When Will the U.S. Dollar Collapse?


collapsing dominos with international currency symbols on them

A dollar collapse is when the value of the U.S. dollar plummets. Anyone who holds dollar-denominated assets will sell them at any cost. That includes foreign governments who own U.S. Treasurys. It also affects foreign exchange futures traders. Last but not least are individual investors.

When the crash occurs, these parties will demand assets denominated in anything other than dollars. The collapse of the dollar means that everyone is trying to sell their dollar-denominated assets, and no one wants to buy them. This will drive the value of the dollar down to near zero. It makes hyperinflation look like a day in the park.

 

Two Conditions That Could Lead to the Dollar Collapse
Two conditions must be in place before the dollar could collapse. First, there must be an underlying weakness. As of 2017, the U.S. currency was fundamentally weak despite its 25 percent increase since 2014. The dollar declined 54.7 percent against the euro between 2002 and 2012. Why? The U.S. debt almost tripled during that period, from $6 trillion to $15 trillion. The debt is even worse now, at $21 trillion, making the debt-to-GDP ratio more than 100 percent. That increases the chance the United States will let the dollar’s value slide as it would be easier to repay its debt with cheaper money.

Second, there must be a viable currency alternative for everyone to buy. The dollar’s strength is based on its use as the world’s reserve currency. The dollar became the reserve currency in 1973 when President Nixon abandoned the gold standard. As a global currency, the dollar is used for 43 percent of all cross-border transactions. That means central banks must hold the dollar in their reserves to pay for these transactions. As a result, 61 percent of these foreign currency reserves are in dollars.

Note: The next most popular currency after the dollar is the euro. But it comprises less than 30 percent of central bank reserves. The eurozone debt crisis weakened the euro as a viable global currency.

China and others argue that a new currency should be created and used as the global currency. China’s central banker Zhou Xiaochuan goes one step further. He claims that the yuan should replace the dollar to maintain China’s economic growth. China is right to be alarmed at the dollar’s drop in value. That’s because it is the largest foreign holder of U.S. Treasury, so it just saw its investment deteriorate. The dollar’s weakness makes it more difficult for China to control the yuan’s value compared to the dollar.

Could bitcoin replace the dollar as the new world currency? It has many benefits. It’s not controlled by any one country’s central bank. It is created, managed, and spent online. It can also be used at brick-and-mortar stores that accept it. Its supply is finite. That appeals to those who would rather have a currency that’s backed by something concrete, such as gold.

But there are big obstacles. First, its value is highly volatile. That’s because there is no central bank to manage it. Second, it has become the coin of choice for illegal activities that lurk in the deep web. That makes it vulnerable to tampering by unknown forces.

Economic Event to Trigger the Collapse
These two situations make a collapse possible. But, it won’t occur without a third condition. That’s a huge economic triggering event that destroys confidence in the dollar.

Altogether, foreign countries own more than $5 trillion in U.S. debt. If China, Japan or other major holders started dumping these holdings of Treasury notes on the secondary market, this could cause a panic leading to collapse. China owns $1 trillion in U.S. Treasury. That’s because China pegs the yuan to the dollar. This keeps the prices of its exports to the United States relatively cheap. Japan also owns more than $1 trillion in Treasurys. It also wants to keep the yen low to stimulate exports to the United States.

Japan is trying to move out of a 15-year deflationary cycle. The 2011 earthquake and nuclear disaster didn’t help.

Would China and Japan ever dump their dollars? Only if they saw their holdings declining in value too fast and they had another export market to replace the United States. The economies of Japan and China are dependent on U.S. consumers. They know that if they sell their dollars, that would further depress the value of the dollar. That means their products, still priced in yuan and yen, will cost relatively more in the United States. Their economies would suffer. Right now, it’s still in their best interest to hold onto their dollar reserves.

Note: China and Japan are aware of their vulnerability. They are selling more to other Asian countries that are gradually becoming wealthier. But the United States is still the best market (not now) in the world.

When Will the Dollar Collapse?
It’s unlikely that it will collapse at all. That’s because any of the countries who have the power to make that happen (China, Japan, and other foreign dollar holders) don’t want it to occur. It’s not in their best interest. Why bankrupt your best customer? Instead, the dollar will resume its gradual decline as these countries find other markets.

Effects of the Dollar Collapse
A sudden dollar collapse would create global economic turmoil. Investors would rush to other currencies, such as the euro, or other assets, such as gold and commodities. Demand for Treasurys would plummet, and interest rates would rise. U.S. import prices would skyrocket, causing inflation.

U.S. exports would be dirt cheap, given the economy a brief boost. In the long run, inflation, high interest rates, and volatility would strangle possible business growth. Unemployment would worsen, sending the United States back into recession or even a depression.

How to Protect Yourself

Protect yourself from a dollar collapse by first defending yourself from a gradual dollar decline.

Important:  Keep your assets well-diversified by holding foreign mutual funds, gold, and other commodities.

A dollar collapse would create global economic turmoil. To respond to this kind of uncertainty, you must be mobile. Keep your assets liquid, so you can shift them as needed. Make sure your job skills are transferable. Update your passport, in case things get so bad for so long that you need to move quickly to another country. These are just a few ways to protect yourself and survive a dollar collapse.

