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The sleeping dragon wakes up - China 2010

The most recent Wikileaks cables once again reminded us of the sleeping dragon, China. And more precisely, its interesting relationship with USA. So my last post for 2010 will be dedicated to China and USA.
To start with, I will quote a Wikileaks cable published by NY Times:
"The message delivered by the office, the person said, was that “in the past, a lot of /* Chinese */ officials worried that the Web could not be controlled.”
“But through the Google incident and other increased controls and surveillance, like real-name registration, they reached a conclusion: the Web is fundamentally controllable,” the person said." source ,

The Google incident was hacking of Google's servers in China and stealing their source code. Quite creepy statement, huh? Well, this is China we're talking about.
I make that distinction in the beginning, because in the quoted articles, China appears in many lights - economical, political, military. But above all, it's important to keep in mind what exactly is its social side. To remember when we talk about money, exactly how those money or products were produces. And by whom. Another useful article on the subject is: Suspicious Death Ignites Fury in China. It's about corruption in China and how some problems are solved with the "No man, no problem" strategy. Trough death, to be explicit. So this is China we're talking about. Not the spiritual China who gave us "Tao Te Ching" and Chinese medicine. Not the exotic and cosmopolitan China. But that China that everybody avoids to discuss and that made countries like Russia, Ukraine, Serbia, Egypt and even more (see here) to boycott the Nobel prize for peace this year. And you'll see a lot of faces of that China in the articles below.
I'm not going to comment explicitly each and every article, just the common trend. A year ago, Chinese superiority was still kind of a public secret - everybody knew about it, but preferred to keep quite. This year, people start talking. And the picture they draw is far from nice. China hacking its way to US official Internet traffic (first article)? Such accidents simply do not happen. Re-routing classified documents trough your server is something serious. And the very fact that USA is not reacting, but merely questioning Chinese actions should tell you how serious the things are. Whether China did it as an act of aggression or only to see if it's doable doesn't matter. The truth is that China invest heavily in cyber-defense and you don't do that unless you have something on your mind. Especially when combined with the second article concerning the way Chinese army regards USA - as an enemy. I personally found that little bit odd - I knew about the propaganda, what I didn't know is that it was directed against USA. Because so far China left the impression of being militarily benevolent power - a country that is more interested in profit than in participating in wars. Not any more. From the second article it becomes quite clear that their army seriously hates USA. Maybe only time will show how this will develop, but clearly, such attitude without any serious reason behind it is quite scary. Not only for USA, but also for the whole world. We don't need another war. Nobody wins from wars, besides very few and very rich persons and corporations. And I wanted to believe that the world changed since the last big war.
The last 3 articles are on economics. The moral from all of them is that USA has serious problems with China in economics as well. And not only with them - in one of them it's said directly - USA is no longer in position to direct world's economics and to tell what's right and what's wrong. And that's quite serious statement.
As serious as it sounds, I think this is part of the normal dynamics of the power in our world. History shows us that when someone is weak, it's normal to expect someone to become strong. We can't fool ourselves that once the crisis is over, things will go back to "normal". They never will. At least, not in the old "normal". As for the new "normal", I sincerely hope that it will be for better. But considering the situation in China, that's also questionable. The good side is that not only China gets stronger but also Brazil and South America as a whole. I wish I could add Europe to the list, but for the moment, that's not the case. What's good about Europe is that being the biggest market on the world, it could mitigate some economical aggressions. What's bad is that in the whole cat-fight for power in Europe, it's hard to come up with common position and from there problems arise. If only the EU could act as one and to stand an inconvenient but useful for the world and Europe position, things would be much easier. But that's not going to happen any time soon. Or at least it appears so.
Well, I guess only time will show who the next BIG in Earth economics will be. Chinas sounds as the obvious next leader, but I still have my hope for Brazil. And I can only wish luck to their new President - Dilma Rousseff, to bring her country to the top. She's only half Bulgarian but she's a strong lady!

That's it folks. Have a great New Year's eve and also very successful and happy New 2011 Year. Enjoy!

  1. Report Looks at How China Meddled With the Internet
  2. U.S. Alarmed by Harsh Tone of China’s Military
  3. Currency Rift With China Exposes Shifting Clout
  4. Countries See Hazards in Free Flow of Capital
  5. As China Rolls Ahead, Fear Follows

Report Looks at How China Meddled With the Internet

November 17, 2010
An annual report to Congress touched off a round of speculation Wednesday about the motives of a small Chinese Internet service provider that briefly rerouted as much as 15 percent of the world’s Web traffic on two occasions last spring.
The report, by the United States-China Economic and Security Review Commission, noted that the service provider, IDC China Telecommunication, broadcast inaccurate Web traffic routes for about 18 minutes on April 8. That information was then retransmitted by China’s state-owned China Telecommunications, effectively forcing data from the United States and other countries to pass through Chinese computer servers. A similar episode in March drew less attention.
The report said the move affected data traveling over both the government and military networks of the United States, including information from the Senate, the Army, the Navy, the Marine Corps, the Air Force, the secretary of defense’s office, NASA, the Department of Commerce and the National Oceanic and Atmospheric Administration, as well as from many American companies.
The incidents, which were widely reported when they occurred, were never explained, although Chinese engineering managers said that the routing errors were accidental.
The commission said it had no evidence that the misdirection was intentional. American computer network engineers who met with Chinese technicians visiting the United States at the time said they did not believe that the Chinese had given them a full description of what had happened.
While sensitive data such as e-mails and commercial transactions are generally encrypted before being transmitted, the Chinese government holds a copy of an encryption master key, and there was speculation that China might have used it to break the encryption on some of the misdirected Internet traffic.
There was also speculation that the rerouting might have been a test of a cyberweapon that could be used to disrupt the Internet during a crisis or a war.

