From the other side of the Silk Road: MSFS in Saudi Arabia (2012)

Georgetown Historian John McNeill on US-China Cold War Parallels

[GJIA] What similarities or differences do you see with the situation developing between the US and China now and that which developed between the US and the Soviet Union after World War II?

[McNeill] I don’t see a strong historical parallel. In the late 1940s the US had all of the economic advantages and most of the geopolitical ones. For a period the US possessed half of the world’s industrial capacity and had politically-assured access to most of earth’s oil and coal resources. In post-1945 USSR, meanwhile, people were literally starving in provincial cities. Its political system had some appeal around the world, and it acquired an important ally (for ten years) with the 1949 Chinese Revolution. But its political position was effectively circumscribed by US containment efforts. Today, the authoritarian and nominally communist PRC has a much stronger economic and political position than that of the USSR from 1945 to 1991, while the US economic position is weaker relative to that of the late 1940s.

Importantly, China and the US are economically interdependent in a way that the US and USSR never were. China holds trillions of dollars of US debt and could destroy public finance in the US in a week if it so wished. But China also needs the US to keep buying its products. Even after the US started selling grain to the USSR in the 1970s those two economies were never greatly intertwined. In both cases the pairs of countries were by some measures the two strongest in the international system, but beyond this, I see only a weak parallel.

Link to the full interview:
http://journal.georgetown.edu/2012/02/07/parallels-and-precedents-five-minutes-with-historian-john-mcneill/

China's Demographic Transition and the Hukou System

Google now has a cabinet position in Taiwan

More significant business-government interactions (also known as public-private partnerships) are an emerging trend in international relations. Google's having a cabinet position (minister without portfolio) in the current Taiwan government is significant evidence of this.

The google data center that is being constructed in central Taiwan will be a huge boon to the local economy.

Graphic is from the Taipei Times article: Cabinet reshuffle sees 16 new names

Madeleine Albright on the future of U.S.-China Relations

KGA: Based on your experience, both in office and from what you’ve observed in recent trips to the country, what do you believe is the likely future of the U.S. relationship with China?

MA: It’s hard to predict. President Obama is looking for partners, for countries we can work with. There are discussions about the Chinese helping the Europeans out of their debt crisis. We’d like to see China not only as a global power but as a power that actually takes responsibility and isn’t a free rider in the international system.

On the other hand, there continue to be issues such as the South China Sea. Secretary Clinton has suggested that there is a multilateral solution, rather than the Chinese unilaterally deciding that they have access to the sea and the islands and arguing with Vietnam and the Philippines. I was just in Beijing for the third high-level dialogue between a bipartisan U.S. delegation and the International Department of the Communist Party of China, and as a result of those discussions, I got the sense that there are actually a number of issues where we can see commonalities. For example, trying to deal with global problems related to the environment and energy.

It is one of those very fluid relationships that depend on who’s in power, and we’re going to see how that works with the transition in power in China this year, coupled with the fact that we have an election going on at home. In every election that I’ve seen the challenger tries to portray China in the worst possible way, and we’re already seeing that China-bashing going on. So it is a peculiar year to look at it all. The future of our relationship is still very uncertain, and this can be viewed as a threat or an opportunity- or treated as both.

As orginally published in the Georgetown Journal of International Affairs blog page on November 14, 2011. Please find the rest of the interview at the Georgetown Journal of International Affairs

Summer 2011: Ulaanbaatar, Mongolia

Link to a video on my summer work project.

Enjoy!

Far East Forum Special Report from Suqian, China: Refining Small Business Development in China- (Posted by 任翔 on behalf of 安东武 )

Refining Small Business Development in China

ZHANG CAIJUN

So I've never set foot inside a developing-world corn oil refinery until today, but after an hour climbing fractured sheet metal staircases to various levels of gleaming freshly-installed machinery, I now have a basic understanding of both the production process and the business challenges facing its ebullient and ambitious owner. At this point a lack of business and management training are pretty much the only hurdles between Zhang Caijun and his goal- selling his own corn oil brand directly to customers. He has already secured access to a line of microcredit through Opportunity International (OI) China's Suqian branch, where I'm working this summer.

Zhang demonstrated the function of each machine in the factory with intimate familiarity, for he had singlehandedly overseen their purchase and installation, and is primarily responsible for their operation, maintenance and replacement. He seemed to take almost a father's pride in sharing the production process with us, from start to finish.

Running at full capacity the factory requires only five additional employees, whom he trains personally. At this point he conducts every administrative aspect of the of the business himself. The result is forty tons of kitchen-ready corn oil per day, which is sold at rock-bottom prices to distributors, slapped with their label, then shipped and sold at much higher cost to supermarkets and food manufacturers. Starting as an uneducated corn oil peddler, Zhang was able to build the factory from the ground up and secure a series of loans to purchase new equipment (the hardware) and refine his product, yet he lacks the training and expertise (software, as he described it in Mandarin) to transition into a company capable of marketing and distributing its own brand.

