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Sunday, March 20, 2011

Taking small steps in its own path


Made In China By Chow How Ban



Despite calls on the Internet to emulate the political unrest in Middle-Eastern and African nations, most Chinese prefer to stay away from even peaceful strolls – they are happy with the direction China has taken thus far. 

CHINA has every reason to believe that a Middle East or North African-style uprising would not occur in the country.

Time is still on the Communist Party-led government’s side to set everything right and show its people that it will be able to address inflation, their grievances on social injustice, corruption and lack of democracy.

In general, the Chinese are quite happy with the way the government has propelled the nation to economic and social successes.

Nevertheless, the minority pre-democracy activists circulated messages on the Internet, encouraging the public to take to the streets in Beijing, Shanghai, Guangzhou and other cities for a peaceful stroll every Sunday.

However, in the past four weeks, few actually turned up.

The preventive measures taken by China, like blackouts of postings calling for revolts on the Net and reminders to university students against gatherings were effective, not to mention the large police presence at the suggested places of protests.

The Chinese Foreign Ministry, pressed by the foreign media on the issue, described the issue as something “created out of thin air”.

Last week, its minister Yang Jiechi said that he had not seen any sign of tension in China. Rather, its people had a joyful Lunar New Year and are focussed on pursuing development.

After the Chinese National People’s Congress (NPC) session in Beijing on Monday, premier Wen Jiabao told reporters it was not right to draw parallels between China and the troubled countries.

“After 30 years of reforms and opening up, China has achieved rapid economic and social development,” he said.

“I believe the Chinese people have seen that the government is taking serious steps to address the challenges and problems brought about by development.”

He said although China had become the world’s second largest economy, its people were aware that China remained a developing country with a huge population, weak economic foundation and uneven development.

He dismissed suggestions that China had developed its very own model that could be emulated by other countries.

“We simply embarked on a path that fits China’s conditions.”

Wen hinted that China would continue to push for political reforms that the Communist Party deemed necessary to vitalise both the party and country.

He cited elections for NPC deputies at county and cities without districts, full administrative power in villages, indirect elections at and above city levels, and multi-candidates elections for members of the party’s central committees, as some examples of China’s efforts to promote democracy.

“Nothing in this world stays immutable and it is only through reform that we ensure continuous existence and growth,” he added.

However, Wu Bangguo, chairman of the NPC Standing Committee, China’s top legislative body, told about 3,000 deputies that China would not adopt a multi-party rotation system or other Western political systems.

“Following our own path and promoting socialism with Chinese characteristics is the only correct road to development for China. If we waver, it is possible the country will suffer internal disorder,” he said.

Two weeks after comprehensive foreign media coverage on the protests, several state-owned newspapers finally voiced out their views.

The government’s mouthpiece People’s Daily said that while the world was reeling from the loss of lives in the Middle Eastern nations, crippled by political turmoil, some quarters with ulterior motives were hoping that the Chinese would embark on similar street protests.

“China is not the Middle East. The Chinese are taking small steps to become prosperous. They deeply understand that if they want to lead a better life the precondition is a stable society,” the daily said.

Chen Jingqiu, a member of the China Association for Promoting Democracy and Chinese Political Consultative Conference (CPPCC), said the government was trying its best to address the people’s grievances on government transparency and social injustice.

“The government will have to meet some benchmark in running the country, and the CPPCC members and NPC deputies will gauge their performance,” he said.

“More importantly, we must sort out our domestic relations. I believe revolutionary protests like those in the Middle East and North Africa will not happen in China.”

Saturday, March 19, 2011

After the tsunami - Chaos theory in real life

THINK ASIAN By ANDREW SHENG 

Chaos theory in real life





http://www.youtube.com/watch?v=93OkKykpovw&feature=player_detailpage#t=59s

I was at an IMF conference on capital flows in Bali when the Japanese earthquake and tsunami occurred. As the tragedy unfolded over the weekend, it became clear that the crisis was complicated by nuclear considerations. All of our sympathies and condolences go with our Japanese friends as they go through this terrible natural disaster, possibly larger than the Kobe earthquake.

When the Year of the Rabbit ushered away the Year of the Tiger, there was a false spring in February when financial markets were buoyant as everyone thought recovery was in the air. Even the Nikkei stock market index reached a recent peak. The US economy seemed to be on the upswing as unemployment numbers declined one percentage point. The earthquake shattered that illusion of recovery.

Chaos theory is always introduced by the idea that the flutter of a butterfly's wings can cause a hurricane the other side of the world. We now see Chaos theory in real life. A tsunami in Japan can hit the west coast of the United States, but financial markets immediately reacted around the world, as everyone tried to assess what the largest net foreign asset holder in the world would do. Will the Japanese sell off their foreign assets to finance their own post-earthquake reconstruction? If they do so, will they sell off foreign currencies and buy back yen, which will make the yen stronger?

