It's the End of the World as We Know It

And it's not just the dollar slipping below 8:1 against the RMB.

"If you asked me two years ago when [the] yuan could become fully convertible, I would have said it would be in [the] remote future - in 15 or 20 years. But today if you ask the same question again, I'll say this could happen well within 10 years, or even likely three years later," said Lee, who is known as the "godfather" of Hong Kong's financial sector.

Wu Zhong, The People’s Forex Liberation Army, Asia Times May 16, 2006

To me, the backstory of Chinese currency reform has been memories of the Asian financial crisis of 1999. China escaped unscathed because its currency was not freely convertible and therefore not vulnerable to revaluation, manipulation, or speculative attack.

Now, Wu Zhong’s story indicates a different imperative at work today: the Chinese government is finding the burden of being the virtually exclusive holder and manager of China’s vast foreign exchange reserves excessively onerous.

The result is an opening toward de-regulatation and decentralization--and covertibility, perhaps in a limited sense.

The new slogan is Forex for the People!

Individuals and entities will be permitted to hold foreign exchange reserves and invest them both in domestic markets and overseas.

For “qualified investors”, it’s already begun. Again from Asia Times:

With the approval of the State Council, the National Social Security Fund became the first qualified institutional investor to put money into overseas stock markets, with the Hong Kong market its top priority. The news drove Hong Kong's Hang Seng Index to its highest levels since the former British colony reverted to Chinese rule in 1997. This year, up to $6 billion is expected to flow out of China into overseas securities markets, which is likely to increase to up to $10 billion.

I see two drivers for the program:

First, in a Chinese world of consistently favorable trade balances, compulsory purchase of forex pours RMB into the local economy and stokes inflationary pressures. China can move to a more pro-active and rational macro-economic policy if it doesn’t have to buy every dollar that comes into the country.

Second, the Chinese government feels it already holds enough US dollars and US government debt. Maybe millions of Chinese forex holders will still keep their money in dollars and buy US Treasuries, but maybe they won’t. It’s not the Chinese government’s headache anymore.

It will probably turn out to be a headache for Chinese investors. I am anticipating a tsunami of money, followed by a tidal wave of fraud, and then an avalanche of losses.

It may be a bigger headache for us.

The implication for the US government, of course, is that it can’t rely as much as it did in the past on providing the primary, preferred destination for the overtaxed Chinese bureaucrats seeking to offload tens of billions of dollars of new forex reserves every month.

Weakening the symbiotic relationship between the US government and the Chinese government may modify the behavior of the US government: we may not feel we are hostage to China’s bankers, and may pursue more aggressive trade policies without worrying that the PRC will stay away from the next US Treasuries auction and plunge our economy into a tailspin.

It’s more likely we’ll miss that simpler world where Chinese bankers, trapped behind a wall of policy, regulation, and currency controls, had no choice but to dump their millions in the lap of the US Treasury.

With the US government notching up deficits of about $300 billion a year for the foreseeable future, it can’t be reassuring to see one of the biggest customers for our debt setting limits on the increase in its exposure.

Now we’ll have to compete with a larger spectrum of higher-yielding investment instruments available to smaller, less risk-averse forex holders, probably causing an increase in our borrowing costs and goosing US inflation as a result.

Whether the free flow of forex and a dynamic international currency market for the RMB symbolizes true convertibility—and China’s final mastery of its fears of currency manipulation—is, for me, still an open question.

The program described in the Asia Times looks to me like liberalized, privatized management of forex reserves accumulated under China’s current account—the trade surplus.

Allowing the price of that forex to fluctuate--and creating the financial markets and instruments to enable speculation in that forex--is a logical corollary. That's convertibility, at least in one sense of the word.

It does not look like China has plans for opening the capital account to speculative inflows. The Chinese government would presumably maintain the financial heft and privileged position needed to guide the value of the RMB against foreign currencies.

Hat tip to Simon World for pointing out the Asia Times piece.

