THE WATER HEGEMON
Hydro-control turning China into dreaded hydra? By Brahma Chellaney
Bangkok Post, Oct 18, 2011 at 12:00 AM
With Beijing controlling the sources of Asia's most important rivers, water has increasingly become a new political divide in China's relations with neighbours like India, Russia, Kazakhstan, Nepal and the Mekong River countries.
http://www.bangkokpost.com/opinion/opinion/261849/hydro-control-turning-china-into-dreaded-hydra
International discussion about China's rise has focused on its increasing trade muscle, growing maritime ambitions, and expanding capacity to project military power. One critical issue, however, usually escapes attention: China's rise as a hydro-hegemon with no modern historical parallel.
The Mekong River, whose water level last March dropped to only 33 centimetres, the lowest in 50 years. People living downriver in Thailand, Laos and Cambodia attributed the fall in water level to newly constructed dams in China.
No other country has ever managed to assume such unchallenged riparian pre-eminence on a continent by controlling the headwaters of multiple international rivers and manipulating their cross-border flows. China, the world's biggest dam builder _ with slightly more than half of the approximately 50,000 large dams on the planet _ is rapidly accumulating leverage against its neighbours by undertaking massive hydro-engineering projects on transnational rivers.
Asia's water map fundamentally changed after the 1949 Communist victory in China. Most of Asia's important international rivers originate in territories that were forcibly annexed to the People's Republic of China. The Tibetan Plateau, for example, is the world's largest freshwater repository and the source of Asia's greatest rivers, including those that are the lifeblood for mainland China and South and Southeast Asia. Other such Chinese territories contain the headwaters of rivers like the Irtysh, Illy and Amur, which flow to Russia and Central Asia.
This makes China the source of cross-border water flows to the largest number of countries in the world. Yet China rejects the very notion of water sharing or institutionalised cooperation with downriver countries. Whereas riparian neighbours in Southeast and South Asia are bound by water pacts that they have negotiated between themselves, China does not have a single water treaty with any co-riparian country. Indeed, having its cake and eating it, China is a dialogue partner but not a member of the Mekong River Commission, underscoring its intent not to abide by the Mekong basin community's rules or take on any legal obligations.
Worse, while promoting multilateralism on the world stage, China has given the cold shoulder to multilateral cooperation among river-basin states. The lower-Mekong countries, for example, view China's strategy as an attempt to "divide and conquer". Although China publicly favours bilateral initiatives over multilateral institutions in addressing water issues, it has not shown any real enthusiasm for meaningful bilateral action. As a result, water has increasingly become a new political divide in the country's relations with neighbours like India, Russia, Kazakhstan, and Nepal.
China deflects attention from its refusal to share water, or to enter into institutionalised cooperation to manage common rivers sustainably, by flaunting the accords that it has signed on sharing flow statistics with riparian neighbours. These are not agreements to cooperate on shared resources, but rather commercial accords to sell hydrological data that other upstream countries provide free to downriver states.
In fact, by shifting its frenzied dam building from internal rivers to international rivers, China is now locked in water disputes with almost all co-riparian states. Those disputes are bound to worsen, given China's new focus on erecting mega-dams, best symbolised by its latest addition on the Mekong _ the 4,200-megawatt Xiaowan Dam, which dwarfs Paris's Eiffel Tower in height _ and a 38,000-megawatt dam planned on the Brahmaputra at Metog, close to the disputed border with India. The Metog Dam will be twice as large as the 18,300-megawatt Three Gorges Dam, currently the world's largest, construction of which uprooted at least 1.7 million Chinese.
In addition, China has identified another mega-dam site on the Brahmaputra at Daduqia, which, like Metog, is to harness the force of a nearly 3,000-metre drop in the river's height as it takes a sharp southerly turn from the Himalayan range into India, forming the world's longest and steepest canyon. The Brahmaputra Canyon _ twice as deep as the Grand Canyon in the United States _ holds Asia's greatest untapped water reserves.
The countries likely to bear the brunt of such massive diversion of waters are those located farthest downstream on rivers like the Brahmaputra and Mekong _ Bangladesh, whose very future is threatened by climate and environmental change, and Vietnam, a rice bowl of Asia. China's water appropriations from the Illy River threaten to turn Kazakhstan's Lake Balkhash into another Aral Sea, which has shrunk to less than half its original size.
