"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.

Taiwan Rapper Video for Japanese Earthquake Victims

New Rap Video about Inflation in China

EVENT: The Department of Homeland Security- Year Eight

A few very interesting points from this morning's event on Georgetown's campus.

The event was moderated by NBC's Andrea Mitchell. C-SPAN provided coverage, and a portion is slated to air on MSNBC.

The participants consisted of all three Secretaries of Homeland Security.
Janet Napaolitano
Tom Ridge
Michael Chertoff

Prominent attendees:
Sen. Landrieu
Congressmen King and Price
Congresswoman Harmon
The German Ambassador

Some salient points that were made. Please note that they are paraphrased.

Napolitano:
- Intelligence is not linear, but rather is a cloud of information.
- Currently, intelligence about aviation places it as the most significant ongoing threat. US adversaries prefer passenger jets over cargo jets. Bridges, and trains are secondary.
- Moving forward on the Lisbon Treaty that would permit and establish guidelines for airline passenger information sharing between EU countries and the US is entering its third round of negotiations.
- The biggest concern of DHS is homegrown terrorists.
- DHS has an active presence at US hacker conventions and actively tries to recruit the best.

Chertoff:
- Risk management is not about risk elimination.
- The government evaluates the potential impact before funding and project decisions are made
- Layered defense, with built-in redundancies should help mitigate intel failures.

Ridge:
- Airline security is not yet at the risk managed stage.
- Should we treat everyone as a potential terrorist forever?
- It was easier to go to the moon than to come up with some of the strategies and technologies required for airline security.
- Currently enjoys flying and has been pulled aside for secondary screening on a number of occasions. Finds TSA staff to be delightful.