World economy flying on one engine !

IMF Managing Director Christine Lagarde participating in the Asia Finance Conference at the Bank of Indonesia, in Jakarta, Indonesia on Sept 2, 2015. PHOTO: EPA

With a strong dollar and growing fiscal and trade deficits, small wonder that the markets are debating whether that engine is flying on empty

I was in Jakarta this week attending an IMF-Bank Indonesia conference on the Future of Asian Finance, the title of an International Monetary Fund (IMF) book launched last week with essays by IMF experts reviewing the lessons from the past and sketching how Asia can build its future, with a supportive financial system.

This is a very useful book, because it contains massive amount of helpful data and analyses for Asian policymakers to strategise how to respond to the current turbulence.

This weekend, the G20 Finance Ministers and central bank governors are meeting in Ankara, as Turkey takes the chair of G20 Presidency for 2015, with the key objectives of: strengthening global recovery and lifting potential; enhancing resilience; and buttressing sustainability.

Unfortunately, the current environment is heading in the opposite direction.

In the IMF Note for the G20 Meeting assessed that global growth for the first half of 2015 was slowing; financial conditions for emerging market economies have tightened; and risks are tilting towards the downside.

My interpretation is that basically what the IMF is saying is that if we are not careful, a perfect storm may be looming.

Understandably, the fund called for strong mutual policy action to raise growth and mitigate risks.

The real problem is that G20 members’ policy actions are likely to pull in different directions.

Sept 15 will be the seventh anniversary of the failure of Lehman Brothers, a landmark event, which triggered efforts to prevent global collapse that set up the greatest financial bubble in recorded history.

In the first half of 2015, almost every country witnessed record peaks in their stock markets, bond markets and real estate prices.

Given the fact that most countries are still slowing or having modest recoveries, this bubble has been pumped up by advanced country central banks in an activist monetary gamble called quantitative easing.

Indeed, the McKinsey Global Institute has warned that global credit and leverage is at its highest ever, and despite much soul searching about the need for macro-prudential regulation to prevent bubble risks, there has been not much deleveraging.

We have the odd situation whereby the governor of the Bank of England, currently chairman of the Financial Stability Board, warns about real estate bubbles, but hasn’t dared so far to raise interest rates in his own country.

The Fed has also anguished over whether to raise interest rates this month or in December. The polarity of debate is astonishing.

There are those who say that the US economy is now strong enough to take a 25 basis point interest rate increase, whereas authoritative figures like former Treasury Secretary Larry Summers have argued that another round of QE4 may be necessary to prevent “secular stagnation”.

When the Chinese authorities intervened in the A share market in August, the Financial Times and Wall Street Journal revelled at China’s debacle, only to wake up after their own markets, Dow, Nikkei and German Dax, witnessed the largest drops since 2011 after the announcement of the yuan devaluation of only 1.9%.

People in glass houses should not throw stones at each other, forgetting that other people’s misery, mistakes or misfortunes rebound on oneself.

The markets are not wrong to be nervous. The current global slowdown and turbulence is not the fault of any single country, but the result of a highly fragmented international financial system (IMS) being buffetted without a single monetary authority, fiscal authority or regulatory authority.

We have moved from a unipolar world to a multipolar casino where no one is fully in charge.

The IMS fragility stems from the fact that its inherent trade and debt imbalances, swing periodically to excesses without a coherent or single mechanism to control or moderate them.

Remember, the IMF is not the world’s central bank – that power was assumed by the leading sovereign central banks, particularly the US Fed. In 2005, then chairman Ben Bernanke complained that the Fed was losing monetary policy effectiveness because of excess savings by the surplus countries, notably China and Japan.

The United States can run ever larger trade deficits, because surplus countries are more than willing to hold dollars in their foreign exchange reserves.

The 2007/2009 crises erupted when the trade imbalances generated a second order imbalance with the United States and European banks expanding credit both off-balance sheet and off-shore in dollars and euro.

