The Song Remains the Same

As we continue down the path of history as usual to a world full of conflicts with issues more complex than Soviet v. Capitalist, The Economist in a recent article, Terror not China, predicts that the next US president will continue to focus on the Middle East rather than what should be considered more pressing issues: our old comrade Russia, and our new comrade China.

The article gives three reasons why the US will keep its attention on the Middle East:

• "American attention is inevitably concentrated on the regions where its troops are fighting, and sometimes dying."
• "[T]he consequences of a botched policy in that area are so serious."
• "[T]he American public is deeply divided about what to do about Iraq and beyond."
• To paraphrase from a previous issue of the magazine: American presidents cannot stand chaos in the Middle East.
  

This all boils down to al-Qaeda being a more immediate threat to the US than Russia and China.

The article offers a path for US foreign policy in Iraq that it thinks any new US president should adopt. The article advocates redefining America's mission in Iraq and redefining what victory in Iraq means. With victory in Iraq, American attention can focus Iran and Palestine. The article subtly advocates for Barack Obama saying that he is the only one who "talks about the possibility of dealing with the country directly," and the article suggests that this could set the stage for a "grand bargain" which could be fundamental in bringing peace to the region.

Dealing with the Middle East, rather than our potential rivals, China and Russia, is fine for the short term, but Russia and China are liable to be more serious potential problems than the Middle East. Here are the article's easy summaries of Russia and China:

Russia

"America's relations with Russia are likely to get even cooler than they are now."

"Russia is becoming increasingly anti-American as well as increasingly autocratic."

"Russia is furious about America's ambitions to extend its missile shield. America is furious about the way that Russia uses the superpower's problems in the Middle East to extend its own influence and forge anti-American alliances."

China

"America is getting more anxious about China's growing economic might. Anti-Chinese sentiment in America is already strong. Democrats in Congress are preparing to hammer China over counterfeit goods, product safety and exchange-rate policy. The media have been a-twitter with stories about poisoned pet food, tainted toothpaste and lead-painted toys. America's trade deficit with China has been rising relentlessly (see chart 4). Many critics argue that China is trying to cheat its way to economic success, keeping its currency artificially low to give Chinese products an unfair advantage, creating barriers to keep out American goods and allowing producers to operate largely outside the law."

"America's Sinophobia could be magnified by the Beijing Olympics in August."

"America, in short, will come face to face with a country that might become its greatest rival in the 21st century. Although some of the forecasts are over the top, China's economic growth is certainly remarkable; and economic growth is inevitably accompanied by growing political clout."

The tune might be changing a bit with a new president, but it sure would be swell if we could change our whole foreign policy band from the simple pop of the Monkees to the multi-layered and complex rock of Led Zeppelin.

Posts of the Week: 3/24 - 3/30

China’s Energy Conservation Law (Introduction) at China Environmental Law

Returning Products to a Factory in China at Silk Road International
And commentary at China Law Blog, Returning Substandard Products To Your China Factory: In Another Lifetime, Brother.

Chinese hotel liable for sales by shop; Apple opposes Hamburg recordings at IP Kat

This Just In From the MOC at China Hearsay
And commentary at IP Dragon, How Should China Spend Its Extra Yuan On IPR Enforcement?.

China Manufacturing Moving to Madagascar at China Law Blog

What We Can Learn From Dell at Managing the Dragon

Three and a Half Kinds of Factories at Silk Road International

The RMB and contradictory policies on inflation and unemployment at China Financial Markets

First QDII liquidated – reversing previous money outflows at China Financial Markets

China commodities exports to slow as domestic economy warms, imports to increase at China Briefing News

Yellow Cranes, Will You Return? at China Business Law Blog

China Marketing: Think Deep, Not Big, and Add A Twist at China Vortex

China’s Biggest Challenge for Developing the West at China Vortex

Reality Check at James Fallows

What's Up With China's Bank's Profits?

Bank of China (BOC) just reported a 31% increase in profits for 2007 over 2006, and Industrial & Commercial Bank of China (ICBC) reported a 65% increase in net profit for 2007. In a time characterized by bank crises how did these two banks with significant subprime mortgage exposure manage such a profitable year? Well, the kind folks at the Wall Street Journal had a story today by Jason Leow explaining just how the Bank of China might have managed to post an impressive increase in profits in a subprime year, "Bank of China Cuts Subprime Exposure."

Long story short, BOC simply did not include the full extent of its possible losses from subprime investments in its financial reports.

To increase the length of the story, WSJ says that analysts have suggested that BOC's accountants have taken advantage of "legal" accounting methods in China to write off their loss to the government:

"Some of the losses could have been booked to shareholder equity rather than recorded as a profit-and-loss number. If so, the government--which owns about 70% of the bank--would have taken the lion's share of the hit, rather than foreign and domestic investors. Such an accounting method is legal, analysts say."

Though we can't know for sure that this is what happened, the history of Chinese banks and non-performing loans suggests that the government isn't afraid to take a few hits for the benefit of the creditworthiness and financial health of their banks. Is it just me or is it sort of strange when Washington is overtly propping up domestic financial institutions and Beijing is covertly propping up domestic financial institutions?

