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Flash Point Taiwan Straits
eDefense ^ | March 2005 | Kenneth B. Sherman

Posted on 01/11/2006 8:05:58 PM PST by Jeff Head

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To: Jacquerie

Sickening. He apologized for his language that was not even directed at this individual and that should have been the end of it.


21 posted on 01/12/2006 7:51:54 AM PST by Jeff Head (www.dragonsfuryseries.com)
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To: gaijin; Gengis Khan

Thank you both! BTTT.


22 posted on 01/12/2006 7:53:40 AM PST by Jeff Head (www.dragonsfuryseries.com)
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To: Yehuda

They are spending their new found wealth on military means, IMHO, to ultimately acquire and hold more...at the point of the sword.


23 posted on 01/12/2006 7:54:32 AM PST by Jeff Head (www.dragonsfuryseries.com)
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To: AdmSmith
Unless of course, some huge nationalistic issue comes along, veiled in propoganda, which distracts the people and gets them pointed at some external source.
24 posted on 01/12/2006 7:56:04 AM PST by Jeff Head (www.dragonsfuryseries.com)
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To: AdmSmith

I think you're missing something here.

China owns about $800 billion in US dollars, another $250-300 billion in US treasuries, so around $1 trillion.

GDP is a per year figure, and debt doesn't change much per year.

Chinese GDP for 2005 is 1.9 trillion US dollars.

Get it? They can pay it all back with US dollars, easily.

Compare that with what we have in the US:
http://www.cia.gov/cia/publications/factbook/geos/us.html

Look at PUBLIC debt: 65% of GDP!!!!! Are we going under? Not soon, but maybe in 10 years?? China's PUBLIC debt is 30% of GDP which they can pay easily with the dollars they own.



25 posted on 01/12/2006 8:56:04 AM PST by pganini
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To: pganini
The problem is that the Chinese bank have nonperforming loans. The Kunlun Credit Co-operative in Golmud (and other financial institutions) went down the drain last year. http://english.people.com.cn/200507/05/eng20050705_194104.html

and http://www.moneyweek.com/file/2868/bam-chinabanks.html

I do not think that they will just pay as you mentioned. The result would be world wide chaos, when they liquidate their holdings. It has to be a managed landing, but I am not sure that it will be a soft.
26 posted on 01/12/2006 9:23:11 AM PST by AdmSmith
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To: AdmSmith

You fail to realize that the Chinese banks that have nonperforming loans are PUBLIC companies, their debt is reflected in the PUBLIC debt section.

My point is that the debt picture in China is not as bad as it seems - it's bad, but the same picture can be painted of US public debt which is mostly a government thing, same goes with CHina. The bad loans come from teh state owned banks -- the private banks are in much better shape because they scrutinize the lender a lot more. Anyway, China has enough resources to pay the debt back in a flash if it needs to.

They'll slowly reduce the debt of the state companies -- either turning them insolvent or letting private companies buy them out. The only time I see them selling USD and US treasuries on a massive scale is if US gets involved with a Taiwan issue, they'll do that as an "economic" repercussion.

Anyway, i don't think it's as pressing as what all the analysts are saying, because they all miss the big picture that China has enough foreign reserves to handle any type of financial issue. Their strategy of allowing their citizens to buy foreign treausries is paying off - you can go into any banks in China and pick ANY currency you want to put your money (I don't find the same in the US), and naturally most of their citizens put their savings in the dollar.


27 posted on 01/12/2006 9:44:48 AM PST by pganini
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To: pganini
Yes, I know that the Chinese banks are mainly state owned.
Despite this (or perhaps due to this) they are very slow in addressing the problem of bad loans. It seems that they think that as long as they have growth the problem will shrink. But, with no legal framework the probability of disaster is high.

