CHINAwatch

China's Sichuan earthquake shakes the world

On 12 May at 2.28 p.m. local time, I was on a direct train to Guangzhou, when a catastrophic earthquake, later upgraded to 8 on the Richter Scale, devastated Sichuan and some areas in neighboring provinces, leaving millions homeless and over 80,000 dead or unaccounted for.

According to the Information Office of the State Council on 21 May, the death toll had reached 41,353 (later revised to 55,239) with 274,683 injured and 32,666 still missing. So far a total of 6,452 survivors had been unearthed from the rubbles with 396,811 rescued or evacuated.

When CNBC Europe emailed me about the economic impact of this disaster, I gave the following take:

(a) The earthquake is more severe than the last big one at Tangshan on 28 July, 1976. It has now affected an area of some 100,000 sq km. One of the 'rice bags' of China, Sichuan accounts for 9.2% of China's grain output and 9.4% of China's rice output. But most of the affected areas are hilly rural villages representing only a small percentage of Sichuan’s agricultural production. Moreover, China has built up a huge rice and grain reserve which should moderate any upward pressure on food prices. In any case, such impact is likely to be temporary as China is a net food importer.

(b) Albeit one of China’s largest provinces, Sichuan's contribution to China's GDP is only about 3.5% , accounting for 1% of China's export. The Chinese authorities have so far estimated the direct physical loss at about US$10 billion. Analysts have figured that the overall economic impact is likely to be in the range of 0.2 -0.7% of China’s GDP.

(c) As part of the leadership's full-throttled response, there will be vigorous infrastructural investments in reconstruction. These will have a significant positive GDP contribution, though at the expense of sustaining higher steel and concrete prices.

(d) Overall inflation in China is expected to moderate in the second half of 2008 as a result of the cooling of the world economy. In keeping with a tightening policy, Premier Wen has since ordered a cut of 5% in all government budgets, particularly in areas of non-essential expenditure, in order to pay for the reconstruction.

(e) Amidst slower global economic growth and rising commodity prices in 2008, China's overall GDP growth is expected to decelerate to 9 or even 8%. Nevertheless, this would still be the envy of many countries.

The way this earthquake has shaken China and the rest of the world is not so much the scale of its economic impact or loss of lives and property. It is how the Chinese leadership and the Chinese people have remarkably risen to this colossal adversity.

There was instantaneous 24-hour TV coverage across the country with massive press reports and the international media given unprecedented free access. Premier Wen flew to the scene within four hours and went straight near the epicenter. Over 100,000 soldiers of the PLA were  mobilized to save lives and provide emergency relief amidst the rubbles. Psychological counselling teams were working around the clock on deprived children and relatives. The entire nation of volunteers, many leaving their jobs, hurried to give a hand. Almost immediately, as many as 57 civic groups were mobilized online and offline with a coordination office set up in Chengdu.  There were long queues in many cities to donate blood. Voluntary cash and material donations came pouring in across the country and from the Chinese Diaspora, now reaching $2 billon and counting. Similar support along with rescue teams has been arriving from many governments around the world, including the US, EU, Russia, Japan, the Middle East, South America, and Africa.

For the first time for a natural disaster, the nation went into an official three-day national mourning from 19 – 21 May, with all national flags flown at half-mast. All the flags at the United Nations were also flown half-mast in support.There was a three-minute silence on the first day to pay respect to the dead. As a fifth of mankind of 1.3 billion people from all walks of life stood in grim silence, few managed to suppress their tears. Fresh in their minds were vivid scenes of courage and compassion, some not widely reported in the West:

(a) A dead young mother was unearthed still breast-feeding her baby who has survived in her arms.

(b) A beautiful young girl who had just realized her ambition of being a primary school teacher was found dead protecting four students with her body, leaving behind a photo album full of her now- extinguished dreams and aspirations.

(c) A young Chinese student buried in the rubble for days asked for a cold can of Coca Cola on being discovered by rescuers and then had to have both his legs amputated. When volunteers greeted him with tears after the surgery, he just asked them not to cry and said he was alright.

(d) A father was waiting to be removed from tons of concrete, saying to his anxious wife that all he wanted for the rest of his life was to be with her and their child. Those were his last words.

(e) Right in the epicenter, the decimated Beichuan Middle School re-opened with the National Anthem on 19 May in make-shift premises for its grief-stricken surviving students, many of whom lost their parents and close relatives.

There are many, many more of these moving true-life scenes, watched real-time on television: scenes of heroism, compassion, humanity and fortitude that have dramatically united China as a country and changed perceptions of China across the world.

As the whole of China is gearing up to the Beijing Olympics this summer, she stands an even better chance of making this the best Olympics ever as world opinions have markedly softened towards her in the wake of this historic catastrophe. From the highest leaders to the ordinary citizens, China's response of great perseverance, compassion, courage, dedication, unity, transparency and efficiency has won hearts and minds both inside and outside China. Across the world, there has been an outpouring of heartfelt support, empathy and praise. All this is likely to make the Chinese people more poised and fortified to face the many challenges of building a better tomorrow.

Andrew K P. Leung, SBS, FRSA

www.andrewleunginternationalconsultants.com         

How the Olympic Torch Relay inflamed Chinese nationalism

Following the undignified public reception of China’s Olympic Torch Relay in London, Paris and San Francisco, Chinese blogs and chatrooms around the world were ablaze with passion and fury at what was perceived as the West’s deliberate rubbishing of China’s national pride. What was perceived as the West media’s biased and sometimes erroneous reporting added to the sense of injustice. For example, CNN had to tender an uncharacteristic apology because their images of alleged use of force against protesters by Chinese police were actually taken in Nepal. When BBC was showing a Lhasa official clearly saying in Putonghua ‘Rioters disrupting the relay will be dealt with according to the law’, the English voice-over was ‘We will show no mercy’. For what had been running the gauntlet of unruly protests and media aspersions is more than the Olympics Torch Relay. It is not even the issues of Tibet separatism or China’s human rights. It is nothing less than the restored pride of a modern China after centuries of foreign humiliation.

To the vast majority of Chinese, Tibet is and has long been an inseparable part of China. To see so many Western protesters demanding separatism when the Dalai Lama is openly against it smacks of opportunism. Some protestors admitted that they were hirelings. Some do not even know where Tibet is. Much of the West’s commentaries revealed at best a glaring economy with the truth if not total ignorance of Tibet’s long history in the context of China as a nation. A rare article by Foster Stockwell on Tibet entitled Myth and Reality was published online in the Telegraph dated 5 March 2008 (http://my.telegraph.co.uk/elle/march_2008/myth_and_reality_of_tibet.htm )

A PEW Global Attitude Survey in June 2006 found that 81% of the Chinese were satisfied with the state of their nation, compared with 29% for Americans and 35% for Britons. Indeed, the Chinese satisfaction figure increased from 48% in 2002 to 72% in 2005. Although the survey may be biased towards urbanites, this is hardly a picture of suppressed people under a repressive regime as painted by some of the West’s commentators.

