China follows British footsteps to African wealth | BBC News

China follows British footsteps to African wealth

By Justin Rowlatt BBC News, Angola

Chinese investment in Angola is bringing back to life one of the greatest rail routes in Africa, the Benguela Railway. In return, China gets oil - but are accusations of a colonial-style scramble for resources fair?

The passengers squatted beside the railway tracks. It was impossible to tell how many there were.

In the darkness their bodies merged with great shapeless bundles of luggage, but there were certainly hundreds.

Then with the first flush of dawn, and bang on time, the bright beam of headlights appeared in the far distance.

The crowd immediately began to stir and jostle for position, even before the train had eased to a halt.

They threw up their boxes and bags into the open cattle trucks and scruffy passenger carriages, then scrambled after them.

The line stretches from Angola's west coast to the Zambia border

Tony, the railway official who was looking after us, urged us to get moving too.

"It will not wait for you," he warned.

He hurried down to the very last carriage, and gestured at us to board this battered old compartment.

"You can leave your things safely here," he said.

We did as he said and climbed up the steps, and into another world.

Teak-lined stateroom

The contrast with modern Africa could not have been greater.

We were in a teak-lined stateroom, the windows shaded by slatted blinds.

TV SERIES Justin Rowlatt has embarked on a global journey to explore the effects of China's policy of "going out" into the world to secure the energy and raw materials its rapidly growing economy needs. A two-part documentary series will air on BBC Two in early 2011. He will also be reporting regularly for the BBC News website. Chinese karaoke fans sing Angola's praises An invitation to dine in the Amazon Brazil's Chinese bikini problem Difficult times for blue-collar America Chinese chicken farmers ruffle Zambian feathers

There was a table with a crisp white tablecloth surrounded by four heavy chairs and, in the ceiling, a big silver fan.

We had stepped back into Edwardian England.

Tony laughed at my astonishment. He had known we would be impressed.

"You should feel at home," he teased.

"This is one of the original British carriages, where the directors of the railway company would travel."

Our grand accommodation was a remnant of what was once one of the great routes of Africa - the Benguela Railway.

It was an engineering triumph, stretching 1,000 miles up from the Angolan coast, right into the southern Congo.

Some people mutter that it is really just another scramble for oil and other resources Angola's railways back on track

The railway took almost 30 years to build and cost the equivalent of hundreds of millions of pounds - as well as the lives of many of the indentured labourers who worked on it.

But little remains of the glory of the Benguela now. Until very recently all but a tiny stretch of the line was closed.

The railway was one of the many victims of Angola's 27-year-long civil war.

Now it is being rebuilt. Not, needless to say, by the British, but by the Chinese.

Back in Luanda, the Angolan capital, I had heard a lot of anxiety about the Chinese move into Africa.

Some people mutter that it is really just another scramble for oil and other resources.

It is true that Angola has some of the biggest oil reserves in Africa.

But as I looked around at the expensive fittings in our state car on rails, it looked as if motives of the men who built this railway were pretty similar.

The Benguela railway was not a philanthropic project, but a business investment. It was built to ship out the incredible copper wealth of central Africa.

Rolling supermarket

As soon as the train pulled into the first station - a dusty stop in the middle of dry scrubland - it was clear that the recent Chinese work on the railway is providing economic benefits too.

Those huge bundles I had seen by the passengers were thrown open.

Our people have been fighting for so long, they don't know how to build anymore Angolan woman

Inside were huge mounds of tomatoes, onions, greens, dried fish and great bloody lumps of meat.

The hundreds of people waiting surged forward, yelling and rushing from one carriage to another to barter for the goods on offer.

I realised that this train was, in effect, a rolling supermarket and the passengers were small businessmen and women.

"I couldn't do this before the railway was fixed," one large woman selling plump red tomatoes told me.

"Before, I had to travel by car which was much more expensive."

She giggled shyly and acknowledged that she was making better money now. "I am not rich, but a bit richer," she told me.

