Twofish's Blog

July 26, 2008

Note on hot money inflows

Filed under: china — twofish @ 6:59 am

Just a note on the source of hot money into China…

Personally I do not think that the bulk of the hot money comes from Chinese family networks. Much of it certainly does, but the numbers we are seeing are just too large. I think the bulk of the hot money comes of accounts controlled by PRC corporations that are repatriating dollars that in years past would have remained in Hong Kong.

About Chinese banks

Filed under: china, finance — twofish @ 6:54 am

AJ: Brad- I wonder if the trigger to adjust will come from an internal crisis in China’s financial system. As Michael Pettis noted yesterday China’s mortgage market actually looks a lot like the US market in 2006 and their financial institutions are even more precarious,

We’ll see over the next several months, but I’ve had a long standing disagreement with Michael Pettis over the health of the Chinese banking system, and I am much more optimistic that it will withstand a slowdown than he is. In particular, I do not think that Chinese banks generally are more precarious than US banks.

The basic problem with US banks is that they were able to use securitization to circumvent restrictions on lending and reserve requirements. Chinese banks just weren’t allowed to do this. Yes people in Chinese banks may have tried to circumvent the restrictions on lending, but it makes a big difference if you have to make some effort to circumvent the regulators, than if the regulators are simply not standing in your way.

One big difference is that Chinese officials have been worried about a banking collapse since 1998 and have been working very hard not to make it happen. By contrast, if you go to 2004-2005, none of the regulators seemed very concerned about the possibility of banking problems, and so the US allowed things that Chinese officials simply did not. For example, there is nothing in China that I can see that corresponds to widespread lending of subprime mortgages or the securitization infrastructure that supported this mess.

One other difference between China and the United States is that urban wages in China are growing rapidly whereas wages in the US have been stagnant since the late-1990’s. This means that there is much less pressure to extend massive amounts of consumer credit.

Again, I might be wrong about this and it could be the Chinese banking system is going to collapse in three months. However, if it turns out that the Chinese banking system doesn’t collapse or experience major difficulties in the next year, I think the psychological impact in global politics and economics is going to be profound.

The assumption that people have is that the US is better than China and so if something is bad in the US, then it is worse in China. If we have a situation in which this turns out obviously not to be the case, it’s going to shake some basic assumptions people have on the way the world works, and as people try to make sense of the new order of things, unexpected things will happen.

Notes on the US Foreign policy toward China

Filed under: china — twofish @ 6:35 am

Huizer: lean on China (if necessary with volume- or category- related import quota’s) on issues like environment, working conditions, higher and better collected taxes (yes, in this case!) and much better provision of collective goods.

The problem is that this presumes that people outside China are somehow better and wiser at making economic tradeoffs and in generally running an economy than people in China. One lesson of the last set of bank problems is that its not clear that people in the West know how to run an economy better than the people than people in China. Certainly suggestions and ideas are appreciated, but if things start become more than polite suggestions, I do think that China needs to push back a bit.

China can take care of itself, and I’d much rather people in the West do what they need to do out of pure self-interest than out of concern for people in China. If the United States needs to raise tariffs to protect jobs in Kansas and North Carolina or send troops into the Middle East to protect the flow of oil, I’m fine with that.

The trouble with mixing self-interest and altruism is that self-interest ultimate discredits any altruism. By trying to link trade and liberal political reform, the West has managed to completely discredit the democracy movement. If the West starts supporting a “earthquake-proof schools movement” through trade pressure and then the Falugong, Tibetan independence people, and labor unions show up to advance their interests, this will destroy public support in China for the ‘earthquake-proof schools movement.”

I made a point at a discussion about foreign policy toward China where I pointed out that it was very damaging for Western nations to push policies as being good for the Chinese people when it’s pretty clear that the motivation were self-interest. For example, when people bring up intellectual property, ultimately it is because Western companies want to make more money…..

The speaker replied that Chinese aren’t stupid and can obvious see that the West in these situations is acting out of self-interest, ignore the altruistic coating, reply accordingly. Fair enough…. So when the US government then moves the topic from trade and intellectual property to political dissidents and minority issues then……

July 21, 2008

Notes on Washington Post article

Filed under: Uncategorized — twofish @ 6:42 am

The hardest part about writing the previous article wasn’t actually gathering the information.  It took me about an hour on google to track down the information in the Washington Post.  The hard part was that Donald Clarke ended his blog post with:

Thus, one can only conclude that when the law prohibited the authorities from doing what they wished to do, they simply didn’t give a damn.

And I had to struggle extremely hard to avoid saying something very snide and sacastic in response.