Zhang's dilemma is how to cut out the middlemen (distributors), when the only public advertisement he has bearing his own label is printed on the sign above the factory, and his brand recognition is limited to a handful of tenants who rent property on the compound during the off-season to help him make ends meet, along with a small cohort of ten part-time* workers.

OI CHINA

Visiting the workplaces of OI China's microfinance clients affords a unique look into business in its infancy- all of the genetic material is present for evolution into a larger and mature entity, but things are underdeveloped, awkwardly proportioned, in need of guidance- often in the form of financial support and professional training.

The CEO of OI China- a personable Australian of Chinese descent and stalwart Christian faith named Aaron White- privately compared his microfinance philosophy to the holistic approach of traditional Chinese medicine. Western medicine and capitalism tend to favor the scalpel: isolate and remove the harmful or unproductive elements, then prescribe and administer an external cure based on what has empirically proven to work best for the greatest fraction of test cases.

Aaron's strategy (paralleling Chinese medicine) evaluates the subject as a holistic individual, determines what is out of balance, and then patiently sets to work remedying that imbalance. Operationally, this can be accomplished through small loans with conditions and repayment plans tailored to the unique business cycle of the client's industry, through financial or management training from volunteer consultants*, or to insurance policies which help hedge against drought and other factors not commonly covered by commercial financial services. (Microfinance institutions (MFIs) abroad often also collect savings, which helps both client and MFI, but government regulations at the state and provincial levels currently prohibit this in the PRC.)

When I ask the clients we meet why the choose OI China as a business partner, their first response usually concerns the flexibility of repayment options, followed by the personal relationships developed through frequent check-ins and visits, and finally the training services offered by the organization. Many clients lack collateral or are seeking such small loans that banks aren't interested in them as profitable customers, so microfinance providers may be their only option. Competitive interest rates relative to the MFI competition, and the use of innovations like mobile banking (using vans to reach more remote clients; when they reach sufficient scale they will look into partnering with China Mobile to provide cell phone banking), are helping OI China to quickly expand into rural areas.

That's all for now out of Suqian. Until next time,

安东武

*I've learned from other site visits that production in many of the areas rurally-based industries is spotty during the harvest season, because higher relative wages (or the farmers' own family demands) gathering wheat, rice, and other crops pull laborers out of the factories.

*One consultant, David Mumma, accompanied us to Zhang Caijun's oil factory- he was involved with shoe manufacturing factories throughout East Asia until retirement. The other intern here in the office with me is Tracy Quek, a former journalist for Singapore's Straits Times and current master's degree candidate at Johns Hopkins' SAIS in DC.

Taiwan's Soft Power Potential

Taiwan touches your heart -- or so the old slogan of its tourism bureau tells you. Warm fuzziness aside, I've always found the slogan to be a good place to start a discussion on Taiwan's soft power. For whether Taiwan manages to touch the hearts of people outside of its borders is fundamentally dependent on whether it manages to create and employ soft power. The following are some of my thoughts on the subject, fleshed out with the invaluable help of two friends from UC Berkeley.

"Soft power", by the definition of Joseph Nye, is "the ability to get preferred outcomes through the co-optive means of agenda-setting, persuasion, and attraction". This is in contrast to "hard power" -- the coercive power of military or economic might. Taiwan is interested in soft power because, quite frankly, its hard power (particularly military power) resources are very limited. It therefore behooves Taiwan to look to soft power as it designs strategies to secure its goal of gaining a seat and voice in the international community. 

Taiwan's current soft power strategy seems involve an aggressive tourism blitz. It's a good start, but this strategy in and of itself only sets up Taiwan to be the Hawaii of China. It doesn't necessarily improve Taiwan's ability to attract, persuade, or set agendas on the international issues that matter. In short, it's not enough. But then, what would an effective strategy look like?

The Core Messages:
If Taiwan's goal is to gain a seat and voice in the international community, it needs to make sure that its country branding and public diplomacy policies broadcast two key messages:

1. Taiwanese people are warm, open, and generous. 
2. Taiwan intends to be a responsible stakeholder in the international community. 

The first message is important because, in the end, soft power is about making oneself well-liked. The second is important because it implies the notion that international participation isn't about nationalism or secessionist sentiment -- it's simply a matter of being responsible.

The Shining City on the Hill:
Taiwan has several key attributes that it can derive soft power from. It has a strong market economy,  a functioning democratic government, an attractive popular culture, free speech and press, and mostly uninhibited Internet access.