Blogroll Additions and Other Changes

There are some long overdue blogroll additions I need to make in both the name of reciprocity and merit. Plus, there's going to be a little restructuring.

China Environmental Law
Charlie McElwee, counsel at Squire, Sanders & Dempsey and self-described "international energy and environmental lawyer based in Shanghai," is writing an amazing blog focused on China's energy and environmental laws. The narrow focus, substantive depth, and Charlie's experience make the blog a valuable addition to the China law blogosphere. And, Charlie also uses China Environmental Law for some nice posts that drop substantive depth for pleasure: The Birds of Shanghai.

China Esquire
Tom Chow, Associate Attorney at Gartenberg Gelfland Wasson & Selden with "practices in the areas of international business transactions, corporate law, intellectual property and general business litigation," is a prolific poster on, well, exactly what his tagline says: "Chinese law, business, and society… and anything else remotely interesting. A solid recent post: growth of e-commerce means growth opportunities for lawyers.

China Sourcing Blog
Barry van Wyk is cranking out meaty posts on sourcing from China and on China's economy. I particularly enjoyed this post: Life as a piece of iron: Mining, metals and Western 'bad guys.' The material had substance, and we get to rock out at the end of the post.

China Knowledge@Wharton
Is it a blog? Is it news? They call themselves a 'newsletter.' I don't know how to categorize them… What I do know is that every two weeks they print a series of articles with the depth and insight one should expect from a Wharton Business School publication. Until I receive protests otherwise, they're going under Blogs.

China Vortex
I feel like I've been hearing lots of good stuff about China Vortex from CLB. At one point I read it, but I never put it into my RSS feed so I forgot to keep reading. Well, today it goes into my RSS feed. I've perused some of the posts, liked what I've seen and China Vortex certainly belongs in the blogroll.

TIME: China Blog
This multi-authored blog is not always about business or law, but the posts are interesting and have depth.

Now, real quickly:

• I'm updating China Business Law Blog's address in the blog list.
• China Briefing is being moved from Blogs to News.
• China Economic Review is being moved to News, and the Editors' Journal Blog is taking its place.
  

If I missed somebody, let me know.

"China's Manufacturing Competitiveness Is at Risk": Sort Of

Knowledge@Wharton recently published an analysis of the Booz Allen & AmCham China Manufacturing Competitiveness 2007-2008 report entitled New Challenges for Foreign Producers: 'China's Manufacturing Competitiveness Is at Risk. K@W summarizes the report and conducts its own research to discover that China's manufacturing sector is still strong and that we should only expect a decline in the competitiveness of the "high labor, low value-added area" (read: basic cheap stuff).

The Booz Allen report identifies the three biggest challenges to China's manufacturing competitiveness in order as: 1) the appreciation of the RMB, which makes manufacturing costs and the costs of exported goods more expensive in real value amounts; 2) inflation, which increases commodity prices and rents; and 3) wage increases, which are necessary as inflation continues, workers become better organized and the supply of unskilled laborers becomes smaller in relation to the increasing demand for unskilled laborers. But, the AmCham study found that these concerns are only driving 17% of the 66 companies surveyed to form concrete plans to expand "manufacturing capacity to other neighboring countries." K@W notes that it is only the low-value added companies that are moving out of China because the profit margins that these companies operate under are slim enough that they will see a significant gain by moving to India, Vietnam, Thailand, Malaysia or Brazil. And, these firms that are leaving are largely Taiwanese and Hong Kong companies that first opened factories in China back "in the late 1980s and early 1990s." They set the trend with moving into China, and they are setting the trend in moving out of China.

K@W notes that high-value-added manufacturers, such as heavy harbor equipment manufacturers, have plenty of room for profit growth in China because there are many compelling reasons to keep factories in China:

• "Moving a production base is expensive and time consuming, and new markets, especially those outside China, have their own unique and unknown risks.
• "[T]he size and scope of the domestic market."
• "[T]he high quality of Chinese labor."
• Workers in nearby countries may get paid 25-50% of the wage of a Chinese worker but Chinese workers are good and tested at their jobs. Plus, the industrial equipment is high quality. And, countries such as Bangladesh and India suffer from "poverty, widespread religious zeal and a huge disparity in wealth."
  
• "[W]ages in China are still quite low by global standards."

K@W finds that the manufacturers best able to continue to thrive in China are those that insulate themselves from two of the largest concerns: RMB appreciation and wage increases. The way to do this is sell your products to the local market as well as manufacture for export. The domestic market is growing fast, partially due to wage increases, and if wealthier workers are purchasing your goods in RMB, then there are no transaction costs in currency value fluctuations. There are still transaction costs in wage increases but these are decreased by expanding into the domestic market. K@W warns that "underperformers [in manufacturing] . . . simply prefer to source and manufacture products for export." Manufacturers may continue to succeed in simply sourcing high-value added goods from China, but K@W thinks that the days of profitable low-value added sourcing from China are numbered.

For Further Reading:

Booz Allen/AmCham Shanghai Study Finds Key To China Success at All Roads Lead to China
China Competitiveness Survey at China Hearsay
As costs increase in China, Thailand and other “Tigers” see renewed investor interest at China Briefing News

Carnegie on Climate Change: Can't We All Just Get Along?

