CHINAwatch

To what extent an economic rebound will save the US housing market and what is the global economic outlook for 2012?

Notwithstanding refinancing and other palliatives for home owners announced by President Obama in his State of The Union Address, the recovery of the US housing market depends ultimately on robust demand which in turn depend on strong job and income growth.

The measures "To Recover, Rebalance, and Rebuild" as proposed in the Economic Report of the President Click here (Chapter 1) will take time. Even if the economy recovers, it is by no means certain that corporate production and profits would proportionately translate into more middle-class jobs and better wages.

In the same Chapter of the Report, it is pointed out that "Income growth was stagnant for middle-income earners in the 2001–07 period and, as is common, declined in the recessions at the end and beginning of the decade." This reflects a long-term trend. The chapter admits that "the size of the middle class has shrunk. This disturbing trend has taken place over several decades."

This underscores the phenomenon of globalization of the value chain. More and more low-skilled blue-collar production jobs in high-cost countries have become non-competitive internationally. It is doubtful whether, at least for some time, there will be enough high-skilled jobs (and high-skilled personnel) generated in America to fully offset this trend.

The Report (Chapter 2) reviews the influential works by Charles Kindleberger (1978) and Carmen Reinhart and Kenneth Rogoff (2009), "who argue that recessions associated with financial crises are typically deeper than normal downturns and that the recoveries that follow tend to take longer."

In "The Aftermath of Financial Crises*, a paper prepared for the American Economic Association meetings in San Francisco, January 3, 2009, Reinhart and Rogoff observed -

"Broadly speaking, financial crises are protracted affairs. More often than not, the aftermath of severe financial crises share three characteristics.

First, asset market collapses are deep and prolonged. Real housing price declines average 35 percent stretched out over six years, while equity price collapses average 55 percent over a downturn of about three and a half years.

Second, the aftermath of banking crises is associated with profound declines in output and employment. The unemployment rate rises an average of 7 percentage points over the down phase of the cycle, which lasts on average over four years. Output falls (from peak to trough) an average of over 9 percent, although the duration of the downturn, averaging roughly two years, is considerably shorter than for unemployment.

Third, the real value of government debt tends to explode, rising an average of 86 percent in the major post–World War II episodes.

Interestingly, the main cause of debt explosions is not the widely cited costs of bailing out and recapitalizing the banking system......... In fact, the big drivers of debt increases are the inevitable collapse in tax revenues that governments suffer in the wake of deep and prolonged output contractions, as well as often ambitious countercyclical fiscal policies aimed at mitigating the downturn."

With specific regard to the housing sector, the duration of downturn (from four to seven years) and magnitude of decline (from 12.6% to 50.4%) for advanced countries are featured in Table 10.8 (p. 106) of Reinhart and Rogoff's empirical work "This Time Is Different - Eight Centuries of Financial Folly", Princeton University Press, 2009.

This post-Crisis long-hard slog is echoed in McKinsey Quarterly's January 2010 Report "Deleveraging: Now the hard part". Click here

In an Exhibit "A slow start", in the first two years of a five-year recession, economic downturn begins as the economy continues to increase leverage, followed by further downturn during the first years of deleveraging. In the subsequent four to five years, the economy may ‘bounce back’ while deleveraging continues.

So what is the outlook of the US, Europe and developing economies in 2012?

I can do no better than refer to the overview with a coloured globle chart in "The year of self-induced stagnation" in The Eonomist by Zanny Minton Beddoes on 17 November 2011. Click here

The developing economies will of course be affected by the lack-lustre Western markets, but their growth rates in 2012 should remain respectable as much more trade is being done amongst themselves, especially with a re-balancing China, which is still expected to grow by 8.2%.

For a more in-depth look at the prospects for a soft-landing of China's economy in 2012, you may find it useful to Click here for a short overview


Best regards,

Andrew

EU-China Summit on Valentine Day - Does China love EU enough to save it?

Live radio interview on BBC World Service Newshour on 14 February 2012

Download BBC Newshour on EU-China Summit 14.02.12

Outlook on the Chinese economy in 2012

China knows that her past breakneck growth rate is unsustainable, economically, socially, and ecologically. Hence the about-turn to go for a slower and more sustainable growth model in the lastest Five Year Plan (2011-15).

But any drastic drop in growth rates would be convulsive (job losses, social instability etc) especially in a precarious global environment. As China's bank reserve requirements have been increased 11 times since 2009, inflation has somewhat subsided, and house prices are comind down hard, there is room for some easing of credit, especially for hard-hit SMEs.

