military and Party to establish a reliable succession plan from Jiang to Hu that would set the country on a prosperous path.

As Hu seeks to step down, his challenges are to prevent economic overheating, counter any humiliating turn in foreign affairs such as greater U.S. pressure, and forestall unrest from economic left-behinds, migrants or other aggrieved groups. Hu cannot allow the Party (or his legacy) to be damaged by mass protests or economic collapse on his watch. Yet, like Jiang, he has to control the process without having Deng’s prestige among the military ranks and without a succession plan clad in Deng’s armor.

More challenging still, he has to do so without a solid succession plan. Hu is the last Chinese leader Deng directly appointed. It is not clear whether China’s next generation of leaders will augment Deng’s theory, or discard it. But it is clear that China is taking on a challenge much greater than a change in president or administration. It is an existential crisis, and the regime has few choices: continue delaying change even if it means a bigger catastrophe in the future; undertake wrenching economic and political reforms that might risk regime survival; or retrench and sacrifice the economy to maintain CPC rule and domestic security. China has already waded deep into a total economic transformation unlike anything since 1978, and at the greatest risk to the Party’s legitimacy since 1989. The emerging trends suggest a likely break from Deng’s position toward heavier state intervention in the economy, more contentious relationships with neighbors, and a Party that rules primarily through ideology and social control.

[G M]

http://www.reuters.com/article/2011/04/19/singapore-china-yuan-idUSL3E7FI3NA20110419

China began allowing its currency to be used to settle international trades in 2009 through a scheme involving several Chinese cities along with Hong Kong, Macau and various Southeast Asian countries, including Singapore. The scheme was extended to the rest of the world in 2010.

Hong Kong is, however, currently the only place outside China where yuan trades can be settled via a Chinese bank. That is one of the main reasons why CNH, or offshore yuan in Hong Kong, trading volumes have surged and are expected to hit $1 billion a day this year.

"China needs more such centres after first data showed a slowdown in the pace of shift of China's trade to yuan, and Singapore needs the ability to clear trades in order to compete with Hong Kong," said Dariusz Kowalczyk, a senior economist and strategist at Credit Agricole in Hong Kong.

"Such a development would be in line with our expectation of China establishing more yuan offshore centres to speed up the process of yuan internationalization." he added. <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ Chin 's web of currency swap deals: [ID:nL3E7FI0L6] China may permit yuan FDI this year: [ID:nL3E7FJ01W] CNH market developments and news: ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^


The Wall Street Journal, citing unnamed sources, reported last week that China was weighing steps to expand trading of its currency outside the mainland and may select Singapore as a second yuan-trading hub after Hong Kong. [ID:nL3E7FB0GW]

Monetary Authority of Singapore (MAS) Chairman Goh Chok Tong told reporters in Beijing that the People's Bank of China (PBOC) will soon pick an approved Chinese bank in Singapore to clear yuan trades.

PBOC may also give MAS a qualified foreign institutional investor (QFII) licence to invest in onshore Chinese financial products, Goh said.

Approval of such a license would allow financial institutions in Singapore to attract investors with the prospect of being able to invest directly in mainland Chinese markets. China's capital account is largely sealed, preventing foreign investors from gaining exposure to the fast-growing economy.

MAS already has a S$30 billion ($24 billion) currency swap agreement with China to ensure yuan liquidity in Singapore.


HONG KONG'S "CNH" MARKET TO STAY DOMINANT

Analysts said that while Singapore will likely grab a large slice of the fast-growing offshore yuan business, the PBOC will ensure that Hong Kong, a special territory of China, remains the paramount centre, a view that Goh also expressed.

"We have no ambition to try and rival Hong Kong. Singapore cannot rival it because Hong Kong is part of China. It is close to China; it has got much more trade with China," the Straits Times newspaper quoted Goh as saying on Tuesday.

Goh, Singapore's former prime minister, said that the city could play a primary role in facilitating yuan-denominated trade between China and the countries of Southeast Asia and India.

The Straits Times said the designated Chinese bank for clearing yuan trades in Singapore was likely to be either Bank of China or Industrial and Commercial Bank of China (ICBC) .

The Business Times newspaper noted ICBC recently set up a yuan-processing centre in Singapore for Southeast Asia. ICBC is lobbying hard to become the yuan clearing bank for Singapore, a source told Reuters.

Singapore is Asia's trading hub for many of the commodities that China imports. More than 3,000 mainland firms operate in the city and the offshore arm of China's CITIC Bank said recently it saw great potential for developing a yuan business in Singapore.

The city-state is also the world's fourth largest forex trading centre, behind New York, London and Tokyo but ahead of Hong Kong and Sydney.

While there is no official data on the amount of yuan deposits held in Singapore, the city-state's three big lenders DBS , Oversea-Chinese Banking Corp and United Overseas Bank , all offer yuan deposits.

Singapore is also Asia's biggest hub for private banking and investors have access to several funds that invest yuan-denominated bonds as well as shares listed on the Shanghai and Shenzhen exchanges.

Separately, a HSBC spokeswoman in Singapore told Reuters the bank has to-date raised over 1.5 billion yuan in yuan deposits in the Southeast Asia city-state.

[G M]

http://online.wsj.com/article/SB10001424052748704740204576272802457892870.html

HONG KONG—China is accelerating efforts to push its currency deeper into world markets, racing ahead with a series of moves toward a new financial ecosystem with the yuan at its center.

A senior Hong Kong monetary official told The Wall Street Journal on Tuesday that China's central bank is "actively considering" new rules that would make it easier to bring yuan funds raised offshore back onto the Chinese mainland.

 
Javier David talks to Paul Vigna and George Stahl about the factors weighing on the U.S. dollar as well as China's efforts to push its currency into world markets.
.Changing those rules would remove a choke point threatening the fast-growing market for the Chinese currency—also known as the renminbi—that is developing in Hong Kong and elsewhere outside mainland China's borders. Currently, Chinese officials have to approve bringing any sizeable amount of currency—foreign and domestic—into the country. That system is aimed at closely managing the exchange rate and preventing speculation in the yuan.

New rules would make it easier and more attractive for global companies to access cheap funding in Hong Kong's yuan-bond markets and then use that money to boost their China business. They also bring the currency closer to a point where its value might be determined by the market, as are the values of the dollar, euro and all other major currencies.

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.
But while many people believe China will continue to institute changes, full convertibility could be a long way off, and China may opt to stick with limited convertibility.

Eventually, wider use of the yuan outside China could redefine the balance of power in global currency markets, and in the broader economy, as the rest of the world begins trading more yuan-based assets and settling its bills with China in renminbi instead of the U.S. dollar, the global standard since the end of World War II.

Western and Chinese companies would be able to issue bonds or stocks in yuan and invest the proceeds in China without having to convert into or out of dollars, euros or any other currency along the way, as they've had to in the past when raising money abroad.

 .
Ultimately, greater demand for renminbi could lessen demand for the dollar, raising U.S. interest rates and borrowing costs for everyone from the federal government to home owners.

Further evidence that Beijing is reducing its reliance on the dollar came Monday, when a state-run news agency reported that 7% of China's foreign trade in the first quarter was conducted in yuan, up from 0.5% a year earlier.

Concerns about the dollar's longer-term prospects contribute a sense of urgency to China's ambitions. China now holds more than $3 trillion in foreign exchange reserves, most of that in dollars.

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Reuters
 
China maintains tight control of its capital account, and some officials have expressed concern that excessive trade in the yuan outside China could allow speculators to destabilize the domestic monetary system. But despite that, officials in China and Hong Kong are pushing ahead with several plans that weave China's currency more closely into the global marketplace.
.
The risks of dollar exposure were underscored when Standard & Poor's cut its outlook on U.S. government debt to "negative" Monday, unnerving global markets. Shares in both mainland China and Hong Kong fell on the news.

In a brief statement on the Chinese Foreign Ministry's website, ministry spokesman Hong Lei called on Washington to take "responsible policies and measures" to protect the interest of investors. A declining greenback hurts the value of China's vast dollar holdings.

The impact of such a change could be significant. Jun Ma, chief China economist for Deutsche Bank AG, noted that last year China attracted $100 billion in foreign investment. "If only a small percentage of that is in RMB, that will be a huge number," he said. Mr. Ma said he believed the new rules were "likely to come out in months."

Most of 44 multinational companies Mr. Ma surveyed said they would use yuan to invest in China if regulations allowed. Raising yuan offshore would reduce currency risks and would allow them to replace high-cost loans in China, where interest rates are over 6%, with low-cost financing from Hong Kong, where interest rates are around 2.6%.

China maintains tight control of its capital account, and some officials have expressed concern that excessive trade in the yuan outside China could allow speculators to destabilize the domestic monetary system.

But despite that, officials in China and Hong Kong are pushing ahead with several plans that weave China's currency more closely into the global marketplace.

[Body-by-Guinness]

Latest Directives From the Ministry of Truth, April 11-April 19, 2011

The following examples of censorship instructions, issued to the media and/or Internet companies by various central (and sometimes local) government authorities, have been leaked and distributed online. Chinese journalists and bloggers often refer to those instructions as “Directives from the Ministry of Truth.” CDT has collected the selections we translate here from a variety of sources and has checked them against official Chinese media reports to confirm their implementation.

http://chinadigitaltimes.net/china/ministry-of-truth/

[G M]

http://globalspin.blogs.time.com/2011/05/21/facing-the-threat-of-piracy-china-starts-to-talk-like-a-superpower/

The PLA knows how to deal with hostile muslims. Just ask the Uighurs in Xinjiang.

[G M]

http://www.abc.net.au/foreign/

Watch "True Believers".

The Chinese Ministry for State Security has a reputation for very advanced skills in the realm of physical surveillance. This video is very damaging to that reputation.

[G M]

http://business.financialpost.com/2011/06/01/china%E2%80%99s-millionaires-leap-past-one-million/

China’s millionaires leap past one million

Nothing says marxism like a gold plated Infiniti.

[G M]

http://the-diplomat.com/2011/06/03/the-sad-truth-of-china%E2%80%99s-education/



Next week, Chinese students take the national college entrance exam. It’s the soul-destroying culmination of years of study. And as good as it gets.

[DougMacG]

Wrong so far, but I always have doubts that China can continue forward as it is.  I wish for them a stumble only big enough to shake off their rule by the communist-oppressioninsts, and then nothing but continued economic growth and success.

http://ori.cnbc.com/id/43403189
How China Could Yet Fail Like Japan
14 Jun 2011
By: Martin Wolf

Until 1990, Japan was the most successful large economy in the world. Almost nobody predicted what would happen to it in the succeeding decades. Today, people are yet more in awe of the achievements of China. Is it conceivable that this colossus could learn that spectacular success is a precursor of surprising failure? The answer is: yes.

Eightfish | Getty Images
Japan’s gross domestic product per head (at purchasing power parity) jumped from a fifth of U.S. levels in 1950 to 90 percent in 1990. But this spectacular convergence went into reverse: by 2010, Japan’s GDP per head had fallen to 76 per cent of U.S. levels. China’s GDP per head jumped from 3 percent of U.S. levels in 1978, when Deng Xiaoping’s “reform and opening up” began, to a fifth of U.S. levels today. Is this going to continue as spectacularly over the next few decades or could China, too, surprise on the downside?

It is easy to make the optimistic case. First, China has a proven record of success, with an average rate of economic growth of 10 percent between 1979 and 2010. Second, China is a long way from the living standards of the high-income countries. Relative to the U.S., its GDP per head is where Japan’s was in 1950, before a quarter century of further rapid growth. If China matched Japan’s performance, its GDP per head would be 70 percent of U.S. levels by 2035 and its economy would be bigger than those of the U.S. and European Union, combined.

