The Dragon is Out of Breath

As such a key part of the processes of globalization which have developed our global economy in the past few decades, the manufacturers of China could not hope to escape the deletrious effects of the global economic crisis. As demand falls all over the world for finished manufactured products, Chinese factories have been hard-hit. Although most economic data coming out of China is stir-fried and seasoned by government officials, the monthly manufacturer's survey is one number that is seen as reliable, and in the past couple of months, worrisome. What could once have been explained away as the slowing down of manufacturing during the Olympic Games is now something far worse. After two back to back contractions of this Chinese Manufacturers Purchasing Managers Index (or PM Index), it is clear that this is no longer simply a statistical abberation or short-term correction. 

The problems are becoming apparent in very embarrassing ways. For instance, in the fourth-largest city, Chongqing, taxi cab drivers went on strike to protest the depreciation of what amounts to their standards of living.  Increased competition, fuel shortages, and inflation have driven down the value of their fares, which have not kept up with inflation. Showing the critical nature of cab drivers in the PRC, the strikers demands were met after only one day. 

More embarrassing to the ruling party are cases of party officials fleeing the country with embezzled funds, which according to reports total at least $100 billion. One official by the name of Yang Xianghong left a delegation in Paris under the pretense of visiting his daughter. A similar phenomenon is also rearing its ugly head in the private sector, as factory owners who find themselves unable to pay off obligations sell off everything they can't take with them and disappear, literally overnight, of course taking time to destroy all records on the way out. Behavior like this is perfectly expectable when considering information asymmetry. For instance, the factory owner who realizes how bankrupt his company is before anyone else finds out, will probably take whatever he can get out of his investment of time and money and leave before accountability catches up. party officials likewise have a particular interest. In times of economic distress, it is easy to imagine why enforcement of laws governing economic crimes, such as embezzlement and other forms of corruption, would become much more strict. As China doesn't have very many extradition treaties with other countries due to its continued use of the death penalty,  officials can live very well for a while, if not for the rest of their lives, off of ill-gotten gains, and of course, the more the amount of gains, the longer the official is able to pay legal fees and perhaps bribes to lengthen the extradition process or remove it as a possibility altogether.

In China's third-largest city where I live, Tianjin, the economic problems are slow to be revealed. Although this city depends on manufacturing for a great deal of its economic activity, development here was a key point in the latest 5-year economic development plan. So while the rest of China may be wilting from the lack of fresh orders from overseas and paltry domestic consumption, Tianjin is still booming. For instance, even though China is entering the downward cycle in the property sector as evidenced by the proliferation of empty buildings for sale and ret, just as occured in the United States in the past two years, I can see five separate large-scale construction projects just from my apartment windows. Clearly, in a nation as large as China, economic slowdowns are uneven at best. 

The Ben Franklin Report: Leave the Spigot Open

While workers in GM's Janesville, Wisconsin SUV plant are getting a lesson in freemarket economics, Ron Paul is trying to spread the word about an economic malady of a slightly different nature: the ballooning and out of control federal debt that we've been covering here on the Fringe Element. As if the near vertical climb that is growth in the monetary base weren't already enough, the Federal Reserve is going to go ahead and provide unlimited amounts of funding in return for collateral to central banks from around the world. One could say that this is a very selfless act of a benevolent and intelligent Chairman, but more likely, this is an effort to return monetize US Government debt as Dr. Paul points out in the above article. This move by the Federal Reserve will have, perhaps, unintended consequences, as Central Banks return bonds originating in the United States, such as those issued by Fannie Mae and Freddie Mac, to our shores. After all, in a liquidity crisis, why would an institution choose to hold onto assets that are, at best, potentially troublesome?

The rest of the world is also responding to the crisis in ways similar to the United States. After weekend meetings of the IMF and World Bank in Washington, D.C., financial leaders from around the world agreed to initiate a coordinated response, and the markets seem to be enjoying the show. In Japan, the Central Bank is ready to assist any effort negotiated by the IMF, but has so far not announced any support of particular amount of money to domestic banks and financial institutions. In Europe, markets surged amid a flurry of announcements from various national governments laying out plans to guarantee their financial sectors in various degrees, ranging from total guarantees of interbank lending and capital infusions in Germany to bond lending programs in Portugal. In China, the weather is a little less rough, with currency reserves recently surpassing $1.9 trillion in value, the People's Bank's chief Yi Gong, while promising cooperation with the other members of the IMF,  has expressed full confidence that China will weather the financial turmoil. Perhaps not coincidentally, the central government in the same weekend announced plans to double rural disposable income by 2020 to create a domestic consumption base as a way to offset falling exports to the U.S.