One of the deep ironies of this situation is that the purpose of a criminal justice system is to make sure that there is no rush to judgment and that the facts of a case are known so before one makes a final (and in the case of the death penalty irrevocable) judgment.  The trouble with snap judgments is that they tend to be based on prejudices rather than facts, and “Chinese officials are corrupt and blood thristy devils that don’t give a damn about the law” is just as strong and potentially dangerous prejudice as “(insert your ethnic group) are all dangerous terrorists.”  And the fact that everyone (myself included) tends to make these sorts of judgments is *precisely* why we have courts and legal systems, and why in any sort of argument about what happened and what the law should do about it, you need two skilled litgators arguing against each other.

What bothers me is that I’m not the Washington Post, and I was able to with minimal googling able to come up with data that the writer of the article seemed to be quite unaware of.

The most interesting part of what I found is that the key paragraph of the Washington Post article is just wrong…

The public execution of the men was a dramatic example of the massive, unforgiving security operation that has been mounted in China to protect the Beijing Games from what Communist Party authorities describe as an urgent threat of violence and anti-government protest.

If you look at the timeline of events concerning the execution in Xinjiang, it becomes quickly obvious that this statement is just wrong.  The two people involved were arrested  in January 2007.  Their trial occurred last November and was concluded in November 9. 2007.  The delay between November and now is in part due to an new procedure by which all death penalty cases are reviewed by the Supreme People’s Court, and in short the timing of the executions had absolutely nothing to do with the Olympics as far as I can see.  Also if you look at the charges against Mukhtar Setiwaldi and Abduweli Imin, they are pretty serious.  One thing that none of the Western reports mention was that during the arrest, a police officer was killed and that the defendants were charged with possessing  with 16 kg of explosives, 67 hand grenades, and two suicide suits.

Now one could argue about the unfairness of the Chinese judicial system and bring up the possibility that the defendants were totally innocent.  But it is interesting that as the story progresses what the defendants were *charged* with gets removed.

Washington Post appears to get executions in Xinjiang wrong

Filed under: china — Tags: — twofish @ 5:34 am

This just came over the CHINALAW list in response to

about this article in the Washington Post

The Washington Post may be confused about what actually happened. There
is this report from Radio Free Asia about two executions that occurred on the date and the location of that
reported in the post.

The article apparent said that the defendants were immediately executed after
trial, and now contains the corrected information.

talks about this, and contains a translation of Xinhua reports on the

There was also a report in the Associated Press on 7/11

which also didn’t report that the execution was public, and incorrectly
reported that they were executed immediately after trial. In fact the trial
took place November last year.

Also the World Uyghur Congress held a protest about the executions on 7/12

and there is nothing in the press releases or anything else that they have
issued that suggests that the execution was public.

This report was copied on the Irish Times on 7/14

which mentions that the prisoners were led away (although how much it was
copied from RFA is unclear).

And the report didn’t make it to the Washington Post until 7/19

From the Radio Free Asia and Irish Times report it appears that there was a
public sentencing and then the defendant were led away to be executed in
private. This is precisely the procedure which is stated in Article 212.

It is possible that the Washington Post has an independent set of witnesses to
a public execution, however if that were the case, I think it would warrant
an entire article rather than a paragraph in an article about the Olympics.
One thing that I find curious is how the reporter for the Washington Post
seems to be quite unaware of what a very serious violation of Chinese law a
public execution would be.

Also the two people that were executed were hardly anonymous. The cases of
Mukhtar Setiwaldi and Abduweli Imin have been extremely high profile within
the Chinese media over the last year. You can google for the Chinese
transliteration of the names Abduwali Yiming (阿不都外力·依明) and Muhataer
Setiwalidi (穆合塔尔·色提瓦力迪).

It is always important to be careful with accusations of criminal activity
since it is very easy to assume what happened based on fragmentary
information that a criminal act occurred when in fact it may not have.

July 20, 2008

Thinking about time and money

Filed under: Uncategorized — twofish @ 11:37 pm

My mind gets into these weird moments where it starts making connections between seemingly unrelated things.

About two nights ago I was staring at a sculpture in Union Square trying to make sense of it when someone with very bad dental work started explaining to me the various components of the sculpture and after about five minutes, he politely asked if I could give him some spare change which I did since I learned something from him.  The main thing that I learned was the meaning of the numbers.  You have one set numbers which represents the time since midnight, and that part is obvious.  What is less obvious is the other set of numbers which represent the time till midnight.  What you have is basically a digital hourglass.

The thing that the sculpture reminds me of is the light cone and the relationship between time, money, and distance.

The light cone is an object in Einstein’s theory of special relativity that divides the past and the future.  Within the past, there are events that you can see, within the cone of the future are the events that can be affected by your actions.  The light cone resembles something of an hour glass in which grains of sand fall from the future through the present into the past.

The relationship between space, time and money is that with enough money, you can always transcend distance, at least the distances between two points on the globe, but regardless of how much money you have, you cannot transcend time.

