Another clueless article - 2006 June 5

http://www.timesonline.co.uk/article/0,,3-2212112,00.html

It was talking about how this People's Daily article represented the victory of "economic reformers" over "neo-Marxists" when in fact it did no such thing. What the article did was to try to create a synthesis of "reform" and "neo-Marxism" by emphasizing the Marxist and socialist nature of Chinese economic reform. And this hasn't been anything like a secret fight.

Today's People's Daily illustrates this effort at synthesis by talking about the need for more thorough reforms to equalize incomes.

The problem again is one of categorization. Either you are this "old line bad Marxist" or this "new wonderful economic reformer." The issue here is that this isn't how people in China or for that matter reality necessarily looks at things. Most of the Neo-Marxists are emphasizing their reformist nature.

What I think is going to happen is that you'll end up with this mix of neo-Marxist ideas mixed in with neo-liberal ideas, and you are going to come up with a very interesting synthesis.

Politics and strange bedfellows - 2006 June 1

I appear to be one of the few people around that thinks that Chen Shui-Bian shouldn't resign.

Basically I think its bad for political stability if a sitting President resigns, and unless the scandal in Taiwan gets worse, I don't think that there is a reason for him to resign, and much less grounds for his removal. But it's basically up for the pan-Green faction to decide what to do, and I think Ma Ying-Jeou is showing extraordinarily good judgement in resisting calls for pan-Blue to get rid of Chen (and Soong Chu-Yu is showing extraordinarily bad judgement in trying to get rid of Chen.)

First of all, its going to backfire. Second, it's going to get polarize Taiwanese politics even further. One thing that I found in talking to pan-Green folks is that they are extraordinarily and genuinely afraid of pan-Blue acting undemocratically and returning Taiwan to something like martial law. It's very, very important that the decision as to what to do with Chen Shui-Bian come from his political camp. (I'm thinking about Barry Goldwater and the Nixon resignation.)

As far as what this means for Taiwanese politics. Pan-green is a mess. Pan-blue has candidates for the mayoral election this year, a presidential candidate for 2008. Chen's problems are leading pan-green totally leaderless.

This also likely is the end of the independemce movement. The argument used by the independence movement is that Taiwan's problems will be solved with by "identifying with Taiwan." What this did was to get "good government" people on the side of independence. That argument is dead. Without the "good government" middle, independence gets reduced to 30-40% core, with the two likely now screaming at each other.

Notes on the War on Terror and Reply to Thomas Friedman - 2006 May 28

This is in response to the link in Thomas Friedman's response to my article on the QuantWarOnTerror.

The problem is that "bring me scarier boogeyman" sounds a bit like George W. Bush saying "bring it on."

Let me be clear, on this. I think that we (the good guys) will win the Long War. I think that we certainly should win. But we will not win if we are overconfident in ourselves, or if we do not do not take our enemies seriously. Yes Bin-Laden and his kind are evil bastards, but they are smart evil bastards, and if Iraq has taught us anything, its that its a bad idea to be smug, even if you are right.

Now I see two major weaknesses in the strategy of the civilized that Al-Qaeda is exploiting.

* We are thinking in the short term, al-Qaeda is thinking long term. The ultimate intent of Al-Qaeda is to set up a global Islamic state and to destroy the United States. This will not happen next Tuesday or next year, but Al-Qaeda is thinking decades, perhaps hundreds of years ahead.

* Al-Qaeda is thinking in terms of an integrated political-military-economic strategy whereas we are separating the political-military-economic. So far their strategy has been a bit stupid, but they are learning. and as long as you have stagnant economies whose population is rapidly growing, they are going to keep coming.

Why Americans care so much about democracy - 2006 May 26

I have a hypothesis that Americans care so much about democracy because to question democracy questions the very existence of the United States. The United States is rather unique in the world in that it has a national identity based not on a racial, ethnic, or religion myth but rather on the a civic agreement. The ONLY thing that makes an American an American is a legal definition under the US Constitution. Question that, and you question the existence of the United States.

More about hedging - 2006 May 26

Around 1998, there were lots of RAND corporation reports on the PRC-Taiwan military balance and the funny thing about these reports were that they stopped in 2005. Reading closely, one could figure out that the reason that the reports stopped in 2005, was that it was pretty obvious that after 2005, the PRC-Taiwan military balance would rapidly and overwhelming shift toward the PRC, and people didn't really want to talk about that.