According to Paul Schulte, Hong Kong–based global head of financial strategy and Asia banks research at CCB International Securities, a subsidiary of China Construction Bank Corp.,"in the past 12 months Chinese regulators have removed 4.4 trillion yuan in liquidity from the financial system—well in excess of the original stimulus spending—through tightening," according to a report by Allen T Cheng in Institutional Investor of 4 January, 2012 - "Beijing Preps for a Soft Landing" Click here

China has therefore been cleaning up its local debt drastically and the general prognosis doesn't support a doomsday scenario. So a measured easing of credit is unlikely to lead to a credit implosion.

As for the economy, while China's export sector is cooling, consumption is showing robust rising trends. KFC is now opening 500 restaurants a year. According to the World Luxury Association's 2010-2011 annual report, China is expected to become the world's largest luxury market this year.

The rising middle class is growing in China's rapidly expanding cities. According to McKinsey Global Institute, by 2025, China will be adding 350 million more urbanites in 221 new cities each with a population of over a million (compared with only 35 such cities in the whole of Europe at present). This rapid urbanization often gives outsiders an impression of "empty shopping malls and roads to nowhere", a refrain of some "China shorters". But there is no mistake the massive urbanization, the largest in human history. This is likely to offset some of the downturn caused by falling exports.

China's latest PMI rebounded to 50.3% in December, suggesting a soft rather than a hard landing. Click here

For now, relatively better equipped with financial resources, China is counting on maintaining at least 7-8% growth this year. This is supported by most forecasts, including those of the World Bank (8.4%), IMF (9%) and the Conference Board (8%). Click here

According to a report "What's in store for China in 2012?" Download McKinsey Quarterly - What’s in store for China in 2012 - February 2012 by Gordon Orr in the McKinsey Quarterly of February 2012, "Despite food price inflation and a stagnant housing market, China should maintain a rapid rate of growth". The balance of his prognosis is based on the following assessments

1. Government policies will spur consumption and investment.
2. Dominant models will emerge for reforming rural land ownership
3. Real estate will stagnate. I
4. The fundamentals will cause further inflation in food prices.
5. Chinese investment in green tech will spike upward.
6. Accounting scandals will continue.
7. Private-equity and venture capital funds may go ‘walkabout.’
8. Chinese acquirers will be bolder.
9. The automobile segment will be slow.
10. Hospital reform will accelerate.

Nevertheless, as China is re-balancing the economy away from excessive export dependence, the process is likely to be painful.

In a report on 6 February, the IMF warned that China's economy could drop by half this year in the event of a sharp recession in Europe. According to the IMF, while China could sustain economic growth by repeating the massive stimulus package in the global financial crisis, remaining concerns about its lingering problems of bad loans and credit quality may limit the scope of this palliative. Click here

As Europe is China's largest market (ahead of the US), an European Armagedden would be very bad news for China indeed.

Best regards,

Andrew

How successful are China's Silicon-Valley-type innovation hubs and science parks?

According to McKinsey Quarterly's "A CEO’s guide to innovation in China" dated February 2012, "Chinese authorities view innovation as critical both to the domestic economy’s long-term health and to the global competiveness of Chinese companies. China has already created the seeds of 22 Silicon Valley–like innovation hubs within the life sciences and biotech industries. In semiconductors, the government has been consolidating innovation clusters to create centers of manufacturing excellence." Click here

It begs the question how successful in China are these "innovation hubs" and "science parks". There is a perception that at least some of them may be no more than a disguise for real estate speculation.

It is true these facilities are not necessarily a silver bullet for China’s innovation drive. Some may indeed be a camouflage for real estate development. A recent study on China’s science parks by Stuart Macdonald of the Management School, University of Sheffield, et al exposes the fallacy of over-emphasizing the importance of these innovation hubs. Click here

However, as with so many things in a vast country in rapid transition, there is often a mix of myth and reality, hype and truth, seldom black and white.

First, while there is no dispute at all with the main thrust of the study’s cautionary tale, it doesn’t disprove entirely the value of at least some of these hubs or science parks. Some of them are designed as incubators. As soon as competitive success is attained, some firms may choose to relocate to gain economy of scale. The study’s choice as criteria for judging the efficacy of science parks is thus debatable. Instead of the number of firms, number of employees, annual production, net profits and net exports, it would be more instructive if the study had managed to trace to what extent science parks have succeeded in growing China’s innovative enterprises in the national if not global market place, as in the case of the Silicon Valley.

