China Readings for October 5th

  • The three laws of Chinese politics | openDemocracy – A major leadership transition in China is expected a year from now. As I write, things are happening in Beijing – deals being started, in progress, going wrong – which we are likely to learn of only a long time in the future (and perhaps not even then). The current power-play will help decide the identity of the eleven or so real contenders for the (probable) seven available positions on the all-important standing committee of the politburo, the summit of power in the contemporary People’s Republic of China (PRC).

    Chinese politics often seem opaque and mysterious – “byzantine” in the all-purpose formula. It is helpful then to recall that there are several ground-rules. Here are three that might shed light on the leadership process.

  • Hayden Urges Congress to Allow NSA to Monitor Public Networks for Malicious Activity | Threat Level | Wired.com – “We want NSA to protect us, but we don’t want NSA out there being present where our own communications are flowing,” he said. “And we’re just going to have to have a serious chat [about that]. I think we can do that – both the technology and the ethic at NSA would allow us to do that. But it will require some convincing before the agency is given that authority.”

    Hayden also said there were still some people who didn’t have a proper appreciation of the threat the U.S. was facing from foreign attackers. Speaking about recent spates of attacks on U.S. companies and government agencies that appeared to come from China, Hayden said that “as a professional intelligence officer, I step back in awe at the breadth, depth, sophistication and persistence of the Chinese espionage effort against the United States of America.

  • Has the Obama administration made a decision on selling Taiwan new planes or not? | The Cable – The Obama administration is playing a word game regarding Taiwan's request for new F-16 fighter planes; it isn't selling Taiwan the planes — but it won't rule it out either.

    After the administration announced late last month its decision to offer Taiwan a $5.8 billion package of upgrades to its aging fleet of F-16 A/B model fighters, most observers assumed that meant the United States would not sell Taiwan the 66 new F-16 C/D model fighters it has requested. But two senior officials testified today that the sale of the new fighters is still on the table and they denied that China's objections played any part in their Taiwan arms sales decision making.

    "We have not ruled out any future aircraft decisions. We understand Taiwan's interest in F-16 Cs and Ds, and this is under consideration," said Peter Lavoy, the acting assistant secretary of defense for Asian and Pacific affairs, who testified at Tuesday's hearing before the House Foreign Affairs Committee along with Kurt Campbell,

  • Alibaba’s Jack Ma is no double agent – Fortune Tech – Now we're apparently going to consider Jack Ma a national security threat; the same Jack Ma who studied English in Hawaii and goes to the U.S. all the time, both for business and for fun. Jack Ma, who last year at his company's annual "Alifest," a bash for Alibaba-Taobao users, had Jon Huntsman, then the US ambassador to Beijijng, as his featured speaker. (Oh right, I forgot: the mandarin-speaking Hunstsman, now running for the GOP's presidential nomination, is a Chinese stooge because he thinks Romney and Krugman and the rest are idiots for seeking a trade war with Beijing.) Ma's also hosted noted Chinese dupes Bill Clinton and Arnold Schwarzeneger at previous Alifests. That Jack, he's a helluva double agent.

    The truth is, these days the U.S. desperately needs direct investment from China that goes somewhere else other than into Treasury debt. We need Chinese investors and companies to buy distressed real estate and build factories or expand their business presence in the U.S. in a way that would stir economic activity and maybe even create a few jobs. (Think Japan's direct investment wave in the 1980s). China still has huge amounts of dollar reserves that it needs to redeploy (even though its current account surplus has steadily been coming down as a percent of GDP). But if we keep someone like Jack Ma — a brash, engaging, smart entrepreneur who loves the Silicon Valley business ethos — has many friends in the U.S. and (who knows?) might even have a strategy for reviving a flailing Yahoo — if we keep him from pursuing a deal because of specious "privacy" or national security issues, then we are well and truly clueless — dumber even than the Chinese leadership these days thinks we are.

  • "Perplexed" by U.S. Ownership Rules, Alibaba Slows Down Yahoo Bid – Kara Swisher – News – AllThingsD – according to sources close to the situation, what the Chinese entrepreneur got was a cold dose of CFIUS — or Committee on Foreign Investment in the United States, the federal interagency review process for foreign investment deals.

    Translation: If you are from China and want to buy our U.S. companies, we are going to have to give you a major look-see and it is not going to be pretty.

    Perhaps that’s fair, but the prospect that even a purchase such as Yahoo, a consumer business that seem to have little in the way of national security concerns, might enter the buzzsaw of U.S. politics apparently surprised Ma.

    Thus, sources said, that while it remains very interested, Alibaba is now at least a little concerned about the feasibility of the deal and that Ma is “perplexed” about why the U.S. has such restrictive rules against foreign ownership of a consumer business.

