Druckenmiller the Statesman

by Doug Noland

July 18, 2014

Geopolitical risk erupts and a hedge fund titan speaks candidly. Hedge fund manager Stanley Druckenmiller rightfully attainedlegendarystature after achieving a phenomenal 30-year track record. Throughout his career, he has successfully implemented a “top downmacro approach to investing/speculating across global markets, including a highly successful stint partnering with George Soros. Druckenmiller provided cogent remarks Wednesday at the Delivering Alpha conference covered live by CNBC:

Druckenmiller: “As a macro investor, my job for 30 years was to anticipate changes in the economic trends that were not expected by others – and therefore not yet reflected in securities prices. I certainly made my share of mistakes over the years, but I was fortunate enough to make outsized gains a number of times when we had different views from various central banks. Since most investors like betting with the central bank, these occasions provided our most outsized returns - and the subsequent price adjustments were quite extreme. Today’s Fed policy is as puzzling to me as during any of those periods and, frankly, rivals 2003 in the late-stages to early-2004, as the most baffling of a number of instances I have in mind. We at Duquesne [Capital Management] were mystified back at that time why the funds rate was one percent with the ‘considerable periodattached to it, given the vigorous economic growth statistics available at the time. I recall walking in one day and showing my partners a bunch of charts of economic statistics of that day and asking them to take the following quiz: Suppose you had been on Mars the last five years and had just come back to planet Earth. I showed them five charts and I said, ‘If you had to guess, where would you guess the Federal funds rate was?’ Without exception, everyone guessed way north of one percent, as opposed to the policy at the time which was a verbal guarantee that they would stay at one percent for a ‘considerable period of time.’ So we were confident the Fed was making a mistake, but we were much less confident in how it would manifest itself. However, our assessment by mid-2005 that the Fed was fueling an unsustainable housing Bubble, with dire repercussions for the greater economy, allowed our investors to profit handsomely as the financial crisis unfolded. Maybe we got lucky. But the leadership of the Federal Reserve did not foresee the coming consequences as late as mid-2007. And, surprisingly, many Fed officials still do not acknowledge any connection between loose monetary policy and subsequent events. That is why I am personally experiencing a sense of Deja vu.”

“I hope we can all agree that these once-in-a-century emergency measures are no longer necessary five years into an economic and balance sheet recovery. There is a heated debate as to what a ‘neutralFed funds rate would be. We should be debating why we haven’t moved more meaningfully towards a neutral funds rate. If for no other reason, so the Fed will have additional weapons available if the outlook darkens again. Many Fed officials and other economists defend their current policies by claiming the economy is better than it would have been without their ongoing stimulus. No one knows for sure, but I believe that is logical and correct. However, I also believe if you’d asked the same question in 2006 that the economy was better in 2004 to 2006 than it would have been without the monetary stimulus that preceded it. But was the economy better in total from 2003 to 2010 without the monetary stimulus that preceded it? The same applies today. To economists and Fed officials who continually cite that we are better off than we would have been without zero rate policies for long, I askWhy is that the relevant policy time frame?’ Five years after the crisis, and with growing signs of economic normalization, it seems time to let go of myopic goals. Given the charts I just showed and looking at economic history, today’s Fed policy seems not only unnecessary but fraught with unappreciated risk. When Ben Bernanke and his colleagues instituted QE1 in 2009, financial conditions in the real economy were in a dysfunctional meltdown. The policy was brilliantly conceived and a no-brainer from a risk/reward perspective. But the current policy makes no sense from a risk/reward perspective. Five years into an economic and balance sheet recovery, extraordinary money measures are likely running into sharply diminishing returns. On the other hand, history shows potential long-term costs can be quite severe. I don’t know whether we’re going to end with a mal-investment bust due to a misallocation of resources; whether it’s inflation; or whether the outcome will actually be benign. I really don’t. Neither does the Fed.”

I really appreciate Mr. Druckenmiller’s statesman-like comments. As a seasoned trader and hedge fund manager, his thought processes are conditioned to analyze things in terms of probabilities and a risk versus reward calculus. He has generated incredible investment returns and accumulated stunning wealth through a profound understanding of shifting macro backdrops, while implementing disciplined trading strategies. Basically, success depends upon intense objectivity and focus, pressing the winning bets and slashing the losers – the oldYou gotta know when to hold ‘em, know when to fold ‘em, when to walk away and when to run.”

