China: Prosecutors Are Told To Aim High

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January 10, 2016: The big news coming out of China recently was another collapse of the Chinese stock market triggered, in part, by a slowdown in the Chinese economy. Three decades of ten percent a year GDP growth are ending because many things that needed to be built (mines, housing, factories, and infrastructure) have been built and the economy is increasingly dependent on consumer purchases to keep going. The problem is that those decades of growth were accompanied by widespread corruption. This means the banking system is sitting on a lot of worthless or overvalued loans. Too many banks are, in practice, bankrupt even through on paper they are solvent. There is a lot of unsold housing and business properties. Worse, a lot of that stuff (like so much else in China) is shoddy because of the corruption by builders and government officials who are supposed to prevent such fraud. A growing number of Chinese don’t believe their government can handle this mess and that results in hundreds of billion dollars’ worth of Chinese currency trying to get converted to more trusted foreign currencies (like the dollar, euro and yen).

The result in China is too many owners of stock trying to sell at the same time and too many people trying to convert their yuan (the Chinese currency) into foreign currency. The government has limited ability to stop this process. This means the yuan will lose a lot of its value versus foreign currencies. Since the late 1990s this was seen as an inevitable problem and in 2010 China agreed to allow the yuan to be freely (within limits) bought and sold. This meant that the international value of the yuan would more accurately reflect the state of the Chinese economy. By letting the yuan "float", the cost of Chinese exports went up (reducing demand somewhat), while Chinese were able to buy foreign goods for less. Unfortunately the government efforts to control how far the value of the yuan would fall failed and by 2015 it was obvious (because of the stock market collapse that began earlier in the year) that more extreme measures were needed.

Bad data was another major reason for the 2015 stock market crash in China. Technically this was not a crash (at first) but a correction because while the markets lost all its 2015 gains in less than two months the market was still, in August, fifty percent over where it was in 2014. But at the end of 2015 there was another rush to sell stocks and most of the 2015 gains were gone. Despite that the Chinese markets ended 2015 nine percent higher than they were at the end of 2014. But then came another selloff by investors desperate to exchange their yuan before its value plunged any further. Government attempts to keep the value of the yuan higher by using $3.4 billion in foreign reserves will only last for a year or so. In December 2015 over $100 billion of those reserves were used. After the reserves are used up the government will have to clean up the corruption and overvalued assets held by banks and other companies (many of them state owned). The government will have to shut down thousands of state owned companies which are inefficient, bankrupt and a primary source of corruption. In many cases the shuttered firms will also help reduce the growing air pollution. It is often badly run state owned firms that manage to violate the many pollution laws and get away with it. Ultimately the Chinese people will have to pay for this mess via higher taxes and temporarily reduced income (from unemployment because of many bankruptcies). This will make millions of skilled and educated Chinese very angry and that might be enough to force the communist dictatorship that has held onto power for 70 years to allow more democracy. Communist Party leaders do not want to be forced to deal with democracy.

This anger is currently fueled by the millions of small investors who lost big. This was largely made possible by the ease of borrowing money to buy stocks (“buying on margin”), which was a major factor in the epic American 1929 stock market crash. That market lost nearly half its value in two months before the end of 1929 and 90 percent by 1932. Unlike in the West, where (especially the U.S.) most stocks are owned by pension and mutual funds (and a third by families) most Chinese stocks are owned by 90 million individual investors and many of those invested late and got wiped out or suffered heavy losses. Between mid-2014 and mid-2015, when the government encouraged “all Chinese” to benefit from the booming (because of looser government regulations) stock market another 40 million investors bought into the market. Between June 2014 and June 2015, China's main stock market index rose by 150 percent. But six months later most of those gains were gone. Many new investors now believe that corruption and government control manipulated the market. Many major firms were found to be hiding problems and investors lost faith and wanted to sell. While the government can’t hide the damage done here it is made worse by the fact that that the pain is widespread and felt mainly by the newly affluent Chinese who now feel betrayed by their government, which has been encouraging such investing, especially since 2014.