US Trade Deficit With China and Why It’s So High

The Real Reason American Jobs Are Going to China

The U.S. trade deficit with China was $375 billion in 2017. The trade deficit exists because U.S. exports to China were only $130 billion while imports from China were $506 billion.

The United States imported from China $77 billion in computers and accessories, $70 billion in cell phones, and $54 billion in apparel and footwear. A lot of these imports are from U.S. manufacturers that send raw materials to China for low-cost assembly. Once shipped back to the United States, they are considered imports.

In 2017, China imported from America $16 billion in commercial aircraft, $12 billion in soybeans, and $10 billion in autos. In 2018, China canceled its soybean imports after President Trump started a trade war. He imposed tariffs on Chinese steel exports and other goods. 

Current Trade Deficit

As of July 2018, the United States exported a total of $74.3 billion in goods to China. It imported $296.8 billion, according to the U.S. Census Bureau. As a result, the total trade deficit with China is $222.6 billion. A monthly breakdown is in the chart.

US$211.1
Jul 18
US$202
Jan 18
US$205
Feb 18
US$210
Mar 18
US$210
Apr 18
US$214
May 18
US$213
Jun 18
US$211
Jul 18

Causes
China can produce many consumer goods at lower costs than other countries can. Americans, of course, want these goods for the lowest prices. How does China keep prices so low? Most economists agree that China’s competitive pricing is a result of two factors:

A lower standard of living, which allows companies in China to pay lower wages to workers.
An exchange rate that is partially fixed to the dollar.

If the United States implemented trade protectionism, U.S. consumers would have to pay high prices for their “Made in America” goods. It’s unlikely that the trade deficit will change. Most people would rather pay as little as possible for computers, electronics, and clothing, even if it means other Americans lose their jobs.

China is the world’s largest economy. It also has the world’s biggest population. It must divide its production between almost 1.4 billion residents. A common way to measure standard of living is gross domestic product per capita. In 2017, China’s GDP per capita was $16,600. China’s leaders are desperately trying to get the economy to grow faster to raise the country’s living standards. They remember Mao’s Cultural Revolution all too well. They know that the Chinese people won’t accept a lower standard of living forever.

China sets the value of its currency, the yuan, to equal the value of a basket of currencies that includes the dollar. In other words, China pegs its currency to the dollar using a modified fixed exchange rate. When the dollar loses value, China buys dollars through U.S. Treasurys to support it. In 2016, China began relaxing its peg. It wants market forces to have a greater impact on the yuan’s value. As a result, the dollar to yuan conversion has been more volatile since then. China’s influence on the dollar remains substantial.

Effect
China must buy so many U.S. Treasury notes that it is the largest lender to the U.S. government. Japan is the second largest. As of September 2018, the U.S. debt to China was $1.15 trillion. That’s 18 percent of the total public debt owned by foreign countries.

Many are concerned that this gives China political leverage over U.S. fiscal policy. They worry about what would happen if China started selling its Treasury holdings. It would also be disastrous if China merely cut back on its Treasury purchases.

Why are they so worried? By buying Treasurys, China helped keep U.S. interest rates low. If China were to stop buying Treasurys, interest rates would rise. That could throw the United States into a recession. But this wouldn’t be in China’s best interests, as U.S. shoppers would buy fewer Chinese exports. In fact, China is buying almost as many Treasurys as ever.

U.S. companies that can’t compete with cheap Chinese goods must either lower their costs or go out of business. Many businesses reduce their costs by outsourcing jobs to China or India. Outsourcing adds to U.S. unemployment. Other industries have just dried up. U.S. manufacturing, as measured by the number of jobs, declined 34 percent between 1998 and 2010. As these industries declined, so has U.S. competitiveness in the global marketplace
.
What’s Being Done
President Trump promised to lower the trade deficit with China. On March 1, 2018, he announced he would impose a 25 percent tariff on steel imports and a 10 percent tariff on aluminum. On July 6, Trump’s tariffs went into effect for $34 billion of Chinese imports. China canceled all import contracts for soybeans.

Trump’s tariffs have raised the costs of imported steel, most of which is from China. Trump’s move comes a month after he imposed tariffs and quotas on imported solar panels and washing machines. China has become a global leader in solar panel production. The tariffs depressed the stock market when they were announced.

The Trump administration is developing further anti-China protectionist measures, including more tariffs. It wants China to remove requirements that U.S. companies transfer technology to Chinese firms. China requires companies to do this to gain access to its market.

Trump also asked China to do more to raise its currency. He claims that China artificially undervalues the yuan by 15 percent to 40 percent. That was true in 2000. But former Treasury Secretary Hank Paulson initiated the U.S.-China Strategic Economic Dialogue in 2006. He convinced the People’s Bank of China to strengthen the yuan’s value against the dollar. It increased 2 to 3 percent annually between 2000 and 2013. U.S. Treasury Secretary Jack Lew continued the dialogue during the Obama administration.