Second, some of China’s science parks have proved more successful than others. According to the China Daily, “Zhongguancun-based companies garnered business revenues of 380 million yuan ($69 million) in the first quarter of this year (2011) , up 12 percent on a year-on- year basis. The State Council recently approved a development plan called the Zhongguancun National Innovation Demonstration Zone (2011-2020) that allows companies in the area to try out new measures and pilot projects.” Click here

Third, China’s innovation drive especially in green technologies is beginning to catch international attention, at least that of the United States.

A US-China Clean Energy Cooperation Agreement signed on 17 November, 2009 provides for the following -

• A US-China Clean Energy Research Center with World Resources Institute, supported by $150 m combined public-private funding from US and China.

 •Joint research and development in advanced coal research, carbon dioxide capture and storage, building energy efficiency, and clean vehicle technology.

 •A US-China Electric Vehicle Initiative, a US-China Energy Efficiency Action Plan, a US-China Renewable Energy Partnership, a ‘21st Century Coal’ project on Carbon Capture and Storage and a US-China Energy Cooperation Program for renewable energy, smart grid, clean transportation, green building, clean coal, combined heat and power, and energy efficiency.

A World Resource Institute Working Paper dated December 2009, “An Emerging Revolution: Clean Technology Research, Development and Innovation in China” “summarizes China’s policies to prioritize, fund and deploy clean technology R&D and innovation over the short and medium term. These comprehensive policies reflect China’s ambition of emerging as a global power in science and technology through clean technology R&D and innovation.” Click here

A Report to the President of MIT dated 1 April 2010, “The MIT-Greater China Strategy”, noted that “China spends over $136 billion on research and development alone, making it the second highest investor in R&D in the world. During the last decade, China’s R&D intensity has doubled. The number of scientific researchers in China has increased by 77% in just ten years. The scale of its research force, about 926,000 researchers, makes it a significant talent hub.” Click here

Fourth, a McKinsey Quarterly report by Guangyu Li and Jonathan Woetzel, “What China’s five-year plan means for business” dated July 2011 details “ a handful of industries as emerging battlegrounds where countries will be competing for technological leadership during the next wave of development. These industries, including new energy sources and biotechnology, are distinguished by their high profit growth potential and moderate state oversight. In these areas, the government has dedicated itself to incubating national and global champions by helping them gain leading technologies and expanding their commercial capabilities.” Click here

Many of China's teeming researchers work in labs and incubators in universities, science parks and other research hubs. Although some of the off-campus facilities may be less successful, there are those which may well promise to be the cradle of a new generation of indigenous innovative enterprises capable of scaling some of the national if not global commanding heights.

In a fast-changing and globally connected world, governments and businesses disregard China’s massive innovation drive at their peril.

China's quest for Democracy

The Chinese model of development, the so-called Beijing Consensus, has served at least China remarkably well. This appears to have prompted the leader “The Paradox of Prosperity” in The Economist (28 January, 2012), suggesting that “For China’s rise to continue, the country needs to move away from the model that has served it so well." Click here

Of course, China is already changing course. The significant change in emphasis in the new Five Year Plan (2011-15) shows clearly that all is not well with the current model of development. But the thrust of the Economist article is not economic. It aims at the perennial question of Democracy and China’s One Party system.

China in fact has several recognised "democratic parties" but these are very small and the Communsit Party of China (CPC)'s authority is enshrined in the Constitution.

A single party can have a very long life even in a democracy. Look at Singapore and Japan. The same Party in Singapore remains in power since independence. The Liberal Democratic Party of Japan enjoyed power for over half a century until 2009. The point is that any party, in any system, must enjoy the support of the people if its rule is to last. But if people’s support is sufficiently strong, the same one party can last a long time.

As Winston Churchill says, "Democracy is the worst form of government except for all those others that have been tried". However, let's not forget that it took centuries of “democratic” governments for slavery to be totally abolished and even longer to allow women the right to vote. Moreover, there are many "one-man, one-vote" countries where human rights and governance leave a lot to be desired. Do I need to mention Russia?

As exposed by the financial crisis and the Occupy Movement, leading Western democracies appear to be capable of being hijacked by 1% of the people to the detriment of the 99%. Moreover, the American confrontational party system is becoming more and more dysfunctional. The resulting social discontent cannot be entirely blamed on the economy.

