Savior of the world economy
Yan Wei

WORRIES are that a further downturn of the U.S. market in the coming year will intensify cash flow shortages and spur more economic losses, resulting in a complete decline of the U.S. market and therefore slowing down the world economy. Another theory has surfaced assuming that China and the United States are the double-barreled engines of the world economy. As China’s influence spreads, it will have to complement the United States to rid the world of this crisis. Ding Yifan, Deputy Director of the Institute of World Development under the Development Research Center of the State Council, has made clear China’s growing impact on the global economy. However, as Ding wrote to the Global Times, a Beijing-based daily publication, the knockdown effect of the mortgage crisis is apparent, and emerging markets look even more vulnerable because of it. Excerpts follow:
Hard currency advantage
For many years, the U.S. economy has maintained an absolutely leading role in the world. It has been a belief that when the U.S. financial market suffers a cold, global capital markets begin to sneeze. Backed by a strong growth momentum, U.S. consumers have been able to continue heavy purchases as long as they could. As a result of the decades of easy credit that has fueled U.S. massive consumption, the global manufacturing industry was driven forward. Because of this, the U.S. Government has had to issue more treasury bonds to hedge credit accounts. These mounting dollar-denominated financial assets flew into overseas markets. To date, U.S. foreign debts have amounted to more than $9 trillion, and it has had to borrow billions of dollars overseas every day to balance its accounts. Dollar-dominant global financial markets, in addition to high interest rates, make foreign funds scramble to buy into American treasuries to earn against the margin. Rising prices of domestic assets, though always bubble-driven, also stimulate large amounts of foreign capital to flow into the United States. In the 1980s, the Ronald Reagan administration lured foreign capital through high interest rates and a strong dollar. When former President Bill Clinton presided over the country in the 1990s, the dotcom bubble was a major incentive to plenty of overseas funds, pushing the exchange rate of the U.S. dollar to continuous new records.
After the burst of dotcom bubble at the turn of the 21st century, foreign funds flew out of the U.S. stock market and its currency depreciated sharply. The Federal Reserve then raised interest rates to prevent market risks. The poor who have little wealth and weak payback capability went bankrupt and thus triggered the recent subprime crisis involving most financial institutions. If the United States cannot win back the confidence of foreign investors, it will be harder to hedge against the credit funds. Without a consumption boom, the U.S. economic engine is very likely to stall and precipitate a global decline.
China’s climbing imports and rapid growth have created a rosy economic picture. Statistics from the World Bank reveal that the total value of China’s imports is expected to witness a 17.5-percent increase in 2007. But one thing is sure: China also is challenged by insufficient domestic demand. Consumption contributes only 30 percent to the growth of China’s gross domestic product (GDP), compared to 70 percent in the United States. The country mostly imports semi-finished products such as raw materials, energy resources and component parts, and sells them to developed markets after they are processed. This is the reason why the United States cannot be replaced by China in terms of consumption.
But the passion of U.S. consumers is largely affected by wealth, meaning that if the value of their belongings (property, stocks and securities) rises, they will spend more extravagantly. On the contrary, if their assets devalue, they are reluctant to spend. When the burst of the Internet bubble hit, they cut down on expenditures, and now it is the same with the housing bubble. A shrinking U.S. market has also lowered China’s foreign trade level.
China needs to boost consumer spending, but not through credit consumption like the United States, because U.S. dollar is hard currency that is accepted worldwide. The Chinese currency is not yet that popular. And it is risky for China to take in huge speculative funds through large consumption based on its present economic status.
Tight money
The U.S. Federal Reserve had to bail out investors by offering loans after the burst of dotcom bubble, and subsequent excess liquidity has given rise to the housing bubble. When the new bubble blew out, the subprime crisis tightened cash flows. The injection of huge amounts of capital by the Federal Reserve and frequent cuts of interest rates have done little to pick up the treasury market. Some equity funds have failed to survive because of bad debts and the broken capital chain. The Federal Reserve is contemplating further cuts to interest rates to create more liquidity. Those who opposed to the loose money policy, however, are doubtful of the move’s role in rebuilding financial institutions’ confidence. They also blame it for increasing inflationary pressure in the market, where economic stagflation like in the 1970s would reoccur if credit squeeze remains despite growing money supplies. Faced with this dilemma, the Federal Reserve has to raise interest rates to curb inflation through a tighter monetary policy on the one hand, while on the other, capital bailouts are necessary to help investors survive the crisis. Against the backdrop of globalization, American companies do business the world over. But as liquidity evaporates in credit markets, parent companies have to withdraw overseas investment to ensure an adequate money supply at home. China’s bullish stock market has lured a number of speculators, and it will certainly drop as foreign institutional investors leave. If the Federal Reserve’s current monetary policy takes effect and spurs more liquidity, most U.S. capital will choose to stay in China.
Trading factors
China’s total foreign trade volume hit $1.76 trillion in 2006, occupying 65 percent of its $2.7-trillion GDP. A growth pattern over-dependent on foreign trade brings with it more financial risks. If exports to the United States structurally decline, China will take a breath from the enormous pressure to appreciate its currency. Commodities originally produced for export will be sold back into the domestic market, and inflationary pressure will be eased through lower prices. It doesn’t seem bad for Chinese consumers to purchase more and spend less, but it will certainly be a disaster for Chinese manufacturers, who will suffer losses because of reduced profits and rising mortgages.
China’s fast economic growth is also heavily dependent on imported resources to sustain its energy supply. The Federal Reserve’s easy-credit monetary policy will push prices of commodity futures up due to a dollar-calculated pricing system. Commodity prices periodically increase and decline as the value of dollar-denominated financial assets (securities and bonds) fluctuates. When American bonds yielded higher profits in the 1980s, the currency was strong and reined in the overpricing of commodity futures. In the late 1990s, large foreign capital absorbed by the Internet bubble stabilized the dollar’s value. But soon after President George W. Bush took office, dollar-denominated financial assets fell sharply along with a declining IT industry. The financial situation has worsened after the September 11 terrorist attacks in 2001 and the U.S. war in Iraq. An ever-deflated U.S. currency has resulted in the runaway increase of oil prices. The recent oil price hike has created widespread public concern out of fear that an oil crisis like the one that struck in the 1970s could come again. China is an export-oriented market without much pricing freedom, and domestic manufacturers will earn much less if commodity prices surge. Despite its growing role as a contributor to world economy, China is far less able to take the world lead by replacing the United States economically. Only when the Chinese economy becomes more export-independent and based on a solid hard currency will China not be as affected by the outside world.
 