The Trump administration continued the talks until they stalled in July 2018.

The dollar strengthened 25 percent between 2013 and 2015. It took the Chinese yuan up with it. China had to lower costs even more to compete with Southeast Asian companies. The PBOC tried unpegging the yuan from the dollar in 2015. The yuan immediately plummeted. That indicated that the yuan was overvalued. If the yuan were undervalued, as Trump claims, it would have risen instead.

Source: The Balance

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Can France’s daring move eliminate Islamic State? Terrorism is modern society’s cancer !


599ae-france2bvs2bisis
France vs ISIS 2015 By Li Min

After the brutal terror attacks in Paris, France’s Interior Minister Bernard Cazeneuve called for the “dissolution of mosques where hate is preached.” Earlier this year, French authorities said “Foreign preachers of hate will be deported [and their mosques] will be shut down.” The reiteration is taken by many as a renewed demonstration of France’s tough response to the attacks.

The tougher the stance France shows, the more embrace it will get from the public. Likewise, after the September 11 attacks, the US Congress rapidly passed a bill to launch war in Afghanistan and later, the ousting of Saddam Hussein won bipartisan advocacy. But reality shows that after attacks, the agitated Western society tends to overestimate the effects of fierce retaliation and underrate the complexity of the origins of terrorism.

Closing mosques where hatred is preached may be interpreted by Muslims in a way France doesn’t mean. Frankly speaking, the French government is daring enough to take such a measure and it faces a smaller risk of public opposition than if China and Russia did the same. Countries with which the West has biased opinions have to consider the response from Muslims and primarily criticism from Western opinion.

France’s air strikes against the Islamic State (IS) with its Western allies can have some effects, but the IS cannot be uprooted unless the West sends large-scale ground forces or fully supports the Assad regime to fight them.

Even if the IS could be largely crushed, it doesn’t make much difference. In the Middle East, there are no political strongmen any more, and its political and social structures have been shattered. Built up by extreme forces taking advantage of the rift, the example of the IS can be repeated easily.

More importantly, the West’s bombs can destroy the encampments and ammunition depots, but cannot deal with attire like veils. Nor can the West prevent children from being sent to extreme religious schools or grapple with conservative Islam.

Until now, Osama bin Laden is still deemed by many in the Arabic world as a positive figure fighting the West, which reflects the limitation of the war on terrorism.

Terrorism that originates in the Middle East has been embedded with unbelievable hatred. The West has no measures to counter it, nor can it form a consistent organization to take action. The West has been depressed by the consequences of the Arab Spring.

In the Islamic world, there is no figure or power of authority to advance the regional reforms, and apparently the vacancy cannot be filled from the outside. The Islamic world may be in pressing need of examples where some of its countries completely modernize so as to bring some inspiration.

But such a plan is not realistic in the current situation. In this sense, much of the West’s drastic rhetoric only works to show their emotions with problems remaining unsolved. It is merely a response to public opinion.

Terrorism is modern society’s cancer

A series of terrorist attacks in Paris on Friday night have left the world in shock, and all people with a sense of justice will strongly condemn the atrocities. With the Bataclan concert hall, soccer stadium and restaurants as targets, it’s obvious that the terrorist attacks were elaborately planned. These are the most severe terrorist attacks the West has suffered in recent years. They are also the most coordinated and lethal terrorist attacks worldwide in recent years.

Since the 9/11 attacks, the cost of anti-terrorism efforts has been increasingly soaring in both developed and developing countries. However, terrorism continues spreading like cancer. Al-Qaeda has been greatly devastated, but Islamic State, a more brutal extremist group, has emerged. The West is suffering from intermittent terrorist attacks, while in some turbulent underdeveloped countries, terrorist attacks have become commonplace in the fight against their governments. In China’s Xinjiang Uyghur Autonomous Region, a small number of young people has also embraced terrorism, instigated by extremist ideas, turning Xinjiang into a global anti-terrorist front.

Middle East countries suffering from turbulence and abject poverty are the hotbed of terrorism. Like an airborne virus, it spreads to other regions. Refugees and immigrants from the Middle East have brought some deep-rooted problems to Europe and the US. Europe and the US need new immigrants, but their societies have been resisting the trend, including anti-immigration protests.

People with radical ideas from Europe and the US continue to travel to the Middle East to join jihad. Some of them have returned, carrying the terrorist virus. In many cases, terrorist attacks in Europe and the US are no longer directly launched by terrorist groups from the Middle East. The identity of terrorists and the nature of some terrorist groups have become complicated. It is more difficult to take precautions.

Since it’s virtually impossible to reverse globalization, openness and freedom, the system on which societies operate runs counter to the anti-terrorism system. A dangerous element identified by security authorities could be totally free, which means a much higher cost for preventing terrorist acts.

Every government is trying every means to defend themselves from terrorist attacks, but the general understanding of terrorism remains ambiguous and elusive. Geopolitics and ideologies are driving a wedge between different countries. Some countries have double standards over terrorism, imposing a harsh attitude to terrorists on their own turf, but striking a noncommittal and even sympathetic stand on terrorists in other countries.