After centuries of blood and tears of foreign aggression and partition, the vast majority of the Chinese people really love their country, warts and all. They are proud of China’s modern achievements and feel able to hold their heads a little higher in the world. They don’t understand why a non-confrontational China preaching a philosophy of Harmony should attract so much animosity from the West.

An anonymous poem entitled ‘What do you want from us?’ as quoted in one of the Chinese blogs best captures the flavor of the emotions.  'When we toil for your goods, you blame us for the pollution. When we loan you our hard-earned cash, you blame us for your debt. When we multiply, you blame us for consuming the planet. When we restrict our numbers, you blame us for violating human rights'.

Most of the Chinese supporters at the scene are overseas university students. Many are studying for advanced degrees in humanities in some of the world’s best universities. They can’t  all be brain-washed by the Chinese Communist Party, as some Western media appeared to think.

However desirable, it would be naïve to think that the Olympics could ever be separated from politics. It would be unrealistic to expect the Western media to be totally unbiased. It is fair to say that if you go near the kitchen, you have to stand the heat. It would also be unrealistic to expect the West not to harbour a sense of fear, misgivings or unease at a Rising China with a different ideology and a different approach to international politics. These legitimate concerns underline most of the West’s media commentaries.

As I write, the wave of nationalistic boycotts against Carrefour in China has been sweeping across many provinces. Fresh in the mind are TV footages of how Jin Jing, China’s paralympian girl in a wheel chair, was attacked during the Torch Relay in Paris. As forewarned by Peter Hayes Gries (China’s New Nationalism, University of California Press, 2005), unfair and selective demonization could stoke China’s vengeful nationalism. Indeed, the Chinese leadership is very much alive to these dangers. As the tide of nationalism was beginning to appear, the official media immediately called for calm and rational thinking. The barrage of the West’s negative reporting was compared to ‘rains before the rainbow’, extolling citizens to turn their patriotic zeal to continuing building the country’s economy. Much more direct supervision involving China’s security police was later reported in the Financial Times of 2 May.

With a host of pressing internal and external challenges, including inequalities, unbalanced development, pollution, inflation, corruption and a looming aging population profile, China needs all the help she can get in an increasingly inter-dependent world to maintain a relatively benign internal and external environment in the coming decades, so that she can realize her ambition of achieving a middle-income economy by mid-century. While nationalism has its values, the risks of it getting out of hand are far too great. But in the long run, with the Me Generation of the ‘Little Emperors’ (the product of China’s One Child Policy) coming to their own, mere control and suppression of rising nationalism cannot be the answer. A better way has to be found for the Chinese people to live down their historical demons and to embrace a truly diverse and open civil society in the Global Village.

Andrew K P Leung, SBS, FRSA

www.andrewleunginternationalconsultants.com

The Tibet Situation

There are two distinct issues here: separatism and multi-ethnic disharmony.

The first is inextricably bound up with history, which like elsewhere, has defined the modern sovereign states as they are in Europe. The declared independence of Kosovo has ignited concerns amongst a host of European nations with substantial ethnic minorities. These include Spain (with 2.5 million Basques in the northwest region and 7.2 million Catalans in the north-east region); Romania (with 1.4 million Hungarians (Magyars) mainly in Transylvania); Bulgaria (with 700,000 Turks mainly in the north); Slovakia (with 10% population being Hungarians); Greece (with Turks in Western Thrace); and Cyprus (250,000 Turkish Cypriots in a separate state only recognized by Turkey) (Speigel Online International 22 February 2008).

If we go further into history into the origin of modern states elsewhere, we will have to consider the cultural and ethnic dimensions of Australian aborigines and the American Red Indians.

Compared with the above, the administration of Tibet went back even longer, to the Yuan Dynasty in the 13th century and even beyond. The fact of the matter is that we cannot re-write history or turn back the clock. Even the Dalai Lama has repeatedly said openly that he does not support independence. It is therefore disingenuous for outsiders to demand what the Dalai Lama is against.

The second issue, which is of course not confined to China, is how a multi-ethnic, multi-religious, and multi-racial community can live together peacefully. This is closely related to the question of human rights and how it is being defined. China is a country of 56 different races and ethnic groups, virtually all living in harmony. As for Tibet, which is about four times as large as France, there is already a degree of autonomy as it has been governed as an Autonomous Region, where a great deal of the Tibetan cultural and religious heritage has been preserved. The situation, however, is different from other Chinese minorities.

Tibet has been relatively inaccessible from the rest of China for centuries until recent times. On the one hand, this greater integration with the Han Chinese has greatly improved the livelihood of the Tibetan people. According to the United Nations Development Indices, their life-expectancy, literacy and per-capita income have registered marked improvements. On the other hand, the impact of an influx of Han Chinese has raised racial and ethic tensions, as evident from the recent Tibetan riots. Furthermore, the Dalai Lama in exile still commands great respect and following amongst the Tibetan people and many countries worldwide.

What is important now is for the riots to stop. No society can and should tolerate using violence especially against innocent citizens to solve problems, whatever the cause. In doing so, China seems not to have used disproportionate force as she has vowed to act with restraint.

What is even more important is for China to address the underlying social, ethnic and religious tensions to see what improvements can be made to achieve a Harmonious Society in Tibet. The Dalai Lama has openly renounced independence and dissociated himself from the violence and unrests. Notwithstanding mutual distrust over many years, he should be held to his word. Premier Wen has said he is prepared to resume talks with the Dalai Lama on similar terms. A way should be found to see how the Dalai Lama could work with the Chinese authorities to help achieve ethnic and religious harmony in Tibet as an Autonomous Region of China.

Andrew K P Leung, SBS, FRSA

www.andrewleunginternationalconsultants.com

Inflation and the Tibetan riots

At the State Council meeting of January 19 this year, Premier Wen warned that 2008 was going to be one of the most difficult years China had ever faced. Amongst the stormy seas ahead, including a world in the shadow of looming recession amidst continuing financial turmoil, he singled out inflation as the main challenge. A raft of temporary price freezes on commodities affecting people’s livelihood was imposed, including refined oil, gas and electricity. Major food companies in China, including noodle makers and dairy producers, were required to obtain specific permission before any price hike. Export quotas and export tariffs have been introduced on 57 categories of raw grain and powder products such as wheat and corn.

