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FOOD SECURITY : DAMPENED PROSPECTS / THE FINANCIAL TIMES COMMENT & ANALYSIS ( A MUST READ )

2012-01-28T04:19:00.003-05:00

January 25, 2012 7:20 pm

Food security: Dampened prospects

By Louise Lucas and James Fontanella-Khan

As population growth outstrips agricultural gains, policymakers will have to juggle the conflicting need to provide food and jobs while curbing damage to the environment

Bangladeshi women farmers in rainbow-bright saris survey their flooded rice paddies with dismay: the rains have drowned the tender seedlings and, with them, their livelihoods. Climate change, ill-judged policies, protectionism, urbanisation and plain greed have all conspired to reignite Malthusian prophesies of a growing world population unable to feed itself.

Come 2050, the UN predicts earth will be home to another 2bn people; in order to feed us all, production needs to increase by an estimated 70 per cent. That is a big task, not least since the land that humans have so long been tilling is itself facing a revolution. Agriculture, which provides a livelihood to an estimated 2.5bn people, is lagging behind population growth.
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To reverse that course, many experts say another “green revolution” – the yield-boosting transformation of farming in the 1960s and 1970s by the use of better science – is required, entailing superior seeds, husbandry and technology. It could include genetically modified crops, a technique that – just like nuclear power for the world’s energy needs – to its champions forms an integral part of the solution, but to its critics represents a threat to human and environmental well-being.

The prospect of more starving people as staples become unaffordable has put the question of food security firmly on to the top table of global policymaking. Nicolas Sarkozy, the French president, made it a central plank of his country’s presidency last year of the Group of 20 leading industrialised and developing nations; Mexico, this year’s G20 chair, is taking up the baton. At the World Economic Forum in Davos this week, several sessions are devoted to the topic.

Yet these discussions will take place against a backdrop that is not just far removed from the regularly ravaged crops of Asia and elsewhere, but is also one of commodity prices that are in retreat from the peaks of recent years. Amid fears about the health of other parts of the global economy – such as banking and public finances – food security is in danger of being overshadowed.

This is anathema to those urging action. “The fact that prices have come down does not at all change the long-term picture: that in 2050 we will have 9bn-plus people to feed,” says Kostas Stamoulis of the UN’s Food and Agriculture Organisation.

“The issue is here today already,” adds Paul Polman, chief executive of Unilever, who will be discussing food security at Davos. “Every six seconds a child dies of hunger. More people are going to bed hungry now than two to three years ago, before the crisis.”

Governments, industry and civil society across the globe are scrabbling to come up with solutions. India, home to the largest number of starving people in the world, last month secured cabinet approval for a landmark bill guaranteeing heavily subsidised grain to poor families. The measure aims to underpin the health and life chances of more than 60 per cent of India’s 1.2bn population, although sceptics question whether providing grain but not other nutrients can eradicate malnutrition.

Across the developing world, industry is also pitching in. Companies such as Unilever, Nestlé and PepsiCo are helping farmers with the provision of seeds, fertilisers and even microfinance – thereby gaining what SABMiller, the emerging markets brewer, calls a “licence to trade” and helping to secure their own supply of raw materials.

Non-governmental organisations carry out similar activities. But whether private sector or charitable, all these efforts remain piecemeal. “We need to scale up faster and bigger by working together,” says Mr Polman, who chaired the Food Security Working Group set up under the business subgroup of the G20.

For one, he proposes an aid transfusion of $70bn-$80bn to compensate for years of declining investment in agriculture. As the World Bank and other lenders and donors retreated from the field, the buoyant growth in yields unleashed by the green revolution sputtered. Bill Gates, the software billionaire philanthropist, is one who says it is time to reboot that revolution.

“In the last decade we backed off,” he told BBC radio before travelling to Davos. “And now we realise that was a mistake, so we need to get back in there and fund that.”

However, to get more food from the same (or, given trends such as urbanisation, less) land requires more productive crops. But India illustrates why agricultural investment is only part of the solution. Production of food grains in the world’s second most populous country are at record highs and on track to reach 245m tonnes in the year to March, comfortably enough to meet demand of about 220m tonnes.

The same is true on a global scale. “Today, supply is not a problem,” argues Shenggen Fan, director-general of the Washington-based International Food Policy Research Institute. Rather. Or as Gary Markham, director of agriculture at accountants Grant Thornton, says: “Food is in the wrong place.” While parts of Africa starve, warehouses in China are overflowing – as are western dining tables, one-third of whose food ends up in household or restaurant bins.

Mr Fan points to the distortions created by countries’ stockpiling – “We don’t know how much China has, it could easily be 50m-300m tonnes of grain” – as an issue for governments to resolve through improved transparency and information.

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For India and much of Africa, the bigger issue is access and waste. New Delhi reckons that every year up to 40 per cent of Indian fruit and vegetables rots in the fields or on the way to market. Thousands of tonnes of grains such as wheat and rice are also rendered inedible because of a lack of rodent-free cool storage.

The cost of this wastage rings in at almost $20bn, according to government estimates. It is one reason why many welcomed recent – and still faltering – plans to open up the country’s retail sector in the hope that big supermarket groups would establish better supply chains.

Then there are the government policies and market forces that, some argue, exacerbate the supply situation. Chief of these are biofuels. While the US has withdrawn fiscal support for ethanol and biodiesel, other parts of the world continue to encourage such production – viewed by critics as taking food out of bellies to put fuel into motors.

The issue illustrates the bigger policymaking challenge of balancing the sometimes conflicting need for food and for jobs, while also reducing environmental damage. “A hungry world is a dangerous place – it causes rioting,” says Mella Frewen, director-general of FoodDrinkEurope, a trade grouping. But so is a world without adequate work.

“It’s a huge social dilemma,” says Mr Markham, pointing to EU proposals that would link support payments to employment – meaning more people on farms rather than efficient mechanised farming.
Equally, more bountiful crops do not necessarily translate into a more abundant mother nature.

Rampant fertility can also harm the soil and the livelihoods of those who till it. Vandana Shiva, an environmentalist currently advising the king of Bhutan to make the Himalayan nation wholly reliant on organic farming, claims the green revolution has ravaged the world’s ecosystem. “It has eroded farming soil, waterlogged deserts, pest-infected crops and indebted farmers,” she says.

John Beddington, chief scientific adviser to the UK government, prefers to see the two problems dovetailing into one solution: “Agriculture has the potential to mitigate climate change,” he says. That means looking at ways to increase productivity while reducing greenhouse gases, instead adopting practices that sequester carbon dioxide – such as ploughing legumes into the soil that put back essential nitrogen.

Away from the fields, blame is also meted out to self-interested governments and banks – and they too must be brought to heel, critics argue. That means ending protectionism and export bans, such as that imposed by Russia in 2010 after a drought devastated crops and wildfires spread across the country. It also means stamping out the speculation that, critics contend, sometimes goes hand-in-hand with government edicts to cause spikes in commodity prices.

Glencore, the world’s biggest commodity trader, last April admitted to a speculative bet on rising wheat and corn prices in the early stages of the previous summer’s drought – while simultaneously, senior traders publicly urged Russia to impose a grain export ban. When Moscow did just that a few days later, grain prices rallied.

Mr Sarkozy has been blunt on the subject of speculators, saying an unregulated market is “a lottery in which fortune smiles on the most cynical”. He also wants a central crop database and limits on export bans.

But while he has supporters among some governments, much of industry and most NGOs, many concede that getting powerful operators – be it Goldman Sachs’ commodities trading desk or officials in a ministry in Beijing – to be more transparent would be a tough ask.

The tensions in securing cross-disciplinary global agreement are one reason why the food and drink industry and NGOs have taken matters into their own hands, at least at a micro level, by supporting farmers from whom they buy produce. Banks and commodity traders are also slowly getting in on the act. Rabobank of the Netherlands, for example, has launched a barter programme in Brazil. Under this, fertiliser suppliers are paid with crops, which they in turn sell to traders.

But the job is bigger than they can hope to fill. “Individual governments have responsibility at the end of the day to have their people properly fed,” says the FAO’s Mr Stamoulis. “But we think experience shows a coalition of government, private sector, local communities, farmers and civil society in general [is required].”

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There are moves on the demand side too. Government health campaigns are “nudging” Britons to throw out less food. Elsewhere, campaigns advise citizens to, say, go vegetarian for a week or stick to sustainable produce.

More radically, Ifpri’s Mr Fan calls for a tax on meat to reflect the “social costs” of climate change, water and healthcare. “Take it all into consideration and beef will probably be 10 times more expensive,” he says.

That may prove tough to implement. Governments have already been attacked for introducing far milder taxes on sugar and fats.

More palatable are some of the small agricultural steps aimed at boosting supply and ensuring fewer people go to bed hungry. Take rice: thanks to funds and scientific help from overseas, some of the Bangladeshi rice farmers have been able to disprove Malthus’ gloomy prognosis. So-called “scuba rice” can survive up to two weeks of being submerged and still send its green shoots upwards when the waters clear.

