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Power User
Posts: 42527

« Reply #100 on: October 16, 2009, 06:56:13 AM »

I suppose I could put this in the Book Review thread, but I put it here:

It says something about the precarious state of the global economy that the world's most important economic relationship—between the U.S. and China—has been described by a leading economist as one of "codependency," akin, he has suggested, to that of a drug dealer and an addict.

According to this scenario, China (the dealer) exports low-priced goods to America (the addict), which can't stop consuming them. To keep the cycle going, China uses the dollars it accrues from its exports to buy billions of dollars in U.S. Treasurys. (As of September 2008, China became the largest holder of U.S. debt.) The infusion of foreign money helps to keep U.S. interest rates low, which in turn encourages more consumption. The arrangement worked for a while, but then (the scenario goes) the U.S. overdosed and suffered a breakdown. Now China is wondering about the wisdom of being a supplier. "We have lent a huge amount of money to the U.S.," said China's premier, Wen Jiabao, earlier this year. "Of course we are concerned about the safety of our assets. To be honest, I am definitely a little worried."

The relationship sounds rather dysfunctional, when put that way. But is it? In "Superfusion," Zachary Karabell notes certain tensions, but his focus is really on how the two economies became so intertwined and on why it is important to strengthen the bonds between them. Mr. Karabell rightly identifies this as "the crucial issue for the 21st century."

China and America are two of the world's three largest economies (alongside Japan). They traded $410 billion worth of goods in 2007, up from just $5 billion in 1980. Together they can sometimes account for more than half of the world's economic growth in a given year. An economic slowdown in either country can affect the entire global economy.

Yet the relationship—something each country should manage with extra care—is fraught with conflicts and misunderstandings and is threatened by domestic pressures. Mr. Karabell is critical of what he sees as the U.S. determination to "contest the rise of China every step of the way." He insightfully shows how fears of China's growing economic might are used as a battering ram against companies like Walmart—China's low labor costs are held to blame for the success of big-box stores, with their low-price goods. And of course China is a perfect villain for any lobbyist or politician who is eager to protect a U.S. manufacturer by curtailing trade.

In the past 18 months, however, the terms of the relationship have shifted dramatically. While the U.S. economy has been in recession, and the U.S. financial sector on the brink of collapse, China has managed to keep its own economy relatively stable. Its growth rate, though lower than usual, still came in at a robust 8% in the second quarter of 2009. And China's banking sector has experienced little of the turmoil of America's.

View Full Image
By Zachary Karabell
Simon & Schuster, 340 pages, $26
.So who is now the senior partner, so to speak? For years China has been on the receiving end of lectures from U.S. officials—its undervalued currency, inefficient banking system and high saving rate are perennial scolding points. But China is now the one doing the lecturing. Last year, the chairman of the country's banking regulatory commission asked in a speech: "Does money-making or doing business justify the regulators in ignoring their duty for prudential supervision and their job of preventing misbehavior?" Senior Chinese officials have also been chatting up the idea of displacing the dollar as the world's reserve currency. And China has been on a buying spree. Its acquisitions of foreign companies, or investments in them, totaled $56 billion last year. As recently as 2002, the annual total was just $140 million.

Alas, these developments get short shrift in "Superfusion." Instead, there are chapters rehashing how U.S. companies like Kentucky Fried Chicken, Avon and Federal Express made their inroads into China. There is an odd chapter on the shortcomings of Chinese data collection that only briefly touches on the U.S.-China relationship. Mr. Karabell gives China's banking sector a careful analysis, but he treats many other topics superficially. In a discussion of last year's U.S. market turmoil, he simply speculates about what was said in conversations between the U.S. Treasury secretary and China's premier. Most of the book's material seems to be drawn from secondary sources.

Still, the question at the heart of "Superfusion" is a pressing one: What will happen next? Mr. Karabell says that the U.S. must turn its thinking away from the military and security challenges of the 20th century and focus more on the economic challenges of the 21st. If it does so, one key "metric"—for the U.S. and the rest of the world—will be China's growth rate. Can it be sustained?

That depends. With a meager welfare state, Chinese consumers save and save. The consumption rate is only about 35% of gross domestic product—down from 49% in 1990—and the lowest of any major world economy (the U.S. rate is 70%). At some point China will have to consume more, if only to be less dependent on exports for its prosperity. Other changes are needed, too. A 2007 property-rights law may stimulate the economy, assuming that it is enforced, but China still needs to undo an array of obstacles that face foreign investors and domestic entrepreneurs. In the World Bank's most recent study on the ease of doing business in 183 countries, China scored only 89th—and 151st in the category of "launching a business."

But there is reason for optimism. On a visit to London earlier this year, Wen Jiabao, China's premier, claimed to have brought a copy of Adam Smith's "Theory of Moral Sentiments"—not quite "The Wealth of Nations" but still better than Mao's "Little Red Book."

Mr. Rees is the president of Geonomica, a speech-writing and consulting firm in McLean, Va., and has worked for the Office of the U.S. Trade Representative.
Power User
Posts: 15533

« Reply #101 on: November 07, 2009, 10:50:24 AM »,1518,658977,00.html

Rare earth and intellectual capital forge the path to 21st. century dominance.
Power User
Posts: 9482

« Reply #102 on: November 08, 2009, 10:01:42 AM »

Rare earth and intellectual capital forge the path to 21st. century dominance."

Very interesting article, however I do not buy your conclusion.  As much as giving away precious metals didn't make sense, hoarding and keeping them from an already over-priced market does not maximize the return either IMHO.

I have looked at the quality of our economic competitors and believe the only thing stopping unimaginable prosperity in America this century is the enemy within.
Power User
Posts: 15533

« Reply #103 on: November 08, 2009, 02:48:03 PM »

China is positioned to have a Saudi-like economic grasp on a vital natural resource. It will be another card in their deck to be played as needed.
Power User
Posts: 42527

« Reply #104 on: November 09, 2009, 10:29:40 PM »

Related to GM's and Doug's posts?




(WTO) on Wednesday to establish a dispute settlement panel and investigate China's
restrictions on exports of nine key raw materials. The parties had sought formal
consultations during the summer, but with the U.S. Trade Representative spokesperson
saying that consultations have been unsatisfactory, they now are moving on to the
next level in their protests. The request for a settlement panel is the latest
evidence of rising trade tensions as governments strive to recover from the global
recession. And  more importantly, it draws attention to growing trade frictions
between the United States and China.

China claims the export restrictions are part of its pro-environmental resource
preservation policies. But the practice in question reveals something more integral
to China's economic system.

"A problem with this practice arises if one happens not to be China."

With a population of 1.3 billion people, China’s greatest fear is social
instability; therefore, the government goes to great lengths to keep employment
levels up. This requires maintaining production levels even in periods of low global
demand, rather than cutting back on excess capacity and creating hordes of
unemployed workers who might turn to protests. Hence, in the case of the raw
materials in the WTO situation, the central government directs industries to
stockpile massive amounts of raw materials for inputs and implements export
restrictions to ensure that the domestic supplies are high and domestic prices are
low. This cuts down on costs for producers, while subsidies are applied where needed
to make up for the lack of profits.

With a deluge of Chinese products pouring across the globe, competing manufacturers
are wiped out and China wins greater market share.

A problem with this practice arises if one happens not to be China. Prices for the
same raw materials are high because China is hoarding them, so manufacturers
elsewhere see costs rise and markets evaporate. This explains the unity in U.S., EU
and Mexican demands that China cease this practice. Export restrictions (not to
mention a variety of other charges against China) clearly violate WTO protocols --
and though Beijing did secure a list of exceptions when it joined the WTO, the
materials in this dispute are not included. According to WTO procedures, the four
countries will have 60 days to try to resolve the disputes through the consultation
process. It might be years before the trade body adjudicates a case like this. But
at present, it's the threat that counts.

Nevertheless, the timing of Washington's move seems counterintuitive. Next week,
U.S. President Barack Obama embarks on his first tour of Asia since taking office,
including a much-hyped three-day visit to China. Tensions are flaring on trade
issues ranging from tires, steel and chickens to intellectual property rights,
climate change policy, and broader economic matters like exchange rates and
deficits. Meanwhile, the Americans are concerned about China's stance on possible
U.S.-led sanctions against Iran, not to mention its expanding naval presence in the
South China Sea. At the meetings, both sides will seek to smooth out the ruffles:
Pledging cooperation despite differences and denouncing protectionism will be the
order of the day. So why would Washington want to escalate tensions now?

The answer lies in Obama's domestic situation. The president has come up against a
series of intractable problems that easily could spiral into crises for his
administration -- from the pending decision on U.S. strategy in Afghanistan, to the
showdown over Iran's nuclear program, to relations with Russia. Domestic woes, too,
have piled up, including unemployment and the debate over health care reform.

But there is one sure way that the Obama administration can unify its core
constituency -- from union workers to human rights activists -- and galvanize
support when needed. And that is to take aim at China.

Copyright 2009 Stratfor.

Power User
Posts: 15533

« Reply #105 on: November 11, 2009, 08:42:25 AM »

If true, this will shake the world.
Power User
Posts: 9482

« Reply #106 on: November 11, 2009, 11:36:44 AM »

Between the China bulls and bears, I think the truth is somewhere in between.  There has been amazing growth but within that growth are numbers that wouldn't survive serious audit as well as a foundation built partly on a house of cards like bank loan portfolios etc.

Speaking of supply side, they actually lowered their corporate income tax rate in Jan. 2008 right while we were transitioning into Marxism.

It is actually good for the US economy to have the rest of the world strong economically.  In the case of China, my wish is for them to collapse to the point of breaking the regime, and then survive and grow as a free and strong economy that would challenge us to get our own economic house in order.  (Is that too much to ask?)
Power User
Posts: 42527

« Reply #107 on: November 12, 2009, 05:44:16 PM »

How do you get 8% GDP?

Build cities where there are no residents.
Power User
Posts: 15533

« Reply #108 on: November 15, 2009, 10:15:11 AM »

And now for a somewhat alternate take.
Power User
Posts: 42527

« Reply #109 on: January 09, 2010, 09:00:04 AM »

Can we get confirmation on this?  shocked

President Obama did right by Taiwan this week, allowing the sale—over Beijing's loud protests—of sophisticated antimissile batteries to the island democracy. We'll take that as a sign that there's a limit to how far the Administration is willing to go to improve relations with China at the expense of America's democratic allies.

The Bush Administration originally proposed the sale of an advanced Patriot ballistic missile interceptor system, or PAC-3, in 2001, as part of a package that included helicopters, submarines and technology upgrades. But Taiwan was eventually only offered about half of the deal, thanks to political bickering in Washington and Taipei. The formal request to Congress for the sale was only submitted in October 2008.

Meantime, the People's Liberation Army has more than 1,000 missiles pointed at Taiwan's 23 million people, and the Pentagon says it is adding about 100 missiles every year. Then there are the over 60 submarines China has patrolling the waters, plus its development of cyberwarfare capabilities and other asymmetrical threats. Taiwan itself can't possibly win an all-out war against China, but with U.S. help it can make the costs of a Chinese attack too prohibitive to contemplate seriously.

The argument against U.S. arms sales is that it clouds prospects for better relations between Taiwan and the mainland. But as Taiwanese President Ma Ying-jeou—a vocal advocate for a rapprochement with Beijing—has argued, the arms sales help the Taiwan-China dialogue by allowing Taipei to negotiate from a position of strength. Washington's own relationship with Beijing has hardly suffered over the three decades in which the U.S. has been selling arms to Taipei under terms of the 1979 Taiwan Relations Act.

None of this has prevented China from denouncing the deal, as it has previous sales. A Chinese government spokeswoman said Thursday the PAC-3 sale would cause "serious harm." China is also worked up about Taiwan's request to buy 66 F-16s to bolster its aging air force. The latter is still outstanding, as is about $6 billion worth of items that the Bush Administration didn't put forward for sale, such as Black Hawk helicopters, minesweepers and diesel submarines.

President Obama would be wise to approve those sales. As he has learned in recent months, his overtures to China—including his refusal to meet with the Dalai Lama—haven't been reciprocated in better cooperation on North Korea, Iran and other vital U.S. interests. The sooner Beijing learns this Administration will stand up for its friends, the friendlier it will itself become.
Power User
Posts: 15533

« Reply #110 on: January 09, 2010, 09:41:18 AM »

China again denounces U.S. arms sale to Taiwan
Fri Jan 8, 2010 11:32pm EST

Fri, Dec 4 2009
BEIJING (Reuters) - China on Saturday again denounced U.S. arms sales to Taiwan, saying they were an intrusion in Chinese internal affairs that risked undermining its relations with the United States.
Power User
Posts: 15533

« Reply #111 on: January 09, 2010, 09:43:41 AM »

Nice to see Barry show a little spine. Of course the PRC will not let this go unaddressed.
Power User
Posts: 42527

« Reply #112 on: January 09, 2010, 09:58:48 PM »

For those of you who haven't seen this yet:
« Reply #113 on: January 13, 2010, 11:51:51 AM »

What Google's Threat to Pull Out of China Really Means 28 comments
January 13, 2010 | about: GOOG / FXI / BIDU / YHOO   
Patrick Chovanec

An important news story is unfolding today in China. In the wee hours of this morning (Beijing time), David Drummond, Google’s (GOOG) Senior Vice President for Corporate Development and Chief Legal Officer, posted a statement on his blog. The gist of that statement is a business bombshell: Google, faced with what it sees as an intolerable level of censorship and harassment, has effectively decided to pull the plug on its China operations.

Drummond begins by describing the incident that immediately sparked this decision:

In mid-December, we detected a highly sophisticated and targeted attack on our corporate infrastructure originating from China that resulted in the theft of intellectual property from Google. However, it soon became clear that what at first appeared to be solely a security incident … was something quite different … we have evidence to suggest that a primary goal of the attackers was accessing the Gmail accounts of Chinese human rights activists.

Although Drummond does not explictly point the finger at the Chinese government as the perpetrator, it’s hard to read his words as implying anything else.

He goes on to note that when Google entered the Chinese market in 2006, it believed that the potential benefits outweighed some of the uncomfortable compromises it was forced to make. If this proved mistaken, the company pledged, it would reconsider its strategy. The recent cyberattacks, Drummond concludes, combined with China’s tightening controls over Internet access, have tipped the balance. As a result:

We have decided we are no longer willing to continue censoring our results on, and so over the next few weeks we will be discussing with the Chinese government the basis on which we could operate an unfiltered search engine within the law, if at all. We recognize that this may well mean having to shut down, and potentially our offices in China.

I hear from reliable sources that, as of this morning, has unilaterally lifted all of its censorship blocks and is running unfiltered in China. (A more recent report says that the famous “tank man” photo can be accessed, a major no-no as far as Chinese censors are concerned).

Tellingly, Drummond notes that Google’s decision was made in the U.S. “without the knowledge or involvement of our employees in China” — an effort, no doubt, to shield them from retaliation. In light of China’s arrest of four Rio Tinto employees last year on espionage charges following a series of commercial disagreements, Google’s concern is certainly understandable.

Although its statement is couched in diplomatic and open-ended language, make no mistake: Google has crossed the Rubicon. In the U.S., a statement like this might be just a tough-talk negotiating tactic, to see if the other side will blink. But in China, nobody issues an ultimatum — especially not to the government — unless they are fully expecting a final and irreconcilable break. As long as you have some hope of a favorable outcome, you bite your tongue. That’s precisely why Facebook, YouTube, and Twitter have uttered not a word of complaint, even as a six-month ban on accessing those sites has left their Chinese market share in ruins. Google’s decision to publicly throw down the gauntlet — a move sure to be seen by the Chinese government as a virtual declaration of war — is a sign the company has already written off China and is ready to pack its bags.

Some observers wonder whether Google is just using “human rights” as an excuse to fold a failing business, noting that its main Chinese competitor, Baidu (BIDU), has built up a 75% market share, leaving Google with just 18%. It’s certainly true that striking such a pose would win the company kudos from Congress, which was sharply critical of Yahoo (YHOO) when it handed over information to Chinese police that resulted in the arrest of a journalist.

Still, a company with Google’s resources doesn’t just abandon a huge market like China — even if it ranks a distant #2 — without good reason. There’s widespread feeling among foreign companies in China that the issues Google is complaining about are real, and serious. A senior person with a leading global tech company here in Beijing who I talked to, described Google’s announcement as “unprecedented,” and said it will make everyone rethink the way they do business in China. A diplomatic contact told me that the privacy and security issues raised were so serious that “the U.S. government’s response, or lack of response, will send a profound message” not just to China, but the entire world. Already, U.S. Secretary of State Hillary Clinton is demanding an explanation from China for the alleged cyberattacks.

If it does leave, to my knowledge, Google will be the first major U.S. company to quit China explicitly for reasons of political interference — and that marks a very significant development. China has always operated on the assumption that, no matter how they might grumble, foreign investors will ultimately accept whatever strictures China dishes out because nobody, in the end, is willing to walk away from the Chinese market. Google’s decision seriously undermines that assumption. There is a breaking point.
Update: The latest news I'm hearing over Twitter is that

Google is alternatively denying that you can access "tank man" photos through its Chinese site, or saying you always could, while some are reporting it has turned its censoring filters back on again

China has had a remarkably cautious initial response, saying it needs "to study" the Google allegations. I can confirm that, at this moment, and are still accessible from China, which really surprises me.