So how did these traders feel about the Chinese helping to refurbish the line?

They all agreed that the Chinese were very hard workers and had done a fine job.

But should the work not have gone to Angolans, I wanted to know?

"Our people have been fighting for so long, they don't know how to build any more," the woman with the tomatoes told me with a wry smile.

Fair deal?

Of course the Chinese labourers get paid - and their wages come out of a cheap loan which the Chinese government made to the Angolan government.

And that loan, in turn, is paid for in oil.

So in some sense oil money is still the motive.

BENGUELA RAILWAY Opened in 1928 to transport copper deposits It consists of 840 miles (1344 kilometres) of track Twenty-seven years of civil war destroyed much of the railway

But, as the train grunted and clanked on through the savannah, with its occasional vivid red acacia tree, it seemed to me that what was happening now was very different from what the British had done here.

The Angolan oil which pays off that loan is now sold abroad at the prevailing market rate.

Very different terms from those of the British, who carted hundreds of millions of tons of precious African copper down this line without paying anyone a penny for it.

So, while it may be tempting to see today's China as just another imperial power out to exploit the riches of Africa, it seemed to me that there is a big difference between the Chinese presence and the British one.

Though, sitting back in my state car as the train rattled on up the line, I had to admit those British railway pioneers did know how to travel in style.

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via news.bbc.co.uk

The Chinese have been wisely exporting their culture to the developing world in hopes of spreading their uniquely Chinese model for economic development, much the same way the west was able to export its model of free market capitalism to emerging markets post-WWII up until Reagan and the collapse of the Soviet Union. I have been blogging about this phenomenon for years, but the mainstream press is finally starting to wake up.

Chinese family businesses: Dusk for the patriarchs | The Economist

Chinese family businesses

Feb 3rd 2011 | HONG KONG | from PRINT EDITION

COMPANIES can survive for hundreds of years. Their founders cannot. Hence the problem that eventually faces all family-owned firms: how to hand over from one generation to the next. In Stanley Ho’s case, the transition is proving stormy.

Mr Ho is the gambling king of Macau: the founder of an empire that includes casinos, ferries, an airline, hotels and commercial property. He is also 89 years old, in poor health and less lucid than he once was. His four families are fighting like harpies over his assets, which are held within an array of complex structures.

It is messy: Mr Ho (pictured, with his third wife and their daughter) had four concurrent “wives” in a territory that does not recognise polygamy. Three are still alive, plus at least 16 children. Mr Ho apparently had a stroke in 2009, prompting his relatives to start struggling for control.

Their feud has become a YouTube sensation. Every few days, a wheelchair-bound Mr Ho issues a statement that contradicts his previous one: either accusing his relatives of robbery or exonerating them. Throngs of Hong Kongers have joined the journalists outside the family’s many opulent residences, straining for the latest whispers. Two photographers have had their feet run over by limousines.

The Ho saga has prompted fresh scrutiny of other firms that will soon face succession tussles. A major investor in two of Mr Ho’s Macau companies (one controlling casinos, the other ferries) is Cheng Yu-tung, 85, who runs his own swelling conglomerate, New World Development, with unresolved succession issues.

At Sun Hung Kai, Hong Kong’s largest property owner, the succession seemed settled in 1990 with the death of the founder and management passing to his three sons. But turmoil erupted in 2008 when the founder’s then 79-year-old widow, Kwong Siu-hing, emerged as the true power, pushing out her eldest son, Walter, who had been chief executive. On Sun Hung Kai’s board sits Lee Shau-kee, 82, who runs another property company, Henderson Land, with its own succession issues.

Any talk in Hong Kong about succession soon touches upon Li Ka-shing, 82, the territory’s richest resident, whose empire encompasses utilities and property. Much of his wealth has been pledged to charity, but no one knows who will run his firms when Mr Li dies. When he was abruptly hospitalised in 2006, shares in his listed companies immediately sank.

