Friday, January 18, 2008

Thompson on China's Military

I have to admit that I have begun morphing into my father by spending entirely too much time watching C-SPAN. However, in my defense, it is an election year and the banter is neither stoic nor meaningless. Watching Fred Thompson is a pleasure because he has a really deep voice and I always get this sensation that I'm watching a combination of him as District Attorney Arthur Branch on "Law & Order" and White House Chief of Staff Harry Sargent in Clint Eastwood's 1993 thriller, "In the Line of Fire."

What struck me today was that in discussing the freedoms of the US and our constant battle with Islamic fundamentalists, presidential candidate Thompson quickly turned his attention to China and asked the question, "Why are they building up their military so strongly right now?" He then made an astute allusion to Sunzi's "The Art of War" by saying that the Chinese have known for millenia that in order to build a strong military you must first build a strong economy. Indeed, in the second chapter, called "Waging War" (作战), Sunzi starts of by saying "Generally, a war operation requires one thousand light chariots, as many heavy chariots and a hundred thousand armored soldiers with provisions enough to carry them a thousand li. What with the expenses at home and in the field, stipends for the entertainment of state guests and diplomatic envoys, the cost of materials such as glue and lacquer and sums spent for the maintenance of chariots and armour, the total expenditure will amount to one thousand pieces of gold a day. Only after this money is in hand can an army of one hundred thousand men be raised." (Sunzi: The Art of War, Foreign Language Press Beijing, China 2001, Edited and translated into modern Chinese by Wu Rusong and Wu Xianlin, translated into English by Lin Wusun - for the original Chinese, see the end of this posting).

Now, over the last eight years, Donald Rumsfeld repeatedly stated that the Chinese were spending much more than in military armaments than they officially reported, including his visit in late 2005. During that visit, Rumsfeld stated, "'We also approach our relationship realistically...Many countries, for example, have questions about the pace and scope of China's military expansion...A growth in China's power projection understandably leads other nations to question intentions and to adjust their behavior in some fashion." (Associated Press, October 18, 2005)

He is right. There is a lot of money going around China right now and we really have no idea how much of it is being pumped into arms factories. We do know about the military equipment purchases from Russia, we know about their nuclear weapons pointed at Taiwan, however we have very little idea about much else. Moreover, we do see the Shanghai Cooperation Organization;s yearly conference that gathers heads of state from around Central Asia, including Russian President Vladimir Putin, and it is clear that China's influence in that region is growing. Furthermore, China is leading the way in Southeast Asia as well.

So, when Admiral Keating, who just returned from China, said that "We must be more open about its rapid military buildup and should expand military collaboration with the United States to develop greater trust and thereby prevent misunderstandings and confrontation," he means business. The response by his counterpart, General Chen Bingde, chief of general staff of the People's Liberation Army was, ''We don't have the ability to make you afraid of us.'' (January 18th, 2008, by Jim Yardley, The New York Times) Keating's visit came on the heels of a dispute between the US and China around Thanksgiving of last year, when Beijing summarily refused to allow the aircraft carrier Kitty Hawk its scheduled call to Hong Kong. A few days prior to that, China also refused two American minesweepers from Hong Kong due to inclement weather. Most commentators attribute this to the official state welcome by President Bush of the Dalai Lama. Nevertheless, tension is growing.

So, when the real life presidential candidate Fred Thompson takes on international defense and security issues by mentioning China, I actually was somewhat relieved. The bottom line is that the war on terror is a minor conflict and a blip on the map of the balance of power shift. The nation of Islam is 1.5 billion strong, but it's spread over dozens of countries, all with competing national interests. That means that the nation-state of Islam simply does not exist. However, China's nation state is immense, bigger than anything we have seen before and building an infrastructure and industrial complex that will surpass that of the US one day. Let's just hope they continue to prefer our friendship and commercial markets over their own inherent ambitions.


Wednesday, January 16, 2008

Citigroup, China Development Bank, and the Saudis

Well, it sure does look like the recession everybody is humming about is upon us in the US. Let's look at several factors that caught my eye all in the last two days:

1) The unmployment rate went up to 5% at the end of 2007, a benchmark rate that has got to worry even the most optimistic prognosticators.
2) Tonight on C-Span, six democratic members of the House of Representatives, including Minnesota congressman Tim Walz and Keith Ellison, took the podium for an hour to discuss an economic stimulus package for middle income Americans that would pump $100 billion into the economy and target subsidies for health insurance, small businesses, employment, housing cruch victims, and more. Several of the congressmen mentioned that although Americans continue to increase productivity, wage increases have not moved forward
3) A report came in that Citigroup, one of America's pillar financial institutions and a major player in the global banking industry (with a major presence in China I might add - not the least of which is their shining 40-story Shanghai headquarters overlooking the Pudong side of the bund) is in need of $10 billion and that the China Development Bank is one of two major plausible investors - Saudi Prince Alwaleel bin Taleed being the other. City reportedly has a market cap of some $140 billion
4) Bank of America purchases Countrywide Loans for $4.1 billion
5) The value of Asian-Pacific outbound M&A deals in 2007 hit a record US$433.07 billion in 2007, more than double the $187.1 billion in 2006, according to Thomson Financial. The value of U.S. deals rose 13.9%. (, January 10th)

Citigroup is hard at work in China expanding their business, and now it occurs to me that they are looking not only for the retail, but more importantly for the well of funds that will pour into global markets over the next 10 years.