While some lament the appearance that Capitalism has become the newest whipping boy in the arena of economic philosophies, Treasurer Henry Paulson took bold steps in ushering in a whole new era of American socialism, essentially seizing portions of the nine largest lending houses in the United States.

The M.I.C. Rumbles On

With another new week comes another new round of notifications to Congress from the DSCA about new arms sales to various countries, mostly friendly, but others perhaps less so. Moral questions abound surrounding the sales of military weapons to various regimes throughout the world, not the least of which being whether a country can afford the expenditure, but perhaps more importantly, whether the weapons will be used to crush opposition, as may be the case in Kenya. It might also be the case that the 33 T-72's were bound for South Sudan, for the purpose of re-newing the civil war. Interfering with the transfer of arms, of course, is a dangerous game, and will probably not end well.

In Taiwan, the lack of arms sales are much more of a controversy. The Taiwanese government is being vexed by inter-department review in the Bush Administration of its desired arms package. Currently, the brouhaha is boiling down to a game of fingerpointing between the GMT and the former ruling party the DPP. Either way, this type of arms sales, including heavy duty equipment such as attack helicopters and surface to air missiles would certainly force the People's Republic of China to take notice and be concerned.

Casual Observations

In my short time here in the great People's Republic of China, I have made one simple, yet probably overlooked, observation. In the U.S. before I left, every commercial outlet, ranging from department stores to shopping malls were offering deep discounts in an effort to support continued consumer spending. Here in Tianjin, the story is the same. Every outlet, regardless of place on the scale of value, is offering similar discounts. While this may just be a simple coincidence, it is at least anecdotal evidence of further economic problems if consumers are unwilling to assume their historic and necessary economic function. I would post a photo, but Google Images isn't cooperating here.

This, of course, is besides the worries of the larger financial institutions here in the PRC about Fannie Mae and Freddie Mac's balance sheet problems.

More Fucking Earthquakes!

The last year leading up to the Olympics has taught us many things about China and reenforced some old lessons about what to expect from a one-party communist state. One thing in particular that China has had an unfortunate chance to display is their efficiency at disaster relief. As this article attest the Chinese don't fuck around when it comes to responding to a natural disaster. The real test comes in the long term aftermath where the response is measured in terms of how quickly life returns to normal for the residents of the disaster struck region. I don't foresee a state-run news outlet covering anything less than a complete victory.

Sacralige

The damn French ruin everything and now they have put out the Olympic Torch.

The Walk of Shame: Fight the Power

When the Chinese government was putting on a carefully orchistrated dog and pony show to the western media to try and convince us that all is well in Tibet, some brave monks busted in and began pleading with the assembled members of the press, not to believe the crap being fed to them. Aparently this was not so carefully orchistrated after all. The shame is on the Chinese for trying such an old trick.

I want to contrast this to Bjork, who recently ended a concert of hers in China with a call to free Tibet. This was entirely selfish. Her chanting to the audience will have no effect on whether Tibet will gain any sembelance of independence. There was not some person in that audience that will rise up and liberate the downtroden because of a subversive message whispered at the end of a concert. All Bjork did was mark everyone in the audience as a suspect. She got to leave China but now her fans may have to endure scrutiny as suspicious persons because of her self-indulgent outburst.

The Lunar Eclipse Of Blood

Tonight across the northern hemisphere the glorious light of the full moon was briefly occluded by the umbra of the earth. Red light, like the menstrual blood of a celestial goddess, flowed down on us and bedlam broke loose. For two hours, in two cities, the only sound the two authors of this post heard were the sirens of first responders scrambling madly to the next emergency. Wondering to themselves if this were really a Wednesday night. Then silence. The snow no longer reflecting the red power of that celestial orb. The darkness had passed and all that remains is the bright, familiar face of the moon. Her light, no longer simply taken for granted, but ignored as useless. - Th'Dave

It's not often that there happens to be a full lunar eclipse. Somewhat less often, a superpower escalates a potentially dangerous situation involving more sophisticated weapons and a new generation of warfare. In case you were outside enjoying the eclipse and weren't glued to the TV, at 9:30 PM Central Standard Time, right about the time white rabbit peaked, the Lake Erie, an American Aegis-class destroyer shot down that satellite, despite warnings from Russia and China about escalating a new race to weaponize and control space. Not really space, mind you, rather those behind this weapons test with a very small tolerance for error would like to move strategic thinking into the orbits around our beloved Mother Earth. I don't watch TV, but the article above seems pretty media polished, so expect the mainstream news media to pick up this wonderfully nationalistic gem of a story in short order.

