The Doklam triangle

While I was in the U.S., the standoff between India and China in Doklam (in Bhutan) ended abruptly with both sides pulling back their troops and China also removing road construction equipment. On paper, it seemed that India had won the standoff but at least a few have cautioned against any chest-thumping. Correctly so.

This piece in ‘’ drew three lessons from the crisis defusion. One is that “Chinese behavior in territorial disputes is more likely to be deterred by denial than by threats of punishment” Second, denial strategies may be effective, but they have their limitations. Denial is inherently risky….Moreover, denial strategies can only serve to halt adversary action, not to reverse what the adversary has already done….Third, the agreement to disengage suggests that Beijing’s position in crises can be flexible, and perhaps responsive to assertive counter-coercion….Finally, the Doklam agreement, even if it is temporary, tells us that when China confronts a significantly weaker target, such as Bhutan, it will only be deterred by the actions of a stronger third party — in this case, India. …

Prof. Taylor Fravel argues that India did not win the standoff with China. He has his points.  He says,

The frame of winning and losing is misplaced. The genius of the Doklam disengagement is that diplomats defined it in narrow and specific terms, focusing only on the forces at the “face-off site.” Larger issues, such as the location of the tri-junction between China, India and Bhutan, along with China and Bhutan’s competing claims to Doklam, were left off the table. By not disclosing the terms under which the standoff ended, diplomats also allowed each other to save face.

Syed Ata Hasnain writing for Swarajya notes that the issue has been shelved and not solved, in effect. The issue lives to wait another day.

Srinath Raghavan also cautions against triumphalist interpretations in India.

In the context of the Doklam stand-off and its resolution, the BRICS declaration paragraph no. 48 is rather interesting:

48. We, in this regard, express concern on the security situation in the region and violence caused by the Taliban, ISIL/DAISH, Al-Qaida and its affiliates including Eastern Turkistan Islamic Movement, Islamic Movement of Uzbekistan, the Haqqani network, Lashkar-e-Taiba, Jaish-e-Mohammad, TTP and Hizb ut-Tahrir. [Link]

How and why did China agree to name Pakistan based terror organisations in the BRICS declaration? Any explanations welcome.

The Basel Institute on Governance has released its Anti-Money Laundering Index for 2017. Pakistan comes in at 46. India at 88. Singapore is doing better than Switzerland. The best is Finland. The report is here.

In the meantime, Pakistan’s Habib Bank has been ordered out of the United States:

New York’s state banking regulator has slapped a $225m fine on Habib Bank, the biggest bank in Pakistan, and ordered it out of the US after finding a catalogue of flaws in compliance that “opened the door” to the financing of terror.

The Department of Financial Services on Thursday said it was taking drastic action — the first time it has ordered a bank to shut down in the US — because Habib had failed to correct serious weaknesses first identified more than a decade ago. By 2015, the DFS found, the bank’s compliance function was in an even worse state, lacking the most basic of controls on money-laundering and customer screening. [Link]


China linkfest – 10.09.2017

(1) I used to track UK based Fathom Consulting’s China Momentum Indicator. It gives an alternative estimate to the official GDP growth estimates of China. They have updated their indicator and now have a version 2.0. It actually paints the current growth rate of China’s real GDP at 8.2% vs. the official estimate of 6.9%! Over the last two years, the CMI used to track between 2 and 3%vs. official estimates of around 6.5% to 7.0%. Now, the shoe is on the other foot, it seems! [Link]. Fathom Consulting does not think that this is sustainable and attributes the growth re-acceleration to the return of the old economy – borrow, invest in smoke-stack industries. Chris Balding supports that conclusion here.

