Chinese Military,Political and Social Superthread

[Edward Campbell]

I have commented, several times, on the China/Russia border issue and on China's near insatiable appetite for resources - many of which are found nearby, in Russia.

In this article, reproduced under the Fair Dealing provisions of the Copyright Act from the Ottawa Citizen, Russian Prime Minister Dmitry Medvedev warns about the issues:

http://www.ottawacitizen.com/news/Russian+issues+warning+Chinese+threat+East/7068335/story.html

Russian PM issues warning of Chinese threat to Far East
Kremlin suspicious steady immigration could affect resource-rich area

By Thomas Grove, Reuters

August 10, 2012

Prime Minister Dmitry Medvedev on Thursday issued a veiled warning about China's rising influence in Russia's resource-rich Far East, saying it was essential to defend the area against "excessive expansion by bordering states."

Speaking days after Russia's first deputy defence minister said two new nuclear submarines would be sent to the Pacific Fleet, Medvedev also said it was "important not to al-low negative manifestations ... including the formation of enclaves made up of foreign citizens."

His comments, some of the strongest on the subject yet, underlined the Kremlin's suspicions that a steady influx of Chinese migrants may ultimately pose a threat to Russian hegemony in the remote and sparsely populated territories of Siberia and the Far East.

Russia and China enjoy strong diplomatic and trade relations and have joined forces in the United Nations Security Council to block proposed sanctions on President Bashar Assad of Syria. But growing Chinese influence in Russia's Far East - where street signs are often in both Russian and Chinese - has long been a source of tension.

Resource-rich Russia is the world's largest country by territory, but has seen its population of 143 million people fall in recent years, while re-source-hungry China, situated immediately to the south, has a rising population of over 1.3 billion people.

Medvedev, who was president from 2008 until May, raised the sensitive subject at a government meeting during a broader discussion of migration.

"Not many people live there, unfortunately, and the task of protecting our Far Eastern territories from excessive expansion by bordering states remains in place," he said.

Russia has tried to counter-balance China's growing influence in its Far East by boosting its own political and military presence in the region, where it has seen its own influence weaken.

Medvedev's new government, formed in May, included for the first time a Ministry of the Far East to underpin other state programs al-ready in place. One such program has brought 400 families from other former Soviet republics to the area to reinforce its Russian-speaking population.

Medvedev said new migration policies had been drawn up by President Vladimir Putin and told ministers to draft an action plan aimed at turning the policies into reality.

© Copyright (c) The Ottawa Citizen

The main problem facing Prime Minister Medvedev is Russian: the Russian people in the North-East (Siberia) are abandoning their jobs there and returning to the European region. The Chinese are, as far as I know, moving in, but in a very transient manner. They want, indeed need the resources but they want to buy them; they are trying to keep production and distribution lines (distribution lines to Chinese border crossings, anyway) open.

I have seen only one border place and there the Chinese hospital was serving both sides of the border and the Chinese fire department was prepared to respond to, indeed had responded to, fires on the Russian side. The Russian border post was not manned but the Chinese border police refused to allow me to pass into Russia as I did not have a visa. I am told that similar situations exist in many border places.

The Russia-China border is long and, in most places, only lightly fenced and patrolled - parts of it are on rivers which makes control a bit easier.

While I am pretty sure that there have been some (unauthorized?) Chinese incursions into Russia I seriously doubt that it is anything like the invasion about which Medvedev warns.

 

[a_majoor]

An interesting view of China, not as an emerging superpower but as a nation that has already reached its "best before" date. A very contrarian view, but Walter Russel Mead is a very careful observer and his observations should be noted with interest:

http://blogs.the-american-interest.com/wrm/2012/08/11/peak-oil-how-about-peak-china/

Peak Oil? How about Peak China?

It may be hard to believe, but it’s been a full four years since China hosted the Olympics. At the time, Beijing 2008 appeared to herald China’s return, after a 500 year hiatus, to great power status. Commentators were falling over themselves to pronounce the inevitability of China’s rise and its implications for American influence in Asia.

But is it possible we will look back on those Olympic Games as the peak of Chinese power, rather than the beginning of its rise? That’s the provocative argument espoused by The Diplomat:

Everything began to go downhill afterwards.  Caught up in the global economic crisis, the Chinese economy has never fully recovered its momentum.  To be sure, Beijing’s stimulus package of 2008-2009, fueled by deficit spending and a proliferation of credit, managed to avoid a recession and produce one more year of double-digit growth in 2010.  For awhile, Beijing’s ability to keep its economic growth high was lauded around the world as a sign of its strong leadership and resilience.  Little did we know that China paid a huge price for a misguided and wasteful stimulus program.

The bill for that massive spending is now coming due:

Today, Chinese economic policy-makers are hamstrung in trying to revive economic growth.  The combination of local government indebtedness, massive bad loans hidden in the banking system, anemic external demand, and diminishing returns from investments has made it all but impossible for Beijing to use the same old economic playbook to fire up the economy.

According to The Diplomat, the long term outlook is even more depressing. China will have to confront a series of structural challenges if it is to continue to achieve the kind of dynamic growth that lifted the country from economic backwater to emerging great power in just three decades.

The most obvious challenge is demographics. A RAND study observed that the proportion of the Chinese population of working age peaked in 2011 and began slowing this year. The share of the elderly population is rising. Healthcare and pension costs will soar as a result. So will labor costs. Investment and savings will diminish. In short, China may face the prospect, unknown in human history, of growing old before it gets rich.

The environment presents another dilemma. Like many rapidly industrializing economies, China sacrificed environmental protection at the altar of economic growth. But the effects of this approach have taken a toll: already, argues The Diplomat, ”Water and air pollution today cause 750,000 premature deaths and around 8 percent of GDP.” And as Via Meadia recently pointed out, the political costs of this approach are starting to mount as well. An outbreak of NIMBYism has forced many local officials to cancel major industrial projects as ordinary Chinese citizens demand an end to environmentally unsound development.

Of greater concern is that China has backed away from market reforms in the last decade and embraced a version of “state capitalism” that emphasizes the state far more than it does capitalism. But as state-run entities have become more powerful, their political backers—and financial beneficiaries—have an even greater stake in blocking attempts at reform.

And despite its best efforts at censorship, Chinese officials now concede that the internet has become too hard to regulate completely. For the first time, government policies “are being challenged for their reasonableness and legitimacy”, while at the elite level the Bo Xilai affair lifted the facade of unity to reveal a deeply fractured leadership.

Externally, too, China faces a more complex strategic environment than it has for decades. The U.S., which had been distracted and bogged down in the Middle East and West Asia since 2001, has begun to refocus on Asia, much to the delight of most of China’s neighbors. At the same time, as Beijing tries to assert itself, particularly in regards to the South China Sea, smaller powers such as Vietnam and the Philippines are pushing back, emboldened by Washington’s renewed commitment to the region.

It’s a grim analysis, not just for China but for the rest of the world as well. It is not in anyone’s interests to see China flounder. A rich China, secure in its legitimacy at home and abroad, is also a stable China, capable of powering the growth of her neighbors as well as offering a huge market for U.S. products.

The upcoming leadership transition, to be held later in the fall, offers a chance of renewal.  Whether Beijing can rise to meet the challenges of the first decades of the 21st century as it did the last decades of the 20th remains to be seen. The challenges are not insurmountable, but they will require enormous political courage in the face of powerful vested interests.