Did You Hear the One About the Ferrari, the (Alleged) Gangster, and the Chinese TV Network?

One doesn’t expect China to figure in a story about $500,000 race cars, an alleged Euro-trash gangster, and a titanic Internet-stock boondoggle.

But in LA anything is possible.

Southern California has been atwitter concerning the Ferrari crash case. It began as an ur-California event—an early morning drag race on the Pacific Coast Highway, the Ferrari becoming airborne at 162 mph, bisected by a telephone pole, debris scattered hundreds of feet down the road, the alleged driver, Bo Stefan Eriksson, walking away from the wreck nothing more than a bloody nose…all freedom, fun, and reckless self-indulgence, no victims, and no consequences.

But the case quickly took a turn for the worse for Eriksson. It transpired that he had brought the car to LA illegally, he had wangled bogus cop credentials from a little public bus service for the elderly and handicapped in the San Gabriel Valley, he was an executive of a disgraced tech company, Gizmondo, that blew through hundreds of millions of dollars meant to finance the “Swiss army knife” of handheld computer dervices but seemed to function primarily as a piggy bank to fund the lavish lifestyles of directors and executives…

…and today’s LA Times depicts Eriksson as a sleazy, self-made gangster who created a thuggish persona and career for himself on the not-so-mean streets of Uppsala, Sweden.

The illustration for the front page article caught my eye.

It shows Eriksson squatting awkwardly next to a Formula One race car with the logo CCTV—China Central TV—emblazoned on the body.

A China connection between Eriksson and CCTV? That’s news!

Not too much to see here, however.

The car belonged to Jordan Grand Prix, the Formula One team owned by racing legend Eddie Jordan, which had secured a sponsorship deal with CCTV .

Gizmondo had promised $3 million to Jordan for a sponsorship deal. Gizmondo didn’t deliver, and finally coughed up $1.5 million and some (now worthless) stock to Jordan in an out of court settlement.

Despite Jordan’s distinguished history as F1 team leader and personality, his underfinanced team wasn’t able to achieve the success necessary to capitalize on the longshot deal with CCTV, or ensure Jordan Grand Prix’s survival as an independent. He sold the business and the team now races under another name.

But in 2003, Jordan, CCTV, and Gizmondo were still on the same page, failure and disgrace were still in the future, and a picture in today’s paper unexpectedly captures that far-off time.

The uncropped version of the photo on the LA Times website shows Jordan next to Eriksson, holding what must be the notorious Gizmondo device.

Photo by Russell Batchelor / Batchelor/Sutton Images

See Dick Sleep

Some people have professed concern that Vice President Cheney has been photographed asleep in public twice in recent weeks, first at Hu Jintao’s briefing during the summit in Washington, and most recently during a staff meeting.

It seems that the Vice President himself, along with his China policy, is slipping into torpor.

That’s good.

For now China policy appears firmly in the hands of the State Department.

Perhaps the Vice President’s feared and secretive foreign policy cabal had decided that China was too big a mouthful to chew on for an administration already choking on Iraq but still declaring its determination to gorge itself on Iran.

But never count Big Time out.

Diminished capacity is no guarantee of reduced lethality.

When you look at Mr. Cheney, he more and more resembles Ed Woods’ muse and go-to guy for zombie roles, Tor Johnson.


It is easy to imagine his team employing the newest developments in re-animation technology to awaken Mr. Cheney and send him off with an encouraging slap on the rump to devour the brains of the living at the State Department.

We don’t want that.

Sleep, Dick, sleep.

Foggy Bottom in the Driver's Seat on China Policy

In significant testimony before the House International Relations Committee on May 11, 2006, Robert Zoellick clarified that the American snub of Taiwan president Chen Shuibian—shunted off to remote US transit points en route to South America--was no accident.

He also made it clear that expectations and priorities of the US State Department are driving US policy toward Taiwan, something that is not likely to please fans of President Bush and Vice President Cheney.