Yet counter-arguments do exist. One is that China’s size is a disadvantage: in particular, it makes its rise far more dramatic for the demand for resources than anything that has gone before. Another is that the political effects of such a transformation might be disruptive for a country run by a Communist party. It is also possible, however, to advance purely economic arguments for the idea that growth might slow more abruptly than most assume.

Such arguments rest on two features of China’s situation. The first is that it is a middle-income country. Economists increasingly recognize a “middle-income trap”. Thus, sustaining rapid increases in productivity and managing huge structural shifts as the economy becomes more sophisticated is hard. Japan, South Korea, Taiwan, Hong Kong and Singapore are almost the only economies to have managed this feat over the past 60 years.

RELATED STORIES

Current DateTime: 11:21:13 15 Jun 2011
LinksList Documentid: 43403188

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Happily, China has close cultural and economic similarities with these east Asian successes. Unhappily, China shares with these economies a model of investment-led growth that is both a strength and a weakness. Moreover, China’s version of this model is extreme. For this reason, it is arguable that the model will cause difficulties even before it did in the arguably less distorted case of Japan.

Premier Wen Jiabao has himself described the economy as “unstable, unbalanced, uncoordinated and ultimately unsustainable”. The nature of the challenge was made evident to me during discussions of the 12th five year plan at the China Development Forum 2011 in Beijing in March. This new plan calls for a sharp change in the pace and structure of economic growth. In particular, growth is forecast to decline to just 7 percent a year. More important, the economy is expected to rebalance from investment, towards consumption and, partly as a result, from manufacturing towards services.

The question is whether these shifts can be managed smoothly. Michael Pettis of Peking University’s Guanghua School of Management has argued that they cannot be. His argument rests on the view that in the investment-led growth model, repression of household incomes plays a central role by subsidizing that investment. Removing that repression – a necessary condition for faster growth of consumption – risks causing a sharp slowdown in output and a still bigger slowdown in investment. Growth is driven as much by subsidized expansion of capacity as by the profitable matching of supply to final demand. This will end with a bump.

Investment has indeed grown far faster than GDP. From 2000 to 2010, growth of gross fixed investment averaged 13.3 percent, while growth of private consumption averaged 7.8 percent. Over the same period the share of private consumption in GDP collapsed from 46 per cent to a mere 34 percent, while the share of fixed investment rose from 34 percent to 46 percent. (See charts.)

Professor Pettis argues that suppression of wages, huge expansions of cheap credit and a repressed exchange rate were all ways of transferring incomes from households to business and so from consumption to investment. Dwight Perkins of Harvard argued at the China Development Forum that the “incremental capital output ratio” – the amount of capital needed for an extra unit of GDP – rose from 3.7 to one in the 1990s to 4.25 to one in the 2000s. This also suggests that returns have been falling at the margin.

If this pattern of growth is to reverse, as the government wishes, the growth of investment must fall well below that of GDP. This is what happened in Japan in the 1990s, with dire results. The thesis advanced by Prof Pettis is that a forced investment strategy will normally end with such a bump. The question is when. In China, it might be earlier in the growth process than in Japan because investment is so high. Much of the investment now undertaken would be unprofitable without the artificial support provided, he argues. One indicator, he suggests, is rapid growth of credit. George Magnus of UBS also noted in the FT of May 3 2011 that the credit-intensity of Chinese growth has increased sharply. This, too, is reminiscent of Japan as late as the 1980s, when the attempt to sustain growth in investment-led domestic demand led to a ruinous credit expansion.

As growth slows, the demand for investment is sure to shrink. At growth of 7 percent, the needed rate of investment could fall by up to 15 percent of GDP. But the attempt to shift income to households could force a yet bigger decline. From being a growth engine, investment could become a source of stagnation.

The optimistic view is that China’s growth potential is so great that it can manage the planned transition with ease. The pessimistic view is that it is hard for a country investing half of GDP to decelerate smoothly. I expect the transition to slower economic growth and greater reliance on consumption to be quite bumpy. The Chinese government is skilled. But it cannot walk on water. The water it is going to have to walk on over the next decade is going to be choppy. Watch out for the waves.

[G M]

China has been described as an ocean of gasoline just waiting for a spark. A serious global economic downturn could be that spark. Right now, the CCP keeps in power because enough rice bowls are being filled and the standard of living has improved for many. Any loss of the forward momentum and things get very unstable very quickly.

[DougMacG]

The Chinese economy has had a hell of a roll.  Also has real structural weaknesses.  Predicting past growth rates will go on forever is

http://www.bloomberg.com/news/2011-06-27/why-china-s-heading-for-a-hard-landing-part-1-a-gary-shilling.html
Why China’s Heading for a Hard Landing, Part 1: A. Gary Shilling

Few countries are more important to the global economy than China. But its reputation as an unstoppable giant -- as a country with an unending supply of cheap labor and limitless capacity for growth -- masks some serious and worsening economic problems.

China’s labor force is aging. Its consumers save too much and spend too little. Its political and economic policy tools remain crude. Its state bureaucracy seems likely to curb spending just as exports weaken, and thus risks deflation. As U.S. consumers retrench, and as the global commodity bubble begins to dissipate, these fundamental weaknesses will combine in a way that’s unlikely to end well for China -- or for the rest of the world.

To start, China is much more vulnerable to an international slowdown than is generally understood. In late 2007, my firm’s research found that too few people in China had the discretionary spending capability to support its economy domestically. Our analysis showed that it took a per-capita gross domestic product of about $5,000 to have meaningful discretionary spending power in China.

About 110 million Chinese had that much or more, but they constituted only 8 percent of the population and accounted for just 35 percent of GDP in 2009, while exports accounted for 27 percent. Even China’s middle and upper classes had only 6 percent of Americans’ purchasing power.

With such limited domestic spending, why do so many analysts predict that China can continue its robust growth?

In part because they believe in the misguided concept of global decoupling -- the idea that even if the U.S. economy suffers a setback, the rest of the world, especially developing countries such as China and India, will continue to flourish. Recently -- after China’s huge $586 billion stimulus program in 2009; massive imports of industrial materials such as iron ore and copper; booms in construction of cement, steel and power plants, and other industrial capacity; and a pickup in economic growth -- the decoupling argument has been back in vogue.

This concept is flawed for a simple reason: Almost all developing countries depend on exports for growth, a point underscored by their persistent trade surpluses and the huge size of Asian exports relative to GDP. Further, the majority of exports by Asian countries go directly or indirectly to the U.S. We saw the effects of this starting in 2008: As U.S. consumers retrenched and global recession reigned, China and most other developing Asian countries suffered keenly.

Overconfidence in China’s ability to keep its economy booming is also partly psychological. It reminds me of the admiration and envy (even fear) that many felt toward Japan during its bubble days in the 1980s. As Japanese companies bought California’s Pebble Beach, Iowa farmland and Rockefeller Center in New York, what was safe from their zillions? Then the Japanese stock and real-estate bubbles collapsed, and Japan entered the deflationary depression in which it’s still mired.
Success and Complacency

What’s more, China’s recent successes have been so pronounced that they’ve led many to conclude that its economy is a juggernaut. And, indeed, the Chinese have much to be proud of: Last year, China passed Japan to become the world’s second largest economy, a huge achievement considering China started in the late 1970s with a tiny pre-industrialized economy.

But this success may have led to complacency. I suspect that the 2007-2009 global recession, and the dramatic transformation by U.S. consumers from gay-abandon borrowers-and- spenders to Scrooge-like savers, caught Chinese leaders flat- footed. They probably planned to encourage consumer spending and domestic-led growth, but later -- much later.

They were enjoying a well-oiled growth machine. Growing exports, especially to American consumers, stimulated the capital spending needed to produce yet more exports and jobs for the millions of Chinese streaming from farms to cities. Wages remained low, due to ample labor supplies, and held down consumer spending. So did the high Chinese consumer saving rate. Because Chinese could not invest offshore, much of that saving went into state banks at low interest rates. The money was then lent to the many inefficient government-owned enterprises at subsidized rates.

In a country where stability is almost worshipped, why would any leader want to disrupt such a smoothly running economy?

But before you worry about China’s becoming No. 1 any time soon, consider the remaining gap between its economy and the U.S. economy. In 2009, China’s GDP was $4.9 trillion, only 34 percent of the U.S.’s $14.3 trillion. Because China has 1.32 billion people, or 4.3 times as many as the U.S. has, the gap in per-capita GDP was even bigger: China’s $3,709 was only 8 percent of the U.S.’s $46,405.

[Crafty_Dog]

I've commented here more than once about China's weird demographic profile, its cooked bookkeeping, and its rape of its environment and that of the planet.  Doug's post seems sound to me.

[Crafty_Dog]

Lost in the worry over Greek debt defaults, China Daily reports on a default story of more significance. Please consider Local governments run up huge debts, risk defaulting

Local governments had an overall debt of 10.7 trillion yuan ($1.65 trillion) by the end of 2010, said China's top auditor on Monday in a report to the National People's Congress.

He warned that some were at risk of defaulting on payments.

It was the first time the world's second-largest economy publicly announced the size of its local governments' debts. The scale amounts to more than one-quarter of its GDP in 2010, which stood at 39.8 trillion yuan.

Concerns are rising that the problem of local government debt could destabilize the financial system of the country if it is not managed properly, especially after the central government's tightening of the housing market, which could affect local fiscal revenue that is highly dependent on land sales and make debt repayment more difficult.

In addition, China's ambitious plan to construct 36 million affordable homes during the coming five years, including 10 million in 2011 and 10 million in 2012, added to worries about increasing capital tension and rising non-performing loans in commercial banks.

About 79 percent of the local government loans were made by banks across the country, according to the NAO.

Lu Zhengwei, chief economist at the Industrial Bank, said the figures released were moderate compared with previous estimates, and risks lying in these loans are quite limited.

"Overdue loans take up only a small proportion of the total lending and local governments didn't pay them in a timely way mainly because deadlines were too concentrated, not because of deteriorated ability to repay."
$1.65 Trillion is a mountain of cash even to the US. How much of that is at risk is the question, but even 10% would be significant.

Moreover, it is certain that what cannot be paid back, won't be paid back. As in the US, once assets backing loans crash, so will willingness and ability to pay back the loans. Thus, efforts by some to downplay the odds should fall on deaf ears.

Speculation in China is as least as rampant as it was in the US. For example, please consider Ponzi Financing Involving Copper Trade Gone Wild In China.

Also consider Wave of Violent Protests, Rioting, Bombings Hits China; Expect More Riots When China's Credit Bubble Pops, Exposing Mountains of Fraud

Finally, please consider World's Biggest Property Bubble: China's Ghost Cities Revisited; 64 Million Vacant Properties

As long as credit bubbles expand, no one heeds warnings like that issued by China's top auditor. Then when the bubble bursts, everyone cries they were not warned, they were taken advantage of, and they deserve a bailout.

One thing's for certain, when China's credit bubble pops, it will rock the world.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
========================
Also see http://globaleconomicanalysis.blogspot.com/2011/03/worlds-biggest-property-bubble-chinas.html

[Crafty_Dog]

The Chinese government and its media outlets are using Standard & Poor's U.S. credit downgrade to give Washington a tongue lashing for its "debt addiction." And it's no surprise that Beijing would take the chance to score points domestically and rebuke the know-it-alls at the U.S. Treasury, having been on the receiving end of their hectoring for so long.

On the other hand, who are the Chinese kidding with their chest-pounding economic nationalism? A People's Daily commentary yesterday threatened to use China's holdings of U.S. debt as a "financial weapon" to deter arms sales to Taiwan. The official Xinhua news agency's Saturday editorial was a hilarious moral lecture, suggesting that an addicted America's ability to print dollars should be put under "international supervision." But if borrowing is really an addiction that has sapped America's self-discipline, China is both the pusher and a user.