These developments raise two possibilities I did not previously entertain. The first is that Google has the unique size, visibility, and prestige to really play hardball with China, and that turning its censorship filters off and on again was a way to send a message to China that it is willing to hit the "nuclear" button, but is open to talking. The second is that the Chinese government is not completely unified on this issue, that the elements that (allegedly) attacked Google have created an unwelcome mess for other elements concerned that China's business reputation would be damaged if Google picks up its toys and goes home. It is quite possible that both scenarios are true, or neither. The story unfolds ... and is well worth monitoring closely. How it plays out will shape business-government relations in China in significant ways.
Power User
Posts: 42527

« Reply #114 on: January 15, 2010, 08:31:45 AM »

Published: January 14, 2010
SANTA CLARA, Calif. — Last month, when Google engineers at their sprawling campus in Silicon Valley began to suspect that Chinese intruders were breaking into private Gmail accounts, the company began a secret counteroffensive.

It managed to gain access to a computer in Taiwan that it suspected of being the source of the attacks. Peering inside that machine, company engineers actually saw evidence of the aftermath of the attacks, not only at Google, but also at at least 33 other companies, including Adobe Systems, Northrop Grumman and Juniper Networks, according to a government consultant who has spoken with the investigators.

Seeing the breadth of the problem, they alerted American intelligence and law enforcement officials and worked with them to assemble powerful evidence that the masterminds of the attacks were not in Taiwan, but on the Chinese mainland.

But while much of the evidence, including the sophistication of the attacks, strongly suggested an operation run by Chinese government agencies, or at least approved by them, company engineers could not definitively prove their case. Today that uncertainty, along with concerns about confronting the Chinese without strong evidence, has frozen the Obama administration’s response to the intrusion, one of the biggest cyberattacks of its kind, and to some extent the response of other targets, including some of the most prominent American companies.

President Obama, who has repeatedly warned of the country’s vulnerability to devastating cyberattacks, has said nothing in public about one of the biggest examples since he took office. And the White House, while repeating Mr. Obama’s calls for Internet freedom, has not publicly demanded a Chinese government investigation. Secretary of State Hillary Rodham Clinton, who had been the most senior U.S. official to talk of the seriousness of the breach, discussed it on Thursday with a Chinese diplomat in Washington, however, and a senior administration official said there would be a “démarche in coming days” — a diplomatic move.

On Thursday, China’s Foreign Ministry deflected questions about Google’s charges and dismissed its declaration that it would no longer “self-censor” searches conducted on, its Chinese search engine. A ministry spokeswoman said simply that online services in China must be conducted “in accordance with the law.”

In interviews in which they disclosed new details of their efforts to solve the mystery, Google engineers said they doubted that a nongovernmental actor could pull off something this broad and well organized, but they conceded that even their counterintelligence operation, taking over the Taiwan server, could not provide the kind of airtight evidence needed to prove the case.

The murkiness of the attacks is no surprise. For years the National Security Agency and other arms of the United States government have struggled with the question of “attribution” of an attack; what makes cyberwar so unlike conventional war is that it is often impossible, even in retrospect, to find where the attack began, or who was responsible.

The questions surrounding the Google attacks have companies doing business in China scrambling to confirm that they were victims. Symantec, Adobe and Juniper Networks acknowledged in interviews that they were investigating whether they had been attacked. Northrop and Yahoo, also described as subjects of the attacks, declined to comment.

Besides being unable to firmly establish the source of the attacks, Google investigators have been unable to determine the goal: to gain commercial advantage; insert spyware; break into the Gmail accounts of Chinese dissidents and American experts on China who frequently exchange e-mail messages with administration officials; or all three. In fact, at least one prominent Washington research organization with close ties to administration officials was among those hacked, according to one person familiar with the episode.

Even as the United States and companies doing business in China assess the impact, the attacks signal the arrival of a new kind of conflict between the world’s No. 1 economic superpower and the country that, by year’s end, will overtake Japan to become No. 2.

It makes the tensions of the past, over China’s territorial claims or even the collision of an American spy plane and Chinese fighter pilots nine years ago, seem as outdated as a grainy film clip of Mao reviewing the May Day parade. But it also lays bare the degree to which China and the United States are engaged in daily cyberbattles, a covert war of offense and defense on which America is already spending billions of dollars a year.

Computer experts who track the thousands of daily attacks on corporate and government computer sites report that the majority of sophisticated attacks seem to emanate from China. What they cannot say is whether the hackers are operating on behalf of the Chinese state or in a haven that the Chinese have encouraged.

The latest episode illuminates the ambiguities.

For example, the servers that carried out many of the attacks were based in Taiwan, though a Google executive said “it only took a few seconds to determine that the real origin was on the mainland.” And at Google’s headquarters in Mountain View, there is little doubt that Beijing was behind the attacks. Partly that is because while Mr. Obama was hailing a new era of cautious cooperation with China, Google was complaining of mounting confrontation, chiefly over Chinese pressure on it to make sure Chinese users could not directly link to the American-based “” site, to evade much of the censorship the company had reluctantly imposed on its main Chinese portal,

“Everything we are learning is that in this case the Chinese government got caught with its hand in the cookie jar,” said James A. Lewis, a senior fellow at the Center for Strategic and International Studies in Washington, who consulted for the White House on cybersecurity last spring. “Would it hold up in court? No. But China is the only government in the world obsessed about Tibet, and that issue goes right to the heart of their vision of political survival and putting down the separatists’ movements.”

Over the years, there have been private warnings issued to China, notably after an attack on the computer systems used by the office of the defense secretary two years ago. A senior military official said in December that that attack “raised a lot of alarm bells,” but the attacker could not be pinpointed. The administration cautioned Chinese officials that attacks seemingly aimed at the national security leadership would not be tolerated, according to one American who took part in delivering that message.

David E. Sanger reported from Santa Clara, and John Markoff from San Francisco. Mark Landler contributed reporting from Washington.
« Reply #115 on: January 29, 2010, 06:01:24 PM »

Chinese Security Scholar Calls for Overseas Basing to Counter U.S.

Posted by Justin Logan

Dr. Dingli Shen, a scholar of security studies and Chinese and U.S. foreign policies at Fudan University, had an interesting op-ed yesterday that merits attention.

Dr. Dingli Shen

According to Shen, China should consider developing “overseas military bases,” which he says people define in today’s context as “supply bases for the navy escorting the ships cruising in the Gulf of Aden and Somalia.”  Shen lists four main interests that justify overseas bases: “the protection of the people and fortunes overseas; the guarantee of smooth trading; the prevention of the overseas intervention which harms the unity of the country and the defense against foreign invasion.”

The lay reader should be clear that the United States does not look favorably on China’s developing the ability to guarantee its own smooth trading; we like having the leverage to determine, ultimately,whether we will allow foreign countries to trade.  The reader should also be aware that the third interest Shen lists is a diplomatic phrasing of “being able to prevent U.S. intervention in Taiwan,” perhaps in addition to some much smaller concerns about Tibet.  The Chinese do not need to do anything to pursue the fourth listed interest, preventing foreign invasion of China.  So what’s left is protecting Chinese people and money overseas; wresting control of China’s sea lines of communication from the United States; and preventing U.S. intervention in ways that would “harm the unity of the country.”

The piece really goes out of its way to make clear that this is all about countering American military power.

For instance, his first example justifying a greater role for China abroad is the Korean War.  According to Shen, “China had no option but to call up volunteer soldiers to fight against the overseas intervention in its northern neighbor.”  Later in the piece he makes clear that although he believes in each of the four interests above,

[t]he real threat to us is not posed by the pirates but by the countries which block our trade route.

The threats also include secessionism outside the Chinese mainland. The situation requires us be able to hit the vulnerable points of our potential opponents by restricting their international waterway.

In closing, he acknowledges three potential obstacles to successfully developing these overseas bases: “relations between base troops and the host countries,” “the relationship between the base troops and the countries neighboring to the host country,” and “the relationship between the big countries in the world.”  With respect to the latter, Shen notes,

It is inevitable for some countries to suspect our good intention in maintaining the world peace, but their suspicion shall not become an obstacle to our military base strategies. Currently, America, France and Britain own a majority of troop bases in the world. Yet China seldom felt being threatened by the military bases set up by Britain and France. Therefore, we have no reasons to feel that the military bases we set up will agitate other countries. (emphasis mine)

Note the shift from the three countries who have the majority of overseas bases at present to the two countries whose bases don’t concern China.

A few thoughts:

1) How did this debate start?  Shen refers to debates “online,” but presumably this issue has been taken up in greater detail recently in Chinese strategic studies journals.  I’d be interested to see the trajectory of this discussion both there and in public.

2) Why such an expressly anti-U.S.-hegemony tone?  This sort of thing is not exactly conducive to cloaking China’s growing military power in mystery.  The rhetoric about “peaceful rise,” remember, was viewed as too provocative because it included the word “rise,” so it got switched to “peaceful development,” which was viewed as sufficiently diplomatic.  But just coming out and saying “we need overseas bases to counter the U.S. military” like this is running, not walking, in the opposite direction.  This analysis sounds positively Mearsheimerian.  Why is this debate being carried out in this manner, in public and now in English?

3) How does this (or doesn’t it) tie in to prospective Chinese aircraft carrier capabilities?  As one recent article noted,

A PLAN carrier would have the effect of extending Chinese air capabilities without requiring overseas air bases. Nonetheless, while a nuclear carrier may be homeported in China, supplying it with jet fuel, food, ammunition, and other consumables becomes harder with distance. The U.S. Navy solves this problem with an extensive series of overseas logistics bases and large, fast replenishment ships that support the operations of carriers, themselves operating largely from the continental United States. Lacking such support mechanisms, a Chinese carrier is likely to stay closer to home, but it may still require a Chinese support presence overseas.

So then should we interpret such a call for overseas basing as reflecting a continuation of the “string of pearls” orientation of the PLAN, or as laying the groundwork for allowing carriers to operate farther away from Chinese ports?
Power User
Posts: 42527

« Reply #116 on: January 29, 2010, 11:44:42 PM »

China's Planned Evolution of Naval Capabilities
THE CHINA INTERNET INFORMATION CENTER, an online outlet for news and information run by the Chinese central government, published a commentary on Thursday discussing China’s right to build overseas bases to support naval operations and protect Chinese interests abroad. The article, written by Fudan University’s Institute of International Studies executive dean Shen Dingli, is a response to debates inside China and abroad over whether Beijing should establish naval bases, supply depots and related facilities overseas to support China’s naval participation in anti-piracy operations off the coast of Somalia, and ultimately defend China’s broader maritime interests.

The article comes a day after Captain Chris Chambers, director of operations for the U.S.-led Combined Maritime Forces (CMF), which jointly heads the Shared Awareness and Deconfliction (SHADE) working group that helps coordinate multinational anti-piracy operations off of the Somali coast, told a conference in Singapore that China would soon be enhancing its participation in SHADE, and would take on the rotating leadership role in the working group in a few months. Currently SHADE leadership rotates between the CMF and European Union maritime forces and coordinates operations among these and other independent anti-piracy forces in the area.

China will be the first nation participating in the anti-piracy operations to take a leadership role in SHADE, and will expand its naval contribution above its current three-ship task force and take responsibility for patrolling an area with more active piracy. The expansion of China’s contributions and coordinating role are currently awaiting final approval in Beijing, and the extended mission is raising the discussion of a resupply base in the Indian Ocean basin to ease logistics for maintaining China’s fleet. China has kept an anti-piracy task force in the area since December 2008 and has not indicated it is leaving anytime soon. This makes a more local supply depot something that would ease the logistical burden of maintaining the small fleet so far from mainland China.

“The idea of Chinese bases abroad, particularly in the Indian Ocean, immediately raises concerns that China is growing more active and aggressive in its naval activities.”

Beijing has used the anti-piracy operations to demonstrate its growing participation in international operations and develop capabilities to deploy Chinese naval forces far from home for an extended period of time. A natural outgrowth of this is the discussion of establishing overseas naval bases, or at least arranging docking and resupply agreements at other countries’ ports to sustain Chinese maritime operations. But the idea of Chinese bases abroad, particularly in the Indian Ocean, immediately raises concerns in India and elsewhere that China is growing more active and aggressive in its naval activities.

In some sense, these perceptions are accurate, at least so far as China’s planned evolution of capabilities are concerned. China’s economic growth has led to a major shift in the country’s resource needs. China now imports large amounts of raw materials, including oil and minerals, from the Middle East and Africa. As China grows more dependent upon the steady flow of these supplies, it has also grown concerned about the security of its supply lines.

China has long been a land power and its forays into international waters have been few and far between, despite a series of explorations along the Indian and African coasts in the 15th century. Redesigning and training its navy to take a more active role in maritime security is now a major focus of its recent military reforms and a key area is the ability to protect one of its main supply arteries through the Indian Ocean. Beijing has been cautious in this task as it faces opposition from India and the United States, both of which have a much stronger and more secure presence in the region, and both of which have little interest in seeing China significantly expand its naval capabilities.

The anti-piracy operations have given Beijing the perfect opportunity to test and refine its capabilities in a non-threatening manner, and talk of resupply bases — and thus a more permanent Chinese naval presence — is something Beijing is considering carefully but seriously. China is years, if not decades, away from having the ability to sustain a true blue water naval capability and even further from being able to truly challenge U.S. maritime dominance, but each step Beijing takes gives it the skills and experience necessary to make the next move forward. Taking a leadership role in SHADE also gives China a valuable opportunity to observe and learn the protocols and operations of other nations’ fleets — lessons it can apply to its own operations.

Beijing may be far from floating a blue water navy in any sustainable way, but China has recognized the vulnerability of its dependence on overseas resources and is actively working to improve its ability to protect its own supply lines. But when these lines match those of others with equal or even more severe dependencies, like Japan, or pass through competitor’s areas of strategic interest, like India or the United States, even a defensive intent can be perceived as potentially aggressive preparation or action. It is this sort of perception of capabilities that can quickly escalate into competition or an arms race and keep tensions high. It also creates room for misunderstandings and accidents — as we have already seen in China’s more active operations in the South China Sea, and in the U.S. moves to temper Beijing’s advances.
prentice crawford
« Reply #117 on: January 30, 2010, 12:10:30 AM »

 With Guro craftydog's previous post in mind.

prentice crawford
« Reply #118 on: January 30, 2010, 04:36:42 AM »

China suspending military exchanges with the U.S. news services

Beijing - China will suspend mutual military exchanges with the U.S. over its arms sales to Taiwan, state news agency Xinhua said on Saturday.
 "Considering the severe harm and disgusting effect of U.S. arms sales to Taiwan, the Chinese side has decided to suspend planned mutual visits," Xinhua quoted the Defense Ministry as saying.

Earlier, China angrily warned the U.S. that the plan to sell 6.4 billion in arms to Taiwan would seriously harm already-strained ties. One Chinese expert said the sale would give Beijing a "fair and proper reason" to accelerate weapons testing.

The U.S. is "obstinately making the wrong decision," China's Foreign Ministry said in a statement on its Web site.


It said Vice Foreign Minister He Yafei warned the U.S. Embassy that the planned sale would "cause consequences that both sides are unwilling to see" and "seriously harm U.S.-Sino relations" He urged that it be immediately canceled, it said.

A spokeswoman for the U.S. Embassy, Susan Stevenson, confirmed that China expressed its views, and said the Embassy had no comment.

A notification of the planned sale posted Friday on a Pentagon Web site said it would include 60 UH-60M Black Hawk helicopters,114 Patriot Advanced Capability-3 missiles, mine hunting ships and information technology. U.S. lawmakers have 30 days to comment on the proposed sale; without objections, it would proceed.

Taiwan is the most sensitive issue in U.S.-China relations, with the potential to plunge into conflict two powers increasingly linked in security and economic issues. China claims the selfgoverning island as its own, while the U.S. is Taiwan's most important ally and largest arms supplier.

China vehemently opposes U.S. arms sales to Taiwan, and has threatened to invade should it ever formalize its de facto independence.

The U.S., which told China of the sale only hours before the announcement, acknowledged that Beijing may retaliate by temporarily cutting off military talks with Washington, which happened after the former Bush administration announced a multibillion-dollar arms sale to Taiwan in 2008.

No F-16 fighters

"Maybe the People's Liberation Army will accelerate weapons testing, because this time we have a fair and proper reason to do so," said Jin Canrong, a professor of international studies at China's Renmin University.

The package, however, dodges a thorny issue: the F16 fighter jets that Taiwan covets are not included.

The Pentagon's decision not to include the fighters and a design plan for diesel subs - two items Taiwan wants most - "shows that the Obama administration is deeply concerned about China's response," said Wang Kao-cheng, a defense expert at Taipei's Tamkang University.

China has more than 1,000 ballistic missiles aimed at Taiwan. The U.S. government is bound by law to ensure the island is able to respond to Chinese threats.

« Last Edit: January 30, 2010, 04:43:43 AM by prentice crawford » Logged
« Reply #119 on: January 30, 2010, 08:20:55 AM »

With Guro craftydog's previous post in mind.


