China impact, US caution give Australian equities appeal

Wed Sep 28, 2005 11:42 PM ET

By Wendy Pugh

NEW YORK, Sept 28 (Reuters) - Australian stocks will lure investors despite recent rises because of caution toward U.S. stocks and as China's commodities appetite boosts Australia's resource firms, said fund managers.

Australia's benchmark S&P/ASX 200 index has set a string of record highs, led by the world's top miners BHP Billiton Ltd./Plc. (BHP.AX: Quote, Profile, Research) (BLT.L: Quote, Profile, Research) and Rio Tinto Ltd./Plc. (RIO.L: Quote, Profile, Research) (RIO.AX: Quote, Profile, Research) , which together make up about 15 percent of the index.

Many Australian companies are promoting their investment credentials at annual conferences in Asia, Europe and the United States, including at the Merrill Lynch Australia Investment Conference in New York on Thursday and Friday.

High commodity prices and links between Australian companies and China have made Australian shares attractive despite recent gains, said Ron Holt, managing director at fund manager Hansberger Global Investors, based in Fort Lauderdale, Florida.

"If you believe that commodity prices can be sustained and that global demand can be sustained, it is still a market that you would want to have a pretty good weighting in," he said.

Australian resources companies posted strong earnings in the recently ended reporting season for the six-months ended June 30, as miners operated at full capacity to meet demand fuelled by China's growth, and as commodities prices traded at high levels.

BHP Billiton, the world's largest diversified miner, almost doubled its first-half profit. Its fiscal 2006 profit is forecast by analysts to reach $9 billion, up from $6.5 billion in 2005.

Australia's domestic economy has also been solid, with the Federal Government in its May budget forecasting Australian GDP growth for 2005/06 at three percent, increasing to 3.5 percent for 2006/07.

Michael Cuggino, president of Permanent Portfolio family of funds, based in San Francisco, said Australia was likely to benefit from investors seeking to reduce their weighting in U.S. equities amid caution about the outlook in that market.

"In general people have been looking to diversify away from the U.S. market recently, and Australia has a stable government, a good business climate, and the Australian dollar has picked up in value vis-a-vis the U.S. dollar," he said.

Kevin Skelton, Merrill Lynch Australia country head and chairman of investment banking, said funds were likely to flow into Australian companies from investors seeking gains without the volatility of faster-growing regional markets.

"I think there will be a steady stream, because the companies are in such good shape, but it is most likely it will be a steady stream rather than a deluge," he said.

"The issue for Australia is that the PE multiples are higher than the rest of the world, particularly in the banking sector, but the reality is that they are very well managed, the banks here, and they have much lower loss ratios."

Simon Doyle, head of strategy at Schroder Investment Management Australia, said that while the Australian market benefits from strong commodity prices and the solid Australian domestic economy, risks were rising.

"It is pretty fully priced, but it is not outrageously priced," he said. "The problem is that it does require some fairly good earnings expectations to be delivered."

$1=A$1.32


© Reuters 2005. All Rights Reserved.

China economy seen weathering oil prices

China economy seen weathering oil prices

BEIJING: A long-term rise in oil prices of $10 per barrel will shave 0.5 percentage point off China’s economic growth while slashing the trade surplus by as much as $32 billion, Deutsche Bank said on Wednesday.

Higher oil prices would only have a limited impact on China’s overall economy, the seventh-largest in the world, but would eat even further away at corporate margins that have been squeezed by competitive pricing, the bank said in a report.

“Indeed, the sectoral impact — on certain industries — could be a few hundred times larger than the macro impact of oil price changes,” analysts Jun Ma, Nam Nguyen and Richenda Elledge wrote in the report.

They premised their analysis on a crude oil price base of $52 a barrel. It was hovering around $64.80 at 0937 GMT on Wednesday. A per-barrel price rise of $10 would boost consumer inflation by 0.5 percentage point, the report said.

China’s gross domestic product rose 9.5 percent in the second quarter from a year earlier, the eighth straight quarter of growth over 9 percent. Annual consumer inflation has fallen from a peak of 5.3 percent in August 2004 to 1.3 percent this August.

A $10 rise would also directly lead to a reduction of $12 billion in the trade surplus, but by causing slower economic growth in countries that buy a lot of Chinese goods, it could further eat away another $15 billion to $20 billion.

China’s trade surplus is expected to more than triple this year to $100 billion.

The rising surplus, along with strong inflows of foreign investment and speculative money, has put pressure on China’s currency, the yuan or renminbi, to rise in value against the dollar.

“This should help reduce — albeit far from eliminating — the upward pressure on RMB appreciation,” the report said of oil’s impact on the trade surplus.

The start of an era of permanently higher oil prices meant investors should turn to sectors that are insulated from such increases, such as telecommunications, while steering clear of energy-intensive sectors such as chemicals, the report said.

Although higher oil prices would draw more investment to the oil industry, that increase would be overwhelmingly offset by a decrease in investment in other sectors already squeezed by falling profits.

“In sum, stronger oil prices are likely to depress investment demand in a more significant way than its impact on private consumption,” the wrote.

The net impact of Beijing’s reaction to rising oil prices — building strategic oil reserves, buying energy assets overseas, proposing new taxes to curb consumption, and encouraging alternative energy — was likely to support global oil prices and oil asset valuations, they said.

China reiterates tight investment, credit policy

Meanwhile China reinforced policies aimed at preventing an economic overheating, saying the government should continue to control growth in credit and fixed-asset investment. reuters

China looks at $24bn coal-to-oil plan as Beijing bets on oil price staying high

By Richard McGregor
Published: September 27 2005 03:00 | Last updated: September 27 2005 03:00

China is gearing up for a massive investment in a homegrown fuel source to cut its growing reliance on imports - plants to turn coal into gas and oil.


High oil and gas prices have made the coal-to-liquids (CTL) technology increasingly attractive to China, which has abundant reserves of the traditional "black gold", but relatively diminishing reserves of other fuels.

China's central planners have on their desks proposals for at least $24bn (€20bn, £13.6bn) worth of large-scale coal-to-liquids projects, with a number of pilot plants already under construction in Inner Mongolia and other coal-rich provinces.

"If all of these projects went ahead, it would be the equivalent of replacing one million barrels of oil a day," said Jim Brock, a Beijing- based energy consultant. China now consumes about 7m barrels of oil a day.

The technology to turn coal into gas and oil was invented in the 1920s by the Germans, who used it to power their military during the second world war. More recently, it was refined by South Africa in the 1980s under apartheid-era sanctions.

China has long used coal-to-liquids technology on a local level, with 8,000-9,000 crude gasifiers deployed to make everything from fertiliser to chemicals in areas that have long struggled to obtain or afford oil and gas.

Building large CTL plants is a different proposition - effectively, a big bet that oil will remain above $35-$40 a barrel, something many officials and industry executives think is getting less risky by the day.

"We believe they are on the verge of approving some major projects," said Richard Whiting, an executive vice-president of St Louis-based Peabody, the world's largest coal company, which has just opened a Beijing office.

State-owned Shenhua, China's largest coal company, has already announced plans to transform itself from a mere miner into a producer of power, oil, chemicals and methanol.

"Coal will be the best substitute for oil and gas in the future," said Ren Xiangkun, the Shenhua executive in charge of CTL, in a recent speech.

Mr Ren says that by 2020, Shenhua plans an output of 30m tonnes a year of coal liquefied oil products and coal chemical products. China's crude oil output is 180m tonnes a year.

Sasol, the South African company that produces most of that country's diesel fuel using coal, has feasibility studies under way with local partners for two plants, in Ningxia and Shaanxi, to produce 80,000 barrels each a day.

The company believes the success of CTL in China could be underwritten by government support, especially in coal-rich regions trying to use fuel production to stimulate growth.

Johann Van Rheede, a Sasol spokesman, said China was well positioned to develop a CTL industry "particularly because it is a centrally planned economy".

He said it was possible that both the Ningxia autonomous region and Shaanxi province in the central west of China could offer incentives for CTL projects to stimulate industrial growth.

But Sasol has a number of hurdles to pass before any plants are built - namely, its desire to have up to 50 per cent equity in any projects, rather than just providing its precious technical know-how. Shell, the Anglo-Dutch oil and gas group, is also studying using its technology to convert coal to synthetic gas, and then gas to liquids, in a project with Shenhua and Ningxia Coal in western China.

As well as tapping into foreign expertise, Chinese companies and research labs are developing their own CTL applications.

The Yankuang Group, which owns the overseas-listed Yanzhou Coal, has just launched a coal gasification plant to produce acetic acid and other liquids in Shandong province.

"It is not only much cheaper than imported equipment, but is running more efficiently than foreign-made facilities on some key parameters," said Jia Peng, a spokesman for the company.

