Why Do the Chinese Save So Much? A skewed sex ratio is fueling a highly competitive marriage market, driving up China’s savings rate

Why Do the Chinese Save So Much? By Shang-Jin Wei

A skewed sex ratio is fueling a highly competitive marriage market, driving up China’s savings rate and with it the global trade imbalance.
Columbia Business School Ideas@Work, Jan 22 2010

Much attention has been directed toward China’s high savings rate. Not only is the savings rate disproportionately high compared to virtually any other country, but it directly impacts China’s current account surplus and the U.S. consumer deficit. When national savings exceeds investment, the excess savings shows up in China’s current account surplus.

The prolonged period of low global interest rates has been attributed in large part to this surplus, and with the surplus come pros and cons. “In the context of the current crisis, the long period of low interest rates was linked to excessive risk-taking behavior in U.S. markets, especially where regulation has been lax or inadequate,” Professor Shang-Jin Wei says. “The upside is that with low interest rates comes a lower cost of capital, which is good for investment.”

Given its far-reaching effects, both private sector analysts and policy makers have attempted to trace the causes of China’s high savings rate and to predict how long it will last. Some have attributed the savings primarily to Chinese corporations rather than households. Others point to a precautionary savings motive: because Chinese people are worried about costs of healthcare, education and old-age pensions and are unsure about how much these costs might change over time, they respond by saving more. Other explanations point to habit formation or financial development.

“But these explanations do not tell the whole story, and possibly are not the most important part of the story,” says Wei. Instead, Wei hypothesized that an important social phenomenon is the primary driver of the high savings rate: for the last few decades China has experienced a significant imbalance between the number of male and female children born to its citizens.

There are approximately 122 boys born for every 100 girls today, a ratio that translates into cutting about one in five Chinese men out of the marriage market when this generation of children grows up. Three factors conspire to produce the imbalance. First, Chinese parents often prefer sons. Second, it has become increasingly inexpensive for even a relatively poor farmer to afford the $12 Ultrasound B, the most common technology used for learning the gender of a fetus.

Third, and perhaps most importantly, China’s stringent family planning policy limits the number of children a couple can have. The policy allows most couples to have only one child. But in some regions, if a couple’s first child is a daughter, the state permits the couple to have another child. Families with one daughter that become pregnant with another daughter are more likely to terminate the second pregnancy in hopes of producing a son later on. (India, Korea, Vietnam and Singapore also have sex ratio imbalances that favor male children despite the absence of these stringent family planning policies. It might be that in these countries people voluntarily want to restrict the number of children they have, and still prefer sons and have access to inexpensive selective abortions. The sex ratio imbalance is high in these countries but not as extreme as in China.)

“The increased pressure on the marriage market in China might induce men and parents with sons to do things to make themselves more competitive,” Wei says. “Increasing savings is one logical way to do that, to the extent that wealth helps to increase a man’s competitive edge. Parents increase household savings mostly by cutting down their own consumption.”

Wei worked with Xiaobo Zhang of the International Food Policy Research Institute in Washington, D.C., to see if his hypothesis held up, comparing savings data across regions and in households with sons versus those with daughters. “We find not only that households with sons save more than households with daughters in all regions,” Wei says, “but that households with sons tend to raise their savings rate if they also happen to live in a region with a more skewed sex ratio.”

The effect is significant. The household savings rate in China rose from about 16 percent of disposable income in 1990 to over 30 percent today, which is much higher than most countries. About half of the increase in the savings rate of the last 25 years can be attributed to the rise in the sex ratio imbalance. “It’s a very high ratio of savings to income,” Wei says. “The comparable savings rate in the United States would be 2 or 3 percent before the crisis, and about 6 percent since the crisis.”

Even those not competing in the marriage market must compete to buy housing and make other significant purchases, pushing up the savings rate for all households.

“While the conventional explanations for the high savings rate all play a role, they are not as important as people previously thought,” Wei says. “People had noticed the sex ratio imbalance as a social problem. Sociologists and other social scientists had looked at the phenomenon but had not looked at it in relation to the high Chinese savings rate.”

As economists and policy makers have looked with concern to the large Chinese current account surplus and large U.S. current account deficit, or global imbalances, much of their discussion has focused on changing exchange rate policy.

There are global economic implications if China continues to save at such a high rate, and Wei’s research highlights a connection between social policy, saving behavior and current account balances.

“Exchange rates might be part of the solution, but our work suggests they might not be the most important part,” Wei says. Because sex ratio imbalances that skew toward males are viewed as evidence of a society’s tendency to discriminate against women, it calls attention to the status of women and women’s rights. And China is not the only country where the sex ratio dynamic needs attention. “The effect of sex ratio imbalance on savings is not unique to China,” he says. “Many other countries with significant sex ratio imbalances also have relatively high current account balances.

“None of the discussion about global imbalances has brought family planning policy or women’s rights to the table, because people do not see these issues as related to economic policy,” Wei says. “Our research suggests that this is a serious omission. You can only implement the right policy when you get the diagnosis correct, and fruitful policy dialogue has to include discussion on these issues.”

Shang-Jin Wei is the N.T. Wang Professor of Chinese Business and Economy in the Finance and Economics Division and director of the Jerome A. Chazen Institute of International Business at Columbia Business School.

What Can the U.S. Learn from China’s Energy Policy?

What Can the U.S. Learn from China’s Energy Policy?
IER November 20, 2009

Deficits and the Chinese Challenge - Debt can become a real liability for a superpower. Recall what happened to postwar Britain

Deficits and the Chinese Challenge. By ZACHARY KARABELL
Debt can become a real liability for a superpower. Recall what happened to postwar Britain.
WSJ, Oct 13, 2009

The dollar's sharp drop over the past few weeks has led to considerable anxiety about the status of the United States as the dominant force in the global economy. Closely related to this fear is constant worry about the rise of China and the evermore complicated relationship between Beijing and Washington.

Most people are now aware that China is the largest creditor to a heavily indebted U.S. government. It holds close to a trillion dollars of U.S. Treasurys and has invested hundreds of billions more in private enterprises in America. Even though these facts are plainly acknowledged, policy makers and experts continue to underestimate the full ramifications of this relationship.

Consider what happened in 1946, when a cash-strapped Great Britain turned to the U.S. for a loan. For 30 years or more, the British had been consumed by the threat of a rising Germany. Two wars had been fought, millions of lives had been lost, and the British treasury was dramatically depleted in the process. Britain survived, but the costs were substantial.

In spite of its global empire, a powerful military, and an enviable position at the center of world-wide commerce, in early 1946 the British government faced a serious risk of defaulting on its financial obligations. So it did what it had done at various points over the previous decade and turned to its closest ally for assistance. It asked the U.S. for a loan of $5 billion at zero-interest repayable over 50 years. As generous as those terms seem today, such financing had been almost routine in years prior. To the surprise and shock of the British, Washington refused.

Unable to take no for answer, Britain explained that unless it received funds the government would be insolvent. The Americans came back with a series of conditions. They would lend Britain $3.7 billion at 2% interest, and the British government would have to abide by the 1944 Bretton Woods plan, which made the dollar rather than the pound sterling the reference point for global exchange rates and required Britain to make the pound freely convertible. Even more significantly, Britain had to end its system of imperial preferences, which meant no more tariffs and duties on goods to and from colonies such as India. These were not mere financial penalties: Taken together, they meant the end of the British Empire.

Within two years, Britain had left India and was on its way to decolonizing throughout Asia and Africa. Unable to compete with the United States economically and no longer able to reap the benefits of colonial trade, Britain's military shrank and its commerce contracted. It quickly receded from its dominant global position and entered several decades of economic malaise. In the 1980s, Britain finally emerged as a prosperous country, but it was a shadow of what it had been in its heyday.

The U.S. replaced Britain as the guardian of the West. As one British official, Evelyn Shuckburgh, remarked in the late 1940s, "it was impossible not to be conscious that we were playing second fiddle." And that was precisely what the U.S. desired. Having supported the British for decades and become its banker and manufacturer during two wars, at the end of World War II the U.S. fully intended to supplant the British Empire. The loan request provided the pretext, but by then the balance had already shifted and Britain could have done little to reverse the tide.
By 2030—if not sooner—China is likely to surpass the U.S. in the size of its economy, though it will remain on a per capita basis a much poorer society for many years after that. Trajectories can change, but the recent implosion of the American financial system has only accelerated China's rise.

Given the lesson of the British Empire's demise, it would be foolish to base current policy on the assumption that China will hit a fatal speed-bump before it is able to supplant the U.S. And while the level of current indebtedness is manageable for the U.S.—and in fact tethers the Chinese closely to the U.S. economy in ways that are arguably beneficial for both countries—the fact that these economies are currently bound together does not mean that their interests will always be in sync.

Here, too, the British analogy is sobering. For decades, the relationship between Britain and the U.S. was mutually beneficial, though the Americans resented being treated as junior partners. As tension festered, the British were consumed with the more immediate threat of Germany. But in the end it was the U.S. that delivered the knockout blow.

The Americans have not had to deal with a true economic rival since the British more than half a century ago. America today is as unaccustomed to global economic competition as the British were at their apex. The U.S. often seems lumbering and ill-suited to the demands of economic rivalry.