In addition, China has planned the "Great Western Route", the proposed third leg of the Great South-North Water Diversion Project _ the most ambitious inter-river and inter-basin transfer programme ever conceived _ whose first two legs, involving internal rivers in China's ethnic Han heartland, are scheduled to be completed within three years.
The Great Western Route, centred on the Tibetan Plateau, is designed to divert waters, including from international rivers, to the Yellow River, the main river of water-stressed northern China, which also originates in Tibet.
With its industry now dominating the global hydropower-equipment market, China has also emerged as the largest dam builder overseas. From Pakistani-held Kashmir to Burma's troubled Kachin and Shan states, China has widened its dam building to disputed or insurgency-torn areas, despite local backlashes.
For example, units of the People's Liberation Army are engaged in dam and other strategic projects in the restive, Shia-majority region of Gilgit-Baltistan in Pakistan-held Kashmir. And China's dam building inside Burma to generate power for export to Chinese provinces has contributed to renewed bloody fighting recently, ending a 17-year ceasefire between the Kachin Independence Army and the Burmese government.
As with its territorial and maritime disputes with India, Vietnam, Japan and others, China is seeking to disrupt the status quo on international river flows. Persuading it to halt further unilateral appropriation of shared waters has thus become pivotal to Asian peace and stability. Otherwise, China is likely to emerge as the master of Asia's water taps, thereby acquiring tremendous leverage over its neighbours' behaviour.
Brahma Chellaney is Professor of Strategic Studies at the Centre for Policy Research and the author of "Water: Asia's New Battleground." Project Syndicate, 2011.
Thursday, October 20, 2011
Monday, October 17, 2011
Making Banks Safer: Can Volcker and Vickers Do It?
Making Banks Safer: Can Volcker and Vickers Do It?
Authors: Chow, Julian T.S. ; Surti, Jay
IMF Working Paper
October 01, 2011
Summary: This paper assesses proposals to redefine the scope of activities of systemically important financial institutions. Alongside reform of prudential regulation and oversight, these have been offered as solutions to the too-important-to-fail problem. It is argued that while the more radical of these proposals such as narrow utility banking do not adequately address key policy objectives, two concrete policy measures - the Volcker Rule in the United States and retail ring-fencing in the United Kingdom - are more promising while still entailing significant implementation challenges. A risk factor common to all the measures is the potential for activities identified as too risky for retail banks to migrate to the unregulated parts of the financial system. Since this could lead to accumulation of systemic risk if left unchecked, it appears unlikely that any structural engineering will lessen the policing burden on prudential authorities and on the banks.
Section I, Why redefine scope?
The business of banking involves leveraged intermediation managed by people subject to limited liability and, typically, to profit sharing contracts. This combination is well-known to generate incentives for risk-taking that may be excessive from the perspective of bank creditors. Creditor guarantees such as deposit insurance are known to exacerbate this incentive problem because they weaken creditors’ incentive to monitor and discipline management.
These issues are magnified in the case of systemically important financial institutions (SIFIs). Owing to their size, interconnectedness, or complexity, the negative externalities emanating from financial distress at SIFIs makes them a source of systemic risk, leading to them being perceived to be too-important-to-fail (TITF). Consequently, the market implicitly—and often correctly—assumes that apart from explicit deposit insurance, creditor guarantees of a much wider nature would be extended when such firms are threatened by imminent failure.
This serves to weaken the mitigating force of market discipline. Prior to the crisis, the high likelihood of public support assumed in a distress situation contributed to the ability of SIFIs to carry thinner capital buffers at lower cost, acquire complex business models, and accumulate systemic risk. This trend was reinforced by the diversification premier attributed to universal banks by market participants and prudential authorities, enabling them to integrate the provision of retail, investment, and wholesale banking services without erecting the necessary firewalls there-between. These developments resulted in networks of financial interconnections within and across internationally active SIFIs that proved to be difficult, time consuming and costly to unravel. This made it seemingly less costly, during the crisis, to allocate tax payer resources to preventing SIFI failures than to allowing them, with subsequent resolution and restructuring of their businesses.