The real reason Beijing is anthropomorphizing the bond market is to deflect domestic criticism over losses on the investment of its $3.2 trillion in foreign exchange reserves. Chinese are asking why Beijing continues to lend their wealth to Americans rather than using it on development at home. The question arises from a misconception that Beijing has encouraged, which is that the reserves represent the earnings of the Chinese people, their "blood and sweat."

The reality is less admirable. The People's Bank of China (PBoC) accumulated its forex reserves by borrowing yuan from the Chinese people. The U.S. dollar assets and yuan liabilities are roughly balanced on the central bank's balance sheet. If the U.S. government is addicted to debt, so is China's.

The purpose of that precarious balance sheet is to subsidize exports by keeping the yuan's value low and deferring inflation. An economy like China's that is enjoying rapid productivity growth would normally see rising real wages and hence benign inflation that would increase the cost of its exports. Because that process has been stopped, China's exporters remain competitive across a range of labor-intensive products such as shoes and garments in which the country no longer has a true comparative advantage.

Were the PBoC to stop buying U.S. Treasurys and other dollar assets, the result would be an immediate increase in the yuan's value. The losses on U.S. investments as the yuan slowly appreciates are one part of the cost for the export-subsidy policy.

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Getty Images
 .The Chinese economy has become dangerously dependent on exports and investment in future export capacity for growth. Unwinding that dependence and encouraging domestic consumption requires boosting household incomes, which have been depressed by low interest rates on savings—another cost of Beijing's policies. Chinese leaders have been talking about rebalancing the economy in favor of consumption for the better part of a decade, but that can't happen as long as they continue to accumulate reserves.

In the short term Chinese threats to stop buying U.S. debt are empty, since there are no other asset markets deep and liquid enough to absorb the purchases needed to keep the yuan stable. Were China to buy euros or yen in sufficiently large quantities, it would soon run into a protectionist backlash in Europe and Japan as those nations ran trade deficits. The U.S. willingness to run a persistent trade deficit is key to the dollar's status as a reserve currency.

In the longer term, the world should hope that China does stop buying U.S. debt and makes the yuan convertible. China's economic policy makers understand that they have to liberalize their financial system and integrate it into the world economy. But that also means freeing the system from Communist Party political control, as well as breaking with powerful state-owned enterprises that benefit from export subsidies and cheap credit. This makes agreement between President Obama and the tea party look easy by comparison.

The U.S. has certainly allowed unsustainable spending to continue too long. But the Chinese should refrain from self-congratulation. They'll endure more painful withdrawal symptoms than the U.S. will when the PBoC ends its own unsustainable borrowing.

[G M]

Things slow down enough in the global economy, the survival of the CCP would be in doubt.

[ccp]

China’s aircraft-carrier
Name and purpose to be determined
The Chinese navy takes a much-heralded step forward but its intentions are vague
Aug 13th 2011 | BEIJING | from the print edition
 

 It’s definitely big, and it floats
ON AUGUST 10th, after years of secretive work, the Chinese navy launched its first aircraft-carrier on its maiden voyage. The Chinese media hailed the vessel as a sign of China’s emergence as a sea power, one they insist has only peaceful intent. Its neighbours are not so delighted.

State-controlled media had been predicting the ship’s imminent launch for weeks, prompting Chinese military enthusiasts to converge on the north-eastern port city of Dalian in the hope of seeing it set out. One newspaper said a fire escape on a nearby IKEA store was a good vantage point, but the Chinese navy kept quiet about when the date would be.
It has reason to be diffident. The ship is hardly a symbol of China’s prowess in technology. It was bought in 1998 from Ukraine, where it had been rusting half-finished since its first launch a decade earlier. The Ukrainians were told it would be used as a floating casino (they sold it without weapons or engines). But unlike two other ex-Soviet carriers in China that ended up as theme parks, this one was taken to a navy shipyard where, in 2005, it got a telltale coat of Chinese military paint. It was not until July that China confirmed it had been refitting the ship.

China has been mulling plans to build an aircraft-carrier since at least the 1970s. Officials debated how useful one would be in a conflict over Taiwan, the military planners’ main preoccupation until a few years ago. Land-based aircraft and missiles could be deployed easily across the Taiwan Strait. But in the past decade China has become more focused on acquiring the means to project power farther afield, the better to defend shipping lanes, it says, and to help relief efforts.

Other countries in the region believe China also wants to assert territorial claims in the South China Sea more vigorously. Vietnam and the Philippines have been complaining in recent months about what they see as a more aggressive posture by China in that area. There had been speculation that the aircraft-carrier would be launched in time for the Communist Party’s 90th birthday on July 1st. It is possible that its leaders decided that a lower-key affair a few weeks later might avoid stoking the neighbours’ suspicions.

For the time being the region’s pre-eminent naval power, America, is showing little sign of concern. The Chinese carrier’s actual deployment might yet be years away. China will take longer still to gain the expertise needed to deploy a carrier-based battle group, with all its supporting vessels. It is reportedly building two more aircraft-carriers (from scratch, this time). But the Americans worry more about other bits of China’s rapidly improving arsenal, from carrier-busting missiles to submarines and land-based fighter jets.

Unlike the Soviets, the Chinese appear not to be trying to match the size and capability of America’s huge fleet. Officials describe the aircraft-carrier programme partly as a prestige project. China has been acutely conscious of being the only permanent member of the United Nations without a carrier. Its rival India has long had one. Thailand has one too. Japan, another rival, has a carrier for helicopters that could be adapted for fighters.

China’s ship does not yet have a name. In Soviet hands it was the Varyag (a sister ship is the only operational carrier in Russia’s navy). Chinese internet users have made many suggestions. Some believe it should be named after a province. Chinese heroes are also popular, especially Shi Lang, a Chinese admiral who conquered Taiwan in the 17th century. Officials would be wise to avoid that one.

from the print edition | Asia

[G M]

China’s aircraft-carrier
Name and purpose to be determined
The Chinese navy takes a much-heralded step forward but its intentions are vague

Are they? Really?

[ccp]

GM,
That was a quote from the article in Economist not me.

[G M]

GM,
That was a quote from the article in Economist not me.

I know. I was making fun of them.

[ccp]

As I think Doug pointed out the threat to Taiwan is akin to Israel's situation: 

****Can Taiwan Escape China's Ever-Tightening Embrace?

By Doug Bandow | Forbes – 20 hrs agotweet4Share0EmailPrintRelated ContentCan Taiwan Escape China's Ever-Tightening Embrace?
Kinmen Island, Taiwan—A half century ago the world seemed poised for war over the island of Kinmen, known then as Quemoy.  Today Kinmen has become a transit point between Taiwan and China, as tourists tread where bombs once fell.  But this peaceful traffic also may threaten Taiwan, albeit in a very different way.

In 1949 the Communist Party pushed Chiang Kai-shek's Republic of China off the Chinese mainland.  Chiang retreated to the island of Taiwan, seized by Japan in 1895 and returned at the end of World War II.  The ROC also retained control of several smaller islands off the mainland's coast, including Kinmen.

The newly created People's Republic of China attempted to forcibly reclaim the latter in October 1949, but failed after a three-day battle.  After that a Chinese Cold War ensued, with the Communist regime periodically shelling Kinmen and threatening another invasion.

The Nationalist government developed a vast underground military complex and honeycombed the island with bunkers.  Up into the 1980s the island was under military administration and official visitors would be flown in low over the water in military aircraft.   Although no shots had been fired in years, the potential for war seemed real.

The PRC and ROC maintained dueling claims as the sole legitimate government of China, but the balance steadily shifted in favor of the former.  Even the U.S. eventually switched recognition, though it kept close, unofficial ties with Taiwan.

Beijing's economic success has transformed the competition between the two Chinas.  Fifteen years ago China responded to Taiwan's presidential election—won by Lee Teng-hui, a strong advocate of Taiwan's sovereignty—with conveniently timed "missile tests."  Since then the PRC has abandoned overt military pressure, while refusing to formally eschew the use of military force.


Thus, the mainland's mailed fist still lurks in the background.  Indeed, both nations are engaged in almost continuous military shadow-boxing.  With great fanfare China recently launched its first aircraft carrier, the Varyag.  I was visiting Taiwan in early August when the ship began its first sea trials.  On the same day, Taiwan's Ministry of National Defense highlighted its newest cruise missile, the Hsiuing Feng III, as an "aircraft carrier killer."

But overall, worried Lin Wen-cheng, executive director of the Institute for National Policy Research, "because the balance of military power has been changed in recent decades, it is very hard to resist pressure from the PRC."  Clearly international good will is no defense.  Wang Jin-pyng, president of the Legislative Yuan (or parliament), observed:  "because there is so much unpredictability in Mainland China our security cannot solely depend on Mainland China."

So Taiwan continues to purchase weapons from the U.S.  In fact, one of the sharpest disagreements between Washington and Beijing is over U.S. arms sales to Taiwan.  While breaking relations with the ROC more than three decades ago, Washington promised to continue supplying Taipei's military.  However, China has grown increasingly angry over American transfers; after the Obama administration announced its latest package last year the PRC temporarily cut bilateral military ties.

Now the Administration reportedly has decided against selling the F-16 C/Ds needed by Taiwan to contest air superiority over the Taiwan Strait.  Vice Defense Minister Yang Nien-Dzu (Andrew) expressed concern that without the newer planes "we lose our leverage and immediately face the challenge of fulfilling our responsibility of preserving peace and stability in the region."   The issue has a diplomatic impact as well.  Explained Ambassador Chen S.F. (Stephen), now at the National Policy Foundation, a stronger defense would enhance Taiwan's bargaining power:  "when we enter into political negotiations with the mainland we need to go into negotiations from a position of strength."

With the election of Ma Ying-jeou as president in 2008, Taipei changed course, moderating its push for recognition as a separate country.  For instance, no longer is Taiwan pursuing its hopeless quest to get back into the United Nations.

China also eased the diplomatic competition.  Both governments closed their checkbooks and ended their expensive use of foreign aid to add or subtract to the 23 small nations which now recognize the ROC.

Most significant, the two nations now emphasize economic and cultural interdependence.  Investment and trade originally developed through Hong Kong.  But eventually the two Chinas dropped the pretense (and expense) of indirect dealings.

Today 70 percent of Taiwanese investment goes to the Mainland, where nearly 100,000 Taiwanese businesses operate.  The PRC accounts for 41 percent of Taiwan's international commerce.


Economic ties would increase naturally, but both Chinas are accelerating the process.  Chao Chien-min, Deputy Minister of the Mainland Affairs Council, said that Taipei is "trying to change the relationship from a one-way street to a two-way street."  So far the two countries—they actually deal with each other through unofficial organizations since neither formally recognizes the other—have reached 15 cross-strait agreements on issues ranging from tourism to fisheries to crime.

Taiwan has steadily loosened restrictions on Chinese tourists, who have become a common sight at the National Palace Museum and elsewhere.  Some 5.71 million Mainland residents have visited Taiwan since July 2008.

The most important accord, finalized last year, is the Economic Cooperation Framework Agreement, which significantly lowered economic barriers.  Tariffs on hundreds of products will be eliminated over time.

These growing economic ties have profited both sides.  However, the PRC wants more than closer relations.  It wants sovereign control.  Although Beijing has suggested some form of autonomy for Taiwan, there is no doubt where ultimate authority would lie.

Yet as economic links have tightened, the Taiwanese people have moved in the opposite direction politically, ever more determined to retain their independence, de facto if not de jure.  The more they learn about the PRC, the less it seems they want to be ruled by Beijing.

Observed Huang W.F. (David) of National Taiwan University, "more and more Taiwanese realize that they are different than people from the Mainland."  But even if they were the same, why would 23 million people wish to submerge their prosperous and robust democracy in a nation of 1.3 billion, topped by an oppressive autocracy and threatened by violent social unrest?