The philosophy underlying the central government's approach to CTL mirrors that in other industries that the government deems strategic - to maximise self-reliance. Despite its growing oil import bill, and all the headlines that have accompanied it, China remains an energy-rich country, especially compared with Asia's other major economies, Japan and South Korea.

Japan and South Korea import more than 95 per cent of their energy needs. China by contrast relies on imports for 6 per cent of its energy, according to the official government estimate, or 13 per cent, by Mr Brock's calculation.

The government's desire to maintain that self-reliance is boosting the case to maximise use of local coal, which is expected to provide about 60 per cent of China's energy needs by 2020 in any case, and the need specifically for CTL plants.

China now relies on domestic coal for 77 per cent of its power needs and by 2030 it will still be about 60 to 70 per cent.

The recent backlash in Washington against the bid by CNOOC, a state-owned oil major, for Unocal, a US energy company, stung China's central government and has only reinforced its belief in self-reliance.

Joe Zhang, an analyst with UBS in Hong Kong, who has long been sceptical about the viability of, and the political will behind, a large CTL programme, says that persistent high oil prices have changed his mind.

"I think the government has probably run out of options to do anything but get serious about this," he said.

Japan Regards China as a Military Threat for the First Time

SEPTEMBER 27, 2005 05:56
by Hun-Joo Cho (hanscho@donga.com)
  
A “Security and Guarding Plan” by Japan’s Ground Self-Defense Force (GSDF) has been revealed to include a possible Chinese invasion.

During the Cold War era, the plan mostly perceived an invasion by the former Soviet Union as threatening. It is the first time that a Chinese invasion has been confirmed to be included in the plan.

The plan, published by the Asahi Shimbun on Monday, presents a view that North Korea, China, and Russia will be the three nations with the greatest military threat to Japan in order of reference in case of war and sets out preparation measures against them.

This plan is a top secret document that sets up an invasion situation that may occur between the five-year period from 2004 to 2008 and presents the unit operation guidelines for the GSDF. The GSDF staff of officers has prepared specific unit deployment and operation plans every year based on this plan.

The plan writes that the possibility of an attack on Japan by North Korea is “existent,” by China “low,” and by Russia “very low.” The plan predicted that the possibility of a terrorist attack to be low as well. A possible attack by North Korea has already been laid out.

As for the type of Chinese invasion, the plan set out the following situations: an invasion by a brigade on the Senkaku/Diaoyou Islands caused by worsened bilateral relations and disputes over resources in the area surrounding the islands; ballistic missile and fighter plane attack on U.S. forces in Japan bases and Self-Defense Force facilities in case of U.S. intervention supported by Japan in the China-Taiwan dispute resulting from a declaration of independence by Taiwan; and dispatch of guerillas or specially trained forces into Japan’s urban area.

Japan’s response to the hypothetical invasions includes relocating the GSDF infantry unit from Kyushu to Okinawa, the GSDF reclaiming the Chinese-invaded area after a Maritime and Air Self-Defense Force attack, and deploying forces to islands in preparation for possible attacks and mobilizing the forces in Kyushu and Sikoku if needed.

As countermeasures to a guerilla attack in the urban area, the plan suggests relocating the Hokkaido forces and running special operation forces to defend major facilities such as U.S. and Self-Defense force bases.

As for attacks from North Korea, which the plan considers more likely than a Chinese invasion, the plan points out a possible attack by ballistic missiles or by about 2,500 armed operators in case of disputes, triggered by an economic sanction resulting from worsened North Korea-U.S. relations.

Meanwhile, the Nihon Keizai Shimbun reported on Monday that, after the ongoing global relocation of U.S. forces is completed, a U.S. Forces Japan UEX will be established in Camp Zama of Kanagawa Prefecture and take charge of U.S. forces operation in case of war on the Korean peninsula.

The UEX will not have actual combating capabilities at time of peace. However, in case of war, the UEX will be organized into brigades and carry out operations. The U.S. forces plan to build 20 UEXs around the world. The U.S. is said to be planning to relocate the First Army Corps Headquarters from the U.S. mainland to Camp Zama and establish a UEX there.

China sees economy growing 9.2 pct in 2005-paper

Sun Sep 25, 2005 07:50 PM ET
(Add quotes, details)
SHANGHAI, Sept 26 (Reuters) - China's central bank expects the economy to grow 9.2 percent this year and expand 8.7 percent in the first half of 2006, an official newspaper said on Monday.

The People's Bank of China also forecast in a recent research report that consumer prices would rise 2.0 percent in 2005 and 2.1 percent in the first half of 2006, the Shanghai Securities News said.

The annualised figures indicate a slowing economy as China's gross domestic product grew 9.5 percent in the first half of this year.

"We must pay great attention to the impact of surging oil prices, but must also prevent a continued fall in overall domestic prices," the newspaper quoted the report as saying.

China's consumer prices had fallen since March due mainly to sharply slowing growth in food prices, weakening consumer demand and overcapacity of products, in response to Beijing's efforts to cool the economy since early last year, the report said.

Economists have warned of a possible slowdown of China's economy after Beijing's strong economic-cooling steps, with some warning the country could even see deflation by 2008.

The price of China’s growing thirst for electricity

SHANGHAI BUND BY KATHY FONG

CHINA as the world's factory has often been referred to as a thirsty nation. The country needs much electricity for its factories and what more now with many affluent Chinese driving instead of cycling.

The surging energy consumption in this vast country has been blamed by the international community for partly causing the upward spiral in crude oil prices.

China’s oil demand rose 15% to about 290 million tonnes last year – a growth five times higher than the world’s average of 3.2%.

The sharp rise in China’s imports had caught the market off guard last year. The Chinese bought 35% more crude oil, becoming the second-largest crude oil importer after the United States.

The jump in import was said to have propelled crude oil prices to above US$50 (RM188) per barrel. Crude oil prices are currently at the US$65 (RM245) level.

But, the breakdown on the global oil consumption shows that China accounted for only 8.3%, whereas 25% of usage was in the United States last year, according to statistics from British Petroleum.

“People have been fretting about the rising oil import of China. However, most of them are not aware that China is also a big energy exporter,” said Zhang Guobao, vice-chairman of the National Development and Reform Commission (NDRC), the country’s economic planning agency.

In its defence against the argument that China was pushing up oil prices, Zhang said China was a major coal and coke producer – the country supplied 94% of its own energy consumption last year. The rate is among the highest in the world.

Zhang also highlighted the ratio of petroleum in China’s energy consumption structure as only 24%. Nearly 67% of its energy needs were met by coal.  

Given that a large rural population had yet to gain access to electricity, China’s current primary energy consumption per capita is only one-third of the world’s average.  

Like it or not, the world has to accept the reality that China’s energy demand is growing as industrialisation continues and affluence increases in this country of 1.3 billion people.

Perhaps, the more critical issue in the current high oil prices era may be energy conservation and efficiency, particularly among big consumers.

China’s national news agency Xinhua reported that the country needed 2.4 times more energy to produce one unit of output compared with the world’s average, and nearly five times more than Germany and 1.65 times more than India.

China is definitely lagging in terms of energy efficiency. If the inefficiency continues, oil wells will dry up faster than expected to fuel the growth of this emerging economic giant.  

Quick and dirty conversion doesn't cut it for China

By Ross Gittins

John Howard committed an embarrassing blooper in a speech he gave in New York last week. But not to worry - Peter Costello fixed it up in his own speech this week.

Mr Howard predicted that "in the next decade, China will likely [sic] surpass Germany to become the third-largest economy after the United States and Japan".

Oh dear. Did our Prime Minister say that? And to think he said it to the Asia Society, while assuring the rivalrous Americans and fearful Europeans that "China's progress is good for China and good for the world".

The trouble is, he was using a terribly outdated and unscientific way of comparing the size of economies. In the process he greatly understated the extent of China's progress.

The quick and dirty way is simply to convert each economy's gross domestic product into a common currency - invariably, US dollars - at the prevailing market exchange rates.

But that's quite inaccurate and, these days, no self-respecting economist uses that method. It has two big problems.

First, in an era of floating exchange rates, a country's exchange rate with the US dollar bounces around from year to year in ways that say nothing about the relative rate of growth in each country's production of goods and services.

Second, and more significantly, the purchasing power of a US dollar varies greatly from country to country. It buys less in some European countries than it does inside America, for instance, but buys a lot more in developing countries than it does in the US.

The Organisation for Economic Co-operation and Development and others have gone to enormous trouble to determine the differing prices of many goods and services in many countries and so work out a special set of exchange rates that would cause the US dollar to have equal purchasing power in every country.

And note that, according to economic theory, these "purchasing power parity" exchange rates are the ones that should prevail in foreign exchange markets and eventually will. That is, over the longer term, market exchange rates will conform to PPP.

It turns out that, when you work it out properly, China goes from being the seventh largest economy to the second, overtaking Italy, France, Britain, Germany and Japan.

As Mr Costello remarked in a speech to the Lowy Institute for International Policy this week, China's economy is already nearly twice the size of Japan's economy and three times the size of Germany's.