Interestingly, Moody’s has this to say in a research note that is publicly available on setting up a simple login:

Although the contribution of domestic consumption to GDP growth has gradually been increasing, a core of China’s growth model remains investment funded by credit. [Link]

(2) The Chinese consulate-general has entered a dispute over Taiwanese independence at the University of Newcastle, exposing the increasing influence exerted by Beijing on Australian university campuses. [Link]

(3) John Pomfret, the author of ‘Beautiful country and the Middle Kingdom’ has written an article about the influence of Chinese money in American Universities. You can also notice that there are two counter-reactions. However, an independent piece by Chris Balding seems to vindicate Pomfret. Also, check out this news report on what John Garnaut said about China stirring up patriotism among Chinese students in Australian campuses.  Looks like Pomfret was not exaggerating.

(4) How China is helping Malaysia narrow the military gap with Singapore [Link]

(5) The Communist Party has not just stopped with making inroads into the Chinese corporate world. Even foreign firms operating in China are not out of bounds, it seems. [Link]

(6) On to China’s finances and financial arrangements, it is a perennial story. This report in FT talks of the funds that HNA had amassed from shadow finance sources.  [Link]

(7) Regional banks in China’s rust-belt provinces are driving the rapid expansion of shadow banking in the country, fueling a web of informal lending that poses wider risks to the financial system, according to a study by UBS Group AG. [Link]

(8) Similar to how Universities in the West are succumbing to the lure of Chinese money (by admitting students from PRC and through collaborations onshore in China), investors are buckling to the pressure from China. If Universities are not exempt from the seduction of more money, how can one expect investors to stand up to the money might?

BlackRock and Fidelity backed China’s Communist party writing itself into company law this year, according to disclosures that show some of the world’s largest asset managers voted in favour of ranking the party above the boards of state-owned companies. [Link]

(9) China’s media watchdog has said it will ensure production a flood of new TV dramas singing the Communist Party’s praises over the next five years, just days after one of the country’s top stations was publicly shamed for not toeing the ideological line.

With just over a month to go until the party’s five-yearly national congress, the State Administration of Press, Publication, Radio, Film and Television issued more than a dozen guidelines on TV content on Monday.

The first of the 14 guidelines said the industry would ramp up production of “ a large number of TV dramas that sing the praises of the party, the motherland, the people, as well as its heroes”.

Domestic networks will also set aside prime time for programmes with major revolutionary and historical themes. [Link]

(10) In the light of the above, this cannot be surprising. Indeed, to be expected.

(11) Eswar Prasad writes,

China’s vision of multilateralism will certainly serve China well, allowing it to expand its economic and geopolitical influence in a manner that will become ever harder to resist. Whether this will be good for the world remains to be seen. [Link]

Postscript: Must acknowledge, with thanks, that almost all of the links in this post are courtesy of the Twitter handle of James Kynge (FT).

Eric Schmidt, Suy Kyi and Donald Trump

I saw the link to this article in the Twitter handle of James Kynge. That follows the piece below that I had read yesterday.

The first article is about how a Google funded a think-tank fired a researcher who praised the EU fines on Google as a necessary antidote to market power. The second article is about how Aung San Suu Kyi is remaining silent on the alleged atrocites being perpetrated by the Myanmar army on the Rohingya Muslims. George Monbiot, a well-known columnist who champions ‘liberal’ causes, calls for the Nobel Peace Prize awarded to her to be withdrawn.

Both articles convey the essential truth. It is difficult for humans to be able to stay true to their values as they progress through life and begin to taste power and/or wealth. That also exposes the hypocrisy and inconsistency of some of these tech. companies standing up for so-called ‘liberal’ values vs. the American President.

Even Trump has not been able to silence his critics as much as Eric Schmidt has been able to!!

There is a great research site on hubris set up by the Daedalus Trust.  I had blogged on that site more than once. It is not just political leaders who are prone to hubris.

Also, I saw Chris Balding’s article in FP on the compromises that Western Universities make to operate in China. He writes:

Aiming for a diverse student body or announcing opposition to U.S. President Donald Trump’s immigration ban is a low-cost form of opposition that helps a university establish liberal credentials at home. No foreign university, however, has demonstrated willingness to show the same level of opposition to demands made by the Chinese government that it would deem unacceptable at home. The opportunities are too big, and their principles turn out to be surprisingly pliable.