Many Hong Kong tycoons are getting old (see table). Typically, their fortunes date back to the early post-war years, when Hong Kong was a desolate rock, Macau was in decline and Singapore was a swamp. They built empires while keeping tight personal control, often using bewildering interlinked corporate structures.

Within a few years, dozens of publicly listed (but family-controlled) Asian companies will change hands. If history is any guide, the process will hurt, says Joseph Fan, a professor at the Chinese University of Hong Kong. A study he jointly conducted of 250 companies in Hong Kong, Taiwan and Singapore controlled by Chinese families found that successions tended to coincide with tremendous destruction of value (see chart).

There are exceptions. Sir Run Run Shaw, a 103-year-old media mogul, appears to be retiring in peace. On January 26th he announced that he would sell his controlling stake in TVB, Hong Kong’s largest television network, for more than $1 billion. It was the last public link to an empire that once included the largest private film studio in the world. Mr Shaw retired from active management on his 100th birthday, in favour of a much younger manager, his then 77-year-old second wife, Mona Fong.

Many patriarchs built their fortunes with risky bets: movies, the first casino, manufacturing. But many have shifted into merely collecting rents from property and related businesses (ports, hotels, retail) or from government concessions (electricity, telecommunications, gas, casino licences).

The simplicity of the underlying businesses may account for the ferocity of the family battles—it is not hard to make money if you own a casino near mainland China these days. However, in areas that are genuinely competitive, such as banking, Hong Kong’s family firms have been largely elbowed aside by multinationals.

Patriarchs add value in two ways that do not appear on balance-sheets, says Mr Fan. Their reputation ensures that banks will lend money to their companies. And their relationships with government are often lucrative. Alas, these strengths are hard to bequeath to one’s children. Which is why some Asian empires will struggle to outlive their founders.

via economist.com

Very interesting article on the tumultuous fall of Hong Kong's great 20th century tycoons, or the inglorious rise of the next generation of Chinese business leaders, depending on your perspective.

Bamboo scaffolding (more images)

See the full gallery on posterous

Gas Prices in Hong Kong

While there are few gas stations to be found throughout Hong Kong, the prices are quite reasonable by US standards. I found this station while wandering by myself in the middle of the night down a secluded street near the US consulate (Kennedy Road I believe). With the HK$ exchanged at a pegged rate of approximately US$7.75, the cost of regular unleaded is a bit less than $2 and premium is slightly over $2. This at least partially explains the city's very reasonable taxi fares.

Bamboo Scaffolding

I cannot seem to get over my fascination with bamboo scaffolding. Its almost as if the scaffolding is weaved (woven?) together with the excess material sticking out the top, much like an unfinished wicker basket.

China the Mother of All Grey Swans / Japan Past the Point of No Return - October 2010 - By Vitaliy Katsenelson

via scribd.com

Is China on the verge of imploding? Is the excess and idle capacity going to drag the entire country under, and with it the rest of the world?

Many very interesting points raised in this presentation from Vitaliy N. Katsenelson of Investment Management Associates.

China Permits Foreign Investment WFOEs in Medical Industry | China Briefing News

China Permits Foreign Investment WFOEs in Medical Industry

Dec. 14 – In a follow up to the piece we wrote last week on China opening up its medical industries to foreign investment, here we offer readers a direct translation of the pertinent text taken from Guobanfa [2010] No. 58 issued on November 26.

Article 5: Allowing overseas capital to establish medical institutions

Opening up shall be further deepened for medical institutions and investments in medical institutions by overseas capital shall be adjusted into permitted foreign-invested projects.

Overseas medical institutions, enterprises and other economic organizations shall be allowed to set up medical institutions through the form of joint ventures or cooperative joint ventures within China with Chinese medical institutions, enterprises and other economic organizations to gradually cancel restrictions over the proportion of equity held by overseas capital.

Eligible overseas capital may establish wholly-owned medical institutions within China on a pilot basis and restrictions shall be removed gradually.