We could always take it back in something less than a couple days if we needed to, say in the case of this company wanting to do some sort of denial of service attack.   The ability of china to project power is still devweloping and they would not be able to do anything aside from a trade embargo and that would hurt them more than us.
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« Reply #120 on: January 30, 2010, 09:19:10 AM »

With our accumulating and seemingly accelerating economic, political, and military weakness there is going to be more and more of this.

My guess is that BO looks for an exit from Afpakia, he has already committed to an exit from Iraq, Iran will get the bomb, and Russia already retakes the Ukraine (and prepares Georgia) and the confidence of the Poles and the Czechs in our work is minimal.  Seeing this Turkey will not place much value on our friendship.

But I digress-- this thread is about China.  On our current path, China is preparing to retake Taiwan.
« Reply #121 on: January 30, 2010, 09:29:40 AM »

China thinks in terms of generations; we can barely think past the next election cycle. I fear what our shortsightedness will bring.
prentice crawford
« Reply #122 on: January 30, 2010, 07:42:05 PM »

 But isn't that the plan, knock the U.S. out of super power status, level the playing field to make globalisation of government possible? It doesn't seem to matter to these ideologically insane lunatics that this could lead to China and Russia reemerging as super powers and leaving us so weak that they will seek our end. We are screwed guys. Some Leftist have suffered an ideopsychotic break and actually think that their theories work in reality.
« Last Edit: January 30, 2010, 10:35:06 PM by prentice crawford » Logged
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« Reply #123 on: January 31, 2010, 07:30:36 PM »

The meaning of the last sentence is not clear to me, but an interesting read nonetheless.

China's strident tone raises concerns among Western governments, analysts
By John Pomfret
Washington Post Staff Writer
Sunday, January 31, 2010;

China's indignant reaction to the announcement of U.S. plans to sell weapons to Taiwan appears to be in keeping with a new triumphalist attitude from Beijing that is worrying governments and analysts across the globe.

From the Copenhagen climate change conference to Internet freedom to China's border with India, China observers have noticed a tough tone emanating from its government, its representatives and influential analysts from its state-funded think tanks.

Calling in U.S. Ambassador Jon Huntsman on Saturday, Chinese Vice Foreign Minister He Yafei said the United States would be responsible for "serious repercussions" if it did not reverse the decision to sell Taiwan $6.4 billion worth of helicopters, Patriot Advanced Capability-3 missiles, minesweepers and communications gear. The reaction came even though China has known for months about the planned deal, U.S. officials said.

"There has been a change in China's attitude," said Kenneth G. Lieberthal, a former senior National Security Council official who is currently at the Brookings Institution. "The Chinese find with startling speed that people have come to view them as a major global player. And that has fed a sense of confidence."

Lieberthal said another factor in China's new tone is a sense that after two centuries of exploitation by the West, China is resuming its role as one of the great nations of the world.

This new posture has befuddled Western officials and analysts: Is it just China's tone that is changing or are its policies changing as well?

In a case in point, one senior U.S. official termed as unusual China's behavior at the December climate conference, during which China publicly reprimanded White House envoy Todd Stern, dispatched a Foreign Ministry functionary to an event for state leaders and fought strenuously against fixed targets for emission cuts in the developed world.

Another issue is Internet freedom and cybersecurity, highlighted by Google's recent threat to leave China unless the country stops its Web censorship. At China's request, that topic was left off the table at this year's World Economic Forum in Davos, Switzerland, Josef Ackermann, chief executive of Deutsche Bank and co-chairman of the event, told Bloomberg News. The forum ends Sunday.

China dismisses concerns

Analysts say a combination of hubris and insecurity appears to be driving China's mood. On one hand, Beijing thinks that the relative ease with which it skated over the global financial crisis underscores the superiority of its system and that China is not only rising but has arrived on the global stage -- much faster than anyone could have predicted. On the other, recent uprisings in the western regions of Tibet and Xinjiang have fed Chinese leaders' insecurity about their one-party state. As such, any perceived threat to their power is met with a backlash.

A spokesman for the Chinese Embassy in Washington said China's tone had not changed.

"China's positions on issues like arms sales to Taiwan and Tibet have been consistent and clear," Wang Baodong said, "as these issues bear on sovereignty and territorial integrity, which are closely related to Chinese core national interests."

The unease over China's new tone is shared by Europeans as well. "How Should Europe Respond to China's Strident Rise?" is the title of a new paper from the Center for European Reform. Just two years earlier, its author, institute director Charles Grant, had predicted that China and the European Union would shape the new world order.

"There is a real rethink going on about China in Europe," Grant said in an interview from Davos. "I don't think governments know what to do, but they know that their policies aren't working."

U.S. officials first began noticing the new Chinese attitude last year. Anecdotes range from the political to the personal.
At the World Economic Forum last year, Premier Wen Jiabao lambasted the United States for its economic mismanagement. A few weeks later, China's central bank questioned whether the dollar could continue to play its role as the international reserve currency.
And in another vignette, confirmed by several sources, a senior U.S. official involved in the economy hosted his Chinese counterpart, who then made a series of disparaging remarks about the bureau that the American ran. Later that night, the two were to dine at the American's house. The Chinese representatives called ahead, asking what was for dinner. They were informed that it was fish. "The director doesn't eat fish," one of them told his American interlocutor. "He wants steak. He says fish makes you weak." The menu was changed.

Tone with Europe, India

With Europe and India, China's strident tone has been even more apparent. In autumn 2008, China canceled a summit with the European Union after French President Nicolas Sarkozy met with the exiled Tibetan leader, the Dalai Lama. Before that, it had denounced German Chancellor Angela Merkel over her contacts with the Tibetan spiritual leader. And in recent weeks, it has engaged in a heated exchange with British officials over its moves to block a broader agreement at the climate conference.
At the Chinese Embassy, Wang differed on the climate issue. "China is strongly behind the idea of meeting the issue of climate change," he said, "but at the same time we think that there are some people who want to confuse the situation, and we feel the need to try to let the rest of the world know our position clearly."

China also suspended ties with Denmark after its prime minister met the Dalai Lama and resumed them only after the Danish government issued a statement in December saying it would oppose Tibetan independence and consider Beijing's reaction before inviting him again.

"The Europeans have competed to be China's favored friend," Grant said, "but then they get put in the doghouse one by one."
China's newfound toughness also played out in a renewed dispute with India over Beijing's claims to the Indian state of Arunachal Pradesh, which borders Tibet. Last summer, China blocked the Asian Development Bank from making a $60 million loan for infrastructure improvements in the state. India then moved to fund the projects itself, prompting China to send more troops to the border.

David Finkelstein, a former U.S. Army officer at the Defense Intelligence Agency who now runs the China program at the Center for Naval Analyses, said the new tone underscores a shift in China. "On the external front," he said, "we will likely see a China that is more willing than in the past to proactively shape the external environment and international order rather than passively react to it."
An example would be events that unfolded in December when 22 Chinese Muslims showed up in Cambodia and requested political asylum. China wanted to hold seven of them on suspicion of participating in anti-Chinese riots in the Xinjiang region in July.

Under intense pressure from Beijing, Cambodia sent the group home, despite protests from the United States. Two days after the group was repatriated, China signed 14 deals with Cambodia worth about $1 billion.

What the future holds

Whether this new bluster from Beijing presages tougher policies and actions in areas of direct concern to the United States is a key question, Lieberthal said. What China does after the United States sells Taiwan the weapons may provide some clues.
Even before the United States announced its plans Friday, at least six senior Chinese officials, including officers from the People's Liberation Army, had warned Washington against the sale.
Once the deal was announced, China's Defense Ministry said it was suspending a portion of the recently resumed military relations with the United States. China also announced that it would sanction the U.S. companies involved in the sale.
What happens next will be crucial. China quietly sanctioned several U.S. companies for participating in such weapons sales in the past. However, it would mark a major change if China makes the list public and includes, for example, Boeing, which sells billions of dollars worth of airplanes to China each year.

He, the vice foreign minister, warned that the sales would also affect China's cooperation with the United States on regional issues. Does that mean China will continue to block Western efforts to tighten sanctions on Iran? Bonnie S. Glaser, a China security analyst at the Center for Strategic and International Studies, said the answer will probably come soon.

France takes over the presidency of the U.N. Security Council on Monday and is expected to push for a rapid move in that direction.
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« Reply #124 on: February 03, 2010, 11:12:00 PM »

China's Unsustainable Economic Model
CHINA RELEASED THE BREAKDOWN of its economic growth statistics on Tuesday. Bottom line: falling exports weighed heavily on growth and nearly canceled out the GDP gains of domestic consumption. Investment — mostly in infrastructure and public services — comprised over 90 percent of growth.

These results capture the essence of everything STRATFOR has said about the Chinese economy over the past year. Like many countries affected by the recent economic crisis, China resorted to government stimulus to make up for the sudden loss in private demand. But unlike other states that use such measures in emergencies, China’s growth has always been fueled by massive infusions of government funds and credit from a state-controlled banking system. The endless stream of loans nourishes the businesses that employ China’s enormous population. Exports play an important role because they bring in new money to be redistributed by the banks as directed by the government.

Of course, the redistribution process creates divisions between the haves and the have-nots, but such divisions can be elided when times are good. It is only when exports slump that it becomes evident that China’s consumers are too poor to buy all the goods the country produces, and the weight of maintaining growth falls squarely upon the financial system. This setup is particularly problematic because a centrally controlled financial system that endlessly transfers wealth from efficient internationally-linked sectors to inefficient state sectors will eventually collapse under the weight of bad loans.

“Chinese leaders rarely have the coincidence of political and economic momentum necessary to launch major reforms more than once.”
Chinese leaders are well aware that this economic model is unsustainable and have periodically pushed for major restructuring. The primary goal is to increase domestic consumption, shifting reliance off exports, and transitioning into a consumer-driven economic model that is more capable of steady and long-term growth, albeit at a slower pace. Prominent leaders are now calling for such reforms. Knowing that the stimulus cannot last forever, Beijing is attempting to find ways to slightly moderate lending, lower provincial growth targets and cool down the real estate sector while reinvesting government funds in rural areas to boost consumption.

The problem is that the first steps are exceedingly painful, because they involve weaning state businesses from their addiction to cheap credit. A period of slower growth is the price for reforming an economy, and slower growth is exponentially more troublesome in a country with China’s regional differences, wealth disparities and large population. Such reforms are also always obstructed by the inertia in the system then cut short before the finish, usually due to the onset of a new emergency. Chinese President Hu Jintao initiated restructuring reforms in the mid-2000s, but the financial crisis erupted in late 2008, forcing him back into the time-tried solution of credit expansion.

Chinese leaders rarely have the coincidence of political and economic momentum necessary to launch major reforms more than once. With the Communist Party preparing for a leadership transition in 2012, Hu does not have time for another major reform push. No leader in his final years in power wants to mar his legacy with dramatic changes that could destabilize the system.

Moreover, China’s primary export markets have not recovered to the point that China can securely phase out its stimulus programs. Exports only showed positive signs in December 2009, and it is not yet clear where they will go in the coming months. Demand in Europe remains weak due to its own economic woes. The United States is seeing economic life return, but a weak labor market has ensured that households continue to save rather than spend. The United States has also begun pressuring Beijing on a host of disagreements and is brandishing a big stick when it comes to trade protections. In other words, exports are Beijing’s only short-term hope, and they are highly uncertain.

All of this leaves China with little option but to continue using the financial tools it has for as long as they will work, and recentralizing power where necessary to prevent instability. This may mean a China that is more sensitive to perceived external threats, and more reactive politically. It may also mean that foreigners will start thinking twice before doing business in China.
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« Reply #125 on: February 09, 2010, 05:45:02 PM »
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« Reply #126 on: February 09, 2010, 07:13:47 PM »

I really think its time to suggest we raise soc sec and all retirement ages to 70.
No one should get soc sec till then. No gov employee should be on pension till then.
We all work till then unless one is independently able to pay for their OWN retirement or they worked for a private company that can/will do that (and not forced by labor unions into it).
The dole must go.
We are flushing this country's future down the toilet.
The debt will never be paid off.

We can't tax and spend our way out of it like the ONE thinks.
We can't grow our way out of it with endless regulations and taxes.
We have to be free to work our asses off to get out of this mess.

Someone recently told me "f..k" future generations.  He has kids too!  This is a sad commentary of the thinking of some Americans.

It is so hard to be optimistic.

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« Reply #127 on: February 18, 2010, 12:00:38 PM »

Relations between the United States and China have come under increasing stress during the past year. While many of the issues at the root of the tensions have existed for some time, China’s resistance to the U.S. push for sanctions on Iran has become the most urgent and potentially disruptive dispute between the two countries. China believes sanctions could jeopardize its energy security, and that its accession to such a move could harm its international image. However, China will not be able to stop sanctions and will have few options to retaliate against the United States in a way that does not harm Beijing even more.


The United States has intensified its public courting of Beijing’s support for a potential sanctions regime against Iran in recent days. U.S. Secretary of State Hillary Clinton visited Saudi Arabia on Feb. 15-16 where she encouraged a deal in which the Saudis would increase oil exports to China to guarantee China’s oil supply amid the tensions with Iran. On Feb. 14, U.S. Vice President Joe Biden said he expected the Chinese to provide support for sanctions, while National Security Adviser Jim Jones said the same day that China has supported nuclear nonproliferation efforts against North Korea and that as a “responsible world power” it would also do so with Iran. This followed U.S. President Barack Obama’s statement the previous week saying that while the Russians have become “forward leaning” on the sanctions issue, China’s support remains a question.

Washington’s focus on China over the Iranian issue comes in the midst of a rocky patch in overall Sino-American relations. China has consistently resisted the push for sanctions, as they could put Beijing’s energy security at risk and curtail its growing bilateral relationship with Tehran. Ultimately, the Chinese do not have to make a final decision on sanctions until the U.N. Security Council (UNSC) takes a vote. But China has few tools to use against the United States to resist sanctions — and to do so would run the risk of provoking American reactions that China would rather avoid.

The Root of Sino-U.S. Tensions

The Chinese and American partnership has undergone several strains since American financial troubles became global financial troubles in late 2008. Inherent characteristics of the two economies, and their mutual dependence, made it inevitable that economic and trade tensions would arise. China’s single-largest customer is the United States, to which it exported $220.8 billion worth of goods and services in 2009, 18 percent of China’s total exports. By contrast China is the United States’ third-largest export market, importing $77.4 billion in total in 2009. In the process of running large trade surpluses, China has racked up $2.39 trillion in foreign exchange reserves and invested about one third of that into U.S. Treasury debt, thereby helping the U.S. Federal Reserve to maintain low interest rates that perpetuate U.S. consumption of Chinese goods.

U.S.-Chinese economic and financial interdependency has called attention to vulnerabilities and disagreements. The Obama administration slapped tariffs on Chinese-made tires in September 2009, and a host of other disputes have arisen at the World Trade Organization (WTO). While these disputes are mainly political efforts meant to release domestic social pressure, both states are aware that there is potential for protectionist tactics to spiral out of control, making the relationship inherently uneasy and suspicious.

Economic tensions are coupled with military ones. There is already lack of trust between China and the United States on the question of defense. Beijing’s military power has increased as its economic success has enabled greater reforms and better weaponry, and Beijing’s rising military profile has caused concern among states that doubt its intentions. Meanwhile the United States is the world’s leading military power by far, and not only dominates the oceans with naval power (implicitly threatening China’s vital supply lines) but also maintains strong alliances with states on the Chinese periphery, including Japan, South Korea and Taiwan, a territory Beijing claims as its own. Military-to-military talks were canceled in 2008 when the Bush administration agreed to a new arms package to Taiwan, and briefly restarted when China canceled them again in 2010 following the Obama administration’s approval of the deal.

These broader national security issues have become entangled with the trade spats. China has threatened sanctions on American arms manufacturers for making the weapons that Washington is selling to Taiwan in the most recent U.S. arms package. China’s threat to introduce retaliatory sanctions marks a harsher reaction to such arms deals than in the past. On a separate front, a conflict has erupted over China’s Internet control policies and American cybersecurity. China has also reacted sharply against American criticism of its policies in dealing with ethnic minorities and separatism in Xinjiang and Tibet, which has created another diplomatic row in light of President Obama’s plan to meet with the Dalai Lama on Feb. 18.

Resistance to Iranian Sanctions

While trade and defense tensions have long been present in the Sino-U.S. relationship, the controversy over the Iranian nuclear program — and the U.S. push for sanctions — have introduced a new, urgent and potentially destabilizing element into the dynamic. China has rejected the idea of new sanctions since the Obama administration launched negotiations in mid-2009, and the Chinese have shown increasing displeasure with the U.S. sanctions drive since late December 2009 by postponing and sending lower-level officials to negotiations with the P-5+1 group, which consists of the five permanent members of the UNSC (China, the United States, the United Kingdom, France, and Russia) plus Germany. China’s foreign ministry has continued its rejection of sanctions in 2010.