Alternate history – Watchmen trailer

Filed under: Uncategorized — Tags: , — twofish @ 10:51 pm

Noticed something very interesting on the new Watchmen trailer which involves superheroes in an alternate history 1985.  The interesting thing is that there is one frame in which there is an American flag draped over the coffin, and that flag has more than 50 stars.  I counted 54.

Interesting detail.

July 12, 2008

Financial mutually assured destruction

Filed under: china, finance — Tags: , , , — twofish @ 5:25 pm

don’t think that owning large amounts of US debt gives China that much leverage over US policy decisions. It’s very easy to think of ways that China could destroy the US economy. It’s hard to think of ways that China could destroy the US economy without destroying the Chinese economy.

The only scenario I can think of in which China would declare “economic war” on the US would be if it felt its national survival to be at risk, and the only plausible situation in which I can think of this happening is explicit US support for Taiwan independence. The fact that the Bush administration moderated its policies toward Taiwan between 2001 and now was I think driven in part by economic considerations, but that is the only issue I can point to where US debt played a part.

One other thing that economic considerations have played a part in is that Chinese holdings of US debt have eliminated whatever small support there is for a policy of “neo-conservative regime change.” There is no way that the US could fund a major effort at destabilizing the Chinese government (and a few thousand dollars to dissidents that everyone ignore doesn’t count) since that money comes from China.

One note is that the neo-conservatives were particularly idiots at economics, and the fact that they were such idiots and self-righteous, arrogant idiots meant that no one with the slightly amount of business sense would talk to them. So they ended up financing their “war for freedom” by borrowing massive amounts of money from the regimes that planned to eventually overthrow (Saudi, Russia, and China). The only good thing about this is that it discredited them before they could start World War III.

Just like having China embedded in the world financial system and dependent on the United States was intended to keep the idiots out of power in China, I think that having the US embedded in the world financial system and depedent on China keeps the worst idiots out of power in the US. So the influence that China has on US policy (which I might add is still nowhere near the influence that the US has on China policy) is IMHO, not a bad thing. (google for the term constrainment)

July 10, 2008

Notes of China as a creditor

Filed under: china, finance — twofish @ 11:34 am

Huizer: as was the previous owner. In order to have ofices in the US, a foreign bank/BHC itself must comply with the Basle accords, and its domestic governance and regulation must also be in accordance with those accords.

There really shouldn’t be a major issue with this, since China has agreed in principle to the Basel accords, and I don’t see anything within the CIC structure that would prohibit it from acting as a BHC under Federal Reserve supervision.

Also there are lots of Chinese banks that aren’t owned by CIC.

One issue here is that a lot of the regulations on foreign banks operating in the US are discretionary, which gives a lot of power to the regulator to prohibit a license if they just don’t like you. Also in the case of the US, there are so many different regulators, that it’s easy for one to just say no if they don’t like you. One of the goals of WTO was to reduce this problem, and a lot of the standards that China agreed to was to reduce regulatory discretion. However, when the WTO accords were being negotiated, no one really thought about or cared Chinese banks operating in the US, so the agreements that China made in opening up the financial services markets aren’t reciprocal.

Keeping on topic (heh, heh) that might be one of the larger consequences of China as creditor in that the issue of opening up the US financial services market to Chinese banks is now on the table, whereas it was not before. The concept until this year was that US banks would be the intermediaries for Chinese savings since they were supposedly much better run than Chinese banks.

As a side note, German Landesbanks were a major buyer of mortgage-backed securities. They were required by Basel to have reserves consisting of “high quality” securities, and guess where you can get AAA bonds paying very high interest……. Ooppps….

Huizer: But that leaves the problem that these banks are, part of the same BHC.

Hypothetically, the Chinese government could split up ownership of the banks with different holding companies, however in that case, it’s not unclear that this would satisfy US regulators since the different holding companies would ultimately answer to the Communist Party.

However, this is another consequence of last years events, since last year you could argue that having Chinese banks under the ultimate control of a quasi-governmental agency was a bad thing that would automatically disqualify a bank from operating in the US, since private banks were obviously much better at risk control. You can’t make that argument now without people laughing at you.

Also, there is a spectrum of effective control among Chinese banks. There are banks that are more controlled by the Party and Central Government and banks which are less controlled by the Party and Central Government. It’s not necessarily the case that the banks that are less controlled are better run.

Looking at broader issues, the big obstacle I think is to have the US government more or less accept that the Chinese economic system in which the Communist Party makes a lot of the decisions is legitimate way of running a country. It’s not that China is explicitly trying to export its system of government, but rather there is this psychological block that says that the US can tolerate a system of government run by “evil Communists.”