Despite all these unprecedented (by recent Chinese standards) economic setbacks China is expected to see GDP growth of over six percent in 2016. That is twice what most Western nations can expect. Worst case Chinese growth might only be five percent. Most Chinese understand that the Chinese economy is still mighty and are aware of the extent of the shift in global economic power since the Cold War ended in 1991. At that point the U.S. and EU (European Union) had over half the world GDP. The Soviet Union had about ten percent and China two percent. But in 1991 the Soviet Union and its economy was falling apart (hence the dissolution of the Soviet Union). By the end of the 1990s Russia (now with half the population of the Soviet Union) had three percent of world GDP, China seven percent, the EU 24 percent and the U.S. 21 percent. Because China began growing at ten percent a year in the 1980s the compounded growth became very noticeable after the 1990s. By 2015 China was 17 percent of world GDP, Russia three percent, the EU 17 percent and the U.S. 16 percent. Projections for 2020, even taking into account showed down Chinese growth, have China with 19 percent of world GDP, Russia three percent, the EU 15 percent and the U.S. 15 percent. One special aspect in all this is the fact that China has more people than the EU, the U.S. and Russia combined. China also has the worse pollution, labor force unrest, corruption and stability problems than the West, or even Russia. Failure to cope with these problems may do more to hobble Chinese growth than anything the rest of the world does about growing Chinese economic and military power.

Meanwhile without much fanfare in 2015 Russia replaced China as the largest food donor to North Korea. China has been cutting aid in an increasingly desperate effort to halt the North Korean nuclear weapons program. Russia does not care much about that and has been making more economic deals with North Korea than ever before. The latest agreements allow Russia to set up chains of stores, fast-food outlets and local taxi services. This is an obvious effort to appease the Russians and please the new entrepreneur (donju) class at the same time. The recent North Korea nuclear test, in very direct defiance of China puts the Chinese in a very difficult positon.

All this bad news has more and more Chinese very unhappy with their government. Despite millions of police, many more paid informers and several large censorship bureaucracies, China has not been able to keep people from protesting. The most embarrassing example of this is protests resulting from rapidly growing labor problems. Workers want more money, safety and job security. Independent (of government control) labor unions are illegal in China and workers have been creative in finding ways around that restriction to make their point. China does have labor unions but these are government controlled and intended to keep workers in line and prevent strikes (unless the government wants them). None of the angry workers wants to risk jail by openly participating in what the government could call “illegal union activities. So there have been more and more “spontaneous” and “leaderless” work stoppages and walkouts. In some cases workers will threaten management, without using a representative or “workers’ committee” to deliver the threat. All this is of great concern to the government. After all, China is still, in theory and practice, a communist police state. So it is embarrassing, and scary, when all that power proves incapable to keeping workers in line and on the job. The workers use cell phones and the Internet in creative ways, getting around government electronic surveillance to keep workers informed and maintain morale, and the labor actions. There are often repercussions anyway. Strike leaders will be sought more aggressively and punished. Efforts to block use of cell phones and the internet to support such forbidden activities (strikes) will accelerate. But despite all this additional effort the state security agencies still tend to come up empty.

Despite the anti-Chinese aspects of the recent nuclear test North Korea has quietly accepted much of the Chinese advice on economic reforms. Many North Korean leaders are still nervous about what threat, if any, this poses to their power. China advises keeping the donju (entrepreneurs) happy and keeping them close. That has worked for China and it should work for North Korea. So far it seems to be. China and South Korea are both quite uneasy about the prospect of the North Korean government collapsing. China is closer to the situation because for decades Chinese citizens have been allowed to live and do business in North Korea. These Chinese are usually merchants or run Chinese financed businesses. These Chinese can bring their families with them and freely visit China and return to North Korea. These foreigners were rarely bothered, until now. North Korea apparently suspects many of these Chinese are part of the Chinese espionage effort in North Korea and hundreds have been arrested and questioned. North Korean diplomats and businessmen with lots of Chinese experience warn the government that this crackdown could do a lot of damage to relations with China. So far those warnings do not seem to have had any impact. Apparently even Chinese diplomats, including the Chinese ambassador, have been put under surveillance by the secret police. The government has also made it more difficult for these Chinese to return to China. China denies that this is going on but sources inside North Korea insist that it is.