China’s position on Iran follows from its concerns for energy security. China imported about 51 percent of its oil in 2009, and Iran was the third-largest supplier, providing about 11.4 percent of its imports — after Saudi Arabia (20.5 percent) and Angola (15.8 percent). While the current batch of proposed sanctions do not target Iranian oil exports, they would escalate tensions in the Persian Gulf overall. China fears that a military conflict could erupt that would threaten supply lines from other Gulf providers, such as Saudi Arabia or Oman, since the Iranian retaliation might target the Strait of Hormuz through which roughly half of China’s total oil imports transit. Without a steady stream of Gulf oil, China’s ability to maintain economic growth would be threatened. And China is not willing to take such risks with its energy supply.

Moreover, China’s exports of gasoline and refined oil products to Iran have grown in recent months. Iran’s dysfunctional domestic energy situation forces it to import these goods, and China has excess refining capacity. This growing area of trade would specifically be targeted in international sanctions, as the Americans have long signaled that Iran’s dependency on external sources for gasoline is its Achilles’ heel. Sanctions against Iran would also interfere with China’s investments in Iran’s energy sector — including China National Petroleum Corp’s (CNPC) planned exploration of Iran’s massive South Pars natural gas field in March, as well as deals for oil production involving CNPC in Iran’s North Azadegan and Sinopec in the Yadavaran oil field. In other words, while China will not base its decisions solely on its exports to and investments in Iran, those considerations are substantial and will not be ignored.

China also has a reputation to uphold. Especially in recent years, China has positioned itself as a global leader, seeking to complement its economic power with rising military and political status. Beijing has made its voice heard at the United Nations, the G-20 and other global forums as a leader of the developing countries and a counterweight to the developed countries. Simultaneously, China has sought to play a more active role in international security operations, including peacekeeping and disaster relief, and has taken a leading role in the international anti-piracy efforts off the coast of Somalia, all with the intention of enhancing its prestige and developing powers outside the economic sphere. These efforts are also meant to present China as a potential alternative global leader to the United States, and to earn supporters and followers. A substantial amount of credibility thus rests on China’s defending of states like Iran that are antagonistic toward the United States — if China turns its back on Iran, then countries in Latin America, Africa and Southeast Asia that might have thought they could count on Beijing in a pinch will have to rethink their policies. On the contrary, if Beijing can prolong negotiations and delay serious action on Iran, it can extend the time in which the United States is bogged down in the Middle East, winning more room to maneuver toward meeting domestic and international objectives.

Limited Options

Beijing’s problem is that it has very few tools with which to influence the United States’ behavior in general, not to mention toward Iran. China’s only tools to pressure the United States are economic — specifically through trade disputes and purchases of U.S. debt — and they would backfire. Beijing is also not able to directly affect negotiations between the United States and Russia on sanctions. And if sanctions are proposed in the UNSC, China can veto them only if it is prepared for the blowback from the United States.

China’s chief weakness lies in the fact that it cannot escape economic troubles until its export sector revives, but the United States has the ability to put pressure on this sector. The Obama administration has shown a willingness to exercise Section 421, an American law that China admitted into its WTO accession agreement in 2001 that gives the United States the right to enact barriers when it perceives that a dramatic increase in Chinese imports into the American market could disrupt domestic producers. The significance of the September tire tariffs was primarily to warn China that Washington is willing to use this prerogative and there is little China can do about it. If Beijing should seek to retaliate through its own tariffs, it risks provoking a trade war with the United States that it could not win, since its economy is too fragile to sustain the shocks that could be caused by a more aggressive use of Section 421, or more drastic measures.

Even China’s great advantage of being the United States’ primary creditor does not provide as much leverage as one might think. At the latest tally (in December 2009), China held around $755 billion in U.S. Treasury debt, about 6 percent of total U.S. government debt. Slowing or stopping the purchase of U.S. Treasury bonds could have an effect on the U.S. economic recovery, were it feasible for China to do so. But selling off large chunks of American debt would not only require finding lots of very rich buyers, but would leave Beijing with nowhere to invest its surplus dollars month after month, since the other deep debt markets are unsafe (Japan), vulnerable to exchange rate risk (Europe) or too small (everyone else). Investing that much cash into commodities would both roil global debt markets and drive commodity prices sky high. Even if Beijing could successfully diversify away from U.S. debt, the move would cause interest rates to rise in the United States and disrupt U.S. consumption patterns crucial for China’s economy (and global economic stability).

A Russian Turn?

Recently, prominent Russian authorities have made statements implying that Moscow was becoming more willing to endorse sanctions. As long as Russia appears intransigent on the U.S. call for sanctions, it provides China with diplomatic cover. But if a Russian shift is in fact under way — and there is no hard evidence yet that the United States has offered the concessions necessary to win Russia over — then it will have an impact on China’s strategy.

Moscow is critical to the efficacy of any sanctions regime because it can circumvent sanctions by means of its communication and transportation routes through the Caucasus and Central Asia to Iran. Without Russia, international sanctions will not work. Unlike Russia, however, China is not capable of making or breaking sanctions covertly through its participation or lack thereof — its links to Iran go over sea routes, making them vulnerable to American naval power (while the land routes from China to Iran are logistically unfeasible and still hinge on Russian influence). Finally, the United States and European allies are not likely to bring sanctions to a vote at the UNSC unless they have already gained the assurances they need from Russia — and China has no ability to impact these negotiations.

If a resolution authorizing sanctions goes to the UNSC, China will have to determine whether to approve, abstain or to exercise its veto (and China has only vetoed sanctions once, sanctions against Zimbabwe in 2008). Voting for sanctions, China will be stuck with enforcing them (and all that enforcement entails) and managing the domestic and international blow to its reputation for caving to American demands despite its much-vaunted rising-power status. Still, this is a path that China has taken before, and is also likely to take in the event that sanctions are watered down. But even if China abstains from voting to register its displeasure, it will be bound by law to enforce the sanctions, or else it will be publicly exposed for undermining them and subject to a harsh reaction from the United States.

Alternately, if the Chinese were to veto a sanctions resolution, they would risk marginalizing the UNSC’s role in dealing with Iran. The United States has shown before that it is willing to act with an international coalition outside of the United Nations, and Iran presents just the type of scenario in which the United States can do so with broad international support, including all the leading European powers and possibly even Russia. Since the UNSC is a key arena for China in attempting to expand its global influence, Beijing would suffer the effects of both isolating itself from the American coalition and seeing the influence of its UNSC seat dwindle.

Looking Ahead

With little impact on the international negotiations, and limited ability to challenge the United States, Beijing can only attempt to play the diplomatic game and stall. The Russians have not yet signed onto sanctions, and as long as they remain in limbo, Beijing does not have to commit. Nevertheless, exposure to the United States is the reason that China’s Communist Party leadership has become consumed with furious internal debate over the country’s path forward. Beijing is fully aware that the United States plans to withdraw from the Middle East in a few years, which raises the frightful question of where the superpower will focus its attention next. China is afraid that it is the next target, and sees renewed U.S. attention to Southeast Asia as the beginning of a full-scale containment policy. The problem for China is that to decrease its vulnerability to foreign powers will require difficult reforms, and at a time when the Communist Party is approaching a leadership transition in 2012 and the course ahead is uncertain. With these considerations in mind, China must weigh whether it can afford to break with the United States now over Iran, or whether it could better spend its energies fortifying against what it sees as a likely onslaught of geopolitical competition from the United States in a few short years.
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« Reply #128 on: March 09, 2010, 06:49:03 AM »

By Jennifer Richmond and Rodger Baker

China’s National People’s Congress (NPC) remains in session. As usual, the meeting has provided Beijing an opportunity to highlight the past year’s successes and lay out the problems that lie ahead. On the surface at least, China has shown remarkable resilience in the face of global economic crisis. It has posted enviable gross domestic product (GDP) growth rates while keeping factories running (if at a loss) and workers employed. But the economic crisis has exposed the inefficiencies of China’s export-dependent economic model, and the government has had to pump money into a major investment stimulus package to make up for the net drain the export sector currently is exacting on the economy.

Related Special Topic Page
China’s Economic Imbalance
For years, China’s leaders have recognized the risks of the current economic model. They have debated policy ideas to shift from the current model to one that is more sustainable in the long run and incorporates a more geographically equitable growth and a hefty rise in domestic consumption. While there is general agreement on the need for change, top leaders disagree on the timing and method of transition. This has stirred internal debates, which can lead to factionalization as varying interests align to promote their preferred policy proscription. Entrenched interests in urban areas and the export industry — along with constant fears of triggering major social upheaval — have left the government year after year making only slight changes around the margins. Often, Beijing has taken one step forward only to take two back when social instability and/or institutional resistance emerge.

And this debate becomes even more significant now, as China deals simultaneously with the aftermath of the global economic slowdown and preparations for a leadership transition in 2012.

The Hu Agenda
Chinese President Hu Jintao came into office eight years ago with the ambitious goal of closing a widening wealth gap by equalizing economic growth between the rural interior and coastal cities. Hu inherited the results of Deng Xiaoping’s opening and reform, which focused on the rapid development of the coastal areas, which were better geographically positioned for international trade. The vast interior took second billing, being kept in line with the promise that in time the rising tide of economic wealth would float all ships. Eventually it did, somewhat. But while the interior saw significant improvements over the early Mao period, the growth and rise in living standards and disposable income in the urban coastal areas far outstripped rural growth. Some coastal urban areas are now approaching Western standards of living, while much of the interior remains mired in Third World conditions. And the faster the coast grows, the more dependent China becomes on the money from that growth to facilitate employment and subsidize the rural population.

Hu’s predecessor, Jiang Zemin, also recognized these problems. To address them, he promoted a “Go West” economic policy designed to shift investment further inland. But Jiang faced the same entrenched interests that have opposed Hu’s efforts at significant change. While Jiang was able to begin reform of the bloated state-owned enterprises, he softened his Westward economic drive. Amid cyclical global economic downturns, China fell back on the subsidized export model to keep employment levels up and keep money flowing in. Concern over social instability held radical reform in check, and the closer Jiang got to the end of his term in power, the less likely he was to make significant changes that could undermine social cohesion. No Chinese leader wants to preside over a major economic policy that fails out of fear of being the Chinese Mikhail Gorbachev.

For those like Hu who have argued that rapid reform is worth the risk of potential short-term social dislocation, the global downturn was seen as validating their policies — and as confirming that the risks to China of not changing far outweigh the risks of changing now. The export industry’s drag on GDP has forced Beijing to enact a massive investment and loan program. By some accounts, fixed investments in 2009 accounted for more than 90 percent of GDP. Those arguing for faster reform have noted that the pace of investment growth is unsustainable in the long run, and that the flood of money into the system has created new inflationary pressures.

Much of this investment came in the form of bank loans that need to be serviced and repaid. But as the government tries to cool the economy, the risk of companies defaulting on their loans looms. Cooling the economy also threatens to burst China’s real estate bubble. This not only compounds problems in related industry sectors, it could also trigger massive social discord in the urban areas, where housing has taken the place of the stock market as the investment of choice.

Beijing’s Ongoing Dilemma
Chinese leaders face the constant dilemma of needing to allow the economy to maintain its three-decade long export-oriented growth pattern even though this builds in long-term weaknesses, but shifting the economy is not something that can be done without its own consequences. Social pressures are convincing the government of the need to raise the minimum wage to keep up with economic pressures. At the same time, misallocation of labor and new job formation incentives in the interior are causing shortages of labor in some sectors in major coastal export zones. If coastal factories increase wages to attract labor or appease workers, they run the risk of going under due to the already razor-thin margins. But if they don’t, the labor fueling these industries at best may riot and at worst might simply move back home, leaving exporters with little option but to close shop.

Looming demographic changes around the globe also impact the Chinese situation, and the government can no longer rely on an ever-increasing export market to drive the Chinese economy. Some international companies operating in China already are beginning to consider relocating manufacturing operations to places with cheaper labor or back to their home countries to save on transportation costs Chinese wages are no longer mitigating.

With its export markets unlikely to recover to pre-crisis levels any time soon, competition and protectionism are on the rise. The United States is growing bolder in its restrictions on Chinese exports, and China may no longer avoid having the U.S. government label it a currency manipulator. While this may be an extreme measure in 2010, the pressures for such a scenario are rising.

Amid its domestic and global challenges, Chinese leaders are engaged in economic policy debates. It appears that internal criticism is being directed against Hu as social tensions over issues like rising housing prices and inflation grow. In some ways, this is not unusual. National presidents often bear the brunt of dissatisfaction with economic downturns no matter whether their policies were to blame. In China, however, criticism against economic policy falls on the premier, who is responsible for setting the country’s economic direction. The focus on Hu reflects both the depth of the current crisis and the underlying political tensions over economic policy in a time of both global economic unpredictability and preparations for the end of Hu’s presidency in 2012.

To bridge the gulf between the urban coast and the rural interior, Hu and his supporters have pursued a multiphased plan. First, they sought to rein in some of the most independent of the coastal areas — Shanghai in particular, which served as a center of power and influence not only in promoting the continuation of unfettered coastal growth but also of Hu’s predecessor, Jiang. Second, a plan was put in motion to consolidate redundancies in China’s economy and to shift light- and low-skilled industry inland by increasing wages in the key coastal export manufacturing areas, reducing their cost competitiveness. And Beijing added an urbanization drive in traditionally rural and inland areas. Together, this represented a joint attempt to bring the jobs to the interior rather than continue the pattern of migrant workers moving to the coast.

The core of the Hu policies was an overall attempt to re-centralize economic control. This would allow the central government to begin weeding out redundancies left over from Mao’s era of provincial self-sufficiency, which the Deng and Jiang eras of uncoordinated and locally-directed economic growth often driven by corruption and nepotism exacerbated. In short, Hu planned to centralize the economy to consolidate industry, redistribute wealth and urbanize the interior to create a more balanced economy that emphasized domestic consumption over exports. However, Hu’s push, under the epithet “harmonious society,” has been anything but smooth and its successes have been limited at best.

Hu Meets Resistance
Institutional and local government resistance to re-centralization has hounded the policy from its inception, and resistance has grown with the economic crisis. Money is now pouring into the economy via massive government-mandated bank lending to stimulate growth through investments as exports wane. Consequently, housing prices and inflation fears now plague the government — two issues that could lead to increased social tensions and are already leading to louder questioning of Hu’s policies. With just two years to go in his administration, Hu already is looking to his legacy, weighing the risks and rewards between promoting long-term economic sustainability or short-term economic survival. The next two years will witness seemingly incongruent policy pronouncements as the two opposing directions and their proponents battle over China’s economic and political landscape.

Hu’s rise to the presidency was all but assured long before he took office. From a somewhat simplified perspective, the PRC has had only four leaders: Mao Zedong, Deng Xiaoping, Jiang Zemin and Hu Jintao. When Mao died, his appointed successor, Hua Guofeng (who was settled upon after several other candidates fell out of favor), lasted only a short time. Amid the political chaos of the post-Cultural Revolution era, Deng rose to the top. Both Mao and Deng were strong leaders who, although contending with rivals, could rule almost single-handedly when the need arose.

To avoid the confusion of the post-Mao transition, Deng created a long-term succession plan. He ultimately settled on Shanghai Mayor Jiang Zemin as his successor. But in an effort to preserve his vision and legacy, Deng also chose Jiang’s successor, Hu Jintao. Barring some terrible breach of office, Hu was more or less guaranteed the presidency a decade before he took office, and there was little Jiang could do to alter this outcome. Jiang, however, made sure that he left his mark by lining up Hu’s successor, Xi Jinping. Despite Jiang’s support, Xi has not risen through the ranks in the same manner as Hu did, raising speculation of internal disagreements on the succession plan.

Vice President Xi is considered one of the “princelings,” leaders whose parents were part of the revolutionary-era governments under Mao and Deng who mainly have cut their teeth through business ventures concentrated in the coastal regions. Hu, on the other hand, is considered among the “tuanpai” or “tuanxi,” leaders who come primarily from the ranks of the Communist Youth League and interior provinces. While these “groups” are not in and of themselves cohesive factions, and China’s political networks are complex, Hu’s and Xi’s backgrounds reflect their differing policy approaches. As such, the question of the next Chinese leader is shaped by opposing economic plans.

On one hand are those like Hu who support a more rapid and immediate refocusing on rural and interior economic growth, even at the cost of reduced coastal and urban power. On the other hand, those like Jiang and his protege Xi have an interest in maintaining the status quo of regionalized semi-independence in economic matters and continued strong coastal growth. They are proceeding on the assumption that a strong coastal-led economy will both provide more immediate rewards for themselves and strengthen China’s international position and its national defense.

It is important not to overstress the differences. Each has the same ultimate goal, namely, maintaining the CPC as the central authority and building a strong China; it is just their paths to these ends that differ. But the economic policy differences are now becoming key questions of Party survival and Chinese stability and strength. Factional struggles that in normal circumstances can be largely controlled, or at least would not get out of hand, are now shaping up in an environment where China’s three-decade economic growth spurt may be reaching its climax. Meanwhile, social pressures are rising amid uncertainties and instabilities in Chinese economic structures.

Beijing has emerged from the economic crisis bolder and more self-confident than ever. But this is driven more by a recognition of weakness than a false assessment of strength. China’s leadership is in crisis mode, and at this time of economic instability and uncertainty, the leadership must also manage a transition that is bringing competing economic policies into stark contrast. And this is the sort of pressure that can cause the gloves to come off and throw expectations of unity and smooth transitions out the window.