The only way to avoid Britain's fate and meet the challenge of China is to reinvigorate economic life. This is a multiyear endeavor that must be done primarily through innovation, not legislation. America needs to retool its domestic economy to build on the global success of many U.S. companies. It must focus on inventing new products and generating new ideas, rather than defending the rusty industries of yesterday. Fights over health care and climate change are the cultural equivalent of fiddling while Rome burns.

China thrives because it is hungry, dynamic, scared of failure and convinced that it should be a leading force in the world. That is why America thrived a century ago. Today, such hunger and dynamism seem less evident in American life than petulance that the world is not cooperating.
The U.S. is in danger of assuming that because it has been a dominant nation on the world stage, it must continue to be so. That is a recipe for becoming Britain.

Mr. Karabell is the author of "Superfusion: How China and America Became One Economy and Why the World's Prosperity Depends on It," just published by Simon & Schuster.

Japan concerned at weakening of U.S. nuclear umbrella

Japan concerned at weakening of U.S. nuclear umbrella
Japan Today, Monday 14th September, 07:01 AM JST

TOKYO — Japan has expressed its reluctance to accept a proposal that urges the United States to limit the role of nuclear weapons to deterring only nuclear attacks and that seeks a no first-strike commitment in a draft report compiled by an international panel on nuclear nonproliferation and disarmament, panel sources said Sunday.

Japan’s representative to the International Commission on Nuclear Nonproliferation and Disarmament expressed reservations about the proposal due to concerns over a weakening of the U.S. nuclear umbrella, the sources said.

The commission, established at the initiative of Australia and Japan, aims to reinvigorate international efforts on nuclear nonproliferation and disarmament. It is co-chaired by former Japanese and Australian foreign ministers—Yoriko Kawaguchi and Gareth Evans.

The draft document envisages U.S. President Barack Obama working out a new nuclear doctrine before the review conference of parties to the nuclear nonproliferation treaty which is scheduled to be held next May.

It says that the ‘‘sole purpose of U.S. nuclear weapons is to deter use of nuclear weapons against the United States and its allies.’’

Japan has agreed to the principle of reducing the role of nuclear weapons but has expressed reservations not just about the specific proposal but also the suggested timetable and sequence or weapons reduction, the sources said.

Japan is arguing for Washington to maintain its broad nuclear deterrence apparently due to concerns about possible biological and chemical attacks from North Korea, they added.
An adviser to the Japanese commission member said, ‘‘From a Japanese defense perspective, there are two concerns under current security circumstances in East Asia for the time being,’’ according to the sources.

‘‘First, limiting the role of nuclear deterrence in preventing nuclear attack may give the wrong signal to North Korea or other ‘rogue states’ which may have a different strategic (escalation) calculation. To deter such threats, the credibility of nuclear deterrence would remain important.
‘‘Second, a no-first-use declaration by the United States without a reduction in threat would undermine the security of Japan, or at least it would raise the sense of uncertainty and anxiety over security.

‘‘In light of the reality that China has been rapidly catching up in air and sea power balance...in addition to the rapid modernization of its nuclear capability, no-first-use should be come after or along with the commitment of a tangible nuclear threat reduction in the region,’’ the report quoted the adviser as saying.

Beijing Plays Hedge Ball - A contract should be a contract

Beijing Plays Hedge Ball. WSJ Editorial
A contract should be a contract.
WSJ, Sep 09, 2009

Beijing needs to clarify whether a contract is a contract, and fast. Recent suggestions that the government might allow or even encourage companies to challenge derivatives contracts that went against them send a bad signal to foreign companies and countries doing business with China.

The controversy stems from commodities hedges gone wrong. When fuel prices were high, airlines like China Eastern, Air China and Shanghai Airlines and shippers like China Ocean Shipping crafted derivatives contracts with foreign banks to protect the companies from even higher fuel prices. Instead the price of oil has fallen, leaving the companies on the hook for the downside risk of their hedge—a total of about $2 billion for the airlines alone, by some counts.

The companies are crying foul, and several reportedly sent a letter to the banks that sold them the derivatives suggesting they may be "void, invalid or unenforceable." Worse, the government is getting into the act. The state-owned Assets Supervision and Administration Commission, which oversees these companies, on Monday posted a statement on its Web site suggesting that Beijing might countenance efforts to sue to nullify the contracts.

China has been down this road before, pushing foreign counterparties several times over the past decade to back down from derivatives contracts that had turned against a Chinese company. In those cases, the companies or the government variously argued that the firms had been illegally speculating or had not understood the risks they were taking—or even that the people signing the papers on behalf of the Chinese companies hadn't been authorized to do so. It's hard to see how such arguments could apply to the kind of bread-and-butter fuel hedging at issue here.

Policy makers might think the government holds a lot of cards in this case, and in some respects it does. While the derivatives contracts would be tough to wriggle out of legally since they're enforceable through courts in Hong Kong, Singapore or Britain, it would be hard for the banks to collect on any judgment unless they're willing to seize planes at Heathrow or Changi airports.

The banks would have strong incentives not to try, too. Regulators in Beijing decide whether the foreign banks receive various business licenses, for instance, and state-owned enterprises constitute some of the biggest bank clients. Especially since the goal could only be to renegotiate the contracts instead of canceling them, policy makers and executives might think the banks will be willing to pay that price to continue doing business in China.

But this kind of bullying is not free. Most immediately, hedging is a risk-management tool that many Chinese companies can't afford to live without. It works on trust between counterparties that each side will hold up its end of the bargain. Already banks reportedly are demanding higher collateral for derivatives contracts like those at issue here to compensate for the loss of trust. That's an added cost of doing business not faced by other airlines that take their lumps when hedges go wrong. like Hong Kong's Cathay Pacific or America's United.

This incident will leave foreign investors wondering where China stands on its road to commercial rule of law. Following the arrests of Rio Tinto executives in a dispute over ore prices, foreign businesses already have to wonder about their physical safety if they run afoul of Chinese companies in contract negotiations. Now it appears foreign companies can be in financial danger simply for ending up on the "wrong" side of a standard off-the-shelf derivatives transaction.

Beijing officials may not realize the potential effects of this controversy on Chinese companies investing abroad. Chinese mergers and acquisitions in countries like America or Australia have been controversial in large part because politicians in those countries have worried about a lack of transparency within Chinese companies, and whether those companies would play by the rules once they hit foreign shores. Politicians already predisposed to oppose Chinese investment—and perhaps some who'd otherwise support allowing such investments—will hardly take comfort from a sign that Chinese companies won't play by the rules if it doesn't suit them. If Beijing is actively trying to dissuade foreign investment, it's on the right track.

Beijing might be responding to a political storm over the notion Chinese companies have been exploited by Western banks (one wag has called derivatives "financial opium," a charged phrase in China). Or it could be trying to bail out a few companies that made bad fuel-price bets. Or some other political motivation could be at work. Whatever the cause, though, Beijing's only smart way forward is to state clearly that a contract is a contract and that Chinese companies must abide by theirs.

Clinton and Geithner: A New Strategic and Economic Dialogue with China

A New Strategic and Economic Dialogue with China. By HILLARY CLINTON AND TIMOTHY GEITHNER
Few global problems can be solved by either country alone.
WSJ, Jul 27, 2009

When the United States and China established diplomatic relations 30 years ago, it was far from clear what the future would hold. In 1979, China was still emerging from the ruins of the Cultural Revolution and its gross domestic product stood at a mere $176 billion, a fraction of the U.S. total of $2.5 trillion. Even travel and communication between our two great nations presented a challenge: a few unreliable telephone lines and no direct flights connected us. Today China’s GDP tops four trillion dollars, thousands of emails and cellphone calls cross the Pacific Ocean daily, and by next year there will be 249 direct flights per week between the U.S. and China.

To keep up with these changes that affect our citizens and our planet, we need to update our official ties with Beijing. During their first meeting in April, President Barack Obama and President Hu Jintao announced a new dialogue as part of the administration’s efforts to build a positive, cooperative and comprehensive relationship with Beijing. So this week we will meet together in Washington with two of the highest-ranking officials in the Chinese government, Vice Premier Wang Qishan and State Councilor Dai Bingguo, to develop a new framework for U.S.-China relations. Many of our cabinet colleagues will join us in this “Strategic and Economic Dialogue,” along with an equally large number of the most senior leaders of the Chinese government. Why are we doing this with China, and what does it mean for Americans?

Simply put, few global problems can be solved by the U.S. or China alone. And few can be solved without the U.S. and China together. The strength of the global economy, the health of the global environment, the stability of fragile states and the solution to nonproliferation challenges turn in large measure on cooperation between the U.S. and China. While our two-day dialogue will break new ground in combining discussions of both economic and foreign policies, we will be building on the efforts of the past seven U.S. administrations and on the existing tapestry of government-to-government exchanges and cooperation in several dozen different areas.

At the top of the list will be assuring recovery from the most serious global economic crisis in generations and assuring balanced and sustained global growth once recovery has taken hold. When the current crisis struck, the U.S. and China acted quickly and aggressively to support economic activity and to create and save jobs. The success of the world’s major economies in blunting the force of the global recession and setting the stage for recovery is due in substantial measure to the bold steps our two nations have taken.