Looking back to the US now and our next ten years, there is every reason to believe that we can remain competitive, yet only if the legislation and policy supports that hard work. If Citigroup is going to solicit and receive billions of dollars from their "client" in China, meaning our good friend the CCP, and the honorable prince of Saudi Arabia, then it is not just that corporation that should benefit. When you sell a major chunk of a domestic asset, as you'll recall the US government blocked from happening in the case of Unocal, then there should be some trickle-down benefits. My question is, what will Citi do with that infuse of cash? Will they buy more assets, lay off workers, or create more loans for midwest entrepreneurs? If I were China or the good prince, I think I might wait it out 8 months, when that trillion-dollar sub-prime fallout really hits the fan because Citi's assets will look even less liquid and no doubt a stock price drop will reflect that vulnerability.

Then again, at that point, some upset Congressmen from the midwest might step in at that point and block that one too. $430 billion is an obscene amount of capital coming from the East. I just hope that some of that makes it way to the entrepreneur's pursuit, and does not get stuck along the way.

Tuesday, January 15, 2008

China Growth not Unprecedented

Tuesday, January 15th, 2008

Our inaugural post will be an academic paper written by Shoshannah Zirkin. Ms. Zirkin is a graduate student at New York University working towards Masters Degrees in Chinese History and Library Sciences. Daniel Turgel contributed to the research for this paper.

This paper tries to compare China's rise to economic might with its own economic history, as well as compare it to that of the United States from 1820 to 1870, exactly the time when China began to crumble economically thanks to western imperialism and invasion.

China’s Second Rise as an Economic Power
by Shoshannah Zirkin
For over a decade the media has painted China as a dragon waking from a generation of hibernation. Exotic and unpredictable, newspapers claim her vast frontier is uncharted territory, a blank map on which courageous foreign investors can draw their own lines and mark new paths to infinite profits. Those who brave the heat of her fire have unprecedented opportunities. As the government slowly disassembles the fortified bastion of communism, windows of opportunity are opening, and those hungry for wealth and opportunity are running free. “Everybody wants a slice of the Chinese miracle that is powering the world economy,” explains Australian journalist Christopher Russell.[1] Miracle, he claims, and he is not alone. China’s success is lauded by the public throughout the world, as if the country has never before obtained economic achievement. People exclaim that growth of such nature has never been seen before. More startling than a stirring dragon is the young yet forgotten history of China in 1820, when her share led the world GDP at 32.9%, a figure unmatched by a single country anywhere on the globe in the last two centuries.[2]

As the world watches China move ahead, it becomes increasingly beneficial to take a look at China’s past. From 618-907CE China was united under the rule of the Tang Dynesty. This was a period of development and stability, often regarded as China’s Golden Age. The capital city, present day Xi’an, was at the time the most populous city in the world, and new cosmopolitan centers sprouted along the recently built Grand Canal. Strict civil service exams brought reverence and sustained authority to government positions, and veneration for the arts brought forth tremendous talent in the form of both poetry and painting.[3] Europe did not see such high levels of cultural achievement until the Renaissance, centuries later.

In the early thirteenth century the “Chinese were still richer on average than Europeans, and their economy was also larger than that of Western Europe.”[4] International trade prospered along the Silk Road and via maritime trade with Southeast Asia. The Portuguese first anchored on China’s coast in the sixteenth century, and the British followed shortly thereafter. The Europeans were frustrated by the limited access implemented by the Qing Dynasty, who restricted foreign trade to the single port of Canton in the South East of China. While interested in selling products of their own, such as tea, silk, and porcelain, the Chinese found European goods inferior. They agreed to trade, but only in exchange for silver. This arrangement created a tremendous trade deficit. In response the Europeans began to trade opium for goods. An addictive currency, the Chinese became hooked on opium, and the balance of trade soon turned. This exchange resulted in the infamous Opium Wars and humiliating Treaty of Nanking, signed by China in 1842. The Chinese were no match for the British, who fought with technology recently developed during the industrial revolution, a transformation that China was yet to encounter.[5] The Chinese lost territorial integrity and authority over international trade. It is therefore no surprise that China’s staggering 32.9% share of world GDP in 1820 dropped to 17.2% by 1870. In contrast, the share of world GDP of Western Europe rose from 23.6% in 1820 to 33.6% in 1870.[6]

The Qing Dynasty fell in 1911, ending dynastic rule in China. Chaos followed. Thirty years of Civil War accompanied by the Japanese Invasion and World War II. In 1949, Chiang Kaishek and the Nationalist Party were defeated by Mao Zedong and the Chinese Communist Party. The latter gained control over Mainland China, unifying China for the first time in decades. This victory was the start of many years of seclusion for China and the Chinese people. For thirty years, trade with China was virtually non-existent. This changed with the death of Mao Zedong and other original Communist Party leaders such as Zhou Enlai. Reforms implemented by Deng Xiaoping opened China’s boarders, and resulted in the rapid economic development that we still see today.