The rapid rise of IS, to some extent, is believed to being used by the US and Europe to topple Syria’s Bashar al-Assad’s regime. The US is of two minds in cracking down on IS. Terrorism, by taking advantage of the divergence among major powers, survives and free societies invite intermittent terrorist attacks. Furthermore, terrorism can gain support from some radical forces, and lone wolf attacks could also cause heavy losses as terrorist attacks do.

Terrorism is like a cancer of the world, which requires a long-term fight. As the chance of wars among countries gets slim, terrorist attacks will probably become the most challenging global form of violence.

Source:  Global Times

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Yasukuni glorifies Japan’s inglorious past


Yasukuni_Shrine Japanese Ghost: Yasukuni Shrine

In the field of diplomacy, Japanese Prime Minister Shinzo Abe could be better described as “Downturn Abe”.

His visit to the Yasukuni Shrine is a calculated rebuff to those in Japan who seek better diplomatic relations and warms the hearts of those who want Japan to be a major military power and jettison any constitutional restraints preventing this.

The Yasukuni Shrine does not serve the same purpose as Arlington National Cemetery in the United States, or the Cenotaph in the United Kingdom. No bodies are buried at Yasukuni Shrine. Japan’s head of state refuses to visit. Indeed, no emperor has set foot inside the shrine since 1975, three years before the souls of war criminals were interred there by Shinto priests. News of the enshrinement was kept quiet for months.

The late emperor Hirohito refused to go there after convicted war criminals, seven of whom were hanged, were secretly enshrined in 1978, joining about 2.5 million other Japanese who died in battle in the 19th and 20th centuries.

Hirohito had paid his respects at Yasukuni eight times after the war but made his final visit in 1975 by which time, according to palace documents, he became disillusioned with the way the shrine was being managed and what it was trying to represent.

His son, Emperor Akihito, has never visited.

Japan does have a national cemetery, with the remains of the war dead, in Chidorigafuchi, just up the road from Yasukuni. Few politicians visit.

Yasukuni has a specific role: It pays homage to, and celebrates, unapologetic militarism. This piece of Tokyo real estate, close to the Imperial Palace, with its broad avenue lined by cherry blossom trees, is considered holy ground by extreme nationalists.

It is a shrine dedicated to glorifying war, empire and unrepentant militarism.

It is a privately run shrine that enjoys the close patronage of the Japan Association of War Bereaved. The association has, and continues to enjoy, close ties to the governing Liberal Democratic Party.

The Yushukan museum, attached to the shrine, is a land of make-believe for militarists. It claims that Japan was forced into war by the US, and that Tokyo waged an honorable campaign to free Asia from white European colonialism. This time frame, conveniently, leaves out the rapacious behavior of Japanese troops in China before Pearl Harbor.

A Zero fighter aircraft greets visitors at the museum’s entrance. No mention is made of the Nanjing Massacre or the razing of Manila. A giant mural depicts the Battle of Tokyo Bay. No battle ever took place.

During World War II, a ballad popular with Japanese troops heading off to fight had the following refrain: “You and I are cherry blossoms of the same year. Even if we’re far apart when our petals fall, we’ll bloom again in the treetops of Yasukuni Shrine.”

Abe is nurturing the roots of those cherry blossom trees.

By Tom Clifford, a senior copy editor of China Daily USA

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Get pay from spying?


Spying HeroWhistleblowing hero: Germans holding up pictures of Snowden while protesting in front of the Reichstag building which houses the Bundestag (lower house of parliament) in Berlin . — AFP

Heavy-duty spying does not pay 

The hidden costs, and the controversy, of the massive US global spying operation keep on growing.

IF officials behind the US-based “Five Eyes” spying network had hoped the scandal would soon fade away, their obvious disappointment should be an object lesson about their excesses and abuses.

US, British, Canadian, Australian and New Zealand spies – together with their Singaporean and South Korean co-conspirators – had violated the implicit trust placed in their governments by friendly and ally nations around the world.

Former US intelligence contractor Edward Snowden had exposed how the conspirators had tapped into fibre-optic cables in 20 locations worldwide and infiltrated 50,000 computer networks.

This unprecedented scale of spying makes no distinction between friend and foe. It has provoked questions about the value of being a friend or “ally” of these Western countries.

Countries in the world’s main regions have routinely been spied on: Europe, East Asia, West Asia and Latin America. The spying exceeds all norms of intelligence gathering to target the personal cell phones of national leaders, from German Chancellor Angela Merkel to Indonesian President Susilo Bambang Yudhoyono and even his wife Ibu Ani Yudhoyono.

Snowden’s leaks reveal that Spain, for example, had been spied on so much as to have 20 million phone calls tapped each day. For the US authorities to insist that it was all for the sake of fighting terrorism is too much of a stretch.

The spying covers economic as well as political purposes. It was revealed that a foreign government’s confidential information picked up from spying is also used to give an unfair advantage to US companies against other companies in bids for international contracts.

Today’s supercomputers can do a lot of work in very little time. The ones used in the US global spying scheme apparently had very little ethical human supervision, precisely because that was the intention.