 

[Edward Campbell]

I respect Mead, far  more than I respect most American who comment on China, but I take issue with a few points:

1. China, in my opinion, doesn't intend to maintain the kind of growth that it sustained for 20 years - growth will have to slow and people will have to adapt. But: the Chinese now have a middle class which will produce steady domestic demand;

2. Far from the environment being a 'problem,' many observers see China as being the new world leader is useful environmental technologies;

3. I think Mead is misreading what he perceives to be a return to "state capitalism." In fact Hu Jintao has not reintroduced "state capitalism," but he has established an embryonic welfare syatem - one that, given China's strong Confucian cultural traditions, is unlikely to expand, any time soon, into something like our culture of entitlement; and

4. The jury is out on American strategy - President Obama says a lot, let's see what he actually does.

 

[a_majoor]

While in many ways I hope you are correct (a Chinese crash or China as a nation past its best before date would skew so many different economic and political balances and invalidate a great deal of political, social and economic capital world wide), there are many disturbing out of balance metrics, which indicate that something isn't adding up. I share one article which forecasts the Chinese economy from the Austrian perspective, which should cause some cold sweats since this is the same sort of behaviours [chasing government sanctioned incentives] that led to the housing bubble and 2008 crash in the United States. There are links to a fairly long articles which are from a long time foreign resident of China who is pulling the plug, and a response posted on Instapundit. While their accounts are annecdotal, they do track with various other negative indicators.

http://www.nytimes.com/2012/08/12/business/two-ways-to-see-chinas-problems-economic-view.html?_r=2

Two Prisms for Looking at China’s Problems

By TYLER COWEN

Published: August 11, 2012

CHINA is confronting some serious economic problems, and how Beijing does — or doesn’t — respond to them could bend the course of the global economy.

First, China’s real estate bubble is deflating. But its economy also seems to be suffering from what we economists call excess capacity — an overinvestment in capital goods, whether in factories, retail stores or infrastructure.

So what now? The answer depends in part on your school of economic thinking.

Keynesian economics holds that aggregate demand — the sum of all consumption, investment,  government spending and  net exports — drives stability, and that government can and should help in difficult times. But the Austrian perspective, developed by the Austrian economists Ludwig von Mises and Friedrich A. Hayek, and championed today by many libertarians and conservatives, emphasizes how government policy often makes things worse, not better.

Economists of all stripes agree that China may be in for a spill. John Maynard Keynes emphasized back in the 1930s the dangers of speculative bubbles, and China certainly seems to have had one in its property market.

Keynesians would argue that Beijing has the tools to stoke aggregate demand. It could, for example, adjust interest rates and bank reserve requirements, instruct state-owned banks to maintain lending, or deploy some of its $3 trillion in foreign exchange reserves. The government also appears to have many shovel-ready construction and infrastructure projects that could help the economy glide to a soft landing and then bounce back.

The Austrian perspective introduces some scarier considerations. China has been investing 40 percent to 50 percent of its national income. But it is hard to invest so much money wisely, particularly in an environment of economic favoritism. And this rate of investment is artificially high to begin with.

Beijing is often accused of manipulating the value of its currency, the renminbi, to subsidize its manufacturing. The government also funnels domestic savings into the national banking system and grants subsidies to politically favored businesses, and it seems obsessed with building infrastructure. All of this tips the economy in very particular directions.

The Austrian approach raises the possibility that there is no way for China to make good on enough of its oversubsidized investments. At first, they create lots of jobs and revenue, but as the business cycle proceeds, new marginal investments become less valuable and more prone to allocation by corruption. The giddy booms of earlier times wear off, and suddenly not every decision seems wise. The combination can lead to an economic crackup — not because aggregate demand is too low, but because the economy has been producing the wrong mix of goods and services.

TO keep its investments in business, the Chinese government will almost certainly continue to use political means, like propping up ailing companies with credit from state-owned banks. But whether or not those companies survive, the investments themselves have been wasteful, and that will eventually damage the economy. In the Austrian perspective, the government has less ability to set things right than in Keynesian theories.

Furthermore, it is becoming harder to stimulate the Chinese economy effectively. The flow of funds out of China has accelerated recently, and the trend may continue as the government liberalizes capital markets and as Chinese businesses become more international and learn how to game the system. Again, reflecting a core theme of Austrian economics, market forces are overturning or refusing to validate the state-preferred pattern of investments.

For Western economies, the Keynesian view is much more popular than the Austrian view among mainstream economists. The Austrian view has a hard time explaining how so many investors can be fooled into so much malinvestment, especially given the traditional Austrian perspective that markets are fairly effective in allocating resources. But China has had such an extreme and pronounced artificial subsidization of investment that the Austrian perspective may apply there to a greater degree. (Interpolation: The traditional Austrian view does follow that logic, but more modern perspectives include the effects of following incentives, and of course state loans, artificially controlled exchange rates and other manipulations by the State are incentives that literally cannot be beaten, since the State can control, extend and withhold them at will)

The optimistic view is that Chinese excess capacity and overbuilding are manageable — that the current overextensions of investment will be propped up, but they won’t have to be propped up for long. In this view, the Chinese economy will fairly soon grow rather naturally into supporting its current capital structure, and its downturns will be mere hiccups, not busts.

The pessimistic view is that the problems are so large that the government’s attempts to prop up its investments with further subsidies could so limit consumption, and so distort resource allocation, that the Chinese economy will stagnate. In this view, the political means for allocating investment would grow to dominate market forces, the proposed “economic rebalancing” of the Chinese economy toward domestic consumption would become a distant memory, and China would have an even tougher time opening its capital markets and liberalizing its economy. Given that China already faces competition from nations where wages are lower, and that its population is aging, the country might not return to its previous growth track.

THE jury is out. But to my eye, we may well find a significant and lasting disruption, closer to what the Austrian theory would predict. Consider a broader historical perspective: How often in world history have countries enjoyed 30-plus years of extremely rapid growth without a major economic tumble somewhere along the way? One can be optimistic about China for the long term and still be fearful for the next turn in its business cycle.

In any case, China has surprised the world many times before — and is likely to surprise it again.

Tyler Cowen is a professor of economics at George Mason University.

http://www.prospectmagazine.co.uk/politics/mark-kitto-youll-never-be-chinese-leaving-china/

BEARISH ON CHINA: In response to my earlier post, reader Tom Wheatley writes:

After 10 years in China, I am also leaving and taking my wonderful Chinese wife with me back to the US, for many of the reasons described in this article. I simply can’t in good conscience remain in China any longer. This article absolutely nails what is going on in China.

The whole system here is rotten to the core and can’t be sustained. The real estate bubble here is real and insane beyond belief, and when it pops all hell is going to break loose. Municipal governments are drowning in so much debt they make California look like a model of fiscal responsibility. The environment is filthy. Private enterprise is being choked. Corruption is rampant. The legal system is a joke. Property rights are non-existent. Chinese people are getting fed up and can actually connect using social media.

Chinese people like to brag that if they all jumped at the same time the whole world would feel it. Well, we’ll also feel it if they all fall down at the same time. I really hope that our leaders in Washington are preparing for when China implodes, because it’s going to cause an unimaginable amount of human suffering and misery when it does.