I agree completely with Druckenmiller’s comment: “The current policy makes no sense from a risk/reward perspective.” And the critical issue of risk vs. reward gets right to the heart of the failure of contemporary central banking. As a masterful professional speculator, it was imperative for Druckenmiller to move quickly to recognize mistakes and mitigate losses. Discretionary central banking, in contrast, ensures that policy errors are followed by only greater ones. You can toss accountability and objectivity right out the window. Poor performance will see hedge fund managers lose their investors and businesses. Poor policy has led to previously unthinkable policymaker discretion and power at the Federal Reserve (and why there’s an appropriate push for a more rules-based policy approach). And when it comes to pure analytical prowess, the academic central banker is no match for the well-schooled hedge fund titan.

Druckenmiller highlights the 2003-2004 period as an example of “puzzling monetary policy. I remember my frustration with the Fed during that time. Fed funds were held at one percent until June 2004, despite an acceleration of already breakneck mortgage Credit expansion. In fact, 2004 saw annual mortgage Credit growth jump to 13.5%, marking the fourth straight year of double-digit mortgage Credit growth (and fifth of six).

Monetary policy was recklessly loose, though it was expounded in terms of an adroitrisk management approach for minimizing the probability of a very bad economic outcome. Stated differently, the Greenspan/Bernanke Fed believed aggressive monetary policies reduced the likelihood of a highly undesirable deflationary spiral. The Fed explicitly adopted the Bernanke doctrine of ignoring Bubbles and instead placed emphasis on post-Bubblemopping up” (reflationary) measures. As Druckenmiller noted, the Fed was oblivious to the risks its policies were fomenting.

I wasn’t particularly puzzled by Fed policy back in 2003/04; I simply believed our central bank was following terribly misguided doctrine. Clearly, there was a complete lack of understanding as to the myriad financial and economic risks associated with asset inflation and Bubbles. Moreover, there was overconfidence with respect to the Fed’s capacity to reflate system Credit in the event of a major securities market crisis of confidence.

With the Fed apparently having learned nothing from past experience, I find current policy somewhat more baffling. At this point, risks associated with loose monetary policy should be readily appreciated. It doesn’t make any sense that the Fed remains so dismissive of securities market excesses. And with Fed funds stuck at zero and the Fed’s balance sheet rapidly approaching $4.5 TN, our central bankers should recognize that the risks of stoking asset Bubbles are actually even greater today. After almost six years of post-crisis stimulus, Bernanke’s mopping upmaxim has understandably disappeared from Fed discourse.

From Druckenmiller: “There is a heated debate as to what a ‘neutral Fed funds rate would be. We should be debating why we haven’t moved more meaningfully towards a neutral funds rate.”

We’re inundated these days with rationalizations and justification for ongoing reckless monetary management. There are variations of thisnew neutralmantra that an extraordinary backdrop dictates that the Fed sticks with exceptionally low targeted rates for much longer. Apparently, it’s logical that the dire consequences from a period of loose monetary policy stipulate another period of ultra-aggressive monetary stimulus.

Interestingly, leading Keynesian” (inflationist) Paul Krugman has focused a bit recently on the “Wicksellian natural rate” (esteemed Swedish economist Knut Wicksell, 1851-1926):

Krugman (NYT, July 7, 2014): “The Keynesian view of monetary policy is that the central bank should, if it can, set interest rates at a level that produces full employment. Sometimes it can’t: even at a zero rate the economy remains depressed, so you need fiscal policy. But in normal times the Fed and its counterparts should be aiming at the full-employment interest rate. Wicksellian analysis is an older tradition; it argues that there is at any given time a ‘naturalrate of interest in the sense that keeping rates below that level leads to inflation, keeping them above it leads to deflation. I have always considered these approaches essentially equivalent: the Wicksellian natural rate is the rate that would lead to full employment in a Keynesian model. I have, in fact, treated them as equivalent on a number of occasions, e.g. here. Now, what about the BIS [Bank of International Settlements]? It is arguing that central banks have consistently kept rates too low for the past couple of decades. But this is not a statement about the Wicksellian natural rate. After all, inflation is lower now than it was 20 years ago.”

