Burying the pain
How a nation deals with its past has a vital bearing on both its present and future

Dominique Moisi
Oct 19, 2009           
     
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A nation's relationship with its past is crucial to its present and its future, to its ability to "move on" with its life, or to learn from its past errors, not to repeat them. There is the past that "isn't dead and buried. In fact, it is not even past," in William Faulkner's famous phrase. Such a past obsessively blocks any possible evolution towards a necessary reconciliation with oneself and a former or current foe.

Such a past is painfully visible today, for example, in the Balkans, a world largely paralysed by a painful fixation on the conflicts that tore the region apart in the 1990s. An absolute inability to consider the point of view of the other and to go beyond a sense of collective martyrdom still lingers, unequally to be fair, over the entire region.

What the Balkans needs nowadays are not historians or political scientists, but psychoanalysts who can help them transcend their past for the sake of the present and the future. It is to be hoped that the promised entrance into the European Union will constitute the best "psychoanalytical cure".

In contrast to this paranoid version of the past is a past that is buried under silence and propaganda; a past that is simply not dealt with and remains like a secret wound that can become reopened at any moment. Of course, non-treatment of the past is not the exclusive privilege of non-democratic regimes.

More than 30 years after the disappearance of the long dictatorship of Francisco Franco, Spain finds itself confronted by the shadows of a past it has deliberately chosen not to confront. That supposedly buried past was always there, poised to erupt with a vengeance once the economic miracle slowed or stopped.

China, which has just been celebrating with a martial pomp the 60th anniversary of Mao Zedong's founding of the People's Republic constitutes one of the most interesting cases of a nation evincing "shortsightedness" towards its past. China has a lot to show in its recent history. Just consider the massive access to education of its huge rural population in contrast with its "democratic rival" India. So China's pride nowadays is legitimate.

In 60 years, a once weak and divided country, torn apart by internal and external wars, is on the verge of becoming the second most powerful economy in the world. China's insolent prosperity (SEHK: 0803, announcements, news) (even if it is far from being distributed equally), and its relative political stability (even if the regime's opening remains strictly limited), are undeniable and deserving of respect.

But the success of a country that has so mobilised its energies as to transform past humiliations into massive national pride is not accompanied - and this is an understatement - by a responsible opening into its past.

From 1957 to 1976, from the beginning of Mao's Great Leap Forward that led to a mass famine and the deaths of tens of millions of people, to the end of the Cultural Revolution that left Chinese society divided and traumatised due to its wanton cruelty and the destruction of cultural goods, China endured two hideous decades. China must confront them if it wants to progress domestically and become a respected and respectable actor of the international system.

But how can China become capable of implementing the "rule of law" it so badly needs, let us not even speak of democracy, if it continues to systematically lie to its people about the recent past? To refuse to deal with a painful past is to risk reproducing it.

Such a choice can encourage the most dangerous nationalist tendencies within a society that does not know, especially young people, what hides behind the silence and official lies.

The Chinese students I taught at Harvard University last year ignored almost completely their recent history. They reacted with a somewhat defiant nationalism to critical observations. They would "check the accuracy" of historical remarks that did not fit with the history they had been taught at school. How could I be so critical of Mao? It only demonstrated my Western bias against a rising Asian giant.

Between the two extreme of the Balkans and China, the relationship between "memory" and "history" knows so many shades of grey.

It took France nearly 50 years to openly confront its Vichy past and to recognise that the French state had been guilty of collaboration with the Nazis. The country's colonial past remains a painful issue that is still far from being confronted in a dispassionate, objective manner. It is as if truth and justice are seen as potential obstacles to peace, stability and progress.

But there is a major difference between the search for historical truth, which is an absolute must for a society at large, and the search for the settling of scores and the punishment of those found and declared guilty. One must know the past, not to risk repeating it, but also to transcend it.

But between a history that paralyses a nation's ability to "move on" collectively and an absolute unwillingness to face the past, which can lead to criticism of the present, there is ample room for manoeuvre. Healthy nations use that room to bury the pain of the past, if not the past itself.

Dominique Moisi is visiting professor of government at Harvard and author, most recently, of The Geopolitics of Emotion. Copyright: Project Syndicate



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Remember the banking recovery? Think again


Paul Krugman
Oct 20, 2009           
     
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It was the best of times, it was the worst of times. OK, maybe not literally the worst, but definitely bad. And the contrast between the immense good fortune of a few and the continuing suffering of all too many boded ill for the future.

I'm talking, of course, about the state of the banks. The lucky few garnered most of the headlines, as many reacted with fury to the spectacle of Goldman Sachs making record profits and paying huge bonuses even as the rest of America, the victim of a slump made on Wall Street, continues to bleed jobs.

But it's not a simple case of flourishing banks versus ailing workers: banks that are actually in the business of lending, as opposed to trading, are still in trouble. Most notably, Citigroup and Bank of America, which silenced talk of nationalisation earlier this year by claiming that they had returned to profitability, are now back to reporting losses.

Ask the people at Goldman, and they'll tell you that it's nobody's business but their own how much they earn. But as one critic recently put it: "There is no financial institution that exists today that is not the direct or indirect beneficiary of trillions of dollars of taxpayer support for the financial system."

So who was this thundering bank critic? None other than Lawrence Summers, the Obama administration's chief economist - and one of the architects of its bank policy, which up until now has been to go easy on financial institutions and hope that they mend themselves.

Why the change in tone? Administration officials are furious at the way the financial industry, just months after receiving a gigantic taxpayer bailout, is lobbying fiercely against serious reform. But you have to wonder what they expected to happen. They followed a softly, softly policy, providing aid with few strings, when all of Wall Street was on the ropes; this left them with very little leverage over firms like Goldman that are now, once again, making a lot of money.

But there's an even bigger problem: While the wheeler-dealer side of the financial industry - trading operations - is highly profitable again, the part of banking that really matters - lending, which fuels investment and job creation - is not. Key banks remain financially weak, which is hurting the economy as a whole.

Earlier this year there was a big debate about how to get the banks lending again. Some analysts argued that at least some major banks needed a large injection of capital from taxpayers, and that the only way to do this was to temporarily nationalise the most troubled banks. But, the debate faded out after Citigroup and Bank of America, the banking system's weakest links, announced surprise profits. All was well, we were told, now that the banks were profitable again.

But a funny thing happened on the way back to a sound banking system: Last week both banks announced losses in the third quarter. What happened?

Part of the answer is that those earlier profits were in part a figment of accountants' imaginations. More broadly, however, we're looking at payback from the real economy. In the first phase of the crisis, Main Street was punished for Wall Street's misdeeds; now broad economic distress, especially persistent high unemployment, is leading to big losses on mortgage loans and credit cards.

And here's the thing: The continuing weakness of many banks is helping to perpetuate that economic distress. Banks remain reluctant to lend, and tight credit, especially for small businesses, stands in the way of the strong recovery we need.

The main thing for the time being is probably to do as much as possible to support job growth. With luck, this will produce a virtuous circle in which an improving economy strengthens the banks, which then become more willing to lend.

Beyond that, we desperately need to pass effective financial reform. For if we don't, bankers will soon be taking even bigger risks than they did in the run-up to this crisis.

Paul Krugman is a New York Times columnist


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The big burnout
Stimulus packages have fed speculation, not investment, creating dangerous new asset bubbles

Andy Xie
Oct 21, 2009           
     
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Central banks around the world have released massive amounts of money in response to the current financial crisis. How to exit from the current super-loose monetary environment has become a popular discussion. The central bankers are talking down the prospect of raising interest rates, arguing that the weak economy keeps inflation in check. But the proposition that a weak economy means low inflation is false. The stagflation of the 1970s proves it. This round of monetary growth has mainly fed speculation, not credit demand for consumption or investment. Speculation has reached a dangerous point with the oil price threatening to reach triple digits again. Its implications for inflation may spook the central banks to raise interest rates quickly and trigger another crash.

The excess money supply has created a new liquidity bubble. The resulting asset inflation (stocks and bonds in developed markets and everything in emerging markets) has stabilised the global economy. The current equilibrium is one on a pinhead. The hope for strong economic recovery led by emerging economies raises investor optimism - and asset prices. This eases pressure on corporate balance sheets, spurs property production and boosts consumption through the wealth effect, making the hope self-fulfilling in the short term.

A rising oil price threatens to derail this recovery. It can trigger a surge in inflation expectation and a major crash of bond markets. The resulting high bond yields may force the central banks to raise interest rates to cool inflation fears. Another major downturn in asset prices would reignite fears about the balance sheets of global financial institutions, leading to new chaos.

The last two times the oil price surged above US$100, it wreaked havoc on the financial markets and global economy. The runaway oil prices of 2006 were the final straw that tipped the US property market. The oil price fell sharply amid the subprime crisis as the market feared a demand collapse. Then, the Fed came to the rescue and began cutting interest rates aggressively in the summer of 2007 in the name of combating the recessionary impact of the subprime crisis. The oil price rose sharply afterwards on the optimism that the Fed would rescue the economy, and with it, oil demand. It worked to offset the Fed's stimulus, accelerated the economic decline, and pulled the rug out from under the derivatives bubble. The ensuing demand fear again caused the oil price to collapse.

The central banks are using cheap money to inflate asset prices to stabilise the economy. But it also provides the ammunition for oil speculation. An oil bubble is different from others in two ways: it immediately redistributes income, and generates inflation; that is, it weakens consumption and tightens financial conditions on rising expectations for interest rate increases. Oil speculation is the party crasher, even though it destroys itself by destroying others.