Get used to seeing articles like this. Many of my fellow long-term expat friends are planning to leave in the next year to 18 months. Chinese with money are getting dual citizenship and transferring billions abroad. The writing is on the wall.

 

[Nemo888]

I heard someone call them the Red Chinese today. WTF? Aren't they more capitalist than us now? All the things I buy come from there.

Totalitarian,  corporatist, fascist even but definitely NOT communist by any stretch of the imagination.

Do we even have a name for their system?

 

[a_majoor]

Crony Capitalism

 

[Edward Campbell]

An interesting analysis of President Obama's “Priorities for 21st Century Defence” in this article which is reproduced under the Fair Dealing provisions of the Copyright Act from the Globe and Mail:

http://www.theglobeandmail.com/news/world/in-frenemy-territory-obamas-decision-to-police-the-pacific/article4498096/

In frenemy territory: Obama’s decision to police the Pacific

PAUL KORING
The Globe and Mail

Published Saturday, Aug. 25 2012

U.S. Marines are packing for Australia. The navy is sending its stealthy new gunboats to Singapore. And the hottest American F-22 warplanes deployed in Guam.

Barack Obama is done with the nation-building in the quagmires of Iraq and Afghanistan, where hundreds of thousands of “boots-on-the-ground” slogged for years in unpopular, perhaps unwinnable, wars. Instead, America is making a Pacific pivot to face China, and gearing up for a new challenge – managing a rival world power that is neither enemy nor ally.

Mr. Obama’s focus on the Asia-Pacific – outlined in his landmark “Priorities for 21st Century Defence” – comes amid the evident rise of China’s power and influence, and growing tension in the region.

Earlier this week, there were huge demonstrations in China following provocative “landings” by Japanese nationalists on disputed islands in the East China Sea. So far, confrontations in the hotly contested South and East China Seas have been limited the occasional ramming of ships, firing of fire hoses and some arrests. But as tiny protruding rocks and reefs, and the oil and gas riches beneath disputed territorial seas, become military outposts, America’s response to China’s confrontations with Japan and other U.S. allies is likely to be tested.

When Washington called for all sides to talk about the recent island dispute, for example, an undiplomatic shouting match ensued. “We can completely shout to the U.S.: ‘Shut up,’” warned the semi-official Peoples Daily, newspaper of the Communist party.

Only slightly less rudely, a pair of senior U.S. diplomats in Beijing were called in by the Chinese Foreign ministry, and told Washington must “respect China’s sovereignty and territorial integrity.”

Mr. Obama’s pivot encompasses far more than dealing with China. The U.S. already counts South Korea, Japan, Australia and Taiwan as close allies; now, its Hawaii-born, Indonesian-raised, California-educated president is building closer ties with Indonesia and India.

More than a military doctrine, Mr. Obama’s “pivot” is a multi-faceted strategy by the first occupant of the Oval Office to call himself a “Pacific president.” It’s a wide-ranging attempt to shape the entire region into a vast, vibrant, interconnected “pacific” half of the planet.

“We are here to stay,” Secretary of State Hillary Clinton told the East-West Center in Honolulu shortly before Mr. Obama unveiled the pivot earlier this year. “What will happen in Asia in the years ahead will have an enormous impact on our nation’s future. We cannot afford to sit on the sidelines and leave it to others to determine our future for us.”

It’s an intricate dance, however, requiring far more subtlety than the post-Second-World-War era, which pitted America and its allies, including Canada, against clearly-defined enemies.

For a half-century, it was were the Soviet Union, which had the potential to unleash nuclear Armageddon. Since 2001, the disparate evil of Islamic jihadists justified – more or less – the so-called global “war on terror.” Mr. Obama has dropped that phrase and wants to dramatically shift strategic focus. But this time he doesn’t have a clear threat or obvious justification for the costs.

The vast sums required to project power across the Pacific may face tough opposition in Congress, where protecting local bases often trumps the needs of expeditionary forces. And while China remains a single-party state run by communists, it is also a vital engine of international enterprise, a behemoth of manufacturing with a seemingly inexhaustible demand for oil and commodities.

It also has its own, rapidly growing military power. Last year, China’s navy began sea trials of its first, relatively small and so-far plane-less, aircraft carrier. More ominously for the roving U.S. navy, China has also been testing huge new shore-based anti-ship missiles (called “area-denial” missiles).

The task ahead, then, is to bulk up without antagonizing China, which has sparred with the U.S. before over arms sales to Taiwan and a nasty collision between a U.S. spy plane and a Chinese fighter.

“At the end of the day, the purpose of U.S. strategy is to win the peace, is to have a co-operative relationship with China,” says Michael Green, a senior analyst at Washington’s Center for Strategic and International Studies and a former member of George W. Bush’s National Security Council. “But you can’t do that without forward presence, and you can’t do it unless you have credibility on the deterrence side.”

Unfortunately, from Beijing deterrence can look like encirclement.

They see tens of thousands of American troops in South Korea, American spy planes lurking off China’s coasts, 21st-century versions of the gunboats that humiliated Chinese dynasties 150 years ago in Singapore – plus a carrier battle group forward-deployed in Japan (the only one with a home port outside the U.S.) and a vow from Defense Secretary Leon Panetta to shift 60 per cent of the navy’s ships and submarines to the Pacific.

They can certainly expect more of America’s 11 carrier battle groups cruising in the Pacific. Soon, new long-range, pilotless reconnaissance drones will fly from those carriers. Bomber versions will follow. U.S. war planners have also been leaking a new concept called “Air-Sea Battle” – a vague doctrine of combining the Air Force’s long-range, deep-strike bombers with the naval cruise missiles and warplanes from aircraft carriers. No “enemy” is specified, but the doctrine seems tailor-made for taking out industrial and military targets deep inside China.

Clearly, projecting power to reassure allies without seeming aggressive will require considerable strategic finesse.

“We talk about ‘Air-Sea Battle,’” James Cartwright, former vice-chairman of the Joint Staff, told the Joint Warfighting Conference hosted by the US Naval Institute last spring as the full scope of the Pacific pivot was emerging. “It’s neither a doctrine nor a scenario … worst of all, Air-Sea Battle is demonizing China [and] that’s not in anybody’s interest.”

That’s definitely true for Canada. Indeed, the Obama pivot adds a new complication to a Canadian defence policy still rooted in the Cold War and an already-modest military facing savage cuts. Canada’s army has long looked – and deployed – East and our navy has been focused on the Atlantic. But as America turns to the Pacific, it may need to follow, if only to maintain some ongoing relevance to our biggest ally.

For now, the impact of the Pacific pivot depends on Mr. Obama winning four more years in the White House, that second term when presidents traditionally focus on foreign affairs – and their place in history.

Paul Koring gets one thing very, very right: "... from Beijing deterrence can look like encirclement." Threatening Beijing - and encirclement looks like a threat - is a strategic mistake until and unless America is prepared to turn that threat into action. America is not ready, wiling or able to fight a major land war on the Asian continent, so threatening China is silly, sophomoric and toothless sabre rattling which, almost certainly, will provoke an unforeseen and unpleasant reaction.

Koring is also correct when he says: "It’s [the new Asia policy] an intricate dance, however, requiring far more subtlety than the post-Second-World-War era, which pitted America and its allies, including Canada, against clearly-defined enemies." I'm not sure Washington - the White House, State Department and the Pentagon understand intricacy and subtlety; that's a bit unfair: of course they "understand" them but they seem, when faced with domestic political imperatives, unable to practice them.