When you work it out properly, America's $US11,600 billion-a-year economy goes from being 29 per cent of the world economy to 21 per cent. Japan goes from 12 per cent to 7 per cent.

But China goes from 4 per cent to 13 per cent. And India goes from less than 2 per cent to almost 6 per cent, lifting it to fourth position overall.

How can China and India have such huge GDPs? Well, not because they're rich, but because they're so big. China is the most populous country with 1.3 billion people and India is next with 1.1 billion.

This gives them 20 per cent and 17 per cent of the world's population respectively.

At present, America's corrected GDP is 60 per cent bigger than China's. That's because it has the third-biggest population in the world - almost 300 million - and is by far the richest country on a per-person basis.

Where does Australia stand in all this? Our 20 million make us the 53rd biggest country by population and give us a share of the world population of less than a third of 1 per cent.

But we have the 16th largest economy in the world with a 1.1 per cent share of global GDP that's four or five times larger than our share of population.

Why are we rich even though we're not big? Because we have a high level of productivity. That is, we're able to produce a lot of goods and services per person.

Why are we so productive? Because we have a relatively highly educated workforce (human capital), because our workers have a lot of machines to work with (physical capital) and because we have up-to-date machines and know how to work them (advanced technology). We also own a lot of valuable natural resources.

But, having explained all this, Mr Costello went on to sketch out how the world may look in 2050 if present trends continue (which, of course, they may not).

If the global population in 2005 is represented by 100 people, then five are in the US, 11 in Europe, 20 in China, 17 in India and 14 in Africa. If we project forward to 2050, the global population would have risen by 40 per cent.

But if we standardise back to 100 again we'd see the US proportion of global population has hardly changed. Same for India. Europe's proportion would have fallen to seven.

This may surprise you: China's share would fall to 15. Why? Because its One Child policy gives it a fertility rate about as low as ours. And here's another surprise: Africa's share of the 100 would rise from 14 to 21. "The big population shift in the next half century will be to Africa," Mr Costello said.

Turning from population to economic growth, it's well known that China's GDP

has been growing at the annual rate of about 9 per cent for the best part of 25 years. So much so that China now provides the single greatest source of world economic growth.

"As India continues its decade-long emergence from the dead hand of socialism and further opens itself to international markets, much the same has started to occur, although it is not as advanced yet as China," Mr Costello said.

If we project current trends forward to 2050, we find that China's share of global GDP would rise from 13 per cent to 20 per cent, with India's going from 6 per cent to 12 per cent.

America's 21 per cent would fall to 14 per cent, while Europe's fell from 21 per cent (note that, at present, the European Union's economy is about as big as America's) to 10 per cent.

This suggests that China and India are likely to be completing their re-emergence as major powers. Why "re-emergence"? Because, until about 1700, China and India were nearly as rich as Europe in per-person terms. In 1700 they accounted for half of global economic activity.

The industrial revolution began in Europe and spread to America, but now is reaching Asia.

Ross Gittins is the Herald's Economics Editor.

Before the oil runs out: How will this era end?

By John Dillin, The Christian Science Monitor

WASHINGTON — The warnings keep piling up. Author Paul Roberts cautions his readers about The End of Oil. National Geographic's cover story last month examined how the world might survive "After Oil." The Economist magazine asks, "Is the age of oil drawing to a close?"
With the discomfort growing, consumers are considering fuel-efficient cars. Industry has gotten serious in its search for alternatives. New efforts are focused on wind, solar, nuclear, and even old, reliable coal (in a cleaner version) for the energy future.
But is the world really running out of oil? The short answer is no. Earth is swimming in the stuff. What's changed is that the era of cheap oil — a period that has lasted 150 years — is showing its age. Only a dramatic breakthrough — either in technology or consumption patterns — can forestall its conclusion in a decade or two.
If it happens, the end of cheap oil would have a profound effect: stunting world economic growth, constraining China's rise, and challenging Western lifestyles. America's joy ride, in particular, could come to a screeching halt.
"The US has 2% of the world's proven oil reserves. But it burns 25% of the world's transportation fuels," says an analyst close to the oil industry who asked not to be named. "This isn't going to work out in the long run."
The problem isn't readily apparent from a supply viewpoint. When the world's first oil well was sunk in Pennsylvania in 1859, the Earth contained at least 6 trillion barrels of crude oil, geologists estimate. So far, we have used only about 1 trillion barrels.
So what's all the fuss about?
Part of the worry has to do with access. Of the original 6 trillion to 8 trillion barrels in the ground, the industry is capable of extracting only about half — 3 trillion to 4 trillion barrels. Lots of oil is locked in difficult underground formations that are hard, if not impossible, to exploit using current technology.
Moreover, those first 1 trillion barrels were among the easiest to reach. The days of easy gushers and overnight millionaires are long gone. Now the going gets harder.
Perils of recovery
Where underground formations are highly favorable, as in the Gulf of Mexico and Saudi Arabia, oil drillers can often retrieve 60% of the oil. But in marginal formations such as some found in Oklahoma, the average rate of recovery can be as low as 8 to 10%. Worldwide, the average is about 35 to 40%, according to the U.S. Energy Information Administration.
In short, only 2 trillion to 3 trillion barrels may remain for our use.
Even more worrisome is the demand equation. It took 146 years for the world to use the first 1 trillion barrels. The next 1 trillion barrels will be gone by around 2030. After that, we could have as little as 1 trillion or 2 trillion barrels of conventional oil left.
Some experts who follow these issues closely are getting worried. One big change, particularly in the past two years, has been increasing international competition for oil supplies.
During most of the past century, it was mainly the United States, Japan, and Europe that vied for the world's petroleum supplies. Now other nations like China and India are developing their own needs for oil to fuel their factories and their rapidly expanding fleets of automobiles, trucks, and airplanes. That could set off a scramble for worldwide oil reserves, and it seems to assure that higher prices — at least higher than we are accustomed to — are here to stay.
While the nations with the largest reserves, mostly in the Middle East, have periodically offered to increase production, there is also concern that they've showed few signs of boosting their overall capacity to pump oil.
Still, the long-term outlook is murky. Even industry leaders don't always see eye to eye.
There's no impending worldwide supply crisis, according to Rex Tillerson, president of ExxonMobil, the world's largest petroleum company. Oil and natural gas "are likely to remain the primary energy source through the middle of the century," he said in a speech this year.
A recent ExxonMobil study of world energy resources supports that view. It found that oil should remain plentiful and affordable at least through 2030, which was the time limit of the report. Rising worldwide demand will be met primarily by increased production in the Middle East, the study concludes.
We already face "a new energy equation," counters David O'Reilly, chairman and CEO of ChevronTexaco. Three factors are squeezing oil supplies — globalization, economic growth, and falling oil output in several nations, including the US.
"Oil is no longer in plentiful supply," Mr. O'Reilly said in a speech this year. "The time when we could count on cheap oil and even cheaper natural gas is clearly ending."
A crimp in U.S. lifestyles?
When it finally comes, the end of cheap petroleum would be felt nowhere more keenly than in America, a nation built on low-cost, plentiful energy, and cheap oil in particular. Long, leisurely Sunday drives and Saturday night cruising down Main Street in hot rods with 25-cent-a-gallon gasoline were traditions fused into the American psyche in the era after World War II. Today's suburban American lifestyle — built around long commutes to work and large, energy-hungry houses — assumes that low-cost fuel will be available indefinitely.
For years, American prosperity was fueled with oil because the country had so much of it. The country mostly produced as much as it used, but when more was needed, plenty of imports were available from Venezuela, Canada, and other friendly nations.
Today, the U.S. position is more precarious. U.S. output of crude oil and natural-gas liquids (like propane) hit a peak in 1970 of 11.3 million barrels per day (b.p.d.). Then the slide began. By 2004, U.S. production had slumped to just 7.2 million b.p.d., even though U.S. consumption had climbed to more than 20 million b.p.d.
Nor is domestic production likely to spike upward because of some new find, analysts say. By one estimate, some 80% of all the wells ever drilled in the world have been drilled in the U.S.
Because of all this, the U.S. is now highly — perhaps even dangerously — dependent on other nations for its transportation fuels, particularly Canada and Mexico, but also Saudi Arabia, Venezuela, Nigeria, and Iraq.
One immediate problem for the U.S. is that its leaders in Washington too often see the oil supply situation "largely as a political problem," argues Mr. Roberts, author of 2004's The End of Oil. Too many of them insist that if only the U.S. government would allow oil drilling in the Arctic National Wildlife Refuge, or if only U.S. companies were allowed back into the rich Saudi oil fields, the problem would be solved, he adds.
Yet rising prices for gasoline and crude oil already demonstrate something else — that worldwide demand is gaining on, and could soon overtake, supply, Roberts says. If demand keeps rising, he adds, "I don't think anyone in the West knows" whether oil exporters, particularly in the volatile Middle East, can — or will — meet that demand.
Copyright 2005, The Christian Science Monitor