The complacency of their regulators allowed these banks to be excessively leveraged. Threats of raising interest rates caused a market reversal and illiquidity, leading to a crisis of confidence and collapse.

Seven years later, the advanced country central banks and regulators again crow that they have “fixed” the problems, but the markets are as fragile as ever.

They are held together because the central banks have emerged as not only lenders of last resort, but buyers of first resort at any sign of market tantrum.

The stark reality was that it was China’s massive reflation in 2009 that reduced its current account imbalances, increased commodity prices and pulled the world out of recession.

But that was at a cost of a huge internal credit binge. Now that China has taken a pause in growth and attempted to correct its internal imbalances, the rest of the world is taking fright.

When the underlying imbalances are correcting as is happening now, there are no excess savings and no excess credit – only the prospect of higher interest rates.

And higher interest rates mean the pricking of the global asset bubble.

In short, before 2007, the world was a four-engine jet, propelled by the United States, Europe, Japan and the emerging markets, led by China.

After 2009, when Europe and Japan slowed, it was a two-engine jet, with China helping the United States sustain growth and currency stability.

Since the United States and Japan are hesitant to want China to join the special drawing rights club, that second engine is being recaliberated.

The world is now flying on one engine, the United States and US dollar.

With a strong dollar and growing fiscal and trade deficits, small wonder that the markets are debating whether that engine is flying on empty.

And what is the Future of Asian Finance? Watch this space next.

By ANDREW SHENG .THINK ASIAN
Asia News Network
Andrew Sheng comments on global issues from an Asian perspective.

The writer, president of the Fung Global Institute, Hong Kong and the chief adviser to the China Banking Regulatory Commission, is a former chairman of the Securities and Futures Commission of Hong Kong.

WW2 Eastern frontier main battle: China's V-day parade 2015

Xi takes group photos with foreign guests ahead of V-Day parade Chinese President Xi Jinping took group photos with foreign leaders, government representatives and leading officials of international and regional organizations ahead of a V-Day parade on Thursday morning.

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China holds parade, vows peace on war anniversary

Staged a grand parade on Thursday in Tian'anmen Square to mark the 70th anniversary of victory in the Chinese People's War of Resistance against Japanese Aggression (1937-45) and the end of World War II, China attracted the world's attention by showing the aspiration for peace and its determination to safeguard post-war international order.

President Xi Jinping delivered a speech before the parade to call people to commemorate the hard-won peace after years of bloody war that had inflicted heavy losses on China and other countries.

Scan the code and check China Daily's up-to-date full coverage of China's V-Day parade.

In honoring all the Chinese who perished in the war and those who have contributed to the victory in the deadly conflicts with Japan, the parade is a tribute to history and a call for peace, Xi said.

But he warned that the world is far from tranquil although peace and development have become the prevailing trend.

War is the sword of Damocles that still hangs over mankind. We must learn the lessons of history and dedicate ourselves to peace, he said.

Ravaging through Asia, Europe, Africa and Oceania, that war inflicted over 100 million military and civilian casualties. China suffered over 35 million casualties and the Soviet Union lost more than 27 million lives, Xi said.

The victory of the Chinese People's War of Resistance Against Japanese Aggression is the first complete victory won by China in its resistance against foreign aggression in modern times.

This great triumph re-established China as a major country in the world and opened up bright prospects for the great renewal of the Chinese nation, Xi said.

Xi vowed that China will never seek hegemony or expansion no matter how much stronger it may become. He said the country will never inflict its past suffering on any other nation.

Xi, also general secretary of the Communist Party of China Central Committee and chairman of the Central Military Commission, inspected the troops after the speech.

On the Tian'anmen Square, Xi and the first lady Peng Liyuan welcomed honored guests, including 30 national leaders, to watch the parade which involved more than 12,000 military personel as well as veterans and their descendants. Seventeen foreign military teams also took part.