Since Taiwan is governed by the Republic of China, it is often juxtaposed against mainland China, which is governed by the People's Republic of China. Notice that a lot of the power resources listed above are those that the mainland doesn't have. What Taiwan can therefore do is use these to frame itself as the China that the mainland can strive to be --  a possible future for mainland China where a democratic system can co-exist with a reasonably stable (dare I say "harmonious"?) society. This is a variation of what Joseph Nye calls the "city-on-the-hill" effect.

Citizen Diplomacy:
Mainland China primarily uses soft power strategies that are top-down and state-driven. Taiwan should do the opposite -- put citizen diplomacy in the forefront of its strategies. In fact, I would argue that Taiwan should have its youth and students spearhead many of its policies.

There are two reasons for this. The first is that young people are generally better versed with social media and networking. The second is that things that young people say are going to sound a lot more earnest and genuine than anything that comes out of a government bureaucracy.

Student Exchange:
Based on its power resources, a long-term strategy that Taiwan can implement is what I call the "Rhodes Strategy" -- ensuring that a generation of world leaders has set foot in a country in their formative years as students. In fact, Taiwan can frame itself as a potential political future for mainland China, and then augment that "city-on-the-hill" effect by creating an elite student exchange program that teaches comparative politics in the Chinese-speaking world.

This program can be a joint-project between National Taiwan University and Academia Sinica. In it's test-pilot stage, it can form a partnership with University of Hong Kong to attract Hong Kong's top students. If this works out, I recommend branching out to other top schools, perhaps including:

• Harvard's Kennedy School of Government (U.S.) 
• Georgetown's Walsh School of Foreign Service (U.S.) 
• Columbia's School of International and Public Affairs (U.S.)
• National University of Singapore (Singapore)
• Peking University (PRC)
• Fudan Unviversity (PRC)

Colbert Report: The Kim Bojang-ils

The Colbert Report
Tags: Colbert Report Full Episodes,Political Humor & Satire Blog,Video Archive

Last week, Stephen Colbert poked fun at North Korea and its Dear Leader.

"Without tap dance technology, Kim Jong-il will never be able to crush his people with a jazz hand."

Real Estate in Asia: Where are the bubbles, and where is it safe to invest? Far East Forum Special Edition from Ulaanbaatar, Mongolia

People have been talking about it for more than six months. Various and sundry predictions as to when it is going to happen have floated around analysts desks, newspaper editors ears, and even across the coffee or tea table. Yet, thus far, there has been scant definitive, damning evidence and even less written on the subject. I am of course referring to the Mainland Chinese real estate boom (soon to be bust).

Last week’s WSJ article did a tidy job of explaining where the market is heading in Beijing. There is really no telling how fast this is going to happen. Prices have been skyrocketing in Shanghai and Beijing (in particular) as well as Hong Kong over the past few years. Just this past fall the Beijing government attempted to cool the market via restricting home ownership to two properties per person.

This has a number of important implications for the world, as it could be a burst as opposed to simply a ‘deflation.’ Real estate risk is substantial in China because much of the growth has been predicated on increasing land and property values. This will no doubt have an impact on commodity prices for things like sheetrock, steel, copper (as pointed out in the WSJ article), as well as numerous other building supplies.

In addition to the commodity price downturn, Chinese banks holding mortgages could face problems similar to those experienced by US banks during the financial crisis. If the property values decline by 10-20% (as this article suggests), there could be a drastic increase in default risk.

In Hong Kong, the local government is taking up a number of measures including building public housing, re-zoning land, lowering the mortgage amounts that can be borrowed, penalizing back-to-back sales (they have a multi-tiered penalty system within 2 years, and a 15% penalty if a property is re-sold within 6 months!), and increasing the cost of buying for non-residents. (See the South China Morning Post’s article entitled. “Tough Measures to cool homes market”). All of these measures are designed to slow a market whose prices have gone up 18% in the last year (See SCMP’s “Market boom leads to gloom”).

Even across the Strait in the de-facto independent Taiwanese market, prices are still on the rise (somewhere between 10-20% depending on location). There was a lot of speculation about the sharp price increases after Taipei opened the Taiwan home market up to Mainland Chinese in June 2010. The government in Taiwan has also acted to cool the prices by introducing a luxury tax on properties that reach a threshold value. This has apparently worked to some extent because brokerages reported a 20-30% decline in sales after the announcement of this policy (See the China Post’s article entitled “Home prices rise in May despite luxury tax: real estate firms”).

All this begs the question, where should real estate investors send their money in Asia? Based on my own recent experience, I suggest Ulaanbaatar, Mongolia as a destination. Rent prices here are comparable to many American cities (depending on the place). Even more lucrative than this is a business known as ‘mediation.’ Exactly as it sounds, this involves someone fluent in both English and Mongolian that acts as a go-between for foreign tenants and local landlords. They often charge tenants and landlords $500 US each for ‘facilitating and managing the transaction.’ It strikes me that the value-added of this kind of service is extremely low, and offers huge potential for anyone willing and able to provide similar services.