Everything may pass smoothly; two years is a long time, after all. But if there is one thing certain about the upcoming change of presidents, it is that nothing is certain.
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« Reply #129 on: March 12, 2010, 11:49:29 AM »

SAUL LOEB/AFP/Getty Images
U.S. President Barack Obama speaks during the the U.S. Export-Import Bank’s annual conference in Washington, D.C., on March 11Summary
U.S. President Barack Obama on March 11 called for China to institute a “more market-oriented” exchange rate. This statement will hit a nerve in Beijing, which already faces major economic challenges and is concerned about the possibility of a U.S. containment policy targeting China.

U.S. President Barack Obama spoke about the Chinese currency’s exchange rate while addressing the U.S. Export-Import Bank’s annual conference March 11. Among other things, Obama called for China to institute a “more market-oriented” exchange rate. Such talk will hit a raw nerve in China, where the leadership is already facing major economic challenges and is anxious about the prospect of increasing pressure from the Americans.

Obama’s speech, “Powering Jobs, Sales and Profits through Exports,” centered on his National Exports Initiative, the administration’s strategy to boost U.S.-made exports. With high unemployment a pressing problem as the U.S. administration attempts to manage an economic recovery during a year that includes mid-term congressional elections, Obama is promoting U.S. exports as a means of increasing job availability and making up for reduced consumption’s effects on growth. The U.S. Export-Import Bank is an agent of this strategy and has targeted Brazil, China, Mexico and India as countries with massive populations whose households and businesses could buy America’s high-value added goods, from specialized machinery, vehicles and equipment to entertainment products and Internet services. New free trade initiatives also are a component of this strategy, hence Obama’s call for the United States to press forward on free trade agreements with South Korea, Colombia and Panama that have been signed but not yet ratified.

In addressing ways to increase U.S. exports, Obama deliberately chose to enter into the intense debate over China’s currency policies, as they have long been a point of contention between the two states. Beijing uses a variety of internal controls to ensure currency only fluctuates within a narrow band in relation to a basket of foreign currencies, where the dollar is the most heavily weighted. The reason for fixing the exchange rate to the dollar is to provide favorable conditions for Chinese exporters when selling to the United States, the world’s largest consumer market and the destination for nearly 18 percent of China’s total exports.

Before 2005, the fixed exchange rate was a means by which China facilitated its export-driven economic growth and gained market share in the United States and several other markets. From 2005 to 2008 China allowed its currency to gradually appreciate by 20 percent against the U.S. dollar in an attempt to alleviate inflationary pressures, restructure the economy (by increasing domestic purchasing power and weeding out uncompetitive enterprises) and deflect foreign criticism that the currency was undervalued to give Chinese businesses an unfair advantage over foreign rivals. But since the global financial crisis in late 2008, China has essentially “re-pegged” its currency to the U.S. dollar to preserve the best possible conditions for its exporters during a time of trouble due to weak foreign demand.

From the U.S. and European point of view, however, China’s maintaining the de facto currency peg is an unfair advantage for Chinese exporters, and this — not to mention Beijing’s other subsidies and rebates for exporters — is especially problematic during an economic downturn. The United States and Europe claim China’s practices are aggravating problems for American and European manufacturers and hurting employment. They also point out that China’s economy is growing rapidly and exports have shown growth since December 2009. In February, exports grew by nearly 45.7 percent compared to February 2009, the trough of the global recession, and by 8.2 percent compared to February 2008.

Moreover, Obama’s campaign to boost American exports has specifically targeted China, with bilateral trade negotiations ongoing despite the rhetorical harping on trade disputes. Obama wants to reduce the U.S. trade deficit with China and open more of the 1.3 billion-person Chinese market. Chinese currency appreciation would not only ease competition against American manufacturers but also increase Chinese imports of American goods (since a stronger currency increases Chinese people’s purchasing power).

Even the Chinese themselves have emphasized repeatedly the need to promote domestic consumption, especially household consumption, as a means of restructuring the economy to reduce dependency on exports and develop more self-sustaining growth. However, the problem is complicated. A stronger currency will hurt export businesses and export-related employment — and the last thing China needs at the moment is slower growth and higher unemployment in the coastal manufacturing hubs that drive the rest of the economy (even though currency appreciation would benefit Chinese businesses that are reliant on imports or want to invest abroad). Though recent export growth has caused some in China to fear inflationary pressures and call for currency appreciation, Chinese leaders have stated repeatedly — most especially during the ongoing annual National People’s Congress session — that they intend to keep the exchange rate stable, lest they weaken the export sector, delete the government stimulus package and undercut economic recovery and growth. Hence the Chinese are moving very cautiously on the problem of currency appreciation.

For this reason, Obama’s comments will strike Chinese leaders as a direct attack. Not that it comes as a surprise. Beijing has been wary of the Obama administration’s stance on this issue — and other trade issues — since U.S. Treasury Secretary Timothy Geithner first said China was “manipulating” its currency (a phrase laden with legal ramifications) during his talk to the Senate before his approval as treasury secretary. Then, in September 2009, the Obama administration imposed tariffs on Chinese-made tires, invoking Section 421, a measure allowing U.S. protections against Chinese goods that China agreed to when it joined the World Trade Organization. With U.S. elections coming during a period of high unemployment, and trade disputes and deeper disagreements over economic policy already flaring, Beijing has begun to fear that Washington is planning to bring more pressure to bear, and is watching intently for the Treasury Department’s report on April 15 which could officially name China a “currency manipulator,” escalating tensions.

But Chinese anxieties have a still deeper source. Beijing fears the United States is making early movements to contain China’s economic power and prevent its military and political power from increasing. In particular, China has observed recent U.S. moves to expand relations with East Asian states on China’s periphery and sees this as the nascent period of a containment policy against China. Trade appears to be an important component of this strategy, for instance with the United States formally opening up avenues for investment with Cambodia and Laos, or initiating diplomatic contact with Myanmar, in 2009. More importantly, Obama is traveling to Australia in March to launch the Trans-Pacific Partnership — a trade zone that would include Australia, Brunei, Chile, New Zealand, Peru, Singapore and Vietnam and counter China’s trade agreements with the Association of Southeast Asian Nations. Obama is also traveling to Indonesia on the same trip, to strengthen bilateral ties.

From the Chinese point of view, U.S. pressure on its currency policy can be seen as only one aspect of what could be an overall assault on China’s rising economic power and influence. However, Beijing knows Washington is constrained in its foreign policy as long as it remains tied up in wars in the Middle East. It will therefore move quickly to prepare itself for more direct U.S. competition, diversify away from dependency on exports (especially exports to the United States), secure its lines of supply for critical goods and solidify its influence in its near abroad.
« Reply #130 on: March 13, 2010, 05:31:53 AM »

China is to us what we were to Europe after WW2.   A new and potentially powerful nation coming into its own, when the older kids on the block were out of play due to serious injury or other "attention occupying issues".  Obama is trying to get China to give us a mini Marshall plan?  Won't work, China is way past that charity to fellow humans paradigm........(if they ever had it)

China is actually probably our next major military threat, they need resources just like we do, and they may be willing to take them by force of arms.  I think russia is feeling pretty nervous about Siberia, unless there is a treaty already in place..........

Economically, if you are in debt to the bank deeply enough, you own the bank in a weird codependancy way- not healthy.  I think China is sort of realizing this.
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« Reply #131 on: March 18, 2010, 07:08:27 AM »

China's Potential Shift on Sanctions Against Iran
AHANDFUL OF EVENTS BROUGHT STRATFOR’S ATTENTION to China on Tuesday, suggesting that China may be contemplating a shift in its position on the United States’ effort to impose a new round of sanctions on Iran for its secretive nuclear program.

First, the Chinese foreign minister told his British counterpart, who was arguing on behalf of Iranian sanctions, that while sanctions are not a “fundamental solution,” China is growing “more concerned” about the current situation. While the statement was ambiguous, it differed in tone from previous remarks, and may suggest a greater willingness on the part of the Chinese to entertain the possibility of endorsing — or not actively obstructing — sanctions. Second, the Iranian Foreign Ministry called Western visits to convince China to join the sanctions coalition “ineffectual,” adding that China was “independent enough” to resist Western policies. Iran’s rhetoric — though it may be nothing but rhetoric — could also reveal that Iran is growing more worried about losing Chinese support. Third, former Secretary of State Henry Kissinger — a renowned figure who played an integral role in breaking the ice between the United States and China in the early 1970s, and who commands respect in China — visited China’s top foreign policymaker Dai Bingguo, presumably to discuss Sino-U.S. tensions and Iran. Taken together, these events not only reveal the ongoing concentrated effort by the West to win over Chinese support, but also the possibility that the Chinese are considering a shift.

While China has long held that Iran must adhere to the international nuclear non-proliferation scheme and not pursue nuclear weapons, it has also resisted attempts by the United States to gather international consensus behind a new round of sanctions to punish Iran, especially “crippling” sanctions called for by Israel. China receives about half of its oil imports from the Persian Gulf, and about 11 percent from Iran. It exports gasoline to Iran, its state energy companies invest in Iranian energy production projects, and Iran’s sizable population offers a market for Chinese goods. As such, Beijing has resisted any sanctions that could break off bilateral ties, or cause tensions to escalate or conflict to erupt in the region. Moreover, Iranian nuclear weapons do not in themselves threaten China’s security. And China is attempting to position itself as an independent power in global affairs and cultivate relationships with states based on its own interests rather than those of the United States. For these reasons, Beijing has flatly and repeatedly stated that sanctions are not the solution.

“China knows that its options are poor, and so has pushed for prolonged diplomacy as the sole solution to the nuclear question.”
Nevertheless, China is also aware that it is limited in its ability to counteract the U.S. drive for international sanctions. China’s first option would be to exercise a veto against a sanctions resolution at the U.N. Security Council, but it seldom uses its veto alone, and is aware that the United States and its allies can take action outside the United Nations, which would render China even less able to affect the course of events. Its second option would be to attempt to circumvent sanctions by assisting Iran. But unlike with Russia, this option is geographically difficult, and to do so would leave China open to opprobrium and reprisals from the U.S.-led coalition. China knows that its options are poor, and so has pushed for prolonged diplomacy as the sole solution to the nuclear question.

But China knows that far more important than Iran are its vulnerabilities and limitations in dealing with the United States. Washington and Beijing have seen relations grow sour since the global recession began, namely with a series of trade disputes. Recently, however, the disagreements have emerged from deeper differences over the two countries’ economic structures. In particular, the United States has ramped up criticism of China’s currency policy, which keeps the yuan pegged to the U.S. dollar at an undervalued exchange rate so as to make Chinese exports to the United States more attractive. This practice undercuts American producers in competition with China and has become a subject of increasing criticism as the United States is struggling to manage the economic recovery — and reduce unemployment — during a year that will see midterm elections in Congress. U.S. President Barack Obama recently called for China to shift to a more “market oriented” exchange rate, a call his spokesman reiterated Tuesday. Meanwhile, a bipartisan group in the U.S. Congress has been forming to demand that the Treasury Department officially accuse China of currency manipulation, which would help clear the way for Congress to levy tariffs — perhaps even a blanket tariff — on Chinese imports to force China to change policies.

For China, these circumstances are incredibly alarming. After all, Beijing’s paramount focus remains internal — namely, managing its rapidly expanding economy so as to prevent an overheating or slowdown that could cause social frustrations to erupt into unrest. A critical component of this strategy is China’s export sector after the shocks of 2008-2009. The United States remains China’s biggest single market — and its most promising going forward. Beijing’s means of deterring the United States are inadequate. The theoretical option of selling off American debt is not only inherently limited by the need to find enough buyers (which, incidentally, could always be the U.S. Federal Reserve), but also self-destructive because it would negatively affect American consumption and Chinese exports. China’s anxieties are all the greater because U.S. pressure on China is springing from domestic political logic in the United States, rather than purely economic matters. This means that even policy changes to address U.S. complaints could be unsuccessful in calming the United States.

Yet the United States is in need of help on sanctions. Its effort to gather momentum continues to be challenged not only by Chinese resistance, but also (and more critically) by Russia’s reluctance to join. This has led Washington to attempt to water down the sanctions to get support, as well as to downplay Iranian progress on obtaining nuclear weapons. These moves have created tensions with Israel — which has the most to lose in the advent of an Iranian bomb and the least patience for diplomacy — but have not yet won more support for sanctions.

Which means China may have something to gain by altering its stance. STRATFOR sources in Beijing indicate that China may be willing to support sanctions if the United States were to reciprocate, for instance, by not labeling China as a currency manipulator. In other words, rather than considering whether to defend their interests with Iran at a time when the United States is showing a more confrontational attitude, the Chinese may be searching for ways to trade away Iran to gain assurances from the United States that it will not push too hard on the economic front. While it cannot be confirmed that a U.S.-China deal is in the works, Beijing is aware of Washington’s changing mood and is planning its response carefully, keeping its priorities in mind.
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« Reply #132 on: March 30, 2010, 05:12:35 PM »

China: Crunch Time
March 30, 2010
By Peter Zeihan

The global system is undergoing profound change. Three powers — Germany, China and Iran — face challenges forcing them to refashion the way they interact with their regions and the world. We are exploring each of these three states in detail in three geopolitical weeklies, highlighting how STRATFOR’s assessments of these states are evolving. First we examined Germany. We now examine China.

U.S.-Chinese relations have become tenser in recent months, with the United States threatening to impose tariffs unless China agrees to revalue its currency and, ideally, allow it to become convertible like the yen or euro. China now follows Japan and Germany as one of the three major economies after the United States. Unlike the other two, it controls its currency’s value, allowing it to decrease the price of its exports and giving it an advantage not only over other exporters to the United States but also over domestic American manufacturers. The same is true in other regions that receive Chinese exports, such as Europe.

What Washington considered tolerable in a small developing economy is intolerable in one of the top five economies. The demand that Beijing raise the value of the yuan, however, poses dramatic challenges for the Chinese, as the ability to control their currency helps drive their exports. The issue is why China insists on controlling its currency, something embedded in the nature of the Chinese economy. A collision with the United States now seems inevitable. It is therefore important to understand the forces driving China, and it is time for STRATFOR to review its analysis of China.

An Inherently Unstable Economic System
China has had an extraordinary run since 1980. But like Japan and Southeast Asia before it, dramatic growth rates cannot maintain themselves in perpetuity. Japan and non-Chinese East Asia didn’t collapse and disappear, but the crises of the 1990s did change the way the region worked. The driving force behind both the 1990 Japanese Crisis and the 1997 East Asian Crisis was that the countries involved did not maintain free capital markets. Those states managed capital to keep costs artificially low, giving them tremendous advantages over countries where capital was rationally priced. Of course, one cannot maintain irrational capital prices in perpetuity (as the United States is learning after its financial crisis); doing so eventually catches up. And this is what is happening in China now.

STRATFOR thus sees the Chinese economic system as inherently unstable. The primary reason why China’s growth has been so impressive is that throughout the period of economic liberalization that has led to rising incomes, the Chinese government has maintained near-total savings capture of its households and businesses. It funnels these massive deposits via state-run banks to state-linked firms at below-market rates. It’s amazing the growth rate a country can achieve and the number of citizens it can employ with a vast supply of 0 percent, relatively consequence-free loans provided from the savings of nearly a billion workers.

It’s also amazing how unprofitable such a country can be. The Chinese system, like the Japanese system before it, works on bulk, churn, maximum employment and market share. The U.S. system of attempting to maximize return on investment through efficiency and profit stands in contrast. The American result is sufficient economic stability to be able to suffer through recessions and emerge stronger. The Chinese result is social stability that wobbles precipitously when exposed to economic hardship. The Chinese people rebel when work is not available and conditions reach extremes. It must be remembered that of China’s 1.3 billion people, more than 600 million urban citizens live on an average of about $7 a day, while 700 million rural people live on an average of $2 a day, and that is according to Beijing’s own well-scrubbed statistics.

Moreover, the Chinese system breeds a flock of other unintended side effects.

There is, of course, the issue of inefficient capital use: When you have an unlimited number of no-consequence loans, you tend to invest in a lot of no-consequence projects for political reasons or just to speculate. In addition to the overall inefficiency of the Chinese system, another result is a large number of property bubbles. Yes, China is a country with a massive need for housing for its citizens, but even so, local governments and property developers collude to build luxury dwellings instead of anything more affordable in urban areas. This puts China in the odd position of having both a glut and a shortage in housing, as well as an outright glut in commercial real estate, where vacancy rates are notoriously high.

There is also the issue of regional disparity. Most of this lending occurs in a handful of coastal regions, transforming them into global powerhouses, while most of the interior — and thereby most of the population — lives in abject poverty.

There is also the issue of consumption. Chinese statistics have always been dodgy, but according to Beijing’s own figures, China has a tiny consumer base. This base is not much larger than that of France, a country with roughly one twentieth China’s population and just over half its gross domestic product (GDP). China’s economic system is obviously geared toward exports, not expanding consumer credit.