I get the same feeling reading current reports on China's military. Something that is obvious is that sometime around 2020, assuming that there is no economic calamity, the PRC is going to be able to outspend the US military. The policy solutions advanced by the "dragon slayers" have basically boiled down to either "destroy the PRC economy" or "attack the PRC now." Those were always nutty, and as time passes, it is becoming obvious how nutty those ideas are. I was worried for a few years that the idiots would start to run things, but starting in early 2006, I'm becoming more and more convinced that the tide of history is leaving the dragon slayers behind.

So China is going to take over the world.....

Not quite....

It's 2006, and the PRC hasn't invaded Taiwan and is unlikely to despite its increasing military advantage. The reason why is that a unilateral invasion of Taiwan is going to have the US Seventh Fleet step in, and that it would wreck the Chinese economy. There is also the other issue that there is a viable alternative for Beijing's policy aims, which is to increase economic links with Taiwan and then wait about thirty to fifty years at which point Taiwan is likely to drop in Beijing's lap.

Similarly, by 2030, the United States is not likely to be able to unilaterally constrain China's actions, but Russia, India, Japan, Korea, Indonesia, Vietnam are going to be able to do something if China does go crazy. By 2030, assuming no economic catastrophe, China is likely to be worried more about what Jakarta's reaction to its actions than Washington's.

Why I don't think that China is a military threat to the US - 2006 May 25

In 2005, China increased its holdings of US Treasuries by $90 billion.

http://www.treasury.gov/tic/mfhhis01.txt

In 2005, DOD says that China spent between $70 and $105 billion on its military (see page 20 of the DOD report). The official number is $30 billion.

In other words, in 2005, China spent about as much or more on the US military as it did on the Chinese military.

Confusion and cluelessness - 2006 May 23

Here is the new report on China's military

http://www.defenselink.mil/pubs/china.html

The technical stuff is interesting, but there is a lot of cluelessness when it comes to China's "ultimate goals." China's ultimate goals are the same now as they have been for the last 180 years which is to be a rich and powerful nation.

The problem is this. There are a lot of people in the US government who believe that China is the enemy and who think a second Cold War is inevitable. The trouble is that China has not been acting in a particularly evil and aggressive fashion. This confuses them, and when asked about Chinese intentions, they respond by saying that the Chinese are secretive and non-transparent about China's goals, when it is obvious to the rest of the world what they are (u.e. to make China a rich and powerful country). The ultimate confusion here is not in China's goals and tactics. The confusion is that China is acting in a way that is different from the evil, nasty way China should be acting.

This goes to the old saying, be nice to your enemies. It drives them nuts.

But it's really irrelevant here. Unless China bombs Los Angeles, a containment policy against China is not viable. One thing that is missing from the report is how China is funding the United States to the degree of $200 billion/year and that any anti-China policy would require increasing taxes past the point of viability. One might reply that this is a military report and doesn't get into issues of finance.

But that excuse is total malarky. China has realized for the last two thousand years that military matters, foreign policy, domestic policy, and economics are not separate realms, and that any effort to separate these from each other leads to bad policy. If nothing else, the US experience in Iraq ought to be a warning that you can't separate the military from the financial. (Remind me also, why the Soviet Union collapsed. The armies weren't defeated in the battlefields, but rather in the bread lines.)

CSRC just issued new measures on IPO - 2006 May 18

One of the main effects of the laws is to move a lot of the rules from laws to administrative measures. The administrative measures that the CSRC has issued are both more elaborate and more flexible than national law. The passage of the Company Law and the Securities Law is part of a general effort toward creating real securities markets, and allowed the government to lift the moratorium on new IPO issues that had existed in the past year.

As far as the political context, the "administratization" of rules in the Company Law and the Securities Law has caused something of a political backlash in the NPC. The CSRC and most of the economics commissions tend to consist of people who trust markets and are not particularly opposed to privatization. There's no one in the PBC, the CSRC, the CBRC, the Ministry of Commerce, or the NDRC, who I'd consider a Neo-Marxist, and the movement of power from Law to regulation tends to move things toward "socialization" (which as far as I can tell is a euphemism for privatization)

However, what has happened is that the Neo-Marxists in the NPC aren't too happy about this, and this is the root cause of a lot of the backlash against the Property Law and the Bankruptcy Law is probably the fear that it will remove a lot of the restrictions on the administrative bodies which will let them undertake politics which the Neo-Marxists oppose.

