Tuesday, October 21, 2008

A heated debate at Pavocavalry's blog:

Re China

ENNYMAN : While it is true that China has historically been non-expansionist, this does cannot be taken for granted as a straight line philosophy for the future. Internal pressures are already driving China beyond its borders to obtain raw materials for its fast growing middle class and the infrastructure needed to feed it ... China is legitimizing and encouraging Africa’s most repressive regimes, thereby increasing the likelihood of weak and failed states. The United States must also be alert to the potential long-term disruption of American access to important raw materials and energy sources as these resources are “locked up” by Chi­nese firms for the PRC’s domestic market to main­tain China’s economic growth.

This is only true in case of iron-ore and oil - China has every other mineral/fossil reserve except these two. It is in competition with USA to have sustained and uninterrupted supplies of essential inputs over the long term and really has no choice but to look towards alternatives other than those controlled by USA.

China has a legitimate right to ensure its energy supplies to sustain its growth. USA too ensured the same thing long ago but through CIA, military coercion, manipulation - even outright occupation and so forth. I don't see any Chinese military imperialism emerging unless USA tries to deprive China of alternatives as well. In that case, China will fight.

Let's take Oil. China has been investing huge amounts in high risk exploration in Sudan, mostly in the Darfur region. Even the Indians have exploration contracts in Sudan (as well as one Pakistani - Hashwani) but Chinese are much bigger. In response, US tried but failed in getting a UN peacekeeping force in Darfur. That force, was NOT to prevent any genocide of Darfur tribes out of humanitarian reasons - it was to counter Chinese influence in Sudan over its oilfields.

China is trying to cultivate South America as well (Venezuela). As for the main supply from Middle-East, USA is in full military control of not only the M.E oilfields but of the tanker waterways too. Even though China has access to Iranian oil, it can't ensure its transport without a naval presence confronting the US fleets in the region.

Therefore the Gwadar port & gas pipelines project in Pakistan's Baluchistan which is not even yet operational - and there's an insurgency going on there targeting the Chinese engineers building it!

Re Iron-ore, China has sustained supplies from Kandla, India so far but who knows what pledges have been made in this absurd nuclear energy deal (for peaceful purposes of-course) which violates the Non-Proliferation treaty? There's obviously a USA quid pro quo with India.

You said: "China as non-expansionist. Even if the nation does not become an aggressor militarily, its thirst for raw materials is driving up the price of all kinds of goods in the global marketplace, which is having an impact on lives, even if they are not losing freedoms."

It was the WTO regime which turned China into the world's factory place for cheap goods for their markets and keeping the high-value added items for themselves. WTO perhaps thought in its ignorance China will keep making t-shirts and not go for value-addition at the same time. That notion has turned itself on its head and China now has a monopoly over consumer goods over practically the entire world - except automobiles. That too is just a matter of time. Should we then blame China for striving for a value-added standard of living for its people?

To conclude the subject of China, allow me to quote an example:

I lived in Hong Kong throughout the decade after the negotiations for Hong Kong's fate after 1997 commenced in 1983. Britain's initial position was that Hong Kong had been ceded to Britain and not part of the 1897 lease agreement while Kowloon and New Territories peninsulas were - so those two could be handed back if the lease wasn't renewed while Hong Kong Island would remain British.

This was factual but the Chinese refused to even discuss it saying China's ceding of Hong Kong Island was by coercion. Britain's next position was okay renew the lease for another 100 years. China said no and insisted on full sovereignty. Britain said okay we'll keep Hong Kong because it's ours, you take Kowloon and New Territories back - China said fine we'll cut off the electricity and the water and the vegetables to Hong Kong in that case.

Then Britain said alright you take the sovereignty but let British run the administration because we're good at it and that's what the Hong Kong people want - and involve the Hong Kong people as a party in these negotiations since it is a 'Three-legged stool" i.e. Britain, China and the Hong Kong people after an election. China said 'No'. It is a two-legged stool - with just two parties i.e. Britain and China. Hong Kong people are not a party to territory. Britain asked what about the Hong Kong people's wishes? China said "Give them all British passports. If they're Chinese, they'll remain here, or you take them all!"