However, ECFA "is all about politics," wrote John Lee of Sidney's Centre for Independent Studies.  In China's view "this is about enmeshing the two economies in such a way that Taiwan's future is tied to China's."

Which is precisely what Professor Huang fears:  "our autonomy is eroding through closer economic integration with China."  He predicted that "If this goes on for ten years, Taiwan will lose its autonomy."  Huang particularly pointed to Chinese influence over the media.  Hsiao Bi-khim, a former legislator and head of the opposition Democratic Progressive Party's Department of International Affairs, voiced similar concern, stating that "some of the media practices self-censorship" in hopes of profiting from Mainland business.


Government officials respond that Chinese visitors are impressed by Taiwan's open political process and its people's willingness to criticize political leaders.  Ambassador Chen argued that Taiwan "may be the only country which can impact the development of the Mainland."  In his view, Chinese visitors "want to see the way of life here," including Taiwan's democracy.  Ding Shuh-fan (Arthur) of the Institute of International Relations contended that the way 'to improve the situation is to make people in Taiwan more identify with Taiwan," in which case they will keep their autonomy.

On the other hand, it is hard not to feel that some of these arguments are born of desperation:  Ending economic ties with the PRC is inconceivable, ergo they must be beneficial.  Hsiao Bi-khim is less sanguine:  "Instead of Taiwan trying to change China, we see China trying to change Taiwan."  This fear, she claimed, has caused an increasing number of businessmen to secretly support the DPP.

How to best preserve Taiwan's autonomy is an important issue with legislative and presidential elections scheduled for January.  Traditionally the ruling Kuomintang, or KMT, insisted that the ROC was the rightful ruler of all China.  Today the KMT promotes Taiwan's separate existence, while pressing for a more conciliatory policy towards Beijing.  President Ma has espoused "no unification, no independence, and no use of force."

Economic integration, exemplified by ECFA, is the centerpiece of KMT policy.  President Ma declared:  "We have transformed the Taiwan Strait from a danger zone into a peace corridor."  And the process is not over.  Chao Chien-min said that "if President Ma is reelected the current pace will be continued."

What of political integration, as desired by the PRC?  Ambassador Chen said President Ma has refused to talk about reunification:  "Maintenance of the status quo is his top priority."  However, some question the KMT's commitment to Taiwanese sovereignty.  Hsiao Bi-khim said "The perception of our supporters is that Ma is getting too close to China" and they "suspect that Ma would move faster [if reelected] toward political integration."

The opposition DPP once formally advocated independence.  Today it reluctantly accepts the status quo, while pushing to enlarge Taiwan's international space.  The DPP has been critical of Taiwan's growing economic dependence on the PRC.

Nevertheless, DPP presidential candidate Tsai Ing-wen has pledged to continue negotiating with China, but without preconditions.  Chao was skeptical, contending that "if the opposition wins we are going to have a problem" since the DPP does not agree with the so-called "92 consensus," by which Beijing and Taipei fudged the status of Taiwan (one China, interpreted differently).  Without that agreement, he argued, the Chinese may not continue negotiations, since doing so could lead to charges "of accommodating Taiwan's independence."  Lin Wen-cheng similarly warned that "the PRC may grow frustrated and discontinue talks" in the event of a DPP victory.

However, Hsiao Bi-khim responded that the "so-called 92 consensus is a very weak foundation."  There was no real consensus in 1992 between Taipei and Beijing, she argued, and "there is no domestically agreed to consensus."  The only real consensus might be "between the KMT and the Chinese Communist Party."


She noted that the PRC could be expected to attempt to contribute to the DPP's defeat, as in the past, but that does not mean Beijing would not talk with a Tsai government.  Hsiao said there is "no way to come up with a formulation to make China happy, so we won't try to play with words."  Instead, "we need to deal with China and build a stable framework with each other."  She said that former President Chen, the first DPP president, tried to be flexible after his election in 2000, but the PRC "was not prepared to respond" and "the window of opportunity closed quickly."

As for ECFA and the other deals, "We would constantly review them to see if they benefit or hurt the national interest."  However, "whether we should change or even eliminate them is another question."  The issue, Hsiao explained, would "need to be addressed as part of the normal democratic process like any other international agreement."

Although the DPP has emphasized domestic economic issues, Lin Wen-cheng figures that the KMT will press Tsai to answer the China question.  Until now, he said, she "has tried to avoid any discussion of this."  Yet no one really expects the DPP, even if it wins the presidency and control of the legislature, to tear up existing economic accords.

Indeed, Chang Chung-Young of Fo Guang University predicted that even "if the DPP takes power next year they might change their perspective and not go back to the confrontational perspective of three years ago."  Chyungly Lee of National Chengchi University suggested that practical necessity would triumph:  "cross-strait economic relations are irreversible."  They "cannot be reversed."

He's almost certainly correct.  Who in Taiwan wants to give up the extra money earned from commerce and tourism?  Who in Taiwan wants to listen to a renewed litany of threats from Beijing?  Who on Kinmen wants to head back to a bomb shelter to escape an artillery barrage from the Mainland?

Whoever wins in January will face only difficult choices.  As Chao Chien-min acknowledged, "China is doing everything to exploit its strength."  Today that influence in Taiwan is more economic than military.

How can Taiwan escape Beijing's potentially suffocating embrace?  It won't be easy.  Government Information Minister Yang Y.M. (Philip) observed:  "We need to be prudent and patient in dealing with cross-strait relations" in order to "maintain our independence and prosperity."

The Taiwanese people have built an engaging, vibrant, and free society.  One can only hope that sufficient prudence and patience exists on both sides of the Taiwan Strait.****

[Crafty_Dog]

JDN or anyone:

What does Huntsman have to say about this?

[ccp]

From the Economist:

****The internet in China
Bashing Baidu
State television fires on China’s Google
Aug 27th 2011 | from the print edition
 
LAST year Google remembered its motto (“Don’t be evil”) and stopped co-operating with China’s censors. Since then, Google has found it much harder to do business in mainland China. The chief beneficiary was Baidu, China’s leading search engine. Its share of internet searches, already vast, grew to a dominant 75%.

Robin Li, Baidu’s Chinese-born, American-educated co-founder, is only 42 but one of China’s richest men. That makes him a target, despite his scrupulous efforts not to upset the ruling Communist Party. Since August 14th Baidu has been the subject of a series of damning investigative reports on CCTV, the main state-run broadcaster. Using undercover cameras, CCTV exposed Baidu employees apparently helping firms circumvent laws that bar unlicensed companies from advertising online. The reports also suggested that the lack of transparency in Baidu’s advertising system could lead advertisers to overpay. A Baidu spokesman refused to comment.
It was not the first time that CCTV has bashed Baidu. Reports in 2008 made similar allegations, prompting Baidu to apologise publicly. The latest attacks go further, though. It might seem a bit rich for the state broadcaster of a secretive, authoritarian country to chide Baidu for murkiness. And it certainly surprises some China-watchers. Baidu has done all it can to comply with the government’s whims. It is also a national champion: its shares are listed on New York’s NASDAQ exchange, and foreigners can’t get enough of them.

So what might the criticism signify? Is CCTV attacking Baidu for political reasons, or commercial ones? CCTV has a search engine, too, which hardly anyone uses. So do two other big government-run media outfits—the People’s Daily newspaper and the Xinhua news agency. CCTV, though state-run, is not just a propaganda outfit. It is also expected to make money through advertising (and it does). It must be tempting to nobble a rival.

That no other state-run media outlets carried stories on Baidu suggests this is not a government-orchestrated campaign against the company or the internet more generally. However, the Communist Party is wary of the influence of private internet companies, and no doubt keen to see that Baidu doesn’t get too big for its boots.

The party was slow to grasp how big the internet was going to be in China, and it missed its chance to own the digital commanding heights. So it tries to control them indirectly. On August 23rd, for example, Beijing’s Communist Party chief paid a friendly visit to the offices of China’s biggest microblogging site, Sina Corp’s Weibo, and suggested that it “absolutely put an end to fake and misleading information”. Sina Corp, a private firm, deletes postings that annoy the party within hours. Not quick enough, said the party chief.

Perhaps the most likely motive for CCTV’s attacks on Baidu is that its journalists are trying to do their jobs. Public anger about toxic food, corporate mismanagement and official corruption has emboldened reporters. Journalists at CCTV led the extensive media coverage of a high-speed-rail crash at Wenzhou in July that killed 40 people, until the censors curbed them.

Such reporting embarrasses the party, which likes to boast that China builds big infrastructure projects faster and better than anyone else. The CCTV attack on Baidu could reflect a decision to go after a less protected target. Or not. This being China, no one knows for sure.****

[Crafty_Dog]

BY YIPING HUANG Investors have grown increasingly concerned about the risk of a hard landing in China, as shown by the decline of stock prices and the widening spreads on credit default swaps for its sovereign bonds in recent weeks.

These fears are overblown. China will not experience anything like the Asian financial crisis of 1997 given its large current account surplus, gigantic foreign exchange reserves, and undervalued currency.

Many experienced international investors look at a decline in housing prices as a signal of serious trouble to come. But Beijing itself has engineered this decline using policies that restrict house purchases. If this starts to cause major macroeconomic consequences, the government could easily reverse the restrictions. And even if house prices continue to decline, this is unlikely to cause the kind of forced deleveraging that hit Hong Kong in 1997 and the U.S. in 2007.

Chinese households' leverage ratio is still quite low. Total mortgage loans are only about 15% of GDP and less than one year's worth of households' saving. House prices declined significantly in Shanghai in 2004 and in Shenzhen in 2008. While housing investment slowed visibly in both cases, there were minimal macroeconomic consequences.

Concerns about small business troubles and their implications for informal lending are also exaggerated. The People's Bank of China has been tightening monetary policy for more than a year and economic activity has been moderating. It is entirely normal for a number of firms to fail as costs of both labor and capital rise.

Informal lending is risky by definition. At an estimated 4 trillion yuan ($627 billion), however, it is only about 8% of the banking sector's total credit.

Local governments, with total borrowing of 10.7 trillion yuan or 27% of GDP, are a potential problem for both the financial and fiscal systems. Much of the borrowing was used for investment projects, especially infrastructure, during the past three years. It will be difficult for local government-linked entities to immediately pay back the loans when they gradually mature, starting from this year. But the local governments have both strong political wills and sufficient state assets to keep these borrowings from turning bad.

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CloseAgence France-Presse/Getty Images
 
Construction is still underway, despite fears of a property collapse.
.Most of the current economic problems are, in one way or another, related to incomplete restructuring of the financial system. Despite major reforms during past decades, the Chinese financial system remains highly repressive. Most importantly, financial institutions still act more like policy agents in allocating credit. Key interest rates are tightly regulated by the state, and the private sector's access to finance remains highly restricted.

Yet despite these problems—and an inevitable uptick in nonperforming loans following the 2008-09 credit-driven stimulus—the banks' balance sheets are quite healthy today. Their average nonperforming loan ratio is way below 2%, their average capital adequacy ratio is above 10%, and their reserve requirement ratio is at 21.5%. All these provide ample room for the banks to absorb bad assets without causing systemic financial risks.

Some investors worry about a recent decline in bank deposits, a trend that could strain banks' liquidity if it continues. This was not caused by a loss of confidence in the banks, but rather by depositors looking elsewhere for better returns than those available in regular accounts, which are subject to interest-rate regulation. As the default rate for informal lending vehicles rises, deposits may return to the banks.

The ultimate test for the Chinese economy lies with the fiscal sustainability question. If conditions continue to deteriorate, does the government still have the resources to stimulate the economy and prevent a hard landing?

After all, most of the financial institutions are still majority-owned by the state, and the dramatic credit expansion during the past years was directed by Beijing. Therefore the government will have to assume responsibility if bad assets grow rapidly.

