Friday, August 28, 2009

China Bubble

The China stimulus package has forced banks to force-feed the economy with liquidity. The purpose of the so-called “quantitative easing” was to generate domestic demand while exports slumped. But much of the liquidity has flowed into property and stock markets instead ─ and has partly become government fiscal revenue.

Stocks and properties in China may be 100 percent overvalued. Only two decades of relatively high inflation can justify their prices. However, persistently high inflation leads to currency devaluation, which triggers capital flight and, eventually, an asset market collapse.

The stories coming out of China of millionaires losing their deposits in financial institutions, corrupt, fast and loose lending by rural credit cooperatives and bankrupt consumer lending institutions hollowed out by employees and borrowers make me shudder at the thought of the lending bubble being blown by Beijing. Kickbacks to officials who review and approve loans regardless of the borrowers credit worthiness is a replay of what happened in America.

Beijing’s decision in 2008 to embark on a monetary easing policy in tandem with its stimulus package, encouraged financial institutions to grant loans to fund infrastructure projects ─ Confucian capitalism at its worst because most of the money was spent on personal businesses, stock market and real estate. Worries are mounting that the lending spree will lead to a mountain of bad assets in the banks as well as the misuse of funds. Mainland financial institutions extended a record 7.37 trillion yuan of loans in the first six months of 2009, nearly three times the amount a year earlier.

Official statistics show that rural credit co-operatives had piled up about 590 billion yuan in non-performing loans by the end of 2008. Bad loans at rural commercial banks stood at 19.28 billion yuan at the end of the first half of 2009.

Having started a few thrift and loans, savings and loans, federal and state banks in California in the 1980s go-go years both as a lawyer and a principal, I can relate to how financial institutions get hollowed out by owners, shareholders, employees and borrowers.

John Greenwood, an adviser to the former Hong Kong monetary authorities and who still advises the HKMA, also known as the “father of the peg” in Hong Kong, was back in July 2009 and warned that China’s massive stimulus package could cause serious trouble for the mainland economy within two years. “If China continues with the current rate of money and credit growth, there is an inflationary danger,” warned Greenwood. When something seems to good to be true, it is. World trade ─ the engine of global growth ─ has collapsed. Employment is still contracting throughout the world. There are no realistic scenarios for the global economy to regain high and sustainable growth, which means the China stock market and property bubble inflated by the government’s massive stimulus plan will burst.

Wednesday, August 19, 2009

Water Wars

Water is becoming a key security issue in Sino-Indian relations and a potential source of enduring discord. China and India already are water-stressed economies. The spread of irrigated farming and water intensive industries, together with the demands of a rising middle class, have led to a severe struggle for more water. Bhopal, India’s “City of Lakes,” where water was always plentiful, has become a parched wasteland of high and dry lakes where water shortage has turned deadly as residents fight to the last drop. Both countries have entered an era of perennial water scarcity, which before long is likely to equal in terms of per capita availability, the water shortages found in the Middle East.

Tibet and Xinjiang, China’s two westernmost regions, are not only in the forefront of China’s ethnic conflict, but climate change. While Tibet is getting mired in a deepening drought and declining water resources in future years, the water table in Xinjiang is on the rise and the dry climate is gradually becoming more humid. While Tibet is drying up, Xinjiang’s water reserves are growing at a rate equivalent to a rise in rainfall of 10mm per year.

Glaciers in Tibet have been melting for decades. From 1971 to 2002 they shrank by 5.3 percent, and between 2003 and 2008 they shrank a further 10 percent. Between 2002 and 2007 Tibet had suffered a drop in total water resources ─ ice, snow, surface and underground water ─ equivalent to a 30mm reduction in rainfall. Tibet experienced a drought in 2009 with some monitoring stations not recording rainfall for more than 200 days, and temperatures up to 2.3 degrees Celsius higher. The Tibetan plateau is the source of China’s major waterways, the Yangtze, Yellow and Lancang (Mekong) rivers.

Tibet is the source of most major Indian rivers. The Tibetan plateau’s vast glaciers, huge underground springs and high altitude make Tibet the world’s largest freshwater repository after the polar icecaps. Indeed, all of Asia’s major rivers, except the Ganges, originate in the Tibetan plateau. Even the Ganges’ two main tributaries flow in from Tibet.

China is now pursuing major inter-basin and inter-river-water transfer projects on the Tibetan plateau that threaten to reduce international river flows into India and other riparian states. The seeds of a potential water conflict have been sown. Water is now a political tool, not only on the Tibetan plateau, but globally.

It’s the same story in the Middle East. After a five-year drought, the region is headed toward a water calamity that could overwhelm all peace efforts. The Jordan River now has large sections reduced to a trickle. The Sea of Galilee is at its lowest point ever. The surface area of the Dead Sea has shrunk by a third. Iraq’s ancient marshes are now marked by large swaths of stalks and caked mud. In northern Syria, more than 160 villages in two years from 2007 to 2009 have run dry and been deserted by residents. In Gaza, 150,000 Palestinians have no access to tap water. In Israel, the pumps at the Sea of Galilee, its largest reservoir, are exposed above the water level rendering pumping impossible.