In his book, China Shakes the World, James Kygne argues that China’s current growth is new to world history. He explains, “China’s emergence is different and unprecedented… the sheer scale and speed of the renaissance puts it in a class of its own.”[7] While Kygne has a point concerning scale in terms of population, his statement that the dramatic speed of China’s growth is unprecedented is historically inaccurate.

From 1820 to 1870, the US population increased by 25 million people, a mere 8% of world population growth.[8] At the beginning of the nineteenth century, the United States was first establishing the ideals of an independent democratic nation. Jacksonian America, defined by the frontier and represented by the cowboy, was not primarily concerned with international politics. Statistics reflect this claim, as in 1820, US share of world GDP measured only 1.8%. Industrialization coupled with population growth resulted in a fivefold increase in America’s share of the world GDP by 1870, as America’s piece of the world GDP pie increased from 1.8% to 8.9% in fifty years.[9]
This tremendous spurt in economic growth in America signaled the dawning of a new era in the world’s development. The new world had begun to establish itself as a tour de force in all aspects of global commerce. Its markets became a source for imports from Europe and Asia, its factories led the world in production of cotton textiles, and scientific discoveries such as Charles Goodyear’s vulcanization of rubber established a country which would go on to change, create, and recreate global commerce over the next century and a half.

By contrast, China’s renaissance has largely been exclusively in terms of population and economic growth, not technological breakthrough nor political reform. From 1973 to 2006, China’s population increased by approximately 350 million people, nearly 18% of the world’s population growth. During that time, China’s share of world GDP increased from 4.6%[10] to 15%.[11] Over a thirty-five year period, China’s increase in share of world GDP has increased 3.5 times. This puts China on pace only to match and not to exceed the fivefold increase already obtained by the US in the nineteenth century. Such growth is therefore not an unprecedented accomplishment. Moreover, the lack of technological innovation in China that was present in the US during its explosive stint in the nineteenth century deems China’s feats all the more arbitrary. This is because the science behind laying miles of butadiene highway, constructing dozens of modern port facilities, and planting vast stretches of fiber optic has come from the pioneering work of scientists and engineers outside China. America, on the other hand, was built largely on the ingenuity and scientific breakthroughs of its own innovative entrepreneurs and inventors whose work that has shaped this modern life is now so take for granted.

Still, well educated politicians, journalists, and citizens throughout the world continue to laud China’s “unmatched” economic boom. Helmut Schmidt, the first German Chancellor ever to travel to China remarked in a hyperbole that, “It’s a miracle, really. There has never been such a phenomenon in the world’s history.”[12] Why must something be record-breaking to be grand? Although this is not the first time in history that China has been successful, and although China is not the only country in history to experience such growth, her present success nevertheless is still phenomenal.

“Napoleon, it is said, once remarked, ‘Let China sleep, for when she wakes, she will shake the world.’”[13] While the dragon that we know to be China began to stir in the late 1970s and early 1980s, this was not the first time she awoke from a nap! Thirty years in hibernation was preceded by a rich history and tremendous economic success. A height of fortune that today’s China has still not matched. In looking at China’s past and in comparing China to the US, we can readily predict that China will continue to lead the world in economic growth and will have ever-increasing influence and power. To deny China of her unprecedented past is to deprive the dragon of a lifetime of history. Those who shine a light into her dark cave richly reveal a China that led the world’s economy before and elevate her image beside a China that is likely to accomplish the same feat again. But, sadly, many commentators miss the fact that the most important aspect of this historic rise – the speed and momentum of growth - has in fact been done before, right here at home. Thus, given the way that America has challenged and changed the traditional functioning of human civilization, perhaps then the true miracle of China is not in what we have seen already, but rather what contributions to human progress she is yet to offer.
[1] Christopher Russell, “Hong Kong Gateway; Miracle market beckons SA first to the rapidly growing markets of Mainland China,” The Advertiser (Australia), 7 November 2006, 48.
[2] Angus Maddison, The World Economy – A Millennial Perspective.
[3] Valerie Hansen, The Open Empire: A History of China to 1600 (New York: W. W. Norton & Company, 2000), 191-197.
[4] James Kynge, China Shakes the World: A Titan’s Rise and Troubled Future (New York: Houghton Mifflin Company, 2006), 38.
[5] June Grasso, Jay Corrin, and Michael Kort, Modernization and Revolution in China (New York: M. E. Sharpe Inc., 1997), 31.
[6] Angus Maddison, The World Economy – A Millennial Perspective.
[7] Ibid., 27.
[9] Angus Maddison, The World Economy – A Millennial Perspective.
[10] Ibid.
[11] The International Monetary Fund “World Economic Outlook Database,” available from; accessed 11 November 2007.
[12] No Author. “China to Overtakeermany in a Few Years,” Xinhua General News Service, 14 September 2006.
[13] James Kynge, China Shakes the World, xiv.