China holds the levers of the world economy

As Chinese President Hu Jintao prepares to visit New York for this week's UN summit, there appears to be anxiety in Washington over China's rapid rise. "Many US commentators are comparing China's rise to that of Japan early last century, the last time an Asian power seriously entered the big-power ranks," writes Hamish McDonald. With billions of dollars' worth of foreign reserves, increasing economic and military relations with other major world players, Beijing is certainly broadening its reach. However, writes McDonald, "China is far behind the US in economic and military power, and dependent on America for its economic modernization." Regardless, the perception remains: "China seems to be holding the levers of the world economy," he says. – YaleGlobal

Hail to the Chief
Suddenly, China holds the levers of the world economy – and Washington is worried

Hamish McDonald
The Sydney Morning Herald, 13 September 2005

WANG Xiaoyun is the face of China that fascinates and alarms the United States. A mathematics professor at Beijing's elite Tsinghua University, she recently startled US security circles by breaking a key US Government data encryption formula called SHA-1.
In the arcane world of high-level encryption and code breaking, SHA-1 is an algorithm for creating what is known as a "hash" - a single number representing a larger body of information. Wang's work exposed an unsuspected weakness in what was thought an almost unbreakable code.
Although Washington is increasingly worried by purposeful hacking into its secret databases that originates in China, Wang is no electronic spy, and wanted to present her findings to a meeting of US cryptographers in California last month.
But despite applying weeks in advance, Wang couldn't get a US visa in time to attend; nor could eight of the nine other Chinese researchers who applied. An associate, also Chinese but living in the US, presented her paper.
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Wang, however, is not making too much of it. "What has been reported [in The New York Times and in scientific circles] was enough," she said this week. "If the chance comes again I'd like to go - exchanges between scholars like this are necessary."
The visa problems for Chinese scientists reflects growing unease in Washington about the speed with which China is growing, the penetration of its companies into technology, and what seems like the steady closing of the military capability lead enjoyed by the US armed forces.
This and many other aspects of China's rise, like the economic penetration of Latin America, is the uneasy background to this week's visit to New York by the Chinese President and Communist Party chief, Hu Jintao.
Suddenly, China seems to be holding the levers of the world economy. With foreign reserves of $US711 billion ($920 billion), it holds nearly $US500 billion in US treasury bonds and other American securities. It is one of the leaders among the Asian industrial countries that keep the US housing and consumer boom going by providing the US Federal Reserve chairman, Alan Greenspan, with the liquidity for his soft-interest rate policy. A switch of Chinese foreign reserves to euros or yen - or a big revaluation of its yuan to encourage domestic spending - could force up US interest rates, bring the spending party to an end, and scupper the Republican Party's chances of staying in the White House after 2008.
General Motors is making 40 per cent of its worldwide profits in China, while it and other US firms have put $US42 billion into factories and other investments there so far this decade. Entire corporate boards of global giant companies ranging from Time Warner to BHP Billiton have been touring China to survey opportunities.
Following a cave-in by their counterparts at the European Union, US commerce officials are still trying to negotiate a deal to moderate Chinese clothing imports that threaten 600,000 jobs in the US textile sector, following a surge released by the lifting of World Trade Organization quotas at the start of the year. This year, the US is facing a $US225 billion trade deficit with China.
In July a bid by the oil company Chevron for the world's ninth-biggest oil producer, Unocal, was aced by a $US18.5 billion offer by China National Offshore Oil Corp, partly backed by cheap finance provided by reserve-rich Beijing. That bid was dropped on August 2 after Chevron whipped up alarm in the US Congress. The Chinese corporation went on to snap up a Canadian firm with sizeable oil assets in Kazakhstan, albeit a much smaller buy.
Meanwhile, Latin America's latest populist challenger to US hegemony in its hemisphere, Venezuela's President, Hugo Chavez, is riding high on China's underwriting of his plans to double oil production to 5.1 million barrels a day by 2012. Swathes of Brazil are devoted to growing soya beans for China, while its iron ore mines are expanding to fill ships heading to China through a Panama Canal partly run by a Beijing-favoured Hong Kong tycoon, Li Ka-shing.
Last month, Chinese and Russian armed forces held war games in the Yellow Sea based on a scenario similar to an attack on a US-defended Taiwan, testing some of the high-tech equipment Moscow is offering to sell. At a Black Sea resort this week, Chinese generals agreed to buy 38 transport and tanker planes for $US1.8 billion.
Reports in US right-wing publications say US intelligence agencies are being berated in secret government reports for missing key developments in the upgrading of China's huge military, some based on secret US technology stolen by Chinese agents. The FBI is said to be focusing on a technology-collection operation mounted by Chinese front companies and researchers in the US, while in an operation codenamed Titan Rain it is said to be countering a Chinese hacking ring that is vacuuming thousands of secret files out of US government databases.
In December, China will sit at a new East Asian leaders' summit in Kuala Lumpur, at which Japan and late invitees India, Australia and New Zealand will be the main political counterbalances to a region increasingly under Beijing's sway - and even these countries are looking more and more to China for their trade growth.
In the perception put by the former CIA director James Woolsey to a congressional committee in July: "China is pursuing a national strategy of domination of the energy markets and strategic dominance of the western Pacific."
Many US commentators are comparing China's rise to that of Japan early last century, the last time an Asian power seriously entered the big-power ranks. "Could Asia's past also be its future?" asked Daniel Twining, a former adviser to the US senator John McCain, in a recent Financial Times commentary.
The wary approach adopted towards China by the US and other Western powers contrasts with their increasingly warm embrace of India. Its Prime Minister, Manmohan Singh, got a full state welcome in July including a White House banquet - rare in the Bush tenure - and a promise of nuclear and other technology because of India's trustworthiness. The British Prime Minister, Tony Blair, this week went from a business-like call in Beijing on to New Delhi, where he announced a historic partnership between the EU and India, followed by a $US1.5 billion sale of French submarines to the Indian Navy.
Beijing insists the distrust is misplaced. Hu's message to Americans will be that "China is a force for peace and China's development is peaceful in nature", says He Yafei, the Chinese Foreign Ministry's chief of North American affairs.
The limited ambit of China's ambitions has been asserted in the latest edition of the influential US journal Foreign Affairs by one of its top strategists, Wang Jisi, head of international studies at Peking University and Beijing's Central Party School, where the Communist Party's up-and-coming cadres are groomed.
Despite a "love-hate" fixation with the US among many Chinese, China is far behind the US in economic and military power, and dependent on America for its economic modernization, Wang says. Though US influence had been "tainted" by blunders like Iraq, giving China more scope, "it would be foolhardy, however, for Beijing to challenge directly the international order and the institutions favoured by the Western world - and indeed such a challenge is unlikely".
Many experts on the Chinese economy also say the syndrome of China financing America's deficits is more likely to be broken on the US side. China's corrupt banks and moribund sharemarkets cannot divert reserves into efficient domestic investments. July's token revaluation of the yuan, by 2.1 per cent, and its peg to a murky currency basket that still seems 90 per cent based on the US dollar, shows the reluctance of China's communists to risk a domestic recession that could weaken the party's grip.
"My money says the US could survive a disruption in the dependency relationship much more easily than could China," says Michael Pettis, professor of finance in Peking University's management school.
Other China watchers put a different slant to bids like China National Offshore's tilt for Unocal. Rather than an extension of Chinese communist power into the petrol tanks of America, it was an attempt by the Chinese firm to break free of Beijing's grip and turn itself into a multinational. For its own part, Beijing is putting more into its spin in Washington to stave off a backlash and give itself more time for fast growth.
Its huge Washington embassy of 150 diplomats, soon to move to a glittering new building designed by the Chinese-American architect I.M. Pei, is headed by the urbane Zhou Wenzhong, British-educated one-time interpreter for the late supremo Deng Xiaoping, and a former ambassador to Australia. Like his counterpart in Canberra, Fu Ying, he hops quickly into controversies about China with modest comments.
After the recent Russian-Chinese war games, for example, Zhou said China's military was still "basically semi-mechanised … let alone information-based". About 10 of his staff work directly on liaison with congressmen, under the savvy counsellor Su Ge, a former academic, and the embassy employs top lobbying firm Hogan & Hartson and top law firms like McDermott, Will & Emory.
Their efforts are augmented by the Chinese fixers, many of them former classmates of Beijing's top cadres, employed on multimillion-dollar packages by US investment banks to cement share floats and corporate acquisitions yielding huge success fees.
Behind that, China has a natural lobby in US big business. About 60 per cent of China's exports are produced by foreign-controlled firms, many American. In high-tech and patented areas, it's 80 per cent, and most of the profits are reaped offshore by patent and brand owners. "No wonder foreign capitalists are among the most enthusiastic cheerleaders of China's rise," says Fei-Ling Wang, a China specialist at the Georgia Institute of Technology.
Source:The Sydney Morning Herald Rights:Copyright © 2005 The Sydney Morning Herald

China looks to democracy to cure its ills

By Fong Tak-ho

HONG KONG - Over the past 16 years, the Chinese leadership has tried its best to dodge democratic reform while looking for alternative measures to stamp out rampant corruption and increase government efficiency. However, it seems to have recently come to the conclusion that there is just no way other than democratic reform.