  • Bank Of America Charts The Four "Crash Landing" Systemic Endgames For China | ZeroHedge – China, which last week became the target of a "Hard Landing" vendetta by Bank of America's David Cui (noted here). Well, the China strategist just fired a follow up shot with "Four systematic risks & potential for financial market turmoil." So, for all those who need one more nail in the "China Bubble" coffin here we go, first textually… "we have sensed that the financial markets in China have become increasingly unstable and that the risk of a hard landing is rising. In this report we outline four systematic risks that we believe have the potential to cause financial market turmoil: 1) private lending (a current issue); 2) property price correction (potentially over the next three to twelve months); 3) bank bad debt write-off and eventual recapitalization (potentially over the next two to three years); and 4) “hot money” outflows (event driven and highly unpredictable). Many of these risks are intertwined which is why we refer them as systematic risks, i.e. difficult to mitigate via diversification. As a result, we suggest investors remain defensive in their portfolio construction in the medium to long term (although we recognize that some short term tactical bounces in the market are possible after the recent sharp sell-off)."
  • Congressman lambastes Chinese cyber-espionage – Checkpoint Washington – The Washington Post – The chairman of the House intelligence committee on Tuesday launched a broadside against the Chinese government and its efforts to steal commercial data and other intellectual property online, saying that Beijing’s cyber-espionage campaign has “reached an intolerable level” and that the United States and its allies have an “obligation to confront Beijing and demand that they put a stop to this piracy.”

    Rep. Mike Rogers (R-Mich.) noted that it might seem odd that a lawmaker charged with overseeing the U.S. intelligence community should lament spying by another government. But he said that China’s espionage activities now extend beyond the U.S. government and military to include scores of private American companies.

  • Analysis: China seeks profit, shuns politics, in Afghanistan – Yahoo! News – The Chinese passengers boarding the weekly Ariana Flight 332 from the remote western city of Urumqi to Kabul speak volumes about ties between a rising China, the world's number two economy, and its desperately poor and unstable neighbor, Afghanistan.

    Of at least nine Chinese, six were heading for a China-funded copper mine, two were working for a Chinese telecom equipment maker and one was the boss of a Chinese restaurant, struggling to check in several boxes of illicit supplies, from alcohol to frozen pork.

  • Asia Sentinel – Noose Tightens in French Defense Scandal – Asian dimension as French state-owned arms company faces murder, bribery allegations

    After years of inaction and coverup, details are emerging in France of the sale of armaments by the French state-owned defense contractor DCNS to countries across the world including Pakistan, Malaysia, Chile, India, Taiwan and Saudi Arabia, with bribes and kickbacks built into DCNS’s budget, ensnaring politicians across the globe.

    Allegations involving DCNS, formerly known as DCN, range from murder to bribery and corruption and go from defense procurement officials in each of those countries to some of the top politicians in France.

  • Digital Dao: CFIUS Should Deny Acquisition Of Yahoo By Alibaba and DST – Still, this is an interesting problem from a national security perspective. Lots of U.S. federal and state government employees use free email services like Yahoo (ex-Governor Sara Palin being the most visible), as do government officials from other countries such as India. Foreign ownership of Yahoo, particularly where China and Russia are involved, makes access to those email accounts a national security matter for the U.S.

    I've already documented DST-Global's many links to the Russian government. When it comes to Chinese companies, certain rules apply; the most important one being that a company must "stay within the good graces of Beijing to retain its permissions to do business".

  • Sold out by China’s schools – China Media Project – In news that has shaken the world of higher education in China, 69 students at Guiyang Defense University were found to have been sent to work at a manufacturing facility in the city of Dongguan just six days after they began their studies. In their three-year course of study, factory labor accounted for half their “study” time, and during work periods they worked daily double shifts of more than ten hours. The wage levels earned by these student laborers are so low as to inspire fury — just 1,300 yuan over a period of seven months, or less than 200 yuan on average per month.

    The phenomenon of vocational and technical schools (职业技术学校) “selling students” into work positions at factories, clubs and even entertainment venues [such as nightclubs] is already quite widespread. And it has to be said that there are cases even more severe than this one involving Guiyang Defense University. But this is perhaps the first time that dirty dealings on this scale have been openly exposed.

  • Insight: Gucci, Tiffany target Chinese banks – Yahoo! News – Two Western luxury-goods giants are taking a controversial tack in the fight on Chinese knockoffs, by targeting the U.S. branches of major Chinese banks that allegedly do business with the pirates.

    But the copycat-fighting strategy faces resistance from a surprising source: the Federal Reserve Bank of New York, which sees the cases as a threat to the large community of foreign banks operating in America's financial capital.