Finally, I doubt that Washington (White House, Congress, State and Defence) has any coherent vision of America's place in the world and, even less, about how to accomplish their aims, even if they are understood.

 

[a_majoor]

Perhaps the incoming Secretary of State and Administration team should take the time to read Robert Kaplan's book "Monsoon", which lays out many of the strategic challenges facing India and China in the Indian Ocean. Given the US is an Oceanic power, the "string of pearls" approach of China is a more natural fit for the United States, allowing them to have lots of facilities potentially available without a huge investment in manpower and deployed military forces, while "investing" in relationship building instead...

 

[Ignatius J. Reilly]

Perhaps the incoming Secretary of State and Administration team should take the time to read Robert Kaplan's book "Monsoon", which lays out many of the strategic challenges facing India and China in the Indian Ocean. Given the US is an Oceanic power, the "string of pearls" approach of China is a more natural fit for the United States, allowing them to have lots of facilities potentially available without a huge investment in manpower and deployed military forces, while "investing" in relationship building instead...

I agree.  Far better to have U.S. allies in Asia serve as a bulwark, as they have vested interest in a multi-tiered approach to China.
Thanks for the heads up on that book.

 

[Edward Campbell]

More "inside the red wall"* news from China in this report which is reproduced under the Fair Dealing provisions of the Copyright Act from the Globe and Mail:

http://www.theglobeandmail.com/news/world/ferrari-crash-scandal-leads-to-demotion-of-top-chinese-official/article4517178/

Ferrari crash scandal leads to demotion of top Chinese official

ALEXA OLESEN
BEIJING — The Associated Press

Published Monday, Sep. 03 2012

China's hopes for a smooth, once-a-decade political transition have been shaken by a lurid new scandal involving the death of a senior official's son who crashed during what may have been sex games in a speeding Ferrari.

Details of the March accident in Beijing, which allegedly also left two young women injured, have stayed under wraps in China but are leaking out via media in Hong Kong. The media blackout underscores official fears that the public will be outraged by another instance of excess and recklessness among China's power elites.

The embarrassing new wrinkle follows revelations that the wife of a top leader poisoned her British business associate last year. Both scandals have become bargaining chips in the jockeying for power ahead of a major leadership reshuffle this fall.

The South China Morning Post on Monday cited an unnamed official in Beijing as confirming that Ling Gu, the son of a loyal aide to President Hu Jintao, was the person killed in a March 18 Ferrari accident which initially garnered only minimal coverage in China's state media.

The report said Mr. Ling was half-naked when the crash occurred and his two passengers were naked or half-dressed, suggesting they had been involved in some kind of high-speed sex game.

Several other news outlets later cited additional unnamed officials as corroborating details of the incident. However, efforts to get officials to publicly confirm the report were unsuccessful. Faxed requests for information to the Public Security Bureau and China's Cabinet were not immediately answered.

The Post's story came just days after the Chinese government announced Ling Gu's father had been transferred to a new position, a move that analysts say ended his ambitions for a post in the upper ranks of the top leadership. Observers said the shift appeared linked to his son's scandalous death.

On Saturday, Ling Jihua was named as the new head of the United Front Work Department and his old job as director of the general office of the Communist Party's central committee was given to Li Zhanshu — thought to be a close ally of Xi Jinping, the man tapped to the China's next president.

As head of the executive office, Mr. Li will be responsible for personnel arrangements for the party's top leaders. A comparable position in U.S. politics is the president's chief of staff.

The appointment of Mr. Li ahead of a party congress, which should happen in the coming weeks or months, shows Xi is already gaining power. Such personnel changes usually occur during or after the party congress.

China politics expert Bo Zhiyue of the National University of Singapore called the personnel change "a very important signal that a power transition is taking place."

In Communist Party politics, the outgoing leader — who has built a support base while in office — typically attempts to retain power after leaving office, a check on the new administration.

Bo said he thought the shift was being accelerated, creating an arrangement "more in favor of the new leadership than the old one."

Joseph Cheng, a professor political science at the City University of Hong Kong, said that although Mr. Ling's new post was not a "serious demotion," it clearly removes him from the center of power.

China's political process is opaque, with jockeying for power happening behind closed doors, so it's difficult to say how big a role the Ferrari crash had in sidelining Ling though most analysts agree it played a part.

"This Ferrari accident certainly caused (Ling's) stepping down," Mr. Cheng said. "This means that instead of going further up, he has to go to the second line."

Some feel though that the scandal could be limited to Mr. Ling himself and has not significantly eroded Mr. Hu's power or tarnished his reputation.

Yang Dali, a political science professor at the University of Chicago, said Mr. Ling's departure reflects well on Mr. Hu by showing he is "very scrupulous in disciplining his own people" and "willing to penalize his own underlings."

Earlier this year, another top leader, Bo Xilai was ousted as the party chief of the megacity of Chongqing after his wife was declared a suspect in the murder of a British citizen.

Although Mr. Bo was a member of the party's 25-member Politburo, which is just below the nine-member Standing Committee in power, he had alienated other leaders with a high-profile crackdown on corruption that even by China's standards trampled on civil liberties. Many observers believe Mr. Bo's wife's criminal case was used by his opponents as an opportunity to purge him.

Regardless of the resulting power shifts, it's clear that the government is very anxious about how the public will respond to another case of elites behaving badly and has imposed a strict ban on news and Internet posts related to the Ferrari crash. Such incidents have increasingly sparked public outrage in China.

"There's no doubt the authorities have been very concerned about the revolt, the backlash against the flaunting of privileges, whether its cars or expensive watches, those trappings of power and corruption," said Mr. Yang.

He said authorities are very careful to control the spread of such information so it "doesn't stimulate more public anger against the elites."

Cheng noted that few Chinese know about the Ferrari incident and that, if they did, they might see at as too removed from their lives to worry about.

"If there's a Ferrari (crash) case with naked girls in Beijing, well, this is juicy stuff. You get cynical, you feel resentment but you don't do much. You don't protest because it's too far away."

I think the first paragraph is quite wrong. Far from shaking China's hope for a smooth handover, I suspect that this story tell us that the transition from Hi Jintao to Xi Jinping will be more smooth than that between Hu and Jiang Zemin seven years ago and smoother still than the ransition from Deng Xiaping to Jiang in 1990. he notion that the outgoing leader had to keep some grip on the levers of power is unproductive. It appears, to me that Xi and Hu have managed to arrange the handover so that Hu and his followers leave gracefully, to become "elder statesmen" à la Bill Clinton, George W Bush, Tony Blair and Paul Martin: they may have roles on the public stage, even partisan political roles, but their power base will be gone.

It is important to remember that there are "parties" within the CPC - three of them seem, to me to correspond to something akin to US Republicans (pretty tooth and claw capitalists), something like our Conservatives (moderated free marketeers wanting a weak welfare state) and something akin to the NDP (reluctant capitalists, statists wanting a strong welfare state). My guess is that Jiang Zemin fell into the first group and Hu Jintao was in the second. I guess, again  that now deposed Chongqing party boss Bo Xilai was in the third, or maybe in a group to the left of it. I have no idea where Xi Jinping fits.