Added to this is the tumbling of China’s year-on-year export growth rate in February, from 26% to 6.5%. To a certain extent affected by adverse weather conditions, this drastic reduction reflected the increasing unattractiveness of energy-and-labour-intensive exports whose margins continue to be squeezed at a time of rapidly rising costs.

We are witnessing an interesting yet worrying paradox:

(a) China's cheap exports and investment of a sizeable proportion of her gigantic savings in US Treasuries used to keep both global inflation and interest rates low. But signs of stress are beginning to show. Her Export Unit Value Index (EUVI) has registered significant increases during past months. This reflects price pressures due to RMB appreciation, rising commodity and labour input costs, and withdrawal of tax concessions for energy-intensive exports.

(b) The situation is accentuated by the continuing weakness of the US Dollar, in which a great deal of the world's commodities, including oil and food, are denominated. Food price increases in China, already up 11.3% in June last year, are showing little signs of abatement. While prices of consumer goods remain low owing to increasing overcapacity, overall headline inflation is reaching alarming heights.

(c) Food price increases as a proportion of inflation appear on the rise worldwide. Contributing factors include Climate Change such as more frequent extreme weather conditions and water shortage; increased use of farmland for biofuel crops; lower food crop stock levels; and growing Westernization of Asian diets as a result of rising incomes.

(d) There is little room for the world's energy and commodity producers to keep prices low in face of continuing robust global demand driving the Third Industrial Revolution in the 21st Century encompassing nearly half of mankind. A consequence is the huge migration of farmers for urban work exacerbating lower food production and rising food and commodity prices.

(e) The subprime meltdown puts economic stimulation ahead of inflation on the US's political agenda, especially during the time of the Presidential Election. Cutting interest rates is a ready tool, even at the cost of fuelling inflation further.

(f) In spite of the US economic downturn, Walmart has reported healthy profits, suggesting that consumers are flocking towards cheaper goods to fight general inflation.

There are growing signs that we are already in the Delphic Future in Alan Greenspan's 'The Age of Turbulence' (Penguin Group, 2007)

On the other hand, China’s year-on-year import registered a remarkable increase in February, from 27% to 35%. This matches a buoyant growth of retail sales from 13% in early 2006 to 20% in December 2007. According to statements by Commerce Ministry officials on March 12, China’s Foreign Exchange Reserve has just swollen over US$1.6 trillion.  Savings have reached an all-time high of 50% of GDP. Nevertheless there is still too much liquidity in the market creating various asset bubbles. The People’s Bank of China is  to continue with a credit-tightening policy. Due to rising costs and the world’s recessionary jitters, China’s growth is expected to drop from over 11% to a more sobre 8%. China is thus more concerned about inflation than growth while the West, at least for the duration of the financial turmoil, is more concerned about growth than inflation. 

Like other newly industrializing countries, China has to keep growing fast in order to generate 24 million jobs a year to keep her economy on an even keel. What is more, to achieve a more balanced regional development, she is expanding her transport infrastructure at a breakneck pace. In less than five years from 2001 – 05, China completed a host of transport network including railways and roads which would take the West 50 years to deliver. China has already built some 53,600 km of expressways, second in length only to the US interstate highway system. These are planned to expand to 70,000 km by 2020 (The Economist, 16 February 2008). Set against the world’s rapidly rising commodity prices, China’s inflation is thus unlikely to ease any time soon.

While inflation is an on-going problem affecting many people in China, I do not think that the Tibetan unrests are primarily a food inflation issue. Social unrests, some 87,000 cases, are nothing new to China. These have come about as a result of diverse grievances against local inequalities and abuses. The current rioters in Lhasa, however, are Tibetans. Indeed, the Tibetan unrests have a distinctly ‘separatist’ flavour, which is being echoed in neighbouring Gansu Province and by Tibetan activists in other parts of the world. It is this ‘separatist plot’ that China is vigilant against. Indeed, as recently as March 8, China reported a foiled terrorist incident on board an Urumqi-Beijing flight from Xinjiang Province, another flashpoint for (Muslim) separatists.

Following the 11th National People’s Congress, the next generation’s rising stars are now in place. 2008 is likely to be their baptism of fire as it is set to test the mettle and skills of the Hu-Wen leadership. As I write, Gordon Brown has told the House of Commons that Premier Wen is ready to resume talks with the Dali Lama provided he does not support independence and renounces violence.  Let’s keep our fingers crossed.

Andrew K P Leung, SBS, FRSA
www.andrewleunginternationalconsultants.com

The Rise of Sovereign Wealth Funds (SWFs) in the Age of Uncertainty

The Rise of  SWFs

Sovereign Wealth Funds in the Middle East and Asia have accumulated US$2.8 trillion in assets and are multiplying their global acquisitions, according to a study by Morgan Stanley.  Merrill Lynch estimates that SWF investments may quadruple to US$7.9 trillion by 2011. Morgan Stanley expects them to reach US$12 trillion by 2015. Mckinsey believes that this large liquidity contributes to global low long-term interest rates.

The Abu Dhabi Investment Authority (ADIA) has a war-chest of US$ 900 billion. It recently acquired 7.5% of Carlyle Group for US$1.35 billion and 5% of Citigroup for US$7.5 billion. It has also bought an undisclosed stake in SONY. This was outdone by the Kuwait Investment Authority (KIA), which took a stake of US$14.5 billion in the Citigroup, along with Saudi Prince Alwaleed bin Talal and Singapore’s Temasek. Dubai Sovereign Funds have snapped up shares in big names such as MGM Mirage casinos, aerospace giant EADS and the Barneys department stores. Qatar Holding and Dubai Borse have bought 24 and 28 % respectively of the London Stock Exchange, vying to take control of the Nordic stock exchange operator OMX. Dubai has formed an alliance with Nasdaq, of which it already owns about 20 %. All these are likely to be dwarfed by Saudi Arabia, which is expected to be setting up soon ‘the mother’ of all sovereign funds.

At the end of 2006, Asian central banks were accounting for $3,100bn of global SWF investments. That was more than double the total assets managed by hedge funds and quadruple those held by global private equity. By the end of 2007, Asian FX reserves were up 20 per cent to $3,700bn. As for petrodollars, McKinsey Global Institute calculates that with oil prices above $70 a barrel, $2bn of new petrodollars will enter global financial markets every day.

The Singapore Investment Corporation (SIC) has been very active.  After acquiring a 12% stake for US$ 4 billion to become the largest shareholder of Standard Chartered Bank, it has bought 9% of UBS for US$ 9.75 billion and 10% of cash-strapped Merrill Lynch for US$ 5 billion.