It's very important here not to regard the Neo-Marxists as the "bad guys" and the market-oriented financial bureaucrats as the "good guys." Doing so implies that we understand economic and political systems more than we do, and that we know enough to label one side of an argument as "great saints" and the other side as "evil idiots" which is not the case. If you read the neo-Marxists, they actually have some very good points to raise and their arguments ought to be taken seriously. In any event there is enough of an overlap and a sense of shared principles to make watching this argument amusing rather than scary and to believe that what will come out is some muddled political compromise which will push things forward.

Debate is a good thing.

Now for something complete different - 2006 May 18

The reason I'm interested in economics and constitutional systems has to do with the first chapter of the Four Books compiled by Zhu Xi from the works of Confucius. You can find copies of the "Great Learning" all over the internet, but the key idea is that to change the world you start with the investigation of things and the individual. A lot of what I'm interested in is how actions of the invididual combine into social systems that do work or don't work.

A lot of this involves studying law. My training is in astrophysics, and that basically involves studying natural laws. One of the key ideas of Confucianism is that there is a connection between laws of the heavens and laws that govern human behavior, and in a real sense, I'm acting very much as something of a court astrologer.

More about the Austrian School - 2006 May 17

I'm finding myself more and more a fan of the Austrian School of economics and of thinkers like Fredrich Hayek and Ludwig Von Mises. It may seem odd that somelike me who has been criticized from time to time of being an apologist for the Chinese Communist Party is such a fan of philosophers of a liberatarian bent, but it seems to me that Von Mises and Hayek have the best explanation of what went wrong with the Chinese economy and society during the 1960's and 1970's.

The basic idea of von Mises is that centrally planned economies don't work because they are unable to calculate all of the inputs and outputs necessary for economic decision making, and for this to work a decentralized system based on markets and pricing systems is necessary. The modification that I would argue that needs to ne made to the von Mises's critique is that "market-based" and "privately-owned" are not synonymous. It's perfectly possible to have an economic in which firms that are state-owned work on market incentives, and it is also perfectly possible to have private firms that don't respond to price signals. The fact that China has ended up with the former and Russia has ended up with the latter explains why the Chinese economy has ended up working better than the Russian economy.

Corporations can do stupid things. What keeps corporations from doing stupid things indefinitely is that they run out of money. Even though Chinese companies are still largely state-owned, they act in the context of a market economy and pricing system, and so they can't do stupid things indefinitely. Moreover because you have a market and a pricing system, you can keep track of what the economy is doing.

The second idea that from the Austrian school which I find attractive is the relationship between freedom and central planning. It's my argument that China has already made most of the transition to a "free society" and that what remains to be done, while major, is small in comparison to the transition that has already been made.

Let me explain. In China today, you will get into serious trouble if you actively organize against the Communist Party. But suppose I'm not a political activist, I just want to ride a bicycle. In the current system, I find money to buy a bicycle, and I go out and buy it. I can choose not to buy a bicycle, but instead buy a kite, or go fishing or do something else. In any case, there is a whole sphere of things which doesn't involve political activism in which I can make choices.

This wasn't the case in the 1970's.

The key to the freedom that now exists is the market transaction. I have money. I exchange the money for goods and services, or I can provide goods and services in exchange for money. This wasn't how things worked in the 1970's. If you are in a society in which the economy is centrally planned, then the central planners tell you whether or not you get a bicycle or not. In a market economy, people have the option of walking off the job and getting a new one. In a centrally planned economy, you don't.

So this is why I would argue that China has already made most of the transition to a "free society." Yes it is the case that if you enter the political sphere, you might end up in trouble, but there is now a whole area of personal life in which people can made their own decisions: what to wear, what to eat, where to live, and whether to buy a bicycle or save up for a car. And the ability to make these choices will spill and already has spilled into the political arena. When you can choose from fifty different types of breakfast cereal (or whether or not to eat breakfast cereal, or whether or not to eat breakfast at all), you start getting used to it, and eventually, you'd like the same sort of options when it comes to politics.

Yet more on Ernst and Young - 2006 May 16

This is the People's Bank of China's orignally rebuttal.

http://www.pbc.gov.cn/detail.asp?col=100&id=1801

I should point out that one of the lessons of this is how a lot of useful information gets removed when you go through a filter. In the case of the original E&Y report, the important piece of information that got removed was that the report mentioned was essentially a piece of marketing literature on global NPL's rather than an academic tome on China's NPL's. (Academic papers usually don't have pretty color pictures.)

The problem with the reporting of the PBC response is that if you look at the original press release, the tone is matter of fact. But the press reports I've seen in the West make it sound like the PBC was emotional and angry, which isn't in the PBC response at all.