Overseas capital may make investments in both for profit medical institutions and non-profit medical institutions.

Overseas capital shall be encouraged to establish medical institutions in the central and western parts of China.

Capital from Hong Kong SAR, Macau SAR and Taiwan region in establishing medical institutions in the mainland shall enjoy priority support policy in accordance with relevant provisions.

Article 6: Simplifying and standardizing examination and approval procedures for overseas capital making investments in medical institutions

The establishment of Sino-foreign joint venture medical institution and Sino-foreign cooperative joint venture medical institution shall examined and approved by health authorities and commerce authorities at the provincial level, among which the establishment of Chinese medicine hospital, Chinese and western medicine hospital and minority medicine hospital shall seek the opinions of Chinese medicine administration authorities at the provincial level.

The establishment of foreign wholly-owned medical institutions shall be examined and approved by the Ministry of Health and the Ministry of Commerce, among which the establishment of Chinese medicine hospitals, Chinese and western medicine hospitals and traditional Chinese medicine hospitals shall seek the opinions of the State Administration of Traditional Chinese Medicine. Specific measures shall be separately formulated by relevant authorities.

At present, foreign investment is only permitted (with very rare exceptions) in the form of Joint Ventures, however the circular states the equity amount in favor of the Chinese partner may now be reduced. Initial pilot schemes will be permitted for the establishment of WFOEs, while the promulgation of the application procedures is still being worked on.

Also within the circular are the provisions for more “social capital” to be made available for the reform of public hospitals. It dictates the circular is intended to “stably transform some public medical hospitals into non-public medical institutions, appropriately lower the proportion of public hospitals, promote the reasonable distribution of public hospitals and create the situation in which multiple investments are made in medical institutions,” effectively meaning the door has now opened for a class of private hospitals to be both funded from overseas to service the domestic market.

This circular paves the way for far easier access to the large medical care industry in China for foreign investors. Further information concerning this development and the implications for interested parties may be made to Richard Hoffmann, senior legal associate at Dezan Shira & Associates. The firm handles numerous clients in China’s health care and medical industry and can be contact at legal@dezshira.com.

via china-briefing.com

Big news for the opening up of Chinese markets to foreign competition. It still probably makes little sense to try to operate on the mainland without a local partner, but a major step in policy regardless.

Bamboo scaffolding, the ultimate culture shock

The one thing that really jumped out at me within minutes of stepping off the train the night I arrived in Hong Kong on my recent visit was the bamboo scaffolding.

Perhaps its because I am the son, grandson and great-grandson of contractors. Or maybe its because I spent my summers during high school building steel staffolding for my dad's crews as a part-time job. Whatever the reason, I found myself absolutely fascinated by the skyscrappers built of what from a distance looks like popsicle sticks, but upon closer inspection is in fact bamboo tied together by nimble Chinese labors scrammbling up and down without harness.

Its truly an amazing sight of modern engineering that an innovative and modern skyscape like Hong Kong's could be born from such a 19th century building technique!

U.S. and China Agree to New Public/Private Healthcare Partnership | China Briefing News

U.S. and China Agree to New Public/Private Healthcare Partnership

Jan. 20 – China and the United States announced a new public/private sector joint partnership yesterday focusing on the healthcare industry. The U.S. Trade and Development Agency, the U.S. Department of Health and Human Services and the U.S. Department of Commerce joined with China’s Ministries of Health and Commerce to announce their support for the establishment of the new organization.

“The economic and social development of any nation depends on the health and productivity of its people,” said U.S. Department of Health and Human Services Secretary Kathleen Sebelius. “This partnership builds on a strong foundation of bilateral cooperation in this critical sector of our economies.”

The American Chamber of Commerce in China (AmCham-China) was an early proponent of this partnership on the U.S. side and applauds its establishment.

The Healthcare Partnership Program follows two highly successful, existing public/private partnerships that operate under AmCham-China’s umbrella, namely the Aviation Cooperation Program and the Energy Cooperation Program.