Here is an article from Peter Zeihan at Stratfor:
GEOPOLITICAL INTELLIGENCE REPORT 01.10.2006

Until very recently, China's economic system operated in this way:

State-owned banks held a monopoly on deposits in the country, allowing them to take advantage of Asians' legendary savings rate and thus ensuring a massive pool of capital. The state banks then lent to state-owned enterprises (SOEs). This served two purposes. First, it kept the money in the family and assisted Beijing in maintaining control of the broader economic and political system. Second, because loans were disbursed frequently and at subsidized rates -- and banks did not insist upon strict repayment -- the state was able to guarantee ongoing employment to the Chinese masses.

This last point was -- and remains -- of critical importance to the Chinese Politburo: they know what can happen when the proletariat rises in anger. That is, after all, how they became the Politburo in the first place.

The cost of keeping the money circulating in this way, of course, is that China's state firms are now so indebted as to make their balance sheets a joke, and the banks are swimming in bad debts -- independent estimates peg the amount at around 35-50 percent of the country's GDP. Yet so long as the economic system remains closed, the process can be kept up ad infinitum: After all, what does it matter if the banks are broke if they are state-backed and shielded from competition and enjoy exclusive access to all of the country's depositors?

This system, initiated under Deng Xiaoping in 1979, served China well for years. It yielded unrestricted growth and rapid urbanization, and helped China emerge as a major economic power. And so long as China kept its financial system under wraps, it would remain invulnerable.

But the dawning problem is that China is not in its own little world: It is now a World Trade Organization member, and nearly half of its GDP is locked up in international trade. Its WTO commitments dictate that by December, Beijing must allow any interested foreign companies to compete in the Chinese banking market without restriction. But without some fairly severe adjustments, this shift would swiftly suck the capital out of the Chinese banking system. After all, if you are a Chinese depositor, who would you put your money with -- a foreign bank offering 2 percent interest and a passbook that means something, or a local state bank that can (probably) be counted on to give your money back (without interest)?

The Chinese are well aware of their problems, and perhaps their greatest asset at this point is that -- unlike the Soviets before them -- they are hiding neither the nature nor the size of the problem. Chinese state media have been reporting on the bad loan issue for the better part of two years, and state officials regularly consult each other as well as academics and businesspeople on what precisely they should do to avert a catastrophe.

The result has been a series of stopgap measures to buy time. Among these, the most far-reaching initiative has been a partial reform of the financial sector. The government has founded a series of asset-management companies to take over the bad loans from the state banks, thus scrubbing them free of most of the nonperforming loans. The scrubbed banks are then opened up so that interested foreign investors can purchase shares.

So far as it goes, this is a win-win scenario: Foreign banks get access to assets in-country before the December jump-in date, and the state banks avoid meltdown. In addition, a measure of foreign management expertise is injected into the system that hopefully will teach the state banks how to lend appropriately and -- if all goes well -- lead to the formation of a healthy financial sector. At the same time, the deep-pocketed foreign companies come away with a vested interest in keeping their new partners -- and by extension, the Chinese government -- fully afloat.

The only downside is that central government, through its asset-management firms, assumes responsibility for financially supporting all of China's loss-making state-owned enterprises.

But this rather ingenious banking shell game addresses only the immediate problem of a looming financial catastrophe. Left completely untouched is the existence of a few hundred billion dollars in dud loans -- linked to tens of thousands of dud firms for which the central government is now directly responsible.

Which still leaves for China the unsettled question: "Now what do we do?"

Two Opposing "Solutions"

As can be expected from a country that just underwent a leadership change, there are two competing solutions.

The first solution belongs to the generation of leadership personified by Deng Xiaoping and Jiang Zemin, and could be summed up as a philosophy of "Grow faster and it will all work out." It could be said that during Jiang's presidency, while the leadership certainly perceived China's debt problem, they -- like their counterparts in Japan -- felt that attacking the problem at its source -- the banking system -- would lead to an economic collapse (not to mention infuriate political supporters who benefited greatly from the system of cheap credit).

Jiang's recommendation was that everyone should build everything imaginable in hopes that the resulting massive growth and development would help catapult China to "developed country" status -- or, at the very least, raise overall wealth levels sufficiently that the population would not turn rebellious. In the minds of Jiang and his generation of leaders, the belief was that only rapid economic growth -- defined as that in excess of 8 percent annually -- could contain growing unemployment and urbanization pressures and thus hold social instability at bay.