From the Taipei Times:

In answers to questions about Chen, Zoellick seemed to say that the limits placed on the president -- he was offered stopovers only in Anchorage, Alaska, or Honoloulu, Hawaii -- were in retaliation for what the US administration considers Chen's reneging on the so-called "five-noes" promises he made in his two inauguration addresses, along with his efforts to fight Washington's "one-China" policy.

The five noes policy was a promise by Chen to avoid taking steps toward independence so long as the PRC did not use force to attempt to achieve unification. One pillar of the policy was a pledge not to abolish the National Unification Council.

However, Chen did exactly that.

Per Wikipedia:

On 27 February 2006 Chen dismantled the National Unification Council saying it "will cease functioning and the budget no longer be appropriated", effectively breaking the promises made in 2000. In the week prior, he told U.S. Congressman Rob Simmons that the Council and Guidelines were "absurd products of an absurd era.”

Probably the key element in the Wikipedia entry comes next:

Chen has revealed he planned to draft a new constitution, which many conjectured would be pro-separatist, before he stepped down in 2008.

Taiwan independence is geopolitical dynamite, and the US government doesn’t want the Taiwan government pursuing it without close direction from Washington.

Chen understandably feels that Taiwan independence is central to his political identity and covenant with his followers, and he has an obligation and desire to pursue it, and not soft-pedal it in deference to the priorities of the United States.

He probably also has the somewhat cynical realization that if he pushes for Taiwan independence, the US will be unable to abandon Taiwan.

This idea that the US is to a certain degree hostage to Taiwan’s policy on independence, which is in turn an existential matter in DPP politics, would account for Washington’s asperity in its response to Chen’s desire for welcoming, higher profile transit privileges.

So Chen’s getting slapped around a bit.

China watchers will be very interested by Zoellick’s desire to avoid confrontation with China over Taiwan at this time. Again from the Taipei Times:

At another point, as Zoellick was giving an animated defense of the US transit action, he seemed to link it with the fear that Chen's recent actions could provoke a war in the Taiwan Strait between the US and China.

"There are big stakes here where lives could be lost," he said.

"This is the balance ... we want to be supportive of Taiwan while not encouraging those that try to move toward independence. Because let me be very clear: independence means war. And that means American soldiers ..." he said before being interrupted by a questioner.

Admirable views, and ones which I agree with, but seemingly totally out of step with the inexorable triumphalism practiced by the Bush/Cheney administration.

To imply that anxiety over the loss of American lives might be dissuading America from its crusade to bring God’s gift of freedom to the world—or indicate to the Chicoms that we are anything less than eager to nuke it out with them over the Taiwan Strait--is close to political heresy.

This situation implies that the State Department is firmly in control of China policy, at least for the time being, and Zoellick—fresh from his Darfur triumph--is at the heart of it.

Where's the Anger?

You'd think that a president flat on his back in the polls would find time for some righteous panda-baiting.

But in two cases--Chen Shuibian's hegirah of humiliation and the most recent round of jawboning on the RMB--Washington has passed on two chances for some feel-good, base-pleasing, high-profile China-bashing.

It is interesting to speculate what foreign policy objective compels President Bush forgo the pleasure of whacking the panda across the snout, at least rhetorically, after his antics during Hu Jintao's visit and the largely successful effort to steal Hu's thunder in Africa with the Darfur peace settlement.

It is difficult to believe that Washington's restraint is reward for expected Chinese cooperation on Iran at the UN. But what else could it be?

The Darfur Gambit: Countering China While Winning Hearts, Minds, and Wallets in Africa

It appears to me that the sudden Darfur settlement has little to do with the moral challenge of confronting genocide, aroused public opinion, or even the personal and political magnetism of George Clooney…

…and everything to do with the Bush administration’s desire to one-up a certain pasty Oriental potentate.

It is surely no coincidence that the hasty agreement rushed to conclusion by Robert Zoellick of the US and Hilary Benn of the UK provided a spectacular riposte to Hu Jintao’s high-profile, politically charged trip to Africa.