Chinese President Hu Jintao has indicated that China will institute a program of democratic reforms, and Premier Wen Jiabao has given more detail, pledging to introduce direct elections at the township level "within a couple of years".

Hu and Wen chose to make their announcements during international events shorthly before Hu's trip last week to the United Nations summit meeting in New York. This could be a sign that both are eager to project a reformist image to the international community as part of efforts to defuse the theory of a "China threat" from what is still officially a communist government.

"China will press for democratic progress, unswervingly reestablish democracy, including direct elections," the premier, who favors mild reform, told a news conference prior to the 8th EU-China summit on September 5. "If we Chinese people can manage a village, I believe they can manage a town in several years. This system [of direct voting] will be realized step by step."

Visiting British Prime Minister Tony Blair, who sat next to Wen, was reportedly "shocked" when he heard the premier's remarks. Blair shouldn't be surprised. What Wen is talking about is only a mild democratic reform package. Similar political schemes were introduced as early as 1988.

Former Chinese leaders, such as late Communist Party party chiefs Hu Yaobang and Zhao Ziyang, considered what Wen is now planning. Such initiatives came to a sudden halt in 1989 when Hu Yaobang passed away, three years after the pro-reform leader was sacked from his post, which immediately sparked an outcry for more democracy. This pro-democracy campaign culminated in the showdown at Tiananmen Square on June 4, 1989 and the replacement of Zhao Ziyang by Jiang Zemin.

During Jiang's era, direct elections were introduced to Chinese villages. Nevertheless, critics said this was far from enough.

The Chinese government has now exhausted other measures aimed at maintaining social stability, and all are considered to have been unsuccessful. Former premier Zhu Rongji's state-owned enterprise reforms, for instance, backfired as the procedure for management buy-out resulted in even more corruption and embezzlement. (The leaders all agreed that economic reform had a strong political aspect.) Administrative measures alone have proven a poor substitute for democracy.

When China was under Jiang's rule, corruption got worse as individual corrupt officials collaborated with each other, and in recent years the central government has exposed corrupt syndicates involving hundreds of officials.

Meanwhile, many local officials have made use of their unchecked power to exploit natural resources. They have received kickbacks from property developers, and they run coal mines without considering the impact on the environment. Beijing realizes it could face an ecological disaster should this trend remain unaddressed.

When the Jiang administration was replaced by Hu Jintao's team in 2003, Zhao's former secretary, Wen Jiabao, became premier. Now, it looks as if Wen is determined to finish what his former boss could not.

Before Wen declared his intention to introduce more democracy, he tried to introduce administrative measures to lift the efficiency of his civil service. He also issued a spate of government decrees stressing the need to address grassroots problems.
Most government officials, however, turned a deaf ear to these repeated calls. The reason is simple: officials in China are appointed, instead of being elected, and they are not accountable at the grassroots level.

For a long time, Wen has been trying hard to reduce redundancy, to streamline the bulky administrative structure. Like previous streamlining efforts, the plan to cut down the size of the government has met with a huge amount of resistance. To change this situation, Wen has to make sure that the grassroots' voices are heard.

Another reason Wen has to introduce democracy at the township level is to check the power of provincial leaders. These leaders are at the top of the executive, judicial and legislative wings in local government, while theoretically they also have command of the army in their areas.

A provincial leader's power is essentially unchecked. Under such circumstance, the Chinese central government has in the past empowered city and township governments with financial autonomy to prevent the provincial government from becoming too powerful. But this measure has not been very effective as city leaders also can be corrupt.

Thus, the central government is contemplating scrapping the city's role in controlling the city's budget. However, a new problem arises. There are thousands of cities and towns in a single province, and it is very hard for the province to supervise all their operations. Thus the central government is now convinced that corruption at the township level can only be checked by democracy being introduced at that level.

Now it is a question of timing beyond the broad "within a couple of years" promise. No detailed timetable has been announced. In the most optimistic scenario, this reform could be incorporated in the working report for the 2007 17th Communist Party congress. Should Wen's idea meet great resistance, the issue could be delayed to the 18th congress in 2008. In both scenarios, Wen's promise of introducing reform "within a couple of years" could be kept.

There appears to be a rhythm of reform in Chinese history since modern-day China came into existence in 1949. Apart from the unusual period of the Cultural Revolution from 1966 to 1976, a wave of reform thinking washes over China every 14 years or so.

Taking over the mainland in October 1949, the Chinese government virtually ran the state from 1950. In 1964, when most of Mao Zedong's planned economic policies had failed and resulted in the massive famine of the late 1950s, former president Liu Shaoqi took over command of the economy and introduced some elements of market reform. Liu's reform package, however, was called off when Mao initiated the decade-long Cultural Revolution in 1966.

After this devastation, the late leader, Deng Xiaoping, won over his conservative rivals in 1978 to launch his open-door policy. After another 14 years in 1992, Deng pressed ahead with further market reforms by visiting the Special Economic Zone of Shenzhen. Now, it has been almost 14 years since Deng's call to spearhead further market reform.

This 14-year phenomenon is not merely a coincidence. Fourteen years is long enough for the government to forget the very spirit of reform, while it is also long enough for new problems to arise. Officials need to be reminded why there was a need for reform in the first place. The people need to be told how problems that appeared following the previous bout of reforms can be fixed - and this is by further and harder reform.

(Copyright 2005 Asia Times Online Ltd. All rights reserved.

Better to Be Godzilla than Bambi

Better to Be Godzilla than Bambi - By John J. Mearsheimer
China cannot rise peacefully, and if it continues its dramatic economic growth over the next few decades, the United States and China are likely to engage in an intense security competition with considerable potential for war. Most of China’s neighbors, including India, Japan, Singapore, South Korea, Russia, and Vietnam, will likely join with the United States to contain China’s power.
To predict the future in Asia, one needs a theory that explains how rising powers are likely to act and how other states will react to them. My theory of international politics says that the mightiest states attempt to establish hegemony in their own region while making sure that no rival great power dominates another region. The ultimate goal of every great power is to maximize its share of world power and eventually dominate the system.
The international system has several defining characteristics. The main actors are states that operate in anarchy—which simply means that there is no higher authority above them. All great powers have some offensive military capability, which means that they can hurt each other. Finally, no state can know the future intentions of other states with certainty. The best way to survive in such a system is to be as powerful as possible, relative to potential rivals. The mightier a state is, the less likely it is that another state will attack it.
The great powers do not merely strive to be the strongest great power, although that is a welcome outcome. Their ultimate aim is to be the hegemon—the only great power in the system. But it is almost impossible for any state to achieve global hegemony in the modern world, because it is too hard to project and sustain power around the globe. Even the United States is a regional but not a global hegemon. The best outcome that a state can hope for is to dominate its own backyard.
States that gain regional hegemony have a further aim: to prevent other geographical areas from being dominated by other great powers. Regional hegemons, in other words, do not want peer competitors. Instead, they want to keep other regions divided among several great powers so that these states will compete with each other. In 1991, shortly after the Cold War ended, the first Bush administration boldly stated that the United States was now the most powerful state in the world and planned to remain so. That same message appeared in the famous National Security Strategy issued by the second Bush administration in September 2002. This document’s stance on preemptive war generated harsh criticism, but hardly a word of protest greeted the assertion that the United States should check rising powers and maintain its commanding position in the global balance of power.
China is likely to try to dominate Asia the way the United States dominates the Western Hemisphere. Specifically, China will strive to maximize the power gap between itself and its neighbors, especially Japan and Russia, and to ensure that no state in Asia can threaten it.
It is unlikely that China will go on a rampage and conquer other Asian countries. Instead, China will want to dictate the boundaries of acceptable behavior to neighboring countries, much the way the United States does in the Americas. An increasingly powerful China is also likely to try to push the United States out of Asia, much the way the United States pushed the European great powers out of the Western Hemisphere. Not incidentally, gaining regional hegemony is probably the only way that China will get back Taiwan.
Why should we expect China to act differently than the United States? U.S. policymakers, after all, react harshly when other great powers send military forces into the Western Hemisphere. These foreign forces are invariably seen as a potential threat to American security. Are the Chinese more principled, more ethical, less nationalistic, or less concerned about their survival than Westerners? They are none of these things, which is why China is likely to imitate the United States and attempt to become a regional hegemon. China’s leadership and people remember what happened in the last century, when Japan was powerful and China was weak. In the anarchic world of international politics, it is better to be Godzilla than Bambi.
It is clear from the historical record how American policymakers will react if China attempts to dominate Asia. The United States does not tolerate peer competitors. As it demonstrated in the 20th century, it is determined to remain the world’s only regional hegemon. Therefore, the United States will seek to contain China and ultimately weaken it to the point where it is no longer capable of dominating Asia. In essence, the United States is likely to behave toward China much the way it behaved toward the Soviet Union during the Cold War.
 