The central government's public debts stand at about 18% of GDP. Adding local government borrowing and contingent liabilities in other areas, total liabilities are probably about 60% to 80% of GDP. The government still has a large pool of state-owned assets, which are worth about 15 times GDP. Therefore Beijing does have sufficient resources to prevent a systemic meltdown of the economy, at least in the short term.

Foreign investors are assuming that structural factors within China—falling property prices, rising bad loans or the like—will make for a hard landing. The greater threat is a double-dip recession abroad. Left to its own devices, China's growth would soften to just above 8%, down from 10% or more in recent years but still able to create jobs.

Only if there is another global recession would China suffer a hard landing as it suffers weak demand for its exports before it has had time to develop domestic markets.

Mr. Huang is chief economist for emerging Asia at Barclays Capital

[DougMacG]

Asia's Wesbury? 

"Many experienced international investors look at a decline in housing prices as a signal of serious trouble to come. But Beijing itself has engineered this decline using policies that restrict house purchases. If this starts to cause major macroeconomic consequences, the government could easily reverse the restrictions."

Sounds a lot like an argument that could have been made in the U.S., how the resources and powers of the Treasury, the Federal Reserve and FDIC and federal GSEs guaranteeing loans would remove any risk beyond minor fluctuations in housing prices here.  How's that going?

In closing: "Only if there is another global recession would China suffer a hard landing..."

And what are the odds of that?

[G M]

Asia's Wesbury? 

"Many experienced international investors look at a decline in housing prices as a signal of serious trouble to come. But Beijing itself has engineered this decline using policies that restrict house purchases. If this starts to cause major macroeconomic consequences, the government could easily reverse the restrictions."

Sounds a lot like an argument that could have been made in the U.S., how the resources and powers of the Treasury, the Federal Reserve and FDIC and federal GSEs guaranteeing loans would remove any risk beyond minor fluctuations in housing prices here.  How's that going?

In closing: "Only if there is another global recession would China suffer a hard landing..."

And what are the odds of that?

http://www.forbes.com/sites/gordonchang/2011/10/16/chinas-economy-the-correction-history-will-remember/2/

The stocks of Chinese banks fell this year and were trading at price-to-book ratios that assumed these institutions would suffer substantial losses on their loan portfolios.  Beijing’s sovereign wealth fund had to launch a rescue last week by announcing open-market share purchases of Chinese banks.

The move triggered a short rally, but it did not solve the fundamental problem: Credit Suisse last week said that bad debt could be as much as 60% of bank equity.  The 60% figure assumes that bad loans constitute only 12% of loan portfolios, but as in the bank crisis at the end of the 1990s, questionable assets are probably multiples of this figure.

The problem for Beijing is that this time, unlike the end of 2008, it has little flexibility to dump money in the economy to restart growth and save borrowers.  It already did that and has, in addition to inflation, created historically high property prices, vacant apartment buildings, and debt-swollen local government financing vehicles.  Yes, increasing liquidity would aid borrowers in the short-term, but that tactic would only make the debt bomb bigger.

Beijing could take foreign currency out of its reserves to recapitalize its largest banks—as it did in early 2004—but that just pushes the People’s Bank of China, the country’s central bank, deeper into insolvency.  In any event, recapitalization would buy only a little time.

The Chinese central government has, in past crises, sustained the momentum of the economy by creating circular flows of cash, using money from one state institution to bail out other ones.  Yet all artificial situations eventually end.  State-dominated economies have more ability to postpone the inevitable, but the corrections they suffer are often worse as a result of continual deferrals.

Like 2008, the Chinese economy is now emitting strong signals it wants to correct.  Last time, Beijing, flush with cash, chose to override the market and postpone the reckoning with its “tidal-wave” spending.  Now, Chinese technocrats are almost out of options.

As a result, the downturn in China this time is probably the one history remembers.

[Crafty_Dog]

By JOSEPH STERNBERG
Beijing

Among the many myths surrounding China's economy, the biggest relates to how Beijing averted a recession after the global financial crisis. The government was quick out of the gate with a stimulus program running to the trillions of dollars, and growth in gross domestic product (GDP) didn't dip as deeply in China as it did elsewhere. China bulls say this shows the government is smart and worth emulating.

But dig a little deeper and the opposite turns out to be true. China's stimulus took the form of a massive expansion of bank lending, rather than the kind of fiscal spending Westerners typically think of when they hear the word Keynesian. A glance at what has happened at the banks in the aftermath shows how Beijing has backed itself into a corner.

The stimulus opened a credit floodgate that so far has proven impossible to turn off. "There is a misconception that it was only limited to six months," says Charlene Chu, an analyst at Fitch Ratings here and one of the few people outside the government who seems to understand what's going on at China's banks. "But in reality the credit boom lasted a full two years." Fitch estimates that new financing for 2011 will hit 17.5 trillion-18 trillion yuan ($2.7 trillion-$2.8 trillion), equivalent to 37% or more of China's GDP. Financing expanded by an amount equal to 42% of GDP in both 2009 and 2010.

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CloseAFP/Getty Images
 .As a proportion of the economy's size, "that's like having $6 trillion in new credit in one year in the U.S., but for two years running," Ms. Chu points out. "In most countries, when banks encounter a difficult economic environment they pull back credit. They've learned over time that you do not want to increase your exposure in a worsening environment. Here, they like to do the exact opposite."

Beijing essentially did what it has done all along—heavy investments in infrastructure and fixed assets—only more so. But the marginal returns on this strategy are rapidly diminishing. In 2006, one yuan in credit expansion yielded 0.76 yuan in GDP growth, according to Fitch. In 2007 and 2008, that one yuan of credit continued to create at least 0.70 yuan in growth. But in 2009, as the credit stimulus got under way in earnest, one yuan of new stimulus credit created a paltry 0.18 yuan in additional GDP. That has improved somewhat since then, but for 2011 one yuan of credit still is expected to create only 0.42 yuan in GDP.

Many economists expect some large portion of those loans to go bad. Beijing probably does have the resources to engineer a bailout of some kind. Less discussed but more important, however, is the question of what that means for China's economy. A bailout will come at the cost of future economic reform and growth.

Consider the implications for rebalancing, or China's crucial shift to domestic consumption from export-led growth. Chinese banks are heavily dependent on deposits for funding, as opposed to the interbank lending markets used by their Western peers. The last time Beijing faced a bank-solvency crisis, in the late 1990s, the authorities recapitalized the banks via what's known as financial repression: Regulators set interest rates on household deposits below the rate of inflation, allowing banks to charge lower interest rates on loans while still gradually earning their way back into the black thanks to the guaranteed spread.

This amounts to a wealth transfer to the banks from households. Such a policy undermines the goal of encouraging those households to consume more. But Beijing may have little choice but to continue financial repression indefinitely given the large volume of nonperforming loans likely accumulating anew on bank balance sheets.

It gets worse. Sooner or later, China will have to fix its system for allocating capital. Introducing market interest rates would be the centerpiece, a way to shift capital away from inefficient state-owned enterprises and toward entrepreneurial, private-sector companies by pricing that capital in a way that encourages more productive uses.

That reform, though, is next to impossible now. Any increase in interest rates to the higher level more common for a developing country would risk pushing too many companies into default. Beijing can't afford that at a time when the banks already are bloated with loans of dubious quality.

Then there's monetary reform. Beijing has made waves with its talk about boosting the use of the yuan beyond China's borders. This would eventually require lifting capital controls, which would facilitate a more efficient allocation of capital across China's borders.

Easing capital controls is a nonstarter as long as the banks are under stress. The last round of bank bailouts, in the late 1990s, succeeded in large part because capital controls trapped depositors in the system. Controls remain strict, but it is somewhat easier now than it was then to take money out of the country. Already the banks are under strain as a result.

As the authorities have increased the required reserve ratio—the percentage of a bank's assets it must keep on deposit at the central bank—banks that were once flush with cash suddenly find themselves in a squeeze. Banks are even trying to securitize risky loans on the sly (sound familiar?) to develop "wealth-management products" with which to attract depositors. So Beijing won't risk any more capital flight by lifting exchange controls.

Ironically, then, China's stimulus, hailed in some quarters of the West as Beijing's greatest success, could become one of the most severe risks to face the Communist Party in a generation. Already inflation is re-emerging on the back of the credit expansion, with consumer-price rises above 6% in recent quarters. Inflation and regime change historically have gone hand-in-hand in China; the 1989 Tiananmen Square protests were preceded by a bout of inflation.

Meanwhile, the stimulus is denting Beijing's ability to undertake reforms it will have to pull off to keep the economy growing. This is dangerous for a regime whose legitimacy rests solely on its ability to deliver rapid growth.

China's 9.1% growth rate for the July-September period may compare favorably to the situation in the U.S. and Europe right now, but don't read too much into it. Beijing has only delayed a moment of reckoning. It has not avoided one.

Mr. Sternberg is an editorial page writer at The Wall Street Journal Asia.

[G M]

**This could will have cascading effects felt globally.

http://www.sovereignman.com/expat/obvious-signs-of-a-slowdown-in-china/


Obvious signs of a slowdown in China

by Simon Black · View Comments



October 26, 2011
 Shanghai, China
 
Stunned. That probably best describes the mood of China’s vast pool of property owners. For the last few years, anyone with as much as a taxi driver’s salary has been speculating in the real estate market, scooping up off-plan properties at terms that would make a Countrywide mortgage broker blush.
 
And why not? Chinese culture has almost universally adopted the attitude that property prices never go down. Minor fluctuations and corrections over the last several months have been written off as statistical error.  Well, reality has now uncomfortably set in.
 
Recent reports from the National Bureau of Statistics show that home prices have fallen up to 50% in many parts of the country in the period from July to September. But who gives a damn about government reports? The real evidence is on the ground.
 
Here in Shanghai, nearly 300 angry customers stormed a sales office of Longfor Properties Co Ltd after finding out that the developer had slashed prices on one of its projects by nearly 25%… practically overnight.
 
Another angry mob in Shanghai assembled outside the sales office of China Overseas Property Group Co after that company made similar price concessions for new buyers.
 
These were obviously the poor suckers who bought in months (or years) ago at a much higher price… and they’re not especially happy about a property crash.
 
The most significant contributor to the price decline is tightening credit; after dumping trillions of dollars into the economy to ward off the effects of the global financial crisis, the Chinese government is now pressuring banks to reduce loans.
 
This is bringing much of China’s credit-intensive economy to a screeching halt. So much for China leading the world out of the global financial crisis. And it doesn’t just affect the property market.
 
Auto dealers are having the same issues, with many luxury brands ranging from BMW to Mercedes offering steep discounts up to 20% to lure buyers onto the showroom floor.
 
Growth has definitely slowed dramatically, and the tightening of credit is having widespread effect across the economy… and the prospect for increased social unrest here is growing.
 
Taking a page from America’s playbook, the government is responding by playing up threats of terrorism. It’s an easy distraction, and it keeps people in line. In fact, China’s government is revising its policy to ensure that anyone who might rock the boat is branded a ‘terrorist’ and will be subject to asset seizure.
 
Many people with money or significant assets in China see the writing on the wall and are lining up to diversify internationally– citizenships, trusts, foreign bank accounts, etc. I should know, I just spent the day in a room packed with Chinese people trying to learn about their internationalization options. I’ll tell you more about that tomorrow.

[G M]

http://www.marketwatch.com/story/watch-out-for-chinas-freak-economy-2011-10-25?pagenumber=2

You can see a proxy for the Chinese housing bust in the performance on Wall Street of E-House (China) Holdings /quotes/zigman/477117/quotes/nls/ej EJ -3.61%  , a real estate broker with a U.S. listing. The stock has collapsed in a year from $17 to less than $7, and the company recently reported it swung to a second-quarter loss thanks to “tough market conditions.”