(The Daily Mail-Beijing Review Articles Exchange Item)



The Middle East with a Washington view
Claude Salhani

LEBANON is ‘pregnant with incredible danger’. It would appear that Lebanon’s political parties suffer from collective amnesia electing to forget the consequences of a devastating civil war rather than electing a new president. And amid a lingering political crisis accentuated by the country’s leaders’ inability to agree on replacing the vacant presidency, Lebanon’s rival political and religious parties have started to re-arm. Since Emile Lahoud’s departure in late November and after 16 attempts at staging an election Lebanon remains without a president. It would be an understatement to say the situation is precarious. This is “a moment that is pregnant with incredible danger,” said Augustus Richard Norton, a faculty member of both international relations and anthropology at Boston University during a discussion held this week at Georgetown University addressing the current political impasse in Lebanon.
Norton’s is an old Middle East hand with over three decades of experience in the region’s politics. His fears of seeing the conflict spread were shared by two other scholars with similar knowledge of the area. “Things are falling apart. The Lebanese system has lost — that is if it really had it — a rudder or steering wheel,” said Michael C. Hudson, Saif Ghobash professor of Arab studies and international relations at Georgetown, as well as the author of numerous books on the Middle East. Hudson sees “new axes of conflict” emerging in what he calls “the post Taif period,” referring to the city in Saudi Arabia where the terms putting an end to the 1975-1990 civil war were negotiated amid attempts to redistribute Lebanon’s political cards to fall more in line with the country’s changing demographics. In grossly oversimplified terms, the 15-year conflict had pitted principally the country’s Muslims, backed by the Palestinians, who at that time were still based in Lebanon, against the Christian militias. “Now, the main axes appear to be Sunni vs Shias, rather than Muslims vs Christians,” said Hudson.
The political cleavage amplified since the assassination of former prime minister Rafik Hariri, as Hudson pointed out, gives the impression that there “now appears to be two Lebanons; a Lebanon of the March 14 group and a Lebanon of the March 8 group.” As a reminder for those not familiar with the inner workings of Lebanese politics, the March 14 Movement comprises the current government headed by Prime Minister Fouad Siniora, who along with Saad Hariri, the son of the assassinated former prime minister, is the political heir to Hariri’s legacy; the Christian Lebanese Forces headed by Samir Geagea — who is currently in Washington at the invitation of the Bush administration, and is expected to meet with the president this week; and Walid Jumblatt, who commands the loyalty of the majority of the country’s Druze community. On the other side of the political barricades is primarily the Shia Hezbollah organisation, backed by Iran and Syria; the less influential Druze rivals of the Jumblatt clan, and the followers of former Lebanese Army Commander General Michel Aoun. “Both are very different and we wonder which one is the real Lebanon,” pondered Hudson. But one of the virtues of the Lebanese has always been their ability to look at the bright side of very negative situations. The divide in the Lebanese political landscape, explained Bassam Haddad, “clearly is not purely sectarian and definitely not purely religious.”
For Haddad, the director of the Middle East studies programme at George Mason University and a visiting professor at Georgetown University, for the most part the conflict is not sectarian, “and so far this is one positive development in Lebanon.” If the prior civil war had divided the country along religious groups — again this is over simplification –the current crisis is seen more as the flexing of political — and military — muscle between the United States and France on one side with Syria and Iran on the other. As Haddad elucidated, “it is difficult to talk about Lebanon without involving Syria.” No doubt, Geagea’s visit to Washington — and particularly his meeting with President Bush — was orchestrated, at least in part, intent to send a message to Damascus. As the crisis gathers momentum both sides have taken to accusing each other of placing the interests of foreign powers ahead of Lebanon’s own national interest. The March 14 movement has been branded as being too pro-American, while the March 8 group on the other hand, is accused of fighting Damascus and Teheran’s battles. As Ghassan Tueni, a prominent Lebanese journalist and publisher of the country’s major newspaper noted of a previous conflict, “Lebanon is always the proxy battleground for forces from the outside.” So what comes next in the Lebanon political impasse? Most likely more of the same; more paralysis, more waiting for miracle solutions and more blaming “the other side.” A situation guaranteed to continue unabated at least until Lebanon’s political and religious leaders learn to think as a nation rather than as sects, clans or allowing themselves to be moved around as pieces on the Middle East’s chess board.