Which brings us to the issue of dependence. Since China cannot absorb its own goods, it must export them to keep afloat. The strategy only works when there is endless demand for the goods it makes. For the most part, this demand comes from the United States. But the recent global recession cut Chinese exports by nearly one fifth, and there were no buyers elsewhere to pick up the slack. Meanwhile, to boost household consumption China provided subsidies to Chinese citizens who had little need for — and in some cases little ability to use — a number of big-ticket products. The Chinese now openly fear that exports will not make a sustainable return to previous levels until 2012. And that is a lot of production — and consumption — to subsidize in the meantime. Most countries have another word for this: waste.

This waste can be broken down into two main categories. First, the government roughly tripled the amount of cash it normally directs the state banks to lend to sustain economic activity during the recession. The new loans added up to roughly a third of GDP in a single year. Remember, with no-consequence loans, profitability or even selling goods is not an issue; one must merely continue employing people. Even if China boasted the best loan-quality programs in history, a dramatic increase in lending of that scale is sure to generate mountains of loans that will go bad. Second, not everyone taking out those loans even intends to invest prudently: Chinese estimates indicate that about one-fourth of this lending surge was used to play China’s stock and property markets.

It is not that the Chinese are foolish; that is hardly the case. Given their history and geographical constraints, we would be hard-pressed to come up with a better plan were we to be selected as Party general secretary for a day. Beijing is well aware of all these problems and more and is attempting to mitigate the damage and repair the system. For example, it is considering legalizing portions of what it calls the shadow-lending sector. Think of this as a sort of community bank or credit union that services small businesses. In the past, China wanted total savings capture and centralization to better direct economic efforts, but Beijing is realizing that these smaller entities are more efficient lenders — and that over time they may actually employ more people without subsidization.

But the bottom line is that this sort of repair work is experimental and at the margins, and it doesn’t address the core damage that the financial model continuously inflicts. The Chinese fear their economic strategy has taken them about as far as they can go. STRATFOR used to think that these sorts of internal weaknesses would eventually doom the Chinese system as it did the Japanese system (upon which it is modeled). Now, we’re not so sure.

Since its economic opening in 1978, China has taken advantage of a remarkably friendly economic and political environment. In the 1980s, Washington didn’t obsess overmuch about China, given its focus on the “Evil Empire.” In the 1990s, it was easy for China to pass inconspicuously in global markets, as China was still a relatively small player. Moreover, with all the commodities from the former Soviet Union hitting the global market, prices for everything from oil to copper neared historic lows. No one seemed to fight against China’s booming demand for commodities or rising exports. The 2000s looked like they would be more turbulent, and early in the administration of George W. Bush the EP-3 incident landed the Chinese in Washington’s crosshairs, but then the Sept. 11 attacks happened and U.S. efforts were redirected toward the Islamic world.

Believe it or not, the above are coincidental developments. In fact, there is a structural factor in the global economy that has protected the Chinese system for the past 30 years that is a core tenet of U.S. foreign policy: Bretton Woods.

Rethinking Bretton Woods
Bretton Woods is one of the most misunderstood landmarks in modern history. Most think of it as the formation of the World Bank and International Monetary Fund, and the beginning of the dominance of the U.S. dollar in the international system. It is that, but it is much, much more.

In the aftermath of World War II, Germany and Japan had been crushed, and nearly all of Western Europe lay destitute. Bretton Woods at its core was an agreement between the United States and the Western allies that the allies would be able to export at near-duty-free rates to the U.S. market in order to boost their economies. In exchange, the Americans would be granted wide latitude in determining the security and foreign policy stances of the rebuilding states. In essence, the Americans took what they saw as a minor economic hit in exchange for being able to rewrite first regional, and in time global, economic and military rules of engagement. For the Europeans, Bretton Woods provided the stability, financing and security backbone Europe used first to recover, and in time to thrive. For the Americans, it provided the ability to preserve much of the World War II alliance network into the next era in order to compete with the Soviet Union.

The strategy proved so successful with the Western allies that it was quickly extended to World War II foes Germany and Japan, and shortly thereafter to Korea, Taiwan, Singapore and others. Militarily and economically, it became the bedrock of the anti-Soviet containment strategy. The United States began with substantial trade surpluses with all of these states, simply because they had no productive capacity due to the devastation of war. After a generation of favorable trade practices, surpluses turned into deficits, but the net benefits were so favorable to the Americans that the policies were continued despite the increasing economic hits. The alliance continued to hold, and one result (of many) was the eventual economic destruction of the Soviet Union.

Applying this little history lesson to the question at hand, Bretton Woods is the ultimate reason why the Chinese have succeeded economically for the last generation. As part of Bretton Woods, the United States opens its markets, eschewing protectionist policies in general and mercantilist policies in particular. Eventually the United States extended this privilege to China to turn the tables on the Soviet Union. All China has to do is produce — it doesn’t matter how — and it will have a market to sell to.

But this may be changing. Under President Barack Obama, the United States is considering fundamental changes to the Bretton Woods arrangements. Ostensibly, this is to update the global financial system and reduce the chances of future financial crises. But out of what we have seen so far, the National Export Initiative (NEI) the White House is promulgating is much more mercantilist. It espouses doubling U.S. exports in five years, specifically by targeting additional sales to large developing states, with China at the top of the list.

STRATFOR finds that goal overoptimistic, and the NEI is maddeningly vague as to how it will achieve this goal. But this sort of rhetoric has not come out of the White House since pre-World War II days. Since then, international economic policy in Washington has served as a tool of political and military policy; it has not been a beast unto itself. In other words, the shift in tone in U.S. trade policy is itself enough to suggest big changes, beginning with the idea that the United States actually will compete with the rest of the world in exports.

If — and we must emphasize if — there will be force behind this policy shift, the Chinese are in serious trouble. As we noted before, the Chinese financial system is largely based on the Japanese model, and Japan is a wonderful case study for how this could go down. In the 1980s, the United States was unhappy with the level of Japanese imports. Washington found it quite easy to force the Japanese both to appreciate their currency and accept more exports. Opening the closed Japanese system to even limited foreign competition gutted Japanese banks’ international positions, starting a chain reaction that culminated in the 1990 collapse. Japan has not really recovered since, and as of 2010, total Japanese GDP is only marginally higher than it was 20 years ago.

China’s Limited Options
China, which unlike Japan is not a U.S. ally, would have an even harder time resisting should Washington pressure Beijing to buy more U.S. goods. Dependence upon a certain foreign market means that market can easily force changes in the exporter’s trade policies. Refusal to cooperate means losing access, shutting the exports down. To be sure, the U.S. export initiative does not explicitly call for creating more trade barriers to Chinese goods. But Washington is already brandishing this tool against China anyway, and it will certainly enter China’s calculations about whether to resist the U.S. export policy. Japan’s economy, in 1990 and now, only depended upon international trade for approximately 15 percent of its GDP. For China, that figure is 36 percent, and that is after suffering the hit to exports from the global recession. China’s only recourse would be to stop purchasing U.S. government debt (Beijing can’t simply dump the debt it already holds without taking a monumental loss, because for every seller there must be a buyer), but even this would be a hollow threat.

First, Chinese currency reserves exist because Beijing does not want to invest its income in China. Underdeveloped capital markets cannot absorb such an investment, and the reserves represent the government’s piggybank. Getting a 2 percent return on a rock-solid asset is good enough in China’s eyes. Second, those bond purchases largely fuel U.S. consumers’ ability to purchase Chinese goods. In the event the United States targets Chinese exports, the last thing China would want is to compound the damage. Third, a cold stop in bond purchases would encourage the U.S. administration — and the American economy overall — to balance its budgets. However painful such a transition may be, it would not be much as far as retaliation measures go: “forcing” a competitor to become economically efficient and financially responsible is not a winning strategy. Granted, interest rates would rise in the United States due to the reduction in available capital — the Chinese internal estimate is by 0.75 percentage points — and that could pinch a great many sectors, but that is nothing compared to the tsunami of pain that the Chinese would be feeling.

For Beijing, few alternatives exist to American consumption should Washington limit export access; the United States has more disposable income than all of China’s other markets combined. To dissuade the Americans, China could dangle the carrot of cooperation on sanctions against Iran before Washington, but the United States may already be moving beyond any use for that. Meanwhile, China would strengthen domestic security to protect against the ramifications of U.S. pressure. Beijing perceives the spat with Google and Obama’s meeting with the Dalai Lama as direct attacks by the United States, and it is already bracing for a rockier relationship. While such measures do not help the Chinese economy, they may be Beijing’s only options for preserving internal stability.

In China, fears of this coming storm are becoming palpable — and by no means limited to concerns over the proposed U.S. export strategy. With the Democratic Party in the United States (historically the more protectionist of the two mainstream U.S. political parties) both in charge and worried about major electoral losses, the Chinese fear that midterm U.S. elections will be all about targeting Chinese trade issues. Specifically, they are waiting for April 15, when the U.S. Treasury Department is expected to rule whether China is a currency manipulator — a ruling Beijing fears could unleash a torrent of protectionist moves by the U.S. Congress. Beijing already is deliberating on the extent to which it should seek to defuse American anger. But the Chinese probably are missing the point. If there has already been a decision in Washington to break with Bretton Woods, no number of token changes will make any difference. Such a shift in the U.S. trade posture will see the Americans going for China’s throat (no matter whether by design or unintentionally).

And the United States can do so with disturbing ease. The Americans don’t need a public works program or a job-training program or an export-boosting program. They don’t even have to make better — much less cheaper — goods. They just need to limit Chinese market access, something that can be done with the flick of a pen and manageable pain on the U.S. side.

STRATFOR sees a race on, but it isn’t a race between the Chinese and the Americans or even China and the world. It’s a race to see what will smash China first, its own internal imbalances or the U.S. decision to take a more mercantilist approach to international trade.
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« Reply #133 on: March 30, 2010, 06:10:13 PM »

**China and the NorKs are as close together as "teeth and gums". This is one tool they'll use to control Obama quite a bit, IMHO.**

Monday, March 29, 2010
What Happend to the Cheonan?

UPDATE/9:30 am EDT. In a rather dramatic about-face, South Korea is now pointing the finger of blame squarely at Pyongyang. The ROK Defense Minister now says a mine from North Korea may have caused the blast that sank the Cheonan. Additionally, President Lee Myung-bak has placed the South Korean military on alert, to respond to further "moves" by the DPRK.

As ROK Navy teams continue their rescue and salvage operations, a North Korean defector raised the possibility of a suicide attack. Chang Jin-seong, who worked for Pyongyang's spy agency before fleeing in 2004, said some DPRK naval units have trained for suicide missions.

But Washington is still downplaying the possibility of North Korean involvement. Monday, a senior State Department official said the U.S. still has no firm evidence that Pyongyang was behind the attack.

American reluctance to blame North Korea promises to create a potential rift between Washington and Seoul and set the stage for a possible crisis in the coming days. If South Korea determines that Pyongyang was behind the Cheonan disaster, there will be a demand for revenge, both publicly and officially. At that point, the Obama Administration will be forced to admit North Korean complicity, and attempt to dissuade South Korea from taking military action.

And, if you don't believe South Korea would take such steps, consider the hours following the Rangoon bombing in 1983. After learning of North Korea's attempt to kill the South Korean president (and his cabinet) in Burma, some ROK Army units began mobilizing for war. One U.S. officer, stationed in Korea at the time, reports that some mechanized and armored battalions actually left their garrisons and were heading towards the DMZ--without notifying the United States.

The military preparations received little attention in the west, but they were indicative of the shock and outrage that followed the assassination attempt. Needless to say, there were some tense days in Seoul and Washington, as U.S. officials cautioned their South Korean counterparts against any hasty action. Similar discussions will likely occur in the coming days, but it may be more difficult to deter Seoul this time around. South Korea is far more powerful --militarily, politically and economically--than it was in the early 1980s, and has every right to defend its interests. If Mr. Obama and his advisors believe the Cheonan affair will quickly blow over (with little diplomatic or military fallout), they are sadly mistaken.
Three days ago, it was dominating world headlines. But almost as quickly as it sank into the Yellow Sea, the South Korean naval vessel Cheonan has disappeared from the 24-hour news cycle.

And that's clearly by design.

The sudden loss of the Cheonan was stunning, to say the least. On patrol near the disputed Northern Limit Line with North Korea, the 1,200-ton corvette was suddenly struck by a mysterious explosion that ripped the vessel in half. Three hours later, the last section of the ship went down, leaving more than 40 sailors dead or missing.

It was South Korea's worst naval calamity in more than 30 years; as rescue operations began, suspicions were immediately cast on the DPRK--and with good reason. The two Koreas have fought a series of naval engagements in the area over the past decade (with North Korea taking the worst of it), and Pyongyang has been spoiling for payback.

But in the hours following the disaster, officials in Seoul (and, to a lesser extent, Washington) tried to refocus global attention on other scenarios. As naval and coast guard vessels were pulling sailors out of the water, sources at the South Korean defense ministry suggested the Cheonan was the victim of an internal mishap, caused (perhaps) by an ammunition or engine explosion.

At the U.S. State Department, spokesman P.J. Crowley was quick to point out that American officials "had no direct evidence" of North Korea involvement, and referred reporters to the ROK government for more "definitive" information.

Meanwhile, Pyongyang was quiet--a little too quiet. Normally, a scandal or blunder in South Korea becomes gist for the DPRK propaganda machine--an opportunity for Kim Jong il to tout the "superiority" of his regime. But this time, there was none of the usual bluster. In fact, North Korea seemed to go "out of its way" to avoid mentioning the maritime disaster.

Seoul and Washington also seemed reluctant to mention the tragedy, beyond the initial statements. Oddly enough, that strategy may have been the best approach, because few western observers were buying explanations of an internal explosion on the Cheonan, or U.S. claims that we "knew nothing" about possible North Korean activity in the area.

The internal failure theory was shredded almost as soon as surviving crew members reached land. They told of a routine night patrol, suddenly punctuated by a massive blast that tore the corvette in half. There were no reports of a weapons accident or engine mishap just prior to the explosion. In fact, survivor accounts--and descriptions of the damage--were consistent with a torpedo or mine attack.

As for U.S. surveillance of the area, that subject has received less attention. But Mr. Crowley's statement is little more than a carefully-worded, verbal two-step. The waters on either side of the NLL are some of the most closely-monitored on earth. The massive U.S. SIGINT complex at Osan AB, Korea (along with other sites in the Far East) monitors activity throughout North Korea, including naval traffic. U.S. and South Korea recce aircraft criss-cross the skies daily, and satellites keep close tabs on key military complexes, including those of the DPRK navy.

To be fair, the U.S. might have missed the deployment of a small number of mines, or a single torpedo shot from a North Korean submarine. But we almost certainly had a picture of naval activity along the NLL in the hours leading up to the Cheonan tragedy, and we have detailed knowledge as to how the DPRK conducts mine-laying, submarine and surface combatant operations. If North Korea recently engaged in mine-laying activity (or training), there's pretty good chance it was detected. How the information was handled is another matter, but readers will note that Mr. Crowley's response artfully dodged that type of context.

Which brings us back to the essential, unanswered questions: first, why would North Korea pull a stunt like this, and secondly, why are the U.S. and Seoul so reluctant to point the finger?

The first one is easy enough. North Korea has a long history of deadly provocations towards South Korea and the U.S. From the capture of the USS Pueblo in 1968 (and the subsequent downing of an EC-121 reconnaissance aircraft the following year), to the infamous "tree-chopping" incident in the DMZ, Pyongyang has killed dozens of American servicemen over the past 40 years.

During the same period, South Korea has suffered even greater casualties. A 1968 raid by DPRK commandos on the ROK presidential mansion in Seoul killed at least 68 South Korean soldiers, police officers and civilians. Fifteen years later, North Korea attempted a similar decapitation of ROK leadership, during the infamous Rangoon bombing (while several cabinet officials were killed the South Korean leader survived only because he was running behind schedule.

Four years later, DPRK agents (acting on the personal orders of Kim Jong-il) planted explosives on a Korean Airlines jet that blew up over the Andaman Sea, killing all 115 people on board.
It remains the worst terrorist act perpetuated against a South Korean target.

Beyond casualties--and North Korean involvement--these events have something else in common, a muted response from both Seoul and Washington. There were never any retaliatory attacks against the DPRK, fearing that an increase in military activity might lead to a renewed Korean conflict. The "official" responses to these deadly attacks have been a mixture of diplomatic protests, various forms of sanctions and (on rare occasions) a military demonstration.

Against that backdrop, is it any wonder that Pyongyang continues to thumb its nose at the international community and stage "incidents" when they serve the intended purpose. Even if South Korea and the U.S. determine that the Cheonan was sunk by an enemy mine or torpedo, North Korea has little to fear, in terms of possible consequences. Better yet, the DPRK has often used such incidents to pry concessions out of the U.S. and its allies in Seoul. We can almost hear the demand this time around: "Send us more food aid and we'll guarantee that your ships don't blow up along the NLL."

What else does the DPRK gain from this? A propaganda victory (should they decide to claim it), and a tactical advantage in future clashes along the NLL. With the Cheonan disaster fresh in everyone's mind, ROK Navy commanders will be less aggressive in responding to future maritime incidents, fearing the loss of more surface vessels. Additionally, South Korean fishermen may be reluctant to return to the crab beds of the Yellow Sea, worried about the possibility of more mines in local waters, and the ability of the ROK Navy to defend them from possible DPRK attack.