China's society has vastly different cultural roots, based on collectivism rather than individuality, and the sanctity of the common good over personal liberty. Chinese ancient philosophy is imbued with the concept of the “Mandate of Heaven”, rooted in the Confucian idea of the state having to win the people over by improving their lives. By this token, some dynasties like the Tang Dynasty (618 -907 CE) presided over a centuries-long period of peace and prosperity. Others tended to face an untimely demise because the rulers failed to honour the Mandate.

Of course, times have changed, and we are in the 21st century. But the principle still holds true today of winning the Mandate of people's hearts and minds.

According to PEW, a Washington-based public opinion research organization, there is a growing percentage of people in China becoming more satisfied with the country’s direction for the period from 2007 to 2010. Indeed, the Chinese government’s popularity ratings have been remaining very high in recent years (over 80%) compared to Western democracies. Overall, by comparison, the Chinese people were found to be happier and more optimistic about their future. So talk of a Jasmine Revolution in China is thought to be at least premature. Click here

In fact China has not denounced democracy. Indeed, President Hu openly repeated the word “democracy” 61 times at the opening of the Party Congress in 2007. Neither is China saying that the country is already sufficiently democratic. Successive Party School directives emphasize the need for the CPC to continue to reform and re-invent itself as a ruling party in tune with the times.

However, China remains unconvinced that the Western model of democracy is the “End of History”. China will continue her quest for her own ideal model of government, looking at some of the more successful Western models and experiences, without wanting to copy any particular system.

But with an increasing level of local unrests, rising aspirations of a “generation W(eb)”, ecological constraints, and a more hostile external environment, the Chinese system will no doubt continue to be tested.

Best regards,

Andrew

China willing to help European bailout?

"China willing to aid bailout: EU Leaders" This is the heading of the eye-catching article in the ChinaDaily.com on 28 Janaury 2012. Click here

It is at least conceivable that rather than an act of philanthropy, China would view this as a once-in-a-lifetime opportunity to enhance the nation's international image, prestigue, geopolitical and geo-economic influence.

While China would welcome and indeed make it a condition that other nations need to join in the rescue, it is apparent that no other country has financial resources big enough to match. So China is likely to be at least the primus inter pares.

Second, China could expect an understanding, if not a clear quid pro quo, that she would now be recognized as a full market economy. In any case, this would only be a few years ahead of the original target of 2015 as understood on China's first entry into the WTO. It is in any case curious that Russia, but not China, has long been recognized as a full market economy.

Third, China could also expect Europe to sell more European high technolgy to China (if not yet to lift the 21-year old arms embargo). This would help redress the trade balance with Europe (except Germany which already has a positive trade balance with China).

Fourth, China could take the opportunity of increasing the nations's share and hence voting rights in the IMF possibly to attain a veto power on par with the EU as a bloc or the US by itself.

Fifth, part of the rescue could take the form of currency swaps with individual Member States in need, including an understanding that the RMB (Chinese yuan) will be recognized for bilateral trade settlements. Like what has already happened with a number of other countries, this would help further boost the on-going internationalization of the RMB (the Chinese yuan).

Sixth, the rescue could accelerate China's ongoing efforts to construct a China-Europe high-speed rail network (initially for freight) which is designed to connect 17 European countries to China's eastern seaboard, including a possible Beijing-London link). This is slated to be the largest infrastructual project in human history. Click here Even before its completion, this gigantic project will spur European economic revival and open doors to much closer economic, trade, investment, and cultural exchanges with Europe.

Perhaps, with constructive thinking outside the box, the current European Crisis is too good to waste both for Europe, China, and indeed, the rest of the world.

Best regards,

Andrew

How to bring the jobs back home?

With the Western world still mired in a financial, economic and employment morass, there is an increasing spread of an under-current of protectionism as a counterweight against globalization. Witness President Obama's mantra on outsourcing in his State of the Union Address or a suggestion for a Plan B calling for "local content" in manufactured goods as in a YaleGlobal article in a Part I series on globalization by Pierre-Noel Giraud dated 24 January, 2012. Click here

But as another YaleGlobal Part II article in the same series by Alain Renaudin dated 27 Janaury, 2012 Click here shows, what is at stake is not so much a country label – “Made in France” or “in the United States”. What is more important for consumers is the quality and value embedded in the goods, either in terms of superior design, technical performance (e.g. an Intel Core label on computers), quality-price ratio, or environmental or other values.

Sometimes, nationalism or national pride may also play a part in opposing globalization. For example, France rejected Pepsi Cola's equity stake offer as "France doesn't want Pepsi in our yogurt".