As we move toward recovery, we must take additional steps to lay the foundation for balanced and sustainable growth in the years to come. That will involve Americans rebuilding our savings, strengthening our financial system and investing in energy, education and health care to make our nation more productive and prosperous. For China it involves continuing financial sector reform and development. It also involves spurring domestic demand growth and making the Chinese economy less reliant on exports. Raising personal incomes and strengthening the social safety net to address the reasons why Chinese feel compelled to save so much would provide a powerful boost to Chinese domestic demand and global growth.

Both nations must avoid the temptation to close off our respective markets to trade and investment. Both must work hard to create new opportunities for our workers and our firms to compete equally, so that the people of each country see the benefit from the rapidly expanding U.S.-China economic relationship.

A second priority is to make progress on the interconnected issues of climate change, energy and the environment. Our two nations need to establish a true partnership to put both countries on a low-carbon pathway, simultaneously reducing greenhouse gas emissions while promoting economic recovery and sustainable development. The cross-cutting nature of our meetings offers a unique opportunity for key American officials to meet with their Chinese counterparts to work on the global issue of climate change. In the run-up to the international climate change conference in Copenhagen in December, it is clear that any agreement must include meaningful participation by large economies like China.

The third broad area for discussion is finding complementary approaches to security and development challenges in the region and across the globe. From the provocative actions of North Korea, to stability in Afghanistan and Pakistan, to the economic possibilities in Africa, the U.S. and China must work together to reach solutions to these urgent challenges confronting not only our two nations, but many others across the globe.

While this first round of the U.S.-China Strategic and Economic Dialogue offers a unique opportunity to work with Chinese officials, we will not always agree on solutions and we must be frank about our differences, including establishing the right venues to have those discussions. And while we are working to make China an important partner, we will continue to work closely with our long-standing allies and friends in Asia and around the world and rely on the appropriate international groups and organizations.

But having these strategic-level discussions with our Chinese counterparts will help build the trust and relationships to tackle the most vexing global challenges of today—and of the coming generation. The Chinese have a wise aphorism: “When you are in a common boat, you need to cross the river peacefully together.” Today, we will join our Chinese counterparts in grabbing an oar and starting to row.

Mrs. Clinton is the U.S. Secretary of State. Mr. Geithner is Secretary of the Treasury.

Cross-Strait Relations Improve, but China Still Deploys Missiles

Cross-Strait Relations Improve; China Still Deploys Missiles. By Richard C. Bush III, Director, Center for Northeast Asian Policy Studies
Brookings, June 27, 2009

In the relations between Taiwan and China, something intriguing happened between last spring and this spring. I refer not to the impressive progress that the two sides have made since Taiwan President Ma Ying-jeou took office in May 2008. They have restored dialogue mechanisms; concluded agreements to enhance cooperation in the areas of trade, transportation, finance, and crime control; and made possible Taiwan’s participation as an observer at the annual meeting of the World Health Assembly. This significant progress occurred against the backdrop of fifteen previous years of deepening mutual mistrust, which led Beijing and Taipei each to craft policy based on fears of the other’s intentions rather than hopes for cooperation.

The intriguing development was what happened in the military field. In spite of progress in the political and economic arenas, the People’s Liberation Army’s procurement and deployment of equipment that puts Taiwan at risk continued unabated. According to the last two Pentagon report on China’s military power, released in March of 2008 and 2009, China’s short- and medium-range missiles, which target Taiwan, increased from a range of 995-1070 to 1050-1150. This rate of growth is a bit less than previous years, but still raises the question, what is going on?

Let us stipulate, for purposes of discussion, the following:

• The PLA’s buildup occurred over the past decade because China perceived that Ma Ying-jeou’s predecessors planned somehow to permanently separate Taiwan from China. It was necessary, therefore, to secure the ability to deter this challenge to China’s fundamental interests, and to punish Taiwan if deterrence failed.
• Some of the systems the PLA is acquiring have multiple uses, including surface ships, submarines, fourth-generation aircraft, and cyber-warfare. These can be used, for example, to protect China’s interests in the East China Sea as well as attack Taiwan. (But that is cold comfort for Taiwan’s security planners. They worry—correctly that those systems will be used against them, and to block the United States from coming to the island’s defense.)

Still, it is startling that Beijing did not adjust the procurements and deployments that are most relevant to Taiwan in response to Ma’s taking office. After all, what drove China to its military buildup was its perception of threatening intentions of Ma’s predecessors. He on the other hand has pursued a policy of reassurance and reconciliation. We can imagine several possible reasons.

The first is bureaucratic: that the PLA procures equipment on a five-year cycle, and the adjustment to Ma will begin in the cycle that begins in 2011. The second concerns threat perception: PLA and other leaders do not believe that the threat of separatism has disappeared. Pro-independence forces could return to power and China must be prepared. The third possible reason is institutional. The PLA is increasingly a corporate entity that has its own view of how, within broad policy parameters, to protect China’s national security. It could be some combination of the three. We simply do not know.

China’s failure to adjust has important implications for the future of cross-Strait stability, because it affects the sustainability of Ma Ying-jeou’s policies. In his electoral campaign, he argued that that the best way to ensure Taiwan’s prosperity, security, and dignity in the face of a more powerful China to reassure and engage Beijing. His appeal, therefore, defines what he must achieve to secure re-election in 2012 for himself and his party. Moreover, Ma has made very clear that China’s existing military capabilities are an obstacle to creating a truly stable cross-Strait environment. As he told The New York Times last year, “We don't want to negotiate a peace agreement while our security is threatened by a possible missile attack.”

China derives significant strategic benefit from Ma Ying-jeou’s policies, because they diminish what it saw as a serious threat. Ironically, if the China is too grudging on what it offers in return, particularly in the area of security, it will undercut Ma’s core argument and the political support that sustains it. It was Taiwan fear of China’s buildup that helped create the previous vicious circle. It cannot be in China’s interest to restart a negative spiral.

What are the implications of this situation for the United States? Washington’s fundamental goal is the preservation of peace and stability in the Taiwan area. It does not believe that goal is served when Chinese military power creates a strong sense of insecurity on Taiwan. Taiwan is thus subject to coercion and intimidation because its own deterrent is weak and it cannot negotiate confidently with Beijing.

If by its actions Beijing demonstrates a continuing desire to increase Taiwan’s sense of insecurity, then it is proper for the United States to reduce it through arms sales and other forms of security cooperation. We should, of course, provide systems that strengthen Taiwan’s real deterrent, not those that are useful primarily as political symbols (China can easily tell the difference). True, continued arms sales will damage U.S.-China relations, but we are responding to a problem that China has itself created.

President Ma’s initiatives present a strategic opportunity to transform and stabilize cross-Strait relations. But opportunities must be seized. China has done so in some areas but certainly not in the military area. To further increase its own sense of security, China must be prepared to strengthen Taiwan’s as well.

China's War for Ore - Business is being reshaped around the world

China's War for Ore. By HOLMAN W. JENKINS, JR.
Business is being reshaped around the world.
WSJ, Jul 15, 2009

China was miffed by the outcome of what we last year called the corporate "deal of the century." But shareholder interests prevailed. How often will that be said in the future?

Politics, that ugly dynamic when mixed with business, was already back in play last week as Rio Tinto, an Australian mining giant at the heart of the controversy, saw four of its Chinese executives arrested in Shanghai on spying charges.

China says the busts are not retribution for the cancelled deal between Rio and a state-owned company, which received angry press in China. Instead, the arrests supposedly arise from skullduggery by Rio officials during fraught annual ore-price negotiations with mainland steelmakers. But the distinction may be irrelevant. Ore has become a major neuralgic concern for China. It sees its dependence on imported supply as strategically risky. It fears that its massive attempts to "stimulate" domestic job growth are being drained off as fatter profits for Australian mining companies.

When the intrigue is unraveled, moreover, don't be surprised if the arrests are partly aimed at corralling the mainland's own restive steelmakers, many of whom have not cooperated in Beijing's ore strategy but have been striking their own spot market deals at higher prices.

But let's step back. Rio has been wrongfooted over and over lately amid the zigzagging of the world's monetary conditions, whose chaos is now disastrously reshaping business-government relations globally (think the Obama administration's ownership of most of the Detroit auto industry).

When China was booming, Rio played coy in the face of a merger bid from fellow miner BHP Billiton 18 months ago, acknowledging the "industrial logic" of the deal but insisting the offering price was "several ballparks" short of fair value.

Oops. With the collapse of Lehman and the global meltdown, ore prices plummeted and BHP withdrew its bid. Suddenly, Rio needed its own debt bailout and turned to a company on the cash-rich mainland, state-owned Chinalco. Beijing was doubly pleased by the $19.5 billion Chinalco deal. Not only was China getting ownership of Australian ore assets at a bargain price, but the deal also killed off any chance of a BHP merger, seen on the mainland as an Aussie plot to gouge China.

Oops. The Chinalco proposal ran into a buzzsaw of nationalist opposition in Australia. And while a government review board dragged its feet, the delay allowed Ben Bernanke to rev up the monetary engine and China to launch its own massive stimulus. Ore prices recovered. A BHP joint venture was back on the table. In a jilting worthy of a Judy Blume novel, Rio last month dumped its Chinese savior and leapt into bed with its erstwhile Australian suitor.