It has long been a “given” that all countries gather intelligence, to varying degrees, through some of their diplomats, expatriates and other undercover operatives. The extent of this activity also varies with the distance in relations between the spying country and the one spied upon.

Between friendly countries, discussions on issues of common interest and concern are the means of updating one another on events. Excessively intrusive and invasive spying, however, such as the kind Snowden has revealed, is supposed to be for untrustworthy governments and enemy nations.

Such universal perceptions and expectations lie at the heart of the current spying controversy. There is little wonder that countries so sordidly spied on take the matter so seriously.

Such spying shows the United States would enforce its will on all other countries, as opposed to sharing information between equal partners with mutual respect. It also implies that rules will be made by the US alone.

At the bilateral meeting in Jakarta during the week between Malaysian Prime Minister Datuk Seri Najib Tun Razak and Susilo, Malaysia declared full support for Indonesia in placing the spying scandal on the agenda of the next Asean Summit in Myanmar.

In seeking a satisfactory corrective for spying intrusions that breach all known limits, granting a regional profile to the problem is the least that Indonesia and Malaysia can do. Thailand is another Asean country targeted by these spies operating in part from the respective Australian embassies.

France and Germany are particularly outraged by “Five Eyes” snooping. Italy, the Netherlands and Spain are also concerned, as the scandal unites political parties within individual nations as well as European countries throughout the EU – except for Britain.

The aggrieved countries find the excessive spying violating privacy rights, their national sovereignty as well as their domestic laws. US officials predictably reject its seriousness.

The EU now wants a new law requiring private IT companies to inform European regulators if a foreign snooping request is made on any European citizen. That effort could clash with an existing US law that bans any company whose “cooperation” is required from telling anyone.

The potential conflict would pit European determination against US intransigence. It would further test the trans-Atlantic alliance in the post-Cold War period.

As the initial leaks started to provoke European anger, clandestine efforts tried to dilute or divert the upset.

It was somehow also “leaked” that the French government had been spying on its own population, followed by allegations that the German government had known about and even used information obtained by US-connected spies. The truth of these “mitigating” leaks was, however, less clear.

As expected, such efforts at damage control had a very limited effect. The harm perpetrated by US-led spying on the trust, goodwill and relations with Europe was far more serious, and remains a main feature in the foreground.

In Latin America “south of the border”, Brazil, Colombia, Mexico and Venezuela are particularly disturbed by US-led spying activities. Argentina, Bolivia, Chile, Ecuador, Nicaragua, Paraguay and Uruguay are also concerned.

Several of these countries have already offered asylum to Snowden, who hopes to avoid prosecution in the US after his current one-year asylum stay in Russia. The more Washington pressures and threatens these countries, the more keen they are to protect whistleblowers like Snowden.

The Union of South American Nations (Unasur) is currently working on a new, alternative communications system that will cut the prospect of US spying in the region. As a sign of seriousness, the region’s defence ministers who form Unasur’s defence council are tasked with developing the new system.

Unasur’s 12 member countries may be disadvantaged in lacking sophisticated technological inputs for the system. However, they also enjoy certain advantages in a renewed unity, determination and strength of purpose.

Brazilian President Dilma Rousseff, whose email had been hacked by US spies, has accused Washington of violating human rights and crime. Four days ago, she followed this with a defence procurement contract that spelt out clearly where Brazil stood.

Capping a 10-year plan, Rousseff announced on Wednesday that Brazil would buy 36 of Sweden’s Saab Gripen fighter jets instead of Boeing’s F/A-18s in replacing the air force’s ageing fleet. Brazil had bargained the price down from US$6bil (RM19.8bil) to US$4.5bil (RM14.8bil).

US officials privately grumbled over having lost “a US$4bil deal” but in fact the cost of NSA spying on Brazil is almost twice that. Boeing’s price for the F/A-18s was US$7.5bil (RM24.7bil).

Over the longer term, the cost to the US economy is likely to grow if Washington does not or cannot seriously mend its ways. US-based companies like Google, Yahoo! and Microsoft are often seen by other countries as part of the problem in having to comply with US laws and demands.

Unasur is already showing the way forward by working on an alternative. In time, other regions like Europe and countries such as Russia, India and China may also develop their own communications systems and software, taking more business away from US companies.

In the short term it is always tempting to blame the messenger such as Edward Snowden rather than the problematic nature of the message itself. Ironically, the development of modern communications has raised awareness of privacy and sovereignty rights – and of their violations.

To level the playing field, IT development as well as spying activities may need to become more equalised. By serving the greater interests of the greater number, that would be democratisation indeed.

Contributed by Bunn Nagara, who is a Senior Fellow at the Institute of Strategic and International Studies (ISIS) Malaysia, The Star/Asia News Network

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Financial crises a result of governance failures


ROMAN emperor Julius Caesar was famously warned by a seer about the Ides of March, traditionally March 15.

Euro Zone

On March 15 this year, banks in Cyprus were closed to allow politicians time to decide how to raise 5.8 billion euros so that the country could qualify for 10 billion euros in bailout funds from the rest of eurozone and the International Monetary Fund (IMF). The solution suggested was to levy a tax on depositors, sparking a realisation that finally, the Europeans had decided to “bail-in” investors and depositors, rather than using public funds to “bail-out” everyone else.