Globalization has many faults that need correction as Joseph Stiglitz, a Novel laureate, outlined in his seminal works "Globalization and Its Discontents" (2002) and his subsequent book "Making Globalization Work" (2006).

But globalization is a natural stage of world development. As in the case of borderless Web-connectivity, the world has become much more "distributed" and inter-dependent. There is no point in going back to the past.

Developing countries like China, India, Brazil, Indonesia and countries in Africa are all struggling to climb the industrialization ladder to better living standards for their teeming billions. Many would die for the kind of low-end jobs no longer viable in the West.

On the other hand, however, fast-developing economies like China are also upgrading their technologies, skills, and innovation, out-competing more and more jobs in Western countries.

That is why Obama’s State of the Union Address is also a clarion call to continue to upgrade the skill-sets of the American people through a better and more forward-looking public education system. Click here

Countries like China need to be constantly on their toes by upgrading the competitiveness of their peoples, if necessary, by allowing the youngest and brightest who can afford to pay to further their education in the best universities abroad.

Meanwhile, overall, the West is still miles ahead of developing countries in design, creativity, innovation, and technology, as can be seen from a league table of the world’s leading brands.

But these brands are not equated to “Made in X Country” labels. Look inside a Toyota or, as illustrated in the YaleGlobal Part II article above, an Airbus A380, and one would wonder how to define where the final product is made.

As Thomas Friedman has famously termed, “the world is flat”. At the same time, the world is not static but is constantly evolving, economically, financially, socially, culturally, geopolitically and ecologically. Survival, Adaptation and Transformation remain imperative now as they have been in the past millennia.

As Jared Diamond outlines in his book “Collapse - How Societies Choose to Fail or Survive” (2005), it is often a matter of Leadership and Choice. But turning the clock back is never an option.

Best regards,

Andrew

"Super Imperialism - The Economic Strategy of American Empire"

Michael Hudson’s controversial book, “Super Imperialism - The Economic Strategy of American Empire”, Pluto Press, New Edition March 2003, offers a no-holds-barred elucidation of a plausible American Grand Design to rule the world through calculated “Monetary Imperialism”. Click here

Hudson explains how, when America was the creditor to the world, the old European powers were bankrupted with mountains of American debt during and in between two world wars, from which America emerged with holding three-quarters of the world’s gold, as an unrivalled global exporter of goods and finance, and as the issuer of the world’s leading and indispensable reserve currency – the US dollar.

This dominance has been consolidated by an international economic and monetary order underpinned by US-centric Bretton Woods institutions - the International Monetary Fund (IMF) and the World Bank. Under the banner of a “Washington Consensus” model of development, they served to anchor the US dollar as a global currency and expanded markets and access to resources for American businesses. This gradually helped America to dismantle the Sterling Bloc and eventually displace the British Empire as the global hegemon.

After becoming a budget-deficit and debtor nation in the wake of the Korean War, America has turned what would be a weakness into a hegemonic strategy that seeks “to oblige other governments to finance the deficit by lending their surpluses to the US government, and in the process, to finance its domestic budget deficit, or to let the dollar depreciate and thus favour US exports” as well as dissipate the value of America’s external debt. What is sometimes called a “benign neglect” of payment deficits has been quietly transformed into a wilful policy.

This proactive “dollar-debtor standard” interacts with powerful banking elites and an ubiquitous “military-industrial complex’, creating the largest war machine the world has ever known. The rising influence of this complex was flagged up by President Eisenhower at his farewell address in 1961. Needless to say, after the collapse of the former Soviet Union, this war machine without peer has greatly empowered American hegemony.

What is more, the costs of this militarism are increasingly being financed by the inflow of foreign surplus capital into US Treasuries as a relatively secure haven for excess national liquidity. This helps to prop up the strength of the dollar and enables America to continue to spend by exercising the unique power of seigniorage in printing as much greenback as America pleases.

This underpinned former US Treasury Secretary John Connally’s famous remark in 1971 that "The dollar is our currency, but it’s your problem.”

That remark is also the title of an April, 2005 article for the Hoover Institution by Niall Ferguson. He reckoned that the Bush administration’s combination of tax cuts and a global war on terror was being financed with a multibillion-dollar overdraft facility at the People’s Bank of China (through China’s huge purchase of Treasury bills), a kind of Chinese ‘tribute’ to the ‘American Empire’. Click here

In April, 2009, Paul Krugman, New York Times Op-ed columnist and Novel Prize laureate, called this China’s ‘Dollar Trap’.