Oil is perfect material for a bubble. Supply cannot respond quickly to price surges - it takes a long time to expand production. Demand cannot drop quickly due to the "stickiness" of consumers' lifestyles and the modes of production.

Oil speculators are no longer restricted to secretive hedge funds. Average Joes can buy exchange traded funds (ETFs) to own oil or anything else. And, why not? The central banks have made clear their intentions to keep money supplies as high as possible, debasing the value of paper money to help debtors.

It seems that no good deed goes unpunished in this world. If you speculate big, governments will bail out when your bets go wrong and cut interest rates and guarantee your debts for you to make even bigger bets. Savers who live within their means and leave some for rainy days see their dreams shattered. Maybe everyone should be a hedge fund. The ETFs give you this opportunity. As the masses are given incentives to avoid paper money by buying hard assets like oil, a three-digit oil price appears more likely.

A word of caution for would-be speculators: run for your life as soon as the bond market starts to plunge. The oil bubble is easy to come and quick to go, because, as it kills other bubbles, the oxygen for its existence is also consumed.

The case for a double dip in 2010 is already strong. Inventory restocking and fiscal stimulus are behind the current economic recovery. The odds are quite low that western consumption will pick up when the recovery runs out of steam next year. High unemployment will keep incomes too weak to support spending.

Many analysts argue that, as long as unemployment rates are high, more and more stimuli should be applied. As I have argued before, the demand and supply mismatch rather than demand weakness per se is the main reason for high unemployment. Further stimuli will only trigger inflation and financial instability.

The current generation of central bankers has ignored asset inflation and believed in maximising employment through monetary stimulus. They have ignored the fact that the economy needs to purge deadwood from time to time.

The stagflation in the 1970s discredited Keynesians who ignored the inflation consequences of sustained monetary expansion. This crisis will discredit those who ignore asset bubbles.

Andy Xie is an independent economist


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Coal conundrum
The US Senate is shaping up as the final hurdle to a new global treaty on climate change

Jeffrey Sachs
Oct 22, 2009           
     
      

  



The United Nations Climate Change Treaty, signed in 1992, committed the world to "avoiding dangerous anthropogenic interference in the climate system". Yet, since that time, greenhouse gas emissions have continued to soar.

The United States has proved to be the biggest laggard in the world, refusing to sign the 1997 Kyoto Protocol or to adopt any effective domestic emissions controls. As we head into the global summit in Copenhagen in December to negotiate a successor to the Kyoto Protocol, the US is once again the focus of concern. Even now, American politics remains strongly divided over climate change - though US President Barack Obama has new opportunities to break the logjam.

A year after the 1992 treaty, president Bill Clinton tried to pass an energy tax that would have helped the US to begin reducing its dependence on fossil fuels. The proposal not only failed, but also triggered a political backlash. When the Kyoto Protocol was adopted in 1997, Clinton did not even send it to the US Senate for ratification, knowing that it would be rejected. President George W. Bush repudiated the Kyoto Protocol in 2001 and did essentially nothing on climate change during his presidency.

There are several reasons for US inaction - including ideology and scientific ignorance - but a lot comes down to one word: coal. No fewer than 25 states produce the commodity, which not only generates income, jobs and tax revenue, but also provides a disproportionately large share of their energy.

Per capita carbon emissions in US coal states tend to be much higher than the national average. Since addressing climate change is first and foremost directed at reduced emissions from coal - the most carbon-intensive of all fuels - the coal states are fearful about the economic implications of any controls (though the oil and motor industries are not far behind).

The US political system poses special problems as well. To ratify a treaty requires the support of 67 of the Senate's 100 members, a nearly impossible hurdle. The Republican Party, with its 40 Senate seats, is simply filled with too many ideologues - and, indeed, too many senators intent on derailing any Obama initiative - to offer enough votes to reach the 67-vote threshold. The Democratic Party includes senators from coal and oil states who are unlikely to support decisive action.

The idea this time around is to avoid the need for 67 votes by focusing on domestic legislation rather than a treaty. Domestic legislation (as opposed to international treaties) requires a simple majority in both the House of Representatives and the Senate. Getting 50 votes for a climate-change bill (with a tie vote broken by the vice president) is almost certain.

But opponents of legislation can threaten to filibuster (speak for an indefinite period and thereby paralyse Senate business), which can be ended only if 60 senators support bringing the legislation to a vote. Otherwise, proposed legislation can be killed, even if it has the support of a simple majority. That will certainly be true of domestic climate-change legislation. Securing 60 votes is a steep hill to climb.

Political analysts know that the votes will depend on individual senators' ideologies, states' voting patterns, and states' dependence on coal relative to other energy sources. Based on these factors, one analysis counts 50 likely Democratic "yes" votes and 34 Republican "no" votes, leaving 16 votes still in play. Ten of the swing votes are Democrats, mainly from coal states; the other six are Republicans who conceivably could vote with the president and the Democratic majority.

Until recently, many believed that China and India would be the real holdouts in the global climate-change negotiations. Yet China has announced a set of major initiatives - in solar, wind, nuclear and carbon-capture technologies - to reduce its economy's greenhouse-gas intensity.

India, long feared to be a spoiler, has said that it is ready to adopt a significant national action plan to move towards a trajectory of sustainable energy. These actions put the US under growing pressure to act. With developing countries displaying their readiness to reach a global deal, could the US Senate really prove to be the world's last great holdout?

Obama has tools at his command to bring the US into the global mainstream on climate change. First, he is negotiating side deals with holdout senators to cushion the economic impact on coal states and to increase US investments in the research and development, and eventually adoption, of clean-coal technologies.

Second, he can command the Environmental Protection Agency to impose administrative controls on coal plants and car producers even if Congress does not pass new legislation. This route might turn out to be even more important than the legislative route.

The politics of the US Senate should not obscure the larger point: America has acted irresponsibly since signing the climate treaty in 1992. It is the world's most powerful country, the one most responsible for climate change to this point, and has behaved without any sense of duty - to its own citizens, to the world, and to future generations.

Even coal-state senators should be ashamed. Sure, their states need some extra help, but narrow interests should not be permitted to endanger our planet's future. It is time for the US to rejoin the global family.

Jeffrey D. Sachs is professor of economics and director of the Earth Institute at Columbia University. Copyright: Project Syndicate


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We don't need this delay on e-textbooks


LEADER

Oct 23, 2009           
     
      

  



The benefits of electronic school textbooks are compelling. They cost half as much as ordinary books, are easy to locate and manage, can be quickly kept up to date, are environmentally responsible and do not risk a child's physical well-being when carried in number in a backpack. Unsurprisingly, school boards and districts the world over are speedily adopting them. But such attributes are not so impressive to a Hong Kong government working group, which after a year of study, has recommended a cautious, go-slow, approach.

Among the group's key suggestions are launching a three-year "promoting e-learning" pilot scheme in up to 30 of our city's 1,060 schools and giving a one-off grant to buy resources. The conclusions are at vast odds with those drawn by the governor of the US state of California, Arnold Schwarzenegger, who in June launched a digital textbook initiative in the name of cutting costs and keeping learning material fresh and relevant. Students are being given free electronic readers, and publishers pushed to quickly make books available. California is by no means at the cutting edge; there are some Hong Kong schools already using the technology.

The working group's chairman, undersecretary for education Kenneth Chen Wei-on, said in unveiling the report yesterday that the interests of stakeholders had been taken into account. This is a euphemism for publishers, who profit lavishly from the textbooks parents have to buy so that their children can get an education. The books are expensive and frequently updated, making their second-hand use impractical. Publishers benefit from the arrangement, as does the government in the taxes it gets as a share from their profits; authorities are in no hurry to dramatically make changes.

Some parents are unsure about e-books. They worry that their children's eyesight will be affected. Others fear that learning electronically may not be effective. Three decades of home and office computers and doctors' advice to take regular, short, breaks from screens make such worries groundless.

The benefits of e-books are obvious. Their widespread use in classrooms one day is inevitable. A go-slow only hampers educational possibilities. Authorities should look beyond the group's narrow suggestions and embrace a forward-thinking policy.


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THIS IS GOOD PRATICE FOR EVEVRYONE

PhD fellowship scheme an investment in education


Albert Cheng
Oct 28, 2009           
     
      

  



The major focus of this year's policy address was nurturing economic development and raising Hong Kong's international competitiveness. Therefore, in addition to supporting the four traditional economic pillars, the government has added six new pillar industries to bolster our economic foundation.

The six new areas are education services, medical services, testing and certification services, environmental industries, innovation and technology, and cultural and creative industries. Education is indisputably the most important pillar of our economy. So, besides offering land for the development of private universities and international schools, the government has encouraged schools and institutions to become international to satisfy growing demand. It is hoped that this will maximise our existing education resources and broaden our global vision to develop Hong Kong into a higher-education hub for the region and the world.

With this in mind, the Hong Kong Research Grants Council has recently set up the Hong Kong PhD Fellowship Scheme, which aims to attract the best and brightest students from around the world to pursue their PhD programmes in Hong Kong. Those who are seeking admission as new, full-time PhD students in any of our seven University Grants Committee-funded institutions, irrespective of their country of origin and ethnic background, can apply.

The fellowship will provide students with a monthly stipend of HK$20,000 and a research-related travel allowance of HK$10,000 per year, for three years.