Similar to so many traditional metrics, axioms and concepts, Wicksell’s natural rate” is not so easily applied to the current environment. I have always been fascinated by Wicksell’s notion of a hypothetical (“natural”) rate that equates with general price and economic stability. The “Austrianschool has argued persuasively that central banks have for years fostered precarious boom and bust dynamics by pushing market yields below the “natural rate.” It makes for a provocative discussion.

From my perspective, Wicksell’s conceptualnatural rate” was derived from the interplay between the supply of and demand for a limited quantity of capital. And this gets right to the major problem I have with both contemporary finance and monetary management: There is today, on a globalized basis, no limits to either the quantity or quality of Credit. To that end, I avoid using the wordcapital.” Capital connotes something of real value – or a financial claim backed by real economic wealth. Yet too much of today’s (debit and Credit entry electronic) finance is backed by nothing. So then, what does a global regime of unfettered electronic finance imply for a “natural” or “neutral interest rate?

Brief thoughts on Wicksell’s natural rate”: I completely disagree with Krugman’s contention that modest consumer price inflation is evidence that current central bank-dictated market rates have been consistent with a Wicksellian equilibrium rate (which Krugman states appropriately supports today’s asset prices). One should instead think more in terms of general stability in various price levels throughout the system, certainly including real and financial asset prices. And one would have to be delusional to believe that asset prices have been in anyway consistent with a stable equilibrium”. Moreover, it is disingenuous to claim that asset prices have not been profoundly impacted by the almost six-year $3.5 TN increase in Federal Reserve securities holdings (Fed Credit). Simply overlay a five-year chart of Federal Reserve holdings with a chart of the U.S. stock market.

And while on the subject of a “natural rate,” I think it’s worth pondering this concept in terms of today’s extraordinarily low Treasury and corporate yields. I believe central bank policies especiallyopen-endedQE3 – have comprehensively distorted asset markets. First, the unprecedented purchases of Treasuries and MBS created liquidity/purchasing power that inflated securities prices generally. Secondly, this liquidity onslaught incited dangerous self-reinforcing excess throughout corporate debt and equities markets. And a runaway corporate securities Bubble has of late boosted the safe haven appeal of Treasuries, with sinking yields further stoking the historic Bubble throughout virtually all asset markets.

Importantly, the willingness to adopt an open-ended approach to the third round of QE has been viewed throughout the marketplace as the Fed (in concert with the global central bank community) having adopted a regime of boundless securities market support. This has profoundly affected market perceptions, hence securities pricing, with the greatest impact upon the traditionally higher-risk segments of the corporate and “structured financesecurities markets.

Stated somewhat differently, the collapse in risk premiums risk asset price inflation – is this inflationary cycle’s greatest market distortion. Indeed, I would strongly argue that unprecedented liquidity injections coupled with implied (ok, explicit) central bank market backstops has inflated the biggest Bubble yet. Any semblance of a “neutral rate” – or a stable securities marketequilibrium” – would require that central banks extricate themselves from the securities market liquidity and backstopping business. Good luck with that.

Troubled waters: the Mekong River crisis

China is bafflingly silent about strange, record-breaking changes that have been wreaking havoc on the mighty Mekong River in recent months, writes
July 18, 2014 11:37 am
A fisherman on the Mekong River, Vientiane, Laos, April 2014©Bakas Algirdas
A fisherman on the Mekong River, Vientiane, Laos, April 2014

Den Kroolong got the jolting news in a 6am phone call at his home in northern Thailand one day in December last year. His boat had disappeared. Being an experienced fisherman, he had left it tied up securely on the banks of the Mekong River, a few minutes’ drive away.

But now a friend was calling to say something extraordinary had happened overnight to the river, which separates this part of Thailand from neighbouring Laos. It had suddenly become engorged by muddy, debris-filled flood waters and had risen by several metres. This was peculiar because December is in the region’s dry season, when the Mekong is normally so placid and low that people grow vegetables along its banks for cash and paddle off the sandy beaches that emerge on its shores.

Kroolong, a 53-year-old grandfather who started fishing on the Mekong when he was nine, was shocked by what he saw when he reached the river. “It was the first time in my life I had ever seen anything like it,” he said one steamy day in April when he took me down to the banks to explain what had happened.

Everything along the banks had been hit. Riverside crops of tomatoes and cabbage were swept away. Fish farms were wrecked. Boats were sunk, battered and, like Kroolong’s craft, carried off by the surging waters. He and a friend jumped into another boat and sped down the river to see if they could find the missing vessel, steering frantically to dodge the tree branches and rubbish being swept along the swirling water.