Biplob Sarker, one smallholder, says he “gave up hope” after 17 days of flooding. “But, to my surprise, the seedlings grew green again after the flood. Still I can’t believe I have got 18 mauds [672kg] of paddy from there.” The challenge for the world is to multiply that surprise.

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Genetic modification: resistance even among the poor

It is the technology that dare not speak its name. Genetic modification roughly translates – in Europe and many of the poorer countries that receive its aid – as Frankenstein tomatoes: an unnatural means of playing God that may have us all sprouting extra limbs. So politicians see few votes in advocating GM, even though it can be used to engineer crops that are more disease- or drought-resistant or grow more abundantly, write Louise Lucas, James Fontanella-Khan and Alan Rappeport.

Even as Monsanto of the US on Wednesday abandoned plans to sell an insect-resistant maize in France, European scientists and government officials are starting to test the waters. UK research trials on wheat modified to repel aphids began this year, although officials insist their crop is not for human consumption.

The US, where farmers have been planting genetically engineered crops since 1996, is less squeamish. Still, big US food companies that use the produce have come under attack. Critics complain the food is unsafe and criticise Monsanto, the GM seed provider, for its aggressive treatment of farmers. But such criticism did not stop BASF of Germany from recently transferring its biotechnology unit, which researches GM crops, to Raleigh, North Carolina.

Food and drink makers, who stand to benefit from GM, are generally in favour. “Can it be right that people in the Horn of Africa have been starving because food can only be transported through Kenya, whose politicians are being put under pressure by the EU not to handle anything GM?” asks Paul Polman, chief executive of Unilever, who chaired the food security working group set up by the World Economic Forum and the Group of 20 leading nations.

But even in countries where famines occur, public resistance is firm. India, which briefly flirted with GM aubergines, backtracked in 2010 when Jairam Ramesh, then environment minister and now in charge of rural development, put a moratorium on GM crops. “There is no hurry to introduce Bt brinjal [GM aubergines] on the pretext of food security,” Mr Ramesh said at the time.

Vandana Shiva, an Indian environmental activist, goes further, claiming the use of GM cotton has had a devastating impact on farmers who have become dependent on seeds produced by large foreign-owned corporations. That has killed diversity, she argues, and – since Monsanto bought out most Indian competitors – has forced farmers to buy its seeds rather than buy from the government at subsidised prices.

Copyright The Financial Times Limited 2012.

CHINA : THE PARADOX OF PROSPERITY / THE ECONOMIST ( A MUST READ )

2012-01-28T04:18:00.003-05:00

China

The paradox of prosperity

For China’s rise to continue, the country needs to move away from the model that has served it so well

Jan 28th 2012
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IN THIS issue we launch a weekly section devoted to China. It is the first time since we began our detailed coverage of the United States in 1942 that we have singled out a country in this way.

The principal reason is that China is now an economic superpower and is fast becoming a military force capable of unsettling America. But our interest in China lies also in its politics: it is governed by a system that is out of step with global norms. In ways that were never true of post-war Japan and may never be true of India, China will both fascinate and agitate the rest of the world for a long time to come.

Only 20 years ago, China was a long way from being a global superpower. After the protests in Tiananmen Square led to a massacre in 1989, its economic reforms were under threat from conservatives and it faced international isolation. Then in early 1992, like an emperor undertaking a progress, the late Deng Xiaoping set out on a “southern tour” of the most reform-minded provinces.

An astonishing endorsement of reform, it was a masterstroke from the man who made modern China. The economy has barely looked back since.

The party’s instinct, born out of all those years of success, is to tighten its grip. So dissidents such as Yu Jie, who alleges he was tortured by security agents and has just left China for America, are harassed. Yet that reflex will make the party’s job harder. It needs instead to master the art of letting go.

China’s third revolution

The argument goes back to Deng’s insight that without economic growth, the Communist Party would be history, like its brethren in the Soviet Union and eastern Europe. His reforms replaced a failing political ideology with a new economic legitimacy. The party’s cadres set about remaking China with an energy and single-mindedness that have made some Westerners get in touch with their inner authoritarian. The bureaucrats not only reformed China’s monstrously inefficient state-owned enterprises, but also introduced some meritocracy to appointments.

That mix of political control and market reform has yielded huge benefits. China’s rise over the past two decades has been more impressive than any burst of economic development ever. Annual economic growth has averaged 10% a year and 440m Chinese have lifted themselves out of poverty—the biggest reduction of poverty in history.

Yet for China’s rise to continue, the model cannot remain the same. That’s because China, and the world, are changing.

China is weathering the global crisis well. But to sustain a high growth rate, the economy needs to shift away from investment and exports towards domestic consumption. That transition depends on a fairer division of the spoils of growth. At present, China’s banks shovel workers’ savings into state-owned enterprises, depriving workers of spending power and private companies of capital. As a result, just when some of the other ingredients of China’s boom, such as cheap land and labour, are becoming scarcer, the government is wasting capital on a vast scale. Freeing up the financial system would give consumers more spending power and improve the allocation of capital.

Even today’s modest slowdown is causing unrest. Many people feel that too little of the country’s spectacular growth is trickling down to them. Migrant workers who seek employment in the city are treated as second-class citizens, with poor access to health care and education. Land grabs by local officials are a huge source of anger. Unrestrained industrialisation is poisoning crops and people. Growing corruption is causing fury. And angry people can talk to each other, as they never could before, through the internet.

Party officials cite growing unrest as evidence of the dangers of liberalisation. Migration, they argue, may be a source of growth, but it is also a cause of instability. Workers’ protests disrupt production and threaten prosperity. The stirrings of civil society contain the seeds of chaos. Officials are particularly alive to these dangers in a year in which a new generation of leaders will take power.

That bias towards control is understandable, and not merely self-interested. Patriots can plausibly argue that most people have plenty of space to live as individuals and value stability more than rights and freedoms: the Arab spring, after all, had few echoes in China.

Yet there are rights which Chinese people evidently do want. Migrant workers would like to keep their limited rights to education, health and pensions as they move around the country. And freedom to organise can help, not hinder, the country’s economic rise. Labour unions help industrial peace by discouraging wildcat strikes.

Pressure groups can keep a check on corruption. Temples, monasteries, churches and mosques can give prosperous Chinese a motive to help provide welfare. Religious and cultural organisations can offer people meaning to life beyond the insatiable hunger for rapid economic growth.

Our business now

China’s bloody past has taught the Communist Party to fear chaos above all. But history’s other lesson is that those who cling to absolute power end up with none. The paradox, as some within the party are coming to realise, is that for China to succeed it must move away from the formula that has served it so well.

This is a matter of more than intellectual interest to those outside China. Whether the country continues as an authoritarian colossus, stagnates, disintegrates, or, as we would wish, becomes both freer and more prosperous will not just determine China’s future, but shape the rest of the world’s too.

UNREST IN CHINA : A DANGEROUS YEAR / THE ECONOMIST ( A MUST READ )

2012-01-28T04:17:00.001-05:00

Unrest in China
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A dangerous year
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Economic conditions and social media are making protests more common in China—at a delicate time for the country’s rulers
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Jan 28th 2012 | CHENGDU, DONGGUAN AND WUKAN VILLAGE

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IN AN industrial zone near Chengdu, the capital of Sichuan province in south-west China, a sign colourfully proclaims the sprawl of factories to be a “delightful, harmonious and happy district”. Angry steelworkers must have winced as they marched past the slogan in their thousands in early January, demanding higher wages. Their three-day strike was unusually large for an enterprise owned by the central government. But, as China’s economy begins to grow more sedately, more such unrest is looming.

China’s state-controlled media kept quiet about the protest that began on January 4th in Qingbaijiang District, a 40-minute drive north-east of Chengdu on an expressway that crosses a patchwork of vegetable fields and bamboo thickets. But news of the strike quickly broke on the internet.

Photographs circulated on microblogs of a large crowd of workers from Pangang Group Chengdu Steel and Vanadium being kept away from a slip road to the expressway by a phalanx of police. Word spread that police had tried to disperse the workers with tear gas. In the end, as they tend to—and undoubtedly acting on government orders—factory officials backed down, partially at least. The workers got a raise, albeit a smaller one than they wanted. Managers’ wages were frozen.
Strikes have become increasingly frequent at privately owned factories in recent years, often involving workers demanding higher wages or better conditions. Private firms, like state ones, are usually strong-armed by officials into buying off strikers. The thinking is that capitulating keeps a lid on news coverage and helps to prevent unrest from spreading. Yet the explosive growth in the use of home-grown versions of Twitter has made it easy for protesters to convey instant reports and images to huge audiences. The Communist Party’s capacity to stop ripples of unease from widening is waning—just as economic conditions are making trouble more likely.