However, some critics argue that the scheme will bring few long-term benefits. Legislator Cheung Man-kwong, who represents the education sector, believes providing fellowships to overseas students with no strings attached will not raise our research capability in strategic areas. He warned that subsidising foreign students to pursue PhD programmes would be nothing more than picking up someone else's education tab. Hong Kong is an international city, so we should promote our city as a free, pluralistic and civilised society. Cheung, a legislator and an educator, should have a more open attitude.

There are no fellowship schemes anywhere else in the world that demand payback in the form of working locally after graduation. Most fellowships are financial awards with no strings attached. Providers don't often seek repayment; they merely ask that students conduct research as part of the deal, with no further post-graduation obligations.

In fact, Hong Kong students have for many years benefited from fellowships granted by institutions in the US, Britain, Australia and other countries. If we insisted on enforcing this irrational rule, we would risk being a laughing stock.

Education is all about creating an inclusive environment that helps nurture young minds. If we are serious about developing Hong Kong into an education hub, we must understand that being a centre of higher education can be a source of global influence and soft power, the essence of which lies in values, which means using culture to attract and co-opt people rather than coercing them.

In recent years, many countries have come to realise that international education is a powerful form of cultural diplomacy that can further national interests and promote trade. China has also begun to cultivate its soft power by expanding its educational and cultural exchange programmes. The reality is that Hong Kong faces a prolonged economic downturn with persistent high unemployment. Demanding that foreign students work here after graduation will only create unnecessary competition and put more strain on the job market.

The golden rule is "do unto others as you would have them do unto you". And the fact that we should always repay a favour with gratitude is not a difficult concept for any educator to grasp.

Albert Cheng King-hon is a political commentator


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Door opens on new economic thinking


George Akerlof and Joseph E. Stiglitz
Oct 29, 2009           
     
      

  



The economic and financial crisis has been a telling moment for the economics profession, for it has put many long-standing ideas to the test. If science is defined by its ability to forecast the future, the failure of much of the economics profession to see the crisis coming should be a cause of great concern.

There is, in fact, a much greater diversity of ideas within economics than is often realised. This year's Nobel laureates are two scholars whose life work explored alternative approaches. Economics has given rise to a wealth of ideas, many of which argue that markets are not necessarily either efficient or stable, or that our economy, and society, is not well described by the standard models of competitive equilibrium used by a majority of economists.

Behavioural economics, for example, emphasises that market participants often act in ways that cannot easily be reconciled with rationality. Similarly, modern information economics shows that, even if markets are competitive, they are almost never efficient when information is imperfect or asymmetric - that is, always.

Just as the crisis has rejuvenated thinking about regulation, so it has given new impetus to alternative strands of thought that provide better insights into how our complex economic system functions - and perhaps also to the search for policies that might avert a recurrence of the recent calamity.

Fortunately, while some economists were pushing the idea of self-regulating, fully efficient markets that always remain at full employment, other economists and social scientists have been exploring a variety of different approaches. These include agent-based models that emphasise the diversity of circumstances; network models, which focus on the complex interrelations among firms; a fresh look at the neglected work of Hyman Minsky on financial crises; and innovation models, which attempt to explain the dynamics of growth.

Much of the most exciting work under way extends the boundary of economics to include psychology, political science and sociology. We have much to learn, too, from economic history.

Ideas matter, as much or perhaps even more than self-interest. Our regulators and elected officials need a wider and more robust portfolio of ideas to draw upon. That is why the recent announcement - by George Soros at the Central European University in Budapest - of the creation of a well-funded Initiative for New Economic Thinking (Inet) to help support these is so exciting.

Inet has been given complete freedom - with respect to both content and strategy. Its only commitment is to "new economic thinking", in the broadest sense.

The marketplace for ideas often works in a way that is less than ideal. In a world of human fallibility and imperfect understanding of the complexity of the economy, Inet holds out the promise of the pursuit of alternative strands of thought - and thereby at least ameliorating this costly market imperfection.

George Akerlof, a Nobel laureate in economics, is professor of economics at the University of California, Berkeley. Joseph E. Stiglitz is professor at Columbia University and winner of the 2001 Nobel Memorial Prize. Copyright: Project Syndicate


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Donald's black hole
By ignoring his critics, the beleaguered chief executive is just digging himself into more trouble

Stephen Vines
Oct 30, 2009           
     
      

  



Now that Chief Executive Donald Tsang Yam-kuen finds himself unfavourably compared to his hapless predecessor, Tung Chee-hwa, he appears to be trapped in the vortex which forces flaying politicians further and further down a hole from which they are unlikely to emerge.

This impression was confirmed this week by Tsang's response to accusations of nepotism. He unwittingly fuelled his descent by ignoring every lesson of political behaviour. The great minds in Government House think they know better and launched him on a disastrous course of counter-attack.

As a young and minor political party official employed to buzz around the corridors of Parliament in London, it was drummed into me that politicians in personal trouble have but two alternatives. The first was "don't complain, don't explain"; that seemed to work best when the media got overexcited by very little indeed. Option number two was called upon when explanation was unavoidable. In this instance, speed was of the essence and the response had to be seen as measured, not petulant and certainly not in the form of a suggestion of conspiracies because, once the person in trouble attributes conspiratorial behaviour to others, the public will assume that conspiracy is nurtured in the bosom of the accused.

Tsang and his advisers took the brave decision to ignore these relatively well-established ground rules and initially remained mute, then allowed some of their acolytes to mutter some disparaging words and finally allowed the chief executive to belatedly respond. In so doing, he mixed petulance with accusations of conspiracy against the government. An issue that could have been tackled with relative ease has now lodged in the public mind as another indication that something is seriously wrong with this administration.

The accusations are trivial: Tsang is alleged to have helped out his in-laws who sell light bulbs by introducing a scheme to encourage the purchase of energy-saving bulbs. And it has been suggested that his influence helped his sister-in-law obtain prior settlement of claims for redress arising out of the Lehman minibond scandal. In both instances, the evidence of direct nepotism is tenuous and, in the matter of light bulbs, even more so.

However, the Tsang regime has only itself to blame. Its arrogant behaviour encourages the idea of cronyism and indifference to the needs of ordinary people. A slew of government appointments to official posts and bodies that the chief executive controls suggest that what matters to this administration is who you know, not what you know.

Moreover, while the door remains largely closed to meetings between the government and its critics, it is flung wide open to the rich and well connected. By unfortunate coincidence, on the day that the chief executive chose to rebuff criticism of nepotism, his financial secretary was greeting tycoons from the property sector; such is the state of insularity in this government that this coincidence was unlikely to have been noticed.

All this would be overlooked if there was a feeling that the government was not being run largely for the benefit of those who have most. As house prices soar, the government self righteously announces that it will not assist less-well-off potential homeowners but will listen to property developers anxious to secure cheaper land for development.

As low-income parents battle to find places for children in overcrowded schools with limited resources, the government outlines plans for more schools and universities for the better off - and so it goes on.

Government policy is poorly received and is presented with an arrogance that underlines its inadequacy. When it comes to anything where the heavy shadow of Beijing prevails, such as representative government, paralysis kicks in as officials attempt to second-guess their masters in the North.

This, then, is the atmosphere in which the worst things being said about the chief executive are given the benefit of the doubt. And it is in these circumstances that Tsang digs himself deeper into the hole as he refuses to acknowledge the legitimacy of critics. He instead turns increasingly inward to his circle of cronies and those whom he fears have the ear of the bosses in Beijing and who might badmouth him at any time.

Stephen Vines is a Hong Kong-based journalist and entrepreneur


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US struggles to defeat lo-tech weapons
The No 1 killer of Nato troops in Afghanistan is home-made bombs

AFGHANISTAN
Dan De Luce
Nov 02, 2009           
     
      

  



The world's most powerful military machine is scrambling to fight a simple, lo-tech weapon in Afghanistan that is killing and maiming US and allied soldiers at an alarming rate. The home-made bomb - often a mixture of fertiliser, fuel and metal - is the No 1 killer of Nato troops in Afghanistan, and the US military has launched a massive, costly effort to try to defeat it.

In Iraq, the Americans eventually managed to contain the scourge partly by employing jamming devices and large numbers of unmanned aircraft that could watch for insurgents planting roadside bombs.

But the rudimentary improvised explosive devices (IEDs) in Afghanistan have no radio frequency to jam, while the country's vast, rural landscape makes surveillance a daunting task, US officers say.

"You've got an entirely different challenge in Afghanistan," said Lieutenant General Thomas Metz, head of the Pentagon's Joint Improvised Explosive Device Defeat Organisation. "It looks about like the moon sometimes. It's huge, open spaces. Not much vegetation. It's an unbelievable, tough, rugged terrain."

American soldiers learned to identify suspicious objects on paved streets in Iraq, but Nato forces in Afghanistan had trouble picking out tripwires or booby traps on dirt roads, said Command Master Sergeant Todd Burnett of Metz' organisation, who regularly visits troops on the Afghan front. Soldiers who had only recently arrived in Afghanistan were still trying to figure out how to handle the IED threat there, he said.

"For so long we've been focused on Iraq. We're still learning the environment over there ... we're playing catch-up." And unlike Iraq, where much of the insurgent activity was concentrated in city centres, the bombs were spread over an enormous area, Burnett said.

The threat has steadily mounted in Afghanistan, with more than 1,000 IEDs found or exploded in August - a dramatic increase from just a year ago. But the scale of the threat is still much lower than what US and Iraqi forces faced at the height of violence in Iraq, when the number of IED incidents rose to about 2,500 a month.