A few hours later, they discovered that villagers on the Laos side of the river had picked up his boat. “I told them, ‘This is my boat. I want it back’,” said Kroolong.

“They said, ‘If you want it you have to pay 15,000 baht’.” That was about $460, a large sum for a man who had been making around $6 a day selling the fish he pulled from the river. Convinced the police would be no help, Kroolong left his boat behind, along with a way of life.

He had to take a job as a security guard at a nearby hospital, where he has had time to think about why the river suddenly turned into a swollen torrent that day. “It might have been raining up north,” he said, staring out at the huge stretch of water flowing quietly beside us. “Or it might have been the Chinese dams.”

The dams China has built hundreds of miles upstream from Kroolong’s home are what brought me to the Mekong, one of the world’s mightiest waterways. The river is so long that if it were in the US, it would stretch all the way from Los Angeles across to New York. It starts off high in the snowy peaks of the Tibetan plateau before plunging down through the mountains of China’s southern Yunnan province towards Myanmar, Thailand, Laos, Cambodia and finally Vietnam, where it pours into the South China Sea. Just under half the river’s length is in China, which first started damming it in Yunnan more than 20 years ago.

The early dams were large but nothing like two enormous, newer ones. The Xiaowan, completed nearly four years ago, is one of China’s biggest hydropower projects after Three Gorges on the Yangtze River, with a wall almost as high as the Eiffel Tower and a reservoir that can hold 15 billion cubic metres of water. It is dwarfed in volume, though not quite height, by the newer Nuozhadu dam, which can store 22.7 billion cubic metres of water. Together, the pair can hold enough to drown an area the size of London in water 24 metres deep.

There have long been odd stories about the impact these two dams might be having on the countries further south, where people have blamed them for everything from drought to a drop-off in fish catches. But what emerged from my visit to the Mekong, as I followed the story of the floods that took Den Kroolong’s boat, was even stranger – a cautionary tale about the world’s newest superpower, and about water, a resource under mounting pressure.

People have always fought over water. The wordrivalcomes from the Latin rivalis, or someone using the same stream as another. But conflict is a rising concern today as the United Nations warns that demand for fresh water is on track to outstrip supply by as much as 40 per cent within 16 years. That means co-operation between countries sharing the same river is likely to become even more imperative. Collaboration has long been difficult along the Mekong, where countries are recovering from years of bitter conflict. Now, it seems even more distant as the economic gap between those nations widens.

On one side there is China, an economic giant that is home to nearly 40 major rivers running through more than a dozen neighbours and has a dazzling capacity to tame its waterways. Since the 1950s, a small army of trained hydro-engineers, including former president Hu Jintao and former premier Li Peng, has blocked, straightened and diverted its rivers as part of an accelerating industrialisation drive that has turned China into the world’s second-largest economy and lifted more than 500m people out of poverty.

Because China has nearly 20 per cent of the world’s people but only about 6 per cent of its fresh water, it sometimes wants to simply shift water to where it isn’t. Hence its immense south-north diversion scheme to transfer huge volumes of water from wetter to drier regions. At the same time, its hunger for electricity has made China a hydropower dam builder like no other, with an estimated 22,000 large dams, almost half the global total.

As its cities choke on coal-fired power plants, China has put even more dams on the drawing board, including some in Yunnan, part of another bold engineering effort to transfer electricity to power-hungry factories hundreds of kilometres further east.

But downstream lie five southeast Asian countries where poverty and unemployment are still widespread and Chinese investment is important. The Mekong is a gigantic fish factory and crop irrigator that acts as an economic lifeline for tens of millions of people in these countries. People here eat around 46kg of fish a year, nearly double the global average. Half of Vietnam’s rice crop comes from the Mekong Delta.

That is why China’s dams have been regarded with such concern. Even middling-sized dams create well-documented problems on a river. They block fish from migrating to their spawning grounds and, by releasing water in bursts, scour riverbeds and disrupt fish breeding patterns

They also trap nutrient-rich silt that is needed to keep downstream deltas fertile and stop them eroding away. Years of conflict along the Mekong have made it hard to collect long-term records that could help measure the impact of China’s dams but studies show that fish catch rates and species numbers have declined in parts of the river since 2007.