William Chandler has an interesting article at the Carnegie Endowment entitled, "Breaking the Suicide Pact: U.S.–China Cooperation on Climate Change." The suicide pact to which he refers was coined by Joe Romm who said that we're not going to come to a climate change solution because the two largest carbon emitters in the world are at loggerheads. The Chinese say that Americans individually pollute a tremendous amount and have been doing so for decades so the Americans have to fix the climate change problem. The Americans says that Chinese emissions are growing so rapidly that this growth must be responsible for climate change so the Chinese must take action. Though applying the laws of physics to social sciences may be a mistake, it seems that inertia takes over when each side blames the other and cooperation on valuable climate change initiatives will remain at rest. Fortunately, Mr. Chandler has some recommendations to break the loggerheads, reverse the inertia, and guide the US and China down the path of fruitful climate change cooperation.

Mr. Chandler's recommendations are conditioned upon Chinese and American policy-makers finding "a deeper understanding of energy realities; grasp[ing] the need for immediate action to reduce carbon emissions; and develop[ing] a new, non-treaty-based approach to reaching an international agreement." The deeper understanding that he refers to is the realization that Earth's environment cannot handle a billion more Americans. Frankly, we use A LOT of energy, and as China becomes more middle class, the nouveau milieu are going to want to spend their disposable income on such toys as cars and computers and products that require energy intensive manufacture. Basically, they'll be using more energy. Action needs to be taken by both the US and China to reduce energy intensity so that current Americans' energy use decreases and the energy use of Chinese in the future will be lower than it otherwise would be.

Mr. Chandler has several recommendations on where to begin cutting:

• Cuts in industry including the use of cogeneration and more efficient devices.
• Tougher automobile emissions controls from the pair of countries that manufacture some of the most inefficient automobiles in the world.
• Greener commercial building tech. One area where the US is dominant is window technology where China could do a lot to catch up.
• Greater reliance on natural gas and nuclear.
• Greater efficiency. The US in general, and California in particular leads the world with its virtually unique consumer appliance efficiency standards.

To help in cutting, Mr. Chandler suggests that the US and China need to back away from their "perverse policies" and adopt energy policies that look to curb emissions. Here is a list of his "perverse policies":

• Chinese intervention in energy pricing has actually made energy prices more not less expensive.
• US subsidies to gas and oil producers encourages expansion of these high-emitting energy sources.
• Chinese sponsorship of "massive, inefficient" SOEs encourages growth of coal-burning facilities and discourages innovative companies from effectively competing.
• US regulators set retail prices at the average cost of power rather than the marginal cost which gives a greater than free market return to power companies.
• China needs to adopt US style appliance efficiency standards.
• Chinese controls on foreign investment creates transaction costs, "inadvertently blocking a vital pathway for investment in energy efficiency where it could make the most difference."
• Though China's central government is committed to clean renewable energy, this "has not been translated into tangible incentives at the provincial level."

Rather than rely on Kyoto, or Bali, Mr. Chandler suggests that:

"China and the United States could cooperate to set individual, national goals and then work together to achieve them through domestically enforceable measures and international agreements that prevent either nation from taking advantage of steps taken by the other."

Mr. Chandler writes that:

"Cooperation could be organized in three priority areas: deployment of best practice technologies, innovation in new technologies, and agreements to prevent the two countries from taking advantage."

Unfortunately, I think this is where Mr. Chandler starts running into problems. I support Mr. Chandler's solutions for cooperation and hope that they are aggressively lobbied for. They are pragmatic and truly stress cooperation, but I wonder if they are possible.

The "deployment of best practice technologies" can be helped by tax breaks for best practice technologies and looser investment regulations, as Mr. Chandler suggests. The big problem is getting business leaders to cooperate by "by working with both governments to solve problems impeding the market application of existing technologies." Which business leaders? What if the best practice technology is not the best for their bottom-line, do they invite shareholder lawsuits? Is it understood that the government will implement policies to encourage the technologies so that the business leaders don't have to worry about breaching fiduciary duties? Can we trust business leaders to act fully in the interest of reducing climate change at the possible expense of their corporation's coffers? Bringing business into the mix is necessary, but dangerous.

The "innovation in new technologies" priority area relies on US state representatives, hopefully from California, heading to China and assisting provincial governments in developing similar efficiency programs. Great idea! But who will pay for it? Would the pride of local politicians scuttle the help? When US state politicians can't always agree on the best policies, how are they going to have the authority to presume to help China's provinces? It is worth a try, but it could be costly.

And, Mr. Chandler points to a general unwillingness from both Congress and Beijing to finance and work together in developing tech and testing it in the market place. Asking Congress to become a scientist is a tall order, but I suppose that it is necessary.

We need to grow closer as nations before we can cooperate, and costly programs might increase tensions rather than loosen them. Mr. Chandler acknowledges this when he writes, "A global climate change agreement will first require accommodation between the United States and China." Whether this accommodation grows from realizing that cooperation in addressing climate change should be "considered an act of mutual self-preservation," or something else, Mr. Chandler makes a good point that the US and China need to find some way to cooperate on climate change rather than simply playing the blame game that will hurt us both in the long term.