Metz, charged with leading the effort against the bombs, said eliminating IEDs was unrealistic, but he talks about the need to get "left of the boom" - by detecting the bomb before it goes off and targeting the bomb-making networks.

His organisation, set up in 2006 to tackle the scourge in Iraq, invested close to US$1 billion over the past year in technology, training and other initiatives to battle the home-made bombs.

Metz said he hoped sensors and software could be refined soon to detect small changes on the ground, revealing where an insurgent may have dug up a road or set down a tripwire.

But he said the "game-changing" technology was still not there.

"We're left with some real tough physics problems," he said, as the sensor had to deliver reliable information quick enough to allow a vehicle speeding down the road to stop before reaching the bomb.

To protect troops, the Pentagon is rushing the production of new armoured vehicles for Afghanistan, as a version designed for Iraq has proved too bulky for the country's treacherous terrain.

Seven of the new M-ATVs (mine-resistant, ambush-protected, all- terrain vehicles) have been delivered and the Pentagon has approved plans to quickly produce more to ship to the war.

Defence Secretary Dr Robert Gates has deployed nearly 3,000 troops trained in explosives disposal, intelligence and route clearance to contain the IED threat.

Commanders are working to shift much of the unmanned-aircraft fleet from Iraq to Afghanistan to spy on insurgents planting bombs, and the US military has bought smaller robots that can help soldiers dismantle explosives in a more rugged setting.

In the meantime, the IEDs are wreaking havoc, killing and badly wounding Western troops and Afghans while piling pressure on the Nato-led mission.

With the carnage from the bombs undermining public support for the war on both sides of the Atlantic, some lawmakers in the US Congress say the military has to move faster.

The Pentagon promised that anti-IED programmes would produce results soon, but the death toll kept rising, Republican congressman Duncan Hunter said at a recent congressional hearing.

"We've been ... told that since I got into office in January, `It's going to be there soon, sir. It's going to be there soon'," Hunter, a marine veteran who served in Iraq, said.

"It isn't there now. And we're losing guys every day. So what are we going to do tomorrow to defeat IEDs so that we don't have any more IED deaths?"

Agence France-Presse



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It won't float
Revaluing the yuan now could bring disaster to China, given its unbalanced economy and bubble obsession

Andy Xie
Nov 03, 2009           
     
      

  



US President Barack Obama's upcoming visit to China has inspired another round of pressuring Beijing to revalue the yuan. Those in the west have learned to play the Chinese game: shouldn't China give Obama face by revaluing its currency higher? When that ploy doesn't work, they can accuse China of stealing jobs from other poor, developing countries.

The stick and carrot approach will build momentum until Obama finishes his visit. In anticipation, speculators have put up their positions in the non-deliverable forwards market. The gap between the forward and spot price of the yuan has inspired arbitrage: dollars have been converted into yuan in the underground money market. The resulting rise in China's foreign exchange reserves adds to the case for revaluation. Rhetorical pressure becomes market pressure. It looks like a self-fulfilling prophecy.

But hold your horses. China will not and should not revalue the yuan at this point. It would only destabilise its unbalanced economy. In response to a sharp drop in exports, China cut the mortgage interest rate, reversing its policy of cooling the overheated property sector. The ensuing surge in prices and sales erased all the tightening effects - and some. The economy has become highly dependent on the property sector: mortgage loans boost local government revenue that serves as equity capital for further leveraging. Beyond property, most bank loans are to local government borrowing platforms. China's situation is quite similar to Southeast Asia's before the Asian financial crisis. If not managed carefully, the property bubble could burst and bring calamity to the Chinese economy.

Of course, China could further inflate the property bubble to offset the contractionary impact of yuan revaluation, as Japan did after the 1985 Plaza Accord (in which - at the request of the US - France, Germany, Japan and Britain agreed to work together to deliberately weaken the dollar's exchange rate). But that would merely postpone the inevitable. The longer the bubble lasts, the bigger the crisis when it does burst. I am afraid that is exactly what some people want to see: China makes the bubble bigger to support the US economy during its adjustment, and, when the US economy has adjusted and the Federal Reserve's interest rate is above 5 per cent, China collapses.

Many inside China are helping to bring about this scenario. Since 2004, a major change has occurred in the Chinese economy and society. Bubble making has become a national obsession. If the Chinese economy does collapse, we have only ourselves to blame.

None of this would be good for poor developing countries. The simplistic accusation that China is stealing jobs from them by pegging the yuan to the dollar is naive. Poor emerging economies have benefited hugely from the commodity boom on the back of Chinese demand. The biggest emerging market boom in modern times is thanks to China's impact on commodity prices.

If the Chinese economy falters and the commodity boom ends, other developing countries may be able to gain some market share in exports. But its upside will be much smaller than the losses from low commodity prices. And these nations won't be able to afford to build up their manufacturing infrastructure to compete.

At any moment, the currency market determines exchange rates. But the currency market has a track record for causing massive swings in exchange rates. No conceivable changes in economic fundamentals could justify the swings in the currency market today. It is clearly inefficient. I am not arguing that we should replace it with an administrative system. But, as China has a managed exchange rate, it should be extremely careful about the pressure from an inefficient market.

Is the yuan undervalued? The case for it is largely based on the dollar's depreciation. Prima facie, it is undervalued. But, that's the nature of the pegged exchange rate. When the US dollar rises, nobody shouts that the yuan is overvalued.

I agree that, if the yuan were allowed to float today, it would appreciate against the dollar. The driver is the Fed's zero interest rate. It provides zero-cost dollars to the hedge fund community for carry trades. US policymakers keep talking down the dollar. The combination of zero-cost dollar borrowing and official encouragement has emboldened hedge funds to short-sell dollars and take long positions on emerging market currencies, stocks and commodities. This is a bubble. The dollar's fundamentals have improved: the US trade deficit has halved from its peak and will fall more, and the Fed will probably raise interest rates in early 2010, earlier than expected. A major reversal in the dollar's trend within 12 months is quite likely, and could trigger another hedge fund crisis. If China raises the yuan against the dollar now, it won't be able to lower it when the dollar reverses.

Purchasing power parity (PPP) is an important measure for valuing a pegged currency like the yuan. International financial institutions still consider that the yuan exchange rate is at one-third of its PPP value: in short, massively undervalued. I think that's wrong. Prices of Chinese property, department store goods, cars and even flight tickets are among the highest in the world. How can one argue that the yuan is fundamentally undervalued?

There is another, cheaper world in the informal distribution system. Low earners gravitate towards it to survive. Their low wages are the export sector's main advantage. But, as rising commodity prices increase the cost share of the raw materials in manufacturing products, this advantage is diminishing for China. Increasingly, resource-rich nations are benefiting from China's export boom, not Chinese workers.

China's exchange rate should not be considered separately from the rest of the economy. The exchange rate is not a cause of China's imbalances; the political economy is. A massive revaluation could bring economic collapse and force structural reforms. It would be better - for China and the world - to carry out the reforms first, then float the currency.

Andy Xie is an independent economist


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Consensus the solution to an endless endgame


Thitinan Pongsudhirak
Nov 04, 2009           
     
      

  



The hospitalisation of King Bhumibol Adulyadej has brought Thailand's most daunting question to the fore. The country's wrenching political struggle over the past several years has, at bottom, concerned what will happen after the ailing 81-year-old king's reign, now at 63 years, comes to an end.

Thailand's endgame is being shaped by several key events: the military coup of September 2006, the current military-supported constitution and election in 2007, street protests and seizures of Government House and Bangkok's airports in 2008, the army-brokered coalition government of Prime Minister Abhisit Vejjajiva that has ruled since January, and the Bangkok riots in April.

At stake is the soul of emerging Thailand, with far-reaching ramifications for developing democracies elsewhere as well as the international community.

Thailand's colour-coded crisis pits largely urban, conservative and royalist "yellow" shirts against the predominantly rural "red" columns of former prime minister Thaksin Shinawatra. For much of Thailand's long economic boom of the past two decades, wealth resided mostly in the Bangkok metropolitan area, a boon to the burgeoning urban middle class, but deeply resented by the rural majority.

The rural population's economic opportunities and upward mobility were limited by a shoddy education system and docile state-run media that fed them soap operas and official messages. For a nobody to become a somebody, all roads led to Bangkok and its prestigious prep schools and universities. Farms became increasingly alienated from the urban elite. Thaksin recognised this urban-rural divide and shrewdly exploited it, upending the elite consensus that had long prevailed.

Thaksin and his cronies handed the establishment an opportunity to strike back by abusing power and profiting personally from it. A billionaire telecommunications tycoon, Thaksin presided over the trebling of his family's assets in the stock market. He also engineered an extrajudicial drug-suppression campaign that claimed 2,275 lives.

Thaksin's sins are voluminous, and became the basis of the rise of his yellow-shirted opponents.

After three years, Thailand's crisis has become a knotty saga. Abhisit's pledges of reform and reconciliation in the wake of April's riots have come to little. What had been a pro- and anti-Thaksin fight has gradually become a pro- and anti-monarchy struggle. The rigidly hierarchical forces of the establishment are insecure and fearful of what will happen after the king dies. Lese-majeste cases alleging insults against the immediate royal family are on the rise. Many thousands of web sites challenging establishment interests and deploring post-coup machinations have been blocked.