The second solution comes from the current generation of leadership, represented by President Hu Jintao. This solution calls for rationalizing both development goals and credit allocation. The leadership wants to eliminate the "growth for its own sake" philosophy, consolidate inefficient producers and upgrade everything with a liberal dose of technology. Key to this strategy is a centrally planned effort to focus economic development on the inland areas that need it most -- and this entails tighter control over credit. Hu wants loans to go only to enterprises that will use money efficiently or to projects that serve specific national development goals -- narrowing the rich-poor, urban-rural and coastal-interior gaps in particular.

There are massive drawbacks to either solution.

Regional and local governors enthusiastically seized upon Jiang's program to massively expand their own personal fiefdoms. And as corporate empires of these local leaders grew, so too did Chinese demand for every conceivable industrial commodity. One result was the massive increases in commodity prices of 2003 and 2004, but the results for the Chinese economy were negligible. China consumes 12 percent of global energy, 25 percent of aluminum, 28 percent of steel and 42 percent of cement -- but is responsible for only 4.3 percent of total global economic output. Ultimately, while "solution" espoused by Jiang's generation did forestall a civil breakdown, it also saddled China with thousands of new non-competitive projects, even more bad debt, and a culture of corruption so deep that cases of applied capital punishment for graft and embezzlement have soared into the thousands.

Yet the potential drawbacks of the solution offered by Hu's generation are even worse. In attempting to consolidate, modernize and rationalize Jiang's legacy, Hu's government is butting heads with nearly all of the country's local and regional leaderships. These people did quite well for themselves under Jiang and are not letting go of their wealth easily. Such resistance has forced the Hu government to reform by a thousand pinpricks, needling specific local leaders on specific projects while using control of the asset management firms as a financial hammer. After all, since the central government relieved the state banks of their bad loan burden, it now has the perfect tool to strip power from those local leaders who prove less-than-enthusiastic about the changes in government policy.

Or at least that is how it is supposed to work. Local government officials have become so entrenched in their economic and political fiefdoms that they are, at best, simply ignoring the central government or, at worst, actively impeding central government edicts.

Hu's team is indeed making progress, but with the problem mammoth and the resistance both entrenched and stubborn, they can move only so fast for fear of risking a broader collapse or rebellion. And this does not take into consideration Beijing's efforts to strengthen the Chinese interior -- where the poorest Chinese actually live. Complicating matters even more, Hu's strategy relies upon the central government's ability to wring money out of the wealthy coastal regions to pay for the reconstruction of the interior.

That has made the coastal leaders even more disgruntled. However, they have come upon a fresh source of funding, replacing the traditional sources of capital that now are drying up as a result of the personnel changes in Beijing: the underground lending system, which was spurred by the official government monopoly over banks in years past. The central government now estimates that the underground banking sector is worth 800 billion yuan, or some 28 percent of the value of all loans granted in country.

Dealing with Failure -- And Success

The question in our mind is which strategy will fail -- or even succeed -- first. If Jiang's system prevails, then growth will continue, along with the attendant rise in commodity prices -- but at the cost of growing income disparity and environmental degradation. The likely outcome of such "success" would be a broad rebellion by the country's interior regions as money becomes increasingly concentrated in the coastal regions long favored by Jiang. And that is assuming the financial system does not collapse first under its own weight.

Local rebellions in China's rural regions have already become common, but two of are particular note.

In March, the villagers of Huaxi in the Zhejiang region protested against a local official who had used his connections to build a chemical plant on the outskirts of town. When rumors of police brutality surfaced, some 20,000 villagers quite literally seized control of the town from 3,000 security personnel. Before all was said and done, the villagers invited regional press agencies in to chronicle events in the town that had told the Politburo to go to hell, and started burning police property and parading riot control equipment before anyone who would watch. They actually sold tickets to their rebellion. Huaxi marked the first time local officials actually lost control of a town.