Who is really fit to cast the first stone?

[p.s: Cambridge University Press has reversed its decision to purge articles from the China Quarterly Journal as demanded by the Chinese government]

Wielding geoeconomic tools with success

Beyond sheer size, sums, and growth rates, four more variables help explain a country’s ability to translate its domestic market into geopolitical leverage:

ability to exercise uniquely tight rein over access to domestic markets,

capacity to redirect domestic import appetites to make a geopolitical point,

actual or perceived consensus that a country’s domestic market is too large to ignore (this, of course, especially applies to China and is merely a regional dynamic in the case of Russia), and

a growth trajectory that makes other countries see rising future costs to opposing its foreign policy interests today. Of the various geoeconomic instruments currently in use, these domestic market features are probably most relevant in determining how fruitful particular trade and investment policy and sanctions efforts will be in producing geopolitical benefits.

That is a great framework to think of international trade in geoeconomic terms.  It is from the book, ‘War by other means’ by Robert Blackwill and Jennifer Harris. I have finished reading five of the ten chapters of the book. I found it rich in terms of information. The geoeconomic strategies and tactics adopted by Russia and China are extremely interesting and useful.

I was pleased to note that the authors confirm my understanding of geoeconomics: the use of economics as a tool to further the nation-state’s geopolitical and international power projection goals and not the other way around.

In general,the authors note that China has scored tangible gains – at least in the near term – from their application of geoeconomics as a weapon/tool to achieve their goals. This is what they write:

China openly flexes geoeconomic muscle—both positive and negative—and much of the time it succeeds in advancing Chinese geopolitical interests, at least to some degree, on issues of concern to it. This is not to suggest that China’s geoeconomic tactics are always efficient, in either economic or geopolitical terms, or that there are not cases of overreach and backfire. But by exercising this pressure China has managed to deter arms sales to Taipei and to steadily reduce the number of countries to recognize Taiwan; it has curtailed the activities of the Dalai Lama; it has deterred countries from political showings of support for human rights issues; it has registered noticeable impacts on votes in the UN and frustrated various Western efforts to pressure North Korea; it has given tactical support to a newly emboldened Russian foreign policy; and, not least, it has challenged the balance of power in Southeast Asia, forcing some countries to alter course in pursuing territorial claims, and placing others on notice.

In that sense, what President Trump has been doing in his seven months is to bring back geoeconomics to American foreign policy which, the authors say, America has grown out of. My guess is that, in principle, the authors might approve of what the Trump administration is doing.

In that context, read what Professor Graham Allison had written in the Wall Street Journal on the President’s handling of North Korea. He seems to find a logic in the seeming irrationality. In fact, that is the very idea.

Also, recall what William Galston wrote on August 9 in WSJ on technology transfers and China:

If turning over our technological crown jewels to a foreign power is against the national interest, then our government should have the power to prevent it. But wielding this power without blowing up the international trade regime will not be easy. [Link]

In other words, it is not easy dealing with someone who thinks they obey only the rules they make. Of course, today’s superpowers behaved the same way when they were rising powers.  Now that they are status quo powers, the aspiring powers would challenge the order that they established. So, both the US and China are doing what they are expected to do. But, from the American point of view, confronting the challenge of China would not be easy and criticising the approach of the Trump administration is easier than coming up with more feasible alternatives.

Chinese reactions show that they are worried by the U.S. announcing an investigation into the theft of intellectual property by Chinese firms. The investigations could pave the way for retaliatory action by the United States. See here and here. China says that the American actions threaten to blow up the global trading system but that is what is needed, according to William Galston, to stop China’s ‘unfair trade practices’.

One final point: we should not forget that China’s domestic economic vulnerabilities have risen in tandem with its ability, willingness and brazenness in wielding geoeconomic tools. Perhaps, there is a causation from the former to the latter? I am yet to read the latest IMF Article IV Annual Economic Assessment of the Chinese economy and ‘Selected Issues’. I understand that the Fund has been rather forthright in its bleak assessment of the Chinese economy risks.