There is much less of a block on the other side, since there is no psychological block that I can see for the Chinese government to adopt practices by “evil capitalists” if they can see it as being able to keep themselves in power. But there was in 1980. Coming up with theories of government which would allow China to adopt “capitalist” ideas without calling into question the legitimacy of the whole system was a major challenge.

I suppose what will come out of this is likely the notion that the United States can tolerate a Party run economy, without tolerating the way that the Party treats political dissidents, but even accepting this idea is going to require some time.

This is the only unique thing I can think about the Chinese situation. There are a lot of challenges in getting the German and Japanese banking system to work the US, but in the case of Germany and Japan, the US can accept that they are not being run by “evil Communists.”

The problem that the US faces is that if it goes the route of saying “we aren’t going to let the evil Communist Chinese set up banks in the US” it goes against a lot of the other norms that the US has stated it believes in like regulatory transparency or creation of an impartial legal system.

Huizer: In fact an interesting situation, taxing the routinely adversary lawyers mentality of US regulators in the face of foreign authorities that are skilled in not taking no for an answer and (falsely or rightly aware) that they have financial leverage.

Also if you have money, you can hire your own lawyers. One thing that is happening is that Chinese banks are very actively recruiting Chinese Wall Street bankers with deep knowledge on how the system works. There have been a number of recruiting efforts in NYC by Chinese banks, and at one of them, I was struck that the bank had recruited into its top management one of the legendary people in Wall Street.

One problem is that there is still something of a “Cold War” mentality lurking in the US, which is a problem since the issues that China is posing are ones that are very different from the Cold War Soviet Union. The Soviet Union was never in a position to set up banks in the US or to recruit high level US bank executives to run its economy, and there never was a de-facto alliance between American capitalists and Soviet Communists. The Chinese Communist Party has embraced markets and international trade in a way that the Soviets were never able to for the reason that markets generally work better than central planning, but the fact that the CCP has been market-oriented for a generation is now posing some a lot of new issues.

Huizer: he more I think of it, the spirit of assertiveness and nationalism (see also the Olympics/Tibet display of public sentiment) is probably catching on in Beijing.

It’s actually not “catching on.” Chinese have been assertive and nationalistic for the last 150 years, and popular Chinese nationalism in 2008 is actually much, much less anti-American than it was in 1994. You have people demonstrating against CNN media bias, but those people are trying to get into American schools so that they can get jobs with American companies. Also in 1994, there were a lot fewer Mainland Chinese in the US.

The reason this has come up is that people in the US had the expectation that Chinese nationalism would decline over time, when Chinese youth are probably much more nationalistic than their parents since Chinese youth today grew up in a time in which China has been rising.

The other thing that Americans are not aware of is the degree to which the ideals of “1989 Tiananmen students” have been completely discredited in China. One rough analogy to what has happened in China is a socialist hippie flower child living in the middle of the Reagan revolution. One reason for this is that the Communist Party has embraced markets and globalization, whereas their opponents have tended to be anti-market and anti-globalization (i.e. trade sanctions on China). This is a big problem since it put the Tiananmen students on the wrong side of the tide of history.

Huizer: As a non-Chinese with too little knowledge of Chinese history I would nevertheless tend to dispute claims that Zhonghua is/ has been permanently peaceful.

As a Chinese with a lot of knowledge of Chinese history, I would also strongly dispute those claims. You can write a history book in which China has been always peaceful and defensive, and that is the history book you give to elementary school students to indoctrinate them. However, there are other ways of telling the story. If your goal is to make Chinese look evil and warlike and a danger to civilization that must be crushed, yeah, you can write a history book that says that.

My own view is that to effectively advance Chinese interests in a global world, you *must* read these negative histories so that you can understand how people perceive China negatively, so that you can effectively counter those perceptions.

I should point out that I don’t think that the type of political indoctrination that Chinese elementary school students get is worse or more factually incorrect than the type of political indoctrination that American elementary school students get. One of the purposes of elementary schools of any national-state is political indoctrination.

Huizer: During periods of foreign domination (the Yuan and Qing dynasties) the abject foreign rulers forced China into territorial acquisition which the Chinese people gallantly sabotaged, but not with immediate results.

What gets interesting is when you have multiple and contradictory versions of history within the same book. In the version of history that I tell my kids, the Yuan and the Qing were not “foreign” dynasties, and the Mongol and the Manchu rulers of China were Chinese. Different Chinese, but Chinese nevertheless.

I do have some personal motives here. First is that the broader you define Chinese, the less likely it is that I’m excluded.

The second motive, is that by reading about how the Manchu rulers of China were able to be both “Chinese” and “Manchu” and how they were ultimately able to define the term “Chinese” it gives me a notion of what to do in my situation. I’ve found myself in the ruling power elite of the United States, and the strategies that I’ve ended up using to be both Chinese and American and to define what an American is are very similar to the ones that the Manchus used.

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