Leaders including Russian President Vladimir Putin, President of the Republic of Korea Park Geun-hye, Pakistani President Mamnoon Hussain and UN Secretary-General Ban Ki-moom witnessed the historical event.

1779 overseas Chinese from more than 120 countries and regions were invited, 5 of them were invited to watch the parade from the Tian'anmen Rostrum, including Chinese American physicist Paul Chu, and business tycoon Lucio Tan.

Opened with a helicopter flying by parading the national flag, the march past lasted for about 50 minutes. 20 military helicopters flew overhead forming the figure 70 to mark the 70th anniversary commemorations. Seven fighter jets flew past, making the world's longest colored vapor trail.

After more than 300 veterans, including Kuomingtang veterans, and their descendants passed by in two vehicle formations, eleven formations of Chinese troops marched past, including 51 female honor guards. It was the first time female honor guards have joined a parade. More than 50 generals, with an average age of 53, leaded parade units.

Seventeen formations of foreign troops from 17 countries including Russia and Pakistan, marched past, before twenty-seven formations of armaments paraded. This was the first time foreign military teams join in a Chinese military parade.

Studio interview: China to showcase never-before-seen military hardware http://t.cn/RyAuPdo

More than 500 pieces of China's latest equipment were displayed, 84 percent of which have never been viewed by the public, many of which are among the world's most advanced.

The navy displayed its latest anti-ship missiles, ship-to-air missiles and carrier-based aircraft, while the air force brought long-range bombers, fighters and airborne early warning and control (AEWC) aircraft.

The armaments on display also included the army's newest helicopter gunships and battle tanks as well as intermediate-range conventional and strategic ballistic missiles from the Second Artillery Force.

The events ended with 10 air force formations flying over the square and doves and balloons being released.

China has held 15 military parades since the establishment of the People's Republic of China. In 1999 and 2009, grand military parades were held to celebrate the country's 50th and 60th founding anniversary. This was the first parade not held on China's National Day.

As it is an international convention to hold a parade to mark the victory day, China held the grand event with a theme of "remember history, cherish the memory of China's revolutionary martyrs, uphold peace and create the future".

By PENG YINING in Tian'anmen square (chinadaily.com.cn)



Obama's absence at parade costs US chance to display leadership

Tomorrow, China will be holding a military parade to commemorate the 70th anniversary of the victory in the World Anti-Fascist War. Dozens of global leaders or their special envoys have arrived in Beijing, save for US President Barack Obama or his high-level representative, who could have been a guest of honor at the ceremony.

The absence of the US president at such an important event is a pity. Washington’s move has also affected most Western European leaders, who decided to follow the US' lead.

But Washington compromised, and will send US Ambassador to China Max Baucus to the parade, a gesture to show that the US will be present at the event. Washington clearly doesn’t want the absence of Obama or his high-level envoy to turn into media fodder.

While it is a pity, Obama’s absence will hardly affect Sino-US relations. Still, as former allies, China and the US have lost a chance to celebrate the victory they achieved together. How they fought side by side 70 years ago continues to be cherished by the Chinese, and the memory of that time has helped nurture a favorable impression of the US.

Geopolitics remains central to Washington’s decision-making process, and weighs heavily on US diplomatic policy. However, calculated moves do not always lead to a better decision. Washington’s ambivalence to Beijing’s invitation has cost itself a chance to display leadership across the Pacific Ocean, regardless of trivial gamesmanship and bickering in the region. The US seems unable to look at the big picture: The parade in Beijing is a righteous cause.

It is not hard to figure out why Obama or a special envoy will be absent. To some extent, the reasons are understandable. First, the US simply wants to show its support to Japan, which strongly opposes the parade and imagines itself as the target of the event. Second, the US dislikes such large parades in a non-Western country, considering it “muscle-flexing.” Third, as the US election approaches, presidential candidates try to earn brownie points with the electorate through China-bashing. The political climate in the US might have made Obama think twice.