The Cyprus crisis caused a stir in global financial markets, because it punctured expectations that the worst was over. Instead, it demonstrated another episode of muddling through.

Banks in Cyprus re-opened on Thursday with new capital controls on the amount depositors can take out. Larger depositors with over 100,000 euros would stand to lose up to 40% of their deposits. Of course, a significant portion of the deposits in Cyprus banks belong to Russians, who may suffer losses of 4 billion to 6 billion euros. For certain investors, this is the price of putting money in higher risk offshore financial centres. The price to Cyprus of operating as an offshore financial centre is likely to be a drop of GDP of more than 20% in the next couple of years.

The Cyprus outcome is not unexpected. If European governments are to be loaded with heavy debt burdens as a result of the crisis, they will be bound to start “taxing” offshore financial centres, where rich Europeans had been avoiding tax for years. If the eurozone banking union is to have any credibility, they will have to start controlling banking centres which operate largely on tax and regulatory arbitrage. Moreover, having banking assets seven to eight times GDP is no longer considered viable, whether for Cyprus or Iceland.

At the heart of such troubles lies the issue of governance. Financial crises are more governance failures than anything else.

Last week, The End of History philosopher and political scientist Francis Fukuyama published an important blog commentary on “What is governance?” This is the much-awaited part of his promised series on political governance, beginning with his 2011 book The Origins of Political Order. In that book, he looked at the three components of a modern political order a strong and capable state, the rule of law and accountability of the state to its citizens. Since the 2011 book stopped at the French Revolution, most readers would be curious to see how he handled the rise of China, which has a different political system from the West.

Fukuyama’s new definition of governance is “a government’s ability to make and enforce rules, and to deliver services, regardless of whether that government is democratic or not.” Notice that he has decided to remove any suggestion that democracy is automatically associated with good governance, appreciating that “an authoritarian regime can be well governed, just as a democracy can be mal-administered.”

Accordingly, he uses four approaches to evaluating the quality of governance: procedural measures, input measures, output measures and measures of bureaucratic autonomy. To put it into simple language governance should be measured according to how you govern (the processes); the efficiency of governance (how much tax or resources you need); the effectiveness (outcomes rather than objectives) and whether the bureaucracy is independent of politics or not (the autonomy question).

In dissecting governance into its different dimensions, Fukuyama has helped to clarify the methodology in thinking about the tradeoffs between the ability to have high discretion versus being bogged down by excessive rules, and high capacity to execute, versus low capacity to execute. Critics of that approach would argue that strong states with excessive discretion may not be sustainable. On the other hand, weak states with too many rules and no discretion may not be sustainable either.

Fukuyama is right to point out that the bureaucracy’s interests may not be identical to those of the people. The bureaucracy is supposed to be agent of the people (the principal), but many bureaucracies serve their own interests, rather than the public to the extent that civil servants may be neither civil nor servants.

Indeed, the simplistic view that the state is deterministic versus the view of free market self-order misses the fundamental point that large bureaucracies also have self-order. Anyone familiar with working in large complex bureaucracies in China, India or the United States, with many layers of government, would recognise that it is not easy to implement policies from the centre. State or provincial governments have a mind of their own, with very different priorities from that of the centre.

Indeed, in the 21st century, many cities have become more effective instruments of state, and it is not surprising that effective mayors have become national leaders because they show a capacity to deliver close to the people.

The more interesting question about governance is: why are collective action traps so pervasive? In other words, it is understandable why ineffective and weak bureaucracies or political systems are unable to overcome gridlock in their systems, but it is common to see highly effective and capable bureaucracies also caught in gridlock.

These gridlocks are apparent in the resolution of the euro crisis, the stalemate in the Doha World Trade Organisation negotiations and the Durban climate change debates. In the first week of April, the Institute for New Economic Thinking, the Centre for International Governance Innovation and the Fung Global Institute will be hosting a major conference in Hong Kong on how creative and innovative thinking can open up new avenues of thinking on the solutions to global governance. As a respected member of the global economic community, Hong Kong should make its voice heard.

You can watch most of the podcasts on http://www.ineteconomics.org or www.fginstitute.org.

THINK ASIAN By ANDREW SHENG

Tan Sri Andrew Sheng is president of the Fung Global Institute. 

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No easy path to ‘Chinese dream’


Chinese-dream-symbolChina’s new President last week reaffirmed his aim to achieve the ‘Chinese dream’, but the country faces many challenges on the road to fulfilling this dream.

LAST week saw the completion of China’s leadership transition, with Xi Jinping as the new president and Li Keqiang the new premier.

President Xi set the world speculating when he spoke of “striving to achieve the Chinese dream of great rejuvenation of the Chinese nation”.

One Western newspaper commented it was a collective national dream, contrasting it, unfavourably, to the “American dream” of giving individuals equal opportunities.

But to the Chinese, the promised renaissance of the nation is a reminder of the collective humiliation during the colonial era and the “dream” to win back its previous place as a world leader in science, technology, economy and culture.