Xi Jinping ~ get used to seeing is face

Peng Liyuan ` wife of Xi Jinping,
a famous Chinese folk singer,
and, in her own right - based
on her status as an
entertainer - a MGen in the PLA


__________
* Zhongnanhai is a large walled compound in the centre of Beijing, right next to the Forbidden City and it is the headquarters of the Communist Party of China and the State Council (Central government) of the PRC. The compound is quite large, it contains two lakes and many buildings, and it is very well guarded.

 

[Edward Campbell]

Broadly and generally: Good news!

http://www.theglobeandmail.com/news/national/harper-meets-chinese-president-on-last-day-of-apec-summit/article4529916/

Harper meets Chinese president on last day of APEC summit

VLADIVOSTOCK, RUSSIA
The Canadian Press

Published Saturday, Sep. 08 2012

 

[a_majoor]

With the good news of the previous post I hate to return to the "cue ominous music" theme, but never the less:

http://thediplomat.com/2012/09/07/are-chinese-banks-hiding-the-mother-of-all-debt-bombs/

Are Chinese Banks Hiding “The Mother of All Debt Bombs”?
September 07, 2012
By Minxin Pei
 
China's massive bank financed stimulus was intended to keep the economy moving. It may instead lead to economic disaster.

Financial collapses may have different immediate triggers, but they all originate from the same cause: an explosion of credit.  This iron law of financial calamity should make us very worried about the consequences of easy credit in China in recent years.  From the beginning of 2009 to the end of June this year, Chinese banks have issued roughly 35 trillion yuan ($5.4 trillion) in new loans, equal to 73 percent of China's GDP in 2011. About two-thirds of these loans were made in 2009 and 2010, as part of Beijing's stimulus package.  Unlike deficit-financed stimulus packages in the West, China's colossal stimulus package of 2009 was funded mainly by bank credit (at least 60 percent, to be exact), not government borrowing.

Flooding the economy with trillions of yuan in new loans did accomplish the principal objective of the Chinese government — maintaining high economic growth in the midst of a global recession.  While Beijing earned plaudits around the world for its decisiveness and economic success, excessive loose credit was fueling a property bubble, funding the profligacy of state-owned enterprises, and underwriting ill-conceived infrastructure investments by local governments.  The result was predictable: years of painstaking efforts to strengthen the Chinese banking system were undone by a spate of careless lending as new bad loans began to build up inside the financial sector.

When the Chinese Central Bank (the People's Bank of China) and banking regulators sounded the alarm in late 2010, it was already too late.  By that time, local governments had taken advantage of loose credit to amass a mountain of debt, most of it squandered on prestige projects or economically wasteful investments.  The National Audit Office of China acknowledged in June 2011 that local government debt totaled 10.7 trillion yuan (U.S. $1.7 trillion) at the end of 2010.  However, Professor Victor Shih of Northwestern University has estimated that the real amount of local government debt was between 15.4 and 20.1 trillion yuan, or between 40 and 50% of China’s GDP.  Of this amount, he further estimated, the local government financing vehicles (LGFVs), which are financial entities established by local governments to invest in infrastructure and other projects, owed between 9.7 and 14.4 trillion yuan at the end of 2010.

Anybody with some knowledge of the state of health of LGFVs would shudder at these numbers.  If anything, Chinese LGFVs are known mainly for their unique ability to sink perfectly good money into bottomless holes in the ground.  So taking on such a huge mountain of debt can mean only one thing — a future wave of default when the projects into which LGFVs have piled funds fail to yield viable returns to service the debt.  If 10 percent of these loans turn bad, a very conservative estimate, we are talking about total bad loans in the range of 1 to 1.4 trillion yuan.  If the share of dud loans should reach 20 percent, a far more likely scenario, Chinese banks would have to write down 2 to 2.8 trillion yuan, a move sure to destroy their balance sheets.

The Chinese government, to its credit, was also aware of the danger of this ticking debt bomb.  Unfortunately, it used a solution that merely delayed the inevitable.  In the first half of this year, Beijing announced a policy of mandating banks to extend by one more year the deadline for local governments to repay their bank loans that were about to mature.This move was taken, in all likelihood, to conceal the festering problem in the financial sector during the year of leadership transition.  But it did nothing to defuse the debt bomb.

If debt taken on by LGFVs was the one shoe that has dropped, what about the other shoe?

Obviously local governments were not the only culprits during China's credit bubble in 2009-2010.  There were other participants in this frenzy of borrowing and spending.  With the slowdown of the Chinese economy, these participants are, like the proverbial naked swimmers exposed by falling tides, coming out of the woodworks.

Over-leveraged real estate developers, for example, are struggling to stay a step ahead of bankruptcy.  The Chinese media has reported several instances of suicides of bankrupt real estate developers.  Some bankrupt businessmen simply vanished.  According to a story in the South China Morning Post in May this year, 47 business owners disappeared in 2011 to avoid repaying billions in bank loans.

Chinese manufacturing companies, state-owned and private alike, could be next in line.  Their profit margins are notoriously thin.  With excess capacity a systemic problem in the Chinese economy, a slowdown in economic growth will result in a rapid build-up of inventory and a glut of unsold goods in all industries.  Getting rid of their inventories at a discount will wipe out their slim profits and incur financial losses.  Some of the loans extended to them in good times will surely go bad.

But the potential risk for a financial tsunami is greatest in China's shadow banking system.  Because of very low-yield for savings by Chinese banks (since deposit rates are regulated) and competition among banks for deposits and new fee-generating businesses, a complex, unregulated shadow banking system has emerged and grown significantly in China in the last few years.  Typically, the shadow banking system pushes something called "wealth management products," which are short-term financial products yielding a much higher rate than bank deposits for investors.  To evade regulatory oversight, these products do not appear on a bank's balance sheet.  According to Charlene Chu, a highly respected banking analyst for Fitch ratings, China had about 10.4 trillion yuan in wealth management products, about 11.5 percent of the total bank deposits, at the end of June this year.

Since borrowers that use funds provided by wealth management products tend to be private entrepreneurs and real estate developers denied access to the official banking system, they have to promise a higher rate of return.  Obviously, higher return also means higher risks.  Although it is impossible to estimate the percentage of non-performing loans extended through wealth management products, using a conservative 10 percent baseline would mean another 1 trillion yuan in potential bank losses.

The shadow banking system has another function: channeling funds to borrowers or activities explicitly banned by government regulation.  In the last two years, the Chinese State Council has tried to deflate the real estate bubble by limiting bank loans to real estate developers.  But banks can skirt such restrictions by ostensibly lending to each other, with the funds ultimately going to financially stretched real estate developers.  Chinese banks do this out of their own survival instinct.  If they do not lend to effectively delinquent real estate developers who have borrowed large amounts, they would have to declare these loans non-performing and suffer losses.  On the balance sheets of Chinese banks, such loans are technically classified as claims on other financial institutions.  According to a recent report in the Wall Street Journal, inter-bank loans today account for 43 percent of total outstanding loans, 70 percent higher than at the end of 2009.

Disturbingly, none of these huge risks are reflected in the financial statements of Chinese banks.  The largest state-owned banks have all recently reported solid earnings, high capital ratios, and negligible non-performing loans.  For the banking sector as a whole, non-performing loans amount to only 1 percent of total outstanding credit.

One things is evident here.  Either we should not believe our "lying eyes" or Chinese banks are trying to hide the mother of all debt bombs.