The credit bubble is imploding.

What would a housing bust be without a credit bust? This will be the mother of all implosions, too.

In the past two and a half years, China has witnessed a staggering credit bubble. Total lending has come to about $7.8 trillion.

To put this in context, that is twice the entire net government debts of the European so-called “PIIGS” — the troubled countries of Portugal, Ireland, Italy, Greece and Spain — put together.

What sort of accountability has there been to all this lending in a single party, Communist-run, Third World economy with little previous experience of credit?

Um…

An alarming report from Schroders said Chinese banking operates in a “twilight zone” of phony accounting and shadow money and it’s all coming apart. “Almost half of all credit creation in China is off balance sheet,” wrote the team at Schroders.

They think this situation could unravel “over the next three to six months,” producing a huge crisis with international implications. Most Chinese banks, they predict, will end up as “zombie banks.”

The canary in the coal mine might be the boom city of Wenzhou in the south. On a single day last month, nine company bosses all suddenly went on the lam to avoid bankruptcy. Nine on one day.

Reports put the figure in the town at 29 since April. One boss committed suicide.

The stock market is signaling trouble.

It’s a mistake to assume the stock market is always correct, but generally speaking when it signals a downturn it does so pretty clearly.

And what it’s saying about China is alarming.

Chinese stock prices have slumped by 22% since July, says FactSet. They are, on average, down to nine times forecast earnings, valuations last seen during the depths of the financial crisis in 2008-2009. Prices of property developers have collapsed, in many cases below book value.

And you can see in the prices of mining and other resources stocks elsewhere. They have in many cases slumped by a third or more. In London, mining giant Vedanta Resources /quotes/zigman/336962 UK:VED +3.04%  has halved in price since early last year.

In most cases, the stocks of resource companies have fared much worse, so far, than the prices of the underlying resources themselves. Maybe that makes them a buy. Or maybe the forward-looking equity market is seeing something sooner than the commodities markets — as was the case for gold mining stocks six weeks ago.

Albert Edwards at SG Securities warned that China’s long-running investment boom has no precedent and is bound to burst. “China is a ‘freak’ economy,” he wrote. “To my knowledge no other economy in history has experienced such high investment/GDP ratios and seen so many sequential years of strong investment growth.” The Asian tigers in the 1990s? Japan? Nothing comes close, says Edwards.

That boom has helped carry the world economy through the troubles of the past five years. What happens if it, too, ends?

[Crafty_Dog]

Vice President of Strategic Analysis Rodger Baker explains how Europe’s debt crisis exposed the vulnerabilities inherent in the Chinese economic model.
Editor’s Note: Transcripts are generated using speech-recognition technology. Therefore, STRATFOR cannot guarantee their complete accuracy.
Related Links
•   China Political Memo: Wenzhou Backs Away from the ‘Wenzhou Model’
The Chinese continue to watch the way in which the Europeans are trying to deal with their financial and political crisis right now. For China this is particularly important. Number one, Europe has become China’s largest export market and that has a major impact, of course, on the way in which the Chinese operate their economy. Number two is that a continued or an even deeper crisis in Europe could pull the entire global economy into recession.
Chinese exports to Europe and to much of the rest of the world saw a particularly sharp drop in 2009. This was something that the Chinese government had to rush to stabilize — they counteracted that dip in exports with a huge increase in domestic investment. The Chinese had hoped, during that time, that the Europeans would simply build themselves back up, pull themselves out of this particular crisis and that China would be able to continue with its fairly rapid expansion of exports to Europe to keep its economy chugging along as China headed towards its 2012 leadership transition.
Although Chinese exports to Europe picked up a little bit in 2010, the rate of growth that the Chinese had been seeing in the previous four or five years slowed down quite a bit. The problem for China is that as the pace of export growth slows, the pace of import growth doesn’t. The Chinese still need a very large amount of commodities. They’re importing these commodities, not only to feed their export market, but to feed all of this new domestic investment. And that means that while the Chinese may not be making as much selling, they are having to buy still a very high market prices to be able to develop internally.
The European crisis, and really the slowdown in the United States as well, has brought home to the Chinese something that they already knew but they had hoped to be postponing — and that is the need to fundamentally restructure their economy. The Chinese base their economy very similar on what we’ve seen in other Asian economies; it was an economy that needed continuous growth. Continuous growth in exports, more money, more money every year and that would allow the Chinese simply to borrow, to supply employment, to not have to worry about things like profits, but rather find some ways to funnel money down into the population.
If we look at the Chinese then we see that there’s maybe 300 million people who are part of the really economically active part of China. However, that leaves out more than a billion people from being part of this Chinese economic growth, this Chinese economic activity. Historically, it’s not from the coastal areas, it’s not from the wealthy areas that trouble comes in China. It’s from the rural areas, it’s from the people who are poor, it’s from the people who aren’t connected to this economic system.
One of the solutions the Chinese have tried to follow is urbanization: the idea that if they build it, people will come and if people move to the cities they will suddenly have jobs and in having jobs in the cities and living in a city, they’re going to become consumers. And certainly this is not for the entire billion of the population that’s not active, but maybe another hundred million, 200 million, 300 million. And that would help to better distribute wealth throughout China; it would also ease China off from their heavy dependence upon exports.
This boom in urbanization coincided with this government need to spend a lot more on domestic investment. It also fell right inside of what was already building as a speculative bubble in real estate investment. And that investment was coming not only from the coastal populations in China — the ones who are trying to find ways to save for the future and therefore invest in real estate — but also from businesses, from SOEs, who are buying real estate watching prices go up and then betting against that real estate, or investing or taking out loans against that real estate, to be able to continue to operate their businesses.
So we have a China that’s facing a real estate bubble in an attempt to build a new urbanized society, but the individuals who would be moving into that urbanized society can’t afford to move in because of the price rise in housing. The government is trying to find ways to slow down that rise in price, but if they move too quickly it can undermine the collateral for the loans from state-owned enterprises, it can pull away the nest egg from their middle class and that can cause a very rapid backlash against the central government.
For China then, what this European crisis has done is it has brought something that they’ve known for a long time right up into the front. They no longer have the ability, it seems, to simply keep pushing back economic change and perhaps even not the ability push back political change in the country because the European crisis has ended their ability to count on this continuous rise in exports.

[G M]

http://gizmodo.com/5859081/why-is-china-building-these-gigantic-structures-in-the-middle-of-the-desert

 

[G M]

http://www.theepochtimes.com/n2/china-news/chinese-tv-host-says-regime-nearly-bankrupt-141214.html

Chinese TV Host Says Regime Nearly Bankrupt

By Matthew Robertson
Epoch Times StaffCreated: November 13, 2011Last Updated: November 15, 2011.
 

Larry Lang, chair professor of Finance at the Chinese University of Hong Kong. (Wu Lianyou/The Epoch Times)

China’s economy has a reputation for being strong and prosperous, but according to a well-known Chinese television personality the country’s Gross Domestic Product is going in reverse.

Larry Lang, chair professor of Finance at the Chinese University of Hong Kong, said in a lecture that he didn’t think was being recorded that the Chinese regime is in a serious economic crisis—on the brink of bankruptcy. In his memorable formulation: every province in China is Greece.

The restrictions Lang placed on the Oct. 22 speech in Shenyang City, in northern China’s Liaoning Province, included no audio or video recording, and no media. He can be heard saying that people should not post his speech online, or “everyone will look bad,” in the audio that is now on Youtube.


 


In the unusual, closed-door lecture, Lang gave a frank analysis of the Chinese economy and the censorship that is placed on intellectuals and public figures. “What I’m about to say is all true. But under this system, we are not allowed to speak the truth,” he said.

Despite Lang’s polished appearance on his high-profile TV shows, he said: “Don’t think that we are living in a peaceful time now. Actually the media cannot report anything at all. Those of us who do TV shows are so miserable and frustrated, because we cannot do any programs. As long as something is related to the government, we cannot report about it.”

He said that the regime doesn’t listen to experts, and that Party officials are insufferably arrogant. “If you don’t agree with him, he thinks you are against him,” he said.

Lang’s assessment that the regime is bankrupt was based on five conjectures.

Firstly, that the regime’s debt sits at about 36 trillion yuan (US$5.68 trillion). This calculation is arrived at by adding up Chinese local government debt (between 16 trillion and 19.5 trillion yuan, or US$2.5 trillion and US$3 trillion), and the debt owed by state-owned enterprises (another 16 trillion, he said). But with interest of two trillion per year, he thinks things will unravel quickly.

Secondly, that the regime’s officially published inflation rate of 6.2 percent is fabricated. The real inflation rate is 16 percent, according to Lang.

Thirdly, that there is serious excess capacity in the economy, and that private consumption is only 30 percent of economic activity. Lang said that beginning this July, the Purchasing Managers Index, a measure of the manufacturing industry, plunged to a new low of 50.7. This is an indication, in his view, that China’s economy is in recession.

Fourthly, that the regime’s officially published GDP of 9 percent is also fabricated. According to Lang’s data, China’s GDP has decreased 10 percent. He said that the bloated figures come from the dramatic increase in infrastructure construction, including real estate development, railways, and highways each year (accounting for up to 70 percent of GDP in 2010).

Fifthly, that taxes are too high. Last year, the taxes on Chinese businesses (including direct and indirect taxes) were at 70 percent of earnings. The individual tax rate sits at 81.6 percent, Lang said.

Once the “economic tsunami” starts, the regime will lose credibility and China will become the poorest country in the world, Lang said.

Several commentators have expressed broad agreement with Lang’s analysis.

Professor Frank Xie at the University of South Carolina, Aiken, said that the idea of China going bankrupt isn’t far fetched. Major construction projects have helped inflate the GDP, he says. “On the surface, it is a big number, but inflation is even higher. So in reality, China’s economy is in recession.”

Further, Xie said that official figures shouldn’t be relied on. The regime’s vice premier, Li Keqiang for example, admitted to a U.S. diplomat that he doesn’t believe the statistics produced by lower-level officials, and when he was the governor of Liaoning Province “had to personally see the hard data.”

Cheng Xiaonong, an economist and former aide to ousted Party leader Zhao Ziyang, said that high praise of the “China model” is often made on the basis of the high-visibility construction projects, a big GDP, and much money in foreign reserves. “They pay little attention to things such as whether people’s basic rights are guaranteed, or their living standard has improved or not,” he said.

Behind the fiat control of the economy, which can have the appearance of being efficient, there is enormous waste and corruption, Cheng said. It means that little spending is done on education, welfare, the health system, etc.

Cheng says that for the last decade the Chinese regime has accumulated its wealth primarily by promoting real estate development, buying urban and suburban residential properties at low prices (or simply taking them), and selling them to developers at high prices.


According to Cheng, the goals of regime officials (to enrich themselves and increase their power) are in direct conflict with those of the people–so social injustice expands, and economic propaganda meant to portray the situation as otherwise prevails.

Few scholars inside the country dare to speak as Lang has, Cheng said. And that’s probably because he has a professorship in Hong Kong.

[Crafty_Dog]

Another perceptive reader of our forum!

GM:  Please double post that in the Military Science thread too.  Thank you.

[G M]

http://gizmodo.com/5859081/why-is-china-building-these-gigantic-structures-in-the-middle-of-the-desert

 

http://www.livescience.com/17052-mysterious-symbols-china-desert-spy-satellite-targets-expert.html

Mysterious Symbols in China Desert Are Spy Satellite Targets, Expert Says

[Crafty_Dog]

Email Print Save ↓ More .
.smaller Larger  By JOSEPH STERNBERG
With a thud akin to a tree falling in a Chinese woodland, a new report on doings at scandal-plagued Sino-Forest hit the street this week. The Toronto-listed company fell from grace in June when a short-selling research firm accused it of shady accounting. Now an independent committee of the company's board says that's all bunkum. The shorts are sticking to their story.