High growth in recent decades has boosted China’s economy and confidence. Nevertheless, China’s new leaders face many serious challenges ahead which need to be tackled if the “Chinese dream” is to be realised.

First is the need to fight widespread corruption. Making this his main priority, Xi warned that corruption could lead to “the collapse of the Party and the downfall of the state.”

New leaders usually vow to get rid of corruption, but few have succeeded. If Xi wins this battle, it would be a great achievement.

Second are administrative procedures and abuse of official power that cause inefficiency and injustices right down to the local level.

At his first press conference, premier Li promised to shake up the system, acknowledging the difficulties of “stirring vested interests.” He promised that a third of 1,700 items that require the approval of government departments would be cut.

Frugality is to be the new hallmark. Spending will be reduced in government offices, buildings, travel and hospitality and the savings will be redirected to social development.

Third are the complexities of running China’s large and complicated economy. China aims to grow continuously by 7-8% a year. The rest of the global economy is, however, in a bad shape.

The country has thus to shift from export-led to domestic-demand led growth, and from investment-led to consumption-led domestic growth. Implementation of this new growth strategy, which the government has accepted, is not easy.

There are also the challenges of managing the currency, the huge foreign reserves and the regulation of capital flows, with the aim of having finance serve the real economy while not becoming a source of new instability.

In foreign trade, China has been very successful in building up a powerful export machine. But growth of exports to the West is slowing due to the near-recession, and new forms of protection (such as tariff hikes using anti-dumping and anti-subsidy measures) are increasingly used on Chinese imports.

At the same time, other developing countries are becoming wary of their increasing imports of cheap Chinese goods. How can China be sensitive to their concerns and strive for more balance and mutuality of benefits?

Fourth are China’s social problems. Poverty is still significant in many areas. Social disparities have worsened, with wide gaps in rich-poor and urban-rural incomes that are politically destabilising.

Redistributing income towards the lower income groups can meet two goals: reducing social inequalities and providing the demand base for consumption-led growth. The policies can include wage increases, provision of social services and income transfers to the poor.

Fifth is the need to tackle China’s environmental crises, which include emerging water scarcity, increased flooding, climate change and urban air pollution. Recent studies show the health dangers of the worsening air pollution, including links to the 2.6 million who die from cancers annually.

Many of the protests in China in recent years have been over environmental problems, including polluting industries located near communities. How can China integrate ecological concerns into its development strategy?

Sixth is China’s foreign relations. Xi last week reaffirmed China’s principle of “peaceful development” and that the country would never seek hegemony.

There is need to settle the different claims by China and other East Asian countries on the South China Sea in a proper and peaceful way and build confidence of its neighbours on this principle.

China, which is still very much a developing country in terms of per capita income and other characteristics, also need to stand with the rest of the developing world in international negotiations and relations.

At the same time, it is expected to provide preferences and special assistance to poorer countries and its investors abroad are expected to be socially and environmentally responsible.

Most difficult for China is the ability to manage foreign relations with developed countries, especially the United States. China is a rising or risen power, and viewed with some envy as a rival by those who fear losing their previous dominance.

Maintaining political stability with these powers is important; but of course this does not depend on China alone.

The above are only some of the hurdles facing China on its road to realise its dream of rejuvenation. As with any dream, it is not impossible to achieve but the road is long and difficult.

 GLOBAL TRENDS By MARTIN KHOR
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President Xi: Russia ties ensure peace; foreign debut illuminates China’s ‘world dream’


Xi-Jinping-wife1

Chinese President Xi Jinping and his wife Peng Liyuan arrive in Moscow Photo: AP

Freshly elected President Xi Jinping chose the Russian capital as the first foreign city he will visit as China’s head of state, as Moscow and Beijing move toward a full-fledged partnership for the next decade.

On the global arena, both Russia and China have a similar approach, and Jinping’s visit has been interpreted as a sign that the new Chinese administration is keen to re-inforce ties with Russia.

In the past, the two countries had a difficult and politically ambiguous relationship and were once Cold War rivals but their international interests are becoming more aligned.

The two countries have often jointly used their veto powers at the United Nationa Security Council, most recently with issues related to the Middle East, where they have blocked Western-backed measures regarding the Syrian conflict.

China and Russia also share a sizeable border and have tried to bolster their regional clout as a counterweight to a United States that is ‘pivoting’ towards Asia.

And as well as being permanent members of the Security Council, the two countries have worked shoulder-to-shoulder on the Shanghai Cooperation Organization and the so-called G20.

President Xi Jinping will also be talking trade on his visit in Moscow. The two countries have burgeoning business interests.

Bilateral trade has more than doubled in the last five years and reached $83bn in 2012 but the volume of trade is still low compared to their other trade partners. It is five times smaller than Russia’s trade with the European Union, and also far smaller than China’s trade with the United States; but the trade in energy is seen as a growth market for the two countries.

Russia is of course the world’s largest energy producer and China the biggest consumer. The two countries are in discussion about a gas pipeline that could eventually deliver 38bn cubic metres of Russian gas a year to China

So, how significant is this visit? Will it shape a new relationship between Moscow and Beijing?