The Lower Mekong countries’ dependence on the river is likely to intensify as some start building their own large hydropower dams, which will rely on predictable water flows from Yunnan.

International strategic experts say that all adds up to a worrying situation in a region now confronting fresh tensions as China and nearby countries make territorial claims to islands in the South China Sea.

“It’s right up there with the South China Sea as a longer-term threat to peace and stability in the region,” says Richard Cronin of the Stimson Center, an international security think-tank in Washington DC.

The Xiaowan dam, in Yunnan province, can hold 15 billion cubic metres of water©Imagine China
The Xiaowan dam, in Yunnan province, can hold 15 billion cubic metres of water

If China fails to release enough water during the dry season, most of the new downstream dams will struggle to generate power at that time of the year, he says. And considering China’s own water shortages, it is possible Beijing could decide to prioritise water over energy production and withhold some of the flow for its use.

The situation is exacerbated by China’s deep reluctance to share information about the dams. According to several academics I spoke to, Chinese scholars studying the Yunnan dams treat their data as a state secret

Journalists reporting for foreign newspapers have been detained while trying to see them. One who tried to see the Xiaowan dam in 2010 told me that even Chinese people had to show proof of identity before being allowed near the site.

China has also been reluctant to negotiate the use of its rivers. The world has plenty of examples of countries figuring out treaties and agreements to manage shared waterways, says Peter Gleick, a global water conflict expert who runs California’s Pacific Institute, an environmental think-tank with a database of water disputes dating back 5,000 years. “But in the Mekong we have a situation where one party has a very strong history of acting unilaterally,” he says. China was one of just three nations to vote against the UN’s 1997 treaty governing shared international rivers and has never agreed to negotiate joint management of the Mekong.

This means that getting timely information about how much water China is withholding or releasing from its massive dams is far from straightforward, which quickly became apparent from an attempt to find out what really caused the December floods on the Mekong.

. . .

The spot in northern Thailand where Kroolong’s boat disappeared in December is in Bueng Kan province, a little over halfway down the length of the Mekong. It took a flight from Bangkok and a three-hour drive to get there, and it was not quite what I was expecting from a river that has always seemed faintly mythical, a haunting backdrop to the Vietnam war, and home to exotic creatures such as the Mekong giant catfish, which can weigh as much as a cow.

It was the middle of the day. The heat was unbearable. Vicious biting ants attacked my ankles. There was no sign of jungles or giant catfish, just Thai villagers sheltering quietly from the hammering sun under any available shade as the huge brown river flowed by, separating us by several kilometres from the hills of Laos on the other side.

It did not take long to meet more people who had been affected by the Mekong’s odd behaviour in December and most had little doubt about the cause. Just up from where Kroolong’s boat disappeared, Ladda T-horkham, a weathered grandmother, had put in a new crop of tomatoes, garlic and spring onions on the river’s banks before the waters rose

Half her plants were washed away and though she tried to grow more, it was so late in the season the new crop did not do as well. The traders who used to buy from her stopped coming, she said, forcing her on to a bike to sell the vegetables herself.

When we met at her house nearby, she said she thought she knew what had happened: “I heard they released water from the Chinese dams.”

A few hours’ drive further downstream, a line of sun-bleached branches and debris high above the water’s edge still marked the level that the Mekong reached in December. There, several fishermen said they had lost nets and engines in flooding they thought must have been caused by a release of water from China’s dams. “I wouldn’t mind so much but they should have given us some warning,” said Rut Nuamnuan, who added that the surge cost him more than Bt3,000 in damages and lost income after his engine and boat were damaged.

In just four Thai provinces alone, the sudden December flooding caused at least Bt7m worth of damage, or around $220,000, according to Towards Ecological Recovery and Regional Alliance, a Thai environmental organisation that spent weeks interviewing villagers about the incident. The total cost of the damage all along the river was undoubtedly greater but even that is a weak reflection of how people’s lives were affected by an event the group’s co-director, Srisuwan Kuankachorn, suspects was connected to the dams.

More troubling, he said, was the fact that China had said nothing public about the flooding. It’s a mess. China will have to learn how to be more responsible and transparent in how it treats its neighbours if it wants to be seen as a civilised superpower,” he said.

. . .