Wednesday, August 12, 2009

Sino-U.S. Century

America and China have elevated the bi-annual Strategic Economic Dialogue meetings to bi-annual S&ED meetings. The inaugural meeting took place in Washington DC on July 27-28, 2009. The meetings are no longer limited to financial and economic matters discussed between the U.S. Treasury Secretary and his Chinese counterpart, but now include the U.S. Secretary of State and her Chinese counterpart to also address global geopolitical issues.

“The relationship between the United States and China will shape the 21st century, which makes it as important as any bilateral relationship in the world,” president Obama said in his opening remarks that kicked of the S&ED. Serious words to digest, but the perfect antacid to unnecessary repeated burning economic, financial, ethnic, terrorist and military indigestion attacks. China’s Hu Jintao sent a message to the meeting in which he said China sought a “positive, constructive and comprehensive relationship.” He went on to add: “As two countries with significant influence in the world, China and the United States shoulder important responsibilities on a host of major issues concerning peace and development of mankind.”

The S&ED should be elevated to include at least one annual presidential level meeting. Why not make them even stronger? America and China must step up their dialogue and cooperation in areas of trade, energy, environmental protection, food safety and military cooperation and sign a mutually beneficial bilateral treaty governing their relationship in these areas.

A comprehensive bilateral treaty that brings the two countries closer together would be just as miraculous as Obama’s election victory was. The China challenge is, first and foremost, really about money and military might. Energy and the other geopolitical issues are secondary. The other side benefits of a bilateral treaty are that it would allow U.S. firms to invest in China’s industrial sector and allow U.S. firms in China to settle disputes by international arbitration rather than subject them to the arbitrary rule of law that currently exists in domestic Chinese courts. In turn, China would have an incentive to improve its legal system and to better protect private property rights and intellectual property.

Presidents Hu and Obama agreed in April 2009 at the London G20 to combine the unheard of Strategic Dialogue with the SED into one S&ED. A naturally challenging dialogue in the interlocal global web both countries have spun themselves and each other into in the last 30 years. Nothing of significance came out of the meeting except for the very significant memorandum of understanding between the two regarding global warming, energy and environment that they are both pushing each other from radical extremes. That is one issue they really have to duke out honestly and harmoniously as the cornerstone pillars of their future continuously bonding relationship depends on it. If they can’t solve this one, then humanity is doomed.

Wednesday, August 05, 2009

Smoked Meat

China is the world’s largest producer and consumer of tobacco. It is a country that sees about a million tobacco-related deaths a year, a quarter of all such deaths worldwide.

China is a signatory to the World Health Organization’s Framework Convention on Tobacco Control, which aims to reduce global demand for tobacco products by encouraging developing nations to adopt anti-smoking measures that are now commonplace in developed countries. China signed the convention in 2003, ratified it in 2005 and became a full member in 2006.

The mainland is home to about 350 smokers, with about 3 million people taking up the habit annually. Nearly 60 percent of males aged 15 or above are smokers. More than one million Chinese die each year ─ one every two seconds ─ from smoking related diseases. And 540 million people suffer from passive smoking. China’s culture of cigarette smoking runs very deep and is very pervasive. Most of the founders of the People’s Republic, including Mao Zedong and Deng Xiaoping, were chain smokers.

One of the biggest difficulties the country faces in banning smoking is the fact that 56.8 percent of male doctors are smokers ─ the highest ratio in the world. The government only plans to ban smoking in all hospitals in 2011, when the convention’s timetable kicks in. According to the convention, China is required to ban smoking in all indoor public venues, office buildings and public transport from 2011.

The central government did not ban smoking in public entertainment venues, including movie-theatres, stadiums and bookshops until 1991, nor in airport terminals until 1997.

The nation grows a third of the world’s tobacco crops and manufactures a third of its cigarettes according to WHO. The State Tobacco Monopoly Administration has more than 500,000 employees in more than 1,000 companies across 33 provinces. China’s massive tobacco industry employs more than 20 million farmers and more than 10 million retailers. Pre-tax revenues from the tobacco industry amounted to 388 billion yuan in 2008 and accounted for about 8 percent of the country’s fiscal revenues. Any wonder Chinese are smoked meat?

I agree with professor Zou Fangbin, an economics professor at the Guangdong University of Business Studies who has proposed the scrapping of the state monopoly and allow companies in the private sector to compete in this lucrative deadly sector. How can the government regulate an industry it owns and controls? It can’t. The commercial and regulatory arms of the industry have to be separate. China is the only one of the 164 signatories to the WHO convention to have a monopoly.
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