On the other side of the world, there was another earth-shattering pronouncement, not immediately comprehensible by ordinary investors, but very significant in terms of financial markets.

On Oct 15, 2010, Pimco, the world's largest bond fund manager, with probably US$1 trillion under management, announced that their Total Return Bond fund was cutting their holdings in US Treasuries as a result of quantitative easing. Most retail investors probably did not notice that announcement.

But on March 9 this year, the head of Pimco, Bill Gross, announced that at the end of February 2011, the fund had sold off all its US Treasuries and agency debt. To me, that is as significant as a tsunami in financial markets.

I did not fully digest the significance of that event because I was travelling from Washington DC to Bali. But after I downloaded Gross' comments, available at www.pimco.com, I began to understand his thinking. He showed a fascinating chart on who was and will be holding US Treasuries. In the past, the Federal Reserve only held 10%, foreigners 50% and US institutions and individuals held 40%. Since the beginning of QE2, the Fed has been buying 70% and foreigners are buying 30%, while US institutions are staying on the sidelines.

So why are US funds like Pimco not buying? Part of the reason is that “Treasury yields are perhaps 150 basis points or 1.5% too low when viewed on a historical context and when compared with expected nominal GDP growth of 5%.”

In other words, the US dollar is violating the second of the three pillars which give it the most-favoured-currency status, according to Barry Eichengreen, professor at University of California at Berkeley, who has a great understanding of the special role of the US dollar from the span of economic history.

On March 2, 2011, Prof Eichengreen wrote an article in the Wall Street Journal arguingL: “Why the Dollar's Reign is Near an End”. The three pillars are firstly, the depth of US dollar-denominated debt securities, secondly, the dollar is the world's safe haven, and thirdly, the dollar benefits from a dearth of alternatives.

Currently, 42.5% of global foreign exchange transactions are conducted in US dollars, compared with 19.5% for the euro, 8.5% for the yen and 6.4% for sterling. This is because commodities like oil and gold are priced in dollars. Moreover, a large chunk of foreign exchange reserves are held in US dollars, the largest being Asian and Opec central banks and sovereign wealth funds.

The preliminary report on foreign holdings of US securities as at the end of June 2010 was published at the end of February 2011 by the US Treasury. Foreign holdings increased US$1 trillion from a year ago to US$10.7 trillion, of which US$2.8 trillion was in equities and the balance in debt securities. Out of the US$10.7 trillion, China held US$1.6 trillion (15%), Japan US$1.393 trillion (13%) and Middle East oil producers US$350bil. So, the real fear of Bill Gross is the question: “Who will buy Treasuries when the Fed doesn't?”

More important, what happens if the foreigners decide like Pimco not to buy any more Treasuries, especially when they decide to bring their money home for their own domestic purposes?

Consequently, we are even closer to the edge of higher currency volatility than what the market is telling us. One of the big lessons of the recent past is that the price of money and risk spreads (and credit rating agencies) have not warned investors of the inherent risks in financial securities.

With QE2 and near-zero interest rates in the major reserve currencies, the spreads simply do not reflect the inherent risks that I have outlined above. This means that sooner or later there will be a spike in the price, or a sharp fall in value, if history is any lesson to go by.

Indeed, I have argued that even though the Dow Jones Industrial Average has doubled since the beginning of QE2 in 2008, if you deflate the index by the price of gold, the equity market has crashed already.

I would be the first one to hope that the current economic recovery in the United States and Europe will be sustainable. I strongly hope that Japan will recover quickly from this sudden shock and tragedy. But I would not be responsible if I did not think that the financial markets are once again not reflecting the risks out there. Just like Bill Gross, it is legitimate to ask “whether Quantitative Easing policies actually heal, as opposed to cover up, symptoms of an unhealthy economy.”

Watch this space.

Andrew Sheng is the author of the book “From Asian to Global Financial Crisis”.

Friday, March 18, 2011

Quake shifted Japan 2.4 meters east




The massive earthquake that devastated northeastern Japan has shifted the country more than 2 meters away from the neighboring Korean Peninsula, scientists said.

The Korea Astronomy and Space Science Institute (KASSI) said the Korean Peninsula moved east up to five centimeters while Japan shifted some 2.4 meters east.

Consequently, the distance between the countries increased by more than 2 meters, the institute said.

The disputed Dokdo islands, also claimed by Japan where they are known as Takeshima, relocated the furthest, moving 5 cm east, as the islands in the Sea of Japan are relatively closer to the epicenter.

The southwestern port of Mokpo drifted 1.21 cm.

"We are closely monitoring to see whether the shift was temporary or perpetual," KASSI said.

"But don't worry. You will never feel the change anyway," she said.

According to NASA, the magnitude-9.0 earthquake also shortened Earth's day by just over one-millionth of a second and shifted the Earth's axis by about 16.5 cm.


Source: China Daily,Agence France-Presse

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