What A Week (and a Half)!

Wow! A lot happened these past few weeks, huh? Tibetan unrest, market crash, commodities crash, market recovery, market crash. My head is spinning with the possibilities of what to post.

Had I been around last week, I probably would have posted on "A ravenous dragon: A special report on China's quest for resources," from last week's Economist. Many of the articles discuss the effect of China's thirst for commodities. Two discuss the mutually beneficial relationships between China and other developing nations. One worries that China is paying too heavy of an environmental price. Another suggests that "China must learn to do more with less." The commodities articles are the centerpiece, though. But, after gold and oil each dropped around 10% last week, the Economist articles have lost much of their relevance today.

Had I been around, I almost certainly would have avoided even commenting on the situation in Tibet. I'll still avoid commenting, but I'll point you towards some very interesting reporting. Apparently, The Economist's China correspondent was the only Western journalist in Lhasa when rioting broke out. In the most recent print edition of the magazine and on Economist.com, the correspondent has published the eyewitness account and several photos of the Tibetan uprising. Here's a list of the articles:

• "Lhasa under siege"
  
• "Trashing the Beijing Road"
• "Pictures from Lhasa"
  

Though I can certainly appreciate a [probably fake] ancient Chinese curse, I wonder how much more interesting the times will get? To use a metaphor with a more concrete source, I suspect we are just entering the rabbit's hole.

I Have Returned

Germany was wonderful. If you're ever in Munich for a while, take a day and walk through the woods to Kloster Andechs. It is beautiful. But, get directions first...

My posting should return to its prior frequency.

I'll Be Back

This afternoon I leave the beautiful, 75 degree, sunny Spring Break destination beach city, the wonderful San Diego, for rainy/snowy Munich, Germany. Nothing quite goes with the cold like sausage, pretzels and beer. I'm so excited!

I'll be back next week. My email should work. Prost!

Tools: Pt. 3 Translating the Law

My friend Howard Lee, JD/MBA student at University of San Francisco, is currently translating China's laws with Adsotrans. Here's Adsotrans' description from their website:

"Adsotrans is an open source natural language processing engine for Chinese text. It is used for Chinese text annotation and analysis, machine translation, language learning, search-preprocessing, semantic analysis and data-mining"

The Adsotrans software is getting more powerful all of the time. Check out Howard's results at his website, Adsotrans China Law.

A Helm to Grasp, A Course to Steer, A Port to Seek

There's an interesting article in the Economist on a probable decline in the shipping industry, Heavy weather, A golden era for shipping may be coming to an end. According to the article the combination of a large increase in shipping capacity and higher costs, with a 5 month decline in shipments from Asia to America is driving down the profitability and share value of shipping companies. This is following a hugely profitable period for shipping. But, there have been increases in shipments from Asia to Europe with the increase in value of the Euro, and "the sharpest increase" is in shipments from America to Europe and Asia with the decline of the dollar.

Here are some key stats and figures from the article:

• The share prices of Pacific Basin and Jinhui Holdings have "increased fivefold between the middle of 2006 and the middle of 2007."
• "Staggering sums were made in private transactions" of ships:
• "[A]n iron-ore carrier built for $31m in 2001 was sold for $150m in 2007."
• "[A]n oil tanker bought for $142m and still under construction was recently resold for $168m."
• "Pacific Basin announced annual profits of $472m, up 328% on the previous year, but its share price is down almost 30% from its peak last November."
• Jinhui's shares are down even more from their November 2007 peak, and they canceled construction contracts on two iron-ore carriers, "worth $123m each."
• "About 60% of the global capacity is about to be floated, adding to a huge increase in supply."
• Oil prices are up, crews are in low supply, and inflation is driving up cargo value and insurance costs.
  

There is dispute over whether the shipper's problems stems from America's subprime mortgage debacle, or from a slowing demand for shipping right as supply is increasing.

The article writes that affirmative steps are already being taken to deal with the decline in shipping: Maersk Line is planning vessel sharing with competitors, and Neptune Orient Lines was discussing consolidation with TUI, until talks allegedly broke down.

An economic downturn, or recession or whatever they call it these days, is a great time for buyers. Sounds like it's also a great time for importers & exporters, too. As long as you have customers looking to

[A big shout out to Henry B. Adams for the title. Other quotes in the running included, "To reach a port we must sail, sometimes with the wind, and sometimes against it. But we must not drift or lie at anchor," by Oliver Wendell Holmes, Jr.; and "A ship in port is safe, but that's not what ships are built for," by Rear Admiral Grace Hopper.]

Posts of the Week: 3/2 - 3/9

Booz Allen/AmCham Shanghai Study Finds Key To China Success at All Roads to China
Richard Brubaker offers considerable insight to the recent study.

IP Win For Motorola at China Hearsay
Design patents, they work somewhere!

Recession after the Olympics? at 2Point6Billion
The comments add considerably to the discussion.

Trouble Ahead For Globalization at Managing the Dragon

"This is not the time for responsible politicians to be feeding America’s fears."

Foreign Direct Investment In China: It All Just Changed at China Law Blog
Steve Dickinson on the changing rules of foreign investment in China. Plus, see the response by Bill Dodson at This is China!