U.S. Alarmed by Harsh Tone of China’s Military

October 11, 2010
BEIJING — Defense Secretary Robert M. Gates met his Chinese counterpart, Liang Guanglie, in Vietnam on Monday for the first time since the two militaries suspended talks with each other last winter, calling for the two countries to prevent “mistrust, miscalculations and mistakes.”
His message seemed directed mainly at officers like Lt. Cmdr. Tony Cao of the Chinese Navy.
Days before Mr. Gates arrived in Asia, Commander Cao was aboard a frigate in the Yellow Sea, conducting China’s first war games with the Australian Navy, exercises to which, he noted pointedly, the Americans were not invited.
Nor are they likely to be, he told Australian journalists in slightly bent English, until “the United States stops selling the weapons to Taiwan and stopping spying us with the air or the surface.”
The Pentagon is worried that its increasingly tense relationship with the Chinese military owes itself in part to the rising leaders of Commander Cao’s generation, who, much more than the country’s military elders, view the United States as the enemy. Older Chinese officers remember a time, before the Tiananmen Square protests in 1989 set relations back, when American and Chinese forces made common cause against the Soviet Union.
The younger officers have known only an anti-American ideology, which casts the United States as bent on thwarting China’s rise.
“All militaries need a straw man, a perceived enemy, for solidarity,” said Huang Jing, a scholar of China’s military and leadership at the National University of Singapore. “And as a young officer or soldier, you always take the strongest of straw men to maximize the effect. Chinese military men, from the soldiers and platoon captains all the way up to the army commanders, were always taught that America would be their enemy.”
The stakes have increased as China’s armed forces, once a fairly ragtag group, have become more capable and have taken on bigger tasks. The navy, the centerpiece of China’s military expansion, has added dozens of surface ships and submarines, and is widely reported to be building its first aircraft carrier. Last month’s Yellow Sea maneuvers with the Australian Navy are but the most recent in a series of Chinese military excursions to places as diverse as New Zealand, Britain and Spain.
China is also reported to be building an antiship ballistic missile base in southern China’s Guangdong Province, with missiles capable of reaching the Philippines and Vietnam. The base is regarded as an effort to enforce China’s territorial claims to vast areas of the South China Sea claimed by other nations, and to confront American aircraft carriers that now patrol the area unmolested.
Even improved Chinese forces do not have capacity or, analysts say, the intention, to fight a more able United States military. But their increasing range and ability, and the certainty that they will only become stronger, have prompted China to assert itself regionally and challenge American dominance in the Pacific.
That makes it crucial to help lower-level Chinese officers become more familiar with the Americans, experts say, before a chance encounter blossoms into a crisis.
The Chinese effectively suspended official military relations early this year after President Obama met with the Dalai Lama, the Tibetan religious leader, and approved a $6.7 billion arms sale to Taiwan, which China regards as its territory. Since then, the Chinese military has bristled as the State Department has offered to mediate disputes between China and its neighbors over ownership of Pacific islands and valuable seabed mineral rights. And when the American Navy conducted war games with South Korea last month in the Yellow Sea, less than 400 miles from Beijing, younger Chinese officers detected an encroaching threat.source

Currency Rift With China Exposes Shifting Clout

WASHINGTON —The divergence between the mounting anxieties over Chinese policy and the cautious official response was a striking display of the difficulty of securing international economic cooperation, two years after the financial crisis began.
Above all, officials say, the crisis has shifted influence from the richest powers toward Asia and Latin America, whose economies have weathered the recession much better than those of the United States, Europe and Japan.
“We have come to the end of a model where seven advanced economies can make decisions for the world without the emerging countries,” said one European official involved in the weekend talks. “Like it or not, we simply have to accept it.”
The debate over currency valuation is pivotal. World leaders broadly agree that for the global economy to be more stable, imbalances between creditor countries like China and Germany and debtor countries like the United States and Britain have to be fixed. Correcting those imbalances, some economists say, will help create jobs in the United States and reduce the threat of inflation and asset bubbles in China.
The shifting dynamics have most noticeably affected the United States, which pushed more forcefully than its counterparts for stronger pressure on China but has been unable to persuade them to stand with it at the forefront of the debate.
In general, the Europeans have taken a far more conciliatory line toward China.
Another factor is that the most dire part of the crisis has passed, and many countries are now more concerned with their own national economies and no longer feel the urgency act in concert.
Complicating the effort is a dispute between the United States and Europe over how to change board representation within the I.M.F. to give greater voice to the fast-growing economies that are propelling global growth. The Americans want emerging countries, especially China, to have more representation, and thus take on more responsibility. But Europe is reluctant to give up some of its positions on the board. And significantly, in the eyes of many countries, the United States has lost some of the standing it needs to shape global policy. Not only is Wall Street viewed by many as having initiated the world financial crisis, but also, a number of countries fear that policies by the Federal Reserve are pushing down the dollar’s value — the same kind of currency weakening for which the Obama administration has criticized China.