Then, in December, protests erupted against a local official in Shanwei, who had similarly lined his pockets with the money that was supposed to have been made available to farmers displaced by his expanding wind-power farm. The local governor figured that since he was investing not just in an energy-generating project in energy-starved China, but a green energy project, that he would have carte blanche to run events as he saw fit. He was right. When the protests turned violent, government forces opened fire -- the first authorized use of force by government troops against protesters since the Tiananmen Square incident in 1989.

Such events are, in part, evidence of a degree of success for the strategy espoused by Jiang's generation. The grow-grow-grow policy results in massive demand for labor by tens of thousands of economically questionable -- and typically state-owned -- corporations. This, in turn, draws workers from the rural regions to the rapidly expanding urban centers by the tens of millions. The dominant sense among those who are left behind -- or those who find their urban experiences less-than-savory -- is that they have been exploited. This is particularly true in places like Shanwei, on the outskirts of urban regions, when urban governors begin confiscating agricultural land for their pet projects.

But for all the complications created by Jiang's solution to China's economic challenges, it is Hu's counter-solution that could truly shatter the system. In addition to dealing with all the corrupt flotsam and high-priced jetsam of Jiang's policies, Hu must rip down what Jiang set out to accomplish: thousands of fresh enterprises that are unencumbered by profit concerns. A steady culling of China's non-competitive industry is perhaps a good idea from the central government's point of view -- and essential for the transformation of the Chinese economy into one that would actually be viable in the long term -- but not if you happen to be one of the local officials who personally benefited from Jiang's policies.

The approach of Hu's generation is nothing less than an attempt to recast the country in a mold that is loosely based on Western economics and finance. Even in the best-case scenario, the central government not only needs to put thousands of mewling firms to the sword and deal with the massive unemployment that will result, it also needs to eliminate the businessmen and governing officials who did well under the previous system (which did not even begin to loosen its grip until 2003). And the only way Beijing can pay for its efforts to develop the interior is to tax the coast dry at the same time it is being gutted politically and economically.

The challenge is to keep this undeclared war at a tolerable level, even while ratcheting up pressure on the coastal lords in terms of both taxation and rationalization. But just as Jiang's "solution" faces the doomsday possibility of a long rural march to rebellion, Hu's strategy well might trigger a coastal revolution. As the central government gradually increases its pressure on the assets and power of China's coastal lords, there is a danger that those in the coastal regions will do what anyone would in such a situation: reach out for whatever allies -- economic and political -- might become available. And if China's history is any guide, they will not stop reaching simply because they reach the ocean.

The last time China's coastal provinces rebelled, they achieved de facto independence -- by helping foreign powers secure spheres of influence -- during the Boxer Rebellion. This resulted, among things, in a near-total breakdown of central authority.
28 posted on 01/12/2006 10:14:37 AM PST by AdmSmith
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To: AdmSmith

I don't think this author knows the historical context of the Boxer Rebellion to even comment on this. Boxer Rebellion is supported by the state (the empress) AGAINST foreign occupation. From that point alone, i don't think the rest of the article merits anything because he is basing his viewpoint solely on historical perspective and he's getting it wrong.

But, he did say something right -- China isn't hiding the banking problem, and hence, it will not be a major problem down the road. It'd be more problematic if they were trying to hide it like SARS.


29 posted on 01/12/2006 11:47:20 AM PST by pganini
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To: pganini

We will soon know, the WTO deadline is in December.


30 posted on 01/12/2006 11:58:27 AM PST by AdmSmith
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To: pganini
I think you're missing something here.

China owns about $800 billion in US dollars, another $250-300 billion in US treasuries, so around $1 trillion.

GDP is a per year figure, and debt doesn't change much per year.

Chinese GDP for 2005 is 1.9 trillion US dollars.

Get it? They can pay it all back with US dollars, easily.

Yes, I agree with your analysis. In fact, Red China has already done exactly this type of cash transfusion to prop up its banks.

Were an ordinary developed nation in the PRC's position, I think it would be worse off since what we think of as ordinary central banking would not (in my opinion) do this type of propping.