Debunking the Myths about Doing Business in China at China Business Law Blog
Brad Luo casts some critical key strokes upon some China "myths."

Dan Harris Writes A Lot About Registering Your TMs
Change Your Car's Oil. See Your China Trademark Lawyer.
Register Your IP In China. This Is What I'm Talkin 'Bout.

A Reason to Have Faith in China's Legal System: The Labor Contract Law at Transnational Law Blog
Travis Hodgkins gets [justifiably] critical on NPR's coverage of the Labor Contract Law.

Jeez louise department (China and right-wing bloggers) at James Fallows
Admittedly, I much prefer the Shorter version of "right wing bloggers and China" point:

"[C]ompared with a confrontation with Iraq or Iran, a military showdown with China would be 10 times as unnecessary and 100 times as stupid."

Cai Guo-Qiang, critic of collectivism at Marginal Revolution
Tyler Cowen suggests that we turn to the philosophy of Leo Strauss, father of neoconservatism, to fully understand Mr. Cai's art. Here are some on topic sentences from his Wikipedia biography:

"[P]hilosophers wrote esoterically to avoid persecution by the state or religious authority, while also being able to reach potential philosophers within the pious faithful. From this point on in his scholarship, Strauss deepened his conception of this means of communication between philosophers and “potential knowers.”

"Ultimately, Strauss believed that philosophers offered both an "exoteric" or salutary teaching and an "esoteric" or true teaching, which was concealed from the general reader."

From what I remember of Mr. Strauss, this method was also derived from Medieval religious scholars who wrote esoterically about Heaven because if the lay people knew what Heaven was, they might not be so interested in leading a pious life. For the record, Heaven was thought to be a singular existence where pious souls sang a single perfect note of bliss for eternity in praise of God. For the sake of converting the masses to Catholicism, it was easier to tell the flocks that Heaven was a cloudy place where you got to chill with all of your buddies.

Dumb and Dumberer on Trade at The Volokh Conspiracy
Echoing a lot of China blogging takes on the Democratic presidential candidates, and the possible fallout from their pandering to the good men and women of Ohio.

NPC on the Economy

Xinhua has ongoing special coverage of the 11th National People's Congress. Today they posted the Officials brief on Chinese economy, 11 reports on various aspects of the Chinese economy. Here are the stories and my quick summaries:

China's development chief: macroeconomic regulation "effective"
Ma Kai, Development Chief of the National Development and Reform Commission (NDRC), says, hey, our macroeconomic reform must be effective, look at our growth! To say otherwise "doesn't accord with logic or facts."

Top planner: China Feels inflation pressure, determined to reach CPI targer
Mr. Ma says, sure, there's been price hikes, but they're just "reasonable 'price recovery.'" Don't you worry, CPI will only rise 4.8% on the year.

Top planner: China's trade surplus to "last for another period of time"
Mr. Ma says, the US had a trade surplus for 80+ years of its history, Germany has had 55 years of trade surplus, and Japan has had 26 years of trade surplus. Tough luck, this is the process of globalization.

China should be cautious of U.S. subprime crisis
Zhou Xiaochuan, governor of the People's Bank of China, says, China will experience an indirect impact from America's subprime mortgage crisis. The downturn in the U.S. economy will change the global economy and have a significant impact on international trade. Plus, the Fed's interest rate cuts will have a serious affect on China's interest rate and monetary policy. Fortunately, Mr. Zhou thinks that America's subprime crisis will only have a limited direct impact on China's economy.

China's interim price control necessary, legal
Mr. Ma says, the price hikes are only "interim measures," which means the government isn't actually interfering with market prices. It must be troubling when the government is trying to convince you that their policies are legal, and this is somehow tied into what is necessary.

Recent snow, ice storms not to change fundamentals of Chinese economy
Mr. Ma says, Dude, we totally rocked during the storm. There were some "defects in the economic development ... discovered in the storms," but we're totally fixing those. See above, sort of.

China to consider seriously adjustment of taxation policy in capital market
I was really looking forward to reading this one, but the link is broken. Blast! The small excerpt reads like Beijing is going to reduce the stock trade stamp tax.

Top bank official: stronger yuan not major inflation control means
The yuan value has nothing to do with inflation! Nothing! The value of the yuan is totally decided "by market forces, or the suppliers and demanders' predictions of the trend of a currency's value."

Mainland willing to facilitate cross-Straits currency exchange
Mr. Zhou says, Sure, we'll facilitate currency exchange between the RMB and the New Taiwan Dollar, it only "requires willingness and political conditions" between Taiwan and Beijing.

China continues to lift restrictions on citizens' overseas investment
Mr. Zhou says, we don't want domestic investment overheating so restrictions will continue to be lifted.

Central bank governor voices room for China's interest rate increase
Mr. Zhou says, "China has many domestic factors to be considered in interest rate adjustment." Really, interest rate adjustment has nothing to with interest rate adjustments happening in some country on the other side of the Pacific.

