Wednesday, May 27, 2009

Chinese Navy a Threat?

The PLA navy was founded in Taizhou, Jiangsu, on April 23, 1949, bringing together vessels acquired from the Kuomintang and left behind by the Japanese after World War II.

China’s state of the art nuclear submarine the Type 094, also known as Jin Class kicked off the PLA Navy’s three day 60th anniversary party celebration in the northeastern coastal city of Qingdao last month. Naval vessels from 14 countries, including the U.S., and naval representatives from 25 countries, joined in the celebration. Conspicuously absent was the Japanese navy. Japan was not invited for fear it might anger the Chinese public, still deeply scarred by the military invasion in the 1930s and its attendant atrocities.

The idea of inviting an international array of naval personnel was to build foundations for further exchanges and the PLA Navy’s integration with the international community.

Chinese nuclear submarines cruise the western Pacific and share the waters with the U.S. Pacific Fleet. China still has a long way to go as a naval power, but it is only a matter of time before Chinese warships routinely deploy to the Middle East and Africa, where over 75 percent of China’s vital oil imports come from.

China’s first aircraft carrier doesn’t even begin to match the 12 carriers the U.S. has. The U.S. carriers do not operate by themselves, but with powerful and capable escort ships in carrier battle groups.

China needs a reliable infrastructure for projecting and sustaining naval and air power. The U.S. is the pre-eminent exponent of this strategy. It has a long head-start over China. Its 5th Fleet is based in Bahrain, in the Persian Gulf, drawing ships on rotation from both the U.S. Pacific and Atlantic fleets.

U.S. defense spending equals the defense budgets of the next 15 countries combined and will soon exceed all other countries combined. In 2008 the General Accounting Office said cost overruns for the Pentagon’s 95 biggest weapons programs ─ just the overruns! ─ added up to $300 billion, more than double that of China’s $70 billion and Russia’s $50 billion combined military budgets.

With an overall military budget of more than $655 billion in 2009 – almost 10 times that of China’s, not counting the overruns – the U.S. is unmatchable.

Thursday, May 21, 2009

Human Capital

The 624,000 international students attending U.S. colleges and universities in 2008 contributed $15 billion to the U.S. economy. The majority come from India and China. For every 100 foreign students who received an American Ph.D in engineering or the physical sciences, the U.S. got 62 patent applications. As for the students who returned home, many took with them warm feelings toward America, democracy and free enterprise. Do the math. Yet, since the Patriot Act was enacted, all foreign student applications have to be screened by the Office of Homeland Security, which gets bogged down, forcing students to defer their studies for a year.

University presidents are justifiably outraged. “We don’t want our students saying we might as well go to Britain rather than the U.S.,” Yale University President Richard Levin said during a student recruitment visit to China in 2007.

While the enrollment of foreign students is just now rebounding in the U.S. in the wake of 9/11, it is increasing dramatically at universities in Britain, Germany, Australia, New Zealand and Singapore. The European Union is even considering offering citizenship to foreign students who complete their doctorates at European universities.

Technological leadership is the key to prosperity and security, and America remains the world’s technology leader – for now. But, as highlighted by a 2005 report from the National Academies, the U.S. lead in science and technology is not guaranteed. America must now “prepare with great urgency to preserve its strategic and economic security,” the report said. Asian universities now produce 47 percent of engineering graduates worldwide and foreign-born inventors account for nearly half of all U.S. patents.

China has moved up to third place in the world after Japan and the U.S. in the number of patent applications filed. According to the World Intellectual Property Organization, Chinese inventors submitted 173,327 patent applications in 2005, a 33 percent increase over the previous year and the biggest leap in submissions of any country that year. Japan had the most filings followed by the U.S.

More than half of the high-technology startups launched in America between 1995 and 2005 had at least one founder of overseas origin, a 2007 study by Duke University in Northern Carolina found. It revealed that in the Silicon Valley, 52.4 percent of startups in the past decade had at least one founder of foreign origin, significantly higher than the California average of 38.8 percent and the national average of 25.3 percent. Sergey Brin, from Russia, co-founded Google. A German, Andy Bechtolsheim, and Vinod Khosla from India founded Sun Microsystems. Jerry Yang, a Chinese, co-founded Yahoo.

The result is that the U.S. is losing its dominance in critical areas of science and innovation, as evidenced by the rise of foreign patents. “The rest of the world is catching up,” said John E. Jankowski, a senior analyst at the National Science Foundation, the federal agency that tracks science trends. “Science excellence is no longer the domain of just the U.S.” This is best exemplified by the number of patents registered today. Asians, most notably Chinese and Indians, have become more active and in some fields have taken the innovation lead. The U.S. share of its own industrial patents has fallen steadily over the decades and now stands at 52 percent.

China has invested heavily in human capital that promises to sustain growth and create greater prosperity. Parents in China spend $90 billion a year on their children’s education. This is over and above what the government spends. Government and families constantly increase their investment in primary and secondary education. Elite English private schools are setting up campuses in China to capitalize on the educational opportunities. Given the excellent core curriculum available across China to its 230 million students, the country is well positioned to continue to upgrade its human capital over the next decade. Shouldn’t America be doing the same?