The China Investment Corporation (CIC) has been set up to manage US$200 billion of China's US$1.4 trillion foreign currency reserve. It has acquired a 9.9% stake for US$ 5 billion in Morgan Stanley, following an earlier 10% stake for US$ 3 billion in Blackstone.  All of China’s major multinationals are controlled by the state. Their funds and investments are therefore considered in the same category. China’s Industrial and Commercial Bank of China (ICBC), the world’s largest bank by market capitalization, has taken a 20% stake (US$ 5.6 billion) in Standard Bank, the largest bank in South Africa. This was the largest single foreign direct investment in Africa. This followed China Development Bank’s acquisition of a 2.6% stake for US$ 3 billion in Barclays Bank and Citic Securities’ 6.6% stake for US$ 1 billion in Bear Stearns. China has now spent US$ 29.2 billion in acquiring overseas assets.

Objectives of SFSs

By definition, SWFs are not answerable to private shareholders. Because of their size, they are often used as instruments of the state, to invest in strategic industries, to gain relevant business or technological expertise, and to build up the presence of the country owning such funds in their target investment locations. China’s SWFs, for example, are set up for the following reasons:

(a) to look for higher returns for her huge foreign currency reserve;
(b) to reduce her excessive domestic savings and liquidity;
(c) to help redress the global financial imbalance;
(d) to relieve international pressure on the RMB to appreciate too fast;
(e) to facilitate the globalisation of China’s financial services;
(f) to sharpen her international financial expertise; and
(g) to gain international strategic leverage.

SWFs are sometimes regarded as investing in ‘risky assets’ but are generally run according to commercial principles. The ADIA, for example, has teams of world-class financial specialists and professionals. However, as SWFs tend to be controlled by less democratic and less transparent states, there are legitimate concerns with geopolitical undertones about their overseas investments. 

In any event, some countries tend to regard some of their national business icons off limits to foreign ownership. For example, France did not want Pepsi Cola to take an equity stake in her yogurt conglomerate Danone. Others, e.g. the US, may be worried about foreign investment in what are regarded as strategic assets by a different political regime such as China. These apprehensions managed to scuttle China National Offshore Oil Corporation (CNOOC)’s bid for UNOCAL earlier. Similar concerns have been raised in the EU, notably Germany and France. Other countries, such as South Africa, may have a more open mind. To vet politically-sensitive SWF investments, the US has an inter-agency ‘Committee on Foreign Investments in the United States’ (CFIUS). Other developed countries have similar mechanisms. Most of these misgivings, however, may be more imagined than real. 

The Age of Uncertainty

As a source of huge and ready cash, SWFs are becoming increasingly welcome in a world reeling from a global credit crunch coupled with a host of financial and economic uncertainties. Particularly -

(a) the crunch doesn't look as if it is going to peter out any time soon. No one can rule out the possibility of still some more dirt being revealed from under the carpet of more major banks and finance houses;

(b) the global financial imbalance doesn't look any less precarious. The USD continues to appear sickly with the US economy weighed down by sub-prime jitters. Major USD holders including central banks, SWFs and petrodollar owners are likely to further diversify their currency baskets. There is danger of a vicious circle leading to plummeting confidence in the greenback;

(c) the prices of energies and commodities, including minerals and foodstuffs, continue to rise worldwide, fuelling inflation and recession fears;

(d) in the short-term at least, the Fed seems ready to sacrifice inflation safeguards by continuing to lower interest rates to stimulate the economy; yet much of these lower rates do not pass to the final consumer borrowers owing to increased credit risk aversion;

(e) job losses and lowering wages are translating into rising protectionist sentiments on both sides of the Atlantic. This is bad news for international trade.

The above shows that amidst the current global credit crunch, SWFs are increasingly being courted as white knights in shining gold armour for the rescue of banking damsels in distress. This is underpinned by a desire to forge closer links with some of the world’s most dynamic emerging markets.

Conclusion

SWFs command massive financial resources and are becoming increasingly prominent internationally. How they choose to invest or park their money has a significant impact on sectors, industries, economies, and currencies, if not whole countries. Because of their very nature, SWFs tend to be less transparent and are less able to meet full disclosure requirements.  They deserve to be closely monitored and regulated. But a balance needs to be struck between suspicion, caution, and genuine commercial considerations, especially if the stake is not large proportionally, if the investment does not carry any voting rights, and if such investment does not compromise national security.

No country even if able to do so should copy the Middle East and East Asia by rushing ahead to establish its own SWF. These funds are usually the product of external circumstances. In the case of the Middle East, they are the product of concentration of oil reserves coupled with an unprecedented rise in oil demand and prices. In the case of China, they have arisen from her export-oriented and fully globalized manufacturing powerhouse and a less developed internal financial investment market.

If not used properly, a SWF may run the risk of weakening private sector competitiveness of the country owning the SWF. Channelled properly, however, they should be welcome as a most potent force for good. They will provide the developing countries concerned with more exposure to international best practices.  They will integrate them even more closely with the global trading system. Above all, these mountains of gold in the East could well provide the financial impetus required in partnering with Western green energy and environmental companies to cash in on the benefits of accelerating global responses to Climate Change (See my article ‘China and the Middle East: an Eastern Alchemy for Global Harmony’ under Publications on my website below). This may be a most meaningful way to finance the Bali Roadmap on Climate Change and to turn its international rhetoric and intention into reality.

Andrew K P Leung, SBS, FRSA

www.andrewleunginternationalconsultants.com

The Bali Roadmap and the Geopolitics and Geo-economics of Climate Change

The Bali Roadmap on Climate Change was drawn up in a drama of agony and  ecstasy about Planet Earth and North-South responsibilities. Yet the familiar TV images of threatened polar bears and smoke-belching factories hide tectonic shifts in geo-economics and geo-politics that are quietly re-shaping the world.

Though timely, the feeble Bali Roadmap is no guarantee of deliverance from fossil fuel addiction. Notwithstanding recent dramatic strides in renewable energies, the West is likely to rely mainly on fossil fuel to maintain a mobile individualistic lifestyle. Likewise, the newly industrializing and urbanizing countries will continue to depend on it for sufficient manufacturing jobs to maintain economic progress and political stability. China alone has to generate at least 24 million jobs a year to stay even.  India, set to overtake China as the world’s most populous country in about four decades, cannot rely on IT services alone to employ her teeming millions.

Unlike previous Industrial Revolutions, populations across the developing world are industrializing all at once. They are rightly wary of restraints on their long-awaited development opportunities.  Their Western counterparts are equally unenthusiastic about restrictions of their preferred lifestyle. Until a viable alternative energy source is found on a global scale, there will be increasing concerns about energy security, scrambles for fossil resources and shifts in the world’s economic and geopolitical landscape, set against the background of Climate Change.

