China’s Questionable Market Recovery

Money has to stay fit. It gets soft just lying on the couch, feet up on the coffee table, flipping through reality TV shows.  And this week the money looks like its running back to Asia.

The Shanghai composite index jumped 2.87% on Wednesday prompting a flurry of reporting on the re-awakening of China’s stock market. What a jump. Better days here we come . . .

Chart Source: Yahoo Finance

But before we get ahead of ourselves, take a look at the year-to-date chart.

Chart Source: Yahoo Finance, annotations added.

Yes, it’s that little blip at the bottom edge of the chart. The same uptick that occurred once in October, twice in September, and once in August and June as we climb backwards up the downward facing slope (not a yoga move).

 

For even greater perspective take a look at the last five years while the collective West was supposedly entering inevitable decline, imploding under the weight of its own capitalistic excesses. The mole hill made mountain is just barely visible, way down there in the corner, like the raw unamplified light of a distant galaxy.

Chart Source: Yahoo Finance, annotations added.

Even more illustrative than all the hype surrounding this minor bump is the shape of the longer Shanghai curve. The “V-shaped recovery” ended unceremoniously in July 2009 turning into a long, sustained slump (losing over 40% of its value in the last three and half years.) Compare that to the S&P 500 in the “declining” U.S. over the same period (in orange). The S&P elongated “U”-shaped recovery just keeps going (a rocky road, but climbing), and up 20% from Shanghai’s July 2009 peak.

Chart Source: Yahoo Finance, annotations added.

Fundamentally little has changed in the Chinese economy to warrant sustained optimism about stock market recovery. There has been excessive infrastructure investment which will have questionable returns going forward. Local governments are saddled with rising debt. Land development projects increasingly go unfilled or unfinished.  And accounting scandals continue to rock the boat of listed companies, several of which are leaving U.S. markets because of detailed reporting requirements (read investor protection).

Talk of a Chinese soft landing and bounce-back have been de rigeur for some time. There wasn’t a mortgage market bust or banking crisis like in the U.S. (though there are signs of significantly under-reported bank liabilities, off-balance sheet transactions, “alternative” funding schemes, and real estate inventory backlogs of staggering proportions.) But then again, soft-ish landing doesn’t rule out slower days ahead. The U.S. hard landing actually resulted in a far stronger market recovery it turns out. For a sober analysis of China’s financial predicament see Michael Pettis’s “Three cheers for new data?“.

None of this means you can’t make a mint on short-term trading (full disclosure, I am not a short-term trader), but a small spike in an otherwise downbeat cycle hardly marks a trend. Money keeps running the treadmill in the basement to try and stay fit. Funny thing about home exercise equipment, after a few good runs it rarely gets used again.

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Five Quick Fixes to Grow China’s Economy – Quartz Article

Five Quick Fixes to Grow China’s Economy – Quartz Article

The veil has finally been lifted on China’s leadership mystery. Questions now loom large over what, if any, reforms are likely over the next decade. So far critiques of the new seven-member ruling body point to a more conservative streak (don’t expect a democratic thaw anytime soon.) Those with the strongest reform credentials were either left out of the standing committee selection or reassigned. And no one knows for sure what Xi Jinping has in mind beyond platitudes not unique to the political class.

One certainty still stands out. Without significant reform China’s best days may be behind it as growth slows and opportunity stagnates. Five areas of low-hanging fruit would have a significant near-term impact including: ending the hukou residency permit system; opening the financial sector; building a social safety net; equitable tax collection; and an independent judiciary that can fight corruption.

Read the full article on Quartz.

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Excerpt: © 2012, Brian P. Klein, as first published on Quartz.

100 Minutes of Lip Service – Quartz Commentary

100 Minutes of Lip Service – Quartz Commentary

China’s political transition is in full swing in Beijing, replete with lengthy speeches and obligatory internet crackdowns. Outgoing President Hu Jintao’s lengthy reading of the most pressing issues facing the party—in oratory second only to Castro’s multi-hour monologues (minus the Cuban’s fiery delivery)—went on for a good 100 minutes. He made an ominous warning over corruption spoiling the party and threatening the state.