I also have little doubt that the Darfur master stroke was the culmination of a painstakingly choreographed campaign to belittle both Hu and China as unworthy pretenders to power parity with the United States on the world stage.

It started with Hu’s non-state visit to Washington, with the planned and ostensibly unplanned slights, the sleeve-tugging, the screaming protester miraculously unsilenced by the Secret Service, and the ostentatious snoozing by Dick Cheney during Hu’s briefing.

It concluded with the Darfur settlement, trumpeted throughout the world just as Hu was wrapping up his worldwide trip, contrasting American responsible diplomacy in the Third World with China’s oil-grubbing moral turpitude.

The haste in which the flawed Darfur agreement was wrapped up also indicates that political objectives, rather than genuine policy or humanitarian goals, were at stake.

Two years of protracted negotiations under the auspices of the African Union were wrapped up in less than a week of brisk arm-twisting by Zoellick and Benn. It is interesting to speculate what special superpowers of logic and persuasion these First World Solomons could bring to bear in such a short period of time.

Per the Sudan Tribune:

The rebels said only the United States had the power to win concessions from Sudan’s government, though it was unclear what bargaining chips were being used by Washington…

I don’t think I’m out of line in suggesting that financial inducements, perhaps of a personal as well as a government-to-government and government-to-rebel nature, played a role in the sudden acceptance by two of the parties (out of four) of the four pages of US-proposed revisions to the AU-brokered 86-page draft agreement.

Two of the three rebel groups refused to sign the agreement, something that Zoellick, the western press, and humanitarian organizations professed to shrug off. The resistance of the rebels might have been due to issues of principles or because the gravy train of concessions simply wasn’t piled high enough.

Well, there’s always somebody ready to make a deal :

The Nur faction walked out of negotiations in the Nigerian capital before dawn Friday, as had another rebel group, the Justice and Equality Movement.

…

But one of Nur’s top negotiators, Abdulrahman Moussa, said he was walking out on Nur to form his own Front for Liberation and Renaissance. He said was taking half Nur’s camp with him and they supported the peace agreement.

Nur "is not compromising and I don’t think he is seeking peace, especially after the generous offer from Zoellick," Moussa said.

Either way, one would think that negotiations devoted to tying up these loose ends would have been conducted more vigorously and responsibly if the desire to upstage Hu Jintao on the eve of his departure for China had not been paramount.

From partial press reports, it appears that the US-brokered compromise on the key bone of contention—the number of rebel troops to be integrated into the national army—wasn’t even accepted by the Sudan government. Instead of disagreeing, as we say, they agreed to disagree.

No surprise that the adjective “flawed” appears not infrequently in analyses of the deal. From the Reuters article “Darfur conflict seen continuing despite peace deal” :

Many analysts doubt the sincerity of the government, which holds the key to implementing the deal, because Khartoum has undermined so many agreements in the past.

Furthermore, the Sudan regime and its lethal Janjaweed militias seem to be getting a free pass: no sanctions, no war crimes, no commission of national reconciliation, no hard looks in the UN canteen etc. Instead, if the deal holds, Khartoum gets to hand off the burden of pacifying, securing, rebuilding, and developing Darfur to a well-heeled crowd of First-World troops and do-gooders. Not a particularly onerous outcome, in my book.

The kid-glove treatment meted out to the Sudan regime is something that the Western press and opinion have been remarkably silent about.

But the Bush administration’s stance of moral hostility and righteous confrontation toward Khartoum--as contrasted with the amoral and mercantilist Chinese position--has always been vastly overstated.

An eye-opening article in the November 3, 2004 Sudan Tribune stated: Sudan Prayed for Bush Re-election .

Let’s repeat that.

Sudan Prayed for Bush Re-election.

Because Clinton had been—and it was feared Kerry would be—too aggressive in applying sanctions to Sudan. The article also contains the interesting nugget that Sudan’s strongman, in addition to harboring bin-Laden, supported Saddam Hussein’s invasion of Kuwait—a rogue-state two-fer distinction I believe Sudan only shared with Taliban Afghanistan.