January 9, 2016: In the north (Hebei Province) four senior members of the provincial Communist Party were expelled from the party for corruption. The four are now being prosecuted and the expulsion almost guarantees conviction and harsh sentences. This is part of the national government effort to make a dent in corruption. In the past only lower ranking party members were prosecuted but it eventually became clear that if the corrupt senior party members were not shut down the widespread corruption would survive. So now the prosecutors are told to aim high. Officials in charge of anti-corruption efforts recently announced that they had been told to look everywhere within the Chinese Communist Party for corruption. This is unprecedented and if the investigators are allowed to prosecute all they find to be dirty there will be a lot of new faces in the partly leadership by the end of 2016. Apparently officials were quietly told that if they resigned, admitted their transgressions and made restitution they would be left alone.

January 8, 2016: Alarmed at North Korea’s recent nuclear test and continued Chinese aggression Japan and Britain agreed to closer coordination in defense matters. Britain, and many other European countries, have economic interests in East Asia and concern over Chinese efforts to threaten the free movement of maritime traffic by seizing control of the South China Sea. Japan has been establishing closer defense relationships with South Korea, the United States and other nations feeling threatened by Chinese aggression.

January 6, 2016: The North Korean conducted a successful test of what they claimed was a fusion (H-Bomb) nuclear weapon, This was condemned by Russia, China, South Korea, the United States and just about everyone else. China and Russia both agree that North Korea having nukes is a bad thing but China is more concerned about this than Russia or anyone else. Technical experts from the West, South Korea, Japan and China doubt that the nuclear weapons test was a fusion bomb. Soon (by the end of January) some intel agencies, will have collected and analyzed air samples from near the test site. Winds blow this contaminated air out to where intel aircraft or ground stations can capture samples. Analysis of those samples will clearly show if it was a fission (A bomb) or fusion (H bomb) test. The U.S. Air Force has already sent one of its “sniffer” aircraft (a WC-135) to collect air samples. Chinese ground stations may already have such samples.

January 5, 2016: After years of trying Pakistan and China finally got commitments from two customers (Nigeria and Sri Lanka) for the JF-17 jet fighter. This is a largely Chinese effort but Pakistan is a major investor and also assembles it). The two customers are ordering eleven JF-17s (eight for Sri Lanka) at a very attractive price. Orders for additional aircraft are likely if the first eleven perform well. Previous efforts to export the JF-17 failed because the aircraft was not considered competitive by potential customers. Pakistan has already received or ordered 110 JF-17s as part of a project that began in 1992. While it was a joint Pakistan-China effort China supplied most of the money and did most of the work. China, however, does not use the JF-17, only Pakistan and whatever export customers they can find. The JF-17 is assembled in Pakistan, although over 40 percent of the components come from China or Russia. The project has gone through several name changes (FC-1, Super 7). The 13 ton warplane is meant to be a low cost ($20-30 million) alternative to the American F-16. The JF-17 is considered the equal to earlier versions of the F-16, but only half as effective as more recent F-16 models. The JF-17 uses the same Russian engine, the RD-93 that is used in the MiG-29. The JF-17 design is based on a cancelled Russian project, the MiG-33. Most of the JF-17 electronics are Western. The JF-17 can carry 3.6 tons of weapons and use radar guided and heat seeking missiles. It has max speed of Mach 1.6, an operating range of 1,300 kilometers and a max altitude of 17,000 meters (55,000 feet).

January 3, 2016: China continues to insist that it owns the South China Sea despite what anyone else in the neighborhood believes or international treaties say. The neighbors (especially the Philippines) continues to protest, and build up its tiny air and naval forces. Filipinos are relieved that the United States is taking a more active role in the latter. In the last few months of 2015 American B-52 bombers twice flew through air space in the South China Sea that China now considers Chinese territory. China protested, the United States ignored the protest and also sent surface warships into South China Sea areas China claims sovereignty over. However the second B-52 overflight in December led to an American apology when China protested. Many Filipinos doubt that the United States would stand fast if China pushed hard. China is obviously pushing back, as can be seen by a recent announcement that a second aircraft carrier is under construction and airfields built on artificial islands in the South China Sea are being built to handle large military or civilian aircraft. China also revealed details of military reforms that put more emphasis on Cyber War, space operations and nuclear weapons. There are no signs that China is going to back down when it comes to its many territorial claims on neighbors.