As an American citizen and a veteran, I understand the rationale behind developing weaponry and doctrine for future conflicts, but nothing happens in a vacuum. When the Chinese Military shot down an aging weather satellite and didn't announce it, the world was supposed to be incensed that there was an ulterior motive behind it, and more it seemingly was reflective of cold war thinking. However, other than press conference, the differences seem superficial. If nothing else, the rest of the world could easily interpret the move as standard 'tit for tat' testing, reminiscent of the Cold War. News at 7!

Perhaps the worst part of this entire episode, is that the military has demonstrated its ability to intercept objects moving just about a hair's breadth above the earth's atmosphere, moving at 17,000 miles per hour. Which are the operational requirements of the missile defense system, so also look to say that we should invest more in this pointless weaponizing of space against terrestrial threats. But those tens of seconds are very hard to replicate.

Surely, the apocalypse is nigh! (I hate arguing for him, but it would seem that Bill was taken out of context here.) - TheRedKap

Cleveland, Ohio: Terrible American City Or The Worst American City?

These posts usually start out in the same way. There was weather and the poor quality of Cleveland's infrastructure turned a windy day into a catastrophe. Residents of north east Ohio faced the usual 18 hour power outages after any kind of weather comes through. More significantly a train was thrown from a bridge into lake Erie.

That was last week. While in China they have been experiencing crippling winter weather for two weeks bringing the country to a standstill. The poor infrastructure and inability to deal with this much snow has caused massive transportation interruptions which in turn has caused price of produce to double in some places and has caused many people to go without power since they cant get the fuel to the power plants. At least Hu Jintao acts like a leader in this kind of situation by responding immediately, going to the places affected, and activating emergency response so that a disaster does not get worse.

http://www.alertnet.org/thenews/newsdesk/PEK261760.htm

This week in Cleveland the temperature has been 40-50 degrees Fahrenheit and there have been scattered showers. Which in Cleveland is weather of catastrophic proportions accompanied by flash flooding, and power outages.

http://www.wunderground.com/US/OH/Cleveland.html#WAT

“Big Brother“ 應該怎麽翻譯？

If you think concerns about GPS positioning in cell phones is scary in a tin foil hat kind of way, or you're concerned about a few hundred thousand Social Security Numbers being inadvertently disclosed by Wisconsin state agencies, you might have read George Orwell's "nineteen eighty-four". Wang Jianzhou (王建宙）, head of China Mobile, made quite a splash at a panel about the future of cell phones, with the very literal disclosure, "We know where you are." Sure, Eric Schmidt, CEO of Google, looking to break into the cell phone market, has every right to be enthusiastic about location-based advertising, but the definition of privacy has slightly different meaning in Chinese. For instance, in the first Legal Dictionary published in Chinese after the the opening up of the Chinese marketplace and the liberalization of state regulation (改革開放)　in 1980，the only mention of privacy (隱私) relates to the privacy concerns in the case of rape of other illicit sexual activity. Admittedly, a lot can happen in the 30 years, for instance, China has become an economic superpower with a maturing discourse in civil society. A tightly disciplined form of protest against the problems of development are being demonstrated with increasing regularity, for instance, the ongoing maglev protests in Shanghai.

Congressman Edward Markey (MA - 7th) and Sony CEO Howard Stringer stand on the other side of the issue here in the United States. I, however, still sleep comfortable and content in the knowledge that the Bill of Rights will protect me from an overly intrusive government intent on invading commonly accepted and legally protected norms of telecommunications privacy. Ooops. Rep. Markey, Chairman of the House Subcommittee on Telecommunications and the Log Cabin, wouldn't agree with that statement. On Friday, the Senate voted 60-36 to reject re-writing the laws governing the Foreign Intelligence Surveillance court, no matter how much Sen. Harry Reid wanted to to get Bush a bill before the February 1st deadline.

With 6 million new subscribers every month China Mobile has a significant share of the Chinese cell phone market,　and plans to list on a mainland stock exchange in the near future.　China Mobile covers their liability by mentioning in their privacy policy published online (中文) that government coercion is one reason your privacy could be violated.