 

[tomahawk6]

Canada might want to consider a Swiss style military. Large numbers of reserves that can be called up to roundout the standing force. The reserve ground force should include everyone 18-40 and could be accomplished with a draft. Canada is too large geographically to be defended by the size of the current force. Not depending on the US for security requires a price to be paid.

 

[Sythen]

Canada might want to consider a Swiss style military. Large numbers of reserves that can be called up to roundout the standing force. The reserve ground force should include everyone 18-40 and could be accomplished with a draft. Canada is too large geographically to be defended by the size of the current force. Not depending on the US for security requires a price to be paid.

erm was this posted in the right thread?

 

[Edward Campbell]

Canada cannot move closer to Asia, especially to China, without annoying the USA ~ not in the short term, anyway.

Does that (improved Canada-China ties) mean that the US would withdraw its implicit security guarantee? No, not even close. Geography alone, requires America to defend Canada against any hostile (to America) takeover or even threat. America, the lower 48, has four borders: two oceans and two land borders. Both Canada and Mexico are buffers, vital, essential, strategically imperative buffers for the USA - space age or not. Going beyond that, Americans, as a people, are, in my opinion, culturally unable to watch a close friend and neighbour, a "cousin" even, being attacked by a foreign power.

But: Canada ought not to rely too heavily on that implicit US guarantee; we should welcome it as a backstop but we should rely upon our own ability to hit any balls directed at us, to defend our own wicket, in cricket speak. Our foreign and defence policy should, explicitly, accept the requirement to, and guarantee to our good friend and neighbours that, we will do a full and fair share in defending out own territory and the approaches to theirs.

 

[Edward Campbell]

Good news, in this article which is reproduced under the Fair Dealing provisions of the Copyright Act from The Guardian:

http://www.guardian.co.uk/world/2012/sep/10/hong-kong-elections-pro-democracy

Hong Kong pro-democracy camp takes early election lead
Votes also high for the Democratic Alliance for the Betterment of Hong Kong in areas where pro-China groups are well funded

Vaudine England in Hong Kong

guardian.co.uk, Monday 10 September 2012

Hong Kong's pro-democracy movement has taken a narrow lead in the legislative elections which took place against a backdrop of rising concern about China's influence over the former British colony.

But while the pro-democracy candidates have a slight majority so far in the directly elected seats, in districts where pro-China groups have set up well-funded, extensive neighbourhood networks, votes for the Beijing-backed Democratic Alliance for the Betterment of Hong Kong (DAB) have been high.

The first district to announce results, Kowloon West, a sprawling and diverse electorate, saw a high vote for the DAB alongside victory for more pan-democrats, including the feisty journalist Claudia Mo of the Civic Party.

Some big names from the pan-democratic camp have yet to hear their fate.

The chairman of the Democratic Party, Albert Ho Chun-yan, was not hopeful: "My situation has been worsening. This is beyond my expectations," he said of what he called the most competitive elections yet.

Even before hearing about his won bid for a seat, he announced his resignation as party leader following what he called his party's "serious failure" to garner more votes.

He had lead his party into a compromise with the government over constitutional reforms during the last legislature's term, a move which has spurred support for the more radical People Power Party whose Wong Yuk-man has kept his seat.

While the pan-democratic camp has suffered from its internal divisions, so has the pro-China establishment. Close behind the DAB has been the Federation of Trade Unions, members of which have suggested their poorer than expected showing could be traced back to competition with its allies.

Leader of the pro-business Liberal Party, Miriam Lau Kin-yee, has lost her seat and is resigning her leadership role, mirroring her predecessors at previous elections.

More people voted than ever before, but the 53% turnout was less than the 55% of the 2004 elections when the pool of registered voters was smaller, which also took place amid strong feelings about China's role in the free-wheeling territory.

Counting is continuing, particularly for five new "super-seats", for which people could vote across geographical lines.

Hong Kong's legislature has 70 seats, 40 of which can be voted for directly in geographical constitutencies, with the balance made up of what are called functional constituencies in which, for example, approved doctors' groups can vote for a medical sector representative, or bankers choose a banking representative.

This system guarantees a pro-government majority as the pan-democrats face well-financed and organised opposition in the free seats from the pro-China group, and most functional seats go to establishment figures.

The pan-democrats have now secured the one third of all seats they desire in order to exercise a veto over future legislation which must, during the next four years, include measure to implement China's vision of constitutional change.

For China this city election is probably at least, maybe more important than the forthcoming one in the USA.

 

[Sythen]

http://www.reuters.com/article/2012/09/18/us-africa-china-pushback-idUSBRE88H0CR20120918

Insight: In Africa's warm heart, a cold welcome for Chinese


(Reuters) - Malawians bill their country as the "Warm Heart of Africa" and pride themselves on a reputation for friendliness. But Jaffa Shaibu, a burly 32-year-old merchant in a clothes market in Salima, a dusty town near the shores of Lake Malawi, feels less than welcoming to the Chinese traders who have moved in over the past four years.

"The way it looks, one day there will be a big fight with them," Shaibu said. "One day there will be blood."

Echoing a grievance heard across Africa, Shaibu and his colleagues in this town of 40,000 complain of Chinese businessmen with better access to cheap imports of clothes, shoes and electronics, and deeper pockets that allow them to reduce their margins.

That sentiment is part of a grass-roots backlash against Beijing's increasing diplomatic and commercial clout in Africa.

In many ways, the relationship between the two has never been stronger. Bilateral trade has almost doubled over the past three years, to $166 billion in 2011 from $91 billion in 2009. In July, Chinese President Hu Jintao offered Africa $20 billion in cheap loans over the next three years. China, he said, would forever be a "good friend, a good partner and a good brother" to Africa.

But a growing number of Africa's billion people are less enthusiastic.

More on link.

 

[Retired AF Guy]

The RT website is reporting that China has another, smaller, twin-engine in the works.

Two models of Chinese 5th-Gen fighter in works (PHOTOS)

Published: 18 September, 2012, 14:05

F-60 fifth generation fighter jet. (Image from http://bbs.tiexue.net)

The Chinese military has leaked first photos of a brand new lightweight fighter with external characteristics that allow the jet fifth-generation attribution. Some pictures suggest it could be used on future Chinese aircraft carriers.

Shenyang Aircraft Industry Group (SAC), one of the leading aircraft design and manufacturing corporations of China’s aviation industry, has rolled out a prototype that might eventually become Chinese analogue to America’s F-35.

The aircraft bears a certain resemblance to Lockheed Martin’s F-35 Lightning II, and even reportedly has the codename F-60. Though absolutely no characteristics of the prototype have been unveiled, one major difference is obvious: unlike its American relative, China’s F-60 has two engines.
The pictures of the Chinese technology demonstrator suggest that the engines the aircraft is currently equipped with do not have thrust vectoring nozzles which might suggest the prototype is at too early a stage of testing to get more sophisticated and powerful propulsion package.

Inclined twin vertical tail and wide-spaced ram air inlets are reminiscent of Lockheed Martin’s F-22 Raptor Joint Strike Fighter.

A blurred photo from China Military Report website is the only proof that SAC’s F 60 aircraft has successfully been airborne.