Under a “Structuralist Rationale”, some academics tried to justify this as part and parcel of a global “liberal capitalism” where the US government is merely acting as a trusted global banker attracting deposits from national savers across the globe. Credit is expanded and invested in ways that boost the strength of this global banking system.

As regards military hegemony, well, this is what is required to maintain a safe and stable international order, which is essential for global commerce and prosperity.

Regardless of recent defence budget cuts and growing concern with mounting US national debt, it seems that the above thinking is at least lurking if not very much alive in the minds of some US national planners.

However, since the two world wars, a great deal of water has passed under the bridge. The tide has now turned and the world is a very different place. While US leadership and the US dollar may still look unassailable, how long this position may last is increasingly debatable.

The following developments are instructive -

(a) Not only has the United States lost its position as the world’s largest creditor since the Korean War, it has now lost its position as the world’s largest exporter. While there are still a range of American goods and services that the world remains loyal to, the world is no longer captive to American exports.

(b) Instead of America, China is increasingly becoming the heart of a world production and supply chain where resources, components, technologies, skills, freight and finance may congregate from all corners of the earth.

(c) Unlike the years before the Second World War, Europe is now very much a unified market, if not yet a compete financial, let alone political union. It has now displaced the United States as China’s largest trading partner and in turn China has now become Europe’s largest trading partner ahead of the United States.

(d) There is also a trend of reducing dependence on trade with America amongst developing countries. Since 1990 the average annual growth rate of trade between developing countries grew twice the rate of growth of world trade. Developing-country trade with each other is now 39% of their total trade. See an article by Mari Pangestu, Indonesia’s Trade Minister “APEC and the new dynamics of world trade”, dated December 5th, 2010 on East Asia Forum, an online platform for Economics, Politics and Public Policy in East Asia and the Pacific. Click here

(e) The faith in the greenback as a long-term storage of value for national savers is beginning to frail. Why should surplus countries continue to put all their eggs in a greenback basket when they can now deploy more of their hard-earned cash to acquire assets and resources across the globe or in other global currencies less prone to devaluation through the printing press? Despite the Euro crisis, the euro or at least other European currencies including the Swiss franc, other international currencies like the Japanese yen , as well as emerging currencies like the Chinese yuan, may in due course offer asset classes with more attractive returns.

(f) Albeit remaining non-convertible on the capital account, the Chinese yuan (RMB) is being aggressively internationalized for bilateral trade settlements, the issuance of RMB-denominated bonds and other financial products, cross-border investments, including mergers and acquisitions, and foreign direct investments (FDI) in and outward direct investments (ODI) from China. It is now beginning to be bought, though still in relatively small quantities, by some central banks including Japan and Malaysia as part of their foreign currency reserves. The day when the Chinese yuan becomes at least one of a number of leading international currencies does not look very far away.

See my recent presentation "Securing renminbi via the private sector- Renminbi Internationalization: Opportunities and Policy Implications for Central Banks" at a seminar for central banking executives in Kuala Lumpur. click here

(g) As forewarned in the National Intelligence Council Report “Global Trends 2025 – A Transformed World”, dated 21 November 2008, Click here the United States will be able to continue to lead the world in the coming decades but its capacity to lead is declining. More reliance has to be placed on multilateral efforts and sharing of responsibilities as the world has become more interdependent and complex, with new asymmetric forces and new state and non-state actors. The time for a hegemonic mindset is past.

(g) As tried in various quarters, hard power is not always effective in resolving conflicts or threats, whether global or regional. Eleven aircraft carrier battle groups may be of no avail in stamping out global terrorism or arresting the spread of nuclear weapons. Indeed, hard power may well prove to be counter-productive.

The Era of Multilateralism has arrived. While the world in many ways is still looking up to America for  leadership, there is risk that such leadership could be compromised, rather than enhanced, by a zero-sum hegemonic mindset.

To attain global peace, stability, and prosperity, and to address the many economic, financial, security, and ecological challenges the world is facing, there is room for more shared leadership and responsibility with the world’s rising powers on the basis of equality, mutual benefit, and respect for diversity instead of a winner-takes-all end-game.

Best regards,

Andrew

Critical challenges facing a China in rapid transition

YaleGlobal Online runs a two-part series on China's Challenges.

PART I is an insightful summary by Thomas Fingar dated 16 January, 2012. Click here The following addional observations may be helpful -

(a) The imbalances of less developed regions, low-cost (and energy-intensive) production and inadequate domestic consumption are being vigorously redressed in the current transformational Five Year Plan (2011-15). Don't expect miracles and a smooth ride, but like the China story of the past three decades, do not dismiss too soon the ability of the Party to achieve surprising outcomes.