To be honest, China never expected Obama to attend. But his “remedial work,” by asking Baucus to attend on his behalf, is weak.

Many China watchers have differing takes on the US’ attitude toward China’s parade. Some believe Baucus’ presence reaffirms an agreement between China and the US that both countries have no animosity towards each other. But some think Obama’s absence is much more complicated.

The Chinese have learned how to deal with narrow-mindedness, so they don’t actually mind whether Obama or a high-level official from Washington will attend. China’s open mind will help steer both countries away from unnecessary disputes

Source:Globaltimes.cn Published: 2015-9-2 21:11:50

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  A region evolves with rising China

  South-East Asia’s complex big power relations demand careful and considered understanding, where frequent complications and familiar gut...

A region evolves with rising China

South-East Asia’s complex big power relations demand careful and considered understanding, where frequent complications and familiar gut reactions do not help.

WHEN countries have difficulty relating to a rising China, part of the problem lies in not understanding where China is heading and not knowing what it will become.

The sheer scale of China’s development and the weight of its trajectory mean that the impact of its rise on the rest of Asia and the world is bound to be considerable and profound.

As a frame of reference, the future of today’s China is often seen in the context of its past: a “Middle Kingdom” entity, the heart of an Asian tributary system, a regional superpower with global pretensions whose once closed-door policy is opening to the world.

Yet none of these references fits because modern China’s pace of change is as rapid as it is vast. Not only is it a post-Deng China, it is now into the fourth- and fifth-generation leadership of post-Dengist society.

A sense of a likely future China may then be deduced through elimination, by discarding what it is unlikely to be.

These include a communist superpower, a nation shaped by a distinct ideology, and one led by a powerful charismatic individual. But what of those things, admittedly few, that it will still be?

One of these is rule by the Chinese Communist Party (CCP), particularly since single party rule continues to be a central bastion of the status quo. Yet even this requires qualification, if not some revision, and is already subject to much speculation.

The CCP has had to undergo some redefinition as circumstances evolve. The state socialism it championed underwent a social(ist) market phase to emerge as state capitalism.

Ideology continues to be diluted as dogma fritters away. Conservatives and reformists both within and outside China agree the trend is irreversible if not also inevitable.

Just about the only thing that a future China is still certain to be is a unitary state. But even this has to be qualified again.

What is now regarded as Greater China – the People’s Republic of China on the mainland, Hong Kong, Macao and Taiwan – are unlikely to be fused into one singularly cohesive whole anytime soon.

Yet they are moving together towards a unitary economy, the basis of the modern nation state. Such a trend is beyond the protestations of democrats and the comprehension of many strategists.

At the same time, provinces are slowly moving towards greater autonomy in economic matters, including in dealings with neighbouring countries. A country as large as China cannot endure too long under strict centralised rule.

And China has endured longer than all others, with the country now into its fifth millennium of continued statehood. These trends and movements take time and may seem imperceptible for other countries, but they are par for the course with China’s enormous timelines.

For decades now, Chinese authorities have also introduced elections at local levels with invited inputs from the Carter Center. Voting has been practised in village and provincial levels, and despite occasional fits and starts the trend is towards a controlled political opening with assured stability.

All of this contributes to the near-incomprehension of today’s China on the part of external observers. A survey of their attitudes, assumptions and responses in any given week attests to this reality.

Questions of whether China (meaning Beijing) can ever govern Taiwan, or even understand Hong Kong, are typical. The real risk of observers not seeing the wood for the trees is ever-present.

A debate of sorts has emerged over China’s likely reaction to a possible win by Taiwan’s Democratic Progressive Party (DPP) in next January’s election. Pessimists who fret over their own cynical pronouncements fail to realise that China is playing for bigger stakes than petty party feuding.