“The Healthcare Partnership Program is a milestone in U.S.-China cooperation in healthcare and will strengthen the contribution of U.S. companies to China’s healthcare reforms,” said AmCham-China Chairman Ted Dean. “Public/private partnerships like the Healthcare Partnership Program are important examples of how the two countries can come together for mutual benefit.”

The new public/private partnership was announced as part of Chinese President Hu Jintao’s official state visit to the United States this week. The Healthcare Partnership Program will be headquartered in AmCham-China’s Beijing office.

China Briefing broke the news of foreign investment being allowed into China’s healthcare and medical industries six weeks ago. Foreign investors may now establish WFOEs in the sector, our full overview of the applicable regulations are contained in our article “China to Allow Foreign Capital into Medical Organizations” and a translation of the regulations in this piece, “Foreign Investment WFOEs in China’s Medical Industry.”

Dezan Shira & Associates have been advising foreign manufacturers and pharmaceutical companies about establishing a presence in the China market, and obtaining the pertinent licenses, since 1992. Please contact the firm for legal and tax advice concerning investments into this industry at info@dezshira.com, or download the firm’s brochure here.

via china-briefing.com

The puzzle of China’s rising household saving rate | vox - Research-based policy analysis and commentary from leading economists

In an effort to reduce its sizeable current-account surplus, the Chinese government has made it a priority to “rebalance” growth in China by stoking private consumption. This column examines the determinants of the high household saving rate that keeps Chinese consumption so low.

Economists have repeatedly warned policy-makers about imbalances in the global economy, including those caused by the actions of China in running up a colossal current-account surplus. During the global financial crisis and the following global recession, this surplus shrank from 11% of GDP in 2007 to an estimated 5% in 2010, but many analysts view this as a temporary respite related to the contraction in trade and expect China’s current-account surplus to rise again (Baldwin 2009). Chinese government officials, meanwhile, have argued that the current-account surplus is driven by structural factors and that the exchange rate has little role to play in influencing the saving-investment balance. They have also made it a priority to “rebalance” growth in China by stoking private consumption. As part of this debate, we ask what determines the high household savings that have been keeping China’s consumption so low.

The facts

Gross domestic saving in China has surged since 2000, climbing to over 50% of GDP starting in 2007 (Figure 1). In particular, enterprise saving – including that of state-owned enterprises – has risen sharply in recent years. Government saving has also increased. Over this period, the share of household saving in national saving has not changed much, but this is mainly because of a fall in the share of household income in national income rather than a decline in the household saving rate (Prasad 2011).

Figure 1. Gross saving rates by sector

Source: National Bureau of Statistics (Flow of Funds data).

Figure 2. Household saving rates

Source: National Bureau of Statistics, Flow of Funds data and Urban and Rural Household Survey. Saving rate from national accounts is significantly higher than that from the household surveys. This discrepancy is common (it is present in most countries), and can be due to differences in definitions of income and consumption, methodology and sample coverage.

Chinese households save a large share of their disposable incomes and their average saving rate has increased over the last decade and a half (Figure 2). This pattern is particularly pronounced for urban households, which account for about two-thirds of national income. After remaining relatively flat during the early 1990s, the average saving rate of urban households relative to their disposable incomes rose from 18% in 1995 to nearly 29% in 2009.

This increase took place against a background of rapid income growth and a real interest rate on bank deposits that has been low over this period (and even negative in some years, as nominal deposit rates are capped by the government). This pattern of a rising household saving rate at a time of high income growth seems inconsistent with a certainty-equivalent life-cycle hypothesis model, which would imply that future high income growth should cause households to postpone their savings.

New explanations: Evidence from survey data

In our first paper (Chamon and Prasad 2010), we use data from the annual Urban Household Surveys to characterise household saving patterns. These are large annual cross-sectional surveys conducted by the National Bureau of Statistics.