(b) The growing international competition from other fast-developing emerging economies is in a way welcome as this would accelerate the transformation outlined in (a) above.

(c) China's growing "demographic deficit" of an aging population profile is well-rehearsed . For now, there is still a huge pool of young workforce from the countryside. But the built-in demographics remains an albatross around China's neck. The One-Child Policy is already being modified for families of both single-child spouses. Trust the Party to press the button to abandon the Policy when the time comes.

(d) Politics- China is a paradox of both centralization and de-centralization, each having its advantages and problems. Provincial party secretaries and governors presiding over the development and livelihood of populations the size of many mid-sized countries wield unthinkable powers compared to a Western democracy. Yet they have all earned their spurs through the ranks as part of the system beholden to the Party leadership in Beijing who, in turn, emerges from an essentially competitive, and well-tried, meritocratic system, a system not far from an ancient Chinese adage, "Those most able (note, not necessarily those popularly elected) should lead".

The Party is now headed by more highly-educated and much younger leaders (often with foreign postgraduate degrees) with years of proven track records through jobs in the provinces and ministries, including many with international exposure. Those at the top know that the Party’s survival depends on its continued ability to reform and change with the times.

The Party is trying to move towards a model of governance for the people (though not yet of or by the people). The challenges remain in the nurture of a genuinely representative electoral system starting at the village level (covering the vast proportion of the population) and the development of a more impartial judiciary system.

So far with a vibrant economy, the Party has managed to deliver the goods and still enjoys a relatively high level (over 80%) of popularity ratings, according to a PEW opinion survey in 2010.

But serious problems are bubbling, including unbridled corruption, power abuse, environmental degradation, water and other resource constraints, growing inequalities, rising levels of discontent and aspirations of a more individualistic “Generation – W (Web)” in an age of spontaneous, internet-enabled citizenry actions across the globe. (The Rise of Generation W(eb)" Chapter 1 in "China Inside Out", Bill Dodson, John Wile & Sons (Asia) Pte Ltd, 2011)

On the economic front, China is set to grow on average at a more stainable pace of about 7% annually. China’s Academy of Social Science has recently put the growth rate at 9% for 2012. While it may be too early to predict a “ Coming Collapse of China”, as the redoubtable Gordon Chang again does, all bets will remain open on the likely outcome of China’s challenging trajectory during the next few decades.

PART II is an article dated 18 January 2012 by Borje Ljunggren, revolving around a recent tale-telling mass protest in Wukan Village. Click here

The Wukan event is in many ways another milestone in China's trajectory. Mass protests and unrests, as the article depicts, are not uncommon in China and are in fact rising. But this follows on an August mass protest in Dalian which resulted in a swift shutdown of a government-sanctioned chemical plant project. Click here

What is more, the incident in Wukan, a small village in the Donghan Township in Guangdong province, saw Wang Yang, provincial party secretary (above the rank of provincial governor) swiftly intervene. Wang is a rising star tipped to make it to the Party politburo (China's state cabinet). Not only did he openly acknowledge that the villagers' complaints were legitmate, he detained various senior village officials for disciplinary investigations and basically acceded to virtually all of the villagers' demands. He further legitimized the status of the well-organised citizenry body and later appointed its leader as the secretary of a preparatory committee to lead the re-election of a new village committee in place of the current one which is being accused of land grabs and corruption. Click here

"After a deal was reached, Prime Minister Wen Jiabao in Beijing declared: “We can no longer sacrifice farmers’ land ownership right to reduce urbanization and industrialization costs,” the YaleGlobal article reports.

While it is unlikely that Beijing would choose to weaken the Party's authority by repeating this surprising response too often, there is little doubt that the Wukan incident is regarded by the current leadership, and almost definitely by the next one, as the defining clarion call to improve the Party's governance, including the issue of politicaly powerful vested commercial interests.

The urgency is particularly acute at the local, especially the village level, where officials are less well-trained and where, as the Chinese adage goes, "The mountains are high and the emperor far away."

The need for reform and improvement has become even more pressing in response to the rising aspirations of an internet and more individualistic generation who are part and parcel of a much needed rising middle class to balance China's economy towards a more consumption-oriented model.

Best regards,

Andrew

www.andrewleunginternationalconsultants.com

Would war clouds over Iran precipitate WW3?