There are five drivers at work.

First, rapidly rising energy prices have dramatically boosted the confidence and international influence of countries rich in fossil energy. Some of these countries, such as Russia, Iran and Venezuela, are flexing their energy muscles to gain geopolitical space. Others, especially the petrodollar countries, are making their mighty financial presence felt across the globe.  For example, the Abu Dhabi Investment Authority has acquired 7.5% of Carlyle Group for US$1.35 billion and 5% of Citigroup for US$7.5 billion. This was outdone by the Kuwait Investment Authority, which bought a US$14.5 billion stake in the Citigroup, along with Saudi Prince Alwaleed bin Talal and Singapore’s Temasek.  Saudi Arabia, a gigantis inter paris amongst the Gulf Cooperation Council (GCC) states, has a domestic investment fund of US$600 billion with projects in the pipeline over 20 years. There are talks of a GCC Monetary Union for 2010. The attitude of OPEC countries on what currencies in which to keep their oil wealth would have a major impact on the US dollar and global financial stability.

Second, we are seeing new energy geopolitics and geo-economics re-defining relationships in Central Asia, as in the case of the Shanghai Cooperation Organization. (See my article of 17 June, 2006‘What the Shanghai Cooperation Organization means for the global order’ under Publications). We are seeing them in Australia, which is fast emerging as a major provider of much sought-after mineral resources, including uranium for the world’s resurging nuclear energy programmes. We are seeing them also in resource-rich countries in South America, such as Venezuela and Brazil. In particular, Brazil is the world’s leading exporter of ethanol, produced from her abundance of sugar cane. As some 65% of Brazil’s cars already use bio-fuels, the Brazilian experience is a well-fitted laboratory for the world’s business-savvy auto giants on cue to revolutionize the world’s future car industry with green energy cars.

Third, insatiable global energy demand has given Africa a new-found dynamism, putting her in the spotlight of global geopolitical attention. At the recent EU/Africa Summit in Lisbon, the cool reaction to the EU’s bilateral economic partnership overtures is a sign of rising African pride, nationalism, and solidarity. This display of African strength reflects an awareness that an energy and resource-hungry world seems to be competing in a new courtship of Africa. China’s pervasive and ideology-free investments are seen in the context of her geopolitical influence in this resource-rich and strife-ridden continent. While the EU is redoubling her efforts to engage Africa, the US is considering relocation of her African strategic command from Frankfurt to Africa.

Fourth, energy security has come up on top of many countries’ political agenda. In his last State of the Union Addresses, President Bush re-emphasized the reduction of gasoline usage by 20% over the next 10 years in order to achieve the target of reducing Middle East oil import by 75%. He set great store on renewable energies and bio-fuels as well as technologies for plug-in and hybrid vehicles. Similar calculations of energy security inform the EU’s energy policy, ever conscious of the long arm of Russia’s energy reach. China is well aware of her own conundrum.  Internally, she has to take the pollution together with the world’s outsourced energy-intensive manufacturing. Externally, she has to contend with the world’s competitive energy geopolitics. Accordingly, she has mandated sustainable development together with emission and energy input reduction targets in her 11th Five Year Plan (2006-10). (See my article of 8 August, 2006 ‘Energy Security and Countering Climate Chaos: China’s Approach and Global Impact’ under Publications). That’s why China, along with India, played an enthusiastic and constructive role in the negotiations for the Bali Roadmap.

Last and definitely not least, a recent study by Trausti Valsson (How the world will change with Global Warming, University of Iceland Press, 2006) shows how the momentum of global warming may change the balance of the world’s economic gravity dramatically towards the Artic. We are already witnessing a flurry of active interests (including Russia) in staking territorial claims on the Artic’s cornucopia of oil, gas and mineral deposits. Over the next few decades, the melting of Artic ice is set to open up much shorter shipping lanes connecting the North Pacific with the North Atlantic through the Bering Straits and the Canadian archipelago. The Davis Strait, the Denmark Strait, the passage between Iceland and Norway, and the so-called GIUK (Greenland, Iceland and UK) sea lanes are also likely to gain commercial and geopolitical importance, along with the position of Alaska, the Kamchatka Peninsula, the Sea of Okhotsk, and the Aleutian Islands. In an extreme scenario, if global warming persists at its current pace past 2100, the centre of the world’s economic gravity is projected to shift towards the Northern Hemisphere near the Artic (thought to be virtually ice-free by then) while the world’s current temperate zones may become overheated and the Southern Hemisphere relatively marginalized. Even if this extreme case does not materialize, the on-going geopolitical and geo-economic implications for countries with existing Artic territorial claims such as Russia, Canada, the Nordic countries and the US would demand serious attention. The same goes for the implications for countries such as China and India without direct and ready Artic access.

Needless to say, the above implications are over and above the threatening projections of rising sea-levels, disrupted Gulf Stream flows, methane release by melting permafrost in the Siberian tundra, and other looming ecosystem dislocations.

Before the Bali Roadmap has a chance to re-shape the world’s climatic order, the global geopolitical and geo-economic landscape is poised to change almost beyond recognition in the 21st century.

Andrew K P Leung, SBS, FRSA

www.andrewleunginternationalconsultants.com

Reading the tea-leaves of China’s 17th Party Congress

(A short note written for and published by the Asymmetric Threats Contingency Alliance (ATCA) dated 24 October, 2007)

With abated breath following the conclusion of the much-watched 17th Communist Party of China (CPC) Party Congress, the world's media has finally met the new line-up of China's leadership at a press conference in Beijing. But what will this new line-up signify to China and the rest of the world? Various speculations on behind-the-scene machinations and the significance of what often sounds like political rhetoric remain to challenge observers. To some, the whole ritual appears no better than a Chinese riddle, if not one wrapped inside a puzzle in the midst of an enigma.

Succession

All eyes naturally fall on the two rising stars elevated to the Politburo. Observers hasten to point out that Xi Jinping belongs to the so-called 'princeling group' consisting of some of the more able offspring of Old Revolutionaries. Li Keqiang is a known protégé of President Hu with strong Communist Youth League affiliations (the so-called 'tuanpai'). But what often passes without comment is that Xi has consistently proven his mettle as an outstanding administrator through the ranks, from village, county, city, prefecture to provincial levels. Equally less conspicuous is the fact that Li studied Law and has a doctorate in economics from Beijing University and that he ran one of the most effective campaigns to promote former President Jiang Zemin's 'Three Represents'. (Andrew Nathan and Bruce Gilley, 2003, China's New Rulers - The Secret Files, New York Review Books.)  Perhaps not unlike political pedigrees in the West, political anointment may be a blessing in modern Chinese politics. But with no lack of other aspirants, that is by no means a be-all and end-all. There is still many a slip, and a great deal depends as much on past track record as on future performance in what is now evidently a collective leadership.