Offices, luxury brand shopping, and a complete (excepting a single Kenny Rogers Roasters) dearth of western food chains in the city are three of the most lucrative opportunities I have witnessed since moving here. Next to Sukhbaatar Square the Central Tower claims a Louis Vuitton, Armani, and Hugo Boss store. People in UB claim that for at least a short period of time the LV Store was the highest grossing in all of Asia. Right across the street is another new gleaming building, the Blue Sky Tower, which according to MAD investment solutions is the tallest structure in Mongolia (Article). Yet, there is not a single Starbucks, McDonald’s, Pizza Hut, or KFC. Not that any one brand is necessary, it is striking that most developing countries have at least one of these to offer whereas Mongolia has not even one.

Up Next: China’s New Conflict in the South China Sea

Follow-Up Thoughts on KORUS and Free Trade

After writing my previous post on the United States-South Korea Free Trade Agreement (KORUS), I realized that a bit more needs to be said about KORUS, free trade agreements, and Roger Bybee's "Funnel for Exploitation" article in order to do justice to the complexity of these issues.

According to the U.S. Trade Representative's Office, the provisions of the KORUS FTA stipulate:

• 95% of bilateral trade in consumer and industrial products would be duty-free within a 5 year time frame
• South Korea lowers tariffs and non-tariff barriers on U.S. automobiles, manufactures, and agriculture.
• Increased export opportunities for U.S. service-based firms in sectors such as finance, health care, telecommunications, and education.

The cumulative result can lead to gains that (at the very least) increase U.S. export volume from $10 billion to $11 billion. The South Koreans, in turn, could gain from a more efficient allocation of resources to its most productive sectors.

But Mr. Bybee doesn't really care about the specifics of the KORUS FTA, does he? If you read the article closely enough, you realize that the particular group of activists that the article speaks for isn't concerned about the nitty-gritty details -- these activists operate on a fundamental rejection of free trade and globalization. The reasons are varied, but they all stem from a latent fear: the fear of needing to adapt and compete in a global economy.

It may be a bit trite to say that there's nothing to fear but fear itself, because the pain felt by workers in traditional blue-collar industries is very real. But on a broader level, it's important to understand that jobs in these industries are not coming back -- that other countries now have a comparative advantage in those industries. Rather than to try to preserve the low-skilled manufacturing jobs that are getting outsourced to developing countries, it makes a lot more sense to focus on export industries where we have a comparative advantage: high-tech machinery, financial services, education etc.

Think of it this way: Don't fight Schumpeter's gales of creative destruction (a catch-all term for job creation and destruction via the forces behind globalization). Compete in the global economy by utilizing it to your advantage. Redirect the blows of creative destruction with economic aikido. That's the type of mindset that workers and policymakers facing a free trade regime should adopt.

One final point: activists like Mr. Bybee who (explicitly or implicitly) claim that we need protectionist policies to weather a recession should go back to their history textbooks and read up on the 1930 Smoot-Hawley Tariff, which was passed during the Great Depression. No self-respecting economist -- or educated person, for that matter -- would argue that workers were helped by the era's protectionist policies. In fact all studies indicate that it exacerbated the Great Depression.

South Korea FTA: Reports of Exploitation are Greatly Exaggerated

Recently there's been more talk in Congress about the United States-Korea Free Trade Agreement (KORUS). As one would probably come to expect by now, the anti-globalizers are angrily shaking their fists and crying foul. Yet they do so for all the wrong reasons.

Check out the In These Times article "South Korea 'Free Trade' Deal: Another Funnel for Exploitation", which was re-posted today on Global Trade Watch's official blog. According to the article, KORUS opens the U.S. market to goods that are 35% "Made in Korea" (meaning that 65% can by low-wage labor in developing countries like China -- which the article equates to as "21st century slavery"). It basically argues that outsourcing to East Asia means exploiting labor abroad while impoverishing labor at home.

Scary stuff, right? What's actually scary here isn't the reality of the free trade deal, but the mish-mash of textbook fallacies and unwarranted anxieties that the article presents as its key arguments. Here's my take on these arguments:

(1) "Job Loss"
Trade doesn't unilaterally destroy jobs. Trade, by definition, involves quid pro quo -- you import something while exporting something else. It's funny how the article never mentions jobs that would be created in industries that would be supplying our exports to South Korea. These industries, according to the Brookings Institution, include finance, telecommunications, law, accounting, health care, and education. So while the ALF-CIO could potentially lose out as a result of KORUS, people in these industries stand to gain. This is on top of the fact that both American and Korean consumers would have access to better quality goods and services at cheaper prices.