Now the Chinese naturally see dirty politics at work, but the deal was actually scuttled by Rio's shareholders, who rightly saw more upside in BHP's offer. Yet it's also true the Chinalco bid would likely eventually have been torpedoed by the Australian government. Polls were running strongly against selling the country's mineral patrimony to a company ultimately controlled by the Chinese Communist Party. Australia Prime Minister Kevin Rudd, who prides himself on being an old China hand, must have been overjoyed when this icky chalice was taken from his lips by Rio's shareholders

Yet the politics have only turned ickier since the Rio arrests. And Beijing has other cards up its sleeve. It can take its opposition to the BHP-Rio deal to Europe's trustbusters, who voiced qualms about their earlier proposed tie-up. China also can make use of its own new anti-monopoly law, which has already been used to punish the U.S. for blocking an oil deal. Earlier this year, Chinese regulators nixed Coca-Cola's purchase of a local juicemaker on "competition" grounds that antitrust lawyers considered ludicrous.

More disturbing, China has upped its ore purchases in recent weeks even as mainland growth seems to be slowing, suggesting an effort to lay in a stockpile for a longer showdown against Rio-BHP.

If the Rio arrests mark the beginning of a Chinese war to remake the global ore market more to China's liking, Beijing might want to think again. Its clumsy attempt to make computer makers instruments of Internet censorship was not exactly confidence-inspiring. Ensuring nobody wants to do a business deal with China for fear of being charged with a death penalty crime hardly improves the case. Then there's the epic civil disorder in Xinjiang.

The final casualty may be China's overblown reputation for macroeconomic competence, on which so many hopes for global recovery depend. There are already signs its stimulus efforts are running off the rails. The world might appreciate a signal right now that China's government actually knows what it's doing.

Schlesinger: Why We Don't Want a Nuclear-Free World

James R. Schlesinger: Why We Don't Want a Nuclear-Free World
WSJ, Jul 11, 2009

Views from India: Why Manmohan Singh is in Yekaterinburg?

Talking Heads: Why Manmohan Singh is in Yekaterinburg? By P. Stobdan
IDSA, June 16, 2009

Prime Minister Manmohan Singh is attending a slew of Russian hosted high profile meetings including those of the SCO and BRIC in Yekaterinburg which would be viewed keenly by most international watchers. The SCO, keenly nurtured by Russia and China as an exclusive nucleus, had hitherto excluded those with observer status from its core deliberations. The forum became popular as an embryonic counterpoise to the United States after 2005 when it bluntly issued a quit notice to the US from Central Asia and decided to salvage an assortment of autocrats being ostracized by the West. Since then, even Iran has been seeking shelter under the SCO auspices.

Why has Russia changed the summit format this time around to include Iran, India, Pakistan and Mongolia in the core deliberations? While it reflects the changing international realignment, the spin now emerging clearly indicates that Russia is counter-strategizing to deal with global issues or at the least it is unwilling to concede the challenges being posed by NATO. The rift with the trans-Atlantic alliance continues as Moscow has rejected the idea of exerting pressure on Iran over its nuclear programme in exchange for the US abandoning its planned missile defense system in Eastern Europe. For its part, NATO has not abandoned its quest to bring Ukraine and Georgia within its fold. The standoff over Georgia also continues.

It is also clear that Russia’s showdown with Georgia has changed the rules of the game. Moscow had lost diplomatic face not only in Europe but also in Asia. Many of Russia’s friends including SCO members were incensed by its adventurism towards former-republics, including the way in which it had been using gas as an instrument for arm-twisting. China and the Central Asian states were wary of Russia’s action and as such they did not endorse Moscow’s call for recognizing Abkhazia and South Ossestia during the last SCO summit in Dushanbe. The adroit Chinese were certainly not keen to pick a fight at the risk of ruining relations with the West. Moscow has also perhaps realized that it is fast losing influence in the Eurasian space, especially given that the global meltdown has made Central Asian states more dependent on China. The former Soviet republics are relying more on Chinese driven institutions than moribund organization led by Russia. Unlike Russia, China has showed no inclination for prematurely confronting the West. Instead, it was cautious about admitting Iran into the SCO as a full member and may have moderated Central Asian behavior to the chagrin of Moscow.

It is against the backdrop of this trend of Russia losing economic, political and cultural attractiveness vis-à-vis China that we should see Moscow’s attempt to bring India fully into the Eurasian space. Another reliable partner is Russia’s old trusted ally - Mongolia. India’s inclusion is also linked to the global financial crisis. Both Russia and China have been attempting to evolve a fresh financial architecture, including a proposal for a new global currency to replace the dollar as a way to preempt another financial meltdown. Russia hopes that Brazil, India and China would join hands as part of the BRIC forum to push the idea further.

The SCO meeting would be significant especially since it is being held against the backdrop of the new American Af-Pak Plan and Obama’s attempt to muster the support of regional powers to make his Afghan policy a success. The SCO, under Russia’s presidency, has been talking about Afghanistan more seriously than before mainly because the focus of geopolitics has shifted from Iraq to Afghanistan – Russia’s traditional backyard. In fact, the high profile March 2009 Conference in Moscow clearly set the stage for the SCO to play a stepped-up role, when it announced a roadmap to deal with increasing security concerns emanating from Afghanistan. It called for comprehensive cooperation against terrorism, drug trafficking and organized crime. The Russians suspect that the global economic downturn may have had an impact on the Taliban as well and thus strengthen the drugs trade. But SCO efforts are being hampered by the NATO presence in Afghanistan. The Russians claim that Afghan opium production increased 44 times after NATO and US troops were deployed in the region and since the withdrawal of Russian border guards from Tajik-Afghan border in 2005.

Moscow has shown willingness to provide transit routes for NATO shipment across Russia and Central Asia to Afghanistan. But this is being downplayed by the US which prefers to rely upon Pakistani supply routes. Attempts would be made by the SCO to bring Afghanistan within its fold this time. As the US intends to deal with and not confront the Taliban, Moscow fears that there will be a power vacuum in Afghanistan upsetting the existing balance. Some SCO declarations may come as music to Indian ears, since they would be a contrast to the NATO’s military approach and are likely to insist upon Pakistan stopping terrorism emanating from its soil. For New Delhi, the SCO may provide a useful platform to counter the negative fallout for Indian interests emerging from the Af-Pak plan. India had earlier pushed for a policy that integrates development projects in Afghanistan with security initiatives and has also insisted that there are no ‘good’ or ‘bad’ Taliban.

It is also likely that Russia is once again trying to use its leverage to soften India with regard to ongoing tension with Pakistan. Putin made a failed attempt earlier to bring together Vajpayee and Musharraf at a similar summit held in Almaty in 2002. Vajpayee did not relent.

The SCO carries a range of ambitious goals under its charter as letter of intent, including the development of an energy club, an inter-bank consortium, and cultural centres to set up an SCO university. But all in all, its strength is slightly exaggerated. The grouping suffers from nebulous internal contradictions. Everyone plays a game under the SCO template. There are internal discords and competing interests. Behind the SCO façade both China and Russia are competing for energy deals with Central Asian states. And like in Africa, Chinese firms are buying resource mines by befriending the region’s corrupt regimes, and in the process is fuelling corruption and undermining a host of environmental and labour standards.

The importance of India is occasionally aired by the SCO members, but in reality Russians and Central Asians only pay lip service while China effectively scuttles anything positive involving India in the Eurasian space. Decades of Indian efforts for an energy deal with Central Asian states remain frustrated. Except on security issues there is little that India can achieve in the SCO. The danger is that though the SCO is not a military block, it is increasingly getting securitized due to stepped-up co-operation to fight terrorism through intelligence consultations and large-scale military exercises. Many have dubbed it as an Asian NATO.

There is nothing wrong in Manmohan Singh attending the Yekaterinburg meeting even if it is a low diplomatic parade. It is also alright if the Prime Minister wants to dispel the myth that he only cares for Washington. In any event, India stands to gain by being courted by other centres of power rather than placing all its eggs in the American basket.

Prof. P. Stobdan is Senior Fellow at the Institute for Defence Studies and Analyses, New Delhi

The North Korean Syndrome- Talk,Test, Talk Again,Test Again

The North Korean Syndrome- Talk,Test, Talk Again,Test Again. By B.Raman
C3S Paper No.278 dated May 30, 2009

Years before 2006, North Korea had a tested medium-range missile capability and was developing a long-range capability which could hit targets in the US. If its objective was only to have the capability to target South Korea and Japan, it did not need a long-range capability. It wanted the long-range capability to intimidate and threaten the US. But its economy was in such a bad shape that it did not have the money to spend on its missile programme.

2. And that money came from Pakistan and Iran. They funded research and development of the North Korean missile programme as a quid pro quo for North Korea’s sharing its expertise and technology with them and selling to them some of the missiles. The Pakistan-North Korea missile development co-operation started clandestinely in 1993 when Benazir Bhutto was the Prime Minister, but it came to public notice in 1998 when Pakistan tested its so-called Ghauri missile, which was nothing but a re-baptised version of a North Korean missile. Benazir Bhutto, who was then in the opposition, publicly claimed credit for giving Pakistan a deterrent capability against India by persuading North Korea during a clandestine visit from Beijing in 1993 to co-operate with Pakistan in missile development. Around the same time, reports also started coming in of Iran’s missile procurement relationship with North Korea.