Anger at the bottom

At a cheap restaurant in Qingbaijiang, opposite a dormitory compound for Pangang employees, grimy steelworkers complain that the government’s promise of an extra 260 yuan ($41) a month is hardly enough. Many of the lowest-paid earn as little as $190 monthly. But the workers know that the steel industry is struggling—and that vengeance on persistent troublemakers can be fierce. A police notice warns of legal action, including imprisonment, against any strikers who continue “disrupting public order”. Security agents follow your correspondent in an unmarked car.

All this is partly a result of the curb on China’s stimulus spending and carefree (reckless, many would say) bank lending in the wake of the global financial crisis of 2008. There are fewer new construction projects; demand for steel has flattened. Pangang’s plant in Qingbaijiang is running at a loss. The number of steel firms in the red rose from nine in September to 25 a month later. Even though the government is less worried about inflation now than it was a few months ago, and is releasing the economic brakes a little, the steel industry is expecting a lean period. Some firms might have to close.

Overall economic growth is still looking robust. In the final three months of 2011 China’s economy grew by 8.9% compared with the same period a year earlier—enviable by almost anyone else’s standards, though still the slowest since the second quarter of 2009. The slowdown has so far been gentle, and in line with government efforts to prevent overheating. But this does not stop officials worrying that the coming year could be unusually difficult..

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Europe is the biggest buyer of Chinese products—and the euro zone’s travails have plunged many manufacturers into despair. Depressed demand in both Europe and America has taken its toll on factories. The steelworkers’ strike was one of many in recent months, most of them in China’s export-manufacturing heartlands near the coast (see map).

Chinese exporters do not face as big a shock now as they did in late 2008, when the financial crisis caused a sudden collapse in demand and the loss of as many as 20m migrant-labour jobs. But that time China’s recovery was rapid, helped by stimulus spending of 4 trillion yuan (more than $630 billion at today’s exchange rate), as well as developed economies’ own stimulus projects. The impact on migrant workers was further mitigated by the coincidence of the worst of the downturn with the lunar new-year holiday, when most migrants go home for lengthy periods.

This time exporters face protracted slow growth in developed economies, and the risk that the euro zone’s difficulties might worsen. China’s policymakers do not want another lending spree that might burden the financial system with more bad debt, on top of the borrowing accumulated during the previous binge. The country’s relatively low budget deficit (about 2.5% of GDP in 2010) gives it room to spend more on social housing, social security, tax cuts for small firms and consumer subsidies. These could help promote private consumption—eventually.

Nerves at the top

The long-term plan is for China to wean itself off its reliance on exports and investment projects such as roads, railways and overpriced property developments, and for domestic consumption of goods and services to play a much bigger role in fuelling growth. But this rebalancing will be a long, hard slog. Officials do not want shock therapy because it could threaten the jobs of many of the 160m migrants who come from the countryside to provide the cheap labour behind China’s exports.

This economic quandary has become more acute at what is a delicate political moment for the Communist Party. Later this year (probably in October or November), the party will hold its five-yearly Congress, the 18th since its founding in 1921, at which sweeping changes in the country’s top leadership will begin to unfold.

The Congress will “elect” a new 300-member central committee (in fact it will be hand-picked by senior leaders). This will immediately meet to rubber-stamp the appointment of a new Politburo, a body that currently has 25 members. All but two of the Politburo’s nine-member inner circle, the Politburo Standing Committee, will be replaced. Two appointments are all but certain: Vice-president Xi Jinping to take over from President Hu Jintao (as party chief after the Congress and as president next March); and Li Keqiang to replace his boss, the prime minister, Wen Jiabao, also next March. There will be much jockeying for the other slots.

It is a decade since China experienced a leadership changeover on this scale—and the first time since the late 1980s that the advent of a new generation of leaders has coincided with such a troubled patch for the economy. The previous time, in 1988, an outbreak of inflation threw Deng Xiaoping’s succession plans into disarray, giving conservatives ammunition with which to attack his liberal protégés. The party’s strife erupted into the open the following year as students demanding greater freedom gathered in Tiananmen Square.

The threats to the party today are very different, but fear of large-scale unrest still haunts the leadership. The past decade has seen the emergence of a big middle class—nearly 40% of the urban population, as some Chinese scholars define it—and a huge migration from the countryside into the cities. The party takes no chances. Large numbers of plainclothes police are on permanent watch in and around Tiananmen Square. (Since 2008, visitors to the vast plaza have had to undergo airport-type scanning and searches.) Early last year, when anonymous calls began circulating on the internet for citizens to gather in central Beijing in sympathy with the uprisings that were breaking out in the Arab world, the location specified was not Tiananmen but Wangfujing, a shopping street nearby. The police responded by flooding that area with officers too.

In the Pearl River Delta, which produces about a third of China’s exports, there are plenty of signs of malaise. Outside a Taiwanese-owned factory in Dongguan, a dozen or so police officers wearing helmets and carrying clubs watch a small group of angry workers complain that the owner has run away. The factory (which makes massage seats) is unable to pay its debts. They are afraid that, this time, after the lunar new year break they will have no jobs to come back to. A plainclothes policeman tries to silence them. Then a uniformed officer moves in with a video camera, and most of the workers retreat, keeping a prudent silence.

Others in the delta have been less reticent. In November thousands of employees at a Taiwanese shoe factory in Dongguan took to the streets in protest against salary cuts and sackings, purportedly caused by declining orders. Protesters overturned cars and clashed with police. Photographs of bloodied workers circulated on the internet. There have been further protests in recent weeks.

Guangdong province also saw a wave of strikes in 2010. At that time workers—mainly in factories supplying the car industry—were demanding only higher pay and improved conditions. Most of those disputes were quickly and peacefully settled, and rarely involved action on the streets.

The latest spate of confrontations looks different. The steelworkers at the state-owned factory near Chengdu wanted a raise; but, these days, rather than bidding to improve their lots, workers are mostly complaining about wages and jobs being cut. The strikers seem more militant.

A report published this month by the Chinese Academy of Social Sciences (CASS) says that, compared with those in 2010, the strikes of 2011 were better organised, more confrontational and more likely to trigger copycat action. “Workers are not willing this time to accept that they have to make sacrifices for the national good because firstly they have already made enough sacrifices, and secondly, fewer are willing to just pack up and go home,” says Geoff Crothall of China Labour Bulletin, an NGO in nearby Hong Kong.

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Where the heart is

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The government hopes that jobless migrants will return to their home villages, where they or their families still enjoy a tiny land entitlement on which they can subsist, or find work closer to their hometowns. Many will: job opportunities in the interior have grown in the past few years, thanks to a surge of government investment in central and western areas, aimed at evening out economic growth.

Last year Chongqing, a region in south-west China which had long exported large numbers of workers to the coast, for the first time employed more of its surplus rural workforce locally than it sent to other areas. Chongqing’s party chief, Bo Xilai, is believed to be a contender for the Politburo Standing Committee. He has been trying to turn Chongqing into a model for the absorption of rural labour into cities, a project that has involved vast spending on low-cost housing to accommodate the region’s migrants.

But rising numbers of migrant workers in big cities—more than 60% according to the National Bureau of Statistics in 2010—are themselves the offspring of migrants and have no experience of agricultural life. They regard themselves as urbanites, even if they are excluded from many of the welfare benefits to which city-dwellers are entitled. They are better educated than their parents’ generation, and more assertive. A riot by migrants last June in Dadun, another factory town in Guangdong where many of the country’s jeans are produced, hinted at the problems China could face if second-generation migrants lose hope. The manhandling of a pregnant woman by security guards prompted two days of violence, with thousands of migrants setting fire to vehicles and government buildings. Strikes in coastal factories now mainly involve second-generation migrants, according to the report by CASS.

Such unrest is not about to topple the party. As Chinese officials nervously digest the implications of unrest in the Arab world, demonstrations in Russia and an easing of repression in Myanmar, they draw comfort from the consistency of Chinese opinion polls. These appear to show high levels of trust in the central leadership and of optimism about the future under party rule. Many ordinary Chinese are contemptuous of local authorities, but still believe that leaders in Beijing are benign.

The power of weibo

But according to Victor Yuan of Horizon, a polling company in Beijing, citizens’ satisfaction with their own lives and confidence in the government, though high, experienced a “big drop” in 2010 and didn’t recover last year. Confidence in the government has fallen by about 10 percentage points, to around 60%.
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Mr Yuan says the rapid spread of microblogs has contributed to this decline. By the end of last year, weibo, as Chinese versions of Twitter (itself blocked in China) are known, were used by nearly half of the 513m Chinese who had accessed the internet in the previous six months (see chart).

This was slightly more than the number who used e-mail and a rise of nearly fourfold over the year before, according to the government-affiliated China Internet Network Information Centre. Li Chunling of CASS estimates that 90% of urban internet users under 30 are microbloggers.