To discuss this Inside Story, with presenter Hazem Sika, is joined by guests: Victor Gao, the director of China National Association of International Studies, who was also a former China policy advisor; Dimitry Babich, a political analyst at Russia Profile magazine; and Roderic Wye, a China analyst at Chatham House and senior fellow with the China Policy Institute at Nottingham University.

“Obviously there is a lot of substance [in the meeting] about the energy relationship, there are big issues to talk about on the international stage – not least, North Korea and the problems there – but also it is an important symbol to show for both Russia and China that they have independent foreign policies … and that they are not beholden to the United States in any particular way.”

Source:Al Jazeera – Roderic Wye, China analyst at Chatham House

Xi’s foreign debut illuminates China’s “world dream”

On Friday, Chinese President Xi Jinping embarked on his first overseas trip since taking office last week, and experts here believe the trip will clarify Xi’s recent references to China’s “world dream.”

Shi Yinhong, a professor of international relations at Renmin University of China, said, “The trip will reveal some important features of Xi’s concept of world order.”

“From the destinations of Xi’s first foreign trip, we can tell that China is committed to promoting democratization in international relations as well as a more just and reasonable international order and system,” he said.

In a joint interview on Tuesday with reporters from BRICS countries (Brazil, Russia, India, China and South Africa), Xi said China hopes that countries and cultures around the world will carry out exchanges on equal footing, learn from each other and achieve common progress.

He also voiced his hope that all countries will make joint efforts to build a harmonious world featuring enduring peace and common prosperity.

“This is Xi’s version of China’s ‘world dream,'” Shi said.

“It is in line with the common aspirations of people from different countries and closely related to the ‘Chinese dream’ put forward by Xi,” he said.

Pursuing the “Chinese dream” of the great rejuvenation of the Chinese nation is conducive to realizing the “world dream,” and if the “world dream” comes true, it could offer a sound external environment for the country to achieve the “Chinese dream,” Shi said.

NEW TYPE OF INTER-POWER TIES

Based on Xi’s first foreign trip and his interactions with other foreign leaders in the past week, analysts believe China is committed to developing a new type of “inter-power relations” in an all-around and open way, with hopes of breaking the zero-sum theory by promoting win-win cooperation.

Unlike past inter-power ties that have mainly targeted certain world powers, China now advocates a new type of cooperative relationship among all major powers, including leading powers among developing countries, said Ruan Zongze, deputy head of the China Institute of International Studies.

“We should adopt a new and open attitude toward all powers,” he said, adding that the word “new” here means regarding the development and growth of other countries as an opportunity for one’s own country.
“Only by doing this can state-to-state relations develop in a sound and sustainable way,” he said.

In the joint interview Tuesday, Xi said his visit to Russia shows the “high level and special nature” of the comprehensive strategic cooperative partnership between the two countries.

Ruan said China’s relations with Russia, the first leg of Xi’s trip, have already reached a stage featuring a “high level of mutual trust,” with both countries seeing each other’s development as an opportunity.

“The zero-sum mentality, namely believing one party’s success means the other’s failure, has been one of the major factors hampering mutual trust and creating conflicts between major powers,” he said.

Ruan pointed out that although Sino-Russian relations have seen marked progress in the past decade, this does not mean there are no problems in the bilateral relations.

“Both sides, however, agree not to let these differences restrain the development of bilateral relations,” Ruan said.

MAIDEN TRIP NOT TARGETING A THIRD PARTY

Analysts here also point out that Xi’s maiden overseas voyage as China’s head of state is not of an exclusive nature and does not target a third party.

Zhang Yuanyuan, former Chinese ambassador to Belgium, said China’s foreign policy is inclusive.

During his nine-day tour, Xi is scheduled to pay state visits to Russia, Tanzania, South Africa and the Republic of Congo. He is also expected to attend the fifth leaders’ summit of BRICS countries in Durban, South Africa.

Zhang said the visits involve multiple factors, including a world power and a neighboring country, developing countries and multilateral cooperation, all of which have been among China’s foreign policy priorities.

During the week since Xi was elected president, other Chinese leaders have received important guests and maintained contact with leaders from other countries.

In a phone conversation on March 14, Xi and U.S. President Barack Obama both promised to make efforts to achieve the goal of building a new type of inter-power relationship.

While meeting with U.S. Treasury Secretary Jacob Lew here on March 19, Xi urged the two nations to objectively view each other’s development stages, respect each other’s interests for further development and regard the other party’s opportunities and challenges as its own.

Zhang pointed out that building a new type of inter-power relationship and exploring ways for the two major powers to get along with each other could straighten out Sino-U.S. relations and break the historical curse in which “conflicts between major powers are inevitable.”

Meanwhile, Ruan Zongze dismissed concerns about Xi’s itinerary, saying such concerns are “totally unnecessary.”

“The reason for China to pursue the building of a new type of inter-power relationship is that it will not embark on the path of alliance,” he said.

“The age of old-school alliances or jointly targeting a third party has long passed,” Ruan said.- Xinhua

 

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