3.When Pervez Musharraf was the President of Pakistan, it had carried out a number of firings of medium and long-range missiles capable of hitting the major cities of India. These were not test firings. These were firings meant to demonstrate Pakistan’s possession of such missiles and to psychologically intimidate India. I had pointed out on many occasions that Pakistan’s action in carrying out so many demonstration firings spoke of the large stock of missiles which it has got from North Korea. Even Osama bin Laden, in one of his messages, taunted Musharraf for ordering a demonstration firing of a missile whenever he was facing difficulty at home.

4. Around the same time, Iran started emulating Pakistan by carrying out demonstration firings of missiles in order to psychologically intimidate Israel. Apart from oral warnings and threats to board North Korean ships suspected of carrying prohibited equipment to other countries, the US did nothing.Even if one can understand its inability to act against North Korea due to a fear of an irresponsible state like North Korea provoking a war in the Korean region, one failed to understand its inability to act against Pakistan and to encourage Israel to similarly act against Iran.

5.In 2003, the international community learnt with shock and surprise that Pakistan’s weapons of mass destruction capability relationship with North Korea was not confined to missiles, but also covered military nuclear capability.A.Q.Khan, the Pakistani nuclear scientist, was found to have supplied nuclear-related eqipment and technology not only to Iran and Libya, two Muslim countries, but also to North Korea. It was a nuclear-missile barter relationship. This relationship had continued at least till the Kargil conflict between India and Pakistan in 1999 when, according to Khan’s own admission to some journalists, Musharraf sent him to North Korea to procure urgently some surface-to-air missiles.

6. When all these factors came to notice one after the other since Pakistan’s firing of the Ghauri missile in April,1998, the US had three options:

• Act against North Korea through a pre-emptive strike against its nuclear and missile production facilities . It did not do so due to a fear of the unpredictable behaviour of North Korea which could have led to a war in the Korean region.
• Act against Pakistan in order to penalise it for its relations with North Korea and to force it to terminate its relationship. This might not have forced North Korea to stop its programme, but it might have slowed down its programme due to financial difficulties. It would have also given some indication of the US resolve to act. The US did nothing. After 9/11, co-operation ftrom Pakistan against Al Qaeda assumed greater importance for US policy-makers than options of action to stop North Korea from acquiring a military nuclear capability.
• Similarly, act against Iran or encourage Israel to act. From time to time, statements were made that all options were open—-meaning even a military strike against the nuclear establishments in Iran. In the case of powers such as North Korea and Iran, empty warnings without a demonstration of the resolve to act create only contempt.

7. All eggs were put in the basket of the six-power talks, which were marked by a faith in the ability and readiness of China to make North Korea behave. North Korea skilfully adopted a strategem of “Talk, test, talk again, test again”. It will seemingly co-operate with the talks, agree to some denuclearisation measures, then break the agreement under some pretext, test, then agree to talk again, then break the talks again under some other pretext and then test again. This has been going on for some years now.

8. The result:North Korea is a demonstrated nuclear power with a delivery capability at least against South Korea and Japan, if not yet against the US. It has carried out two tests, with the second one earlier in May,2009, reportedly being more powerful and more sophisticated than the first one in 2006. It has reportedly re-started the re-processing of spent fuel rods which would add to its stockpile of fissile material.

9. Pre-emption is no longer an option. Can North Korea be pressured or cajoled through China to come back to the negotiating table and to renew its commitment to the denuclearisation path? Even if one succeeds, it is very likely that after some talks, it will break the agreement reached under some other pretext. It broke the last agreement under the pretext that the UN imposed sanctions against it for allegedly testing a communication satellite. The next time, it will find some other pretext.

10. All US administrations have fought shy of a confrontation with North Korea. The Barack Obama administration even more so than its predecessors. The North Korean leadership has concluded that not only the US, but even Japan and South Korea do not have the stomach for a policy of confrontation. It, therefore, feels it does not have to fear either pre-emption or confrontation.

11. There is one option still left—- threaten China with the danger of the international community closing its eyes to Japan acquiring a military nuclear capability if China does not force North Korea to de-nuclearise. Will it work? It may or may not, but in the absence of any other options, it is well worth giving a try.

12. Even while struggling and juggling with various options available against North Korea, it is important for the Obama Administration to remember that Teheran is closely watching how Obama handles North Korea. Any sign of further weakness and accommodation with North Korea could encourage Iran in its nuclear obstinacy. This is definitely not the time for the Obama Administration to convey a wrong message to Iran that ties between the US and Israel are weakening. The US will end up by undermining a steadfast ally for the sake of better relations with an unpredictable country. The US may have valid reasons for improving its relations with Iran, but this should not be at the expense of its relations with Israel.

(The writer, Mr B.Raman, is Additional Secretary (retd), Cabinet Secretariat, Govt. of India, New Delhi, and, presently, Director, Institute For Topical Studies, Chennai. He is also associated with the Chennai Centre For China Studies.)

What I Saw at Tiananmen

What I Saw at Tiananmen. By Claudia Rossett
WSJ, Jun 04, 2009

The Geography of Recession

The Geography of Recession. By Peter Zeihan
Stratfor, June 2, 2009 1844 GMT

The global recession is the biggest development in the global system in the year to date. In the United States, it has become almost dogma that the recession is the worst since the Great Depression. But this is only one of a wealth of misperceptions about whom the downturn is hurting most, and why.

Let’s begin with some simple numbers.

As one can see in the chart, the U.S. recession at this point is only the worst since 1982, not the 1930s, and it pales in comparison to what is occurring in the rest of the world. (Figures for China have not been included, in part because of the unreliability of Chinese statistics, but also because the country’s financial system is so radically different from the rest of the world as to make such comparisons misleading. For more, read the China section below.)

But didn’t the recession begin in the United States? That it did, but the American system is far more stable, durable and flexible than most of the other global economies, in large part thanks to the country’s geography. To understand how place shapes economics, we need to take a giant step back from the gloom and doom of the current moment and examine the long-term picture of why different regions follow different economic paths.


The United States and the Free Market

The most important aspect of the United States is not simply its sheer size, but the size of its usable land. Russia and China may both be similar-sized in absolute terms, but the vast majority of Russian and Chinese land is useless for agriculture, habitation or development. In contrast, courtesy of the Midwest, the United States boasts the world’s largest contiguous mass of arable land — and that mass does not include the hardly inconsequential chunks of usable territory on both the West and East coasts.

Second is the American maritime transport system. The Mississippi River, linked as it is to the Red, Missouri, Ohio and Tennessee rivers, comprises the largest interconnected network of navigable rivers in the world. In the San Francisco Bay, Chesapeake Bay and Long Island Sound/New York Bay, the United States has three of the world’s largest and best natural harbors. The series of barrier islands a few miles off the shores of Texas and the East Coast form a water-based highway — an Intercoastal Waterway — that shields American coastal shipping from all but the worst that the elements can throw at ships and ports.

(click image)

The real beauty is that the two overlap with near perfect symmetry. The Intercoastal Waterway and most of the bays link up with agricultural regions and their own local river systems (such as the series of rivers that descend from the Appalachians to the East Coast), while the Greater Mississippi river network is the circulatory system of the Midwest. Even without the addition of canals, it is possible for ships to reach nearly any part of the Midwest from nearly any part of the Gulf or East coasts. The result is not just a massive ability to grow a massive amount of crops — and not just the ability to easily and cheaply move the crops to local, regional and global markets — but also the ability to use that same transport network for any other economic purpose without having to worry about food supplies.

The implications of such a confluence are deep and sustained. Where most countries need to scrape together capital to build roads and rail to establish the very foundation of an economy, transport capability, geography granted the United States a near-perfect system at no cost. That frees up U.S. capital for other pursuits and almost condemns the United States to be capital-rich. Any additional infrastructure the United States constructs is icing on the cake. (The cake itself is free — and, incidentally, the United States had so much free capital that it was able to go on to build one of the best road-and-rail networks anyway, resulting in even greater economic advantages over competitors.)

Third, geography has also ensured that the United States has very little local competition. To the north, Canada is both much colder and much more mountainous than the United States. Canada’s only navigable maritime network — the Great Lakes-St. Lawrence Seaway —is shared with the United States, and most of its usable land is hard by the American border. Often this makes it more economically advantageous for Canadian provinces to integrate with their neighbor to the south than with their co-nationals to the east and west.

Similarly, Mexico has only small chunks of land, separated by deserts and mountains, that are useful for much more than subsistence agriculture; most of Mexican territory is either too dry, too tropical or too mountainous. And Mexico completely lacks any meaningful river system for maritime transport. Add in a largely desert border, and Mexico as a country is not a meaningful threat to American security (which hardly means that there are not serious and ongoing concerns in the American-Mexican relationship).

With geography empowering the United States and hindering Canada and Mexico, the United States does not need to maintain a large standing military force to counter either. The Canadian border is almost completely unguarded, and the Mexican border is no more than a fence in most locations — a far cry from the sort of military standoffs that have marked more adversarial borders in human history. Not only are Canada and Mexico not major threats, but the U.S. transport network allows the United States the luxury of being able to quickly move a smaller force to deal with occasional problems rather than requiring it to station large static forces on its borders.

Like the transport network, this also helps the U.S. focus its resources on other things.
Taken together, the integrated transport network, large tracts of usable land and lack of a need for a standing military have one critical implication: The U.S. government tends to take a hands-off approach to economic management, because geography has not cursed the United States with any endemic problems. This may mean that the United States — and especially its government — comes across as disorganized, but it shifts massive amounts of labor and capital to the private sector, which for the most part allows resources to flow to wherever they will achieve the most efficient and productive results.