Chinese Military Spending: New Year, Same Old Tune

I really wanted to avoid the topic of China's defense spending. It seems more the domain of the paranoid right-wing blogger. Fortunately, at least one publisher is not blowing this China military spending thing out of the water. Time Magazine has a pretty fair article entitled, That Murky Threat from China. Time's conclusion is summed in these lines:

"unlike the old Soviet Union, the Pentagon can't quite cite a clear and present danger. So it's pointing to China's secretiveness as justification for assuming the worst."

Ah, assuming the worst. Is there a better way of scaring up the electorate into voting for you, the one person who stands between freedom, justice and the American way, and the Red Army's tanks rolling through honest American families' cul de sacs? Don't tell anybody, but I used this same quote from Robert Graves' Count Belisarius in my first post. I just really like the quote, and it fits the situation as described by Time, aptly:

"It is well known what happens on such occasions [when a group of people/senators meet to discuss a situation]. The simplest and most obvious conclusion is rejected as unworthy of such experts in wisdom as these ingenious hoary old men, and an obscure alternative is warmly debated and then rejected; finally a most far-fetched and marvelously improper conclusion is found and unanimously accepted."

I can't quite put where I heard that Americans with their TV and video games have the attention span of a cocker-spaniel, but it was probably the liberal media. Somehow this China military buildup scare sounded familiar, not so familiar that the same news would be trumpeted out exactly annually, but maybe annually plus one or two days, or minus one or two days. Well, we’ve got all of these fancy research tools at school, and I decided I'd do some news searches to figure out if this China military buildup is used each year to strike fear into our hearts. Here are the year-by-year headlines from the New York Times, Washington Post, LA Times, Chicago Tribune, and Wall Street Journal:

2008

• NY Times, March 5, "China Plans Steep Increase in Military Spending"
• Washington Post, March 5, "China's Military Budget Reported at $59 Billion; Sharp Buildup Raises Concern in U.S."
• LA Times, Nothing!
• Chicago Tribune, March 5, "Chinese to Boost Military Spending Again"
• Wall Street Journal, March 5, "China's Military Boost May Stir Fear"
  

2007

• NY Times, March 5, "Beijing Accelerates Its Military Spending"
• Washington Post, "China Boosts Military Spending; Senior U.S. Official Presses Beijing to Clarify 'Plans and Intentions'"
• LA Times, March 5, "China announces military budget hike; The nearly 18% increase will fund raises for troops and upgrades to the nation's arsenal, analysts say"
• Chicago Tribune, March 5, "China to boost military budget; U.S. seeks details of 18 percent hike, sharpest in years"
• Wall Street Journal, March 5, "China's Military Buildup Spurs Concerns"
  

2006

• NY Times, March 5, "Chinese Premier Pledges Help for the Rural Poor, Playing Down Growth of Military Spending"
• Washington Post, March 5, "China Plans to Boost Spending in Rural Areas; Goal Is to Curb Growing Unrest" [article ends speculating whether the 14.7% increase is accurate, and whether that spending in rural areas might be going into weapons development]
• LA Times, March 5, "In Deal With India, Bush Has Eye on China" [article about deals with India as hedge against China's increasing military might]
• Chicago Tribune, March 5, "Defense spending to jump 14.7%"
• Wall Street Journal, March 6, "China Defense Outlay To Increase by 14.7%, The Most in 4 Years"
  

2005

• NY Times, March 13, "The Two Faces Of Rising China"
• Washington Post, March 21, "Rice Warns Europe Not to Sell Advanced Weaponry to China" [because we're concerned that they're already spending too much]
• LA Times, March 5, "China Boosts Spending on Military by 12.6%"
• Chicago Tribune, Nothing
• Wall Street Journal, March 22, "Europe Is Likely To Lifting China Embargo --- Arms Decision Is Put Off Due to Protests by the U.S. And Beijing Saber Rattling"
  

2004

• NY Times, Nothing!\Washington Post, March 7, "China Tells Foreigners Not to Aid Activists; Warning Appears Aimed at Dissuading U.S. From Involvement in Taiwan, Hong Kong" [detailing China's spending as connected Taiwan]
• LA Times, March 7, "China to Boost Defense Funds by 12%"
• Chicago Tribune, Nothing!
• Wall Street Journal, March 8, "U.S. Seeks to Defuse Taiwan Standoff"
  

2003

• NY Times, Nothing!
• Washington Post, March 7, "China Backs Europeans On Iraqi Inspections" [in the final paragraph John Pomfret notes that this year saw the lowest growth in military expenditure in 14 years]
• LA Times, Nothing!
• Chicago Tribune, Nothing!
• Wall Street Journal, Nothing!
  