We document that saving rates have risen across the board in urban China, but especially among households with relatively younger and older household heads. That has led to an unusual “U-shaped” age-saving profile (see Figure 3), where the saving rates are higher at the two ends of the age distribution of household heads. Typically, one would expect saving rates to increase with the household head’s age, peaking prior to his or her retirement, and then turning negative in retirement.

Figure 3. Urban household saving rates by age of head

Notes: Based on a 10 province/municipality subsample of the National Bureau of Statistics Urban Household Survey. Saving rates smoothed by a moving average with 4 neighbouring age averages. For details on the data, and how saving rates are defined, please refer to Chamon and Prasad (2010).

We test a number of conventional theories and find little evidence that they can explain these patterns. For instance, the data suggest a limited role for demographic shifts in explaining saving behaviour. The cohorts most affected by the one-child policy are not among the highest savers.

Instead, the declining public provision of education, health, and housing services (the breaking of the “iron rice bowl”) appears to have created new motives for saving. This can contribute to rising savings as younger households accumulate assets to prepare for future education expenditures and older households prepare for uncertain (and lumpy) health expenditures.

The inefficiency of “self-insurance” contributes to higher aggregate savings (as many households save in order to protect against a shock while relatively few may actually be hit by one). We estimate that the motive of saving for health expenditures accounts for an increase of more than 5 percentage points. The extensive privatisation of the housing stock has also contributed to savings. We estimate that saving for house purchases increased average saving rates by 3 percentage points relative to the 1990s, with the effect concentrated among households with younger household heads (that are less likely to own their dwellings).

While cross-sectional household data can help evaluate the importance of competing channels, it is less informative when saving rates have risen across the board, as is the case in urban China. If indeed rising uncertainty and the related increase in precautionary saving is an important driving force behind the trend in saving rates, the availability of panel data on household income could help quantify that uncertainty and gauge its potential impact on savings.

In a second paper (Chamon et al. 2010), we use a panel dataset from the China Health and Nutrition Survey. That survey does not provide information on consumption or savings but does have data on incomes that allows us to quantify the rise in income uncertainty and decompose the variance of income into components attributable to permanent versus temporary income shocks. We find strong trend growth in both the mean and the variance of total household income. Interestingly, the variance of permanent shocks to household income has remained relatively stable, while the variance of transitory shocks trends upwards. This result is in line with a large literature on how technological and sectoral shifts and the associated labour reallocation can generate higher transitory uncertainty even though some of these shifts themselves are permanent in nature.

Based on these results, we calibrate a simple buffer-stock/life-cycle model of savings to evaluate the implications of rising uncertainty on household saving rates. Under plausible parameter values, the rising transitory variance of income can explain about 4 percentage points of the increase in the saving rate among the households with younger heads. Households with older household heads that have already accumulated significant savings can more easily accommodate transitory shocks and this factor does not add much to their savings.

On the other hand, households with older heads are more affected by the pension reforms in 1997, which transferred urban pension obligations from employers (predominantly state-owned enterprises) to provincial governments. We estimate that a decline in the pension replacement rate from 75% to 60% of pre-retirement income (in line with estimates for the transition generation under the reform) can explain a 6-8 percentage point increase in saving rates for households with heads in their 50s. The initial effect is more muted for younger households, who have a longer time to adjust to the pension reforms. Thus, we are able to trace much of the increase in savings, concentrated among households with relatively young and relatively old household heads (the “U-shaped” pattern described above), to higher income uncertainty and pension reforms.

Conclusions

Our analysis based on cross-sectional and panel data sheds light on different motives that drive the saving behaviour of Chinese households. While the combined effect may be smaller than the separate estimates from the two independent approaches, the results are able to account for a substantial portion of the increase in average saving rates of urban households as well as the U-shaped age-saving profile of savings.

• We find that motives of saving for precautionary purposes due to rising income uncertainty and for housing purchases explains the rising saving rates of households with young household heads.
• Pension reforms and rising medical expenditures account for much of the rise in the saving rates of households with older heads.