(2) Social Safety Net -- "Shove 'em Off the Cliff"??
What the article lambasts as "ensure them a safety net, then shove 'em off the cliff" is actually a very responsible economic policy. The Heckscher-Ohlin Model of international trade shows that since the economy as a whole benefits from trade, the best way to help displaced workers is to promote freer trade and then compensate the workers through unemployment benefits or job retraining.

(3) "Exploitation"
The indictment that traded products will be produced in conditions equivalent to 21st century slavery is moralistic nonsense. As Nobel-winning economist Paul Krugman explained in his 1997 Slate article "In Praise of Cheap Labor", jobs in China or Myanmar at low wages and spotty working conditions (by U.S.-standards) is better than no jobs at all. By arguing for what is essentially "good jobs in principle, no jobs in practice" for workers in these countries, the "Funnel for Exploitation" article is effectively saying that the workers deserve to stay in abject poverty.

The fact of the matter is that KORUS is rather economically benign for both South Korea and the United States. Or to borrow from Mark Twain's immortal quip: the reports of exploitation are greatly exaggerated.

"There's only one China... composed of two separate and completely different Chinas"

A friend of mine from Taiwan brought this to my attention. It's a brilliant tongue-and-cheek explanation of Taiwan Strait Issue by Michael Chamberlain and Charlie Pickering of The Mansion, a 2008 Australian satirical news show.

Professor Robert Berring of UC Berkeley once called the Taiwan Strait Issue an unusual (and perhaps unnatural) situation in international law. From this video, it's pretty self-evident as to why.

Henry Kissinger: On China

Yesterday, Dr. Henry Kissinger appeared on the Charlie Rose Show to promote his new book On China. I found the interview to be very interesting. 

Some salient points:

• Two key issues that China faces in the next decade: (1) reconciling economic change with their political system, and (2) dealing with the fallout of the One Child Policy.
• China's fear is the U.S. geopolitically encircling it a la containment. The U.S.'s implicit fear is China creating an East Asian Bloc and pushing it out of the region. There needs to be more high-level bilateral dialogue between China and the U.S. so that both sides understand each other's views and fears (see Youtube clip below).
• Too many people on both sides erroneously see individual events on the other side as part of a larger plan to contain their influence. 
• With regards to human rights, the U.S. needs to understand that China doesn't want to be lectured. China needs to understand that Americans innately feel strongly about transgressions on individual human dignity.
• There has never been a smooth regime change in China -- China's history alternates between stability and disintegration. There is a latent fear of mass chaos via regime change.    
• The recent financial crisis has struck a blow against the legitimacy of U.S. economic policies in the eyes of the Chinese. 

See the full interview at: http://www.charlierose.com/view/interview/11701

Confucius (the Movie) and Trade Protectionism

A year ago, I came across a rather amusing New York Times article regarding China's film policies. The article reported that Chinese authorities removed the Hollywood sci-fi film Avatar from their theaters to ensure the box office success of domestic productions such as Confucius (starring Chow Yun-fat as the eponymous sagely philosopher). This is common practice in China. China only allows 20 foreign films into the country every year, and usually limits their screenings to 10 days.

It's therefore no surprise that Hollywood wasn't amused. In fact, the United States has taken this issue up to the World Trade Organization's Dispute Settlement Body, arguing that China's film policies violate international trade law. The WTO has ruled in the U.S.'s favor.

According to an article by Professor Stanley Lubman of Berkeley Law, China argued that it had the right to set import quotas under Article XX(a) of the General Agreement on Tariffs and Trade, which condones trade protections designed to "protect public morals". The WTO accepted this argument, but decided that China's way of executing its trade policies -- in which the importation of foreign films is controlled by 2 state-owned companies -- is unacceptable. If China doesn't comply with the WTO's ruling, the United States can impose retaliatory trade measures on Chinese exports.

Professor Lubman implied that China's concern with "public morals" has to do with the government's stance on politically touchy views. I would, however, like to point out several other possible motivations behind China's policies:

(1) Industrial Policy: Cinema is an industry that China believes has substantial export potential. It may therefore decide that it wants domestic films to thrive under trade protection while it preps the industry to compete globally.

(2) National Pride: China may believe that it's necessary to protect products that are emblematic of its national culture from international competition. And what's more Chinese than a film about Confucius?

(3) Soft Power: Combine the previous two points and we arrive at another insight. As a 2010 Guardian article points out, movies can serve as a major soft power resource, and a film industry that can compete internationally can generate substantial soft power. Exporting culturally-rich movies like Confucius can lead to international influence -- provided that they can compete toe-to-toe with the next James Cameron flick.