A new consensus is imperative if Thailand is to regain its footing. The reds must distance themselves from Thaksin's abuses of power and the yellows will have to accept some of Thaksin's policy legacy, particularly grass-roots opportunities for jobs, education and upward mobility.

Thitinan Pongsudhirak is professor and director of the Institute of Security and International Studies at Chulalongkorn University, Bangkok. Copyright: Project Syndicate

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The new Japan?


ALEX LO

Nov 05, 2009           
     
      

  



Beijing doesn't do failure, and that is what makes the nation's future scarier every time it dodges a bullet. It looks like it's tempting fate. Confidence breeds hubris; it's pride that takes men to awesome heights before the gods send them crashing down to earth.

It is now a cliche that China has had a good crisis, and that it is emerging from the global financial crisis not only relatively unscathed, but has also managed to reap geopolitical dividends that will enable it to throw its already considerable weight even more effectively across Asia and around the world. It has secured assurances of a greater say in international institutions like the International Monetary Fund; the Group of Eight leading economies has become the G20, but some say it's really the G2 - China and the US - that really counts. Barely a global issue can be negotiated, let alone resolved, without China's participation.

China's success has installed pride in a new generation of Chinese, not only on the mainland but also overseas. When I was a high-school student in North America in the 1980s, many Chinese didn't want to speak the language and would sooner forget their culture. Now, everyone wants to learn Putonghua. Commodities investment guru Jim Rogers says he is making sure his young children grow up speaking Chinese.

In The New York Times, Thomas Friedman, arguably the most widely read foreign affairs commentator in the US today, calls the central government "relatively enlightened". Recently, in the same publication, Paul Samuelson, the Nobel Prize-winning economist - a proponent of the efficient-market hypothesis widely blamed for contributing to the current crisis - thinks it's a matter of time before China's economy will overtake that of the US.

"The day will come when China's total real GDP will exceed America's. Boohoo. But that's a realistic expectation," Samuelson wrote. "We begin now a new era in which China will increasingly make obsolete America's 1950-2009 world leadership. Your children and my grandchildren will live in this new and challenging era."

I have heard all this talk before. So have you, if you are my age or older. Substitute China with Japan, and the current timeframe with the mid-1980s, and its deja vu all over again. Back then, some of my North American classmates started taking Japanese classes; better to speak the language of your future bosses, they said.

Then, as now, the US lost its self-confidence, after the Black Monday crash in 1987. It was after the crash that Japan's bubble economy took off. Its stock and property markets went through the roof. Many western economies were mired in negative or slow growth but Japan's recovered with relative ease. An export-led economy led to a massive current account surplus, so large Japanese corporations went on a buying spree for trophy foreign assets, especially those in the US. Remember Rising Sun, both the book and the movie, and the first Die Hard - all using the great Japanese corporate shopping spree as the dramatic background? Today, you see the same mania in the stock and property markets on the mainland, and the same globetrotting shopping craze among some of China's largest state-owned enterprises.

State-directed capitalism, whether in Japan or China, uses government-ordered bank lending as a partial substitute for western-style monetary policy. Then, Japanese banks, as their Chinese counterparts today, enjoyed "fortress" balance sheets. Pressured by western powers, much like China is today, Tokyo let the yen surge, setting the stage for the bubble phase. Will Beijing do the same if and when it lets the yuan off its US dollar peg?

The Chinese communist state has proved to be a brilliant learner of history and a great survivor of dire circumstances. Part of its survival success has been its ability to extract valuable lessons from the decline and fall of the Soviet Union. This was the subject of US academic David Shambaugh's fine book, China's Communist Party: Atrophy and Adaptation. Will Beijing be able to do it again - this time to learn from, and avoid, Japan's mistakes?

Alex Lo is a senior writer at the Post. alex.lo@scmp.com


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No place like home
The government needs to stop pandering to property developers and address the home ownership issue

Stephen Vines
Nov 06, 2009           
     
      

  



Nothing is more likely to stimulate a small avalanche of hypocrisy than discussion about land and property in Hong Kong. Property developers, allegedly speaking in the name of community interests, arrive in their chauffeured limos to lobby officials for a greater supply of cheaper land. Free-market ideologues, rattling around their lavish apartments, pontificate about why making property purchase accessible to those on low incomes distorts sacred non-intervention policies. Meanwhile, hapless members of the government oscillate between repeating the long-dead mantra of "positive non-interventionism" while busying themselves with finding new ways to intervene in the property market.

All this is taking place in Hong Kong - the only avowedly free-enterprise society where the government retains total ownership of all land with the anachronistic exception of St John's Cathedral. Furthermore, Hong Kong houses a higher percentage of its population in public housing than any other capitalist society. In case anyone gets carried away with the idea that the origins of this vast housing programme were purely altruistic, it is worth remembering it was widely supported by industrialists keen to keep wages low by removing the pressure of high housing costs.

Fast forward to today and we see Chief Executive Donald Tsang Yam-kuen promising to intervene to avert a property bubble and we see calls for reform of the land sales policy from self-interested property developers.

At the upper end of the property market, the government thinks it is moving decisively to cool the market by imposing a 60 per cent lending cap on loans to this sector. This is no more than vaguely amusing to cash-rich buyers who have no need to borrow. Many of them are from the mainland and are holding hot cash that they are keen to offload into property.

Meanwhile, anyone who has taken more than a few moments to study the government's land sale policy knows perfectly well that it is expressly designed to favour a small clutch of larger property developers. Alone or in concert, they are the only ones able to bid for the large land plots, which tend to be offered in government land sales alongside smaller plots at sites adjacent to the developer's existing holdings.

This encouragement of monopolistic practices is carried out under the banner of the free market and ensures competition is severely limited. Unsurprisingly, the larger property developers are keen to prevent changes that threaten their monopoly, but they are still pressing for ways of acquiring land at lower cost.

While the developers understandably focus on increasing profitability, the one serious method of creating a bigger property-owning class in Hong Kong has been firmly ruled out by the Tsang administration. It says that the Home Ownership Scheme, which juddered to a halt in 2002, will not be revived although some still-unsold HOS properties will be offered for sale.

Hong Kong has never had another scheme to seriously address the issue of property ownership by low-income groups. Naturally, it is loathed by property developers and self righteously condemned by the better off, who can't stand seeing ordinary people getting a stake in the property market.

However, the HOS no more distorts Hong Kong's property market than it is distorted by all other forms of government intervention. Alone among government measures, the HOS increases access to the market as opposed to preserving the asset value of those already in the market.

The government's refusal to revive the HOS is largely a reflection of its determination never to upset Hong Kong's most influential people. But official opposition to helping the less off acquire homes stands in direct contradiction to Tsang's constantly repeated goal of preserving stability.

Countless studies have shown that the most stable societies are those with the widest degree of property ownership. Giving people, excuse the pun, a concrete real stake in society is the surest means of ensuring stability.

What works elsewhere will work here; all it needs is for the government to plough through the narrow self-interest of those who have benefited most from the existing system and not be deflected from the objective of bringing property ownership within the reach of more people.

Stephen Vines is a Hong Kong-based journalist and entrepreneur


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Wake up to reality


MICHAEL CHUGANI

Nov 09, 2009           
     
      

  



Our chief executive says he doesn't lose sleep over the scandals that hound him. Maybe he should. Granted, lying awake at night prevents the necessary recharging of body and mind, but the tossing and turning has its own benefits. It forces you to think about the worries that keep you awake. And Donald Tsang Yam-kuen has plenty to worry about.

The late US president Ronald Reagan slept so soundly through the many scandals he should have worried about that he left office looking younger than when he went in. The difference was that the people loved him. That cannot be said of Tsang. Some have actually started comparing him unfavourably with his unpopular predecessor, Tung Chee-hwa. That alone should keep anyone awake.

By Tsang's own admission, only about half of the people like him. That's actually quite good for a leader of a free society in his second and final term. The trouble is, the people who don't like him dislike him intensely. They think he is arrogant, in cahoots with the tycoons, subservient to Beijing and oblivious to their many problems. They think he just doesn't understand them any more, that he can't see things from their perspective. This is not necessarily true, but it is what half the people believe.

That should be Tsang's greatest worry - that half the people are convinced he has lost the credibility to be their leader. He needs to lose some sleep over the fact that he's past the stage when he can convince them otherwise. Hong Kong is now, more than ever, such a divided community that no one wants to compromise any more on the big issues.

At least in Tung's time, the people were so united in despising him that the solution became simple. Beijing dumped him. But not all the people despise Tsang. Half the people think he's doing a good job. They believe the Tsang-haters are troublemakers out to get him.

This great divide has forced Tsang into lame-duck status well before his time. There is now a growing impression, even among some of his allies, that he can no longer govern effectively.

When even a nonsensical scandal manufactured by political opponents can force a leader to back off from such a basic policy as encouraging community use of energy-saving light bulbs, it shows how weak that leader has become. Too many people were too ready to believe Tsang pushed the policy solely to benefit distant in-laws in the light-bulb business. He has lost the benefit of the doubt. And that spells big trouble for any political leader. No leader can govern effectively without the people's trust.

The troubling thing about Tsang's troubles is that he is actually not a bad leader. His style may be lacking but his substance is not. He was in the right place at the right time when Beijing ousted Tung, and he proved his worth as leader in his first few years. But he is now leader at the wrong time. The people are restive. The recession has spotlighted the harsh gap between the haves and the have-nots. Bitterness is fanning animosity among the deprived towards the wealthy class. The once revered tycoons are now despised for their open greed. People believe the government is not on their side. There is only so much Tsang can do. Beijing calls many of the shots, yet the anger is directed at Tsang. He has become the fall guy.