By western media accounts you’d think China was finally getting serious about graft in the world’s second largest economy. That this was considered news in the US says more about the inability to separate propaganda from policy than it does about any new crackdown in China.

Read the full commentary on Quartz.

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Excerpt: © 2012, Brian P. Klein, as first published on Quartz.

Ten Foreign Policy Priorities for Obama – CNN Commentary

Ten Foreign Policy Priorities for Obama – CNN Commentary

(From CNN GPS – full list here.) Barack Obama has won reelection as America’s president. But while the economy – and avoiding the so-called fiscal cliff – will inevitably take up much of his time, there are numerous foreign policy challenges facing the next administration. GPS asked 10 leading foreign policy analysts to name 10 things that Obama should focus on next. The views expressed are, of course, the authors’ own.

Drop China ambiguity

By Brian Klein

Brian P. Klein is a global strategist and former U.S. diplomat. He blogs at Klein’s Commentary.

China’s economic rise and increasing military assertiveness have pushed U.S. strategic ambiguity to its limits. If a decisive position isn’t taken soon, allies and friendly countries will question whether the U.S. can back up its Asia pivot talk with action. Focusing on realistic trade liberalization, increased military contacts with China and firm engagement rather than the blame and shame tactics of the past must become a priority.

Meanwhile, the once vaunted Arab Spring, so full of promise and democratic zeal, shows signs of entering a long dark winter. Egypt’s President Mohamed Morsy whittles away at reforms in the marginally secular republic, while Syria’s civil war now threatens regional stability, with conflict overflowing into Turkey and Lebanon. Boots on the ground may not be an option, but a focused effort to influence, if not completely resolve these destabilizing trends will be essential to restoring peace.

Half-Time in America is Over, It’s Decision Time

Half-Time in America is Over, It’s Decision Time

They lined-up half a block down the street, forty to fifty people at first, in 35 degree weather well before 8:00am. Parent’s with young children bundled up against the cold, women and men in business suits, in old jeans, in work-out clothes. Hispanic, White, African American, and Asian. No one forced them to show up. No one cut the line. All stood as strangers to each other in a simple, silent procession of cooperation and civic pride.

They came and they waited and then one by one they went inside. All the while the line outside grew longer, the wait half an hour or more. Some held coffee or a paper, but most looked around every time a person who entered came back outside, as if something important had just happened.

On election day everyone who votes is a celebrity, a representative, an agent of change in a social ritual that renews hope, promises a better future and gives an incomparable feeling of freedom.  Something important did happen behind those doors. Volunteers donated their time to help forge a more perfect union between citizens and their government. People voted and they were transformed.

And no matter what their beliefs, their race, their religion, education or profession, or how much money they have in their pockets, on this day, in this line, at this moment, they stand equal among their peers – one person, one vote.

Then it’s over, sticker in hand, back out into the cold to go their separate ways. That’s America and that tens of millions of people will voluntarily go out of their way and spend time in civic ritual at polling stations all across this country renews a hope in the experiment of democracy that grows stronger, every vote, every election.

Half time in America is over. It’s decision time. Choose wisely, but choose.

Is Fox News A National Security Risk? A Benghazi Lessons Update

Is Fox News A National Security Risk? A Benghazi Lessons Update

It was supposed to be a conspiracy of epic proportions. The U.S. government knew about the threats in Benghazi and did nothing, even when pleas for help came from the Consulate. No other major news organization would follow the story. The CIA called for back-up but was told to “stand down”. U.S. government officials said it was a mob action following the release of a third-rate anti-Islam internet movie, and then changed their story. Could it be any clearer? Why wasn’t anyone doing anything about it?

In “The Real Benghazi Lessons” on CNN’s website I wrote about the need to de-politicize this issue and the realities of incomplete information, especially during a crisis. Over 100 comments poured in full of conspiracy theories and anti-Obama screeds. These replies, it turns out, were parroting the very same set of narrow criticisms that Fox News has been broadcasting at increasingly louder volumes in the run-up to election day.