Nukes Change Everything - Zbigniew Brzezinski responds.
As an occasional scholar, I am impressed by the power of theory. But theory—at least in international relations—is essentially retrospective. When something happens that does not fit the theory, it gets revised. And I suspect that will happen in the U.S.-China relationship.
We live in a very different world than the one in which hegemonic powers could go to war without erasing each other as societies. The nuclear age has altered power politics in a way that was already evident in the U.S.-Soviet competition. The avoidance of direct conflict in that standoff owed much to weaponry that makes the total elimination of societies part of the escalating dynamic of war. It tells you something that the Chinese are not trying to acquire the military capabilities to take on the United States.
How great powers behave is not predetermined. If the Germans and the Japanese had not conducted themselves the way they did, their regimes might not have been destroyed. Germany was not required to adopt the policy it did in 1914 (indeed, German Chancellor Otto von Bismarck followed a very different path). The Japanese in 1941 could have directed their expansionism toward Russia rather than Britain and the United States. For its part, the Chinese leadership appears much more flexible and sophisticated than many previous aspirants to great power status.
Showing the United States the Door - John J. Mearsheimer responds.
The dichotomy that you raised between theory and political reality is an important one. The reason that we have to privilege theory over political reality is that we cannot know what political reality is going to look like in the year 2025. You mentioned that you traveled to China recently and talked to Chinese leaders who appear to be much more prudent about Taiwan than the conventional wisdom has it. That may be true, but it’s largely irrelevant. The key issue is, What are the Chinese leaders and people going to think about Taiwan in 2025? We have no way of knowing. So today’s political realities get washed out of the equation, and what really matters is the theory that one employs to predict the future.
You also argue that China’s desire for continued economic growth makes conflict with the United States unlikely. One of the principal reasons that China has been so successful economically over the past 20 years is that it has not picked a fight with the United States. But that logic should have applied to Germany before World War I and to Germany and Japan before World War II. By 1939, the German economy was growing strongly, yet Hitler started World War II. Japan started conflict in Asia despite its impressive economic growth. Clearly there are factors that sometimes override economic considerations and cause great powers to start wars—even when it hurts them economically.
It is also true that China does not have the military wherewithal to take on the United States. That’s absolutely correct—for now. But again, what we are talking about is the situation in 2025 or 2030, when China has the military muscle to take on the United States. What happens then, when China has a much larger gross national product and a much more formidable military than it has today? The history of great powers offers a straightforward answer: China will try to push the Americans out of Asia and dominate the region. And if it succeeds, it will be in an ideal situation to deal with Taiwan.
America’s Staying Power - Zbigniew Brzezinski responds.
How can China push the United States out of East Asia? Or, more pointedly, how can China push the United States out of Japan? And if the United States were somehow pushed out of Japan or decided to leave on its own, what would the Japanese do? Japan has an impressive military program and, in a matter of months, it could have a significant nuclear deterrent. Frankly, I doubt that China could push the United States out of Asia. But even if it could, I don’t think it would want to live with the consequences: a powerful, nationalistic, and nuclear-armed Japan.
Of course, tensions over Taiwan are the most worrisome strategic danger. But any Chinese military planner has to take into account the likelihood that even if China could overrun Taiwan, the United States would enter the conflict. That prospect vitiates any political calculus justifying a military operation until and unless the United States is out of the picture. And the United States will not be out of the picture for a long, long time.
It’s Not a Pretty Picture - John J. Mearsheimer responds.
If the Chinese are smart, they will not pick a fight over Taiwan now. This is not the time. What they should do is concentrate on building their economy to the point where it is bigger than the U.S. economy. Then they can translate that economic strength into military might and create a situation where they are in a position to dictate terms to states in the region and to give the United States all sorts of trouble.
From China’s point of view, it would be ideal to dominate Asia, and for Brazil, Argentina, or Mexico to became a great power and force the United States to concentrate on its own region. The great advantage the United States has at the moment is that no state in the Western Hemisphere can threaten its survival or security interests. So the United States is free to roam the world causing trouble in other people’s backyards. Other states, including China of course, have a vested interest in causing trouble in the United States’ backyard to keep it focused there. The picture I have painted is not a pretty one. I wish I could tell a more optimistic story about the future, but international politics is a nasty and dangerous business. No amount of good will can ameliorate the intense security competition that will set in as an aspiring hegemon appears in Asia.

Zbigniew Brzezinski is a counselor at the Center for Strategic and International Studies.
John J. Mearsheimer is the R. Wendell Harrison distinguished service professor of political science at the University of Chicago, where he codirects the Program in International Security Policy. He is the author of The Tragedy of Great Power Politics (New York: W.W. Norton, 2001).

Clash of the Titans

Clash of the Titans

By Zbigniew Brzezinski, John J. Mearsheimer

Is China more interested in money than missiles? Will the United States seek to contain China as it once contained the Soviet Union? Zbigniew Brzezinski and John Mearsheimer go head-to-head on whether these two great powers are destined to fight it out.
Make Money, Not War - By Zbigniew Brzezinski
Today in East Asia, China is rising—peacefully so far. For understandable reasons, China harbors resentment and even humiliation about some chapters of its history. Nationalism is an important force, and there are serious grievances regarding external issues, notably Taiwan. But conflict is not inevitable or even likely. China’s leadership is not inclined to challenge the United States militarily, and its focus remains on economic development and winning acceptance as a great power.
China is preoccupied, and almost fascinated, with the trajectory of its own ascent. When I met with the top leadership not long ago, what struck me was the frequency with which I was asked for predictions about the next 15 or 20 years. Not long ago, the Chinese Politburo invited two distinguished, Western-trained professors to a special meeting. Their task was to analyze nine major powers since the 15th century to see why they rose and fell. It’s an interesting exercise for the top leadership of a massive and complex country.
This focus on the experience of past great powers could lead to the conclusion that the iron laws of political theory and history point to some inevitable collision or conflict. But there are other political realities. In the next five years, China will host several events that will restrain the conduct of its foreign policy. The 2008 Olympic Games is the most important, of course. The scale of the economic and psychological investment in the Beijing games is staggering. My expectation is that they will be magnificently organized. And make no mistake, China intends to win at the Olympics. A second date is 2010, when China will hold the World Expo in Shanghai. Successfully organizing these international gatherings is important to China and suggests that a cautious foreign policy will prevail.
More broadly, China is determined to sustain its economic growth. A confrontational foreign policy could disrupt that growth, harm hundreds of millions of Chinese, and threaten the Communist Party’s hold on power. China’s leadership appears rational, calculating, and conscious not only of China’s rise but also of its continued weakness.
There will be inevitable frictions as China’s regional role increases and as a Chinese “sphere of influence” develops. U.S. power may recede gradually in the coming years, and the unavoidable decline in Japan’s influence will heighten the sense of China’s regional preeminence. But to have a real collision, China needs a military that is capable of going toe-to-toe with the United States. At the strategic level, China maintains a posture of minimum deterrence. Forty years after acquiring nuclear-weapons technology, China has just 24 ballistic missiles capable of hitting the United States. Even beyond the realm of strategic warfare, a country must have the capacity to attain its political objectives before it will engage in limited war. It is hard to envisage how China could promote its objectives when it is acutely vulnerable to a blockade and isolation enforced by the United States. In a conflict, Chinese maritime trade would stop entirely. The flow of oil would cease, and the Chinese economy would be paralyzed.
I have the sense that the Chinese are cautious about Taiwan, their fierce talk notwithstanding. Last March, a Communist Party magazine noted that “we have basically contained the overt threat of Taiwanese independence since [President] Chen [Shuibian] took office, avoiding a worst-case scenario and maintaining the status of Taiwan as part of China.” A public opinion poll taken in Beijing at the same time found that 58 percent thought military action was unnecessary. Only 15 percent supported military action to “liberate” Taiwan.
Of course, stability today does not ensure peace tomorrow. If China were to succumb to internal violence, for example, all bets are off.
If sociopolitical tensions or social inequality becomes unmanageable, the leadership might be tempted to exploit nationalist passions. But the small possibility of this type of catastrophe does not weaken my belief that we can avoid the negative consequences that often accompany the rise of new powers. China is clearly assimilating into the international system. Its leadership appears to realize that attempting to dislodge the United States would be futile, and that the cautious spread of Chinese influence is the surest path to global preeminence.

Chinese economy continues to boom

by Quentin Sommerville
BBC News, Shanghai

China's growth shows no sign of slowing, according a new report by the Organisation for Economic Cooperation and Development (OECD).