Tsang is a victim of Hong Kong's freedoms. The people have all the freedoms of democracy without actual democracy. They can use, or abuse, democracy's freedoms without the restraint that democracy demands. And they're only too willing to do this to take it out on Tsang but not Beijing.

Our politics have become directionless, almost unreal. We blame Tsang's supposed failures on the lack of democracy. Yet we resort to ways that insult democracy in trying to undermine his leadership. The nauseating frenzy over the light-bulb scandal is one example. It makes you wonder if we're actually ready for real democracy.

Michael Chugani is a columnist and broadcaster. mickchug@gmail.com


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Net can be tolerated or turned off, not tamed


David Eimer
Nov 10, 2009           
     
      

  



Business is booming in Dunhuang, a historic desert town in western Gansu province. But the visitors packing out its hotels and coffee shops aren't tourists, but businesspeople from nearby Xinjiang. With internet access across that province still cut off after the July riots in Urumqi, Dunhuang is now the closest place to Xinjiang to get online.

Beijing claims that the July disturbances were partly organised over the internet and fears further trouble, which is why, four months later, Xinjiang's 20 million residents remain unable to check their e-mail. Uygur exiles have denied using the Net to instigate the riots, pointing out that Beijing is quick to shut down any website or chat room that might be promoting sedition.

But amid rumours that internet access will not be restored until after the Lunar New Year, Urumqi's business community is getting used to the commute to Dunhuang. Nor is Xinjiang the only place that is currently internet-free. It emerged last month that officials in Guanxian county, Shandong province , had shut down all internet cafes in the county, supposedly because too many children were skipping lessons to play computer games. "Our purpose is to improve the quality of life for local residents," a local official said of the ban.

Only on the mainland would the government claim that preventing people from using the internet is making their lives better. In the West, the opposite is true, because freedom of information is regarded as a basic right.

This, though, has been a bad year for the mainland's 338 million internet users. These days, anything connected to Tibetan or Xinjiang independence, or human rights or democracy advocates, is blocked. Networking sites like Facebook and Twitter are inaccessible because the authorities fear they could be used to organise protests against the Communist Party.

Blaming the internet for the rise of dissent on the mainland is as futile as shutting down internet cafes because teenagers are skipping school to play World of Warcraft. It is a reflection of poor parenting, rather than of the insidious nature of the Web. Blocking internet access in Xinjiang, and social networking sites everywhere, because people are allegedly using them to challenge the authorities, is like holding the water company responsible when you forget to turn off your taps.

The Xinjiang internet ban signals a new desperation on the part of Beijing. It's an acknowledgment that officials have failed to tame the Net, despite the estimated 40,000 people paid to monitor it and to plant pro-communist-party comments in chat rooms. Now, Beijing has boxed itself into a corner where, having failed to control the internet, its only option is to shut it down completely.

Only a real optimist would suggest that the Xinjiang internet shutdown might lead to a reappraisal of the way the mainland controls information. Beijing faces a stark choice; either allow access to the internet, or close it down. And with hundreds of millions of people dependent on the Net more than ever for work and play, preventing them using it will create far bigger protests than were seen in Xinjiang.

David Eimer is a Beijing-based journalist


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Beware of those seeking to manipulate public opinion


Albert Cheng
Nov 11, 2009           
     
      

  



Since the release of his policy address last month, Chief Executive Donald Tsang Yam-kuen has been under fierce media attack over allegations of favouritism. These sensationalist, negative reports dominated the front pages of several mainstream Chinese dailies for more than two weeks, creating a well of public discontent against Tsang and his administration, his popularity hitting a new low.

According to a University of Hong Kong opinion poll in mid-October, public distrust almost doubled, from 14.3 per cent in August to 28 per cent last month. On the other hand, public trust in the government fell slightly, by one percentage point, to 45 per cent, over the same period. Tsang's popularity rating fell to 48.4 per cent, his lowest since taking office in 2005.

Two damning allegations quickly became scandals for Tsang. The first was that his son's father-in-law would benefit from the subsidy voucher scheme for energy-saving light bulbs announced in his recent policy address. Tsang was criticised for failing to declare that his in-law was a distributor of Philips light bulbs in Hong Kong. Second, it was claimed that a legislator had assisted Tsang's sister-in-law to secure early compensation to recover a portion of her Lehman Brothers investment months before most other victims.

Even veteran politician Allen Li Peng-fei said he was bewildered by the resoluteness of the media. He said it was extraordinary for two leading Chinese dailies to mount such a concerted anti-government attack by carrying front-page stories continuously for more than 10 days.

Li said that, while the media might have been overly confrontational, Tsang should rectify his mistakes before it's too late. He suggested a good place to start would be to look at the performance of his administration, especially whether his political spin doctors have done a competent job. More importantly, have they been truthful in relaying the true depth of public sentiment to their boss?

I agree with Li that it's time for the chief executive to do some soul-searching. But we shouldn't be misled by his remarks and allow the media to pull the wool over our eyes with reports that are based on false information. Sensational news does not represent public opinion.

In any event, those accusations have turned out to be untrue. Regarding the light-bulb incident, it was confirmed that Tsang's in-law was not the sole distributor, and had sold most of his company shares years ago. Tsang's sister-in-law was not given preferential treatment because many other investors received early settlements, some before her.

The danger is that sensational news and false reports can be used to manipulate public opinion. Because the media has been so aggressively hounding Tsang, it is not difficult to understand why both his and the administration's popularity ratings have plunged.

But most unexpected was the prejudiced analysis played up by the director of HKU's public opinion programme, Dr Robert Chung Ting-yiu, who said that, if Tsang's popularity rating hit the 45 mark, it would be equivalent to public support of only 20 per cent. He also warned that, in the West, such low ratings almost certainly force leaders to resign.

Such scaremongering perpetuated by an esteemed academic is mind-boggling. Chung's job is to conduct public opinion surveys, which are just academic studies.

Has Chung forgotten the controversy he sparked over the alleged government interference of his public opinion programme in 2000? At that time, he claimed that he had been under political pressure from the government and his university to discontinue his opinion polls on the then-chief executive, Tung Chee-hwa, and his administration.

Chung alleged that such interference would hinder academic freedom. If he truly treasures academic freedom, he should recognise that he has a responsibility to maintain political impartiality at all times.

Albert Cheng King-hon is a political commentator

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Predicting the past


ALEX LO

Nov 12, 2009           
     
      

  



China's critics like to point to the many repugnant aspects of its one-party rule and, by and large, they are mostly true. The nation's defenders, or apologists, prefer to focus on the things it has done right, and castigate those who fail to acknowledge its many genuine achievements. One group sees the Chinese state as nothing more than a dictatorship, whether communist or fascist. The other considers it the vanguard engaged in nation-building and, in doing so, charts a new course for the Asian economic-developmental model - and a viable alternative to Anglo-American democratic capitalism. Both perspectives are not so much wrong as intellectually limiting and morally unimaginative.

It is far more fruitful to consider the central government as a one-party adaptive machine. As a one-party state, it has imposed party discipline and unity as the precondition for its survival. Yet, it also allows free discussion and debate behind closed doors - and among some outside experts - to better recognise the most pressing problems, and formulate long-term strategies and policy responses, without the need to seek periodic electorate mandates. Beijing's ability to adapt to dire, changing circumstances and survive crisis after crisis has confounded critics and friends alike.

Take, for example, Beijing's response to the debate on global warming in the run-up to the Copenhagen talks on climate change next month. It is another classic instance of how it works to outmanoeuvre foreign critics while devising a long-term strategy dictated by national interests as Beijing defines them. In late September, President Hu Jintao scored a major public relations coup in New York when he announced it was national policy to achieve a low-carbon economy. This was pledged with a "notable" carbon reduction by 2020.

Just two years ago, China reached the low point when scientists calculated it became the world's worst greenhouse-gas emitter, exceeding even the US. Instinctively, it hit out at developed nations' past emissions and accused them of conspiring to try to slow the growth of developing nations. India and Brazil voiced similar complaints.

But, now, Beijing has found its footing. An increasing number of foreign sceptics and experts are being won over by Beijing's fundamental policy shift on energy demands and climate change. This has gone so far that there are now new western critics arguing that China is pursuing state industrial policy - presumably unfair by free-market principles - in developing nuclear, solar and wind power to become an alternative energy powerhouse. There is just no pleasing everyone! Far from being set up as the fall guy, should the Copenhagen talks fail, Beijing is positioning itself as the new climate crusader.

It is so easy to criticise China but difficult to get it right. Too often, critics identify a trend - usually a crisis or a major problem - and then project it onto the future. Hence, you have predictions about China's impending collapse or the Chinese state's inevitable need for political reform to halt its own demise. Two years ago, Elizabeth Economy, an expert on China's environment and a senior fellow of the Council on Foreign Relations, published a major essay in Foreign Affairs about the country's "coming environmental crash". We now know Beijing was, by then, well aware of the environmental problems and costs she enumerated and was working to tackle them in a major policy overhaul.

All linear predictions or projections neglect a basic principle in chaos and complexity theory. It is that trend reversals are almost impossible to predict and hard to spot even after they have occurred. Think stock markets. Thus, when the Chinese communist state reached its nadir after the Tiananmen Square massacre, the fall of the Berlin Wall and the collapse of the Soviet Union, many people were predicting its destruction; yet the 1990s was to be the decade when China's economy soared.