And now the mainstream media swings back with detailed reporting on what actually happened. The Wall Street Journal dove deep into the confusion of the night itself, multiple attacks, a DoD drone brought in to provide real-time pictures (yes, the military did try and help), and squabbling between the State Department and CIA over who was ultimately responsible for security of the main Consulate building.

According to the New York Times the CIA “played a pivotal role in combating militants . . . deploying a rescue party from a secret base in the city, sending reinforcements from Tripoli, and organizing an armed Libyan military convoy to escort the surviving Americans to hastily chartered planes that whisked them out of the country.”

The response occurred within an hour of the reported first attack. Thirty people were successfully evacuated, including support from U.S. military assets. An unnamed official also stated that no one was told to “stand down.”

So why no detailed account until now?

Because so much of what was apparently going on in Benghazi was under the radar and classified. That’s how you fight terrorism and dictatorships, not in the headlines or the fanatical press chasing ratings. The risks to Libya’s fragile democracy, a hallmark of the Arab Spring uprisings, still remain high. Now, thanks to all of this talk of a cover-up U.S. foreign policy operations have been dealt a significant blow. Fox’s unrelenting politicizing of the issue has thrust these operations onto the public stage,  jeopardizing future U.S. government operations in Benghazi and elsewhere.

Are there real concerns over the security at forward operating diplomatic posts? Of course. And Congress is following up on their October showmanship of a hearing with a detailed investigation. They even set a post-election Nov. 8th deadline for a full accounting of what happened (State is also conducting another review according to an article in Foreign Policy.)

Exposing troubling and sometimes illegal U.S. government activity (say in the possible use of torture or the subversion of democracy in Watergate) certainly provides a critical and necessary check on authority. That’s the power of a free press.

This shouldn’t be confused with prime time personalities slinging unsubstantiated conspiracy claims and peddling innuendo as if it were real news. In the end Fox’s irresponsible coverage has generated a politically motivated blame game damaging U.S. national security in the process.

Related posts:

De-Politicizing Benghazi (also on CNN’s GPS as The real Benghazi lessons)

Muslims Didn’t Kill Diplomats in Benghazi

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Despite Global Slowdown, Prosperity on the Rise

Despite Global Slowdown, Prosperity on the Rise

The Legatum Institute, an “independent, non-partisan, public policy organization” based in London came out with their annual Prosperity Index this week. Among the key findings in an analysis of 142 countries around the world: From 2009 to 2012 prosperity* rose in every region despite the global economic downturn. Central Asia and Southeast Asia top the charts with index scores rising approximately half a point followed closely by Sub-Saharan Africa and East Asia. Unsurprisingly the U.S., Asia Pacific (including Japan and South Korea) and Europe round out the bottom. Other findings include:

  • Prosperity may not be growing at the highest rates in North America, Europe and the Asia Pacific writ large, but advanced economies in these regions still dominate the upper echelons of overall rankings  ( 40 out of the top 50).
  • However, the U.S. fell to #12 overall and out of the top ten for the first time with a lackluster showing in Economy (#20) and Safety/Security (#27) sub-indices. Of particular concern “Fewer US citizens agree that working hard results in success.”
  • A country on the move, Indonesia jumped 26 spots since 2009 finishing 63rd overall this year. China finished at #55 with a strong showing on Economy and Social Capital indicators but failed to break into the top category across all other sub-indices with a particularly poor showing in Personal Freedom (#129) and Safety/Security (#101).
  • The largest sub-indice gains were found in Entrepreneurship/Opportunity and Health while Social Capital and Governance barely changed. Safety/Security declined driven by the Arab Spring and high rates of theft and assault in Latin America.
  • Accountable government was seen as a “key stepping stone to prosperity” with the notable exception of India, where corruption concerns continue to grow, falling ten places. Twenty-seven of the top thirty countries in the index are democracies.
  • A strong correlation was also found between tolerance indicators and high overall prosperity rankings. Win won for immigration and integrative social values.