More Good News! (Depending on your positions)

Citigroup is learning a small lesson in operating in different economies internationally, with an emphasis on command economies. The Chinese government, according to the English reporting from Reuters, is sticking its fingers in the pie, so to speak, and putting the brakes on any capital infusion from China Development Bank (CHDB). According to this report (Chinese, 中文） from news365.com.cn, the Deputy Chairman of the PRC's Ministry of Finance, Li Yong （李勇） indicated that he was not previously informed of the deal, but that it would be decided upon in the same manner as similar investments. On Sunday, Mr. Yong admitted that he had no understanding of the situation surrounding this type of investment, but that China Investment Corp. (中文） should not meddle in the business decision-making of the CHDB. This signal from the Finance Ministry will probably mean that the deal will be delayed slightly, pending further developments. As of publishing Citigroup was down and trading very actively. Oh, and the Mighty "C" is looking to save $10 billion in cash, lay off about 20,000 workers, and make $24 billion more in writedowns!

The deal is certain to escalate the debate over whether overseas sovereign wealth funds should be allowed to take a more active role in the financial markets in the form of capital infusions. However, considering the cash-strapped situation domestically, there are few alternatives, lest large financial institutions flirt with insolvency.

Add Sears to the list of retailers who didn't have a great holiday season. How much more coal is there to go around? And what does 2008 bode?

What will the Fed decide today? Will they go for broke and announce a full point decrease in the rate to defy analysts' predictions, or will it be a, relatively conservative at this point, .5% increase? Inflation will be the key word at the meeting today, so they might be hesitant to play fast and loose with M3 growth during a recession.

Also, here is a look at the bubbly nature of the economy and why this bubble is more dangeerous this most.

A Question of Origin

Among the many questions surrounding China's economic development and the associated environmental problems, there is rarely any question of responsibility. As the Chinese Communist Party maintains a firm control over all policy measures, it's easy to point the finger and say that they bear all responsibility. However, a couple of recent articles, one from the New York Times and the other from the Wall Street Journal, might lead one to slightly more nuanced conclusions.

The article from the New York Times, describes how Germany, suddenly left without coal to power its industrial juggernaut, sold off the pieces of industry to parties in China. German politicians were able to point at a blue sky and the profit off of the sales and benefit politically, while the factories were set up in China to keep producing the black soot that nearly destroyed the Black Forest.

The article from the Wall Street Journal illustrates Canada's role in the Three Gorges Dam project. In a similar vein, then-Prime Minister Jean Chretien leveraged deals to provide turbines to the project to keep his native province of Quebec from seceding from the confederation.

These stories, if nothing else, should provide anecdotal evidence that policy makers need to consider the ethical implications of international trade. These facilities are still polluting at the same rate, if not more, than they were for their previous owners, and yet they were sold anyway, instead of cleaner alternatives. Are ethical obligations limited to boundaries and citizenship?

If nothing else, these cases provide further evidence that one can make money through immoral business practices. Moral hazard theorists be damned!

In other environmental news from the Middle Kingdom, Beijing recorded its 256th "blue sky day" of the year. Pollution is squarely on the agenda for the next five years, with a new Politburo getting settled into office. Also making news is a website (English, 中文） from the Institute of Public & Environmental Affairs detailing air pollution.

Tons o' Guns

As always, there is a firestorm of news and protest surrounding U.S. foreign arms sales. And, of course, the countries involved are potential flashpoints for future conflicts.

From Iraq comes news that the Defense Department is bolstering its foreign military sales staff in Baghdad. In a program that was already plagued with problems of corruption and mismanagement, the problems were further compounded when the program realized the ridiculous leap in funding levels, from $200 million to $3 billion in only one year. The corruption in the acquisition process already has the potential to sour relations with our NATO ally, Turkey, as weapons bound for Iraqi troops have showed up in the hands of militant fighters fighting for an independent Kurdistan. However, due to the personnel shortage that accompanied the increased workload, the Iraqi government was forced to buy weapons from other countries. Now, members of Congress reportedly want to know whether American money was used to buy Chinese weapons for the Iraqi Army.

Arms sales, in fact, also provide one of the main sticking points between the United States and China, mainly weapons sales to the island of Taiwan. The economic problems that are the most prominent in the domestic, national discourse in U.S. relations with the PRC have been "underlined by the U.S. for years." However, the issue of Taiwan and the foreign arms sales are the basis for the other point of contention between the two superpowers. In fact this year, Section 1206 in the National Defense Authorization Act of Fiscal Year 2007, the House of Representatives Armed Services Committee establishes some pretty firm policies. Emphasis has been added by author.