The suspected photo of China's SAC F 60 fighter test flight. (Image from http://wuxinghongqi.blogspot.com)

Now it has become obvious that in the race for possession of fifth generation aircraft the Chinese military placed its bets on two horses: Chengdu Aircraft Corporation, which is heavily testing its J-20 “Mighty Dragon” fifth generation heavy fighter-bomber, and Shenyang Aircraft Industry Group with its F-60 lightweight fighter.

The F-60 prototype jet bears the side number 31001, which may be a reference to Chengdu’s J-20 heavy fighter jet. The first two J-20 prototypes have “2001” and “2002” side numbers respectively. Yet, the F-60 and J-20 are not likely to be regarded as competitors because it appears the aircraft will have different specializations.

China’s future sea-based fighter jet

China’s first aircraft carrier, dubbed Shi Lang, laid down by the Soviet Union in the late 1980s and almost finished now by Chinese engineers, is expected to be put into service by the end of 2012. Still, Beijing has informed the warship will be not ready for action till 2017.

The People’s Liberation Army Air Force (PLAAF) already has fighter jets to form the aircraft wing for Shi Lang. China produces J-15, a copycat of the Soviet-made Su-33. The J-15 copycat has been made by Shenyang Aircraft Industry Group. But the Su-33 was designed in the 1980s and cannot be regarded a proper sea-based aircraft in the 2010s. Probably since SAC already proved it can make a sea-based aircraft, Beijing commissioned a great challenge of creating a fifth generation fighter jet for naval use to this corporation.

Chinese Military Review website has published computer-generated images of the F-60 fifth generation fighter jet in action with a whole range of various air to air missiles. On at least two pictures the aircraft is depicted with an extended arrest hook that the sea-based aircraft use to stop after landing on the deck of an aircraft carrier.

The two-wheeled front rack chassis of the real F-60 prototype also suggests the aircraft is being engineered for naval use, like sea-based versions of Dassault’s Rafale in France, Lockheed Martin’s F/A-18 E/F Super Hornet and the Soviet-made Su-33. At the same time there are no signs the prototype is capable of short take off and vertical landing, which the F-35B STOVL version has.

A brief look at the computer-generated images also exposes another feature the F-60 has in common with Lockheed Martin’s F-35 Lightning II: an extremely limited space in the internal weapon bays. A stealth aircraft must have all of its weapons hidden inside the hull to decrease the aircraft’s visibility to enemy radars. The Chinese F-60, just like the American F-35, can only carry small-sized short range missiles in true stealth mode.

To get seriously armed the F-60 would have to carry long-range missiles externally, which would nullify its stealth capabilities. If so, the F-60 will have limited capabilities.

Probably the biggest problem of the modern Chinese aviation industry is the deadlock with military jet engines it currently finds itself in. For both Chengdu’s J-20 and Shenyang’s F-60 there are no reliable Chinese-made jet engines with technical characteristics appropriate for a fifth generation fighter. Still, Chinese engineers are known not only for copycat efforts, but for outstanding persistence in achieving their objectives.

It cannot be altogether excluded that by 2017, when the Shi Lang aircraft carrier will be commissioned and more warships of the kind be under construction, Chinese engineers will probably decrease or eliminate the dependence on Russian jet engines and spare parts and put the F-60 on a proper flight.

Article Link (with photos).

 

[a_majoor]

More "cue ominous music".

Chinese statistics have been fairly sketchy at best, and we have seen results which are at variance to the narrative of Chinese success (poorly constructed infrastructure, massive overbuilding of real estate [and not just "ghost cities"] and inputs and outputs that simply do not match up. If this story is accurate, then far more trouble is looming, and the people who are invested in the idea that China's economic growth will save the day will have their illusions shattered. One can only wonder at what the chaos predicted within China as markets unravel will unveil; economic and political chaos generally has very poor end results for the rest of us as "the man on the white horse" makes his appearance:

http://www.zerohedge.com/news/how-chinas-rehypothecated-ghost-steel-just-vaporized-and-what-means-world-economy

How China's Rehypothecated "Ghost" Steel Just Vaporized, And What This Means For The World Economy
Submitted by Tyler Durden on 09/17/2012 17:20 -0400

One of the key stories of 2011 was the revelation, courtesy of MF Global, that no asset in the financial system is "as is", and instead is merely a copy of a copy of a copy- rehypothecated up to an infinite number of times (if domiciled in the UK) for one simple reason: there are not enough money-good, credible assets in existence, even if there are more than enough 'secured' liabilities that claim said assets as collateral. And while the status quo is marching on, the Ponzi is rising, and new liabilities are created, all is well; however, the second the system experiences a violent deleveraging and the liabilities have to be matched to their respective assets as they are unwound, all hell breaks loose once the reality sets in that each asset has been diluted exponentially.

Naturally, among such assets are not only paper representations of securities, mostly stock and bond certificates held by the DTC's Cede & Co., but physical assets, such as bars of gold held by paper ETFs such as GLD and SLV. In fact, the speculation that the physical precious metals in circulation have been massively diluted has been a major topic of debate among the precious metal communities, and is the reason for the success of such physical-based gold and silver investment vehicles as those of Eric Sprott. Of course, the "other side" has been quite adamant that this is in no way realistic and every ounce of precious metals is accounted for. While that remains to be disproven in the next, and final, central-planner driven market crash, we now know that it is not only precious metals that are on the vaporization chopping block: when it comes to China, such simple assets as simple steel held in inventories, apparently do not exist.

From Reuters:

    Chinese banks and companies looking to seize steel pledged as collateral by firms that have defaulted on loans are making an uncomfortable discovery: the metal was never in the warehouses in the first place.

This means that in an economy in which the creation of liabilities, and pledging of assets took place at a furious pace in the past 5 years, nobody really knows just what the real state of credit creation truly was. What is 100% certain is that as a result of this revelation, the GDP number of the country, which is and always has been a derivative of credit formation and expansion (and heaven forbid contraction), is massively overrepresenting what it is in reality, and that the Chinese economy has been expanding at a far slower pace if defined not only by the creation of liabilities, but by matched assets. Most importantly, it means that every single Renminbi in circulation is impaired as a country-wide liquidation event would see huge losses by every creditor class. It also would mean, naturally, zero residual value left for the equity.

And just like that the Chinese growth "miracle" goes poof... as does its steel first, and soon all other commodities (coughcoppercough) that served as the basis of "secured" liability creation.

Reuters continues, even if the punchline is already known:

    China's demand has faltered with the slowing economy, pushing steel prices to a three-year low and making it tough for mills and traders to keep up with payments on the $400 billion of debt they racked up during years of double-digit growth.

    As defaults have risen in the world's largest steel consumer, lenders have found that warehouse receipts for metal pledged as collateral do not always lead them to stacks of stored metal. Chinese authorities are investigating a number of cases in which steel documented in receipts was either not there, belonged to another company or had been pledged as collateral to multiple lenders, industry sources said. 

    Ghost inventories are exacerbating the wider ailments of the sector in China, which produces around 45 percent of the world's steel and has over 200 million metric tons (220.5 million tons) of excess production capacity. Steel is another drag on a financial system struggling with bad loans from the property sector and local governments. 

    "What we have seen so far is just the tip of the iceberg," said a trader from a steel firm in Shanghai who declined to be identified as he was not authorized to speak to the media. "The situation will get worse as poor demand, slumping prices and tight credit from banks create a domino effect on the industry."