Does any of this matter? No.

We mean that in a broader sense. As regards the particulars of this alleged fraud story, the board's report is informative. If it turns out to be true (Canadian authorities are conducting an investigation of their own), it also stands as corroboration of a theory offered in this space in June that Sino-Forest could be a "real" company and still be unsuitable for listing on a Western exchange.

The crux of the charges leveled by short-sellers at Muddy Waters Research was that Sino-Forest had far overstated its forest holdings in China, and that it engaged in a complex tangle of related-party transactions that obscured the true nature and scope of its business. The charges spooked markets and the stock plunged some 74% before it was suspended in August. Regulators launched a probe.

The board committee offers a different story. It purports to have secured copies of much of the local-government documentation that it says proves Sino-Forest's rights to the timber assets it claims, although it notes that China's regulatory system doesn't churn out the sort of comprehensive property records auditors would expect of a Western firm. The report also offers a plausible explanation for a key gotcha passage in the shorts' research, the fact that various financial data reported to shareholders by Sino-Forest and associated companies don't jibe with data submitted to the State Administration for Industry and Commerce (SAIC).

The explanation? That's just the way things are done in China—the numbers often don't match up. Tellingly in this regard, the committee notes that some suppliers and other companies associated with Sino-Forest declined to speak with board investigators for fear that the government would get wind of any information disclosed.

Enlarge Image

CloseAssociated Press
 ."[M]any third parties explained their reluctance to provide requested documentation and information as being 'for tax reasons' but declined to elaborate," the report says. As we noted in June, it's likely that Sino-Forest's complex corporate structure and relationships with third parties stem in large part from attempts to manage its tax liabilities and those of its partners.

This report raises a question for Western investors: Even assuming there was no fraud, do you really want to put your money in a company that says it has no choice given China's regulatory environment but to conduct business through an astonishing array of offshore subsidiaries and hazy related parties, without normal proof of asset ownership?

That question, in turn, gets at the nub of the recent misadventures of Chinese firms listed abroad. Ultimately Sino-Forest has not only fallen victim to short-sellers or any fraud that might be proven to have occurred. It is also a victim, and a sign, of the changing zeitgeist—that is, of the willingness of foreigners to tolerate the risks of investing in Chinese firms.

When China's economy was the wonder of the world, companies like Sino-Forest made a lot of sense. It is a land and resources company in a country where both were booming so much that one could expect an enticing return despite some nagging concerns about corporate governance.

As broader skepticism mounts about China's economy and the quality of Chinese companies, investors suddenly are more receptive to those nattering nabobs of negativism on the short side. The genius of Muddy Waters—and perhaps of all short sellers—is timing, not research savvy. This is not to say that investors will uniformly spurn Chinese shares in the West; initial offerings are showing some signs of reviving. But gone will be the heedless enthusiasm, and investors will demand greater clarity.

This is bad news for Sino-Forest, since it means that whatever a special board committee reports and whatever the outcome of the legal wrangles, investor confidence is unlikely to return to a company forced to operate under the conditions in which any legitimate forestry company in China must.

Such has been the case at other Muddy Waters targets to emerge from special investigations, such as Orient Paper (down more than 50% despite repeated avowals that it's on the level). A company can defend itself against an accusation. But there's no defense against a mood.

Mr. Sternberg, an editorial page writer for The Wall Street Journal Asia, edits the Business Asia column.

[G M]

http://www.chinapost.com.tw/commentary/reuters/2011/11/18/323278/Analysts-suspect.htm

Updated Friday, November 18, 2011 0:14 am TWN, By Kevin Yao ,Reuters


Analysts suspect China's forex may be weaker than perceived

BEIJING -- Europeans searching for a bazooka to blast away eurozone debt problems might well eye China's US$3.2 trillion foreign exchange arsenal with envy, but Beijing has far less firepower available than many assume.
 

Most of money in the world's biggest store of foreign exchange reserves is prudently kept in near-cash instruments to fund import and debt service bills in the event of an unforeseen domestic emergency, or invested in long-term assets that, if sold in size to help Europe, would spark panic on global financial markets.

 In fact, analysts reckon China's armory has only about US$100 billion to spare.

 “The sheer size of China's foreign exchange reserves is massive, but the actual amount of money available for investing in Europe each year isn't that big,” said Wang Jun, an economist at CCIEE, a top government think tank in Beijing.

 A crucial constraint is China's existing holdings of U.S. Treasury securities. Beijing is by far the biggest foreign owner, with an estimated 70 percent of the nation's reserves held in U.S. government bills, bonds and other dollar assets.

 Turn outright seller and the market value of the remaining holdings is likely to plunge.

 That's not a great investment strategy given the Chinese public's unhappiness about the roughly 38 percent decline in the nominal value of the dollar in the last 10 years.

 The government also may have to set aside some foreign exchange reserves to bailout the banking system if piles of loans to local governments and the property sector turn sour.

 China injected nearly US$80 billion in reserves into its big state banks from 2003 to 2008 to help them clean up their balance sheets so they could float shares.


Shrinking Exports, Smaller Surplus

 Meanwhile, China's trade surplus, essentially the money it has to invest overseas, is shrinking as Beijing does what critics in the developed world have been urging for years and rebalances its economy away from exports.

 Imports surged 28.7 percent year on year in October and the surplus of US$17 billion was well short of the US$24.9 billion forecast by economists.

 Beijing holds an estimated one-quarter of its reserves in euro-denominated assets, so keeping that steady implies a US$117.5 billion increase this year if the country's foreign exchange reserves grow by the US$470 billion estimated in 2011.

 That's roughly the amount economists expect China to invest in Europe in 2012.

 “Assuming the FX reserve accumulation does not slow significantly, I think China will put at least US$80-100 billion in euro assets per year in the next two years,” said Wei Yao, China economist at Societe Generale in Hong Kong.

 China recycles foreign exchange assets into overseas investments so outflows of cash roughly track inflows.

 The build-up in FX reserves, a result of the central bank's intervention to limit the yuan's appreciation, tends to fuel inflation pressures even as the central bank issues bills to mop up the amount of local currency it pumps into the economy.

 And it explains why foreign reserves cannot easily be used for domestic spending on infrastructure or shoring up pension systems, since simply converting the cash risks driving up both inflation and the value of the yuan currency.

[G M]

http://www.bloomberg.com/news/2011-11-17/china-said-to-warn-banks-on-risks-tied-to-local-government-property-loans.html

China Said to Warn Banks on Risks Tied to Local Government, Property Loans


 By Bloomberg News - Nov 17, 2011 8:16 PM MT .
Home sales plunged 25 percent in October from the previous month. Photographer: Nelson Ching/Bloomberg





 Oct. 24 (Bloomberg) -- Bloomberg Television's Stephen Engle reports from the Chinese city of Loudi on how farmers are being uprooted by the local government with inadequate compensation. Cities across China are increasingly seeking to cash in on real estate prices that have risen 140 percent since 1998, by appropriating land from peasants and flipping it to developers for huge profits. (Source: Bloomberg)


 July 14 (Bloomberg) -- Bloomberg's Stephen Engle reports from Loudi, China, on the construction of infrastructure financed by local government debt. Loudi is paying for the building of a 30,000-seat stadium, bulb-shaped gymnasium and swimming complex with 1.2 billion yuan ($185 million) in bonds, guaranteed by land valued at $1.5 million an acre. That’s about the same as prices in Winnetka, a Chicago suburb where the average household earns more than $250,000 a year. In Loudi, people take home $2,323 annually. (Source: Bloomberg)
.
China’s banking regulator warned lenders that some projects backed by local governments may run out of funds, and loans to property developers are likely to sour as sales slow, a person with knowledge of the matter said.

The China Banking Regulatory Commission told lenders last week to step up asset sales and debt restructuring for unprofitable local government financing vehicles that are struggling to repay loans, the person said, declining to be identified as the instructions were private. The watchdog also said banks should cut “high-risk” loans to developers, the person said.

China’s banking regulator tightened capital requirements and clamped down on off-balance sheet assets this year. Still, the International Monetary Fund this week called for closer oversight of the banks as risks increase. Home sales plunged 25 percent in October from the previous month. Industrial & Commercial Bank of China (1398) Ltd. and its three biggest local rivals have lost about $71 billion in market value this year.

“The government is still very careful about the property market as it doesn’t want volatility in housing prices,” Ivan Li, deputy head of research at Kim Eng Securities Hong Kong Ltd., said by telephone today. “You can see there are pressures building up: The government is worried that some developers may shut down, triggering defaults on bank loans.”

A Beijing-based press official for the banking watchdog said he couldn’t immediately comment. The regulator told banks to “pay close attention” to property loan risks as falling home prices and sales are straining developers’ finances, according to a third-quarter report posted yesterday on the CBRC’s website.

Shares Decline

Shares of the four largest banks fell, led lower by Agricultural Bank of China Ltd. (1288) The nation’s fourth-largest lender dropped 3.4 percent to HK$3.35 as of 11:05 a.m., and ICBC declined 3.1 percent to HK$4.44, helping pull the Hang Seng Index to a 1.9 percent loss.

China last month named its securities regulator Shang Fulin to replace Liu Mingkang as head of the CBRC, putting him in charge of a 106 trillion-yuan ($17 trillion) industry that includes four of the world’s eight largest lenders by market value. His appointment was part of the biggest reshuffle of financial officials in China in a decade.

Premier Wen Jiabao’s battle to lower housing prices in China began in April last year, when the cabinet raised minimum mortgage rates and down-payment ratios for some home purchases, saying “more forceful” steps were needed to cool speculation. Authorities tightened the rules further this year and imposed housing purchase restrictions in about 40 cities.

Home Prices Fall

Home prices fell in 33 of 70 cities monitored by the government in October, the statistics bureau said today. Prices may fall as much as 30 percent in the next year, Barclays Plc’s research unit said last week. They had risen by 140 percent from 1998 to the end of last year, according to the bureau.

[G M]

http://blogs.the-american-interest.com/wrm/2011/11/17/chinas-global-nightmare/

November 17, 2011


China’s Global Nightmare


Brazil is of course happy to let foreign companies invest in its vast but difficult to access offshore oil reserves. China is interested in that oil — perhaps too interested. The FT recently reported this story:
 

China’s second largest state-controlled oil major Sinopec has signed a $5.2bn deal to buy 30 per cent of the Brazilian assets of Galp Energia, which include operations in the pre-salt fields, so-called because they lie under two kilometres of the stuff.
 The deal is Sinopec’s second acquisition in the area after its $7.1bn investment in the Brazilian assets of Repsol YPF last year. Sinopec has also signed a $10bn oil-for-loan deal with Brazil. Elsewhere, Sinopec’s peer, Sinochem, has a $3.1bn stake in an offshore oil field in Brazil run by Norway’s Statoil…
 
But it is a partnership that will be fraught with difficulties with Brazil already growing suspicious of its increasingly close relationship with Beijing. China is now Brazil’s largest trading partner and last year was its biggest investor.
 
If Chinese state-owned companies are involved at every level of the pre-salt programme, Brazil may start to wonder whether it is ceding too much influence to a foreign government over what is considered a highly strategic asset.
 
So strategic, in fact, that former president Luiz Lula da Silva changed the law to give Petrobras the status of sole operator of the area. In one of his other last acts as leader, Lula da Silva also changed the land law to prohibit foreigners from acquiring large tracts of farmland, a measure seen as aimed at China.
 
The real importance of this story does not, however, have much to do with Brazil’s jittery nerves about Chinese investment.  It is to remind us about a key Chinese vulnerability that is often overlooked by pundits: China’s growing dependence on natural resources located far from its frontiers.
 