As I argued in a previous post , the Bush administration has willingly engaged with Sudan, not necessarily because of its vital assistance in the war on terror, but because Washington was keen to counter Chinese influence and access in that country. And of course, there’s oil there.

In this context, China can at least congratulate itself on keeping its powder dry and ignoring calls from the Bush administration, Nicholas Kristof, and outraged never-againers to sanction Sudan in the UN. Any such action would have merely alienated Sudan, and with no practical benefit.

John Bolton’s soft-pedaling of sanctions at the UN—limiting the list of Sudan bad guys to four irrelevant second bananas--indicates that the real action on Darfur was, as it has been for the last two years, in the African Union negotiations—which the US intended to butt in on anyway.

That’s another indication to me that the Darfur settlement was part of a carefully thought-out program both to belittle and one-up Hu Jintao during his world tour, and also to puncture Chinese pretensions to challenging the US for a leadership role in the Third World.

How successful will America’s new focus on countering China be?

The vindictive aspect of the campaign—the desire to publicly humiliate Hu and China—is of a piece with Bush’s well-documented knee jerk hostility to leaders and countries that do not pay him sufficient tribute as the world’s moral and military hegemon, usually expressed in impulsive, self-defeating actions like the fiasco of Hu’s Washington visit.

Symbolically kicking sand in Hu Jintao’s face may have satisfied President Bush’s tender ego and also provided some political haven from the storm of bad news battering his administration and poll standings.

The PR and spin gods seem to be smiling on the Bush administration once again after a long absence.

The most amusing element of this story has been the credulous cheerleading of the western press and the humanitarian organizations. A mishmash agreement that lets the Khartoum regime off scot-free is greeted with such hosannas that one must believe there is a deep hunger after Iraq for the West to seize the moral ground, vis a vis China at least, regardless of the facts.

Human Rights Watch's statement is all of a piece. From Chinese president ends oil safari, to mixed reactions:

But angry critics have accused Beijing of doing business with undemocratic regimes, notably Sudan, an oil-rich nation that has for several decades used oil revenues to wage deadly successive wars on dissent.

"When Western governments try to use economic pressure to secure human rights improvements, China's no-strings rule gives dictators the means to resist," Human Rights Watch's executive director Richard Roth said recently.

It is to laugh. The Sudan regime is considerably richer and stronger and legitimate today, but little thanks to China. More thanks to Washington and its desire to counter Beijing in Africa.

But the painstaking planning and successful execution—and the focus on the Third World--argues that the overarching strategy was planned by the State Department and not the White House press office or Dick Cheney’s cabal, and has a chance of enduring, just as the State Department’s anti-Russian initiatives have persisted and flourished.

The welcome news for Africa may very well be…

Checkbook diplomacy is back, baby!

American policy seems to be moving away from the coercive insistence on US strategic priorities and moral imperatives justified by our self-assumed leadership role in the Global War on Terror.

We haven’t abandoned American unilateralism and returned to the flabby bosom of the UN, but at least the United States is now competing for the attention of Third World states, instead of merely demanding and compelling it.

African states can look forward to a profitable cycle of playing off Beijing against Washington.

All I can say is, it’s better than people shooting at each other.

And if the rickety Darfur agreement survives, we’ll be grateful for that, too.

The Thousand Days

Liberals groan at the thought of another 1000 days under the reign of George W. Bush.

China, on the other hand, probably considers that 1000 days a precious, slowly closing window of opportunity.

China has 1000 days to promote cautious and self-serving multi-lateralism as an alternative to detested Bush administration unilateralism.

China has 1000 days to promote the establishment of a nuclear, friendly Iran as a counterweight to US influence in the Gulf.

Currently, the world community appears to be unwilling to frame the Iran debate in any terms that will give the Bush administration any opportunity to claim a UN, diplomatic, or moral mandate for military action or even a position of leadership against Teheran.