* Prosperity was defined as income and wellbeing which include both numeric data and survey results standardized for statistical comparison. Details on their methodology can be found here and their full press release.

De-Politicizing Benghazi – CNN Commentary

De-Politicizing Benghazi – CNN Commentary

(Also on CNN’s GPS website)

A recently publicized series of State Department email by CNN lays out in harrowing detail the attack on the U.S. Consulate in Benghazi. They are sure to provoke another round of finger-pointing and more politically-motivated pabulum.

At 4:05pm: “The Regional Security Officer reports the mission is under attack. Embassy Tripoli reports approximately 20 armed people fired shots.; explosions have been heard as well.”

Ambassador Stevens and four other personnel, according to the same email, are in the safe haven and the 17th of February Militia is providing security support. Based on this early assessment it appears the situation is under control. Diplomats are safe. Armed entities are defending.

Further reassurance comes at 4:54pm: “Embassy Tripoli reports the firing at the U.S. Diplomatic Mission in Benghazi has stopped and the compound has been cleared. A response team is on site attempting to locate COM personnel.”

Unfortunately all was not under control, the compound was overrun, and Ambassador Stevens died along with three other personnel.

The political spin machine has been busy politicizing this tragedy since its onset. The same Congresspeople that cut State security funding hauled up department officials to berate them on the lack of high security at the Consulate (the same happened after the disastrous 1998 bombing of the U.S Embassy in Nairobi.) In the second Presidential debate Romney berated Obama for taking so long to identify the attack not as an unruly mob but the work of a specific terrorist organization (even though Obama did characterize the attack as a terrorist act shortly after events unfolded).

In another email released by CNN Ansar Al-Sharia claimed responsibility on Facebook and Twitter. Aha, go the conspiracy theorists, proof the administration knew but didn’t say anything for weeks. But no, that doesn’t prove a thing.

On any given day in the complex world of threat analysis people and groups make all kinds of claims. It isn’t as if terrorists are holding a press conference for the world’s media to ask questions. Individual bits of information are simply that. Single puzzle pieces that tell very little about the full picture of what happened until amassed and reconstructed.  Details must be verified, cross-checked and analyzed before informed assertions are made.

This very small selection of email give the impression of control but information at the beginning of any crisis is often hard to come by and spotty at best. No single account could immediately identify a specific attacker. Even establishing the facts of a traffic accident requires a police report and potential review by a judge or jury. It’s a process. An armed assault on a U.S. diplomatic mission, thousands of miles away, in a far flung province recently freed of civil war creates an infinitely more complicated undertaking. It requires, it demands time to assess and judge.

There are ways to address the serious issues involved in the loss of our diplomatic personnel. Inquiries can and should be made. Did the rush to set up a presence in Benghazi trump normal security procedures? Why was a rosy picture being portrayed of a post-uprising Libya when in fact serious threats remained. How critical was it to set up a new consulate in the first place?

Using the attack in Benghazi as fodder for more November electioneering, however serves only the short-term interests of those who benefit by not giving the security of our diplomatic missions the thorough review (and funding) it requires. This does nothing to ensure the future security of our diplomatic personnel. They deserve better.

Post-Debate Wrap-Up: The Candidates on Asia

Post-Debate Wrap-Up: The Candidates on Asia

The final 2012 U.S. Presidential Debate went off without a hitch last night as both candidates stuck closely to their foreign policy talking points. China was meant to feature prominently with time devoted explicitly to the bilateral relationship. After brief opening remarks both Obama and Romney veered off topic and returned to the jobs question, a perennial favorite whenever China comes up.

What we know of the candidates’ positions from last night’s sometimes testy exchange paint a picture of a complicated U.S. relationship with the world’s second largest economy. These include concerns over the loss of domestic manufacturing, rule of law and growing military strength balanced against commercial opportunities half a world away (see full transcript starting with the China question here.)