War drums seem to be beating for military action against Iran as international pressures are being stepped up to impose more draconian sanctions on Iran and two US aircraft carrier battle groups are being deployed to the Persian Gulf.

Any conflict in the Gulf may as the Iranians threaten, lead to a closure of the choke point of the Strait of Hormuz where 40% of world energy shipping and a far higher percentage of China’s energy supplies must pass.

It is no wonder that Premier Wen chose to pay a rare high-level 6-day visit (14-19 January) to the Middle East, the source of about 60% of China’s oil supplies,  during these sensitive times. The visit by a Chinese premier to Saudi Arabia was the first in 21 years while the visits to the UAE and Qatar were the first ever by a Chinese premier.

A raft of $16 billion-worth of agreements were signed covering trade, energy, infrastructure, finance and culture, including a $5.6 billion first-ever currency swap with the Arab countries in an on-going process to internationalize the Chinese yuan, a$8.5 billion deal with Saudi Aramco for a joint venture refinery to become operational in 2014, and an agreement  between Abu Dhabai National  Oil Company (Adnoc) and the China National Petroleum Corp to develop  upstream projects.

Also on the cards was an attempt to accelerate ongoing negotiations for a free trade agreement between China and the six-nation Gulf Cooperation Council (GCC), which was launched in July 2004.

Nevertheless, the Iranian question, and the security of passage for China’s critical oil supplies, was never far from the top of the agenda.

The Premier reaffirmed China’s opposition to Iran developing nuclear weapons and China’s willingness to work with concerned parties to establish a nuclear- free Middle East, saying that China will not trade its principles for profits.

However, he also took care to reiterate the position of many other countries, that legitimate trade with Iran should be protected rather than being used as a weapon which could jeopardize the normal international order. He emphasized that the issue of an Iranian nuclear threat should be resolved through diplomatic channels involving the Six-party diplomatic group made up of the United States, China, Russia, Britain, France and Germany.

Almost on cue, on 19 January, Iran declared that she is ready to resume the talks with the “Iran-six”, agreeing to use Turkey as an intermediary venue.

Notwithstanding increasing tension in the Gulf , fuelled by growing hardline Israeli pressure, a war-wary American electorate and indeed the US Military are unlikely to by enthusiastic about a war on Iran, however triggered, which may lead to uncontrollable escalations and consequences across and beyond the region, particularly in the wake of recent US defence budget cuts and restraints.

So it may be unnecessary to dismiss the kind of alarmism about a world war to be triggered over Iran as posted on The Daily Squib, a British satirical publication established in 1862. In a posting dated 17 November 2011, entitled “If you can’t hear the drums of war, you must be deaf”, a Machiavellian Henry Kissinger was portrayed as rubbing his hands in glee that by provoking Russia and China into a world war with the United States over Iran, after the dust (and blood) has settled, the United States with its peerless war machine would emerge to reign supreme over the entire world. Click here

First, the satire gave me much mirth at the thought that someone as astute as dear old Henry Kissinger would give such a nonsensical interview.

Second, with US and Russian aircraft carriers calling in the Gulf, those who may think the story is at least plausible may run the risk of under-rating the collective intelligence of China and Russia.

In case of a US-provoked War on Iran, it is by no means certain that Russia or China or both would fall into the trap of being sucked into a WW3.

A more probable outcome would be that consistent with their common approaches to conflict resolution, both countries would condemn the military intervention as illegal under UN rules and would rally support from the war-adverse international community.

At the same time, both countries would act as good guys in mediating the military conflict through diplomatic and other channels while watching the US dragging herself into a much worse fate than Iraq at a time when the US has become less able financially, economically, and politically to embark on a war that would lead to world Armageddon.

Instead of the satirical outcome of a new era of US world dominance, the more likely outcome would be that the United States would only hasten its decline of world leadership, economically, financially, and morally.

So, let’s hope that wiser heads will prevail over Iran.

Perhaps it may be relevant to recall whether the former USSR or Vietnam changed their regimes as a result of US military action.

It may also serve as food for thought to borrow the concluding reference to Thomas Jefferson in Christopher Treble’s book “The Power Problem – How American Military Dominance Makes Us Less Safe, Less Prosperous, and Less Free”, Cornell University Press, 2009.

The Founding Father “predicted that one day, in the not too distant future, Americans “may shake a rod over the heads of all, which may make the stoutest of them tremble. But I hope our wisdom will grow with our power, and teach us, that the less we use our power, the greater it will be.”

Best regards,

Andrew

www.andrewleunginternationalconsultants.com