Laissez-faire capitalism has its flaws. Inequality and social stress are just two of many less-than-desirable side effects. The side effects most relevant to the current situation are, of course, the speculative bubbles that cause recessions when they pop. But in terms of long-term economic efficiency and growth, a free capital system is unrivaled. For the United States, the end result has proved clear: The United States has exited each decade since post-Civil War Reconstruction more powerful than it was when it entered it. While there are many forces in the modern world that threaten various aspects of U.S. economic standing, there is not one that actually threatens the U.S. base geographic advantages.

Is the United States in recession? Of course. Will it be forever? Of course not. So long as U.S. geographic advantages remain intact, it takes no small amount of paranoia and pessimism to envision anything but long-term economic expansion for such a chunk of territory. In fact, there are a number of factors hinting that the United States may even be on the cusp of recovery.


Russia and the State

If in economic terms the United States has everything going for it geographically, then Russia is just the opposite. The Russian steppe lies deep in the interior of the Eurasian landmass, and as such is subject to climatic conditions much more hostile to human habitation and agriculture than is the American Midwest. Even in those blessed good years when crops are abundant in Russia, it has no river network to allow for easy transport of products.

Russia has no good warm-water ports to facilitate international trade (and has spent much of its history seeking access to one). Russia does have long rivers, but they are not interconnected as the Mississippi is with its tributaries, instead flowing north to the Arctic Ocean, which can support no more than a token population. The one exception is the Volga, which is critical to Western Russian commerce but flows to the Caspian, a storm-wracked and landlocked sea whose delta freezes in the winter (along with the entire Volga itself). Developing such unforgiving lands requires a massive outlay of funds simply to build the road and rail networks necessary to achieve the most basic of economic development. The cost is so extreme that Russia’s first ever intercontinental road was not completed until the 21st century, and it is little more than a two-lane path for much of its length. Between the lack of ports and the relatively low population densities, little of Russia’s transport system beyond the St. Petersburg/Moscow corridor approaches anything that hints of economic rationality.

Russia also has no meaningful external borders. It sits on the eastern end of the North European Plain, which stretches all the way to Normandy, France, and Russia’s connections to the Asian steppe flow deep into China. Because Russia lacks a decent internal transport network that can rapidly move armies from place to place, geography forces Russia to defend itself following two strategies. First, it requires massive standing armies on all of its borders. Second, it dictates that Russia continually push its boundaries outward to buffer its core against external threats.

Both strategies compromise Russian economic development even further. The large standing armies are a continual drain on state coffers and the country’s labor pool; their cost was a critical economic factor in the Soviet fall. The expansionist strategy not only absorbs large populations that do not wish to be part of the Russian state and so must constantly be policed — the core rationale for Russia’s robust security services — but also inflates Russia’s infrastructure development costs by increasing the amount of relatively useless territory Moscow is responsible for.

Russia’s labor and capital resources are woefully inadequate to overcome the state’s needs and vulnerabilities, which are legion. These endemic problems force Russia toward central planning; the full harnessing of all economic resources available is required if Russia is to achieve even a modicum of security and stability. One of the many results of this is severe economic inefficiency and a general dearth of an internal consumer market. Because capital and other resources can be flung forcefully at problems, however, active management can achieve specific national goals more readily than a hands-off, American-style model. This often gives the impression of significant progress in areas the Kremlin chooses to highlight.

But such achievements are largely limited to wherever the state happens to be directing its attention. In all other sectors, the lack of attention results in atrophy or criminalization. This is particularly true in modern Russia, where the ruling elite comprises just a handful of people, starkly limiting the amount of planning and oversight possible. And unless management is perfect in perception and execution, any mistakes are quickly magnified into national catastrophes. It is therefore no surprise to STRATFOR that the Russian economy has now fallen the furthest of any major economy during the current recession.


China and Separatism

China also faces significant hurdles, albeit none as daunting as Russia’s challenges. China’s core is the farmland of the Yellow River basin in the north of the country, a river that is not readily navigable and is remarkably flood prone. Simply avoiding periodic starvation requires a high level of state planning and coordination. (Wrestling a large river is not the easiest thing one can do.) Additionally, the southern half of the country has a subtropical climate, riddling it with diseases that the southerners are resistant to but the northerners are not. This compromises the north’s political control of the south.

Central control is also threatened by China’s maritime geography. China boasts two other rivers, but they do not link to each other or the Yellow naturally. And China’s best ports are at the mouths of these two rivers: Shanghai at the mouth of the Yangtze and Hong Kong/Macau/Guangzhou at the mouth of the Pearl. The Yellow boasts no significant ocean port. The end result is that other regional centers can and do develop economic means independent of Beijing.

(click image)

With geography complicating northern rule and supporting southern economic independence, Beijing’s age-old problem has been trying to keep China in one piece. Beijing has to underwrite massive (and expensive) development programs to stitch the country together with a common infrastructure, the most visible of which is the Grand Canal that links the Yellow and Yangtze rivers. The cost of such linkages instantly guarantees that while China may have a shot at being unified, it will always be capital-poor.

Beijing also has to provide its autonomy-minded regions with an economic incentive to remain part of Greater China, and “simple” infrastructure will not cut it. Modern China has turned to a state-centered finance model for this. Under the model, all of the scarce capital that is available is funneled to the state, which divvies it out via a handful of large state banks. These state banks then grant loans to various firms and local governments at below the cost of raising the capital. This provides a powerful economic stimulus that achieves maximum employment and growth — think of what you could do with a near-endless supply of loans at below 0 percent interest — but comes at the cost of encouraging projects that are loss-making, as no one is ever called to account for failures. (They can just get a new loan.) The resultant growth is rapid, but it is also unsustainable. It is no wonder, then, that the central government has chosen to keep its $2 trillion of currency reserves in dollar-based assets; the rate of return is greater, the value holds over a long period, and Beijing doesn’t have to worry about the United States seceding.

Because the domestic market is considerably limited by the poor-capital nature of the country, most producers choose to tap export markets to generate income. In times of plenty this works fairly well, but when Chinese goods are not needed, the entire Chinese system can seize up. Lack of exports reduces capital availability, which constrains loan availability. This in turn not only damages the ability of firms to employ China’s legions of citizens, but it also removes the primary reason the disparate Chinese regions pay homage to Beijing. China’s geography hardwires in a series of economic challenges that weaken the coherence of the state and make China dependent upon uninterrupted access to foreign markets to maintain state unity. As a result, China has not been a unified entity for the vast majority of its history, but instead a cauldron of competing regions that cleave along many different fault lines: coastal versus interior, Han versus minority, north versus south.

China’s survival technique for the current recession is simple. Because exports, which account for roughly half of China’s economic activity, have sunk by half, Beijing is throwing the equivalent of the financial kitchen sink at the problem. China has force-fed more loans through the banks in the first four months of 2009 than it did in the entirety of 2008. The long-term result could well bury China beneath a mountain of bad loans — a similar strategy resulted in Japan’s 1991 crash, from which Tokyo has yet to recover. But for now it is holding the country together. The bottom line remains, however: China’s recovery is completely dependent upon external demand for its production, and the most it can do on its own is tread water.


Discordant Europe

Europe faces an imbroglio somewhat similar to China’s.

Europe has a number of rivers that are easily navigable, providing a wealth of trade and development opportunities. But none of them interlinks with the others, retarding political unification. Europe has even more good harbors than the United States, but they are not evenly spread throughout the Continent, making some states capital-rich and others capital-poor. Europe boasts one huge piece of arable land on the North European Plain, but it is long and thin, and so occupied by no fewer than seven distinct ethnic groups.

These groups have constantly struggled — as have the various groups up and down Europe’s seemingly endless list of river valleys — but none has been able to emerge dominant, due to the webwork of mountains and peninsulas that make it nigh impossible to fully root out any particular group. And Europe’s wealth of islands close to the Continent, with Great Britain being only the most obvious, guarantee constant intervention to ensure that mainland Europe never unifies under a single power.

Every part of Europe has a radically different geography than the other parts, and thus the economic models the Europeans have adopted have little in common. The United Kingdom, with few immediate security threats and decent rivers and ports, has an almost American-style laissez-faire system. France, with three unconnected rivers lying wholly in its own territory, is a somewhat self-contained world, making economic nationalism its credo. Not only do the rivers in Germany not connect, but Berlin has to share them with other states. The Jutland Peninsula interrupts the coastline of Germany, which finds its sea access limited by the Danes, the Swedes and the British. Germany must plan in great detail to maximize its resource use to build an infrastructure that can compensate for its geographic deficiencies and link together its good — but disparate — geographic blessings. The result is a state that somewhat favors free enterprise, but within the limits framed by national needs.

And the list of differences goes on: Spain has long coasts and is arid; Austria is landlocked and quite wet; most of Greece is almost too mountainous to build on; it doesn’t get flatter than the Netherlands; tiny Estonia faces frozen seas in the winter; mammoth Italy has never even seen an icebreaker. Even if there were a supranational authority in Europe that could tax or regulate the banking sector or plan transnational responses, the propriety of any singular policy would be questionable at best.