Another surprising outcome which ended much speculation is the stepping down of Zeng Qinghong,Vice President, in compliance with the Party's collectively-agreed age criteria. He was reputed to be former President Jiang's king-maker and a highly able and respected leader tipped to rise even higher. His departure from the Politburo, along with the more internationally known and highly capable Vice Premier Madam Wu Yi, signifies what one Beijing citizen insightfully observed, 'The flag is more important than any individual.'

It is therefore becoming evident that the Communist Party has morphed from an ideological party into a more stable party of government, based on competitive, yet collective, meritocracy with an institutionalized and clearer leadership transition system. Nothing shows this better than the much smoother power transition from former President Jiang to President Hu and the ushering in of a new leadership line-up in this Party Congress.

'Scientific Outlook on Development'

But what is the CPC government for? It goes without saying that as inequalities inside China are becoming more acute, the government cannot survive for long without continuing to improve the well-being of most (rather than some) of the people, particularly the impoverished peasants, who, after all, were the original staunch supporters of the CPC and still represent the majority of the Chinese people.  In the light of critical challenges of corruption, pollution, and China's internal and external economic imbalances, it is no surprise that the concept of 'Scientific Outlook on Development' advanced by President Hu is now being written into the Party's Constitution. This stresses the overriding need for continuous development, a more people-based, law-based and more democratic style of governance, a scientific approach to decision-making, and coordinated and sustainable development. It is interesting that at the Party Congress, President Hu mentioned the need for public hearings for major legislations. The recently enacted Property Law, for example, involved a long process over two years of debate and wide-ranging grass-root consultations, including public hearings.

In keeping with this 'Scientific Outlook', there is already a quiet revolution to professionalise China's management and ruling cadres through more local and overseas training, often in partnership with leading universities in the US, Europe and Singapore. In January 2002, China's State Council signed an agreement with Harvard's Kennedy School of Government and the School of Public Policy and Management of Beijing's Tsinghua University to implement an on-going 'Harvard Project'. This has already trained 300 high-ranking officials from China's ministries, commissions and provincial governments in three-month-long training courses. Their case studies are compiled into materials for training of other officials at Tsinghua and other local universities. About 40,000 officials at various levels are now being sent overseas for training each year. Some of this training includes a six-month job-shadowing with their foreign official counterparts. Ministers with overseas study background include the Foreign Minister, the Health Minister, the Education Minister, the Science and Technology Minister, the Director of the State Intellectual Property Office, and the President of the People's Bank of China. Likewise, the 17th Party Congress has witnessed an increase in the percentage of younger and university-educated delegates (alongside more female and ethnic minority delegates).

The 'Scientific Outlook on Development' embodies China's often-quoted mantra of Harmony. The philosophy of Harmony dates back to Confucianism, which set great store on harmony within the self, within the family, between different sectors in the same society, between nations and between man and nature. (Confucianism, my ATCA article of 7 June, 2006.)  China is reviving a global interest in Confucianism and the concept of a 'Harmonious World', as these concepts, based on balance, inclusiveness, and cooperation despite disagreement, are considered to be of increasing modern relevance both internally and internationally. They are seen to be applicable conceptually to such strategic challenges as inequalities, social justice, environmental over-exploitation, imbalance between consumption and export, over-heating and over-capacity, international conflict resolution, and multilateralism.

Democracy

It has been reported that President Hu mentioned the D-word no less than 60 times in his report to the Party Congress. What he meant, of course, is not Western democracy, but 'socialist' democracy with Chinese characteristics, especially 'intra-Party democracy'. This envisages collective leadership with more clearly defined divisions of responsibility, greater accountability, and oversight of central committees by plenary Party sessions at all levels. More interestingly, apart from widespread village-level direct elections, the CPC is experimenting with direct elections of Party chiefs in Hubei Province and in Chongqing, (the world's largest megapolis with a population of 30 million), in Sichuan Province.

Still, a swallow does not a summer make and it is early days yet. What is more, it is not evident that democracy is something that can always be imposed (as in the case of Iraq).  Nor have newly democratized countries generally proved to perform better according to the United Nations Development Index, compared with non-democratic countries at similar levels of development. China, in fact, clearly outperforms all other countries in similarly levels of development under virtually all indicators (Randall Peerenboom, 2007, China Modernizes, Oxford University Press).

No doubt, the debate, both inside and outside China, will go on as to how best to advance democracy and what form of democracy would suit which countries at a given stage of development with any given set of political, economic, cultural and social circumstances. There may not be a black-and-white answer. For example, the outcome of the related debate between the so-called Washington Consensus and the Beijing Consensus remains mixed at best.

Climate Chaos

With her teeming masses, China needs to generate 24 million jobs a year just to stay even. When the Party Congress re-affirmed the importance of economic growth, the world was a little nervous as to what this would mean to Climate Chaos. In addition to mandated unit energy input and emission reduction targets (which are so far falling behind), China's 11th Five Year Plan calls for doubling renewable energy generation to 15% of total energy needs by 2020. The Law on Renewable Energies has been enacted. Rules were promulgated on 1 August this year requiring power distributors to include electricity in their grids from renewable energies, including hydropower, wind, biomass, geothermal and solar energies. At a later stage, discussions are expected on the share of renewable energies in the total electricity output.

In 2005, China's renewable energy consumption was more than 166 million Tonnes of Coal Equivalent (TCE) or 7.5% of total energy consumed. By 2010, renewable energy is expected to reach 270 million TCE, of which hydropower would account for 180 million kW, wind power 5 million kW, biomass power 5.5 million kW, and solar power 300,000 kW. Production of ethanol fuel is expected to grow to 2 million tonnes, bio-diesel 200,000 tonnes, and methane fuel 19 billion cubic meters (Beijing Review, 13 September, 2007).

In view of the stark reality of increasing global constraints and instability of energy and other resources, the Chinese leadership has repeatedly stressed the imperative of switching to a more energy-conserving and environment-friendly model of development, if only as a matter of self-survival. Against China's dramatic economic achievements in recent years, President Hu at the Party Congress reminded cadres of the need to remain 'sobre' as China's current development is 'low-level, incomplete, and unbalanced'. It is sobering, for example, to note that in spite of China's skyrocketing growth, her GDP per capita still ranks below 100 in the world, amongst Africa's poorest nations. Even by 2027/8, when China's GDP is expected to match the US (Goldman Sach's graph in The Economist, 6 July, 2007), her GDP per capita would still equate to a moderately developing country.