Weibo have transformed public discourse in China. News that three or four years ago would have been relatively easy for local officials to suppress, downplay or ignore is now instantly transmitted across the nation.

Local protests or scandals to which few would once have paid attention are now avidly discussed by weibo users. The government tries hard, but largely ineffectively, to control this debate by blocking key words and cancelling the accounts of muckraking users. Circumventions are easily found. Since December the government has been rolling out a new rule that people must use their real names to open accounts. So far, users seem undeterred.

In the build-up to the 18th Congress, China’s leaders will become especially anxious to prevent embarrassment to the party. Weibo are likely to make their lives a lot more difficult—at least that was the lesson from a ten-day stand-off in December between police and residents of the coastal village of Wukan in Guangdong.

The villagers’ protest was typical of thousands that roil the Chinese countryside every year: a complaint about the seizure of agricultural land by local officials for private redevelopment. Unusually, however, in Wukan citizens took control of their village and drove out party hacks and police. Officials were alarmed by images that circulated on weibo of triumphant residents rallying in the centre of their village, like students in Tiananmen Square 22 years ago (see the picture at the start of this piece). They tried, unsuccessfully, to stop news spreading by ordering a block on the village’s name and location.

The villagers gave up their protest on December 21st after a rare, high-profile intervention by the Guangdong party leadership, which promised to look into their complaints. Remarkably, on January 15th the protest leader, Lin Zuluan, was appointed as the village’s new party chief (the previous one having disappeared, it is thought into custody). Even the party’s main mouthpiece in Beijing broke its silence on the issue, saying it showed that local officials should stop treating citizens as adversaries.

Wang Yang, Guangdong’s party chief, who is believed to be a contender for a senior Politburo position this year, said the incident demonstrated how people’s “democratic consciousness” was getting stronger. He called on officials not to ignore citizens’ concerns.

Few regard the Wukan episode as a turning point for the party. At least one protester on Tiananmen Square has since been seen being dragged away by police in the usual fashion. But it has stirred debate, online at least, about how the party should respond to protests and other forms of public pressure. And villagers in Wukan warn that they will not be satisfied until they have reclaimed their land. One protest leader says there could be another, “even bigger” uprising.
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Not everyone has a home to go to

The new leadership that will take over after the upcoming Congress will quickly face tests of its ability to handle social unrest. Even if the country does not appear on the brink of an Arab-style upheaval, many Chinese academics say the next few years could see burgeoning instability, exacerbated by slower economic growth and a widening gap between rich and poor. China’s outgoing leaders have tried to suppress debate about ways of reforming the political system to allow the public to voice their grievances more freely. But many analysts believe there is a pressing need for such reform. Today’s “China model”, as some in China and abroad were tempted to call it after Western economies fell into disarray three years ago, appears increasingly unsustainable.

Chinese roulette

An intriguing glimpse of how at least some in the party elite might see things was offered last April when Zhang Musheng, a prominent intellectual, published a book calling for a revival of the one-time Maoist goal of building a “new democracy”. General Liu Yuan, the son of Liu Shaoqi who was China’s president during the Mao era, openly backed the idea. Mr Zhang (himself the son of a late senior official, as are several of the new leaders-to-be) said a new democracy would involve continued party rule but with much greater freedom.

Few of China’s liberals believe there is much chance of any leader pursuing this idea in the near future. But Mr Zhang’s description of China today has struck a chord (and has been circulated widely by weibo users). A well-known economist, Wu Jinglian, picked up a phrase of Mr Zhang’s in an essay in Caijing, a Beijing magazine, in which he attacked the notion of a “China model” and called for political reform. The phrase of Mr Zhang’s that made an impression was one describing China as “playing pass the parcel with a time bomb.”

DOUG CASEY ON THE COLLAPSE OF THE EURO AND THE EU / INTERNATIONAL SPECULATOR ( A MUST READ )

2012-01-28T04:16:00.002-05:00

Doug Casey on the Collapse of the Euro and the EU

Doug Casey, Chairman

(Interviewed by Louis James, Editor, International Speculator)

January 25, 2012

L: So Doug, a lot of readers are concerned about what's going on in Europe. Is this the beginning of the proverbial "it?" Or can the Eurozone be saved?

Doug: In brief, the answers are "yes," then "no" – and a "good riddance" to both the Eurozone and the euro. But most people think the old order should be maintained at almost any cost. That would include George Soros, who recently penned an article called Does the Euro Have a Future?

Now, I don't normally look to Soros for economic commentary, despite the fact that he's one of the shrewdest and most successful speculators in the world. He does, however, represent the way the Davos people, Eurocrats, and the ruling classes in general think.

But just because he's made a lot of money doesn't make him an expert in economics, any more than financial success is proof that Ted Turner, Bill Gates or Warren Buffett know anything about economics. They're all idiot savants, a bit like Dustin Hoffman's character in Rain Man. But that's another subject.

Soros writes: "The political will to create a common European treasury was absent in the first place, and since the time the euro was created the political cohesion of the European Union has greatly deteriorated." He's absolutely right about that and goes on to say that to create a common European treasury, the EU would have to have the power to tax. So, he's saying that the euro should be preserved, and that to do that, it should be backed by wealth extracted by force from the average person in Europe.

But that's the problem with every currency in the world today; they're not backed by a commodity, but only by the ability of government to steal from the people. And the euro doesn't even have that going for it.

L: And the power to tax is an essential, defining characteristic of the nation-state. It's the thing that empowers it to exist and separates it from voluntary organizations. To create that power in Europe would really be to turn the place into one single country. It wouldn't be long before they had a European army.

Doug: Exactly. Right now the Eurocrats in Brussels really only have the power to regulate, which is bad enough. But if the European Union had the power to tax, it would become an actual empire. Especially if they then created a European army – there's no telling what kind of mischief they'd get into.

On the bright side, they can't really afford an army. That's the bright side of all these governments being bankrupt: They spend way too much on welfare and debt service to afford much warfare. I guess that makes welfare and debt good things, in a perverse way.

L: [Laughs]

Doug: Anyway, Soros went on to observe: "The euro crisis could endanger the political cohesion of the European Union." That's true too, of course. The EU is a completely artificial union. The Swedes are very different from the Sicilians, and the Portuguese very different from the Austrians.

These people have little in common besides a history of fighting with each other. Force them together into a phony union, and they'll become mutually resentful, the way the Germans and the Greeks now are.

The EU was put together partly to avoid future wars, but it may turn out to be a war incubator. It makes no sense for there to be a European Union at all.

Incidentally, people think of these countries – Italy, France, Germany, and so on – as though they are fixtures in the cosmos, but they aren't. In their current forms, they're all newcomers on the stage of history.

L: You mean the gods didn't affix them to the celestial spheres, up there with the stars? I could have sworn Jupiter told me he did…

Doug: [Laughs] No. The average person doesn't realize that the country we know as Italy today was only created in 1861, a consolidation of many completely independent and very different entities that had been separate states since the collapse of the Roman empire. Germany was only unified in 1871, out of scores of principalities, dukedoms, and whatnot. Both unifications were very bad ideas. Even today, there are separatist movements in big Western European countries, like the Basques in Spain, or those in the United Kingdom who wish it weren't quite so united.

L: So what's the alternative?

Doug: Of course, the ideal would be for there to be seven billion little countries on the planet – each one a sovereign individual.

But I'll take what I can get in the meantime, and would rather see smaller states competing for citizens as customers – although I don't really like that analogy, because states are not voluntary organizations, nor do they provide much in the way of useful services. Anyway, a more cohesive European Union is a step in the direction of Orwell's Oceania, which was in constant warfare with Eurasia and Eastasia. It's odd how the world is becoming much more like 1984 in some ways at the same time that the nation-state itself is collapsing.

What would have made sense is for Europe to have become a free-trade and -travel zone. No customs duties and no need for work permits or passports. A free-enterprise union – created simply by dropping barriers – would have facilitated all sorts of business and job creation. Instead, idiotically, the Europeans just created yet another layer of government in Brussels. Which is rather ironic in that Belgium is itself a non-country, created out of two very different societies – Flanders and Wallonia.

Now there's a wannabe megagovernment bent on finding new ways to regulate enterprise out of existence. And if people like Soros are heeded, it will have the right to tax in addition, in order to give value to its essentially worthless currency.

All this would be a non-problem if they simply used gold – which is what, as I've long predicted, is happening, starting with the gold-for-oil trade between India and Iran.

People talk about the EU as being a way to avoid new wars in Europe. But they forget that in the 19^th century, Europe had fewer wars than ever before or since. At that time, "mark, " "lira, " "franc, " and "pound" were all just names for specific amounts of gold. It worked very well; and to paraphrase Ludwig Von Mises: When goods cross borders freely, soldiers don't – or at least are less likely to.

All the gyrations and machinations these Eurocrats are desperately rushing into place to try to save the unnecessary and counterproductive euro are…

L: …not just the wrong thing, but the exact opposite of the right thing.