As a result, you'll probably see fewer South Korean boats (and ROKN escorts) along the southern edge of the NLL this summer. It's a move that will cost the ROK economy millions--and it will make a lot of fishermen angry--but officials Washington and Seoul clearly want to avoid a confrontation with Pyongyang. In their view, North Korea is a problem to be "managed" until the communist regime eventually implodes. That's why we may never know what happened to that South Korean corvette or if we do, the news will be dribbled out on a Friday night or a holiday, to minimize media coverage.

Then, when North Korea pulls a similar stunt in the future, the same "leaders" will offer the same, feigned outrage. Once the furor dies down, they'll cave again to Pyongyang's newest demands. And the cycle will only repeat itself.
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« Reply #134 on: March 31, 2010, 07:52:42 AM »

Any reactions to the Stratfor piece I posted yesterday.  Its hypothesis seems to me to be quite an eye-opener that turns things upside down.
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« Reply #135 on: March 31, 2010, 08:32:56 AM »

China wil use the NorKs and others to counterbalance any attempt by the US to become more advisarial in economic issues.
« Reply #136 on: March 31, 2010, 10:17:16 AM »

Japan and South Korea can handle NorK without breaking a sweat.  They have the same tech that we do as far as anti ICBM and Japan has Aegis equipped ships for the other airborne threats.  A few runs by both Japanese and Korean airforces with the bombs we used to take out that republican guard brigade in Iraqi Freedom would turn that army Kim Jung Il has built into mulch.  NorK is getting treated/ ignored because they are impotent for the most part, a distraction at best.  Not big enough to be a legit. threat, but enough to be used as a strawman for the press.

China is only a threat on the asian continent right now, until they build some carriers/sea control ships, and an amphibious fleet their threats are to Russia and India.  Chinas only threat to us is "we will sell of your debt cheap to ruin the dollar as a world currency",  that doesn't kill people or take territory.  Heck, it may be the best thing to happen to us, we would be forced to regrow our manufacturing sector.  A pissed off America without the usual leashes to rein us in once we recover?
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« Reply #137 on: April 01, 2010, 07:43:07 AM »

China's Currency Debate
THE WAR OF WORDS BETWEEN CHINA and the United States on the subject of China’s currency, the yuan or renminbi, saw a momentary reprieve on Tuesday, when two out of three newly appointed members of the People’s Bank of China monetary policy committee entered the debate. Just one day after being appointed, Li Daokui said China should adjust its exchange rate on its “own initiative” before September, so that the currency does not get caught up in the politics of U.S. midterm elections. Xia Bin said China should resume its policy of permitting the yuan to gradually appreciate, as was done from 2005 to 2008. Separately, U.S. President Barack Obama met with China’s new ambassador to the United States and called for a “positive relationship” with China, only hinting at the underlying economic strains by saying the two should work together on sustainable and “balanced” global economic growth.

On the surface, Li’s statement was absurd. The question of China’s fixed exchange rate — its peg to the U.S. dollar, giving it an advantageous position in U.S. markets — has been thoroughly entangled in U.S. domestic politics since Treasury Secretary Timothy Geithner used the word “manipulation” during his confirmation hearings in early 2009, and has become more so in recent months. Although the U.S. economy has emerged from recession, unemployment remains lodged at nearly 10 percent, a fact that gnaws on the Democratic Party as it approaches already contentious elections in November. Not only are the Democrats historically linked to U.S. manufacturers and more inclined to use protectionist policies to defend them, but also they traditionally have fewer qualms about pushing back on America’s East Asian trade partners.

Congress has already leapt into action, proposing a bill that would force the U.S. Treasury Department to take a strict interpretation when it assesses whether to accuse China of formally “manipulating” its currency in a report due April 15. The bill would clear the way for punitive measures as well. Bottom line, few issues could be more politicized. Having passed a major domestic hurdle with health care, Obama has set his sights on a foreign policy victory. But sanctions on Iran have already been watered down, and the surge is only beginning in Afghanistan. In other words, playing hardball on China’s currency is one foreign policy issue where Obama can boost his party in elections. And joblessness — not Iran’s nuclear program — is the American public’s number one concern.

“Few today are willing to accept the idea that a country with a $4.9 trillion economy — a country that recently surpassed Germany as the world’s leading exporter and will soon surpass Japan as the second biggest economy overall — deserves to skirt international rules.”
The proper way to interpret Li’s remarks, then, is to focus on his emphasis on China not succumbing to U.S. pressure, but changing its currency policy on its “own initiative.” With the U.S. government bearing down, Li’s statement appears crafted to begin the process of saving face. Domestically, the Chinese government cannot be seen as caving in to American demands. But for months China has internally debated the merits and flaws of removing the currency peg. What Li is doing is reaffirming that currency appreciation would assist in China’s badly needed economic restructuring by boosting domestic purchasing power, weeding out inefficient industries and making others more competitive, and fighting inflation expectations. He is arguing that appreciation is not some foreign imposition, but rather a Chinese policy implemented for the good of the Chinese people.

China is thus signaling to the United States that there is no need to get overexcited or overaggressive. The currency will move. The only questions concern magnitude and timing. For the Chinese, it is critical to limit and prolong the currency’s appreciation, since they argue each percentage point increase in the yuan’s value will shave the already razor-thin profit margins of China’s all-important exporters. The last time Beijing allowed the yuan to strengthen, in 2005, it ascended about 20 percent over the course of three years. The situation now is more delicate as it does not come amid one of the biggest credit and consumption booms in history, but amid a period of recovery from global recession in which China’s major export markets have begun to increase savings and cut back on spending. In short, Beijing knows that if it allows the yuan to rise it will do so during a time of weaker external demand than before — not to mention the problem of creeping wage inflation on China’s coasts, which will also eat away at exporters’ profits.

What is surprising is the extent to which the debates over the exchange rate adopt China’s rationale. In governments and institutions, among academics and experts of every stripe, in the United States, Europe and Japan, an increasingly abstruse debate has circulated around the precise expectations, limits, measures and effects of each degree of yuan appreciation. Some say the currency is undervalued by 20 percent, others say 40 percent. Getting China to revalue the yuan by X amount would save Y jobs and reduce the trade deficit by Z.

But the flurry of discussion masks the central problem. China’s policies assume that the world will graciously allow it to break the norms of international trade by strictly controlling the value of its currency, as many developing countries do. They ask the developed world to patiently suffer the evisceration of its own manufacturing sector until such time as Beijing believes it can wean its industries off a weak currency, and push them out of the nest to try their wings. For decades this assumption was economically beneficial for almost everyone. But circumstances have changed. Few are willing to accept the idea that a country with a $4.9 trillion economy — a country that recently surpassed Germany as the world’s leading exporter and will soon surpass Japan as the second biggest economy overall — deserves to skirt international rules. Not to mention the elephant in the room: China’s apparent exemption from full currency convertibility.

The United States, for one, does not appear willing to grant these favors any longer, and sees this fundamental point — China’s deviation from set standards — as true regardless of midterm elections. Washington sees China’s position as ludicrous, and while it may not immediately demand full convertibility, it is showing every sign of attacking the yuan peg. Beijing sees the currency peg as anything but ludicrous, since strengthening the currency inherently threatens social instability. Which would explain why the Chinese are reaffirming their own reasons for gradually strengthening the yuan, negotiating to allay Washington’s agitation and rushing to prepare for the economic fallout at home.
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« Reply #138 on: April 02, 2010, 02:26:58 AM »

I finally took the time to go through this. Thanks Crafty for posting. A synopsis and a few comments:

They see the Chinese economic system as "inherently unstable.", basically a house of cards. Economy held up by exports, but exports are down 20%.  Exports won't recover until 2012 (if then), held up by subsidies until then. 

The state tripled its infusion to banks for lending. A third of GDP is from propped up loans.  A fourth of that lending is for non-productive uses (most of the rest questionable too).

The US may 'force' China to both appreciate their currency and accept more exports which, in Japan, caused a collapse and long term stagnation.

They only wonder which will bring down China first, its own internal imbalances or the U.S. decision to take a more mercantilist approach (export orientation) to international trade."
The China economy as we know it hasn't had to survive a downturn.  Downturns have a good sides, easing bubbles and clearing out dead wood to make room for new, healthier growth.  Politically, China's ruling party hasn't gone through bad times.  Their 'legitimacy' comes from the security they bring, including economic.

Real numbers are probably worse / far worse than the ruling parties published data.

From a previous Strat, the (silly) tire issue with tariff imposed in Sept. was a warning shot from the Obama administration to the Chinese of what powers are at his disposal and what his willingness is to use them. 

The US, presumably in recovery, could instead dip downward again and further.  US consumers have more disposable income than all of China's other markets combined.  If our dip is long term, chances are China can't keep pretending things are fine and subsidize their way out of it.

If China quit buying our debt, it would force fiscal discipline in the US government.  If the US either tanks or heads into protectionism or both, China could collapse economically, leading also to a political crisis IMO.

OTOH, all previous reports of their demise have been premature.
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« Reply #139 on: April 02, 2010, 06:12:00 AM »

Sec'y of the Treasury Geithner has recently been talking a bit about how the Chinese should revalue the renimbi (sp?).  Coincidentally we now begin to hear that the Chinese may get on board for some lesser level of sanctions against Iran.

(Not that sanctions are really a meaningful strategy.  I agree with Stratfor that they are more a way to pretend to be doing something.  Basically I think we have already decided on some sort of containment strategy.  I suspect the ensuing nuclear arms race throughout the region and much of the world will cause us to deeply regret this.)
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« Reply #140 on: April 02, 2010, 06:37:50 AM »

Coincidentally enough, here's this from Pravda On The Hudson (POTH a.k.a. the NYT) so read between the lines:

WASHINGTON — Tensions between China and the United States have ebbed significantly in recent days, with the countries now working together to deter Iran’s nuclear ambitions and with the Obama administration backing off a politically charged clash over China’s currency.

The warming trend was evident in the Chinese government’s announcement on Thursday that President Hu Jintao will attend a nuclear security summit meeting in Washington later this month. American officials had feared that Mr. Hu would skip the talks to express China’s anger over recent diplomatic clashes, including a White House decision to sell arms to Taiwan and President Obama’s meeting with the Dalai Lama, the exiled Tibetan leader.

But this week, the drumbeat of bad news — and an underlying narrative of a rising China flexing its muscles against a debt-laden United States — has suddenly given way to talk of collaboration.

On Thursday night, President Obama spoke with Mr. Hu for about an hour by telephone, a chat that lasted so long that Air Force One had to be held for 10 minutes on the tarmac at Andrews Air Force Base after landing so that Mr. Obama could finish up the conversation. Chinese television reported that Mr. Hu expressed a desire for healthier ties, while stressing Beijing's sensitivity about Taiwan and Tibet.

For now, the United States is setting aside potentially the most divisive issue in the relationship, deferring a decision on whether to accuse China of manipulating its currency, the renminbi, until well after Mr. Hu’s visit, according to a senior administration official. That decision, the official said, reflects a judgment that threatening China is not the best way to persuade it to allow the renminbi to appreciate against the dollar.

Many economists expect China to act on its own to loosen the tight link of the renminbi to the dollar — a policy that keeps the currency’s value depressed and makes China’s exports more competitive in global markets.

Still, the administration’s decision not to force the currency issue now could carry political risks at home. Lawmakers on Capitol Hill have introduced legislation calling for trade sanctions against China if it does not change its currency policy. And unions and manufacturers cite the undervalued Chinese currency as a major culprit for lost jobs.

The White House would not comment on the currency issue, but an official said that if China did not take action on its own, the administration could raise the issue again at the Group of 20 summit meeting in June. The White House welcomed Mr. Hu’s visit as proof that its policy of engaging with China on strategic issues of common interest had paid off.

“We have an important relationship with China, one in which there are many issues of mutual concern that we work on together,” said a White House spokesman, Bill Burton. “But there also will be times where we disagree. I think this proves the point that despite those disagreements, we can work together on issues like nuclear proliferation.”

The relationship between the countries was also affected last week when Google, citing Chinese censorship, began redirecting users in China to its uncensored Hong Kong search engine.

On Wednesday, China appeared to throw its support behind new United Nations sanctions aimed at putting pressure on Iran over its nuclear program. The Security Council has been stymied by China’s insistence on diplomacy over sanctions.

American officials said they expected China to wrangle over the wording of a United Nations resolution, with a goal of watering down the measures against Tehran. Indeed, on Thursday, Iran’s nuclear negotiator, Saeed Jalili, arrived in Beijing for talks with China’s foreign minister, Yang Jiechi. The ministry appeared to steer clear from any commitment for sanctions.

Still, earlier this week, Mr. Obama expressed optimism that the major powers could unite this spring behind a resolution that would apply new pressure on Iran over its nuclear program.

The administration has engaged in intensive talks with Chinese officials to demonstrate to Beijing the destabilizing effect of a nuclear-armed Iran. A crucial advance, officials said, came in early March when an American delegation, led by Deputy Secretary of State James B. Steinberg and the National Security Council’s senior director for Asia, Jeffrey A. Bader, visited Beijing.

Mr. Hu’s visit will take place only two days before the Obama administration faces a deadline to decide whether to label China a “currency manipulator,” meaning that it intervenes in currency markets to gives its exporters an artificial advantage. Pressure in the United States has been building to take that step, which could initiate a Congressional process that would lead to slapping tariffs on Chinese imports.

But given the potential for embarrassing Mr. Hu — and for sending bilateral relations into another tailspin — the administration decided not to report on April 15, one of the deadlines set by Congress and the Treasury Department to issue a report on possible currency manipulation.

Nicholas R. Lardy, an economist at the Peterson Institute for International Economics in Washington, said the Treasury Department could delay the deadline for weeks. “As a practical matter, they’ve got a lot of wiggle room,” he said. Mr. Lardy added that he thought it was unlikely that China would have agreed to a visit by Mr. Hu unless there was at least an informal assurance by the Treasury that China would not immediately be named a currency manipulator.

Lawmakers signaled that they would not be easily mollified if the administration gave Beijing a pass on its currency.

“The most important issue in the Chinese-American relationship is currency,” said Senator Charles E. Schumer, Democrat of New York, who introduced a bill threatening China with trade sanctions. “It relates to American jobs, American wealth and the future of this country. This issue should not be traded for another.”

Relations between the countries began to fray in November, soon after Mr. Obama went to China on a state visit that was more circumscribed than American officials would have liked.

In the months that followed, tensions increased. American officials accused China of thwarting a climate change deal in Copenhagen and Chinese leaders threatened to punish the United States for a $6 billion weapons deal for Taiwan. In February, China’s Foreign Ministry called in the American ambassador for a scolding about Mr. Obama’s meeting with the Dalai Lama, whom China calls a separatist.

But then came a thaw. In recent days, public statements in Beijing and Washington hinted at fading tensions. Mr. Steinberg, the deputy secretary of state, declared that United States did not support independence for Taiwan and Tibet. And Mr. Obama, at an event on Monday for China’s new ambassador to Washington, offered generous praise for China.
« Reply #141 on: April 02, 2010, 08:57:58 AM »

Incident created by N. Korea allows for facesaving kowtow in China propoganda, allowing Chinese .gov to make a magnanimous gesture to the big noses of the west.   Nothing new, that is the protocoll for years!  Behind the scenes tho' other issues are generating pressures too, like I mentioned in my other post.
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« Reply #142 on: April 04, 2010, 11:35:18 AM »

"Sec'y of the Treasury Geithner has recently been talking a bit about how the Chinese should revalue the renminbi.  Coincidentally we now begin to hear that the Chinese may get on board for some lesser level of sanctions against Iran." 

The Geithner report trashing China over currency manipulation was supposed to come out Apr 15.  Hu visits the 12th. Geithner 'delays' the report trashing China.  China presumably will agree not to fully block watered down sanctions which we all agree are just symbolic, not effective.  This pressures Israel not to strike because the international 'community' is 'doing something'.  And then what? We all live happily ever after?

No one can say ever again that the Obama administration doesn't have experience with this type of negotiations, not after healtcare via the Louisiana purchase, the Cornhusker kickback, the federal hospital for Connecticut and the State Bank of North Dakota.  These guys know how to put a deal together!
 April 4 (Bloomberg) -- U.S. Treasury Secretary Timothy F. Geithner delayed a scheduled April 15 report to Congress on exchange-rate policies, sidestepping a decision on whether to accuse China of manipulating the value of the yuan.

Geithner in a statement yesterday urged China to move toward a more flexible currency and said a series of meetings over the next three months will be “critical” to bringing policy changes that lead to a stronger, “more balanced” global economy. The delay comes as Chinese President Hu Jintao is scheduled to visit Washington for a nuclear summit April 12-13.
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« Reply #143 on: April 04, 2010, 03:43:04 PM »

Well, if there is a quid pro quo then it seems not improper to me not to make it apparent to all the world to the embarassment of the Chinese.
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« Reply #144 on: April 04, 2010, 06:11:54 PM »

Keep in mind that causing the Chinese to "lose face" will create "blowback" at some point. Forgiveness is not a Chinese cultural trait.
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« Reply #145 on: May 17, 2010, 11:45:52 PM »

Hong Kong by-elections a test for democracy camp AFP
by Peter Brieger  – Sun May 16

HONG KONG (AFP) – Hong Kong on Sunday held by-elections triggered by pro-democracy lawmakers seeking to pressure Beijing into speeding up the pace of electoral reform in the territory.