As profit margins of energy-intensive OEM exports are becoming wafer-thin, China is already trying to catch up in building a Nation of Innovation. This means building her own proprietary technologies and international brands, speeding up research and development in such areas as live sciences, environmental technologies and aeronautics, promoting creative industries, IT and business outsourcing and financial services. This vision of diversifying from material-dependent output is in keeping with the zeitgeist that the new global economy is increasingly driven by 'conceptual output', which is characterised by 'constant, and often negligible marginal cost' and much reduced physical material input for a unit of output (Alan Greenspan, 2007, The Age of Turbulence - Adventures in a New World, Penguin Books).

Conclusion

China's leadership is becoming younger, more professionalized and institutionalized as the CPC continues to re-invent itself to move with the times. Its aim remains to build an all-rounded, moderately well-off society in the coming decades, in time to lay a strong economic foundation to shoulder the looming social and economic burden of an aging population. For this she needs to maintain a benign internal and external environment. She can ill afford any major domestic or international turmoil. Hence her mantra of 'Peaceful Development' and 'Harmony'. According to the Asian Development Bank (China Office), at an annual growth of above 7.2% China will be able to achieve her target of quadrupling her 2000 GDP to attain a per capita GDP of USD 3,000 by 2020. The Boston Consulting Group has just released a report highlighting that China is set to become the world's second largest consumer market by 2015. This  tallies with earlier studies by Credit Suisse (Jonathan Garner, 2005, The Rise of the Chinese Consumer - Theory and Evidence, John Wiley and Sons). China's civil society has become much more vibrant with some 250,000 NGOs working on a host of civic issues including the environment (in partnership with the government). There are now some 36 million blog websites (albeit still controlled in regard to a handful of remaining politically sensitive subject areas). It has been estimated that China has over 80 million Christians, including those belonging to non-state Catholic churches (David Aikman, 2003, Jesus in Beijing, Monarch Books). With a population the size of a fifth of mankind beset with a multitude of internal and external challenges, the vision of China's leadership is often hard pushed to match reality. The prognosis, nevertheless, appears reasonably promising.

Andrew K P Leung, SBS, FRSA

www.andrewleunginternationalconsultants.com

China's Burmese chessboard

(A short note written for and published by the Asymmetric Threats Contingency Alliance (ATCA) dated 28 September, 2007)

With the Burmese situation threatening to implode and the matter placed before the UN Security Council, all eyes are now on China (and to a lesser extent on India) as Burma's strong backer. What are China's options on this delicate Burmese chessboard?

The first, of siding with the Junta in any form, is a non option, as the world's commentators would agree. China needs all the positive international image she can get for her coming-of-age world party, the Beijing Olympics, as a responsible super-power and global stake-holder. What is more, with Burma's popular groundswell for change, it is not a foregone conclusion that this time around, the Junta may be able to maintain the upper hand.

The second, of supporting regime change demanded by the National League for Democracy under Aung San Suu Kyi, is equally, if not more, inconceivable. Not only would this raise many unwelcome questions on how China approaches her own democratic development, but by painting the Junta into a corner, this may also provoke hard-line bloody repressions causing even more serious turmoil.

The third, as China is wont to do, is to declare the current unrest an internal problem for the Burmese to solve on their own. This convenient response, however, may not suit China's best interests as it may appear. Allowing the situation to fester would prolong an inherently unstable regime at China's doorstep. Or it may precipitate a radical revolution for democracy liable to be copied as 'colour revolutions' amongst China's neighbours, or worse still, by the monks in Tibet or the Muslim separatists in Xinjiang. So sitting tight while a neighbour catches fire doesn't sound like an attractive proposition.

But China is not alone in believing that sanction or confrontational coercion is necessarily the best way to resolve conflict. The immediate victims of these strictures are often the poor masses rather than those in power. Nor, of course, does she believe that Western democracy is a universal and instant panacea, a one-size-fits-all solution regardless of circumstances. There is no lack of faltering examples of hasty democratization from Russia to the Middle East. On the other hand, China's own example, and those of modern Vietnam and some East Asian countries, suggest that democracy is not always a pre-condition to development (China Modernizes, Randall Peerenboom, 2007).

So China's best bet would seem to be, first, to cajole the Junta to refrain from aggravated repression and concurrently to help Burma address the underlining grievances leading to the mass protests. These grievances are often rooted in poverty and economic under-development, for which China (and neighbouring India) are well placed to help.

It is therefore no surprise that as highlighted in the ATCA article 'Burma in Biggest Uprising in 20 Years:  The China Black Swan' of 26 September, 2007, China has stressed the need for stability, issues resolution and national reconciliation in the hope 'that Myanmar will push forward a democracy process that is appropriate for the country'. This would also be in tune with China's desire for gradual development of a perhaps more stable form of democracy, as highlighted by Ambassador Morland's ATCA article of the same date.

Andrew K.P.Leung, SBS, FRSA

www.andrewleunginternationalconsultants.com

China joins the Capitalist Club - Multilateralism in a Shrinking World without Borders

(A short note written for and published by the Asymmetric Threats Contingency Alliance (ATCA) dated 29 July, 2007)

Let me first stress to the distinguished ATCA members across 120 countries, that I do not represent or speak for China or the Chinese government. But I do see different shades of so-called, democracies' around the world. I also see that each country's development is different with its own geographical, demographic, environmental, historical, cultural, economic, political and other challenges. In an age of profound globalization and paradigm shift, may I respectfully suggest that for the purpose of our Socratic dialogue, our debate should perhaps also take account of the following angles, which I have recently shared with our distinguished ATCA contributor Professor Jean-Pierre Lehman for his Evian Group at IMD Lausanne, Switzerland:

(a)     As the world has become so interconnected and interdependent - with value creation migrating across borders so readily - and as global economics have changed so dramatically, we need to re-think the global trading system in the highly integrated globalization of the 21st Century (highlighted, for example, by the Doha Round) and to address its 'Disconnects'. This would include the structure and functions of the World Trade Organization, the United Nations, the World Bank and the International Monetary Fund. (The World is Flat, Thomas Friedman, 2005; Making Globalization Work, Joseph Stiglitz,2006)

(b)     We are also witnessing a global industrial revolution the likes of which the world has never seen.  Almost all at once, over 40% of humankind in China, India, SE Asia, Central Asia, Latin America, Africa, Russia and Eastern Europe are industrializing and urbanizing to varying degrees. Concurrently the world is becoming much more populated. How best should the global competition for resources including energy, minerals and water be coordinated and managed, both between emerging and developed economies and between all countries individually?