Doug: [Laughs] Just so. Back to Soros. He has a prescription for preventing a meltdown, of course.

He advises: "First, bank deposits have to be protected." In other words, to discourage people from bailing out of unsound banks and destabilizing a corrupt banking system, all bank deposits should be guaranteed. That's a catastrophic idea. It would further encourage all sorts of bad lending by incompetent bankers while sucking hundreds of billions of capital from productive parts of the economy. He also asserts that some banks in defaulting countries have to be kept functioning, in order to keep the economy from crashing entirely. That's another ridiculous idea, plundering the prudent and productive to pay for the profligate.

If banks were run according to sound banking principles, with a clear division between demand deposits and time deposits and no fractional reserve banking, we wouldn't have to worry about any of these issues.

But instead, Soros goes on to write that the European banking system should be recapitalized and put under EU supervision. I want to know how this recapitalization would be done – all those governments are bankrupt. All that Soros is suggesting is to make a bunch of national problems into one big continental problem. For all anyone knows, the Fed is creating trillions of dollars to give to the EU. The only thing that's really clear is that we're moving out of the eye of the hurricane and back into the storm. But it will be much, much fiercer than what we saw in 2008.

Soros also states that government bonds have to be protected from "contagion." Whatever that means, the implication is more central control and throwing more taxpayer money at the insoluble government problems. The bankrupt banks will have to lend the bankrupt governments money, so they can pay their bonds off, while at the same time the same bankrupt governments lend the bankrupt banks money, so they don't go under. It's all just a ridiculous shell game.

L: It all sounds like a call for creating more unbacked currency units. If their only answer is just to run the printing presses, it'll be Weimar hyperinflation all over again.

Doug: Yes. Soros' bottom line is: "There's no alternative but to give birth to the missing ingredient: A European treasury with the power to tax and borrow."

This, he claims, is "the only way to forestall a possible financial meltdown and another great depression." Forestalling the depression is impossible. All that can be done is to make it less severe – by doing exactly the opposite of what Soros recommends.

L: And that would be…?

Doug: My view, as you well know, is that they shouldn't forestall the meltdown, but should let the market correct past mistakes and get on with building real economic growth for the future. Nietzsche was right when he said, "That which is about to fall deserves to be pushed." But it really doesn't matter what these fools do; we're in the early stages of the Greater Depression. It's going to have a life of its own.

Soros' solutions are counterproductive band-aids. But since he got to offer solutions, I'm going to offer some too. For starters, the national debts of all these countries should be defaulted on, including the United States. Those debts constitute an unethical mortgage without consent on the next two or three generations of people as yet unborn as a result of the excess consumption of their parents and grandparents. The government debt should also be defaulted on to punish the people stupid enough, or unethical enough, to lend these states the money they've used to do all the destructive things they do.

Second, central banks should be abolished and thereby fractional reserve banking as well. That would force banks to run on sound, classical terms, and depositors would be induced to seek out the most sound and secure banks.

Third, there shouldn't be national currencies. Commodities – with gold most likely the popular choice – would again be used as money.

Fourth, most financial regulations and taxes – especially income taxes – should be radically reduced or eliminated. At the same time, government spending should be cut even more radically. These governments, if their existence is to be tolerated at all, should be strictly limited to doing nothing more than protecting people from overt force and fraud.

L: Sounds good to me, but you know that's not gonna happen. So, tune in your guru-vision for a moment and tell us what you think is most likely to happen. Does Soros get his wish and we see a new European superstate emerge? Or does the EU disintegrate?

Doug: There's not a snowball's chance in hell that the EU will turn into a superstate. The chances are much, much better that it will fragment. If these countries have breakaway movements within them, how could they possibly succeed in peacefully joining together?

If you think about it, the Soviet Union was a sort of Eastern European Union, and it disintegrated. Yugoslavia also showed what happens to artificial European unions, as did Czechoslovakia. These are all straws that show which way the wind is blowing in Europe.

That's quite apart from the fact that trying to compact all of these different ethnicities, languages, religions, cultures, and so forth together into one giant nation-state is illogical, counterproductive, dangerous, and pointless.

L: So, how long do you give the EU before it breaks up? And the euro?

Doug: Well, as you know, one should never predict both an event and the time it will take place. But I've long said that, "While the US dollar is an 'IOU nothing, ' the euro is a 'who owes you nothing.'" So I think the euro will reach its intrinsic value long before the dollar does. The euro – in anything like its present form – will cease to exist within two to three years at the outside. If I had a lot of my wealth in euros, I would get it out ASAP. My favorite alternative for protecting wealth, of course, is the precious metals: gold and silver. If you want to speculate for gains on this trend, I think there will be a bubble in the mining stocks, many of which are cheap right now.

L: For new readers, Doug's notion of the intrinsic value of the euro, the dollar, or any unbacked "fiat" currency is zero. They are literally worthless and only useful as long as people imagine otherwise. So much for the euro, but what about the EU itself?

Doug: Centripetal force will eventually tear it apart, with the EU as a whole disintegrating long before its individual parts – France, Italy, Germany, the UK, etc. – fall apart.

L: How long is "eventually?" Can the EU itself last long after such a crushing setback as the collapse of the euro?

Doug: Probably not – they'll likely go in close succession. Europe is just in a world of trouble; the continent reminds me of that cruise ship that sank off the coast of Italy recently. They are dying financially, with all the debt bankrupting governments, businesses, and individuals. They are economically in a lot of trouble, with stifling regulations and taxes. They are demographically in a lot of trouble, with birth rates far below replacement in general, except among African and Muslim immigrants who are not integrating. Europe has long been a hotbed of religious, ethnic, and race wars – quite frankly I see the next one building up right now.

L: What about Eastern Europe? They have different problems – like endemic corruption and other Soviet legacies – but they tend to be very pragmatic and willing to work hard.

Doug: Yes, there's a dichotomy. The bad news is the Soviet legacy hanging over them, but the good news is that they've experienced naked socialism, and they know what it's really like. A lot of thinking people there are experiencing shock therapy and leaning much more towards free markets than people in the West.

I'm definitely more optimistic about Eastern Europe than Western Europe. However, the general decline of Europe – which started with World War I – is going to continue. I only hope Europe just declines in relative terms, not absolute terms.

The fact of the matter is that I'm most optimistic about the Orient. That's where the action has been and is going to be. I'm also favorably inclined toward Latin America, which has huge problems but is, at least, mostly out of harm's way from the evolving Forever War.

L: Doug, you're on record as saying that China is in a bubble and that it's going to pop. How does that square with your being optimistic about the Orient? You can't be thinking Japan will take the lead again…

Doug: No, certainly not. I do think China is ripe for a fall, but it's a matter of the short vs. the long run. I'm very bearish on China in the short term, but after the current system washes out, I think it's going to be the place to be – or at least, that area. I think China is another country that has excellent chances of breaking up into five or more separate countries.

L: Wow… okay… More investment implications, besides getting out of the euro?

Doug: Buy gold and silver. Don't be fooled into thinking the dollar is strong just because the euro is weaker.

L: Very well; thank you for your thoughts.

Doug: My pleasure. I've got some other things on my mind, so we'll talk soon.

L: Looking forward to it. Have a great evening, Tatich.

Doug: You too, Lobo.

[Editor's Note: For new readers, "tatich" is Mayan for "big chief."]

THE ZERO DECADE / THE WALL STREET JOURNAL REVIEW & OUTLOOK ( VERY HIGHLY RECOMMENDED READING )

2012-01-28T04:15:00.001-05:00

REVIEW & OUTLOOK

JANUARY 27, 2012

The Zero Decade

The Fed doubles down to reflate the housing market.

The two most powerful men in Washington have a big disagreement. No, not President Obama and Speaker John Boehner. We mean Mr. Obama and Federal Reserve Chairman Ben Bernanke, who can't seem to agree on the health of the U.S. economy.

On Tuesday night, the President proclaimed that the "state of our Union is getting stronger," employers are hiring faster than they can find skilled workers, and manufacturing is booming. Less than a day later, Mr. Bernanke and his Open Market Committee (FOMC) downgraded their already modest growth outlook and said the recovery is so vulnerable that the Fed must keep interest rates at near-zero for another three years.

The contradiction may not be as profound as it seems. Mr. Obama is running for re-election and this time he needs to sell audacity more than hope, while the Fed is still trying to reflate the housing market that it seems to believe is the main driver of economic growth. The Fed is straining to deliver the asset-price "stimulus" that Mr. Obama can't any longer get out of Congress.

That's the best way to understand the FOMC's remarkable announcements on Wednesday, followed by Mr. Bernanke's quarterly press conference. The central bank had already promised to keep short-term rates near-zero through most of 2013, but now it feels the need to assure investors it will keep them there through the end of 2014. That would be six years in total, more than half of what may eventually become known as the Fed's Zero Decade.