Couple historic trend reversals with a centralised government that is relatively nimble and eminently adaptive, and no wonder you have so many run-of-the-mill critics with egg on their faces.

Alex Lo is a senior writer at the Post. alex.lo@scmp.com


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Spotlight on Obama's China policy
Summit will test signalled moves towards era of co-operation

SINO-US RELATIONS
Cary Huang
Nov 13, 2009           
     
      

  



When it comes to the big foreign-policy issues of the day, Barack Obama's White House has tended to live in an opposite world to that of his predecessor George W. Bush. China policy appears to be no different, as will be seen when the US president touches down in the country for the first time on Sunday.

Obama rose to power on a platform of major domestic and international policy change, and it is becoming apparent that he wants a new era in Sino-US relations. China, in turn, is warming to a more prominent role in global affairs.

At its core, the summit will be about creating a new level of co-operation. Initially, Obama's approach to China was built on aspects of Bush administration policy, which then deputy secretary of state Robert Zoellick defined in September 2005 as a "stakeholder" relationship.

All indications are that the Obama administration intends to move the relationship to the next level, making it more of a partnership, diplomats and observers of Sino-US affairs say.

Diplomats familiar with preparations for the summit said the two sides had agreed on an eight-item agenda. A Chinese diplomat said that among them, Beijing proposed Tibet and Taiwan issues, while the US demanded arms controls and non-proliferation, military transparency and co-operation. Other topics include counterterrorism, trade and climate.

Issues to be watched are disputes stemming from China's scorching economic growth, such as trade disputes, the yuan exchange rate and China's request for the US to approve it for market economy status. Another is an agreement on climate change, which would be crucial for the success of next month's climate summit in Copenhagen.

But atop the agenda is the desire to discuss a framework that could help address nagging suspicions between the two sides, diplomats said.

Dr Jin Canrong , of Renmin University's School of International Relations, said Obama's China policy was putting into action the new US "vision for a China partnership" outlined by Deputy Secretary of State James Steinberg in September. In the language of diplomacy, it was coined "strategic reassurance".

Jin said: "That was the most eye-catching statement by any Obama administration official. It suggested the US intention to move towards a more closed partnership."

Steinberg said strategic reassurance rested on a "core, if tacit, bargain": China's "arrival" as a prosperous power would be welcomed; in turn, China "must reassure the world that its rise will not come at the expense of [the] security and well-being of others". Bolstering that bargain, Steinberg added, "must be a priority in the US-China relationship".

But he failed to spell out details, setting the stage perhaps for Obama to expound further when he meets his counterpart Hu Jintao next week. Obama's first Asia trip as president takes in Japan, Singapore and South Korea. He arrives in Shanghai on Sunday and leaves Beijing on Wednesday.

Brookings Institution China researcher Dr Cheng Li said no administration wanted to appear as if it had no vision, so Obama would try for something new: "In a departure from his White House predecessors, this president has already signalled a more respectful US posture towards China."

US assistant secretary of state Dr Kurt Campbell, the top US diplomat on China affairs in Beijing recently to lay the groundwork for Obama's visit, spoke of US hopes of upgrading dialogue in strategic issues and developing "rules of the road for how we co-operate in the future" at the summit.

Professor Tao Wenzhao , a senior follow with the Chinese Academy of Social Sciences' Institute of American Studies, said Obama's statement of "strategic partnership" last week was the latest evidence that his administration wanted very much to upgrade ties to a new level.

"There is plenty of obvious recent evidence that suggests the Obama administration's approval of China's rising power and the White House's desire to give it a bigger say and larger role in global affairs," Tao said.

At a recent news conference, Obama spoke approvingly of the rise of China and said it was a good thing decisions were no longer made by "Roosevelt and Churchill sitting in a room with a brandy". While he was referring to decisions made by the US and Britain during the second world war, the idea of a special relationship, dubbed the G2, has been floated in US academic circles since 2006.

It was raised again this year by former US national security adviser Professor Zbigniew Brzezinski in Beijing, against the backdrop of the financial crisis and a world scrambling to find an antidote through existing groups such as the G8 and the G20.

Ben Simpfendorfer, a chief economist at the Royal Bank of Scotland, said the crisis meant both economies should work together to lead the world out of the mess as they are responsible for global imbalances - the main source of the worst financial woes since the Great Depression.

"The United States and China are central to global imbalances, so there is good reason to talk of a G2," he said.

Tao said the idea had attracted interest, particularly since the G20 meeting in April in London where Obama and Hu launched the so-called annual strategic dialogue. This was an upgraded version of the economic dialogue under Bush, as it had "added a strategic content" to "strengthen ties at all levels".

While both governments rejected the G2 concept publicly, diplomats said both nations had the desire to build a new intellectual framework that allowed both powers to consult and seek consensus or agreement to disagree on major issues before they are put into open debate globally.

That is not to say the long list of concerns held by both sides has vanished. Li, Tao and Jin all acknowledged, however, that Steinberg's thesis had accurately identified the nub of the problem: strategic mistrust.

US suspicions range over China's fast military build-up and human rights to its massive export sector and the country's "mercantilist approach" towards acquiring resources and energy. In Beijing, many believe, for instance, that Washington wants to contain China's rise by denying it access to markets, energy sources and high-end technology.

Steinberg said transparency and co-operation were important in three areas. "The risks of mistrust are especially acute in the arena of strategic nuclear weapons, space, and in the cyber realm.

"Achieving mutual reassurance in these areas is challenging but, as we learned during the cold war, essential to avoiding potentially catastrophic rivalry and misunderstanding. Both sides need to devote creative thinking into how we might address these thorny challenges."

Vice-Minister of Foreign Affairs He Yafei made no secret of China's concern last week, saying US pledges to recognise China's sovereign rights over Tibet and Taiwan "were most important to the political foundation of their relationship".

In response to a report by the South China Morning Post (SEHK: 0583, announcements, news) last Friday that Beijing was pushing for Obama to state during his trip that Tibet was part of China's territory and the US opposed Tibetan independence, he said: "That is because a key issue in laying the political foundation is mutual respect for each other's core interests, and for China an important part of our core interest is sovereign integrity and security."

Li said it was also likely that progress would be made in discussing global and regional security threats, including nuclear non-proliferation in North Korea and Iran, and on other issues such as combating terrorism, and stability in Afghanistan and Iraq.


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Congress' crazy scheme to enfeeble the Fed


David Ignatius
Nov 16, 2009           
     
      

  



Among the cherished prerogatives of members of the US Congress is the right to second-guess. That ritual is now playing itself out with a vengeance as they attack the Federal Reserve for its role in last year's financial crisis.

The Fed made its share of mistakes in creating the bubble economy. But, once the crisis hit, it was the Fed's innovative, try-anything response that saved the country from what might have been another Great Depression. Fed chairman Ben Bernanke deserves a public "attaboy" for finding ways to pump liquidity into credit markets that were on the verge of freezing up tight. Instead, he's getting a congressional raspberry.

Bernanke's creative policies last year were possible because of the Fed's political independence and its wide-ranging authority. Those broad powers are now under attack: Congress is proposing new limits on the Fed's role as financial supervisor and "lender of last resort" that could prevent it from responding as aggressively to the next crisis as it did to the last one.

The political challenge to the central bank's authority comes at an especially delicate moment - as the economy begins to rebound and the Fed considers future tightening of monetary policy. It will need public support to combat inflation. But, as The New York Times noted in a recent front-page article, the Fed is now "under more intense attack than at any time in decades", from both left and right.

Wall Street so far appears unfazed by the criticism of the Fed, perhaps because investors assume the protests are political posturing. But this could change. "If Congress even appears to be politicising the Fed's monetary policy function, rest assured two market developments are inevitable - a collapsing dollar and higher long-term interest rates," warns David Smick, a Washington financial consultant.

Fed-bashers have an unlikely new champion in Senator Chris Dodd, who last week introduced a bill that would strip the central bank of most of its supervisory functions. The Democrat said the Fed had been "an abysmal failure" as a regulator and that its powers should go to a new supervisory agency.

How did Dodd, the gentlemanly Banking Committee chairman, suddenly become a neopopulist? The answer is that Fed-bashing seems to be good politics; Dodd faces re-election next year.

Dodd's newfound scepticism is symptomatic of the central bank's larger problem. Unemployment is above 10 per cent, the public is angry - and looking for people to blame. The Fed is just elitist enough, and Bernanke is just enough of a professorial egghead, to make them targets for popular anger.

Bernanke's supporters offer a simple argument for maintaining the Fed's current role in supervising banks. Without it, they say, the Fed would lack the information - and the "feel" for the markets - to intervene effectively in a crisis.

Perhaps it's a harbinger of good times that Congress now wants to reassert its authority. But it would be stupid, even by congressional standards, to enfeeble the Fed - one of the few institutions that actually rose to the challenge in this crisis.

David Ignatius is a Washington Post columnist



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Beijing refuses to bow to calls for higher yuan
Stable, predictable currency policy reiterated

Cary Huang in Beijing
Nov 17, 2009           
     
      

  



The Ministry of Commerce yesterday rebuffed calls for the yuan to appreciate, setting the scene for tough talks on the currency hours before United States President Barack Obama touched down for his first visit to the country.

Before Obama sat down with President Hu Jintao at a state dinner last night, the head of the International Monetary Fund added pressure on Beijing by calling on it to let the yuan rise after more than a year of being nearly frozen against the US dollar.