Law and Financial Sector Development in China

A few days back, over at Naked Capitalism, Yves had a guest blogger discussing why China is different. Readers of Rogoff and Reinhart will cringe, as Yves notes in the comments section, but the post's extended discussion of the unique features of China's economic development is certainly thought provoking. However, for now I just want to focus on a few points made on financial sector development:

What everyone should be watching is what China is doing in its finance system, and it is moving very fast (and the shadow banking system is moving even faster). It has reformed the four key banks, allowed foreign banks to come in a limited way, managed its SOEs, started to develop a securities industry, started to develop a corporate bond market. But it is quite a balancing act. It still lacks the micro-infrastructure, such as accounting law, securities law, governance structures and so on that are necessary to having a fully functioning cost of capital – that is, capitalism (of a twentieth century type, as opposed to the much sicker, twenty first century type appearing in the West). The aim needs to be to stop the heavy dependence on various forms of lending, by instigating a shift to a better balance between shares, bonds and bank deposits as the capital structure (in developed economies they are roughy in balance). Big equity and bond markets are much safer than a system that depends mostly on bank lending because equity markets and bond markets can reprice without the system breaking, whereas banks break. So it is an issue of national security for the Chinese leadership.

Main takeaways: 1) China has reformed the big four banks, 2) allowed some foreign access to financial markets, 3) started to develop non-equity capital markets, 4) lacks the legal and regulatory framework necessary for these capital markets to full develop and 5) should do all this with the aim of creating financing options outside of the banking sector.

I don't think anyone would contest points 2), 3) or 5), so we can leave them for now and focus on 1) and 4). Has China really reformed its big banks in a meaningful way? Are the legal obstacles just due to a lack of proper laws or institutions? I find it difficult to agree on these points.

With regards to 1), yes, its true that the Big Four banks no longer have massive non-preforming loan (NPL) ratios, but that is hardly due to any substantial reform. Government financed Asset Management Companies (AMCs) bought the NPLs at face value, despite the fact that they are bad loans. While this certainly helped remove the problematic loans from Chinese banks' balance sheets, it did nothing to reform their lending standards. In fact, by creating such a serious moral hazard problem, it may have made them harder to reform. Sure, the introduction of western banks as minority shareholders might help improve lending practices, but the most recent stimulus package has restarted the cycle of reckless lending. Perhaps, as this round's bad loans begin to surface the Chinese government will handle them differently, but its starting to look like a regular cycle.

This, of course, leads us to point 4) regarding the legal and institutional framework for deeper capital markets. It is true that the government is playing catch up, developing new laws and regulatory structures where none exist. However, the problem is not simply a lack of laws: there is an active effort to manipulate the laws they do have. Take, for example, the July 2009 Chinese Supreme Court ruling against UBS (PwC has a great summary in their 2009 NPL Asia Newsletter). In March 2009 the Supreme Court issued a guidance clarifying when courts can rule on investors' claims on NPLs purchased from the AMCs (the answer: when the claims are not on state owned enterprises). While the original guidance was not great, it did clarify when investors could make claims on NPLs and when they couldn't. However, just four months later, in the UBS case, the Supreme Court changed its position indicating that all NPL claims require consent to be transferred to foreign investors, citing older laws and regulations, which the 2009 guidance had appeared to supersede. Why did the Supreme Court change its position? The PwC newsletter speculates it was a political message to foreign investors. Regardless, the result was predictable: most major players left what was a promising and growing market in the financial sector because of an unpredictable legal framework. The point is that while China may still be lacking in the laws and regulations needed for deepening capital markets, it is not making a serious effort at using what laws it does have.

This is important because the post goes on to explain that the top-notch leadership in China is working on filling in the holes:

It would be a fool who thinks the Chinese don’t understand the challenge; they do. Having your life on the line if you get it wrong does rather tend to concentrate politicians’ minds. To get to the top in China on your merits when there is a billion people ensures some serious quality; we can safely assume that some of the Chinese leadership has significant intellectual grunt. It would be worthwhile to listen very closely to what the Chinese say about their understanding of capitalism and what it is doing at the micro, institutional level with its financial system, not so much what it does with the macro-economic levers.

This position seeks to mitigate criticism of Chinese leadership. In essence it says "The problem is a lack of good laws, but very smart and responsible people are working on fixing that." Yet when they make new laws to address these problems they have no problem casting them to the wind for arbitrary political purposes. That this arbitrary change in law closed a potential venue for the government to recover something on its existing NPLs only shows how self-defeating these efforts can be.

China claims to be serious about developing deeper capital markets, and I am confident that many in the government are serious. However, China will be confronting some major structural problems if it cannot properly address financial sector reform. This can't happen until leadership stops using the legal system for political ends.