Getty Images

Federal Reserve Chairman Ben Bernanke

Mull that one over: The Fed is declaring that it needs to run the same super-easy monetary policy when the economy is growing by 2% or 3% as it did amid the worst of the financial panic. And keep doing it past the horizon. The unavoidable implication is that the Fed doesn't think the economy will grow any faster until what would be halfway through Mr. Obama's second term. The other implication is that the Fed has no idea what to do other than to push even harder on the monetary accelerator. Maybe this time, it hopes, the economy's clutch will engage.

This not-so-quiet desperation was clear in a second Fed release that hasn't received as much attention as it deserves. In a statement redefining how it interprets its policy mandate from Congress, the FOMC said it has "reached broad agreement" on new operating principles.

The Fed's dual mandates are stable prices and full employment, and the Fed said sometimes the two are complementary. But from now on when they're in conflict, the Fed essentially said, it will put inflation aside and instead focus principally on cutting joblessness.

It's no coincidence that such a restatement of principles is coming now, when the Fed is looking to justify its extraordinary monetary interventions. If there were any doubt about this intention, Mr. Bernanke put it to rest in his press conference when he said more "quantitative easing" is likely if growth doesn't accelerate soon.

One problem with all of this was pointed out yesterday by Kevin Warsh, who as a Fed governor sat on the FOMC until early last year. Speaking at Stanford, Mr. Warsh said that "exceptionally accommodative monetary policy" has its uses in a crisis or recession.
But the Fed's "recent policy activism—measures that go beyond a central bank's capacity or traditional remit—threatens to forestall recovery and harms long-term growth."

That's a useful warning for markets to hear. Consider that Mr. Bernanke's transparent goal is to drive down long-term interest rates to reduce mortgage rates to reflate the housing bubble. But intervening so directly to keep rates artificially low has made the bond market useless as a price signal or indicator of risk across the larger economy.

The Fed is thus pushing investors of all kinds further out on the risk curve, with consequences no one can foresee—least of all the Fed, as we are now learning from the just-released FOMC transcripts from 2006.

Recall that during the last decade the Fed assured everyone there was nothing to worry about as it kept rates too low for too long, only to create a housing bubble it never did recognize. Recall, too, how its second round of bond-buying (QE2) in 2010-2011 was supposed to lift stock prices but in addition sent commodity prices soaring. Consumer confidence plunged as Americans felt the strain of higher prices for food and energy, and the economy has done notably better since QE2 ended.

Where will the risk-taking excesses show up this time? Who knows, and perhaps the Fed will retreat before the worst happens.

But it was fascinating to see last week that investors were willing to buy $15 billion in 10-year Treasury inflation-protected securities, or Tips, despite a negative real yield. That's right, investors were willing to accept negative current returns in exchange for security against a future inflation breakout.

We mean no counsel of doom because the good news is that the U.S. private economy is performing remarkably well considering all of the burdens government has put on it. Imagine what it could do if our politicians promised not to stick it with new taxes, and the Federal Reserve returned to a normal policy that focused on long-term growth rather than reflating bubbles.

CHINA : WHERE´S THE PARTY / THE ECONOMIST ( HIGHLY RECOMMENDED READING )

2012-01-28T04:14:00.000-05:00

The long arm of the state

Where’s the party?

How the Communist Party is trying to expand its influence in the private sector

Jan 28th 2012
BEIJING

WHEREAS many urbanites devour Chinese editions of Western magazines like Cosmopolitan, GQ, and Vogue, some officials still peruse weightier titles. In December a dozen Communist Party officials gathered in the eastern city of Hangzhou to celebrate the first anniversary of an alluring journal, Party Construction in Non-State-Owned Enterprises. In its inaugural year, said one of them, the magazine had “struck a beautiful pose”. The journal in question, as its title suggests, is engaging with the tricky issue of how the Communist Party can maintain influence within a growing private sector.

The subject exposes some of the deepest contradictions that now lie at the heart of Chinese society. How can the party maintain control over a place that, in ideological terms, is no longer communist? The closure in the 1990s of vast numbers of state-owned enterprises shattered the party’s grassroots base. Over the past decade a priority of the party’s secretive Organisation Department (it handles personnel issues for the 80m-strong party, yet has no listed telephone number) has been to form party cells in private businesses, or “new economic organisations” as the official literature calls them. In 1999 only 3% of private businesses had party cells. Now the national figure is nearly 13%. Coastal Zhejiang province claims all private firms with more than 80 employees have a branch.

As party officials see it, setting up branches in the private sector is about more than just proving that a once-revolutionary party is still in touch with the masses. At a time of rapid social change and outbreaks of unrest, officials hope the new party branches will reinforce stability and keep the party abreast of potential trouble. Some bosses of private firms encourage the formation of cells, in which at least three party members are required. They do so in order to curry favour with local officialdom. But others have misgivings. They worry that the “red-collar” workers, as party-member employees are sometimes called, might interfere in the running of the company.

In state firms, party committees once controlled workers’ lives, monitoring everything from their ideological rectitude to their reproductive cycle. Now the party appears less clear about exactly what the cells should be doing, though it often tries to present them as exemplars of do-gooding in a boy-scout vein.

Xinhua, the state news agency, reported without irony last July that Communist Party branches in foreign-invested firms in Shanghai had acted as a “red impetus” to growth in the wake of the global financial crisis of 2008. It said one such branch in a British marine-equipment company wrote to the firm’s headquarters in London suggesting that the company take advantage of strong local demand by moving more of its operations from Britain to China. On receiving this suggestion, “light filled the eyes” of the top British management, and the firm carried out the party’s plan.

In practice, party cells are most unlikely to be debating ideology with company management. Even within the party, few people believe in Marxism any longer. The tension between an attractive private-sector career and allegiance to the Communist Party is always there for the new breed of party members: 20-somethings who tote iPhones and tweet furiously. Many of them joined the party in the first place only because they were top of their college class and they saw it as a way to earn a lot more money.

In some parts of the country, the government levies a tax, usually 0.5% of payroll, to pay for private firms’ party activities. Few openly complain, but some resist the party’s embrace. Non-governmental organisations—known in party-speak as “new social organisations”—have proved particularly difficult to penetrate. The party, fearful that some might evolve into opposition groups, tries to keep them small.

But in December a report published by a government think-tank warned that “party leadership” over NGOs needed to be strengthened. Otherwise, the report warned, they might become tools of “hostile foreign forces”.

In a crisis, the party expects its grassroots cells to help dissuade people from staging public protests and to feed information to the authorities about possible unrest. In the far-western region of Xinjiang, where the authorities are on high alert against separatist unrest among Muslims, at least some party cells in private firms are expected to report on potential troublemakers.

Last year the authorities in Jimsar county selected 39 party members from private firms to act as gatherers of public opinion and intelligence on “the enemy situation”. A local party report in August said nine pieces of “valuable information” had been collected this way. Clearly some red-collar workers are still putting the party first.

CHINA´S CONNECTIVITY REVOLUTION / PROJECT SYNDICATE ( A MUST READ )

2012-01-27T04:17:00.004-05:00

China’s Connectivity Revolution

Stephen S. Roach

2012-01-26
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NEW HAVEN – Long the most fragmented nation on earth, China is being brought together like never before by a new connectivity. Its Internet community is expanding at hyper speed, with profound implications for the Chinese economy, to say nothing of the country’s social norms and political system. This genie cannot be stuffed back in the bottle. Once connected, there is no turning back.

The pace of transformation is breathtaking. According to Internet World Stats, the number of Internet users in China has more than tripled since 2006, soaring to 485 million in mid-2011 – more than three times that in 2006. Moreover, China’s rush to connectivity is far from over. As of mid-2011, only 36% of its 1.3 billion people were connected – far short of the nearly 80% penetration rates seen in South Korea, Japan, and the United States.

Indeed, with the cost of connectivity falling sharply – China’s mobile users are expected to surpass PC users by 2013 – and, with urbanization and per capita incomes also rising sharply, it is not unreasonable to expect China’s Internet penetration rate to cross the 50% threshold by 2015. That would be the functional equivalent of adding about three-fourths of all existing Internet users in the US.

Nor are the Chinese casual and infrequent Internet users. Consistent with what the social-network theorist Clay Shirky has dubbed a society’s penchant for unlocking the “cognitive surplus” embedded in net-based activities, survey data from the China Internet Network Information Center suggest that Chinese netizens log an average of 2.6 hours per day online – a full hour longer than the average 15-49-year-old Chinese citizen spends watching television.

China’s microblogs, or social networks, where usage tends be most intense, were estimated to have approximately 270 million users as of late 2011. And there is plenty of upside. Worldwide, about 70% of all Internet users currently engage in some form of microblogging, which is the fastest-growing segment of the Internet. In China, this share is just 55%.