Friday, May 15, 2009

China at Crossroad

China is at a political and economic crossroad that few in America or the West fully appreciate. For the first time since China embarked on its economic reforms in 1978 and lifted hundreds of millions of people out of poverty, China’s political leadership is faced with its greatest test of political survival. President Hu Jintao has gone so far as to say that turning the challenges posed by the global credit and economic crisis into opportunities will be a test of the Communist Party’s capacity to continue to govern. China recognizes it needs to stand on its own two feet and not rely on exports.

The task is daunting. Household consumption in 2007 made up just 35.3 percent of China’s gross domestic product, a record low for a major country in peacetime. In the 1980s, it was over 50 percent. By comparison, household consumption in the U.S. in 2007 made up 72 percent of GDP.

China must make radical spending changes from infrastructure to social investments which requires giving people more disposable income. More household subsidies, especially in the areas of health care and education, is what is needed. The problem, believe it or not, is that China does not have the bureaucratic infrastructure in place to minimize waste and corruption.

The other reality is that returning money to the people through lower taxes or spending on social programs is not a high priority in China because its leaders do not have to run for re-election. In China, officials are held accountable to their superiors, not voters. Hence most officials are afraid to make a mistake and take the same bureaucratic road as their counterparts in America. They just want to make it to retirement without taking any risks that could cost them their job.

Thus, Chinese citizens who are unable to vote out their leaders or collect compensation from the courts express their rising anger in protests, riots, strikes and political demonstrations that are unnerving the Communist Party leadership. One must keep in mind that public demonstrations are not permitted in China. So when people do take to the streets at great personal risk, they do so because they want their leaders to notice and do something about it, or lose their “mandate from heaven.”

Millions of laid-off workers and Chinese investors in the local stock market who lost trillions of yuan ─ Shanghai was the worst performing market in 2008 ─ across China are protesting, smashing windows, offices, overturning police cars and scuffling with police. Even police have gotten into the act. Auxiliary officers in Hunan Province surrounded a Communist Party office in December 2008 to demand higher wages. Chinese investors in China’s collapsed market are also demanding an American-style bailout.

Tuesday, May 12, 2009

Pax Americana is Passé

The U.S.-led, post-World War II world is done and over, thanks to America’s failure to adhere to the principles of the Founding Fathers. Compromised national and global leadership, more than $10-trillion in debt and the ignition key that sparked the global financial crisis in its hands, have all contributed to America’s shining city upon the hill losing its luster.

The world’s sole superpower abused its global sheriff’s role with unnecessary wars, failed financial instruments and basic misreading of people’s needs ─ at home and abroad. America is no longer the Mecca of modernity, innovation and economic prowess. The era when America was the global locomotive that dictated the rules of international trade, finance and political affairs is over.

America is now perceived as a moral and political failure, as well as a financial and capitalist catastrophe by the developing world. China, on the other hand, because of its centrally controlled prudent fiscal, development and capitalist model that endowed it with more than $2 trillion in reserves, is fast becoming a viable and more acceptable alternative model. Cash-rich China is in a much stronger geopolitical position than cash-strapped America to move aggressively in the developing world and gain access to their commodities and natural resources.

The new world order that will succeed Pax Americana is one in which China will play a dominant and leading role, if for no other reason than it is the biggest holder of U.S. government bonds, accounting for more than 35 percent of the total held by foreign central banks. It is common knowledge in any bankruptcy proceeding that the lead creditor has a lot to say and the debtor has to listen, whether they like it or not. Taken with China’s model of centrally managed mercantilism which is a preferred model for developing countries, especially dictatorships, America must accept the fact that its failure to heed the admonitions of the Founding Fathers of the Republic has rendered it morally impotent.

Most people in Japan, South Korea and China favor a Northeast Asian free trade area including the three countries. Most Americans, on the other hand, are opposed to regional or bilateral agreements.

China must be viewed as a partner, not a competitor. If America insists on viewing China as a competitor, it will lose the competition. It already has. America has to accept China as a willing collaborative partner. America can no longer ignore the more than 230 years of U.S. business success in China and the political collaboration that goes hand in hand with that success. U.S. exports to China have grown much faster than to any other trading partner. In 2007 they grew by 18 percent and since 2000 they have grown by 300 percent. The U.S. is enjoying a resurgence in exports to China, which are driving productivity gains at a time when the U.S. economy critically needs it. The good Sino-U.S. relationship that exists today is a Bush 43 foreign policy success, built since January 1, 1979, when the two countries established diplomatic relations.

The Beijing 2008 Olympics showcased China’s ascendancy, not only as a sporting powerhouse with their record haul of gold medals, but in the global competition for economic supremacy. The Wall Street financial meltdown that cast its depressive shadow on the global economy has made capitalist America a “bailout nation” as communist China has become the center of U.S. capital and the new Confucian capitalism. China is fast becoming the world’s economic leader.
America is losing its perch of global supremacy. In 2000, U.S. stock exchanges accounted for about half the value of global stock markets; at the beginning of 2008, they accounted for just 33 percent ─and shrinking.

America can only help itself by helping China embrace the future with it as a partner. There is no more room for fear-mongering or bashing of China. The reality of modern China has to be accepted for what it is. America must broaden and deepen its ties with China into a concrete partnership with meaningful economic and military alliances. America must accept the fact that China is part of the solution and not the problem. America must start, sooner rather than later, taking the long-term view of its beneficial relationship with China.
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