Obama Beware: Looming Collapse of North Korea

President George H.W. Bush devoted much of his presidency to foreign affairs. President Bush is often lauded for America’s involvement in the Persian Gulf War, intervening to rightfully expel recalcitrant Iraqi forces wrongfully invading Kuwait at the bidding of Saddam Hussein. Bush’s close friendship with Mikhail Gorbachev, though disparaged for exerting undue influence on Bush’s sluggish reaction to the collapse of the Soviet Union, ultimately behaved as a strengthening force between U.S.-Russia relations. Critics argue, however, that Bush’s foreign policy lacked substance, consistent style, adequate leadership, and, most fatefully, vision. In the book A World Transformed, Bush distinctively details his account and careful reaction to the disintegration of the Soviet Union which tragically illuminates an American president wavering during one of the most decisive moments of modern history: Instead of helping shape the post-Soviet world, Bush did not perceive the imminent Soviet collapse and subsequent seminal stages of Eastern European liberation. Through his reflections, the reader learns that Bush’s loyalties lay first and foremost with his friendship with Gorbachev and not with any premeditated plan to help liberate post-Soviet states from starvation, years of severe oppression, and dysfunctional government. A comparable state of affairs parallel to that of the collapse of the Soviet Union is occurring in North Korea. The Obama administration, like the Bush administration, is woefully defined by a derisory policy that exposes no overarching or guiding vision. Without a dramatic change in policy preparing for the inevitable collapse of the Democratic People’s Republic of Korea (“DPRK”, “North Korea”), the subsequent geopolitical tumult of the Korean peninsula will cast a menacing shadow over Obama and subsequent administrations.

Containment of North Korean nuclear weapons has preoccupied American foreign policy on the Korean peninsula for years. The typical United States pattern towards North Korea has been a perennial denouncement of the North Korean nuclear arsenal followed by negotiations usually involving China, Russia, Japan, and South Korea, the regional nations with the highest immediate interest in the denuclearization of the DPRK. November 2010 evidence surfaced that North Korea continues to promote nuclear proliferation. During visit to Yongbyon, several American academics witnessed that North Korea had begun construction of a light-water reactor capable of generating 25-30 megawatts of electric power; light-water reactors are also typically capable of uranium-enrichment, which could in turn be fodder for another nuclear weapon. A uranium-enrichment plant further highlights that U.S.-promoted negotiations have failed. We are already living with a nuclear DPRK. Thus, U.S. objectives in dealing with North Korea need realistic realignment.

Although the nuclear issue is not a minor one, it should not monopolize the Obama administration’s concerns. Kim Jong-il’s regime appears increasingly unstable as his country faces another potentially devastating famine, compounded by South Korea’s reluctance to permit food aid to North Korea. U.S. State Department officials claim to be waiting for a World Food Program assessment of the severity of the famine and North Korean intent. Kim Jong-il’s failing health and the presumed succession of his son, Kim Jong-un, who is suspected to embrace the same political-military outlook at his father, portend potentially perilous times ahead for North Koreans. Should the regime disintegrate, North Korea’s immediate neighbors, South Korea and China, will be the recipients of starving North Korean refugees, hungering for food and freedom.

The Chinese relationship with North Korea complicates peninsular diplomacy by sustaining the North Korean regime through trade, investment, and economic assistance, rendering many U.S.-led sanctions ineffective. From the American point of view, China emerges as a culprit for aiding a nefarious regime and seemingly supporting her in the wake of the sinking Cheonan and Yeonpyeong military incidents. It is widely believed that China’s perceived recalcitrance stems from her desire to stave off a U.S. presence, already too close for comfort in South Korea. China also provides just enough food and energy to prevent collapse of the DPRK regime and burdensome refugees from depleting Chinese resources.

Obama’s limits of power and international influence are well known in light of America’s political domestic restraints and waning war chest, which make the Korean peninsula a volatile tinder box. The North Korean regime may collapse during Obama’s tenure. Obama’s deliberative, Jeffersonian foreign policy inclinations will pay dividends in the era of selective and multilateral Wilsonian engagement. The challenge is upon Obama to exert strong leadership skills and creative foresight to anticipate the fate of the two Koreas, proactively engaging regional powers and multilateral institutions such as the World Bank, International Monetary Fund, and United Nations to craft a plan of reunification, if that is determined to be an adequate response to the collapse of North Korea.