When it comes to analyzing China, it is always easy to get carried away with numbers – especially those driven by the country’s sheer size. But the real message here concerns the implications of connectivity, not just its scale.

A key implication is the Internet’s potential to play a significant role in the emergence of China’s consumer society – a critical structural imperative for a long-unbalanced Chinese economy. With connectivity comes a national awareness of spending habits, tastes, and brands – essential characteristics of any consumer culture.

The consumption share of China’s economy, at less than 35% of GDP, is the lowest of any major country. Surging Chinese Internet usage could well facilitate the pro-consumption initiatives of the recently enacted 12th Five-Year Plan.

The Internet could also enable freer and more open communications, upward mobility, transparent and rapid dissemination of information, and, yes, individuality. China’s leadership has been increasingly vocal in raising concerns about growing inequalities that might otherwise hinder the development of what they call a more “harmonious society.” Online connectivity could be a powerful means to help China come together and achieve this goal.

Finally, there is the Internet’s potential as an instrument of political change. That is hardly an inconsequential consideration for any country in the aftermath of last year’s Arab Spring, which was facilitated in many countries (especially Tunisia and Egypt) by network-enabled mobilization.

While reform of China’s single-party state has always been viewed as an important objective in modern China – from the so-called Fifth Modernization of Wei Jinsheng in the late 1970’s to recent speeches by Premier Wen Jiabao – meaningful progress has been limited. Is this likely to change as China embraces the Internet?

China is no exception in requiring leadership, accountability, and responsiveness as conditions of political stability. Its rapidly expanding Internet community has repeatedly raised national awareness of tough local issues.
This was especially evident in the aftermath of the Sichuan earthquake of 2008, ethnic violence in Xinjiang in 2009, and the high-speed rail crash in Wenzhou in 2011.

As the Arab Spring demonstrated, the Internet can quickly transform local incidents into national flashpoints – turning the new connectivity into a potential source of political instability and turmoil. But that has been the case only in countries ruled by highly unpopular autocratic regimes.

By contrast, China’s leadership is viewed with a much greater degree of public sympathy. Their quick and direct response to the recent incidents in Sichuan, Xinjiang, and Wenzhou are important cases in point. Senior Party leaders – especially Premier Wen – were quick to lead an empathetic national response that was largely effective in countering the outpouring of concern expressed on the Internet.

None of this is to deny the dark side of the Chinese Internet explosion – namely, widespread censorship and constraints on individual freedom of expression. China’s “SkyNet” team (rumored to be greater than 30,000) is the largest cyber police force in the world.

Moreover, while China is not alone in censoring the Internet, self-policing by many of the nation’s largest portals amplifies official oversight and surveillance. Recent restrictions on microbloggers – especially denial of access to those who use untraceable aliases – have heightened concerns over Chinese Internet freedom. Such restrictions, of course, cut both ways – potentially limiting personal expression, but also constraining disguised and reckless vigilante attacks.

Filtered or not, a long-fragmented China now has a viable and rapidly expanding network. The power of that network – especially insofar as economic, social, and political change is concerned – is hard to predict. But connectivity adds a new dimension of cohesion to modern China. That can only accelerate the speed of its extraordinary development journey.

Stephen S. Roach, a member of the faculty at Yale University, is Non-Executive Chairman of Morgan Stanley Asia and the author of The Next Asia.

THE FED EXPERIMENTS WITH IMPERFECT TOOLS / THE FINANCIAL TIMES COMMENT & ANALYSIS ( VERY HIGHLY RECOMMENDED READING )

2012-01-27T04:15:00.001-05:00

The Fed experiments with imperfect tools

Mohamed El-Erian

January 26, 2012

Policy experimentation continues unabated in the US with the Federal Reserve launching on Wednesday a new initiative to influence market valuations and, through this, the outlook for the country’s economy. The Fed hopes to use greater transparency to mould expectations in a manner that promotes economic growth and price stability. But this new approach could also create confusion and even greater hesitancy on the part of healthy balance sheets to engage in productive investments.

I suspect the Fed recognises that the policies at its disposal are a long way from ideal. Interest rates are already floored at zero and, according to the latest statement, will likely stay there at least through the end of 2014. Meanwhile, its balance sheet has ballooned to a previously-unthinkable 20 per cent of gross domestic product ($3,000bn) through direct purchases of securities in the market place. It is also “twisting”, as holdings of shorter maturity Treasuries are replaced by longer-dated ones.

This unusual policy activism has helped prevent a damaging deflationary spiral. But it has not been sufficient to restore America on the path of sustainable growth and sufficient job creation, nor will it. As acknowledged by Ben Bernanke, the Fed chairman, the benefits have come with “costs and risks”.

Moreover, despite its repeated pleas for fiscal and housing engagement, the Fed has inadvertently provided cover for other government agencies to continue avoiding difficult, but necessary, decisions.
Notwithstanding these shortfalls, the Fed still feels compelled to do even more. For both moral and political reasons, it believes that it cannot be seen to stand on the sideline as the economy struggles with a deeply-entrenched unemployment crisis and political dysfunctionality – even if this means having to use even more imperfect, indirect and, increasingly, unpredictable policy measures.

On Wednesday, the Fed showed how it intends to use “communication” as a much more active tool to inform and influence economic outcomes. But this approach goes well beyond the concept of greater transparency. By publishing members’ individual forecasts – specifically, the annual evolution of the policy rate, the timing of the first hike and a long-term natural rate – the Federal Open Market Committee wants to provide a firmer and steadier outlook to encourage investors, in both physical and financial assets, to commit to long-term decisions.

Few expect this new initiative to have an immediate or durable impact. Beyond 2012, individual FOMC members’ forecasts are quite dispersed, including a 0.25 per cent to 2.75 per cent range for the target Federal Funds rate for end 2014. It will also take time for households, companies and investors to digest yet another set of signals. Moreover, they are much more interested in the likelihood of a new round of Fed purchases, QE3, than forecasts that deal with an unusually uncertain future and are likely to change frequently.

This latest Fed initiative would need to meet two conditions to be effective in the longer-term. We need to see a significant clustering of FOMC member forecasts that could credibly translate into a medium-term vision for policy rates, and greater responsiveness on the part of households, companies and investors to price movements. But even these will not prove sufficient unless the Fed’s continued activism is part of a more comprehensive policy response out of Washington. As yet, there is little to suggest that we are moving quickly enough to meet this requirement.

The writer is the chief executive and co-chief investment officer of Pimco

HOW TO PULL ITALY AND SPAIN BACK FROM THE EDGE / THE FINANCIAL TIMES COMMENT & ANALYSIS ( VERY HIGHLY RECOMMENDED READING )

2012-01-27T04:14:00.006-05:00

How to pull Italy and Spain back from the edge

George Soros

January 25, 2012

The longer-term refinancing operations launched by the European Central Bank in December have relieved the liquidity problems of European banks, but not the financing disadvantage of the highly indebted member states. Since high-risk premiums on government bonds endanger banks’ capital adequacy, half a solution is not enough. It leaves half the eurozone relegated to the status of developing countries that became highly indebted in a foreign currency. Instead of the International Monetary Fund, Germany is acting as the taskmaster imposing fiscal discipline. This will generate tensions that could destroy the European Union.

I have proposed a plan, inspired by Tomasso Padoa-Schioppa, the Italian central banker, that would allow Italy and Spain to refinance their debt by issuing treasury bills at about 1 per cent. It is complicated, but legally and technically sound.

The authorities rejected my plan in favour of the LTRO. The difference between the two schemes is that mine would provide instant relief to Italy and Spain, while the LTRO allows Italian and Spanish banks to engage in a very profitable and practically riskless arbitrage but has kept government bonds hovering on the edge of a precipice – though the last few days brought some relief.

My proposal is to use the European Financial Stability Facility and the European Stability Mechanism to insure the ECB against the solvency risk on any newly issued Italian or Spanish treasury bills they may buy from commercial banks. This would allow the European Banking Authority to treat the T-bills as the equivalent of cash, since they could be sold to the ECB at any time. Banks would then find it advantageous to hold their surplus liquidity in the form of T-bills as long as these bills yielded more than bank deposits held at the ECB. Italy and Spain would then be able to refinance their debt at close to the deposit rate of the ECB, which is currently 1 per cent on mandatory reserves and 25 basis points on excess reserve accounts. This would greatly improve the sustainability of their debt. Italy, for instance, would see its average cost of borrowing decline rather than increase from the current 4.3 per cent. Confidence would gradually return, yields on outstanding bonds would decline, banks would no longer be penalised for owning Italian government bonds and Italy would regain market access at more reasonable interest rates.

One obvious objection is that this would reduce the average maturity of Italian and Spanish debt. I argue that, on the contrary, this would be an advantage in current exceptional circumstances, because it would keep governments on a short leash; they could not afford to lose the ECB facility. In Italy, it would deter Silvio Berlusconi from toppling Mario Monti – if he triggered an election he would be punished by voters.