The views expressed in this column are those of the authors and should not be attributed to the institutions they represent.

References

Baldwin, Richard (2009), The Great Trade Collapse: Causes, Consequences and Prospects, VoxEU.org, 27 November.

Chamon, Marcos, and Eswar Prasad (2010), “Why are Saving Rates of Urban Households in China Rising?”, American Economic Journal: Macroeconomics, 2(1):93-130.

Chamon, Marcos, Kai Liu, and Eswar Prasad (2011), “Income Uncertainty and Household Savings in China”, NBER Working Paper 16565.

Prasad, Eswar (2011), “Rebalancing Growth in Asia”, International Finance, forthcoming. NBER Working Paper 15169.

via voxeu.org

China Link Exchange (01.18.2011)

US, China ink $574mm in trade deals (MarketWatch)

The Short View | China's economic tightrope (FT.com)

China sovereign wealth fund to open an office in Toronto (MarketWatch)

China President Hu's Chicago visit will be trade mission, too (Crain's Chicago Business)

In US-China talks, which side has the upper hand? (Fortune)

'China factor' lures global hedge funds to Hong Kong (People's Daily)

Chinese ban on foreign real estate investment profits (Property Wire)

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100728chinareport_0.pdf (660 KB)

Finally: China stops shock therapy for Internet addicts due to lack of effectiveness data

China stops shock therapy for Internet addicts - Yahoo! Finance

It was more than two years ago when I first blogged about China's use of shock therapy to "cure" individuals of their internet addictions, and today it seems as if the Chinese have decided to abandon such cruel techniques.

Of course, the treatments are only stopping because research conducted at the institution administering the treatments showed it had no measurable effect on the usage of video games by the 3000 young Chinese who were chosen to participate in the program. I am not sure if this speaks more to the Chinese diligence for measuring and quantifying anything/everything, or to their cruel pragmatism when asserting their authority over its citizens. Either way, we should all take note of the casual acceptance of such draconian practices by the one government we are counting on to keep our country out of bankruptcy and our economy from going even deeper into the crapper. It is a scary future for America, a scary future indeed.

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Zhou Xiaochuan breaths fire into US Treasury markets with bold proposal: SDRs and the fall of the Dollar as global reserve...

Cross posted from my blog The World We'll Inherit.

Zhou Xiaochuan, Governor of the Central Bank of China has called for an internationally endorsed shift away from the Dollar as the world's reserve currency "as soon as possible" in advance of the G20 Summit. Zhou urged the International Monetary Fund (IMF) to expand use of Special Drawing Rights (SDRs) and move toward a "super-sovereign reserve currency".

Special Drawing Rights are defined on the IMF website as "The SDR is an international reserve asset, created by the IMF in 1969 to supplement the existing official reserves of member countries. SDRs are allocated to member countries in proportion to their IMF quotas. The SDR also serves as the unit of account of the IMF and some other international organizations. Its value is based on a basket of key international currencies."

This is a very radical idea and cannot be dismissed because (a) Zhou truly does hold the fate of the Dollar and the US economy in his back pocket; (b) the IMF Board of Governors has advocated expansion of the SDR allocations since 1997, with 131 members (77.7%) officially endorsing the proposal. 85% is needed to implement recommendations from the internal SDR review committee, which convenes every 5 years (next 2010). The US controls 16.75% of the total IMF vote, which granting the Obama administration de facto veto of all IMF resolutions. Zhou's plan called for additional currencies to be added to the basket used to value SDRs; encouraged SDRs to be accepted in international trade and investment so they can become established reserve; SDR denominated securities to be introduced. Obama has indicated he opposes any and all such measures.

It is hard to imagine the Dollar, the underlying grease that makes the world work smoothly for American businesses and politicians, is actually on the verge of becoming merely "part of the basket" as opposed to the peg to which each currency is valued. China is the largest holder of US debt and has tremendous leverage in the debate over the realignment of international currency regimes.