Gems from China

It is really hard to believe why an aspiring superpower would do this or is this an effective tactic that other countries can and should learn from? I doubt if is something worth emulating. I am referring to the video that China had allegedly put out, parodying Indians with reference to the Doklam standoff.

But, if you peruse the links below, this might not come as a surprise.

They have also been ordered to remove inscriptions of Islam’s holiest verse, “There is no god but God, and Muhammad is the messenger of God,” from mosque walls and replace them with large red banners that read “Love the [Communist] Party, Love the Country” in yellow writing. [Link]

The title of this article wonders if granting WTO accession to China was a mistake:

When China entered the WTO in 2001, it promised to sign the Government Procurement Agreement, which requires government purchases to be made on a nondiscriminatory and transparent basis, “as soon as possible.” Sixteen years later, this has not happened. [Link]

Apparently, WTO rules prohibit mandatory requirement of technology transfers. The article concludes on this ominous note:

If turning over our technological crown jewels to a foreign power is against the national interest, then our government should have the power to prevent it. But wielding this power without blowing up the international trade regime will not be easy.

Nor will the media and American elites would let President Trump do that.

James Kynge writes about the trust issue with China:

The concern for western business is not that its Chinese counterparts may have more money than sense, but that they have little idea who or what to trust. ….The key challenge for western companies is that Chinese bids emanate from a domestic context that is difficult to understand and impossible to predict. The invisible hand of the Communist party can permit market forces to flourish for a while, only to abruptly curb such freedoms when they no longer serve a higher purpose.

“The risks associated with Chinese investments overseas are usually of three types,” said Yu Jie, head of the China Foresight Project at the London School of Economics. “There are economic risks, political risks and ones associated with the omnipresence of the Chinese Communist party.” All three of these are “inevitably intertwined” given the nature of China’s political system, she adds. They “do not always follow economic rationality”.

The FT has a story based on the latest report by Charlene Chu at Autonomous Research:

In her latest report, Ms Chu estimates that bad debt in China’s financial system will reach as much as Rmb51tn ($7.6tn) by the end of this year, more than five times the value of bank loans officially classified as either non-performing or one notch above. That estimate implies a bad-debt ratio of 34 per cent, well above the official 5.3 per cent ratio for those two categories at the end of June….

…. Her estimate of Rmb51tn in bad debt is based on average credit losses across other 11 other economies that previously experienced rapid debt increases comparable to China, including Japan in 1985-97 and the US in 2000-07.

“What I’ve gotten a greater appreciation for is how everything is so orchestrated by the authorities,” she said. “The upside is that it creates stability. The downside is that it can create a problem of proportions that people would think is never possible. We’re moving into that territory.”

While we are at the subject of bad debts, some stuff from Caixin magazine:

A CBRC-led audit at the beginning of this year found that actual bad loans were higher than what the banks had on the record, a vice director of a provincial branch of the banking regulator told Caixin.

In a report last year, the central bank estimated that lenders might have understated the amount of nonperforming loans by at least 50%, which suggests that bad loans at commercial banks could be as high as 4 trillion yuan.

This could present a problem as the amount of funds set aside for bad loans, totaling 2.9 trillion yuan at the end of the second quarter, is only enough to cover reported levels of bad debt.

In addition to being underestimated, bad loans may be on the rise too.

“The banking industry’s risk control situation is still complex and difficult, and pressure for nonperforming loans to bounce back is very high,” according to an official transcript of the CBRC’s mid-2017 Work Forum held on July 29. [Link]



Doklam standoff – some links

Kanwal Sibal on ‘China’s diplomatic loutishness’ in [Link]

Raja Mohan says that India would lean towards the United States and Japan, abandon its long-standing restraint on being a force that balanced China:

One of the unintended consequences for China from the Doklam crisis would be an India that is forced to think far more strategically about coping with China’s power. For nearly a century, sentimentalism in Delhi about Asian solidarity and anti imperialism masked the more structural contradictions with China. Beijing’s approach to the Doklam crisis could well help bury those illusions. [Link]

This blog post by Pieter-Jan Dockx says India has already aligned with the United States.