Last week, the People's Bank of China tweaked its description of how it manages the currency, setting off a storm of speculation that it might be willing to give the yuan some room to run.

"Either from the perspective of promoting stable global economic development or promoting a recovery in Chinese exports, we must provide a stable and predictable environment for our enterprises, including macroeconomic policy and currency policy," Yao Jian, a ministry spokesman, told reporters yesterday.

Although China's economy has outperformed nearly all others in its recovery from the global financial crisis, many analysts believe a sustained upturn in exports - a core concern of the ministry - will be required for Beijing to let the yuan rise.

The yuan rose 21 per cent against the dollar between July 2005 and July last year. Since then, as the financial crisis gathered force, the currency has been virtually repegged at 6.83 to the dollar. Yuan forwards indicate the currency will climb 3.6 per cent in the next year.

But Yao rejected criticism that the currency was undervalued, saying the exchange rate had little to do with trade imbalances with the US and that Beijing should keep it stable.

IMF managing director Dominique Strauss-Kahn said a stronger yuan was part of the reforms that Beijing needed to implement to increase domestic consumption and help ease global imbalances.

"Allowing the [yuan] and other Asian currencies to rise would help increase the purchasing power of households, raise the labour share of income and provide the right incentives to reorient investment," Strauss-Kahn said in remarks prepared for a financial conference in Beijing.

Obama said on Tuesday that he would raise the currency question on his trip, joining the call from the European Union and Japan. He will hold talks with Hu and Premier Wen Jiabao today and tomorrow.

This week, US business and labour groups urged Obama to live up to his campaign promise that he would "insist that China stop manipulating its currency, because it's not fair to American manufacturers, it's not fair to you [the American people], and we are going to change it when I am president of the United States of America".

US manufacturers say Beijing deliberately keeps its currency undervalued against the dollar to give its companies an unfair advantage. The trade deficit with China is the widest the US has with any country, and it jumped to a record high of US$268 billion last year.

Jing Ulrich, chairman of JP Morgan's China equities and commodities, said Beijing had maintained a stable exchange rate to allow domestic manufacturers and exporters to adjust to market conditions.

"With China enjoying current and capital account surpluses - and with the export downturn bottoming out - it is logical for the yuan to eventually resume gradual appreciation against the dollar to alleviate pressure on domestic money supply," Ulrich said.

She said the appreciation of the yuan would be one solution to trade disputes and imbalances but that Beijing was unlikely to allow it to rise immediately.

"We believe the value of the yuan will only rise to 6.60 against the dollar by the end of 2010," she said.

Additional reporting by Reuters



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Spirit of a G2 haunts European leaders


François Godement
Nov 18, 2009           
     
      

  



The spectre of a Group of Two - a China-US condominium - is haunting European governments as much as the spectre of revolution haunted its courts in the days of Karl Marx's Communist Manifesto. When US President Barack Obama mentioned a "strategic partnership" on the eve of his departure for Beijing, anxiety was mounting.

The words haven't been used officially since 1996, when secretary of state Warren Christopher talked about a "partnership" but rejected the "strategic" adjective. What concern about a G2 does show is insecurity among major countries in the absence of a clear power order.

Of course, every official or officious spokesperson in the US or China will deny that "G2" bears any resemblance to reality. The Obama administration has emphasised "multiple partnerships". Its most decisive international actions so far have been gestures to reach out towards difficult partners, such as Russia over the issue of anti-missile defence and forward basing of interceptor radars, or partners where there was no established channel of dialogue: Iran, Burma and Sudan.

Washington also reconfirmed the strategic partnership started with India by a 2008 nuclear agreement, a heritage guaranteed to annoy Beijing. The Chinese could not have failed to notice the many holdovers from the George W. Bush era in the area of defence and even at the State Department, along with no significant cut in defence spending.

For their part, Chinese leaders and experts abstain from any emphasis on bilateral Sino-American co-operation.

Even if Chinese experts talk of a long-term decline of American influence and strategic leverage, they are the first to point out, defensively, that the US is still in the driver's seat. Clearly, China prefers to sit back and eventually criticise from a distance, in keeping with its strategic conservatism.

But beyond praise for Obama from high-brow Chinese experts, and calls by the new administration for a "comprehensive relationship", there is simply no basis for a strategic convergence between the US and China. So why is it that the G2 is such a spectre?

For one, appearances matter. At the Pittsburgh G20 summit, Obama usually addressed President Hu Jintao before anybody else during the leaders' meeting. And when Secretary of State Hillary Rodham Clinton visits Beijing, the Chinese government upgrades the relations with the US as "our most important relationship".

In truth, there may be less mutual mistrust than political shyness, on each side, about ignoring widely different political systems and admitting to a G2. You don't have to agree on every topic to run a G2: you just have to be the two most efficient political actors on the block, with a potential to hurt as well as to help others by your actions.

That's why everybody else is talking about a G2, and why debates about a G8, G13, 14 or 20 must result in a workable new design for global governance. Failing this, the mix of Sino-US interdependence and competition will define our world.

François Godement is director of the Asia Centre at Sciences Po. Reprinted with permission from YaleGlobal Online. http://yaleglobal.yale.edu


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Playing with fire
Forget China, the US Federal Reserve is the world's biggest currency manipulator

Andy Xie
Nov 19, 2009           
     
      

  



As US President Barack Obama glided through China, a chorus erupted in New York and Washington: the problem with the global economy is China's exchange-rate policy, and Obama's No 1 job is to slay it. It's sad that these people actually believe what they are saying: the same "logic" got the world into the current mess. In the feverish hallucination of salvation, they think that moving China's currency policy would right all wrongs.

The US Federal Reserve is the biggest currency manipulator in the world. Not only does it keep the short-term interest rate at zero through its vast purchase programme for mortgage-backed securities, it also keeps credit spreads and bond yields artificially low. Its manipulation stops money, bond and credit markets from pricing either the Fed's policy or the US economic plight. All the firepower is packed into the currency market, giving speculators a sure bet on a weaker dollar and everything else rising. Here comes the biggest carry trade ever: the Fed is promising no downside for shorting the dollar.

The US Treasury writes an annual report, judging if other countries are manipulating their exchange rates. It should look in the mirror. Even though the Fed is not directly intervening in the currency market per se, its manipulation is equivalent to pushing down the dollar by non-market means.

The Fed is playing with fire. With such massive speculative outflows, the dollar could collapse, sparking hyperinflation, like in Russia in 1998. The main reason this is not happening is because China's currency is pegged to the dollar. The speculators believe that there is no downside, only upside from holding yuan. Hence, China's foreign-exchange reserves are bulging on the inflows. The increases are mostly ploughed back into the US financial market, keeping the dollar up. The dollar's decline has been "orderly", falling 40 per cent from the peak without panic selling, because China has been recycling the dollars. The hot money is targeting emerging economies. The last time this happened was between 1990 and 1994 when the Fed kept interest rates low to cope with the Savings and Loans Crisis. The scale is much larger now. The Fed is keeping the funds rate at zero, compared to 3 per cent then, and manipulating the credit cost and yield curve at the same time through its US$1.2 trillion purchases of mortgage-backed securities. The massive hedge fund industry has magnified the transmission mechanism. The huge inflows into emerging economies are inflating dangerous asset bubbles there: we are seeing the strange combination of skyrocketing asset prices and anaemic economic performance. The foundation for another emerging-market crisis has already been laid.

The Fed may think it is fighting a good battle: the overleveraged banks must not collapse, and the millions of unemployed need a growing economy to get their jobs back. But it has the causality wrong. By feeding the unreformed financial system with zero-interest-rate funds, it is feeding a monster with steroids. The asset bubbles in the emerging economies are pumping up their economies in the short term, which supports US exports on the margin. The consequences down the road could be horrific, even for the US. Emerging-market crises have happened in the past when the US economy was strong. The immediate trigger for such a crisis is usually high US interest rates in a strong US economy.

However, inflation, rather than a strong economy, will force the US to increase interest rates. If an emerging-market crisis happens in such an environment, the US economy would suffer from collapsing external demand, with no strong domestic demand at the same time.

Yes, there is an employment crisis in the US. However, monetary stimulus won't solve the problem. During the globalisation of the past decade, the US economy has lost manufacturing jobs and replaced them with "bubble" jobs in finance, property and retail.

The bubble has popped, and yesterday's jobs are gone. Tomorrow's jobs will be created by entrepreneurs who discover new technologies and new sources of demand. This process will take time and no stimulus can be a substitute for it.

During economic restructuring, it is reasonable to keep monetary policy on the loose side. But, how loose? What the Fed is doing is quite crazy. But the policymakers there don't see the impact in terms of their bubble, even though their policy was mostly to blame for the last crisis. They justify their policies on their immediate benefits. Maybe the Fed thinks that the bubble is on the other side this time and won't cause much damage at home.

Maybe it thinks that the hot money would force China to appreciate its currency and shrink its manufacturing sector to send jobs back to the US. Such opportunistic thinking is shortsighted and won't bear fruit.

The Fed should stop its irresponsible actions now and raise interest rates to 3 per cent immediately. There is still time to prevent another global crisis. But I don't think it will do this. No punishment has been meted out to those responsible for the last crisis. The current policymakers don't have any incentive to do the right thing for the future. And, because the same people are still in charge, we are destined for another crisis.

Andy Xie is an independent economist


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Thanks!

Regards,

chanelrobs
Pret travaux