My guess is that China is rich enough to afford this strategy: their profits last year in foreign trade well outweigh the amount of foreign reserve cash they used to bail out banks over the same period. And as you point out, the Chicoms have a lot more foreign reserves socked away.

I would like to see the U.S. cease all normal trade with China. We are only making this vicious totalitarian state stronger by flooding it with dollars.

31 posted on 01/12/2006 4:25:30 PM PST by snowsislander
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To: AdmSmith

The USSR survived it in the 1920s. Then what happened after that?


32 posted on 01/12/2006 5:07:24 PM PST by GOP_1900AD (Stomping on "PC," destroying the Left, and smoking out faux "conservatives" - Take Back The GOP!)
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To: Jeff Head
"Unless of course, some huge nationalistic issue comes along, veiled in propoganda, which distracts the people and gets them pointed at some external source."

Yes...along with creating a huge nationalistic issue here in the USA just before that. Watch for China to try to dump the US ecomony before moving on Taiwan.
33 posted on 01/12/2006 7:34:08 PM PST by familyop
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Comment #34 Removed by Moderator

To: familyop; Yehuda

Sometime after the Olympics and then after our elections...and then only if a demo or rino occupies the White House...which they will work behind the scenes to influence IMHO.


35 posted on 01/13/2006 1:46:47 AM PST by Jeff Head (www.dragonsfuryseries.com)
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To: pganini

I'm pretty sure our public and private debts and our unfunded obligations are far higher that China's. We've been at this mischief bigger and longer than China

****Unfunded liabilities & oligations are government (state country federal) payments and pensions that will have to be scaled back or repudiated. Same as is being done these days by some major corporations


36 posted on 01/13/2006 2:00:39 AM PST by dennisw ("What one man can do another can do" - The Edge)
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To: Jeff Head

I doubt it.

The only real issue is Taiwan and Chen Shui Bian's decision to pursue independence. If they're going to do it, Chen will have to do it before 2008 or during the Olympics. The current fiscal estimate shows that Taiwan will be totally dependent on mainland for economics after 2007-2008. All China had to do then is cut off the economics (and iwthout using force) and it can control Taiwan. Chen knows this -- so if he declares independence, China will act. The only reason China hasn't used force to settle the issue is that they think they can have Taiwan tied up with the mainland economically, then eventually they'll move to unification (similar to Hong Kong which is dependent on the mainland).


37 posted on 01/13/2006 9:26:11 AM PST by pganini
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To: pganini

China doesn't have to attack Taiwan. They can simply increase to round-the-clock naval maneouvres near Taiwan's shipping lanes and insurance carriers will pull coverage for cargo ships supplying Free China.


38 posted on 01/13/2006 9:29:51 AM PST by Semper Paratus
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To: snowsislander

Eventually they'll get rid of all their state own banks and the private banks will not have this type of problem. And once that happens, i think a "collapse" is very unlikely.

What's more likely is that their own citizens will demand at least, rule of law. If you talk to the average Chinese, he isn't going to complain about of lack of democracy, he's going to bitch about lack of law and enforcement of it. He's going to complain about why certain officials gets preferential treatment under the law.

If they don't get the rule of law in place in the local level (village/city) either via some democratic reforms or judicial revamp, they'll be in serious trouble by 2010. Ironically it's going to be too much wealth that did them in.


39 posted on 01/13/2006 9:30:18 AM PST by pganini
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To: pganini
Well, the Nazis had a very strong rule of law, a very strong economy, and a lot of pride...and we saw what the results of that were in the hands of a totalitarian government.

The key ingredient in avoiding hardship and conflict, either as a result of a collapse or the result of economic clashes giving way to military ones...is for the Chinese people to be free. It is the Chinese people ultimately who must make this happen as I doubt very seriously that the CCP will realistically do it themselves.

Otherwise...I stick by the time table I gace above. Sometime after 2009-2010 if a demo ir rino occupy the White House. But that's just my opinion.

40 posted on 01/13/2006 10:35:05 AM PST by Jeff Head (www.dragonsfuryseries.com)
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