Diversification of business lines could serve to better protect a universal bank against idiosyncratic shocks that adversely impact individual lines of business. At the same time, the free flow of capital and liquidity and the associated growth in intra-group exposures would also increase the likelihood of intra-firm contagion in the event of an exogenous shock. Unlike investment banking clients, retail banking customers typically have few options other than their banks for conducting vital financial transactions. Ensuring business continuity of services to such clients, therefore, serves a clear and important social welfare objective. But, complex business models and high levels of intra-group exposures present a barrier to quickly spinning off the retail parts of a universal bank which can ensure such business continuity.
Restricting the scope of a regulated bank’s business activities could, therefore, serve a number of important policy objectives. From a financial stability perspective, it could limit contagion within and across firms. From the perspective of consumer protection, it could ensure a more efficient provision of assurance of the continuity of retail banking services. And, by more credibly restricting the ambit of tax-payer funded creditor guarantees to depositors it could furnish these benefits more efficiently and cheaply from a social cost perspective.
Accordingly, the official response to the crisis has, besides recognizing the need for strengthened regulation and oversight of SIFIs, also included complementary proposals to redesign and refocus their business activities. A number of concrete proposals have been made, including:
This paper focuses on the motivation, content, operational challenges, and potential costs of these proposals to narrow the scope of banking business. The more radical proposals discussed under the narrow banking umbrella involve strict limits on what retail banks’ permissible activities ought to be and could entail significant dead-weight costs if implemented as recommended. By contrast, the design and motivation for the Volcker rule and retail ring-fence are more precisely targeted at the problems arising from the integrated business models used by SIFIs before the crisis.
The challenge facing these latter proposals lies in the feasibility and cost of their implementation. In the case of the Volcker rule, for example, it will be challenging for prudential authorities to tell apart permissible activities (market making and underwriting) from prohibited ones (proprietary trading) when assessing banks’ exposures to securities markets. Similar difficulties will be faced by supervisors assessing the nature of and purpose of hedging tools and contracts utilized by ring-fenced banks. This presents policy makers with a dilemma. Should they invest the financial cost and time towards gathering more contemporaneous information in order to create better filters and limit loopholes? Or, if this is viewed as being too costly or simply inefficient, should they move to outright prohibition of all activities related to securities markets?
The danger with the second option lies in generating incentives to push risk taking beyond the borders of the regulated financial system. If there are indeed no direct financial linkages between retail financial firms and such shadow banking entities, such risk taking may cease being a problem of regulation. However, systemic risk will continue to accumulate in the shadow banks, and since the participants in the regulated and shadow systems are the same, or are, in general linked, a crisis in that sector will continue to exercise a contagion impact on the regulated banking sector.
http://www.imfbookstore.org/IMFORG/WPIEA2011236
Authors: Chow, Julian T.S. ; Surti, Jay
IMF Working Paper
October 01, 2011
Summary: This paper assesses proposals to redefine the scope of activities of systemically important financial institutions. Alongside reform of prudential regulation and oversight, these have been offered as solutions to the too-important-to-fail problem. It is argued that while the more radical of these proposals such as narrow utility banking do not adequately address key policy objectives, two concrete policy measures - the Volcker Rule in the United States and retail ring-fencing in the United Kingdom - are more promising while still entailing significant implementation challenges. A risk factor common to all the measures is the potential for activities identified as too risky for retail banks to migrate to the unregulated parts of the financial system. Since this could lead to accumulation of systemic risk if left unchecked, it appears unlikely that any structural engineering will lessen the policing burden on prudential authorities and on the banks.
Section I, Why redefine scope?
The business of banking involves leveraged intermediation managed by people subject to limited liability and, typically, to profit sharing contracts. This combination is well-known to generate incentives for risk-taking that may be excessive from the perspective of bank creditors. Creditor guarantees such as deposit insurance are known to exacerbate this incentive problem because they weaken creditors’ incentive to monitor and discipline management.
These issues are magnified in the case of systemically important financial institutions (SIFIs). Owing to their size, interconnectedness, or complexity, the negative externalities emanating from financial distress at SIFIs makes them a source of systemic risk, leading to them being perceived to be too-important-to-fail (TITF). Consequently, the market implicitly—and often correctly—assumes that apart from explicit deposit insurance, creditor guarantees of a much wider nature would be extended when such firms are threatened by imminent failure.