China’s interest in Taipei is Taiwan, not necessarily a Kuomintang (KMT) Taiwan. A lately declining KMT under President Ma Ying-jou has sufficiently energised pragmatists in Beijing to be diplomatic towards the DPP.

Another perennial issue is the presumed rivalry between the US and China. Although competition exists between them, they have more in common than at variance for now and the foreseeable future.

Their shared interests include international security and a single global economy in which both hold the largest stakes. Rivalry in these core areas compromises the interests of both without enlarging opportunities for either.

An understanding of that basic reality is shared between US and Chinese leaders, but apparently not by Japanese ones. The Abe administration is still stuck between old wartime anxieties and proudly snubbing Beijing.

However, China should also not expect anything but Abe’s cancellation of a visit on Sept 3. The occasion, with Western leaders absent, is being presented by some in China as celebrating its victory over Japan.

China: Military parade not aimed at any country

China says its upcoming September 3rd military parade is part of commemorations for the 70th anniversary of its victory in the war of resistance against Japanese aggression, and is not specifically aimed at any country.http://t.cn/RyzoMBy

Nonetheless, the Abe government remains an activist one in provoking competition with China over military issues. Its White Paper released last month inflates China’s maritime military capabilities and even conflicts with US calculations.

Besides the US, Taiwan and Japan, the other barometer of China’s rise as seen through its foreign relations is Asean.

China regards Asean wariness of its territorial assertiveness as limited and negotiable, since not all member countries have rival claims to offshore territory. But Beijing may seriously be underestimating Asean’s sense of solidarity, given not just Asean’s community-building agenda but also its common resolve to develop community cohesiveness.

The established links between China and Asean’s newer CLMV members (Cambodia, Laos, Myanmar, Vietnam) are both limited and fraying in places. Beijing needs to rebuild trust and good faith within Asean as much as in North-East Asia.

China has thus emphasised multi-level, multi-sectoral joint ventures both bilaterally and collectively. Its proposals for a Maritime Silk Road and a One Belt, One Road link to Europe are backed by the China-Asean Maritime Cooperation Fund, the Asian Infrastructure Investment Bank, the New Development (Brics) Bank and China’s own solvency.

On the ground however, Asean collectively seeks enlarged trade volumes with China. However, China’s currency devaluations and the subsequent jolts to regional currencies compromise these goals.

With Indonesia, China is extending cooperation in fighting drug trafficking as Jakarta favours using the yuan for bilateral trade. With Malaysia, China is building linkages in education and industrial development.

Thailand’s post-coup government is seen as leaning towards China, thanks in part to a US snub. Now Thai-Chinese ties are growing over purchases of stockpiled Thai rice and even the prospect of a Kra Isthmus canal.

China’s relations with Vietnam and more so the Philippines will require more time and work. Ironically, Unctad trade data identifies the Philippine economy as the biggest regional beneficiary of China’s rise.

Beijing’s ties with the other Asean countries may be less complicated but still require attention and constant tending. Its record of fully understanding Asean is not impressive.

Overall, Beijing’s relations with Asean and its member nations are economic, diplomatic and socio-cultural, without political interference in their domestic matters. This contrasts with Washington’s largely military posturing and its political pressures on issues of democracy and human rights.

China’s impact on this region is likely to remain non-political and non-military – differing from US interaction. This asymmetry makes up much of South-East Asia’s strategic status quo.

Whether and how it will endure, and whether it deserves to remain, still have to be seen.

By Bunn Nagara Behind the Headlines

Bunn Nagara is a Senior Fellow at the Institute of Strategic and International Studies (ISIS) Malaysia.

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CASS briefing on significance of War of Resistance http://t.cn/RyzoTdB

China is preparing to mark the 70th anniversary of Victory in the Chinese People's War of Resistance against Japanese Aggression and the World Anti-Fascist War. The Chinese Academy of Social Sciences is currently holding a press conference in Beijing on the significance of the V-Day anniversary.