The election, which has angered Beijing and divided the city's democracy movement, comes after five lawmakers from the Legislative Council quit in January in a bid to force a de facto referendum on reform.

Frustrated by what they say is China's intransigence, the lawmakers had hoped that the move -- which will likely see them all re-elected -- would send the strongest message yet to Beijing since Hong Kong returned to Chinese rule in 1997.

However, the outcome of the vote is seen as academic since all pro-Beijing political parties have boycotted the process.

Under the current electoral system, only half of Hong Kong's 60-seat legislature is directly elected while the rest is selected by the pro-China business elite. Campaigners want the entire parliament to be directly elected.

They also want voters to be able to choose the city's chief executive, who is currently appointed by a Beijing-friendly election committee.

Beijing has said that, at the earliest, Hong Kong's chief executive can be directly elected by 2017 and the legislature by 2020.

Chinese officials have openly denounced the "referendum", calling it a "blatant challenge" to Hong Kong's Basic Law, the city's mini-constitution that guarantees certain civil liberties for citizens of the former British colony.

Democracy figurehead Martin Lee condemned a decision by Donald Tsang, Hong Kong's chief executive, not to cast a ballot. "This is absolutely ridiculous," the founder of Hong Kong's Democratic Party told AFP on Sunday.

"It is a total act of kow-towing to Beijing. This is the problem -- Tsang is not elected by the people."

Tsang said his decision was "purely personal".

"In view of the unique nature of this by-election and after careful consideration, I have decided not to vote," he said in a statement.

"All members of my political team share this view and, of their own accord, have also decided not to vote."

In response, "Long Hair" Leung Kwok-hung, one of the five who resigned his seat, protested outside Tsang's residence on Sunday, calling on the city's leader to cast his ballot.

The radical political activist is famous for wearing Che Guevara T-shirts and throwing bananas at government officials during meetings.

Critics said the poll was unlikely to resolve a deadlock between the government and democrats over the pace of political reform, while surveys indicated turnout was only expected to be around 20 percent.

As of 0745 GMT, about 8.5 percent of Hong Kong's 3.7 million registered voters had cast a ballot, according to government statistics, with polling stations due to close at 1430 GMT.

The government introduced a reform proposal in April to increase the size of the election bodies for chief executive and the legislature in 2012. But opposition parties said they would not accept the proposal.

"It is very clear this government is not accountable to the people of Hong Kong," Tanya Chan, another of the five candidates, told AFP on Sunday.

"We hope the government will give a clear road map (on political reform)."
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« Reply #146 on: May 19, 2010, 08:26:17 PM »

If this demonstrates a shift from isolated loners attacking children to groups of "have nots" against the "haves", then this could be a "Archduke Ferdinand" moment that really will shake the world.
« Last Edit: May 19, 2010, 08:28:00 PM by G M » Logged
« Reply #147 on: June 08, 2010, 10:29:32 AM »

In Chinese admiral's outburst, a lingering distrust of U.S.
By John Pomfret
Washington Post Staff Writer
Tuesday, June 8, 2010; A10


On May 24 in a vast meeting room inside the grounds of the state guesthouse at Diaoyutai in Beijing, Rear Adm. Guan Youfei of the People's Liberation Army rose to speak.

Known among U.S. officials as a senior "barbarian handler," which means that his job is to deal with foreigners, not lead troops, Guan faced about 65 American officials, part of the biggest delegation the U.S. government has ever sent to China.

Everything, Guan said, that is going right in U.S. relations with China is because of China. Everything, he continued, that is going wrong is the fault of the United States. Guan accused the United States of being a "hegemon" and of plotting to encircle China with strategic alliances. The official saved the bulk of his bile for U.S. arms sales to China's nemesis, Taiwan -- Guan said these prove that the United States views China as an enemy.

U.S. officials have since depicted Guan's three-minute jeremiad as an anomaly. A senior U.S. official traveling on Secretary of State Hillary Rodham Clinton's plane back to the United States dismissed it, saying it was "out of step" with the rest of the two-day Strategic and Economic Dialogue. And last week in Singapore, Defense Secretary Robert M. Gates sought to portray not just Guan, but the whole of the People's Liberation Army, as an outlier intent on blocking better ties with Washington while the rest of China's government moves ahead.

But interviews in China with a wide range of experts, Chinese officials and military officers indicate that Guan's rant -- for all its discomfiting bluster -- actually represents the mainstream views of the Chinese Communist Party, and that perhaps the real outliers might be those in China's government who want to side with the United States.

Guan's speech underscored that 31 years after the United States and China normalized relations, there remains a deep distrust in Beijing. That the United States is trying to keep China down is a central part of the party's catechism and a foundation of its claims to legitimacy.

More broadly, many Chinese security experts and officials view the Obama administration's policy of encouraging Chinese participation in solving the world's problems -- including climate change, the global financial crisis and the security challenges in Iran and North Korea -- not as attempts to elevate China into the ranks of global leadership but rather as a scheme to enmesh it in a paralyzing web of commitments.

"Admiral Guan was representing what all of us think about the United States in our hearts," a senior Chinese official, who deals with the United States regularly, said on the condition of anonymity because he was not authorized to speak with a reporter. "It may not have been politically correct, but it wasn't an accident."

"It's silly to talk about factions when it comes to relations with the United States," said a general in the PLA who also spoke on the condition of anonymity. "The army follows the party. Do you really think that Guan did this unilaterally?"

China's fear of the United States was very much on display this past weekend during the Shangri-La Dialogue, where Gates and his Chinese counterparts clashed repeatedly throughout the program.

Gates said it was unnecessary for the PLA to hold the military relationship hostage because U.S. arms sales to Taiwan are, "quite frankly, old news." The United States has provided military assistance to Taiwan since 1949, when the Nationalist government of China fled to the island after the Communist victory on the mainland; this assistance did not stop when Washington normalized relations with Beijing in 1979.

"You, the Americans, are taking China as the enemy," countered Maj. Gen. Zhu Chenghu. Zhu rose to prominence in China in 2005 after he warned that if the United States came to Taiwan's defense in a war with China, Beijing would abandon its "no first use" doctrine on nuclear weapons and attack the United States.

In January, Washington announced a $6.4 billion arms package for Taiwan, prompting China to downgrade its military ties with the United States. China's stance on the issue is part of a concerted campaign to change a foundation of U.S. policy in the region -- its security relationship with Taiwan. At the very least, Chinese officials said, they want the Obama administration to reiterate a commitment it made in a joint communique with China in 1982 to decrease arms sales to Taiwan.

The U.S. framing of Guan's speech and the entire PLA as being out of step with the times is significant, analysts said, because the Obama administration could fall into a trap of expecting more from China than it can deliver. On the plane back to the United States, for example, U.S. officials predicted that despite Guan's outburst, China would welcome Gates and that it would also begin to side with South Korea against North Korea following the release of a report in Seoul implicating the regime of Kim Jong Il in the deadly sinking of a South Korean warship on March 26. China did neither, and interviews with PLA officers indicate that the military is highly suspicious of the South Korean report.

U.S. officials have also expressed the hope that China would work harder to press Iran, for example, to engage in talks on its nuclear weapons program. The United States also wants China's cooperation on slapping new sanctions on Tehran. China has shown more flexibility on this issue, but it is still unclear whether it will ultimately support sanctions.

Chinese analysts say the Obama administration ignores what China calls its "core national interests" -- especially U.S. weapons sales to Taiwan -- at its peril.

"For years, China has opposed arms sales to Taiwan among other things, but we were never strong enough to do anything about it," said Cui Liru, the president of the China Institutes of Contemporary International Relations, a think tank run by the Ministry of State Security. "But our national strength has grown. And it is time that the United States pay attention."

"This is not just a talking point that can be dismissed by your government," he continued. "It is something that must be dealt with or it will seriously damage ties."
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« Reply #148 on: June 10, 2010, 07:02:10 AM »

Considering a Failed Transition for China
SOME TWO THOUSAND WORKERS CLASHED WITH POLICE in China on Tuesday during a staged walkout at a factory near Shanghai in Kunshan City, Jiangsu province. According to reports from Hong Kong, about 50 people were injured in the clash. It occurred amid a recent spate of labor incidents, including a series of worker suicides at the Foxconn electronics factory and strikes at Honda factories and several other factories in Guangdong province.

Recent labor problems have resulted in companies offering wage increases to appease workers. Foxconn has raised wages several times, most recently claiming to offer workers a 70 percent raise amid a public firestorm over the unsettling suicides at its plant that drew negative attention to major Western brands like Apple and Dell, who rely on Foxconn for parts. Honda raised wages only to see strikes emerge at one of its subsidiary’s factories. Elsewhere, failed negotiations over wages or unfulfilled promises of wage hikes have triggered walkouts. Most of the targeted companies have been foreign, mainly Taiwanese and Japanese, with one South Korea-affiliated factory. American company KFC agreed quietly during a round of negotiations to pay more to employees in China.

China is in the midst of an internal struggle to manage the rapid transformation of its economy and society. Few, when they look, can doubt that the struggle is one of consequence. The problem is that not many are looking. The recent labor issues raise serious questions about where China is going, and whether it will get there. The answers to these questions have a definite bearing on the global economy.

Beijing knows its lease has run out on rapid export-driven growth spurred by strong global demand. Across the world, stimulus programs are fading, and the debt hangover is setting in. Europe’s economies have become bogged down in unemployment, a weakening currency and painful attempts by many governments to correct their books. The inevitable result of this is less promise for the future consumption of Chinese goods. The United States’ prospects for growth are far better, but Americans’ consumer patterns have mellowed out, and Washington has fiscal problems of its own and is growing more mercantilist and more protectionist in the face of prolonged unemployment. None of these scenarios bode well for China’s manufacturing sector even if it had not spent almost 30 years experiencing unbridled expansion. The reality is that in the near term China will face lower external demand and slower growth rates, and not merely as a theoretical eventuality that can be noted and then blithely ignored.

The only hope for Beijing is to expedite the process of building its consumer base at home to generate new demand to keep Chinese workers busy and factories humming as foreign demand shrinks. One way to start restructuring a country as massive and diverse as China is to increase wages and household incomes, as Beijing has done by having local governments raise their required minimum wages. The more cash people have to spend and invest and boost the economy, the less likely they will be to take to the streets. Simple enough.

“Beijing knows its lease has run out on rapid export-driven growth spurred by strong global demand.”
Except that higher wages directly contravene the factor that made China an economic powerhouse in the first place: its massive pool of cheap labor. China’s manufacturers have already reached the point of saturating foreign markets and can no longer substantially increase their profits by increasing the bulk of production. In response they have pared down their costs, competing with each other to see who can run on thinner margins. This process too has nearly reached its end, with further margin-cutting starting to look fatal. If labor costs rise too high, a number of these companies will be forced to shed workers or shut down, and foreign investors may look elsewhere for cheap labor.

Nevertheless, this is the transition that China knows it must make. The survivors will be leaner and meaner and, ideally, the entire manufacturing sector will become more sophisticated and innovative. At the same time, new growth in other sectors will absorb the labor. The state will be there to catch those who fall through the cracks, economic restructuring will progress and China will shift away from export dependency and maintain growth at lower yet more sustainable rates.

Yet China’s ruling party fears it cannot handle the transition successfully, which explains its anxious attempts to manage the process as carefully and as gradually as possible. This entails using everything in its power to alleviate or suppress internal pressures and limit external interference and disturbances. The survival of the regime, not to mention the unity of the country, is at stake.

Needless to say, the rest of the world also fears a failed transition for China. China’s economy is currently the third largest in the world and much more deeply embedded into the global system than before, with a vast network of nations dependent on it in some way. While China could continue for a considerable period of time using fiscal spending and government direction to maintain its momentum and prop itself up (as it has done through the recent global crisis), a serious slowdown would have extremely negative consequences globally.

Reduced demand would send commodity prices falling and knock commodities producers off their feet in the Middle East, Africa, Latin America, Central and Southeast Asia and Australia. Supply chains linked into China’s manufacturing and assembly lines would collapse or be severely disrupted, harming China’s suppliers and leaving customers — from neighboring Japan and Korea to the United States and Europe — with shortages of goods integral to their own economies. Countries heavily invested in China would scramble to save what assets they could, and global financial markets would be in turmoil (not least because of American-Chinese financial interdependence). Opportunities would emerge for economic rivals to take advantage, developing countries would seek to fill the economic void and developed countries would try to take advantage of their various resources. China’s neighbors and the United States would see opportunities to strengthen their strategic position in China’s periphery.

In other words, trying to imagine what a failed transition would look like for the Chinese economy evokes memories of past failed attempts at social and economic transformation in China, all of which were catastrophic. The difference this time would be that the ramifications would extend further. The possibility alone, however far it may be from materializing in the near term (and STRATFOR suspects it is not as far off as conventional wisdom holds), has been enough to inject even more fear and uncertainty into the world economic system as China initiates new efforts to cool down its surging economy and reshape it for the future.
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« Reply #149 on: June 26, 2010, 02:09:12 AM »



U.S. President Barack Obama spoke at length about U.S.-China relations on Thursday,
expressing approval of China's recent announcement that it would end its currency's
two-year de facto peg to the U.S. dollar and allow more flexibility in its exchange
rate going forward. Obama will meet with Chinese President Hu Jintao on the
sidelines of the G-20 summit, and spoke optimistically and conscientiously in
preparation for the talks. He said essentially that he approved of China's gesture
but now would like to see substantial action to support it.

The yuan's fixed rate has been a recurring source of tensions and threats, and the
prolonged unemployment problems following the recession have made U.S. leaders less
willing to tolerate China's taking exception to a range of international trade
norms. China's recent change to the policy was therefore welcome. But so far it is
merely symbolic, rising by barely two-hundredths of a yuan since a week ago. The
purpose of the tiny change was to give a sign, ahead of the G-20 summit in Canada,
that China is responsive to international demands for it to stop pushing the yuan
down to boost its manufacturers at the expense of others and begin playing a bigger
role in rebalancing the global economy. The other, more important purpose was to
reassure the United States.

In recent months, a long list of senators and representatives, as well as the
Treasury and Commerce departments, have brandished their weapons against China,
warning of the consequences of maintaining a currency that is undervalued by
anywhere from 20-40 percent. In the past few weeks the brandishing has gotten more
menacing. The chairmen of both the powerful Senate Finance Committee and the House
Ways and Means Committee have emphasized that if China does not act around the time
of the G-20 summit, and if the administration does not respond to this inaction,
then they will bring to a vote bills that would force the administration's hand.

From Beijing's point of view, there are good reasons to loosen the currency regime.
Allowing the yuan to rise would help in the process of transforming China's economy
into one that is of and for the consumer rather than one that is of and for the
producer. Chinese households and domestic-oriented businesses would see their buying
power enhanced, while exporters would lose some of their privileges. Investors would
respond to these trends and China would begin to genuinely shift away from
overdependence on exports as a means of growth. However, given the oft-observed
revolutionary effects of consumerism, Beijing is understandably insistent that the
process must be both gradual and carefully controlled. The Communist Party of
China's definition of a gradual pace of reform would elsewhere be interpreted as

"Given the oft-observed revolutionary effects of consumerism, Beijing is
understandably insistent that the process must be both gradual and carefully


For the United States, however, such timing is not fast enough. Midterm elections
are approaching in November and incumbents are in danger. While this is especially
important for congressmen whose states feel they have suffered the worst from cheap
Chinese imports, it is also important for Obama, whose domestic and foreign policy
woes are growing, and who could benefit from looking tough in dealing with China.

But the disagreement runs even deeper. As much as Obama may wish to avoid a
confrontation with China, he cannot afford to veto a bill against China once it sits
on his desk. The yuan is clearly artificially undervalued, and whatever the effect
on the U.S. economy, this is not beneficial. Not to mention the obvious question of
why China's currency is not freely traded like that of other countries, especially
given China's rapid growth, enormous economic size and the recovery of its exports
and trade surpluses.

Obama -- echoing the top lawmakers -- stressed the need to wait and observe the pace
and magnitude by which the yuan will rise in the coming weeks. Presumably, if China
is perceived to have made substantial improvement, the United States will call off
the dogs. Otherwise, the United States will begin meting out punishment for China's
currency "misalignment." The danger lies in where -- and whether -- U.S.
expectations intersect with China's capabilities given its fragile domestic
conditions. In the short term, Washington might be willing to be convinced to give
Beijing more leeway to reform at the pace it thinks it can handle. After all, a
deeper rift with China would not be beneficial for the United States given its other
economic and military preoccupations. (Though it would not be intolerable.) The
upcoming G-20 summit and Beijing's actions in the aftermath of those meetings will
determine whether such a rift can be avoided. Even so, any compromise will be
temporary, which spells trouble for U.S.-Chinese relations in the not-so-distant

Copyright 2010 Stratfor.

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