The EFSF would have practically unlimited capacity to insure T-bills because no country could default as long as the scheme is in operation. Nor could a country abuse the privilege: it would be automatically withdrawn and the country’s cost of borrowing would immediately rise.

My proposal meets both the letter and the spirit of the Lisbon Treaty. The task of the ECB is to provide liquidity to the banks, while the EFSF and ESM are designed to absorb solvency risk.

The ECB would not be facilitating additional borrowing by member countries; it would merely allow them to refinance their debt at a lower cost. Together, the ECB and the EFSF could do what the ECB cannot do on its own: act as a lender of last resort. This would bring temporary relief from a fatal flaw in the design of the euro until member countries can devise a lasting solution.

For the first time in this crisis, the European authorities would undertake an operation with more than sufficient resources. That would come as a positive surprise to the markets and reverse their mood – and markets do have moods; that is what the authorities have to learn.

Contrary to the current discourse, the long-term solution must provide a stimulus to get Europe out of a deflationary vicious circle: structural reform alone will not do it. The stimulus must come from the EU because individual countries will be under strict fiscal discipline. It will have to be guaranteed jointly and severally – and that means eurobonds in one guise or another.

The writer is chairman of Soros Fund Management. His latest book is ‘Coming Soon: Financial Turmoil in Europe and the United States’

NEW YEAR, SAME CRISIS / PROJECT SYNDICATE ( VERY HIGHLY RECOMMENDED READING )

2012-01-27T04:14:00.005-05:00

New Year, Same Crisis

George Soros

2012-01-25
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DAVOS – The measures introduced by the European Central Bank last December, especially the Long Term Refinancing Operation (LTRO), have relieved the liquidity problems of European banks, but have not cured the financing disadvantage of the highly indebted member states. Since high-risk premiums on government bonds endanger the capital adequacy of banks, half a solution is not enough.

Indeed, that supposed solution leaves half the eurozone relegated to the status of Third World countries that have become highly indebted in a foreign currency. Instead of the International Monetary Fund, it is Germany that is acting as the taskmaster imposing tough fiscal discipline on them. This will generate both economic and political tensions that could destroy the European Union.

I have proposed a plan that would allow Italy and Spain to refinance their debt by issuing treasury bills at around 1%. I named it in memory of my friend Tomasso Padoa-Schioppa, who, as Italy’s central banker in the 1990’s, helped to stabilize that country’s finances.

The plan is rather complicated, but it is legally and technically sound. I describe it in detail in my new book Financial Turmoil in Europe and the United States.

European authorities rejected my plan in favor of the LTRO. The difference between the two schemes is that mine would provide instant relief to Italy and Spain. By contrast, the LTRO allows Italian and Spanish banks to engage in a very profitable and practically riskless arbitrage, but has kept government bonds hovering on the edge of a precipice – although the last few days brought some relief.

My proposal is to use the European Financial Stability Facility (EFSF) and the European Stability Mechanism (ESM) to insure the European Central Bank against the solvency risk on any newly issued Italian or Spanish treasury bills that it may buy from commercial banks. This would allow the European Banking Authority to treat these various T-bills as the equivalent of cash, because they could be sold to the ECB at any time.

Banks would then find it advantageous to hold their surplus liquidity in the form of T-bills as long as these bills yielded more than bank deposits held at the ECB. Italy and Spain would then be able to refinance their debt at close to the ECB’s deposit rate, which is currently 1% on mandatory reserves and 25 basis points on excess-reserve accounts.

This would greatly improve the sustainability of these countries’ debt. Italy, for instance, would see its average borrowing cost decline from the current 4.3%. Confidence would gradually return, yields on outstanding bonds would decline, banks would no longer be penalized for owning Italian government bonds, and Italy would gradually regain access to the market at more reasonable interest rates.

One obvious objection to this strategy is that it would reduce the average maturity of Italian and Spanish debt. I believe that, on the contrary, this would be an advantage in the current exceptional circumstances, because it would keep the Italian and Spanish governments on a short leash; no country concerned could afford to lose the ECB facility.

In the case of Italy, the short leash would dissuade former Prime Minister Silvio Berlusconi from seeking to topple Mario Monti’s new government (which has only a fragile majority), because if Berlusconi precipitated an election, the electorate would punish him. This would help to reestablish political stability and accelerate Italy’s return to the market.

My proposal fulfills both the letter and the spirit of Article 123 of the Lisbon Treaty. The ECB’s task is to provide liquidity to banks, while the EFSF and ESM are designed to absorb solvency risk. The ECB would not be facilitating additional borrowing by member countries; it would merely allow them to refinance their debt at a lower cost.

Together, the ECB and the EFSF could do what the ECB cannot do on its own. This would provide temporary relief from a fatal flaw in the euro design’s until the member countries devise a more permanent solution.

The EFSF would have practically unlimited capacity to insure eurozone T-bills in this way, because no country could default as long as the scheme was in operation. Nor could a country abuse the privilege, lest it be automatically withdrawn, causing the country’s cost of borrowing to rise immediately.

For the first time in this crisis, the European authorities would undertake an operation for which they have more than sufficient resources. Coming as a positive surprise to the markets, it would reverse their mood. After all, markets do have moods; indeed, that is what the authorities have to learn in order to deal with financial crises.

Contrary to the current discourse, the long-term solution must provide a stimulus to get Europe out of a deflationary vicious circle – structural reform alone will not do it. The stimulus must come from the EU, because individual countries will be under strict fiscal discipline. It will have to be guaranteed jointly and severally – and that means eurobonds in one guise or another.

George Soros is Chairman of Soros Fund Management and of the Open Society Institute.

BANKS´ ZERO- TOLERANCE TESTED BY FED / THE WALL STREET JOURNAL ( HIGHLY RECOMMENDED READING )

2012-01-27T04:12:00.001-05:00

HEARD ON THE STREET

JANUARY 26, 2012, 3:21 P.M. ET

Banks' Zero-Tolerance Tested by Fed

By DAVID REILLY

Just wait until rates rise. That has been the refrain for some time from a host of financial firms groaning under the weight of zero interest rates. Now, with the Federal Reserve saying rates may stay near zero until late 2014, those firms look like Linus waiting in vain for the Great Pumpkin.

And there is a cost to this so-far-fruitless vigil. The Fed's zero-interest-rate policy, which began in December 2008, coupled with its extraordinary moves to bring down long-term rates, have pressured profits at big banks. Meanwhile, insurers, pension funds, assets managers and others are seeing investment returns and income crimped.

Of course, dealing with interest-rate cycles is part of the financial business. But this time is quite different. If the Fed finally raises rates by late 2014, its zero-rate policy will have lasted six years.

That raises fears that financial firms are facing a structural change in the rate environment, despite the Fed's projection that short-term rates should one day bounce back to around 4%. This could lead to further cost cutting and shedding of some business lines, even as financial firms grapple with upheaval caused by the changing regulatory landscape.

There is the additional risk that the Fed's outlook could be flawed and that it has to raise rates earlier than expected. In that case, finance executives who make changes based on the Fed could actually end up wrong-footed by the central bank.

A prolonged period of ultralow rates hurt because asset returns fall but, over time, firms get less benefit from lower funding costs—deposit rates generally don't fall below zero. One clue to the cost comes from estimates banks provide on the potential impact of a sudden change in rates. In the third quarter, for example, J.P. Morgan Chase said that a one percentage point rise in all interest rates would boost pretax earnings over a 12-month period by about $2.5 billion. A rate move twice that size would result in a benefit of $4.5 billion.

Even if only long rates moved by one percentage point, while short-term ones stayed unchanged, the bank said there would be a gain of $576 million. Bank of America tells a similar tale. It said a one-percentage-point increase in rates would boost interest income by $1.4 billion.

The reason behind such gains: Banks are often able to increase the price of loans faster than they have to increase their cost of funding for, say, deposits. They are also able to roll maturing investments into higher-yielding instruments. And rising rates usually come with stronger economic growth, which leads to more lending and less bad debts.

Granted, net interest margins for banks with more than $1 billion in assets, at 3.47% at the end of the third quarter, are in line with the long-term historical average. Also, the difference, or spread, between two-year and 10-year government debt is above long-term averages.

Yet the biggest banks face a tougher time. BofA's margin in the third quarter, for example, was 2.45%. This is largely because they have a higher proportion of assets in investments, as opposed to loans, than smaller banks.

These are often of shorter-than-usual durations due to uncertainties over the rate, economic and market outlook. And that is painful: The spread between three-month and three-year government debt is about 0.34 percentage point, a third of its long-term average.

Speaking on his firm's earnings call this month, BofA finance chief Bruce Thompson said the only things that will cause net interest income to rise "are primarily a change in interest rates, and to the extent that we see a meaningful change in loan demand."

Bank investors should hold on to their comfort blankets: They face a long, cold wait for the gains that will come from any upturn in rates.