In its first analysis of China's economy, the OECD said the private sector now provided half its output.

It found much to praise in one of the most rapid economic transformations of modern times but said there was also room for progress in key areas.

China must do more to improve education spending and protect the environment.

Private sector engine

China's economy has grown by an average of 9.5% a year over the past 20 years and the OECD says it won't slow down any time soon.

It predicts that China will overtake most Western economies in the next five years.

In economic terms at least, the state and communist party's grip on the Chinese people is weakening.

Well over half the national income now comes from the private sector, generating most of its new jobs.

But China's cradle to grave welfare system has disappeared.

Only a fifth of the country's rural population, its poorest, have any kind of health cover.

Pollution problem

The OECD says the government needs to spend more on health and education.

The quality of the environment is also a serious cause for concern.

Five of the ten most polluted cities in the world lie in China.

The OECD warns that with the pace of economic change remaining strong, the state must work harder to reduce pollution.

China Rising

You may have heard or read about the DoD's latest annual report to Congress on China's military power. There was a good story on NPR last week about it. I've only recently become interested in the "rise of China" debates. But the more I read, the more I'm convinced it's much ado about nothing. China wants to be seen as a great power. It recognizes that the road to take is through economic strength as well as military strength. This shouldn't threaten the U.S. China needs foreign direct investment and values its trade relations with the U.S. As for military strength, China is modernizing its forces. But this seems related mainly to Taiwan and the perception that it needs a modern, high-tech military capable of waging war like the U.S. is able to. That doesn't mean against the U.S. Anyway, the report is suprisingly, highly readable and talks not only about force size but about strategic motivations. It's only about 45 pages. Take a look.

New Cold War? U.S. adapting to shifts in Pacific

Shifts in Pacific force U.S. to adapt thinking
New plans reflect reaction to China's growing power

By Edward Cody
Updated: 5:31 a.m. ET Sept. 17, 2005
ANDERSEN AIR FORCE BASE, Guam - Adull-gray B-2 bomber sat poised in a typhoon-proof air-conditioned hangar, its bat wings stretching 172 feet across. The bomb bay was fitted for 80 GPS-guided bombs, at 500 pounds each, that could be delivered to any target in Asia within a few hours.

The hulking stealth aircraft is a symbol of new times in the Pacific.

"Having this airplane in theater sends a message to the world," said Air Force Lt. Col. Tom Bussiere, of St. Johnsbury, Vt., who arrived at Andersen last February with four of the boomerang-shaped strategic warplanes.

The deployment of Bussiere's squadron, replacing a contingent of aging B-52s, marked part of a broad U.S. military realignment in the fast-changing Pacific. The reposturing, scheduled to run over several years, has been designed to strengthen U.S. military forces in Asia and usher them into a new era, reacting primarily to China's expanding diplomatic, economic and military power.

The rise of China as a regional force has shaken assumptions that had governed this vast region since the end of World War II, including that of uncontested U.S. naval and air power from California to the Chinese coast. With those days soon to end, senior officers said, the U.S. military in Asia is retooling to reflect new war-making technology, better prepare for military crises and counter any future threat from the emergent Chinese navy and air force.

Asian Cold War?
Some U.S. specialists have predicted an Asian Cold War or outright conflict as a newly muscular China gets ready to project power beyond its shores. But U.S. military planners in the region have a different interpretation of the Chinese challenge. The goal, they said in interviews, is to maximize U.S. forces here -- as demonstrated by the B-2 deployment. However, the planners also said the United States was seeking to build a network of contacts with the Chinese government and military through which the power overlap could be managed rather than fought over.

"Do we have to have conflict because of the rise of China? I don't believe so," said Adm. William J. Fallon, who heads the Hawaii-based Pacific Command from an office with a sweeping view of Pearl Harbor and the vast ocean beyond.

"As they grow, there's going to be an inevitable push as they take advantage of their economic ability to improve their military capabilities," he said of the Chinese. "We ought to recognize that as a reality. This is not a zero-sum game.

"I do not buy the program," he said, referring to the presumption that conflict cannot be avoided. "I just don't buy it."

Fallon said he had received a clear mandate in this regard from Washington, despite widely noticed remarks in June from Defense Secretary Donald H. Rumsfeld questioning China's motives in modernizing its military forces. In addition, Fallon said in an interview, this approach means China's cultivation of stronger diplomatic and military ties with other Asian nations does not have to compete with U.S. changes in the Pacific.

"A rising China that is actively engaged in helping the countries of the region maintain security and stability can be a very good thing," he explained.

The admiral, who has led the Pacific Command for six months, got his start building military ties with China during a maiden visit there Sept. 5-9. Although he and his 300,000 troops have responsibility for 43 countries and more than 100 million square miles, Fallon said China's size and growth make it the center of his network-building efforts.

Eventually, he said during a stop in Beijing, he would like military-to-military contacts to grow to the point where he could invite Chinese officers to observe U.S.-South Korean military exercises. But, he acknowledged, there is a long path ahead before that would be possible.

The Taiwan factor
Despite the resolve to get along, the U.S. military in Asia has long faced off with China as part of the struggle over Taiwan. Many of the U.S. moves underway in Asia have been designed to better counter the improving Chinese military in any conflict over Taiwan. Similarly, many of China's weapons acquisitions and other improvements have been made with a view to the possibility of fighting the United States over Taiwan.

This uneasy equation, Fallon said, is "a fact of life."

Under the Taiwan Relations Act, the United States has pledged to assist Taiwan in its defense. Whether this would mean military intervention in the event of a Chinese attack would be up to the leadership in Washington. But conversations with U.S. military planners in the region made it clear they feel mandated to be ready if it comes to that.

In his confirmation hearing to become Air Force chief of staff, Gen. T. Michael Moseley told the Senate Armed Services Committee in June that calculating the right mix of U.S. air power in Asia to defeat China in case of conflict was "at the top of my list." Fallon, in hearings several months earlier, expressed concern that recent Chinese military improvements, particularly in submarines, should not be allowed to alter the balance against Taiwan and, in case of conflict, U.S. forces that could be sent in to help.

The two were referring to the fruits of China's two-decade-old military modernization program. After years as the world's largest military reliant chiefly on masses of soldiers, the Chinese armed forces have sought to leap into the age of electronic warfare. Through acquisitions from Russia and elsewhere, along with developments in their own defense industry, they have laid the groundwork for a newly potent navy and air force, equipped with modern missiles able for the first time to pose a threat to U.S. forces in the region.

The long-standing danger of Taiwan becoming a reason to go to war against China has been part of the broader military realignment, contributing to concern over the extent to which China's rise changes the environment for U.S. military forces.

"China is a huge piece of the puzzle right now, and the military certainly recognizes it," said Col. Michael Boera, who commands the 36th Air Expeditionary Wing at Andersen.

Shifting Japan
Another part of the U.S. military's new environment is a shifting Japan, which has moved away from postwar pacifism and tightened strategic ties with the United States. One clear sign of the evolution was Japan's decision to buy PAC-3 and Aegis anti-missile systems from the United States. The layered defense system, Japanese and U.S. officials noted, was designed to protect Japan -- and U.S. forces based in Japan -- against any threat from Chinese medium-range missiles as well as any North Korean attack.

Some Taiwanese officials have suggested the possibility of an integrated U.S., Japanese and Taiwanese missile defense system based on PAC-3 and Aegis. Fallon noted, however, that Taiwan's defense spending was nowhere near the level needed for that; the Taipei government has still not decided whether to finance purchase of a PAC-3 system on offer from Washington for the last four years.

Nonetheless, Japan and the United States for the first time last February identified stability around Taiwan as a "common strategic objective." Although China complained, Japanese officials called the decision a logical response to China's expanding missile arsenal. Southern Japanese islands, including Okinawa and its many U.S. forces, fall well within Chinese missile range, they noted.

Experts debate end of plentiful oil era

By George Jahn
Associated Press

VIENNA, Austria — Fact: World oil production will peak someday, and supplies will start running out. But when will the tipping point come — in years, decades, or a couple of months from now?

The oil industry says crude will be plentiful for at least another generation. But some experts argue reserves are overstated, oil technologies are limited and demand, sharply boosted by the needs of China and India, could soon outpace supply.

European Union finance ministers are asking the Organization of Petroleum Exporting Countries to ramp up production when the Saudi-led cartel meets Sept. 19 in Vienna — despite the failure of similar boosts over the past year and a half.

Skeptics say that won't work.

"World oil production is going to peak on American Thanksgiving, with a three-week period of uncertainty on each side," declares Princeton professor, geologist and oil maverick Kenneth S. Deffeyes. He uses a formula first developed to pinpoint with near accuracy 1971 as the start of oil production decline in the United States.