Evan Feigenbaum on the coercive ladder available to China. But, he is not sure if China uses them in that fashion.

This Reuters article says that India proposed that China withdrew its troops 250 meters but that China refused and offered 100 meters subject to approval from top government officials.

An interview of Andrew Small by Seema Sirohi for I am not sure I learned much that is new.

Brahma Chellaney says that Xi should collaborate with India and find a face-saving exit for China:

Against this background, the smartest move for Xi would be to attempt to secure India’s help in finding a face-saving compromise to end the crisis. The longer the standoff lasts, the more likely it is to sully Xi’s carefully cultivated image as a powerful leader, and that of China as Asia’s hegemon, which would undermine popular support for the regime at home and severely weaken China’s influence over its neighbors. [Link]

A ‘response’ to Brahma Chellaney, I suppose:

Officials in the top ranks of the party, government and military were summoned this week to ­Beijing for a two-day seminar to study President Xi Jinping’s speeches and to gear up for a key, once-every-five-years Communist Party congress this autumn. ….

At the seminar, Xi told the officials that the last five years had been “extraordinary” for China and that the country had reached a historic turning point.

“Over the five years, the party’s central leadership … solved many challenging problems [the party] wanted to solve for a long time but couldn’t, and achieved many things it wanted to achieve in the past but didn’t manage to achieve,” he said. “The Chinese nation … has achieved the historic leap of rising to our feet, getting rich and getting powerful.”

Chen Daoyin, an associate professor at the Shanghai University of Political Science and Law, said Xi’s remarks were a signal that he had placed himself on par with late leaders Mao Zedong and Deng Xiaoping. [Link]

Repeat: symptoms of hubris [Link]

Sapiens and sperm count

This news-story in FT caused a flutter as it documented that male sperm count has fallen drastically in western countries. It might be truer of other societies too. Stress and chemicals are supposed to have played a role – “prenatal chemical exposure, adult pesticide exposure, smoking, stress and obesity,”

The BBC version of this story said that the sperm count drop could make humans extinct. Well, other living organisms might get a new lease of life. Yuval Harari had written in ‘Sapiens’ that wherever Sapiens set foot, they had destroyed the living organisms that had been existing there for thousands of years. So, may be, this is what Planet Earth needed.

Of course, these stories would prompt granular analysis – geographical, ethnic and religious breakdown of the population that is witnessing sperm count reduction or not, etc.

(2) My friend Nitin Pai wonders (or makes a plaintive appeal to China) why China is willing to alienate 500 million Indians. I doubt if they see the Doklam standoff that way. On his part, the President of PRC has answered him. The question he is asking is why 500 million Indians are alienating 1.3 billion Chinese by not paying homage to them and acknowledging that they have reached a historical turning point?! The article in the ‘South China Morning Post’ reminded me of this.

(3) Little over two weeks ago, I wrote in MINT that the U.S. dollar was still the king. In June, I had questioned the euphoria over Europe.  I am not resiling from both the positions. But, I have to add caveats. Perhaps, I was engaged in cognitive dissonance reduction since I was short Euro vs. U.S. dollar.

After some analysis and reflection today, I have come to the conclusion that, although the U.S. dollar should be supported by the rising real interest rate differential to the Euro, political leadership and policy competence perceptions seem to be tilted in favour of Europe, even if only relatively. Further, in both the regions – America and Europe – there is no interest in their political leaderships to halt the trend in the US dollar – Euro exchange rate. Germany, with its 8.5% current account surplus/GDP ratio is happy to see the currency rise rather than having to undertake fiscal stimulus in an economy that is already operating at full capacity.

American thinking in the present administration favours a weak U.S. dollar. So, for now, the path of least resistance for EURUSD, therefore, is up. But, after reading the Article IV report of the International Monetary Fund on the Euroarea, I was pleased to note that this column of mine still remains valid. The Eurozone is still far from being an Optimal Currency Area.