Romney came out swinging with the now somewhat antiquated claim that China is a currency manipulator. In his own words:

“We’ll also make sure that we have trade relations with China that work for us. I’ve watched year in and year out as companies have shut down and people have lost their jobs because China has not played by the same rules, in part by holding down artificially the value of their currency. It holds down the prices of their goods. It means our goods aren’t as competitive and we lose jobs. That’s got to end.

They’re making some progress; they need to make more. That’s why on day one, i will label them a currency manipulator, which allows us to apply tariffs where they’re taking jobs. They’re stealing our intellectual property, our patents, our designs, our technology, hacking into our computers, counterfeiting our goods.

They have to understand we want to trade with them. We want a world that’s stable. We like free enterprise, but you got to play by the rules.”

Technical issues aside (as the Treasury Department has ruled against that legally very specific manipulator charge in the past), inexpensive Chinese manufactured goods are the result of low cost labor, economies of scale and exchange rates.

No matter what happens the jobs lost to China (and many other countries including Mexico, Turkey, India, and Bangladesh), including low-end garment production, household goods, and assembly work won’t be returning. If Chinese products became more expensive production would shift to other low-wage countries. Check the labels the next time you go shopping and you might be surprised where clothing is manufactured these days.

Even if Romney as President labeled China a currency manipulator, the remedy includes tariffs against Chinese goods. As the moderator Bob Scheiffer accurately pointed out, that would risk a trade war with China. Romney replied that China exports more to the U.S. than the other way around so they have more to lose. This simplistic version of trade does not reflect the realities of international commerce.

Sudden tariff increases would be a particularly reckless course of action which does absolutely nothing to solve the core problems facing U.S. labor, namely better paying U.S. jobs. The effects of punitive action would wreak havoc with trade on both sides of the Pacific and the intricately linked global supply chain.

China’s currency has also been appreciating over the past several years and labor costs are rising as well. Romney’s missive, along with the ear-catching phrase that they “must play by rules” which Obama also reiterated, did little to address real trade frictions like further opening of Chinese markets to U.S. goods, greater Chinese enforcement of intellectual property rights protection, and cracking down on counterfeits entering the U.S. That’s more of what we needed from both candidates.

Obama countered with his own “get tough” strategy including an increasing number of WTO cases levied against China (most of which are won by the U.S.) that did give temporary advantage to U.S. manufacturers of tires and steel. Both industries, however are slow growth and lacking in innovative strategies to remain globally competitive.

Clear examples and real world solutions were needed, only the solutions part was sorely lacking.

On the security front there was precious little mentioned about China’s rise, the U.S. pivot to Asia, tensions in the South China Sea, North Korea, or recent China-Japan disputes. Obama did say:

“We believe China can be a partner, but we’re also sending a very clear signal that America is a Pacific power; that we are going to have a presence there. We are working with countries in the region to make sure, for example, that ships can pass through; that commerce continues. And we’re organizing trade relations with countries other than China so that China starts feeling more pressure about meeting basic international standards.”

And then the conversation veered off into Detroit autos and cuts to education. There was no grand U.S. policy towards Asia offered by or asked of the candidates.

For the most part U.S. voters aren’t even that concerned about U.S. foreign policy when it comes to picking the president. What they want to see is a candidate capable of securing the country against threats, decisiveness and calmness under pressure. The real concern remains jobs, jobs, and then jobs. That’s why the debate consistently put foreign policy back into the domestic context.

All the candidates really needed to do was get in a few good verbal punches here and there and stay off the ropes. That’s what the debate delivered, but little else.

 

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U.S. Presidential Debate – A Foreign Policy Primer

U.S. Presidential Debate – A Foreign Policy Primer

With two weeks left before election day candidates Obama and Romney tackle foreign policy issues tonight. If last week’s battle royale over the economy is any indication this promises to be a no-holds-barred verbal slug fest. Tremendous changes have occurred over the last four years in the Middle East, Europe and Asia. Osama Bin Laden is dead, the wars in Afghanistan and Iraq are over. Dictators have fallen from decades in power. China continues to rise.