The people who should have known most about what happened are the officials in the Mekong River Commission, a body set up in 1995 to co-ordinate the shared use of the river. Its executive office is in a grand building on the Mekong’s banks in Vientiane, the quiet capital of Laos, one of the world’s few remaining communist states.

It took a long drive along the Mekong to get there, followed by a short trip in a bus filled with backpackers across a bridge that spans the river between Thailand and Laos. The Mekong looks spectacular here. At sundown, people sit on its banks and gaze at the sun as it turns into a bright red circle that casts a stream of light down the river’s length before sinking out of sight.

Within sight of the commission building, however, memories of what had happened in December were still fresh. I met a married couple, Davon and Soonton Chanthabouly, in a simple wooden hut on the riverbank, where they had just put in a crop of peanuts worth about 350,000 kip (just over $40) before the river surged. “Nothing like that had ever happened before,” said Davon, adding she was not as upset about the lost money as she was about the week of work it had taken to plant the crop.

Inside the Mekong River Commission itself, Hans Guttman, the Swedish development expert who has been its chief executive since 2011, was as mystified as Chanthabouly about what had happened. “I came into the office and wondered why there was a lake in front of it,” he said as we sat in his large office overlooking the Mekong with senior commission officials. “It was like a flash flood,” said the commission’s international technical adviser, Simon Krohn.

A rise that sudden had not been seen at that time of the year in 50 years and, like the villagers in northern Thailand, Guttman’s first thought turned to China. “We worked on trying to sort out whether it was a release from the Chinese dams,” he said.

As it turned out, however, satellite images showed there had been torrential rains in southern China and northern Laos, where some areas had more than 120 millimetres of rain in just two days.

The commission therefore made a preliminary analysis that rain had caused the unusual flooding, not water released from China’s dams. But it still wanted to know what had been happening at the dams and finding out is far from straightforward.

Commission officials cannot simply pick up the phone and call the operators of the Yunnan dams. They may glean information at ad hoc meetings with Chinese officials but the established line of communication requires them to put a formal request to Beijing through China’s representative in a body based in Bangkok called Unescap, the UN Economic and Social Commission for Asia and the Pacific, the UN’s regional development arm.

It would be different if China were a member of the Mekong River Commission, which one might think it would be, given that 44 per cent of the river’s course is in China. But only Laos, Thailand, Cambodia and Vietnam are full members. If China joined, it would have to share information about the river’s management.

Instead, it is a “dialogue partner” that gives out data during the wet season, to help downstream countries manage flooding, but not in the dry season except in exceptional circumstances, such as a 2010 drought that sparked angry accusations that China was hoarding water to fill its recently completed Xiaowan dam. Beijing did eventually release data that year showing Yunnan province had also been hit by drought, leading Mekong River Commission officials to conclude the dams were not exacerbating the problem.

But damaging floods in the dry season, like those in December, are a new phenomenon, one some officials think could be part of a “new normal” for the river, which is likely to have lower levels in the wet season and higher ones in the dry period as China stores and releases water for the dams.

Guttman said he first broached the flooding with China through Unescap in January and he was still awaiting a formal response when we met in April. By then, however, he was trying to understand another oddity on the Mekong that had happened in February. The river’s levels had suddenly fallen by a metre in some parts, again without warning, and then risen fast to much higher levels than had ever been recorded for that time of year.

This time, there had been no rain and the MRC concluded the dams might have been to blame. “Our guess is that there was some halt in the production of electricity, or a halt in dam operation for some reason,” said Guttman.

There have been some claims made on Facebook that there were some repairs needed somewhere but we have difficulties in following up on that.”

A delegation of Chinese officials who visited the MRC’s Phnom Penh offices in March provided figures showing there had been no unusually big discharge of water from the Chinese dams in December and other data suggesting the flooding had been caused by very high rainfall. But they offered no explanation for the strange February fluctuations, the commission said.

The commission later sent a letter through Unescap in May, formally seeking information about both the December and February changes but Beijing’s response to that would prove even more baffling.

It is one thing for Mekong River Commission officials to be pondering Facebook for clues about China’s dams but it would seem odd if an independent and relatively wealthy country such as Thailand had so much trouble getting information. To find out, I took a flight down to Bangkok, which was already under strain from the political crisis that would erupt into a military coup several weeks later.