December 30, 2015: At the last minute the Philippines agreed to apply to join the Chinese AIIB (Asian Infrastructure Investment Bank). South Korea also applied and was accepted on March 26th. The U.S. and Japan both declined to join the AIIB. The AIIB is part of a Chinese effort to build an alternative to Western dominated financial institutions like the IMF and World Bank. The AIIB would serve as an option especially for friends of China in Asia. South Korea may openly oppose Chinese claims in the South China Sea but has been very receptive to Chinese investment and Chinese investors have responded enthusiastically. China has used its growing economic power to persuade countries to do what China wants and that often works. This is an ancient Chinese practice and until the 19th century China had the largest economy in the region, and the world. Chinese emperors knew (or sensed) that and acted accordingly.

December 28, 2015: China again demanded that the Philippines remove troops and facilities from islands in the South China Sea that have been Filipino (and recognized by international law as such) for a long time. China claims most of the South China Sea now and threatens to use force to eject “trespassers”.

December 27, 2015: In the southeast (Shenzen) the official in charge of industrial safety committed suicide rather than face prosecution for a December 22nd disaster outside the city of seven million. There an illegal (and obviously unstable) pile of construction waste was allowed to exist and grew into an unstable pile over 100 meters (330 feet) high. As expected, during heavy rain much of the pile turned to mud and buried thirty nearby building killing over 70 people. A dozen people have already been arrested and as these things go, some of the convictions may end up as executions. There were three suicides in 2015 by officials or businessmen facing prosecution for disasters like this. One of those was in Shandong province on the 25th when the president of a mining company killed himself because of a mine collapse that killed one man and trapped 17 others.

Based on government supplied pictures and video shown on TV it appears Saudi Arabia and the UAE are both using Chinese UAVs in Yemen. Both countries are known to have been discussing such a purchase with the Chinese, who have a UAV (CH-4) similar to the American Predator that is getting a lot of export sales. Pakistan is known to have some CH-4s. The Chinese UAVs sell well because many nations have been unable to buy similar American UAVs because of American fears that UAV secrets will be sold to enemies of the United States or that the UAVs will be used to support war crimes.

December 26, 2015: Fifty Filipino demonstrators visited Pagasa Island in the South China Sea. This is the second-largest (37.2 hectares/93 acres) of the Spratly Islands and is occupied by 200 Filipinos civilians and a few military personnel. China has been increasingly belligerent in its claims to Pagasa and threatens to “take it back” by force. China reacted to the demonstrators visiting by issuing an official protest and repeating its threats. Chinese military and civilian ships are showing up near Pagasa with increasing frequency and sometimes the Chinese vessels try (by getting in the way) to prevent non-Chinese vessels from getting too close to the island. The Philippines often has a coast guard patrol boat off the island (which is 480 kilometers from the nearest Filipino territory China does not claim) and that provides the possibility of a violent military encounter.

December 25, 2015: Since October Japanese coast guard patrols have found sixteen North Korean fishing boats drifting off the coast, most of them containing decomposing bodies. These are all coastal craft (about 12 meters/38 feet long) which cannot operate effectively on the high seas. It remains a mystery as to what is going on here. The most likely theory is that the boats are of fishermen who, desperate to fill new quotas, went out too far, ran out of fuel and were unable to call for rescue. These boats did not contain radio or GPS and lack of such gear is common aboard North Korean fishing boats. The other theory is that these were defectors who underestimated how much fuel it would take to reach Japan or suffered engine failure. The truth may be a combination of both theories. What is certain is that for many North Koreans life is getting worse and these people are desperate to escape. There are no reports of similar incidents off the west coast of North Korea, which faces China.

December 24, 2015: Japan increased its defense spending for 2016 1.5 percent to $41.8 billion.

December 23, 2015: A Japanese patrol aircraft spotted three Chinese warships near the Senkaku Islands. For the first time armed Chinese warships entered Japanese territorial waters (within 22 kilometers from shore). China claims ownership of the Senkanus even through Japan has occupied them for over a century.

December 21, 2015: China agreed to spend $2 billion to build a 650,000 kilowatt power plant in Pakistan (Sindh province). Fuel will be provided by a nearby coal mine which China will expand and upgrade. China will supply most of the financing and many of the technical personnel as well as key items of equipment. China has become the major source

 

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