More importantly, the committee believes that
maintaining a balance of power across the Taiwan Strait is critical
to ensuring deterrence and preserving peace, security, and stability
in Asia. China’s National People’s Congress adopted an anti-secession
law that essentially authorizes China’s Central Military Commission
to use non-peaceful means against Taiwan if the latter declares
independence. The committee is concerned that this law, in
conjunction with an excessive military build-up by China, may signal
a weakening of deterrence across the Taiwan Strait. The committee
believes that the exchange program, by helping to strengthen
Taiwan’s defenses, would help preserve and strengthen deterrence,
thereby encouraging China and Taiwan to resolve their differences
peacefully.

Considering that Chinese military spending is growing to make the PLA one of, if not the, strongest land forces in the world, the logic of the policy is almost self-defeating. The amount of equipment and money necessary to maintain the vision of deterrence expounded by this doctrine is well beyond the means of the United States. Look for this policy to cause problems in the future, as the U.S. is left groping for a new tact to maintain the stability in the region that is so vital to the international shipping lanes. The real question that would help one in thinking of this problem is, what event could happen that would leap the PRC's political elite to abandon the current Nash Equilibrium enjoyed by all parties in the region, in favor of a military strike? To which, the U.S. is bound under law to look upon with "grave concern," as per the 1979 Taiwan Relations Act.

There is a new arms race brewing in South Asia, although not the usual type. In this case, the developed countries of the world are falling over themselves to provide India with the next generation of military equipment. Looking at potential spending reaching $40 billion dollars, it's not hard to imagine why countries would feel interested in the competition. Nicholas Burns, the Undersecretary of State for Political Affairs feels so strongly about the subject of U.S.-Indian ties that he wrote an article for the current issue of Foreign Affairs. I particularly enjoy who he actually tries to make the article sound sincere in believing that ideology trumps the buying power of the Indian rupee. Again, the subtext to the entire discussion is long-term ties with India, in the fact of a emerging threat from China in Asia.



Before going onto the next topic, enjoy a little video goodness.
















Now, the JDAM is going on sale to countries in the Gulf region, specifically Saudi Arabia, which has caused quite a bipartisan reaction on Capital Hill. One should consider, though, that Israel and its lobby aren't protesting the sale in and of itself, only the fact that sales of this type reduce the strategic and technological edge enjoyed that enforced deterrence and brought stability to the region. The sale is practically dead on arrival.

Finally, in Pakistan, an assassin has taken the life of former Prime Minister Benazir Bhutto, but that shouldn't stand in the way of ever-stronger ties developing between the U.S. and Pakistan. In particular, this event will not interfere in anyway with the proposed $2.1 billion arms deal in progress. Pakistan is slated to purchase 18 F-16s of the C and D variants.

The end result of all of this is that American foreign policy, especially in the case of Pakistan, is being pulled into a cycle of arming one side to counter another threat that may or may not be of its own creation. And while arms sales and military relations reach new highs, things such as civil society and rule of law tend to be left by the way side. The Military Industrial Complex isn't exactly a democratic institution, after all. Those who are in a strong position to regulate this very important facet of foreign policy are focusing on other priorities, to say the least. Instead of controlling the number of arms distributed internationally, they are worried about the transfer of sensitive information, and the ramifications of Globalization on the MIC, but more on that later.

Staring Down the Gunsights

These days there's been a lot of mention of the problematic relationship between the US and China. However, in new developments, the People's Liberation Army is reportedly seeking military nuclear cooperation with the United States. Which enemy do we have in common? Here's a brief background of the latest complications between the Eagle and the Dragon. Here, a pundit from the BBC stumbles through a discussion in the economic problems that have recently surfaced in the form of toy recalls, and at the end interestingly equates it to the military problems. Here, another pundit from the Economist raises the theory that the PLA is not necessarily under direct control of the Party's political leaders. The PLA, of course, has enjoyed a rather privileged position in the hierarchy of power, given it was the proving ground for the first generation of CCP leaders, restored order after the Cultural Revolution, and suppressed the 1989 Tiananmen Square incident. Considering the anti-satellite test, it could mean that the PLA feels entitled to more of a free hand in deciding policy and weapon acquisitions.