—Khaleej Times




US support for Kosovo
Hassan Tahsin

I HAVE always admired the way the former Czechoslovakia allowed the two major ethnic components in its population — Czechs and Slovaks — to go their separate ways and establish their separate independent nations. They have been maintaining cordial relations after their separation. The Balkans on the other hand presents the very opposite. Marshal Tito, because of his success against Germany in World War II, accomplished the miraculous job of uniting Serbs, Croats, Slovenians, Montenegrins, Muslims of Bosnia and Herzegovina, and Albanians in Kosovo under one strong communist nation. This heterogeneous collection of races and cultures and religions could remain as a single entity only as long as Tito was at the helm.
With the demise of Tito in 1980 the struggle for seceding and independence started to erode the stability of the communist republic. The political squabble in Balkans ended with Serbia and Montenegro emerging as the greatest winners while the Muslims of Bosnia and Herzegovina and Kosovo were the victims. The Muslim regions in the erstwhile Yugoslav Republic were dismembered. The Serbian control of the weaker elements in the region was distasteful to the United States who did not want to have a Russian protégé on the European mainland. Serbia is considered the only remaining support base for Russia in Europe after the dissolution of the Warsaw Pact.
While the US was looking for an excuse to undermine the Serbian power, it got an opportunity to challenge Serbia in the region as a champion of the deprived rights of the Muslims in Kosovo. The Russian Federation and Serbia opposed Kosovo’s attempts to gain independence with the open support of the West. Moscow mounted its criticism of the European Union and NATO’s Kosovo policy. Under the cover of NATO, the US sent its forces to Kosovo to drive out Serbia from the region. The US move was supported and appreciated by leading members of the European community such as Germany, France, Italy and Britain. As the efforts for Kosovo’s independence gained momentum, Russia threatened to use force if the US interfered in the internal affairs of Serbia while Russia’s permanent representative to the NATO, Dmitry Rogozin, warned of straining the relations between his country and NATO, unless NATO maintained a policy of nonintervention and neutrality in the internal affairs of other countries. He said his country was committed to stand by Serbia as both had a common Slav ethnic origin and religious identity.
The Serbian public launched a wave of protests and demonstrations demanding their government send its military to Kosovo to stop its attempt to break from Serbia. However, the Serbian government could not take a unanimous stand on how to deal with the precarious situation, as it did not want to invite the fury of the NATO on the one hand and the hostility of its own people on the other. With Washington’s recognition of the independence of Kosovo last month, however, Russia withdrew its threats while the Serbian government resigned because it could not fulfill the wishes of its people. Meanwhile, the United States directed the NATO forces to take necessary steps to protect the nascent state from any hostile move from the furious Serbians at least until 120 days passed over which time the independence of Kosovo would be universally recognized.—Arab News