This serves to weaken the mitigating force of market discipline. Prior to the crisis, the high likelihood of public support assumed in a distress situation contributed to the ability of SIFIs to carry thinner capital buffers at lower cost, acquire complex business models, and accumulate systemic risk. This trend was reinforced by the diversification premier attributed to universal banks by market participants and prudential authorities, enabling them to integrate the provision of retail, investment, and wholesale banking services without erecting the necessary firewalls there-between. These developments resulted in networks of financial interconnections within and across internationally active SIFIs that proved to be difficult, time consuming and costly to unravel. This made it seemingly less costly, during the crisis, to allocate tax payer resources to preventing SIFI failures than to allowing them, with subsequent resolution and restructuring of their businesses.
Diversification of business lines could serve to better protect a universal bank against idiosyncratic shocks that adversely impact individual lines of business. At the same time, the free flow of capital and liquidity and the associated growth in intra-group exposures would also increase the likelihood of intra-firm contagion in the event of an exogenous shock. Unlike investment banking clients, retail banking customers typically have few options other than their banks for conducting vital financial transactions. Ensuring business continuity of services to such clients, therefore, serves a clear and important social welfare objective. But, complex business models and high levels of intra-group exposures present a barrier to quickly spinning off the retail parts of a universal bank which can ensure such business continuity.
Restricting the scope of a regulated bank’s business activities could, therefore, serve a number of important policy objectives. From a financial stability perspective, it could limit contagion within and across firms. From the perspective of consumer protection, it could ensure a more efficient provision of assurance of the continuity of retail banking services. And, by more credibly restricting the ambit of tax-payer funded creditor guarantees to depositors it could furnish these benefits more efficiently and cheaply from a social cost perspective.
Accordingly, the official response to the crisis has, besides recognizing the need for strengthened regulation and oversight of SIFIs, also included complementary proposals to redesign and refocus their business activities. A number of concrete proposals have been made, including:
- Narrow Utility Banking—essentially a reversion of deposit-funded banks into traditional payment function outfits with lending (and investment banking) being carried out by independent finance companies funded by non-deposit means.
- The Volcker Rule—prohibiting banks from carrying out certain types of investment banking activities if they are to continue to seek deposit funding and to retain banking licenses.
- A Retail Ring-fence—that, while not prohibiting banking groups from providing both retail and wholesale banking services, mandates legal subsidiarization of certain retail activities, prohibits this subsidiary from undertaking other businesses and risks, and establishes minimum capital and liquidity standards for it on a solo basis. While not limiting capital and liquidity benefits to the retail subsidiary from other affiliates when necessary, the ring-fence limits capital and liquidity transfers in the opposite direction, to non-ring-fenced affiliates. Such functional subsidiarization could enable continuation of retail operations under distress or failure of a SIFI’s other businesses.
This paper focuses on the motivation, content, operational challenges, and potential costs of these proposals to narrow the scope of banking business. The more radical proposals discussed under the narrow banking umbrella involve strict limits on what retail banks’ permissible activities ought to be and could entail significant dead-weight costs if implemented as recommended. By contrast, the design and motivation for the Volcker rule and retail ring-fence are more precisely targeted at the problems arising from the integrated business models used by SIFIs before the crisis.
The challenge facing these latter proposals lies in the feasibility and cost of their implementation. In the case of the Volcker rule, for example, it will be challenging for prudential authorities to tell apart permissible activities (market making and underwriting) from prohibited ones (proprietary trading) when assessing banks’ exposures to securities markets. Similar difficulties will be faced by supervisors assessing the nature of and purpose of hedging tools and contracts utilized by ring-fenced banks. This presents policy makers with a dilemma. Should they invest the financial cost and time towards gathering more contemporaneous information in order to create better filters and limit loopholes? Or, if this is viewed as being too costly or simply inefficient, should they move to outright prohibition of all activities related to securities markets?
The danger with the second option lies in generating incentives to push risk taking beyond the borders of the regulated financial system. If there are indeed no direct financial linkages between retail financial firms and such shadow banking entities, such risk taking may cease being a problem of regulation. However, systemic risk will continue to accumulate in the shadow banks, and since the participants in the regulated and shadow systems are the same, or are, in general linked, a crisis in that sector will continue to exercise a contagion impact on the regulated banking sector.
http://www.imfbookstore.org/IMFORG/WPIEA2011236
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