Ultra-rehypothecation 101:

    Police have arrested an employee from Baoyang Warehouse in Shanghai and are investigating documentation for steel stocks that the employee issued to a trading firm, said an official with the surname Ou at Baoyang. Baoyang is owned by China Railway Materials Shanghai Company Limited.

    The trade firm used the stocks more than once as collateral to obtain loans, said an executive at Shanghai Minlurin, another trading firm that had steel stocks in the warehouse. The receipts used were for steel worth around 380 million yuan ($59.96 million), the executive said.   

    Similar cases have prompted some trading houses to temporarily halt transactions related to warehouse receipts, disrupting China's steel business, traders said.

If the above makes readers queasy, it should: after all rehypothecation of questionable assets is precisely what serves as the backbone of that critical component of the shadow banking system: the repo market, where anything goes, and where those who want, can create money virtually out of thin air with impunity as long as nobody checks if the assets used for liability creation are actually in the system (and with JPM as the core private sector tri-party repo entity, secondary only to the Fed, one can see why this question has never actually arisen).

In the meantime, the entire Chinese economy is unraveling:

    Banks, too, are giving less credit against warehouse receipts.

    "Fake warehouse receipts have become a problem for some banks and because of this, many banks have boosted monitoring of existing stocks at warehouses and temporarily stopped accepting steel stocks as collateral for loans," said a Shanghai-based branch manager from a Chinese bank who declined to be identified as he was not authorized to speak to the media.

    Steel mills and end users rely heavily on trading firms to keep steel flowing from producers to consumers. Steel traders often buy consignments with full payment, ensuring cash flow to the mills. End users can buy small volumes from the traders, more convenient for them than the big volumes the mills sell.

    Industry sources estimated cases that have already come to light account for about 5 billion yuan ($787.50 million) of bad debt in Shanghai, one of China's biggest steel trading centers.

    At another warehouse, a logistics unit of giant steelmaker Baosteel rented a small office to a company called Shanghai Yiye Steel Trade Market Management Co Ltd. Documents were forged stating Yiye was the owner of some of the steel stored in the warehouse, said Wang Xueying, the spokeswoman for the unit called Shanghai Baosteel Logistics Co Ltd.

    Yiye used the documents in dealings with two companies, China Railway Harbin Logistics and Wuhan Iron Yitong, the spokeswoman said.

    The two companies came to the warehouse to collect the stocks only to find that Yiye did not own the materials, she said. The case is still under investigation, she added.

    Nobody answered telephone calls to Yiye made by Reuters to request comment for this story. Both China Railway Harbin Logistics and Wuhan Iron Yitong declined to comment when contacted.

In conclusion we can only add that we hope none of this comes as a surprise to our regular readers: we have been warning for years that i) the inventory of the world's credible assets is literally evaporating in absence of technological efficiency and CapEx spending (which is also the reason for the ECB's endless lowering of collateral requirements) and ii) illegal rehypothecation of assets, which infinitely dilutes claims on real assets, can and will lead to total losses even for investors who thought they had strong collateral backing.

We now know that this has been happening in China with the most critical component of its economic growth miracle: steel. We will soon discover that all other assets: stocks, bonds, commodities (including gold and silver) and finally cash (think deposits) have been comparably rehypothecated and criminally commingled. The end result will be the most epic bank run in world history, which incidentally is precisely what the central banks are attempting desperately to delay as much as possible by generating excess inflation to "inflate" away the debt, leading to rematching of finite assets and virtually infinite liabilities. Alas, in a world in which credit-money liabilities are in the quadrillions, and in which the real assets are in the tens of trillions, only hyperinflation can seal the deal.

Or, in other words, lose-lose.

 

[Edward Campbell]

An interesting analysis of President Obama's “Priorities for 21st Century Defence” in this article which is reproduced under the Fair Dealing provisions of the Copyright Act from the Globe and Mail:

http://www.theglobeandmail.com/news/world/in-frenemy-territory-obamas-decision-to-police-the-pacific/article4498096/

Paul Koring gets one thing very, very right: "... from Beijing deterrence can look like encirclement." Threatening Beijing - and encirclement looks like a threat - is a strategic mistake until and unless America is prepared to turn that threat into action. America is not ready, wiling or able to fight a major land war on the Asian continent, so threatening China is silly, sophomoric and toothless sabre rattling which, almost certainly, will provoke an unforeseen and unpleasant reaction.

Koring is also correct when he says: "It’s [the new Asia policy] an intricate dance, however, requiring far more subtlety than the post-Second-World-War era, which pitted America and its allies, including Canada, against clearly-defined enemies." I'm not sure Washington - the White House, State Department and the Pentagon understand intricacy and subtlety; that's a bit unfair: of course they "understand" them but they seem, when faced with domestic political imperatives, unable to practice them.

Finally, I doubt that Washington (White House, Congress, State and Defence) has any coherent vision of America's place in the world and, even less, about how to accomplish their aims, even if they are understood.

The headline in the story I cited above said:

In frenemy territory: Obama’s decision to police the Pacific

Now the Chinese tell the Americans to butt out according to this article which is reproduced under the Fair Dealing provisons of the Copyright Act from the South China Morning Post:

http://www.scmp.com/news/china/article/1040225/defence-chief-liang-guanglie-tells-us-counterpart-stay-out-islands-row

Defence chief Liang Guanglie tells US counterpart to stay out of islands row
China's defence chief warns his US counterpart over American claim to a stake in the conflict

Wednesday, 19 September, 2012

Teddy Ng in Beijing and Minnie Chan

In a meeting with his US counterpart yesterday, Defence Minister General Liang Guanglie voiced "strong opposition" to Washington's claim that disputed East China Sea islands fall under its security pact with Tokyo.

Liang also warned US Defence Secretary Leon Panetta - in China for the first time since assuming his post last year - that Beijing was ready to respond militarily to assert its sovereignty over the Diaoyus, which Japan controls and calls the Senkakus.

Leon Panetta stands with Liang Guanglie in Beijing. Photo: AFP

He called on Washington to "concretely" demonstrate it would not take sides in the spat over the five uninhabited islands, which sit near potential supplies of oil and natural gas.

"We reserve the right to take further action," Liang said after the talks. "Of course, that being said, we still hope for a peaceful and negotiated solution."

Tensions remained high yesterday, as Tokyo reported 10 Chinese surveillance ships and a fisheries patrol boat in waters near the islands. Two Japanese activists landed on one island amid fresh protests in Chinese cities to mark the anniversary of the 1931 Mukden Incident.

Thousands gathered outside the Japanese embassy in Beijing. Heavier security was visible in some cities, such as Shenzhen, in what appeared to be a greater effort to keep a lid on protests.

Washington's claim that the islands fall under its post-war defence treaty with Tokyo has irked Beijing.

"I want to make it clear that the Diaoyu Islands are China's inherent territory, which is evidenced by history and law," Liang said.

For his part, Panetta called for calm on both sides of the East China Sea. He said Washington wanted expanded ties with the PLA, and invited China to take part in the 2014 Rimpac international military exercise in Hawaii.

"The key is to have senior-level actions like we are engaging in, that reduce the potential for miscalculation, that foster greater understanding and that expand trust between our two countries," Panetta said.

Panetta will next meet Vice-President Xi Jinping.

Additional reporting by Reuters

That's pretty direct diplomacy.

Over to you, President Obama.