Britain agreed and many did take that choice because Britain thought Hong Kong will be brought down by brain/capital drain.

That's how I'm a British Citizen when I never lived in Britain more than a year at a stretch. I was a Hong Kong Citizen, and remain that (Triple with Pakistan/Britain). But I'm not Chinese, so I'll never be a Chinese citizen. Chinese are extremely racist - but that's another subject for another time.

Anyway the punchline is, China did not give up an inch. When Margaret Thatcher went for the final decision to China, Deng Xiao Ping told her over an 11 course dinner consisting of small bowls of sea-weed and strange reptile meat accompanied with endless refilling of mau tai (Chinese cognac), that China was not going to negotiate back and forth with Britain over this issue. The final offer was 50 years of one country - two systems, meaning Hong Kong could retain the present administrative/financial system for 50 years, and then a rethink, with full Chinese control and no intervention of the British.

If that was unacceptable, it was stated, China was going to send 50,000 People's Liberation Army soldiers overnight into Hong Kong as soon as the dinner was over and occupy it, and Britain could send as many galleons it wanted to prevent it.

This actually happened. This is why Margaret Thatcher fell off the plane stairs on disembarking at Hong airport in 1983 and all markets in Hong Kong crashed - the Hong Kong Dollar fell from KHD3/US$ or thereabouts to HKD 11/US$ in a single day and was pegged at HKD 7.8 where it remains. The real estate was worth nothing and everyone was looking for Canadian visas. That's the time the mainland Chinese started buying up Hong Kong.

Of-course the deal was accepted, and Prince Charles took down the Union Jack on the Hong Kong Kong Harbour on July 1, 1997 with the bemused Chinese looking on ...

The British thought Chinese couldn't run Hong Kong. The 1997 currency crisis occurred at the same time of the handover with the derivative driven attack on HKD as well alongwith Malaysia, Thailand, Indonesia, South Korea, but it couldn't dent Hong Kong under Chinese control. (No connection insinuated here - purely coincidence).

Re Admiral Fasih's article and Brigadier Simon/Pavocavalry's comments:

Admiral Fasih was mostly right in the Geo-Political analysis, except when it comes to economy. USA will not run out of money till the US Dollar denominated global settlement system remains, and I don't see it threatened at all. Some 80% of world trade is denominated in US$, and everyone's surplus with anyone else including the US is deposited with USA. The Euro is nowhere near an alternative. Even if the Chinese or the Japanese tried to retrieve their near $2.5 trillion in US sovereign assets, where would they take it?

Then, US is the largest consumer economy. It's society is culturally consumer. Neither the Chinese nor Japanese nor the Indians come anywhere close. The WTO tried to promote consumerism in other parts of the world to divert exports to USA to reduce US trade deficits but failed miserably. It is culturally just not acceptable neither in the US nor rest of the world.

So, the world will produce and US will consume, and that's how it will remain. There's no alternate for economic growth.

US will remain an economic engine for the foreseeable future unless the entire global economic system collapses. But that's just my opinion.

However, I believe that's how it should be.


Brigadier (retired) Samson Simon Sharaf said...

Yestreday I had a long session with The ex Foreign Minister Sardar Asif Ahmad Ali and Dr. Ashfaq the Economic Advisor.

The highlight was that the present financial crises were generated by outside actors in December 2006. Could you comment on this.

Brigadier (retired) Samson Simon Sharaf said...

You can see Fasih's article on my blog at:

Zeemax said...


The highlight was that the present financial crises were generated by outside actors in December 2006.

I don't recall any particular event in Dec 2006 which could have been triggered by outside actors. The two major events around that time resulting in instability were Steel Mills privatization aborted by SC which was on August 9, 2006, while Jamia Hafsa crisis started on Feb 21, 2007 with the library occupation.

But if Sardar Asif Ahmad Ali and Dr. Ashfaq said that, there must be something I'm not aware of.