What is to prevent Beijing from coordinating a massive pooling of US debt holders in a Chinese managed international and developing market counter-part to the Federal Reserve? The collective Treasury holdings of the central banks in the 131 dissenting IMF member-states, Ivy Leagueuniversity endowments and personal fortunes of Billionaire philanthropists like Warren Buffettand Bill Gates alone would be enough to leverage a new mint for global reserve notes. It would be like stock-piling gold in Fort Knox to guarantee US debt to its creditors during the Depression (or at least I think it would be).

At what could have been a watershed in American history, Obama and his half-staffed Treasury have gone nearly 100 days in the opposite direction of the hopeful, Reagan-esque vision that candidate Obama was so widely praised for forging during his two-year campaign. The president has been either uncertain or unsatisfied with the qualifications of applicants for many critical bureaucratic appoints under his chief deputy Timothy Geithner. Perhaps Geithner is to blame for the lack of decisiveness within his department, but it matters very little for the freshman president with a HUGE to-do list. Regardless, these posts are critical for managing relations with foreign central banks and finance ministers and needed to be filled last-December.

Beijing ordered Zhou to make his aggressive proposal at a crucial moment for Tim Geithner, who had only begun to unveil their plans to combat the morgaged backed securities ailing the financial markets and clearly failed to fully ascertain the significance of Zhou's comments. Geithner was initially receptive and open to suggestions from Zhou, but his comments spurred a 4.2% decline in the Dollar across all currencies in less than 10 minutes. 15 minutes later he backtracked, and in his second press conference Obama reaffirmed the strength and long-term viability of the Dollar as the global reserve currency. Perhaps Geithner has yet to be briefed by his Under-Secretary for Foreign Affairs on the concerns of Chinese policy-makers.

**I searched for photos of Secretary Geithner with the Zhou, and found none - though I did find dozens of candid snapshots of Geithner's predecessor Hank Paulson enjoying face-time with China's top banker. Perhaps Geithner should call on Paulson to fill the void while he continues to recruit his underlings...

Chinese detail ambitious space program in 2008

AP: China to Launch Rockets in Olympic Year



Wired Science: China Details 2008 Space Plans



The Chinese government has just released details of its planned space flights for 2008, leaving few to doubt the true emergence of a third player in the geo-political battle for control over near-Earth orbit. The boldest mission will be the third manned space flight launched by China and will feature the first spacewalk by a Chinese astronaut.



The much anticipated mission will be Shenzhou 7, and is slated for October. This will be a glorious time in Chinese history, provided the government can manage the seemingly impossible challenge of the Summer Olympics, and this human spacewalk will be the cherry on the proverbial sundae for the CCP leadership.

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2008 brings the reality of modern China to Western living rooms...

Image by kk+ via FlickrImage by kk+ via Flickr

For the last decade, China has been meticulously grooming its capital city, Beijing, for the curious eyes of eager Western consumers and potential business opportunities offered by the 2008 Summer Olympics. The Chinese Communist Party (CCP) has made grand promises of wealth and universal well-being to its vast citizenry, all of which hinge upon the near flawless production of the most anticipated event in the history of the Middle Kingdom.

Can the government contain the political powder-keg over which it rules? Will the world accept a Chinese superpower under Communist rule? History is hanging in the balance and nobody (least of all the CCP) knows what to expect in 2008, but I certainly look forward to sharing my thoughts on how America, and the West generally, should respond to the emergence of a more powerful and confident Chinese people.

I also welcome the submissions of papers, presentations, essays or videos anyone would like to contribute. Below I have embedded a great presentation compiled by a dear friend of mine, Victor Lang, who is a native of Hong Kong. Victor and I share many similar interests, such as China-Africa relations, international perception of Chinese politics, and domestic censorship by the CCP and corporations it intimidates to comply with their ridiculous media policies.

Happy New Year to all China Wakes readers and a toast to what will hopefully be remembered as the greatest year in the history of mankind's largest and oldest civilization.

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