  • China treads carefully amid US-Pakistan rift – The Express Tribune – Pakistan, facing a crisis with the United States, has leaned closely to longtime partner China, offering its “all-weather friendship” with Beijing as an alternative to Washington.
    But Pakistan will be disappointed if it hopes to replace American patronage with the same from China.
    While China does not welcome the US presence near its border, it wants stability on its western flank and believes an abrupt withdrawal of Washington’s support for Pakistan could imperil that. It also does not want to upset warming relations with India by getting mired in subcontinent security tension.
  • Silver Lake Said to Discuss Yahoo Deal With Alibaba, Digital Sky – Businessweek – The private-equity firm Silver Lake, Alibaba Group Holding Ltd. and Russia’s Digital Sky Technologies are discussing a possible joint bid for Yahoo! Inc., three people with direct knowledge of the matter said.

    The group contacted Yahoo and its advisers in recent weeks to inform them of a possible offer, said one of the people, who declined to be identified because the talks are private. The discussions are still at an early stage and it’s not certain that the group will agree to make a bid, the people said.

    The would-be partners are girding for potential opposition from U.S. regulators to foreign ownership of a company that handles communications, one person said.

  • Rein: Should America Fear Chinese Innovation – CNBC – Washington Post columnist Vivek Wadhwa made waves with his recent column "What we really need to fear about China". Basing his conclusions from frequent visits to China over the past six years, Wadhwa argues China's next generation, graduating from the country's universities are hungry, innovative and poised to compete with the best Silicon Valley minds.

    Wadhwa points to people like Robert Hsiung and Kai-Fu Lee as examples of top talent ready to make world-changing innovation. Kai-Fu Lee is the former China head for Googlewho set up his own incubator in Beijing called Innovation Works. Robert Hsiung is an entrepreneur who started the now defunct mobile phone apps firm Foxfly.

    Wadhwa overestimates the prowess of China yet underestimates problems facing the education system that prevents the rise of a truly innovative entrepreneurial class

  • China’s Fall, Not Its Rise, Is the Real Threat to the Global Economy: View – Bloomberg – China’s rise to global prominence has long preoccupied the leaders of the developed world. They should be more concerned about what happens if the country’s growth falters.

    With its combination of cheap labor, easy money, undervalued currency, heavy investment in manufacturing and focus on exports, the nation of 1.3 billion has built an impressive economic engine. From 2008 through 2010, China contributed more than 40 percent of the world’s growth.

    But the Chinese model has its limits, and that has far- reaching consequences for the U.S. and Europe, both of which are increasingly dependent on China. The country’s share of global exports already exceeds 10 percent, larger than that of Japan at its peak in 1986. Barring some miracle, Chinese exporters can’t expand their market share much further without lowering prices and wiping out their own profits, research by economists at the International Monetary Fund suggests. China’s dependence on exports also makes it highly vulnerable to slowing growth in the developed world, and to rising trade tensions: The U.S. Senate today began debating a bill that could ultimately lead to punitive tariffs on Chinese imports in retaliation for undervaluing its currency.

    Meanwhile, economic stress is mounting at home.

  • U.S.-Chinese Progress on Accounting Is Dealt Setback – WSJ.com – next round of talks postponed//

    Both sides have said the first round of talks on the issue in July were "very productive." But that was before the SEC sued Deloitte's Chinese affiliate in federal court in Washington last month to enforce a subpoena on Deloitte seeking documents about its former audit client Longtop Financial Technologies Ltd., a Chinese company under investigation by the SEC for potential fraud.

    Deloitte had refused to turn over the documents, saying Chinese regulators hadn't granted it permission to do so and that the Chinese could harshly penalize the firm if it does so under sweeping Chinese "state secrecy" laws. But the SEC said the Deloitte affiliate had to obey U.S. law. The agency said it was "illusory" that there was any risk to Deloitte, adding that the SEC's need for the documents took precedence over China secrecy interests.

    In April, the SEC acknowledged China's sovereignty concerns and said it would work with regulators there if the commission pursued its investigations across China's borders. The SEC's action against Deloitte doesn't seem to be following that policy, though it isn't known if the commission tried working through the Chinese regulators before filing its lawsuit.

  • Chinese Official Warns of Legal Action Over Myanmar Dam – WSJ.com – BEIJING—The head of a major Chinese company behind a controversial dam in Myanmar said the project's suspension by the Myanmar government last week was a surprise that "will lead to a series of legal issues," in the latest sign of frayed relations between the two countries.

    China Power Investment Corp. President Lu Qizhou, in an interview with the state-run Xinhua news agency on Monday, said he learned of the suspension of construction of the $3.6 billion Myitsone dam project "through the media and I was totally astonished."

  • BMW Dangles Discounts as China Luxury Market Cools – Bloomberg – China is turning into a buyer’s market for luxury cars as dealers for Bayerische Motoren Werke AG (BMW), Daimler AG (DAI) and Volkswagen AG (VOW)’s Audi offer discounts to maintain sales as demand cools.

    In Beijing, BMW dealerships are giving markdowns of as much as 19 percent on a 3-series car, while some Mercedes dealers are selling the C-Class Elegance model at 20 percent less than the suggested retail price, according to cheshi.com, a pricing guide tracking more than 3,000 dealers in the country.

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