This task is a formidable one, as evidenced by the failure of preceding administrations. The U.S. is a staunch military and diplomatic ally to South Korea, honoring a commitment deriving from the Korean War, which has yet to end. The U.S. will thus inevitably play a crucial role in any reunification process. The extent to which America participates and guides the process will hinge on visionary groundwork. Signatories to the 1953 Korean War Armistice agreement have a stake in resolving the war and developing a reunification plan. The perennial challenge to palliate China’s suspicions of the U.S. and mitigate her dual allegiances provide ample opportunity for America to find shared mutual goals with China and work in a partnership to reunite the Korean peninsula under one government. The Obama administration’s current policy of “strategic patience,” repudiating engagement with Pyongyang based on the false assumption that political and economic containment is viable, seems to be code for a plan lacking focused strategy. Obama would benefit to learn from Bush’s shortcomings. His administration should be poised to leverage its strengths of engagement while being mindful of political weakness. Blended elements of Jeffersonian fulfillment of a commitment to the Republic of Korea with Wilsonian faith in international institutions should serve as a foundation to guide America’s role in the aftermath of a DPRK collapse. Mindful of clearly delineated goals, Obama will have the power to promote the freedom of exchange of ideas and people in a reunited Korea. Effective leverage of economic, energy, food, commerce, and educational exchange with the eventual denuclearization of the Korean peninsula and concluded with China’s approval, will solidify Obama’s legacy as the ultimate peacemaker and humanitarian.

Upcoming Event: Democratization in Taiwan at Georgetown University (April 1)

Invitation Follows:

Join the Taiwanese American Student Association as we explore the process of, and future prospects for, Taiwan's democratization.

The democratic achievements of Taiwan have been widely recognized by the international community. Taiwan’s democratization is not only an important milestone in the global democratic movement; it has also opened a vital avenue of dialogue between Taiwan and the world

We invite you to join us as we we host a panel of speakers from different walks of life as they give us their take on democracy in Taiwan. We have invited

Deputy Leo Lee (Deputy Ambassador from the Taipei Economic and Cultural Representative Office)
John Tkacik (Former State Department)
Amy Hsieh (Taiwan Foundation for Democracy)

Moderated by Professor Nancy Tucker.

The panel will feature talks from each of these speakers, and will be followed by a Q&A session.

RSVP on Facebook.

Public Perceptions of China in the US: Friends, Frenemies, or Foes?

From a short paper that I did for a statistics course:

Spring 2009 Pew Research data bivariate comparison and analysis of US individual economic satisfaction and perceptions of China.

I suggest that in a comparison of US citizens, those citing a lower level of individual economic satisfaction will be more likely to have a less favorable view (as a measure of public perception) of the People’s Republic of China than will those individuals indicating a higher level of individual economic satisfaction.

There is a strong domestic determinate of personal economic satisfaction that is closely related to public perceptions of the People’s Republic of China. The reasoning behind such a hypothesis is rooted in the common perception that blue collar (particularly) but also some white-collar jobs have been lost to the Chinese. For this reason, individuals experiencing various forms of economic hardship (unemployment, having family/ friends who are unemployed, perceptions of reduced buying power, investments and savings, stock performance, etc.) are likely to seek some sort of explanatory factor. At present, and largely attributable to the 2008 Olympic games, China’s role in the world has been highlighted. It is because of this confluence, that I propose that the greater the self-reported level of economic dissatisfaction, the less favorable will be the public perception of the Chinese.


In this analysis, the two variables considered are personal economic satisfaction and the public perception of China. Personal economic satisfaction is the independent, nominal variable, while the public perceptions stands as the dependent, nominal variable. Nearly 60% of those citing very good personal economic situations have a “somewhat favorable” or better view of China, whereas only 47.83% of those citing a very bad personal economic satisfaction cite having a “somewhat favorable” or better view of China. The converse is also interesting. Amongst those people indicating a “very good” personal economic situation, only 39.95% have a “somewhat negative” or worse view of China. Of those that indicated a “very bad” personal economic situation, 52.18 also reported a “somewhat unfavorable” or worse opinion of China.

Closer examination of the data reveals what appears to be a positive, linear trend suggesting that indeed the lower the personal economic satisfaction, the more negative the perceptions of China. In reaching this conclusion it is important to consider the favorable/somewhat favorable and very unfavorable/somewhat unfavorable categories of public perceptions as two (rather than four) categories. It is important to note also the two far right columns of the graph. These categories are people who either did not know how to characterize their economic situation, or refused to do so. Let us first consider those who do not know how to categorize their individual economic situation. There are a number of possible explanations for this including inattentive individuals, real concerns about the economic outlook, or a flaw in the survey methodology. In this category it is interesting to note that the “somewhat unfavorable” and “very favorable) categories completely disappear. Thus it would seem that if Americans have uncertainty about their personal economic situations, more than half of those individuals also seem to hold extremely negative views of China and none exhibit “very favorable” views. For these reasons, I would argue that this category does in fact lend to proving the hypothesis. On the other hand, the final category (“Refused”) on the graph does not support nor disprove the hypothesis. There are a variety of reasons that individuals might choose not to answer this question—including people who believe in personal privacy.

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