Such stark regional differences give rise to such variant policies that many European states have a severe (and understandable) trust deficit when it comes to any hint of anything supranational. We are not simply taking about the European Union here, but rather a general distrust of anything cross-border in nature. One of the many outcomes of this is a preference for using local banks rather than stock exchanges for raising capital. After all, local banks tend to use local capital and are subject to local regulations, while stock exchanges tend to be internationalized in all respects. Spain, Italy, Sweden, Greece and Austria get more than 90 percent of their financing from banks, the United Kingdom 84 percent and Germany 76 percent — while for the United States it is only 40 percent.

And this has proved unfortunate in the extreme for today’s Europe. The current recession has its roots in a financial crisis that has most dramatically impacted banks, and European banks have proved far from immune. Until Europe’s banks recover, Europe will remain mired in recession. And since there cannot be a Pan-European solution, Europe’s recession could well prove to be the worst of all this time around.

Remember Ozawa: "If Japan desires, it can possess thousands of nuclear warheads"

The Axis of Evil, Again. By BRET STEPHENS
WSJ, Jun 02, 2009

Not 24 hours after North Korea's nuclear test last week, Iranian President Mahmoud Ahmadinejad issued a statement insisting "we don't have any cooperation [with North Korea] in this field." The lady doth protest too much.

When it comes to nuclear weapons and the means to deliver them, history offers two hard lessons. First, nearly every nuclear power has been a secret sharer of nuclear technology. Second, every action creates an equal and opposite reaction -- a Newtonian law of proliferation that is only broken with the intercession of an overwhelming outside force.

On the first point, it's worth recalling that every nuclear-weapons state got that way with the help of foreign friends. The American bomb was conceived by European scientists and built in a consortium with Britain and Canada. The Soviets got their bomb thanks largely to atomic spies, particularly Germany's Klaus Fuchs. The Chinese nuclear program got its start with Soviet help.

Britain gave France the secret of the hydrogen bomb, hoping French President Charles de Gaulle would return the favor by admitting the U.K. into the European Economic Community. (He Gallicly refused.) France shared key nuclear technology with Israel and then with Iraq. South Africa got its bombs (since dismantled) with Israeli help. India made illegal use of plutonium from a U.S.-Canadian reactor to build its first bomb. The Chinese lent the design of one of their early atomic bombs to Pakistan, which then gave it to Libya, North Korea and probably Iran.

Now it's Pyongyang's turn to be the link in the nuclear daisy chain. Its ties to Syria were exposed by an Israeli airstrike in 2007. As for Iran, its military and R&D links to the North go back more than 20 years, when Iran purchased 100 Scud-B missiles for use in the Iran-Iraq war.

Since then, Iranians have reportedly been present at a succession of North Korean missile tests. North Korea also seems to have off-shored its missile testing to Iran after it declared a "moratorium" on its own tests in the late 1990s.

In a 2008 paper published by the Korea Economic Institute, Dr. Christina Lin of Jane's Information Group noted that "Increased visits to Iran by DPRK [North Korea] nuclear specialists in 2003 reportedly led to a DPRK-Iran agreement for the DPRK to either initiate or accelerate work with Iranians to develop nuclear warheads that could be fitted on the DPRK No-dong missiles that the DPRK and Iran were jointly developing. Thus, despite the 2007 National Intelligence Estimate stating that Iran in 2003 had halted weaponization of its nuclear program, this was the time that Iran outsourced to the DPRK for proxy development of nuclear warheads."

Another noteworthy detail: According to a 2003 report in the L.A. Times, "So many North Koreans are working on nuclear and missile projects in Iran that a resort on the Caspian coast is set aside for their exclusive use."

Now the North seems to be gearing up for yet another test of its long-range Taepodong missile, and it's a safe bet Iranians will again be on the receiving end of the flight data. Nothing prevents them from sharing nuclear-weapons material or data, either, and the thought occurs that the North's second bomb test last week might also have been Iran's first. If so, the only thing between Iran and a bomb is a long-range cargo plane.

Which brings us to our second nuclear lesson. Secretary of Defense Robert Gates has lately been in Asia taking a tough rhetorical line on the North's nuclear activities. But it's hard to deliver the message credibly after Mr. Gates rejected suggestions that the U.S. shoot down the Taepodong just prior to its April test, or when the U.S. flubbed the diplomacy at the U.N. So other countries will have to draw their own conclusions.

One such country is Japan. In 2002, Ichiro Ozawa, then the leader of the country's Liberal Party, told Chinese leaders that "If Japan desires, it can possess thousands of nuclear warheads. Japan has enough plutonium in use at its nuclear plants for three to four thousand. . . . If that should happen, we wouldn't lose to China in terms of military strength."

This wasn't idle chatter. As Christopher Hughes notes in his new book, "Japan's Remilitarization," "The nuclear option is gaining greater credence in Japan because of growing concerns over the basic strategic conditions that have allowed for nuclear restraint in the past. . . . Japanese analysts have questioned whether the U.S. would really risk Los Angeles for Tokyo in a nuclear confrontation with North Korea."

There are still good reasons why Japan would not want to go nuclear: Above all, it doesn't want to simultaneously antagonize China and the U.S. But the U.S. has even better reasons not to want to tempt Japan in that direction. Transparently feckless and time-consuming U.S. diplomacy with North Korea is one such temptation. Refusing to modernize our degraded stockpile of nuclear weapons while seeking radical cuts in the overall arsenal through a deal with Russia is another.

This, however, is the course the Obama administration has set for itself. Allies and enemies alike will draw their own conclusions.

The United States and China, Cooperating for Recovery and Growth

The United States and China, Cooperating for Recovery and Growth. By Secretary T Geithner

June 01, 2009

WaPo: Why Chinese consumers need to be an integral part of the global recovery

In Search of Buyers. WaPo Editorial
Why Chinese consumers need to be an integral part of the global recovery
WaPo, Thursday, May 28, 2009

CHINA LENT it, the United States spent it, is a boiled-down description of the economic relationship between the two countries over the past decade. U.S. consumers gobbled up inexpensive Chinese goods (as well as those from other countries), fueling high levels of global growth. The Chinese amassed huge savings, which were in large part used to fund U.S. borrowing. That's not exactly a virtuous cycle, but it's one that became hard to break -- and for the most part, no one really wanted to.

However, it is highly unlikely that U.S. consumers will spend us out of this downturn. Research from the Federal Reserve Bank of San Francisco suggests that U.S. household leverage, which increased from 65 percent in the mid-1980s to 130 percent today, will come down significantly from such stratospheric levels, dampening U.S. consumption growth for quite some time. This deleveraging is in order -- such high debt rates are clearly unsustainable -- but it could also jeopardize what is likely to be a shaky recovery if there is no clear alternative purchaser of the world's goods. Though the United States and other governments are doing their parts through massive coordinated stimulus policies, that will not serve as a permanent solution. As last week's warning from Standard & Poor's about a possible downgrade of Great Britain's AAA bond rating made clear, countries with deficits will have to turn their attention from borrowing to closing their budget gaps once the recovery takes hold.

With its high saving rates and massive population, China has naturally attracted attention as a potential driver of consumption growth. Chinese families haven't been big spenders in the past (the country's spending has been more focused on government investment), due to cultural norms and low incomes. One of the largest factors is a lack of safety net and insurance programs, which forces families to set aside much of their incomes as precautionary savings. Measures to broaden the Chinese middle class and provide some basic economic security could free up immense amounts of cash that could be used to help get the global economy back on its feet. Indeed, the Chinese government has recently introduced new health-care and pension benefits, which should contribute a good deal to Chinese families' spending.

Pressures to speed up the process or to move it in a certain direction are unlikely to be greeted warmly by China. For years, the International Monetary Fund has been urging it to take measures to increase household incomes and the flexibility of its currency. The Chinese respond that they would like to take a bigger role in governing the IMF, not just take guidance from it. Treasury Secretary Timothy F. Geithner will have to approach the topic delicately during his trip to China next week.

Obama And Counter-Insurgency In Chinese Colours

Obama And Counter-Insurgency In Chinese Colours. By B. Raman, C3S Paper No.277
Chennai Centre for China Studies, May 27, 2009

Nothing illustrates more starkingly the helplessness and confusion that prevails in the corridors of the Obama Administration over its Af-Pak policy than a report carried by the “Los Angeles Times” on May 25,2009, regarding a recent visit which Richard C.Holbrooke, the Administration’s special representative for Afghanistan and Pakistan, is reported to have made to China and Saudi Arabia in pursuance of his mandate.

2. To quote a news agency message based on the report carried by the “LA Times” : “The Obama Administration has appealed to China to provide training and even military equipment to help Pakistan counter a growing militant threat, US officials said. …..Richard C Holbrooke, the administration’s special representative for Pakistan and Afghanistan, has visited China and Saudi Arabia, another key ally, in recent weeks as part of the effort, says Paul Richter of LAT. The American appeal to China underscores the country’s importance in security issues. The United States considers China to be the most influential country for dealing with militaristic North Korea. China also plays a crucial role in the international effort to pressure Iran over its nuclear ambitions……A senior US official, while acknowledging China’s hesitation to become more deeply involved, said, “You can see that they’re thinking about it.” He spoke on condition of anonymity because of the diplomatic sensitivity of the subject. US officials believe China is skilled at counterinsurgency, a holdover of the knowledge gained during the country’s lengthy civil war that ended with a Communist victory in 1949. And with China’s strong military ties with Pakistan, US officials hope Beijing could help craft a more sophisticated strategy than Pakistan’s current heavy-handed approach.”