Protesters and army checkpoints choked streets around the city but it was calm inside the country’s department of water resources, where deputy director Chaiporn Siripornpibul was sitting in an office surrounded by graphs and diagrams charting the Mekong’s odd behaviour.

His records also showed there had been extremely heavy downpours before the river rose in December. But had such torrential rain ever caused the river to swell as rapidly as it did in December? “Not like this,” he said, adding he still thought the rain, not China’s dams, must have caused the flooding that month.

He had asked the Mekong River Commission to see if it could get more information from China about the curious fluctuations in the river’s levels, and was still waiting to hear back. Could he not just make a phone call to China and get the information himself? “Ah,” he said, with an apologetic smile. “That’s not easy.”

Officials in downstream Mekong countries are sometimes reluctant to criticise China’s dams, according to Brahma Chellaney, an Indian professor who has written extensively about the threat to regional stability posed by what he calls China’s hydro-supremacy”. “The countries in southeast Asia, they’re all small countries. They’re too fearful to talk about China,” he said.

. . .

At this point, it still seemed possible that answers could be found a five-hour flight away in Beijing, where the Huaneng group, the sprawling state-owned company behind the Xiaowan and Nuozhadu dams, has its headquarters. The city was blanketed in a white haze of bad air, a sign of the coal plant pollution that is spurring China to get more of its energy from smokeless hydropower dams. A spokesman at Huaneng referred questions about the Yunnan dams’ operations to the ministry for water resources, saying it was the body that determined the amount of water discharged from the projects.

The ministry said it could not make anyone available during the week I was in Beijing. But it subsequently sent several documents about the dams, including an April speech by a senior water ministry official who said China used as little as 7 to 8 per cent of the hydropower potential of its trans-boundary rivers, which was far less than that in its inland rivers, or indeed that in large rivers in other countries. As well, it did careful environmental impact assessments on its dams to make sure they were “ecologically safe and environmentally friendly, causing no marked impacts on the neighbouring countries”.

Another paper said the Mekong dams benefited downstream countries because their “scientific regulation” of the river meant its flow could be reduced by 30 per cent during the wet season, when flooding was a problem, and increased by up to 70 per cent during the dry season, to help in drought conditions. This had already prevented drought in downstream countries in 2013, the ministry said

Not only were the dams therefore beneficial, the paper said, but they should not be blamed for any problems downstream because only 13.5 per cent of the water that flows into the Mekong comes from China.

This is misleadingnonsense”, according to Mekong experts such as Milton Osborne of Australia’s Lowy Institute think-tank, who says that during the dry season as much as 40 per cent of the river’s water as far south as Vientiane comes from China.

But what of the strange December flooding on the Mekong that caused so much damage downstream? The water ministry sent a separate written response about this, saying it was definitely due to torrential rains and not its dams, which had operated normally. This fact had been communicatedcomprehensively and effectively” to the Mekong River Commission, it said, noting the delegation that had discussed the event with the commission in March. As for the river’s odd changes in February, a ministry official said it would take some time to supply an answer and it would be best to discuss it later.

Last week, as this article was being prepared for publication, I asked the commission if it had heard anything more about its official request in May for data about the December and February fluctuations. A spokesman said China suggested that the request be tabled for formal discussion” in late August when the MRC was due to meet with Chinese officials in Phnom Penh.

So what is one to believe? How could the commission still be waiting for information in July about events that had happened more than five months earlier

Could it all be a misunderstanding, a case of simple miscommunication? It was tempting to think it might be, except for one thing. Towards the end of one of its statements, the ministry said this: “China’s current dialogue and communication channels with the commission are unimpeded, pragmatic and highly effective.” If one thing is certain, it is that China’s communications about its dams are anything but effective, let alone unimpeded.

This has long perplexed experts who follow its dam construction closely. “I’m the last person you would go to to find a China-basher,” says Professor Darrin Magee, a US academic who has spent years studying Chinese dams. “But in this case they need a new PR person. There’s no rational explanation for not sharing some of the data if indeed these dams are having as little impact as they claim they are.”

That sharing seems unlikely any time soon, given what has just happened on the Mekong. And it is this, more than anything, which makes China’s dams such a concern, for the future of the river and for the millions of people who depend on it.


Pilita Clark is the FT’s environment correspondent. This report is part of the FT’s ‘A world without water’ series

Photographs: Bakas Algirdas; Imagine China

Copyright The Financial Times Limited 2014.