2002

• NY Times, March 7, "China Is Increasing Its Budget For Military Spending by 17.6%"
• Washington Post, March 5, "China Raises Defense Budget Again, Push to Increase Regional Influence Hampered by Army's Struggle to Modernize"
• LA Times, March 7, "China Again Boosts Defense Budget in Bid to Upgrade Military"
• Chicago Tribune, March 5, "China increases defense spending for struggling military"
• Wall Street Journal, March 5, "China to Boost Expenditures On Defense, Other Programs"
  

2001

• NY Times, March 11, "China Sends Its Army Money, and Taiwan a Signal"
• Washington Post, March 6, "China Plans Major Boost In Spending for Military; 'Drastic Changes' Around World Cited"
• LA Times, March 5, "PROBE DISPROVES REPORTS OF IRAQ AID, CHINA SAYS; DIPLOMACY: RESPONDING TO U.S. COMPLAINTS, BEIJING CONTENDS THAT 'SERIOUS INVESTIGATIONS' FOUND NO EVIDENCE TECHNICIANS HELPED BUILD BAGHDAD AIR DEFENSES" [detailing defense spending increases]
• Chicago Tribune, March 7, "CHINA BOOSTS ARMS BUDGET; LARGEST INCREASE IN 20 YEARS SEEN AS MESSAGE TO U.S., TAIWAN"
• Wall Street Journal, March 7, "China Orders Telecom Firms To Cease Business in Iraq --- Move Comes as Nation Boosts military Spending, Warns Against Taiwan Arms Sales"
  

2000

• NY Times, March 19, "War Talk Is Cheap. War Isn't. Keep Talking"
• Washington Post, March 5, "Top Chinese Leader Urges Corruption Crackdown" [article turns into discussion on ties between 13% increase in defense spending and Taiwan]
• LA Times, March 7, "China Projects 7% Annual Growth Amid Restructuring; Asisa: 2000 Budget Also Calls for 13% Hike in Military Spending"
• Chicago Tribune, Nothing!
• Wall Street Journal, March 7, "China Heralds Budget That Trims Deficit" [but obscures real military spending that probably "reaches three times the budgeted figure"]
  

1999

• NY Times, Nothing
• Washington Post, March 5, "China's Premirer Offers Prop for Slow Economy" [but military budget includes double-digit growth]
• LA Times, Nothing
• Chicago Tribune, Nothing
• Wall Street Journal, Nothing
  

1998
Nothing

1997

• Washington Post, March 5, "China Raises Spending For Military"
• Wall Street Journal, March 3, "China Report Backs Industry Reforms and More Aid for Nation's Farmers" [and spending figures given in RMB, but the reporting is still there]
  

1996

• NY Times, March 17, "China's Military Power"
• Chicago Tribune, March 12, "Saber Rattling in Far East"
• Wall Street Journal, March 7, "The Defense of Taiwan"
  

1995
Nothing

1994
Not Enough

1993

• NY Times, March 17, "China Raises Military Budget Despite Deficit"
• LA Times, March 17, "China to Boost Military Spending"
• Chicago Tribune, March 17, "China again raises budget for military"
• Wall Street Journal, March 31, "Security Tensions Rise in Southeast Asia"
  

1992

• NY Times, March 22, "China to Reward Army With 13% Increase in Military Budget"

1991

• NY Times, March 27, "China to Raise Arms Spending Again"
• LA Times, March 27, "China; Defense Spending to Rise 13% in 1991"
• Washington Post, March 27, "China Boosts Arms Budget 12%"
  

1990

• Washington Post, March 22, "China Increases Spending On Military by 15 Percent"

1989

• LA Times, March 25, "China's Military Budget to Drop 6% Despite Officers' Protests"

A military budget drop is probably a good place for me to stop… So, every year for almost the past twenty years we've been told that China's military spending has been increasing at an alarming rate. The tone has shifted from a military buildup to seize Taiwan to a military buildup that threatens the U.S. Thus far, China has not acted upon either...

So what's the deal with these military buildups? Should we really be worried? Is there some sort of tipping point situation here where we won't really notice until it is too late? Does the military buildup really have anything to do with the U.S.?

China does share borders with a bunch of scary places: Burma and its Myanmar military junta, the Kashmir area with ownership in dispute between nuclear-armed states Pakistan & India, Afghanistan, all the other -Stans, plus rampant piracy in the South China Sea. And, China is extending itself into Africa, and the political situation across Africa suggests that it is a good idea to bring lots of guns with you. Brazil's geopolitical problems are minor concerned to the threats in Asia.

Also, China, unlike Europe, is not party to a strong defense treaty, such as NATO. In war, China is on its own and that should give them some justification in building their own military. Not that I ever want to get involved in a war against a Chinese army.

China Homegrown Private Equity

There's a new article by Knowledge@Wharton on the emerging Chinese private equity funds, The Changing Private Equity Landscape in China: The Emergence of the Local RMB Fund. Though foreign private equity and venture capital has grown from US$500 million to US$15.5 billion in 2006, China has been implementing stricter regulations for foreign private equity firms. China's growing liquidity and regulation on foreigners is allowing homegrown Chinese private equity firms to grow.

The benefits to local firms include:

• "Less regulatory scrutiny"
• I suppose this is the insinuation that domestic firms can "get away" with bending more rules
• Also, offshore holding entities are required for freely convertible dollar returns to foreign investors, and "recent regulations in China have made it extremely difficult, if not impossible, to create offshore entities"
  
• "Fewer ownership restrictions"
• Foreign firms are limited in the industries they can invest in, but some argue that the sectors which are not overheated have more opportunities than money available
• Foreigner firms are only allowed to take minority positions in many industries
• "Better access" to transactions and deals
• Local governance
• Rather than having to rely on a home office in another country, the Chinese PE companies can respond quickly to deals because central management is located in China

The hurdles for local firms:

• Lack of Experience
  
• Foreign equity firms have been at their jobs for a long time, whereas "Only a few years ago, there were no local [Chinese] firms"
• Adverse Tax Implications on Exit
• Employee turnover
• "[T]heir incentive structure is not as sophisticated as the international funds so it’s hard to retain a professional team."