Beijing’s chosen national strategy — to achieve great power status by becoming the industrial workshop of the world — locks it into a complex and difficult set of dependencies and relationships with countries and markets all over the world. Access to those resources traps China in complicated geopolitical tradeoffs that can blow up in unexpected ways — as when China had to scramble to protect its citizens in Libya.  Chinese companies become the object of public anger if they are seen to be economically exploitative, unwelcoming to local labor, or environmentally destructive.  And, of course, in the event of a confrontation with the United States, China’s entire supply chain and overseas investments are helpless hostages.
 
Strategically, the only way out of this trap would be to build a blue water navy and air force that could threaten US command of the seas.  But a build up of that kind would not only trigger a massive US response; other countries like Japan, India and Australia would join together to ensure that China did not overturn a maritime status quo that is well trusted by other world powers.
 
We live in an interesting world.

[Crafty_Dog]

These are the sort of points that Stratford makes too, though I take a less sanguine view; not only are broke and slashing our military, but our interest payments to China are paying for its military expansion.

[bigdog]

http://news.yahoo.com/digging-china-nuclear-tunnels-013008319.html

The Chinese have called it their “Underground Great Wall” — a vast network of tunnels designed to hide their country’s increasingly sophisticated missile and nuclear arsenal.

For the past three years, a small band of obsessively dedicated students at Georgetown University has called it something else: homework.

Led by their hard-charging professor, a former top Pentagon official, they have translated hundreds of documents, combed through satellite imagery, obtained restricted Chinese military documents and waded through hundreds of gigabytes of online data.

and the story continues

[G M]

http://news.yahoo.com/digging-china-nuclear-tunnels-013008319.html

The Chinese have called it their “Underground Great Wall” — a vast network of tunnels designed to hide their country’s increasingly sophisticated missile and nuclear arsenal.

For the past three years, a small band of obsessively dedicated students at Georgetown University has called it something else: homework.

Led by their hard-charging professor, a former top Pentagon official, they have translated hundreds of documents, combed through satellite imagery, obtained restricted Chinese military documents and waded through hundreds of gigabytes of online data.

and the story continues

http://www.telegraph.co.uk/news/worldnews/asia/china/8927580/China-hiding-up-to-3000-nuclear-warheads-in-secret-tunnels.html


China 'hiding up to 3,000 nuclear warheads in secret tunnels'

An unconventional project by US university students has concluded that China's nuclear arsenal could be many times larger than current estimates, drawing the attention of Pentagon analysts.


9:23AM GMT 01 Dec 2011


The Washington Post reported on Tuesday that Georgetown University students under the instruction of a former Pentagon official have assembled the largest body of public knowledge yet about a vast network of secret tunnels dug by China's secretive Second Artillery Corps, responsible for nuclear warheads.


The 363-page study has not yet been published, but has already sparked a congressional hearing and been circulated among top US defence officials, including the Air Force vice chief of staff, the Post reported.


"It's not quite a bombshell, but those thoughts and estimates are being checked against what people think they know based on classified information," it quoted an unnamed Defense Department strategist as saying.


The newspaper said critics of the report had questioned the students methods, which included using internet-based sources like Google Earth, blogs, military journals and even a fictionalised Chinese TV show.


But the Post also said the students were able to obtain a 400-page manual produced by the Second Artillery and usually only available to Chinese military personnel.


The students' professor, Phillip Karber, 65, spent the Cold War as a top strategist reporting directly to the secretary of defence and the chairman of the Joint Chiefs of Staff, the Post said.

Karber said that – based on the study of the tunnels – China could have up to 3,000 nuclear warheads, far higher than the current estimates, which range from 80 to 400, according to the Post.

US officials could not immediately be reached to comment on the report.

[Crafty_Dog]

Please post this in the Military Science and Issues thread as well.  Thank you.

[G M]

http://www.cnbc.com/id/45544853

China to Prepare for Social Unrest
Published: Sunday, 4 Dec 2011 | 5:26 PM ET Text Size By: Patti Waldmeir and Jamil Anderlini, Financial Times   

Beijing has underlined its concern that an economic slowdown could lead to social unrest in China.
--------------------------------------------------------------------------------
 
Beijing has underlined its concern that an economic slowdown could lead to social unrest in China, with the country’s security chief urging local officials to do more to prepare for the “negative effects of the market economy”.

Zhou Yongkang, a member of the politburo, told provincial officials that they needed to find better methods of “social management” – a euphemism which can include everything from better internet censorship and strategic policing of violent unrest, to a better social safety net.

“It is an urgent task for us to think how to establish a social management system with Chinese characteristics to suit our socialist market economy,” he told a seminar on “social management innovation”.

“Especially when facing the negative effects of the market economy, we still have not formed a complete mechanism for social management,” he said. Mr Zhou also urged officials to limit spending on wasteful “vanity” projects that trigger public anger.

His comments are the clearest sign yet that Beijing is worried that the global economic crisis could lead to serious domestic social unrest. Mr Zhou’s remarks, published by the state-run Xinhua news agency on Saturday, came at the end of a week which saw evidence of a slowdown in Chinese manufacturing, an easing in credit policy to avert a sharper slowdown, and two outbreaks of violence.

Recent months have seen a rise in unrest – apparently linked to economic grievances, including workers’ fears about the economic dislocation caused by Beijing’s long-term plan to move away from low-value manufacturing to more creative and innovative industries.

Workers in Shanghai clashed last week with police at a Singaporean consumer electronics supplier during a strike over mass job losses due to a company relocation, the US-based group China Labor Watch said.

Tension spilt over in the central Chinese city of Xian on Friday, with Xinhua reporting hundreds of people overturning police and government cars after officers took more than two hours to arrive at a scene where a girl had been killed by a building truck. Ordinary citizens often complain that the government does too little to protect them from safety risks like dangerous driving by such trucks.

More than 10,000 workers in Shenzhen and Dongguan, two leading export centres in southern China, went on strike last month to protest against cuts in overtime – which they rely on to supplement meagre basic pay.

The ruling Communist party relies on rapid economic growth as its main source of legitimacy and Chinese leaders assume that if the economy slows too much it will be unable to contain the resulting social unrest.

Many analysts believe double-digit inflation and an economic slowdown were important contributors to the 1989 Tiananmen Square upheaval and resulting massacre.

In the midst of the 2008 global financial crisis the government identified 8 per cent gross domestic product growth as the level necessary to avoid political chaos and mobilised the entire state sector in a successful effort to “protect 8”.

[G M]

**I don't see this ending well. I don't think we'll see the UN invoke the "responsibility to protect" doctrine either.

http://www.telegraph.co.uk/news/worldnews/asia/china/8954315/Inside-Wukan-the-Chinese-village-that-fought-back.html


Inside Wukan: the Chinese village that fought back

 Something extraordinary has happened in the Chinese village of Wukan.


By Malcolm Moore, Wukan

8:30PM GMT 13 Dec 2011

For the first time on record, the Chinese Communist party has lost all control, with the population of 20,000 in this southern fishing village now in open revolt.
 

The last of Wukan’s dozen party officials fled on Monday after thousands of people blocked armed police from retaking the village, standing firm against tear gas and water cannons.
 

Since then, the police have retreated to a roadblock, some three miles away, in order to prevent food and water from entering, and villagers from leaving. Wukan’s fishing fleet, its main source of income, has also been stopped from leaving harbour.
 

The plan appears to be to lay siege to Wukan and choke a rebellion which began three months ago when an angry mob, incensed at having the village’s land sold off, rampaged through the streets and overturned cars.
 

Although China suffers an estimated 180,000 “mass incidents” a year, it is unheard of for the Party to sound a retreat.
But on Tuesday The Daily Telegraph managed to gain access through a tight security cordon and witnessed the new reality in this coastal village.
 
Thousands of Wukan’s residents, incensed at the death of one of their leaders in police custody, gathered for a second day in front of a triple-roofed pagoda that serves as the village hall.
 
For five hours they sat on long benches, chanting, punching the air in unison and working themselves into a fury.
 
At the end of the day, a fifteen minute period of mourning for their fallen villager saw the crowd convulsed in sobs and wailing for revenge against the local government.
 
“Return the body! Return our brother! Return our farmland! Wukan has been wronged! Blood debt must be paid! Where is justice?” the crowd screamed out.
 
Wukan’s troubles began in September, when the villagers’ collective patience snapped at an attempt to take away their land and sell it to property developers.
 
“Almost all of our land has been taken away from us since the 1990s but we were relaxed about it before because we made our money from fishing,” said Yang Semao, one of the village elders. “Now, with inflation rising, we realise we should grow more food and that the land has a high value.”
 
Thousands of villagers stormed the local government offices, chasing out the party secretary who had governed Wukan for three decades. In response, riot police flooded the village, beating men, women and children indiscriminately, according to the villagers.
 
In the aftermath, the local government tried to soothe the bruised villagers, asking them to appoint 13 of their own to mediate between the two sides – a move which was praised. But after anger bubbled over again local officials hatched another plan to bring the rebellious village back under control. Last Friday, at 11.45 in the morning, four minibuses without license plates drove into Wukan and a team of men in plain clothes seized five of the village’s 13 representatives from a roadside restaurant.
 
A second attack came at 4am on Sunday morning, when a thousand armed police approached the entrance to the village.
 
“We had a team of 20 people watching out, and they saw the police searchlights. We had blocked the road with fallen trees to buy us time,” said Chen Xidong, a 23 year old. “They banged the warning drum and the entire village ran to block the police.”
 
After a tense two-hour standoff, during which the villagers were hit with tear gas and water cannons, the police retreated, instead setting up the ring of steel around Wukan that is in force today. The village’s only source of food, at present, are the baskets of rice, fruit and vegetables carried across the fields on the shoulder poles of friendly neighbours.
 
Then, on Monday, came the news that Xue Jinbo, one of the snatched representatives, had died in police custody, at the age of 43, from a heart attack. His family believe he was murdered.
 
“There were cuts and bruises on the corners of his mouth and on his forehead, and both his nostrils were full of blood,” said Xue Jianwan, his 21-year-old daughter. “His chest was grazed and his thumbs looked like they had been broken backwards. Both his knees were black,” she added. “They refused to release the body to us.”
 
Mr Xue’s death has galvanised his supporters and brought the explosive situation in the village to the brink. “We are not sleeping. A hundred men are keeping watch. We do not know what the government’s next move will be, but we know we cannot trust them ever again,” said Mr Chen. “I think they will try to prolong the situation, to sweat us out.”
 
From behind the roadblock, a propaganda war has broken out. Banners slung by the side of the main road to Wukan urge drivers to “Safeguard stability against anarchy – Support the government!” Nearby, someone has scrawled, simply: “Give us back our land.”
 
The news of Wukan’s loss has been censored inside China. But a blue screen, which interrupts television programmes every few minutes inside the village, insists that the “incidents” are the work of a seditious minority, and have now been calmed. “It is all lies,” said Ms Xue.
 
Her brother, meanwhile, said life had improved since the first officials were driven out three months ago. “We found we were better at administration. The old officials turned out not to have had any accounts in their office, so they must have been swindling us. And we have a nightwatch now, to keep the village safe. We have all bonded together,” said Xue Jiandi, 19.
 
With enough food to keep going in the short-term and a pharmacy to tend to the sick, the leaders of Wukan are confident about their situation.
 
But it is difficult to imagine that it will be long before the Communist Party returns, and there are still four villagers in police custody.
 
“I have just been to see my 25-year-old son,” Shen Shaorong, the mother of Zhang Jianding, one of the four, said as she cried on her knees. “He has been beaten to a pulp and his clothes were ripped. Please tell the government in Beijing to help us before they kill us all,”
 

[Crafty_Dog]

Too bad they don't have a second amendment , , ,