Once supply begins to dwindle, the years to follow will see shortages that at best will cause "global recession, possibly worse than the 1930s Great Depression," says Deffeyes. At worst, he warns of "war, famine, pestilence and death."

Deffeyes' prediction is clearly controversial. Still, it is gaining an audience, and dozens of energy experts and academics say his arguments have merit.

With supply already barely matching demand and prices high and rising, the U.S. oil giant Chevron has begun running ads declaring that "the era of easy oil is over." And normally skeptical organizations are expressing worry.

"The world has never faced a problem like this," says a report prepared this year for the U.S. Department of Energy's National Technology Laboratory. Although oil companies have searched intensively for new oil finds, "results have been disappointing," says the report, from Science Applications International, which focuses on security and energy concerns.

"Oil peaking will be abrupt and revolutionary," says the report.

Still, oil companies and governments are betting — at least in public — that new discoveries and technology will keep the world supplied for at least the next generation. And there are those who would welcome the tipping point, believing the psychological impact will push the world into a serious drive to wean itself off oil.

The U.S. Geological Survey has predicted that a peak in recoverable oil production won't come until 2037, and Saudi Oil Minister Ali Naimi, in a recent speech to industry experts declared that "technological innovation will allow us to find and extract more oil around the world."

Kenji Kobayashi of the global watchdog International Energy Agency wrote this year that global energy demand will grow by nearly 60 percent by 2030, and oil will remain the fuel of choice. He urged more exploration and exploitation efforts, noting a worrisome drop in oil discoveries in recent years.

Proponents of plentiful oil disagree, saying the world's proven reserves amount to 1,277 billion barrels and expected technological advances will soon open up supplies now impossible or unprofitable to exploit.

That, they argue, gives the world a decades-thick cushion to develop other energy sources.

"There will be an increase of production for the next 20 to 25 years. Only after that may we face a decline," says Helmut Langanger, head of exploration and production at Austria's OMV oil company.

Wrong, say the critics: As oil need and the pace of production grow, so will the rate of reserves diminish.

More worrisome are claims of inflated reporting by the Saudis, Iran and most other OPEC members whose national oil companies are not legally subject to audits and other controls. Even firms like Shell and Chevron are thought to base their proven reserve figures in the Middle East in part on unchecked numbers provided by OPEC-member state companies.

OPEC nations deny padding their figures, but even governments are becoming openly skeptical.

Will Our Next Oil Crisis Be With China?

Will Our Next Oil Crisis Be With China? While America Focuses on Hurricane Katrina, China Quietly Buys Up Global Oil Reserves

While U.S. oil companies focus on recovering from Hurricane Katrina and consumers are paying over $3 a gallon for gasoline in most parts of the country, America's next energy crisis is looming quietly in the background, according to Jim Trippon, editor of the China Stock Digest.
Houston, TX (PRWEB) September 17, 2005 -- Americans are suffering at the gas pump while U.S. oil companies recover from Hurricane Katrina. Although the American public is focused on the devastation in New Orleans and Mississippi, China stock expert Jim Trippon says, "America’s next oil crisis is quietly brewing already and that crisis is with China."

Most American's will remember the recent news of China's attempt to purchase Unocal. According to Trippon, the multi-billion dollar deal, which was called off due to vocal Congressional opposition, is only a foretaste of the coming global competition for oil reserves. Trippon cites as proof the deal announced this week that China’s two largest oil companies will buy the assets of Canada’s EnCana in Ecuador for $1.42 billion.

Chinese President Hu Jintao, recently speaking at the United Nations, urged heads of state to work together for energy market stability. However, Trippon notes that it is only natural to expect that China will pursue the "economics of self interest" in an era of rapid economic growth and sky high oil prices. Trippon points at China’s policy of "Energy Security" as a possible reason for China quietly buying oil reserves while America is focused on its recent hurricane.

Trippon feels the mainstream investment community has overlooked the importance China’s growing power in world energy markets and what it will mean for American consumers at the pump. "We had better get used to high gas prices," says Trippon. Trippon, an investment consultant to some of America's wealthiest families, is also the editor of the China Stock Digest.

The China Stock Digest which will launch in December 2005, is a new monthly publication that focuses on helping individual investors and business people understand and profit from China’s economic trends and rapid growth.

Trippon is available for media interviews on short notice. For further information or to schedule an interview with Jim Trippon, contact Amal Zaid at 713-661-3806 or reach Trippon directly 24/7 at 713-498-8849.

CHINA-ASEAN ECONOMIC RELATIONSHIP BOOMING

Friday September 16, 2005, 2:24 pm

BEIJING, Sept 16 Asia Pulse - The trade and economic co-operation between China and the Association of Southeast Asian Nations (ASEAN) has been deepening and broadening, a Chinese commercial official said yesterday. He added that the implementation of the free trade agreement is in full swing.

Fu Ziying, assistant minister of commerce, said the scale of China-ASEAN trade and economic co-operation has been growing, and its level improving, ushering in "a prime era" of development.

Since launching the China-ASEAN free trade agreement in 2002, bilateral trade has increased by an annual rate of 38.9 per cent, Fu said at a State Council Information Office press conference.

Last year, bilateral trade registered at US$105.9 billion, reaching the US$100 billion target one year ahead of schedule, he said.

In the first half of this year, bilateral trade hit US$59.76 billion, up by 25 per cent year-on-year.

ASEAN is now China's fourth largest trading partner.

He went on to say that President Hu Jintao set a target during his visit to ASEAN in April that China's trade volume with ASEAN should reach US$200 billion by 2010.

Fu said that China and ASEAN are preparing for the negotiations on the service trade, which includes the areas of finance, logistics, tourism and insurance.

The negotiations are expected to be carried out late this year, Fu said.

He revealed that market opening is the major focus of the negotiations, tackling questions like which areas to open, and how and when to open.

"There are still different standpoints between China and ASEAN on such issues, so it will take a big effort from both sides," Fu said.

As for the establishment of a free trade agreement, Fu said the process is speeding up, especially after the launch of a tariff reduction programme in the region in July.

"Since the process was initiated, goods between China and ASEAN have been able to enter each other's markets smoothly with low or zero tariffs, and under improved terms of market access," he said.

According to the tariff-reduction programme, 7,000 kinds of commodities will enjoy reductions. The tariffs on 3,408 of these commodities will be cut this year.

China will hold the Second China-ASEAN Business and Investment Summit in Nanning, the capital of the Guangxi Zhuang Autonomous Region in South China, between October 19-20.

In total, 3,293 booths will be set up for the expo, which is part of the summit.

So far, 2,075 booths have been confirmed by domestic participants, and 652 by enterprises from ASEAN countries, Japan and South Korea.

More than 3,000 overseas purchasers are expected to attend the expo.

The expo will focus on demonstrating five categories of commodities: machinery and equipment, electronics and electrical appliances, hardware and building materials, light industry and handcrafts, agricultural products and foodstuffs.

(XIC)

CHINA'S LUXURY GOODS MKT FORECAST TO GROW 20% OVER NEXT 3 YRS

Thursday September 15, 2005, 3:18 pm

BEIJING, Sept 15 Asia Pulse - China's luxury goods market already the world's third largest is expected to grow by 20 per cent annually in the next three years.

That's according to an Ernst & Young report released in Beijing yesterday.

The booming economy coupled with more mature consumers has apparently led to an appetite for luxury goods.

This translates into enormous potential for global luxury goods retailers, said Conway Lee from Ernst & Young.

Lee pointed out that China's luxury market is still in its infancy, different to developed markets.

"In China the consumption of luxury goods is very much item- driven, meaning consumers search for the latest collection or products. In more developed markets consumers tend to seek experiences that pamper them, such as a luxury holiday or a service such as home delivery of groceries," Lee said.

He said foreign luxury brands face many challenges in the Chinese market. These include high rents, distribution and logistics issues, difficulties in personnel training and the need to overcome cultural differences.

Lee added that partnering local firms or entering into joint ventures may help firms overcome such challenges.

"They have to be cautious in choosing credible local partners and engage in comprehensive, on-the-ground research before entering into any such agreements," he warned.

The ability to gain a thorough understanding of China's regional markets is one of the most critical factors if a luxury brand is to be successful. Companies may consider pitching different brand names and offering different products to meet various consumer preferences in China's regional markets, he added.

Lee suggested luxury brands should be prepared to look beyond short-term profits and think about investing in China over a longer period, with the aim of securing market share before the competition does.

The recent revaluation of the renminbi is expected to help strengthen most Asian currencies and will likely spur long-term spending in the region as well as outbound travel from China, he said.

Counterfeits remain one of the biggest problems for luxury brands, the report said.

Firms could consider refreshing their designs quickly in order to keep ahead of counterfeits, Lee suggested.

Ernst & Young's report also said China's homegrown luxury brands may grow in popularity over the next five to 10 years.

Lee gave the example of Shanghai Tang, a Hong Kong based retailer which has successfully entered the global marketplace.

(XIC)