For all of the benefits, that last hurdle is a high hurdle, especially in an industry where your people seem to be of utmost importance.

Posts of the Week: 2/25 - 3/2

Several Takes on Factory Closings in the South of China
Guangdong Manufacturers: “The Reports Of Our Death Have Been Greatly Exaggerated” at The China Game
Moving To Inland China: Anhui As The New Guangdong at China Law Blog
Factory Closing: Why Is Anyone Shocked? This Was Coming… at All Roads Lead to China

Pirated DVD Brands and Brand Awareness at IP Dragon
Are pirates learning the value of IP?

Conversation on the AML
Will the Anti-monopoly Law assist central regional development? at China Briefing News
Interesting Theory at Boulder2Beijing

When will China take over the US economically? at China financial markets
Michael Pettis doesn't think it will be any time soon.

G2000 v. 2000: Do Fear the Domino Effect at China Business Law Blog

Why Chinese Companies Fail In The US, Part II. at China Law Blog
Real interesting exchange here...

Will inflation affect China and the US differently? at China financial markets
Maybe...

What You Say In Ohio, Does Not Stay in Ohio

A couple of days ago on The Daily Show, Madeleine Albright talked about how one of the most dangerous things U.S. politicians do is pander to their base while forgetting that the rest of the world is listening in as well. I immediately thought of Mr. Obama and Mrs. Clinton's fight in Ohio over who opposes NAFTA more. Ms. Albright could very well have been referring to this exchange as well because she was Secretary of State for the man who made the passage of NAFTA a priority. The Free Exchange has a post on the international waves that Mr. Obama and Mrs. Clinton's fight in Ohio is making. Here's what Free Exchange has to say on the Get of rid of NAFTA idea:

It is a bad idea, to say the least. Not only because of the economic benefits of greater economic integration, but for geopolitical reasons as well. In the wake of Democratic statements on the trade deal, government leaders from Canada and Mexico expressed their deep displeasure at the rhetoric, and at the possibility that an American president would go back on his country's word and ignore the concerns of valuable trading partners, just to secure a few votes.

There is a solid discussion of the goods and bad (plural and singular intentional) of NAFTA at that post, plus a post from a couple of days earlier, An unfortunate lack of clarity. The author at FX offers hope that "once the campaigns move beyond Ohio, the rhetoric on trade will mature."

Over at China Law Blog, Dan Harris writes some words that I have had a hard time convincing a friend of mine is true:

Many (most?) in China believe the rest of the world (the United States, in particular) do not want China to rise.

This friend has a background in Middle East foreign policy, so he's got some chops on the world. He says there is no reason for them to believe this, and I say well look at all the smack talking our presidential candidates do about China, and he replies that it is highly unlikely the Chinese are paying close enough attention to everything coming out of our politician's mouths. He thinks that it is our actions towards China, and not our words that should matter. But words do matter, and a country founded on the ideals of a Manifesto written by a couple of Prussians almost exactly one hundred years before its establishment knows just how much words do matter.

My policy is usually to never assume too much of a government, but China certainly has the manpower to monitor the China-words being exchanged in Washington. The majority of those China-words are negative nonsense about how if China is not out to poison our pets and children, then they're stealing all of our jobs and IP (Stan Abrams at China Hearsay keeps a chronicle of this stuff). If the Chinese think that we distrust them then they are wise to pursue strategies and tactics under the assumption that we will become adversaries, such as anti-satellite weapons and computer hacking brigades. But if we can bring a higher level of discourse that assumes friendship rather than competition, then less time and money is going to be wasted by both sides.

National-level politicians in the U.S. are quite intelligent people, but many of them have gotten to their position by success at pandering to their electoral base. They must know America has 150 years of thriving under and fighting for free trade. If they had the cojones to speak candidly on the benefits of working with China for most of America and the unfortunate consequences for our basic manufacturing industries, rather than their current cowardice in bashing China and free trade when it is politically expedient, then we could go a lot further towards the warm and fuzzy goal of creating a more prosperous Earth (cojones/cowardice in tribute to Ms. Albright).


Hilarious Side Comment
One of the comments at the FX Post by world citizen has a great description of what IP piracy is and why developing nations can't justify exploiting it, and how cutting subsidies to our own industries might encourage our trade partners to step up their IP enforcement:

Intellectual Property is what the U.S. produces. Piracy is akin to someone stealing a container of oranges from Mexico, another container of bananas from Brazil, a container of nuts from Africa and a truckload of bowls from China and sell fruit salad on the street at 50 cents a cup. Poor countries produce raw materials, richer countries produce technology. I agree, however, that inorder to protect intellectual property rights, we must respect the agricultural needs of our trading partners, be it Sugar cane or Ethanol from Brazil to allow corn from the U.S. to be exported to Mexico or allowing avocados and onions to freely come from Mexico while they pay full price for CDs and DVDs. This is specialization and that is what makes trade work.