3. I did not know whether to laugh or cry when I read that the Obama Administration believed that “China is skilled in counter-insurgency”, that it acquired its skills during its “war of liberation” against the KMT troops and that it can teach Pakistan “a more sophisticated strategy than Pakistan’s current heavy-handed approach.”

4.What do the Chinese regard as terrorism or insurgency? Which are the terrorist/insurgent organisations in their perception? Anyone, who has been following Chinese methods of internal security management would know that in the Chinese assessment there are two “terrorist/insurgent” organisations posing a threat to China’s internal security—– the Tibetan Youth Congress (TYC), which they project as no different from Al Qaeda in its modus operandi and the Islamic Movement of East Turkestan (IMET) of the Uighurs. Since the pro-Dalai Lama uprising in the Tibetan-inhabited areas of China in March, 2008, the Chinese have been repeatedly and consistently condemning the TYC as a terrorist organisation. They have arrested a large number of Tibetan monks and youth and mass trials have been going on. If Obama and his advisers want to have details of what the Chinese have been doing in Tibet since March,2008, under the pretext of counter-terrorism and counter-insurgency, all they have to do is to read the transcripts of the broadcasts of Radio Free Asia funded by the US State Department and to read the various statements issued by His Holiness the Dalai Lama and his followers. Does the Obama Administration consider this as skilful and sophisticated counter-insurgency techniques?

5. What the Chinese have been doing against the Uighurs in the Xinjiang Province? Indiscriminate arrests, trials and executions. To get details, Obama and his advisers should read the periodic reports of the Human Rights Watch, which is a reputed non-Governmental organisation of the US, and the annual reports of the US State Department on human rights in China. The Chinese counter-insurgency strategy against the Uighurs is based on the principle “catch and kill”. That was why the George Bush Administration refused to hand over to China the Uighur jihadis arrested in Afghanistan. The entire community of the human rights organisations of the West was against their being handed over to China since they apprehended that the Chinese would execute them. That was why Albania was persuaded to give sanctuary to these Uighurs.

6.There are two components to the Chinese counter-insurgency and counter-terrorism strategy in Xinjiang—- “catch and kill” and impose restrictions on the practice of Islam. Under this policy of restrictions, construction of new mosques is not allowed, many old mosques have been forced to close down under the pretext that they were constructed illegally and the people are forced to observe their holy fast inside their houses and not to congregate in public places. This is China’s “skilful and sophisticated” counter-insurgency.

7.IF Pakistan follows even some of these methods, the day will not be far off when Pakistan will become a State ruled by a combine of Al Qaeda and the Taliban. As it is, there is considerable anti-US and anti-Army anger in Pakistan. Instead of finding ways of containing and reducing this anger, the Obama Administration is coming out with shocking ideas such as “Counter-insurgency in Chinese colours”, which could make an already difficult situation even more difficult to handle.

(The writer, Mr B.Raman, is Additional Secretary (retd), Cabinet Secretariat, Govt. of India, New Delhi, and, presently, Director, Institute For Topical Studies, Chennai. He is alaso associated with the Chennai Centre For China Studies.)

China Global Investment Tracker

China Global Investment Tracker, by Derek Scissors, Ph.D.
Heritage White Paper, May 26, 2009

China's role in the global financial arena is becoming increasingly important to the United States and the worldwide community. The China Global Investment Tracker created by The Heritage Foundation is the only available comprehensive dataset relating to large Chinese foreign investments and construction contracts in all areas of the world. Details are available on all attempted transactions over $100 million--both failed and successful -- in a variety of industries, including energy, transportation and banking.

[China's Global Reach]

Chinese investment and business contracts now span the globe. More business of these types is being done with Africa and the Arab world than with China's traditional partners in East Asia.

[Graph 2]

China's investment total could be higher. Tens of billions of dollars in proposed spending have been rejected by Chinese or foreign regulators or simply fallen through.

Download the dataset on large Chinese foreign investments: Chinese Outward Investment

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For more information on the growing Chinese investments in the rest of the world:

Chinese Foreign Investment: Insist on Transparency. By Derek Scissors, Ph.D.
Backgrounder #2237

China holds more than $1 trillion in American bonds. According to the new Heritage Foundation database on recent Chinese foreign non-bond investment, China has invested more than $15 billion in the U.S. in addition to bonds. China's SAFE is the largest foreign investor in the U.S., but has refused to make its activities more transparent. An American priority should be to enhance transparency in SAFE's spending.

Libertarian on nuclear disarmament

Proliferated Nonsense, by Ted Galen Carpenter
The National Interest (Online), May 20, 2009

It's been a really bad springtime for arms-control activists who want to see a nuclear-free world. First, when the UN Security Council criticized North Korea's test of a long-range ballistic missile in early April, Pyongyang used that response—toothless though it was—as a pretext to withdraw from the six-party talks on its nuclear program. Later that month, Iran announced a breakthrough in its uranium-enrichment efforts, boasting that it was now running seven thousand centrifuges. And just this week, credible media reports indicate that Pakistan is rapidly expanding its nuclear arsenal.

Yet while the trend is unmistakably in the direction of more, not fewer, nuclear powers, the arms-control community is devoting ever more time and resources to the goal of "global zero"—the abolition of nuclear weapons. That obsession is a fascinating and maddening detachment from reality.

It is not even clear that abolishing nuclear weapons would produce an unambiguously beneficial result. Perhaps it is only a coincidence, but the six and a half decades since the dawn of the atomic age constitute the first extended period since the emergence of the modern state system in the seventeenth century that no major wars have occurred between great powers. Many historians conclude that the principal reason the cold war did not turn hot was because both Moscow and Washington feared that a conventional conflict could easily spiral out of control into a nuclear conflagration. It is at least a worrisome possibility that the elimination of nuclear weapons could inadvertently make the world safe for new great-power wars. And given the destructive capacity of twenty-first-century conventional weapons, such wars would be even more horrific than the two bloodbaths in the twentieth.

But even if global zero did not produce such a perverse outcome, the goal is simply unattainable. It is improbable enough that the United States, Russia, Britain, France and China would be willing to relinquish their arsenals. It is a much bigger stretch to believe that such countries as Israel, India and Pakistan would do so. And it is bordering on fantasy to expect such wannabe nuclear powers as North Korea and Iran to abandon their aspirations.

All of those countries embarked on nuclear programs because of acute regional and extra-regional security concerns. Israel worries about the huge demographic edge enjoyed by its Islamic neighbors, and the prospect that the Jewish state's edge in conventional military capabilities will gradually erode. Pakistan worries about the growing economic and military power of its larger neighbor, India. New Delhi, for its part, not only distrusts Pakistan, but frets about China's geostrategic ambitions. All of those countries regard their nuclear arsenals as their ace in the hole, guaranteeing not only their regional status, but in some cases their very existence. They are highly unlikely to relinquish such a tangible insurance policy in exchange for paper security promises from the United Nations or any other source.

The incentives are at least as strong for Iran and North Korea to join the ranks of nuclear-weapons powers. As a Shiite country, Iran is surrounded by hostile Sunni neighbors—as well as its arch-nemesis, Israel. Tehran also has reason to fear the United States. Iranian leaders see how Washington has treated nonnuclear adversaries since the end of the cold war. If the U.S. mugging of Serbia didn't convey the message sufficiently, Iran had a ringside seat to the ouster of Saddam Hussein's regime. It was not a manifestation of paranoia for the Iranian leadership to conclude that the only way to prevent Iran becoming the next item on Washington's regime-change agenda was to develop a nuclear deterrent. North Korea appears to have reached a similar conclusion.

Of course, other factors—including national pride and prestige—have played relevant roles in the decision of various countries to become, or seek to become, nuclear powers. But the security concerns appeared to be paramount.

Unfortunately, the emergence of even one nuclear-weapons state in a region creates a greater likelihood that others will follow suit. India's nuclear program made it inevitable that Pakistan would go down the same path. Israel's arsenal likely figured in Tehran's calculations. If Iran continues its nuclear ambitions, it is highly probable that Saudi Arabia, Egypt and other countries in that region will decide on a similar course. North Korea's de facto nuclear status creates pressures on Japan, South Korea and Taiwan to abandon their own commitment to remain nonnuclear. The promise of the U.S. nuclear shield may restrain those ambitions for a time, but it requires considerable optimism to believe that it will do so over the long term.
Instead of pursuing the chimera of global zero, the arms control community needs to focus on attainable goals in a world in which proliferation is becoming an unpleasant reality. Getting the United States and Russia to drastically cut their bloated nuclear arsenals is one such goal. So, too, is an effort to induce India and Pakistan to adopt more explicitly defensive nuclear doctrines, and in the case of Pakistan, to improve the security of its arsenal. It may be possible—although it is more of a long shot—to persuade Iran to refrain from weaponizing its nuclear program, thereby reducing the incentive of its worried neighbors to build their own deterrents. An effort to reduce Pyongyang's temptation to become the global supermarket for the sale of nuclear technology has at least some prospect of success.

Even those more limited and practical goals will require patient, creative diplomacy by the United States and other countries. We are entering a more dangerous era, and there is no policy panacea.