Wednesday, May 25, 2011

World Financial Security and the U.S.

Last week, I attended an international symposium on “Financial Security: China and the World,” held in Beijing and sponsored by China Institute for International Strategic Studies and the Katie Chan Foundation. Speakers came from all over the world including a former President of the European Commission, a former First Secretary of State of the UK and a former President of China’s Export and Import Bank.

Chen Fengying, George Koo & Katie Chan

Inevitably, the status of the U.S. financial health was on the minds of most of the speakers. They raised concerns over the mounting national debt and expressed skepticism as to whether any real solution has been proposed. One economist pointed out that interest payment could take up 20% of the US government revenue now and debt service by 2040 could amount to 58% of the total revenue, clearly an unsustainable proposition.

The US budget deficit continues to increase with no end in sight and counting on foreigners to continue to buy 70% of the US debt remains a keystone to the US strategy. But the foreign appetite for US treasuries cannot keep up with growing supply. As America having to print more money as the only resort becomes more obvious, foreign buyers will avoid buying rather than increase their purchase which will exacerbate the debt crisis.

Concerns were also raised over the prospects of the financially strong nations in the European Union having to bail out the weak yet again. The Germans in particular may face having to bail out the bad debt nations or bail out the over-exposed German banks that carried too much sovereign bad debt in their books. Eventually, the EU will have to create a bail out mechanism that does not look like bail outs in order to overcome domestic political pressures among donor nations.

The speaker from Australia announced that his nation suffered least from the financial tsunami and experienced no recession from 2007 to 2010. Australian banks continue to lend and provided the highest shareholder return among the world’s leading banks. In addition to having China as its major customer, he attributed strong regulation and close government supervision as the cause of the success of the banking sector.

There was universal agreement among the speakers that the world needs regulatory reform in order to prevent another financial meltdown. The speaker from Singapore pointed out that having Standard & Poor or Moody’s provide sell side credit rating for a fee is basically flawed. He offered a not-for-profit organization to compute creditworthiness based on scientifically sound methodologies and offer access to the ratings free of charge to users.

Comments by Mme Chen Fengying, Director of World Economic Studies, China Institute of Contemporary International Relations made quite an impression on me. She said while 9-11 radically changed the U.S. perspective on terrorism, 9-15 (the date Lehman Brothers filed for chapter 11) has led to financial terrorism. Heretofore the world looked up to the US financial model. Now the world needs to look for another.

Ms. Chen went on to say the US debt has now exceeded its GDP by over 30 fold*. She wondered how this could be sustainable but then she professed not to understand how 98% of dot com companies in the US could lose money and not suffer in the price of the their stock. She labeled the US as a credit card economy.

Only 11% of the US GDP comes from manufacturing while nearly twice that percentage comes from financial services sector of the economy. “Wall Street is supposed to serve the economy,” Ms. Chen said, “And not to hold the White House hostage.”

One veteran America watcher from China commented on the current US budget and debt service crisis and speculated that the two political parties will begin by taking on extreme and polarized positions but hopefully in the last minute the Congress will end brinksmanship and do the right thing. If the US government actually collapses, the financial terror that will strike the collective hearts of the world would be beyond comprehension.

I spoke by comparing the economies of Macao with Singapore and it is reported on Peoples’ Daily Online.

* A friend who read the blog commented that total US debt, public + business + financial + household, amount to approximately 52 trillion, which is 3.6 times GDP. Accounting for all public and private sector assets, US probably has a net worth about 5 times its GDP. In other words, the US debt crisis is serious but not so dire as presented by Ms. Chen.

Tuesday, May 24, 2011

A counterpoint to the Three Gorges Dam Controversy

China's Three Gorges Dam was first conceived by Dr. Sun Yat Sen in the early republican period. It was finally realized in recent times when China had the resources to build the dam. As with any high profile project, the dam attracted a lot of attention. Most from the west tend to be critical including a recent spate of them. I came across a well reasoned arguments that presented the positive sides of this project. With the author's permission, I am posting his comments below:
Some three years ago, I recall a similar article on the Three Gorges Dam by Shai Oster, in the Wall Street Journal, suggesting that disaster will soon befall the Dam. Alas, no catastrophe happened to the Dam in the intervening years, but it seems that there remains a clan of people in America anxious to see the “demise” of the Dam in some way.

If we roll back the history of the Dam, we will recall that when China applied to the World Bank for a loan to build the Dam nearly twenty years ago, it was the U.S. who exerted strong pressure on the Bank to deny loan to China. As a result China had to foot the bill herself. But China persevered. Not only did it managed to come up with the huge sum to pay for the enormous job of building the world’s largest dam (which it still is), but it also managed to finish the job on time.

Fast forward to the time of the article of Mr. Oster; at that time the Dam was not yet finished, but there was a significant carping chorus from the U.S. who cited all the factors mentioned in the present articles and more, and strongly suggested that the Dam will be a failure.

At that time I wrote a response which basically said: “Cool it!” I mentioned that from all the reports from within China, and all those who took the Yangtze River cruise through the Dam seemed to say that while the project encountered some problems, they were not such as to slow the project or to impact the project negatively.

Now to the present; I am very sad to see that the carping chorus has not been quieted. Both of the articles forward by Roger quote a “brief statement” from the Communist Party, but then try to play it up like a doomsday announcement.

It happened that Premier Wen Jiabao himself also made a brief statement a few days ago. The gist of it was that the Dam is now finished and doing its job, but that China should not forget the few problems uncovered during the building of the Dam and should work to overcome them.

The editorial from the Washington Post did acknowledge that: “Though the project has generated much-needed electric power and helped control floods, ….” But power generation and flood control were in fact the two major reasons for China to build the Dam in the first place. In all respects, the Dam seems to have carried out these two functions very well. It is now capable of generating enough electricity to power a city the size of Shanghai; and last fall it showed its mettle in helping to relieve the potential big flood plaguing the upper part of the Yangtze.

For a project of unprecedented magnitude, it should not be surprising that it encountered various difficulties. The important question is whether they are surmountable. The “numerous problems” (actually five) cited by Venetia Rainey appear to be all readily solvable if they are seriously addressed. For example, the “small earthquakes” actually were shifting of the ground experienced by some localities because of the added weight of water. I believe the frequency of these incidences is decreasing, and by moving people away from areas where the incidences were more frequent, the problem is essentially overcome. Landslides also occurred in some of these areas, with rocks and earth falling at the side of the river. Again these occurrences are rarer now.

The silt deposits at the upstream side of the dam was something the experts in China worried about ever since the first large dam was built on the Yellow River (which infamously carries a huge volume of silt from the Loess Plateau up stream). However, the Chinese engineer devised a “silt flushing” mechanism which was first successfully applied at the Xiolangde dam, the largest on the Yellow River. The same method has been built into the Three Gorges Dam and the silt threat has been basically removed (the amount of silt on the Yangtze is much less than on the Yellow River to start with).

It will be time-wasting to refute the charges of these articles point by point. But from reports of those who visited the Dam lately via cruises or other mean, the Dam, fully operational, is looking majestic, and is enjoying a booming tourist trade. Where previously only 3000 ton ships can go from Shanghai to Chongqing, now the River can accommodate ships up to 10,000 tons. It has already played a role in flood relief on at least two occasions. In short, the Dam is alive and well, thank you!

I do however hope that the nay-sayers find better things to do. If they still want to carp, how about writing articles on the sad state of American infrastructure, where a great deal of it is old and decrepit and hardly any new construction is taking place.

Jay Hsu