The present financial crisis is mainly a result of inflation spiral which in turn has its roots in a burgeoning fiscal deficit financed purely through direct central bank borrowing. This kind of borrowing is highly inflationary and certain to produce inflation spirals. It basically means printing currency.

The fiscal deficit in 2006 was around 6% of GDP which was already too high, and target was 4.5% (IMF imposes a maximum of 4%). Now it is 8.7%.

This deficit had mainly arisen from increasing subsidies on energy funded by central bank borrowing, and the increased costs not passed on to consumers in a gradual manner for political reasons during 2006/2007.

For example, the thermal generated electricity costs Rs 17/- per unit but was billed at Rs. 6/- per unit. Same thing with petroleum products and furnace oil. The price differential claims were paid to IPPs and oil marketing companies through direct bank borrowing which shot up from around Rs 550 billion to the present almost Rs. 1.5 trillion i.e. tripled. When it got out of hand the past Govt stopped paying the differential claims resulting in IPPs reducing production or shutting down altogether, therefore the electricity crisis. Contrary to common understanding, there's no shortage of power generating capacity in Pakistan. It was just because of Government not paying its bills.

The other crisis is on the external sector which is even more dangerous pushing Pakistan back to IMF. It's roots are in the overall economic direction decided in 2003 which placed all reliance on temporary or one-time external inflows - FDI, privatization, bond issues, GDRs, debt-rescheduling; while creating permanent outflows - foreign dividends/ increased oil demand/ CKD kits of consumer durables/ repatriation of sale-proceeds of real-estate projects on completion.

At the same time exports remained stagnant or decreased and the share of large-scale manufacturing went down from 24% of GDP to 17%.

Obviously, a widening trade deficit was inevitable which has now made the current account deficit unmanageable at $22 billion+. The hit has to come on Capital account and if that's not enough, the deficit in balance of payments (the bottom line) has to be met from a draw-down on reserves.
These are down to around $4 billion (don't believe the figure reported of $ 8 billion something which includes public's FC deposits of $3.8 billion. Those can't be used unles FC accounts are frozen) from a high of about $14 billion in 2007 using the same measure.

I would be very interested to know what Sardar Asif Ahmad Ali and Dr. Ashfaq were referring to.

Majumdar said...

Neither the Chinese nor Japanese nor the Indians come anywhere close.

Well, I guess someone needs to have a look at Punjabis on both sides of the border!!!

So, the world will produce and US will consume

Sooner or later the world will also start consuming, it is just a question of having money in your pocket. Young Indians consume a fair bit, Pakistanis I believe have always been consumers big time. Sometime or the other, the world will not depend on USA alone as a driver of growth.


Majumdar said...

Zee sahib,

I would think that the worst would be behind Pakistan, no? Oil and food prices are falling sharply and since Pakistan isnt a huge exporter, the recession would make only a moderate impact.


Zeemax said...

Hello Majumdar,

Sooner or later the world will also start consuming, it is just a question of having money in your pocket. Young Indians consume a fair bit, Pakistanis I believe have always been consumers big time. Sometime or the other, the world will not depend on USA alone as a driver of growth.

Do read comment #4 on Pavo Sahib's blog article:

Zeemax said...


I would think that the worst would be behind Pakistan, no? Oil and food prices are falling sharply and since Pakistan isnt a huge exporter, the recession would make only a moderate impact.

Yes. The world recession will not impact Pakistan to any great extent, but it has major fiscal problems of its own. It will need to make major policy changes to internalize its economy rather than the present externalized. That means protectionism, foreign exchange controls, and import substitution accompanied with high domestic interest rates. In short, a complete reversal out of the WTO/globalization regime.

I admit I have been always contemptuous of WTO/globalization and you have seen the results of Pakistan's jumping headlong into that. India hasn't that much, but still it has in services and will be impacted by global recession.

I remember some NY experts on our 'other' forum were always singing praises of how globalization creates wealth. I hope they know better now.

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