Still, the global economy has yet to fully recover with Europe teetering on the edge of recession and Japan mired in stagnant economic waters. Middle East political movements struggle to sustain new democracies and China’s economic and military advances raise questions about Asia’s future balance of power.

Here’s a primer on some of the big issues likely to be addressed and a few questions that need to be asked. The debate begins at 9:00pm EST.

Middle East

Since Obama took office four years ago a surprise Arab Spring swept across the region. Libya, Egypt, and Yemen saw leadership changes brought about by popular uprisings. Syria is still mired in its own civil war with little hope of quick resolution. While nascent democracies sprung up after the overthrow of decades of dictatorships serious questions remain about their stability and policies going forward.

For now the Muslim Brotherhood in Egypt holds a tentative control with the military watching from behind the scenes for any signs of the nominally secular government turning into an Islamist stronghold. Libya meanwhile struggles with establishing a strong central government as events in Benghazi, where the U.S. Consulate was destroyed and diplomats killed by a terrorist attack, demonstrate.

In Iran a nuclear standoff continues with enrichment activities racing ahead and Israel threatening attack (though as sanctions take a deeper bit out of the Iranian economy Israeli President Netanyahu has eased off the war rhetoric).

The U.S. military withdrawal from Afghanistan marks the end of major U.S. operations in the region, closing a decade-long period of intervention initiated by the former Bush administration. The Afghanistan government still struggles with providing basic services to its people and countering threats of Taliban violence.

What will Obama or Romney do to further promote democracy in the Middle East without inflaming anti-U.S. sentiment? How can Iran’s nuclear ambitions be eliminated? Is Afghanistan going to slip into chaos once U.S. troops leave?

Asia

China’s inexorable rise gathered speed since January 2009. It completed construction on its first aircraft carrier, became the world’s second largest economy, and has survived the worst of the global economic meltdown with one of the world’s best growth rates. U.S. economic ties with China remains strong which has helped keep domestic inflation low.

Potential flare-ups, however in the South China Sea (with neighbors Vietnam and the Philippines) and East China Sea (with Japan) linger behind the facade of China’s “peaceful rise”. A once in a decade political transition is also underway with China’s new leaders expected to be officially acknowledged on November 8th and installed in March, 2013. Trade frictions are on the rise with increased WTO cases on goods ranging from tires to solar panels. The economy has slowed considerably from the unsustainable double-digit sprint of years past. Some economist predict much tougher times ahead as China’s new leadership faces a country in transition unlike any other time in recent history.

North Korea too has changed since Obama first took office. A young and relatively untested new leader, Kim Jong-Eun rose to power seizing every major military, political and governmental role in quick succession since his father’s passing. In one of the world’s most isolated regimes the family political dynasty remains intact. Hopes for significant economic liberalization have so far failed to materialize and tensions persistent on the world’s last Cold War front.

What does China’s rise mean for U.S. security and economic growth? Is China’s strategic intent to replace the U.S. as main regional influence and what will the U.S. do about it? What will you do as President to reduce tensions on the Korean peninsula and end the decades-long hostilities between North and South Korea?

Europe

Germany, the powerhouse of the continent, has lowered growth forecasts to a barely treading above water 1% for 2012. Most were hoping that the manufacturing giant could sustain strong growth against the headwinds of Spanish, Greek, and Portuguese recession along with a lackluster UK and newly integrated eastern European economies.  As the world’s engines of growth stall one-by-one, the threats of a larger global recession increase, as the IMF has warned with increasing regularity.

How will the European slowdown affect the U.S. economy and can the U.S. avert even more economic troubles if Europe stalls?

Terrorism

Attacks on the U.S. Consulate in Benghazi and a recently thwarted attempt in Jordan in addition to continued fronts in Yemen and now Mali show that the treats of terrorism have not abated. As long as arms continue to flow into the hands of radical groups and weak or failed states remain the threat of violence will continue. Concerted and sustained action can, however minimize the depths of the threat and seriously disrupt organizations bent on destruction.

What can and should the U.S. do to further combat terrorist organizations? Is the Al-Qaeda threat still a focal point of U.S. foreign policy?

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