(c)     Likewise, as the threats of Climate Chaos have become markedly evident, how best should global resources be used in tune with Nature without sacrificing the aspirations of individual countries and peoples at varying stages of development and subject to different political, economic, social, geographical and geopolitical challenges? (The Revenge of Gaia, James Lovelock, 2006; The Weather Makers, Tim Flannery, 2005; Half Gone, Jeremy Leggett, 2005; When the Rivers Run Dry, Fred Pearce, 2006)

(d)     Should world development be approached in diametric terms as between the so-called Washington Consensus and the Beijing Consensus, between Bipolarism and Multilateralism, between the End of History and the Clash of Civilizations? How best should the demons of history and prejudices be addressed to move from confrontation to cooperation, from discord to tolerance, from imposition to diversity, from empire to respect for individual sovereignty, and from instability to lasting peace? (The Beijing Consensus, Joshua Cooper Ramo, 2004; Colossus, Niall Ferguson, 2005; After the Neocons, Francis Fukuyama, 2006)

(e)     How best should we promote much greater understanding and friendly interaction between religions, faiths, cultures, countries and regimes?

(f)     How best should we enhance global cooperation in the development of institutions, policies, technologies, and businesses to address specific global threats including pandemics, climate chaos, and terrorism?

(g)     Should we create a better global financial architecture to address increasing global financial imbalances and much more magnified credit risks in order to maintain long term financial stability?

(h)     How best should we promote more corporate governance, social responsibility, ethics, compassion and charity in society and business across the globe?

(i)     How best should countries be empowered to realize their individual and sustainable development goals?

(j)     How should a better global geopolitical, economic, social, and cultural community be achieved?

To assist further with this ATCA Socratic dialogue in the China context, I can do no better than repeating the last two paragraphs of my preceding article 'Unilateralism does not work. Global interdependence supports multilateralism' (ATCA, 22 July, 2007):

'China, however, needs the West and the rest of the world perhaps even more than they need China. She is now the 4th largest economy in the world, but with a population of a fifth of humankind, she still ranks below 100th in terms of per capita GDP, amongst some of the poorest countries in Africa. Moreover she has only 7% of the world's arable land and only a third to a quarter of the world's per capita water resources, much of which have become polluted. She needs to produce 24 million jobs each year just to stay even. She has to maintain a relatively rapid growth rate, achieve higher value-added in her productivity, and develop a sound economic foundation before her aging population profile begins to bite in 30 to 40 years time. She has to grapple with rising inequality and corruption and build better governance and rule of law. She has to do all these, yet maintaining the sustainability of her environment as more and more of the West's energy-intensive manufacturing is being off-shored to China. That's why China does not want, and cannot afford to be aggressive. She needs peace and Harmony, both at home and internationally, to continue to build a better society for her people, and for the Party to stay in power. So China welcomes international help and cooperation, especially in technology, innovation, resources, and in clean and efficient energies. She is honing her skills in playing a better game in engaging the rest of the world, including the West, as a leading Responsible Stakeholder. In short, while nurturing better relations and cooperation across the globe, she shuns the old concept of 'blocs' and whole-heartedly embraces multilateralism.

Indeed, as Capitalism and Socialism are converging across the world, we need a paradigm shift in our thinking how to engage with other countries, and how to promote peace, stability and development in a world now virtually without borders.'

Andrew K P Leung, SBS, FRSA

www.andrewleunginternationalconsultants.com

China joins the Capitalist Club - the Barclays Deal

(A short note written for and published by the Asymmetric Threats Contingency Alliance (ATCA) dated 25 July, 2007)

The world sits up as China Development Bank (CDB) is buying a multi-billion Euro stake in Barclays, along with Singapore government's Temasek. This could see the CDB's stake rising from at least 3.1% to 8% to become by far the biggest shareholder in this major British bank.  Learning from her previous US adventures, the Barclays deal, before being signed, was well ventilated with the highest level of the British government, including the Prime Minister. The deal would strengthen Barclays' current bid for the Dutch bank ABN-Amro.

From China's earlier foiled bid for UNOCAL in the US, to her recent smoother takeover of MG Rover, and to her new stake in Blackstone, China's capital seems to be coming thick and fast. The Barclays bid is certainly not the first, and is unlikely to be the last. We are seeing a move from 'Made in China', to 'Made by China', and now, as Dr Gerald Lyons, Chief Economist of Standard Chartered Bank likes to call, to 'Owned by China'.

As Temasek has already become the largest shareholder of Standard Chartered Bank, it is evident that Asian capitalists are emerging on the global scene. But unlike Temasek, China's capitalists with global ambitions are facing an uphill learning curve to become more internationally savvy. Working side by wide with some of the world's top players in joint ventures or equities is a good way to pick up the management and investment skills.

What is more, the relative limited private investment outlets in China has led to over-concentration of investment (read speculation) in China's nascent stock markets, leading to roller-coaster rounds of 'musical chairs'.  ['The China Black Swans', ATCA, 14 June, 2007]

This underlines a major threat to China's stability -- her under-developed financial services, including a banking sector still dominated by state-controlled banks. The skills necessary for their developments are also best learnt by welcoming some of the world's leading banks on board through equity stakes in some of China's largest banks, as what has already happened in recent months.

Additionally, China's embarrassment of riches in her Foreign Currency Reserve is both a huge challenge and an opportunity. It now amounts to  USD 1.33 trillion, growing by the day at over 20% per annum. This not only serves to underpin China's financial security but also leads to mounting international pressure on appreciating the RMB too much and too fast for China to handle.  Besides, a great deal of this accumulation is invested in US Treasuries, earning very low return while creating a vicious circle of global financial imbalance. Although much of this mountain of gold is required to improve the dire health, education and welfare services for China's poorer masses, not all can and should be invested internally, if only to avoid the risk of inflation.  So there is every incentive for China's state capital to go global.

As we have seen in recent months, outward investment in energy, resources, and corporations beneficial to China's industrial and financial development is gathering speed. I have also called for some of this sovereign fund, now managed by China's Temasek-styled new agency, to be invested (along with the petrodollars) in global responses to Climate Chaos.  ['China and the Middle East: an Eastern Alchemy for Global Harmony', ATCA, 17 February, 2007].

Morgan Stanley has estimated that such sovereign funds assets worldwide could swell to USD 12 trillion by 2015. It is not inconceivable that a substantial part of this tidal wave of global capital will come from China.

Andrew K. P Leung, SBS, FRSA

www.andrewleunginternationalconsultants.com