Countries See Hazards in Free Flow of Capital

LONDON — In China and Taiwan, regulators are imposing fresh restrictions on stock market investments by foreigners. In Brazil, officials have twice raised taxes on foreign investors. Even in South Korea, host to this week’s Group of 20 meeting, pressure is building on the government to take similar steps.
As the leaders of the 20 major economic powers gather in Seoul, an increasing number of them have either imposed curbs or are in the process of doing so to slow the torrent of hot money into their markets.
Over the years, foreign capital flowing into emerging markets has played a crucial role in helping finance roads in India, factories in China and buyers of luxury cars in Brazil.
But as the sums have compounded and led to more market volatility, fast-growing countries have begun to worry that short-term investment will push up the value of their currencies, make their goods less competitive in the global market, and lead to asset bubbles that will be painful to deflate.
Once a core policy commandment of the so-called Washington consensus and held dear by the United States Treasury, the International Monetary Fund and global investment banks, the belief that unfettered capital flows are a boon for everyone — including the country on the receiving end — has been dealt a major blow.
Short-term investment is now increasingly viewed as something that needs to be controlled.
Still, the risk remains that as capital controls are adopted by more countries, a result will be a series of competitive devaluations, which could drive away overseas investors and lead to a rout of once-buoyant stock markets. Many countries are discussing additional steps because they fear that the Federal Reserve’s latest bid to revive the United States economy by pumping an additional $600 billion into the banking system will further weaken the dollar and send more money into fast-growing markets.
The latest restrictions are as various as taxes on bond and equity flows and extended rules on how quickly short-term capital may be repatriated.
Abandoning its earlier stand, the I.M.F. now recognizes capital controls as a viable policy tool. Likewise, the United States has expressed sympathy and support for the actions taken by countries with overvalued currencies, like Brazil.

As China Rolls Ahead, Fear Follows

By DAVID BARBOZA December 12, 2010

For nearly two years, China’s turbocharged economy has raced ahead with the aid of a huge government stimulus program and aggressive lending by state-run banks.
But a growing number of economists now worry that China — the world’s fastest growing economy and a pillar of strength during the global financial crisis — could be stalled next year by soaring inflation, mounting government debt and asset bubbles.
Two credit ratings agencies, Moody’s and Fitch Ratings, say China is still poised for growth, yet they have also recently warned about hidden risks in its banking system. Fitch even hinted at the possibility of another wave of nonperforming loans tied to the property market.
In the late 1990s and early this decade, the Chinese government was forced to bail out and recapitalize these same state-run banks because a soaring number of bad loans had left them nearly insolvent.
Those banks are much stronger now, after a series of record public stock offerings in recent years that have raised billions of dollars from global investors.
But last week, an analyst at the Royal Bank of Scotland advised clients to hedge against the risk that a flood of cash into China, coupled with soaring inflation, could result in a “day of reckoning.”
A sharp slowdown in China, which is growing at an annual rate of about 10 percent, would be a serious blow to the global economy since China’s voracious demand for natural resources is helping to prop up growth in Asia and South America, even as the United States and the European Union struggle.
And because China is a major holder of United States Treasury debt and a major destination for American investment in recent years, any slowdown would also hurt American companies.
Aware of the risks, Beijing has moved recently to tame its domestic growth and rein in soaring food and housing prices by raising interest rates, tightening regulations on property sales and restricting lending.
Optimists say China has been adept at steering the right economic course over the last decade, ramping up growth when needed and tamping it down when things get too hot. But this time, Beijing is not just struggling with inflation, it is also trying to restructure its economy away from dependence on exports and toward domestic consumption in the hopes of creating more balanced and sustainable growth, analysts say.
China is also facing mounting international pressure to let its currency, the renminbi, rise in value.
Beijing is now under pressure to mop up excess liquidity after state banks went on a lending binge during the stimulus program that got under way in early 2009. Analysts say a large portion of that lending was diverted to speculate in the property market.
In addition to restricting lending at the big state banks, Beijing recently moved to close hundreds of underground banks and attempted to restrain local governments from borrowing to build huge infrastructure projects, some of which may be wasteful, according to analysts.
Some economists say the real solution is for Beijing to privatize more industries and let the market play a bigger role. After the financial crisis hit, the state assumed more control over the economy.
Now, state banks and big state-owned companies are reluctant to surrender control over industries where they have monopoly power, analysts say.
The report, which was released a few weeks ago, said that if growth slowed to 5 percent, the economies of many other Asian nations would suffer seriously. Steel, energy and manufacturing industries around the world would also be hard hit, it said.

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