And with good reason.

Too much has been revealed of the bankrupt intellectual and practical foundations of the Bush preventive war doctrine, the Bush administration’s incapacity for self-examination and self-correction, and its breathtaking mendacity and arrogance in furthering its foreign policy agenda for the world to trust President Bush’s word or his judgment.

Add to that the President’s dismal political ratings, and reports that his handlers believe that confrontation with Iran is the best way to get his poll numbers up.

Ratchet up the rhetoric against Iran too much, and President Bush might take the bit in his teeth again and drag the world into another foreign policy debacle.

As somebody said, “Fool me once, shame on you. Fool me twice, well…won’t get fooled again.”

What we see now is a grudging containment of the Bush presidency by a bizarre constellation of allies and enemies.

The world community will be happy to close the books on the Bush administration.

Once George W. Bush leaves the White House, the new president, be it Clinton, McCain, Allen, or whoever, will have the opportunity to renew the natural covenant between the United States and the prosperous world powers.

The hearts of the Europeans and Japanese do not flutter ecstatically at the idea of Hu Jintao serving as the spokesperson for the global consensus against reckless US adventurism—and they do not look kindly upon Iran’s pretensions to becoming a regional nuclear power.

In the forthcoming honeymoon, they might even let the new US president bomb Iran to his or her heart’s content—or, what’s more likely, back up Washington’s bellicosity with real sanctions and ostracization--as a sort of friendly bouquet welcoming America back to its position of leadership on the world stage.

But not yet.

Now is the time, with America sidelined, that China can really do something for Iran.

“Something” means stalling UN efforts to sanction Iran, diluting the atmosphere of crisis, and making Iran’s surreptitious march toward a nuclear weapons program appear more of a normal, ongoing element in our stress-filled world.

Currently, the Chinese have the best of both worlds.

Either Iran emerges from the current tension thanking China for making the world grit its teeth and accept Teheran’s careful crawfishing toward a nuclear weapons program as part of the global status quo…

…or the Bush administration bombs the stuffing out of Iran and the Middle East remains violently hostile to the United States for a generation.

I can’t say I blame China too much. After all, turnabout is fair play.

As Robert Dreyfuss wrote in The American Prospect, the Cheney view on foreign policy which his minions so ruthlessly and effectively imposed not only on President Bush but on the entire US foreign policy and intelligence establishment is based on a zero sum calculation against China in the Middle East.

As in Occupy Iraq: we win, Chinese lose. On to Iran.

Dreyfuss writes:

Two of the people most often encountered by Wilkerson were Cheney's Asia hands, Stephen Yates and Samantha Ravich. Through them, the fulcrum of Cheney's foreign policy--which linked energy, China, Iraq, Israel, and oil in the Middle East--can be traced. The nexus of those interrelated issues drives the OVP's broad outlook.

Many Cheney staffers were obsessed with what they saw as a looming, long-term threat from China.

...

For the Cheneyites, Middle East policy is tied to China, and in their view China's appetite for oil makes it a strategic competitor in the Persian Gulf region. Thus, they regard the control of the Gulf as a zero-sum game. They believe that the invasion of Afghanistan, the U.S. military buildup in Central Asia, the invasion of Iraq, and the expansion of the U.S. military presence in the Gulf states have combined to check China's role in the region. In particular, the toppling of Saddam Hussein and the creation of a pro-American regime in Baghdad was, for at least 10 years before 2003, a top neoconservative goal, one that united both the anti-China crowd and far-right supporters of Israel's Likud. Both saw the invasion of Iraq as the prelude to an assault on neighboring Iran.

It is more than a little ironic that Cheney’s headlong pursuit of an anti-China policy in the Middle East has given China, Iran, and their allies and sympathizers 1000 precious days of breathing space before America can resume its position of active world leadership and revive the alliance of powers seeking to limit China’s economic, political, and military reach.