Also, the PBC's numbers are not inconsistent with from E&Y's, once you take into account the mistake and match apples and apples. The PBC lists $131 billion for all banks (not just the JSBC). If you add $230 billion for the AMC's (and this is a hard number which there isn't much debate on) and $225 billion for new NPL's (and this is a controversial number), you get about $600 billion in losses add in the $225 billion mistake and $100 billion for miscellanous and rounding errors and you get the $900 billion in the original report.

More on Ernst and Young - 2006 May 15

Looking at the E&Y press release, it seems to me that E&Y was scared to death, but not of the Chinese government.

If E&Y had stood by its numbers then it would have be in serious legal trouble. E&Y is an auditor for the Industrial and Commerce Bank of China and signed that accounting certification saying that the numbers for ICBC are good. If E&Y now says that it doesn't believe those numbers, then it would have been in deep, deep, deep legal trouble.

If you look at the one paragraph statement, it was carefully crafted to get E&Y out of the deep legal hole it had fallen into.

Ernst and Young withdraws report - 2006 May 15

Looks like I wasn't the only who noticed the mistakes in the report. The People's Bank of China complained and E&Y withdrew the report. Personally, I think it was unfortunate that E&Y removed the report from its website, but instead it should have annotated the report with the problems in it.

There is all sorts of speculations in the blogosphere that E&Y withdrew the report after pressure from China. The trouble with all of these speculation is that they are based on rumors and theories based on motives, rather than looking at the report and asking whether the numbers in it are correct or not.

The trouble with this line of inquiry is that it leads to really circular reasoning. Namely, we know that the Chinese authorities are liars because they fudge statistics and we know that the statistics are fudged because the Chinese authorities are liars. The only way to break out of this loop is to look at the numbers and critique them, and I've seen precious little of that.

It's pretty obvious what happened if you look at the E&Y press release. Their original number for the NPL's in big four banks was US$358 billion. The number they are quoting now is US$133 billion, the difference was US$225 billion which was the double counting problem I referred to earlier. Also US$133 billion isn't an "official figure", its the estimate you get after you take E&Y's numbers and add correctly. Also personally I think that number is a bit high.

Off the top of my head, Three of the four banks have total NPL's in the 3 percent range. The one problem bank, Agricultural Bank of China, has an NPL of about 20%. ABC has about $200 billion in loans which gives you US$40 billion. Take $1.5 trillion for the other three banks, you get another $45 billion, which gives you about US$80-90 billion in bad loans. That's also high because I'm mixing both pre-1998 and post-1998 bad loans. US$133 billion is a reasonable number though, but it doesn't have any official backing (and the numbers are changing month to month).

Also I think that the $225 billion for new bad loans is much too high. The real estate property bubble is something to worried about, but of the roughly $1 trillion in loans post-2001, only about 15% are real estate loans. For you to get $225 billion, you'd have to assume that all of the real estate loans go bad, and that is too big a stretch for me. Most of the loans go to capital for mostly state-owned enterprises, and the profitability picture on that looks reasonably good. This doesn't exclude the possibility that some banks will go bad. If the real estate bubble bursts, then the numbers suggest that this won't kill the banking system, but it might kill some banks that are heavy into real estate. If you want me to guess, I'd put the number at something like $80 billion which comes from assuming a (still high) 8% NPL rate. The 8% comes from "gut feeling."

(Again, if anyone wants to challenge these numbers, I'd be happy to listen. It's really important to have debates that are based on fact rather than guesswork. The nice thing about this is that you can do "what-if" simulations, and if you ask the question "what needs to happen for a second NPL problem to cripple the Chinese economy" my sense is that you have to insert some pretty extreme assumptions.)

Personally, I'm not too worried about the three of big-four banks or even the Joint-Stock cooperative banks. The big worry is banking in the rural hinterland and the rural credit cooperative. The fact that the bank with the problems is the Agricultural Bank of China tells you something about the rural economy of China. This is all part of my worry concerning the rich/urban-poor/rural divide. Still if you run the numbers, it looks fixable.

So how did this happen (the E&Y fiasco and not the NPL problem.)

My sense is that E&Y fiasco is also a result of accounting firms trying to do too many things. The original report seemed more like a market brochure for investing in NPL's, and I suspect that's why the numbers missed anyone who had expertise in the Chinese economy.

Comments on Ernst and Young NPL report - 2006 May 5

This news article caught my eye, talking about China's bad debt problem and quote a number of US$900 billion.

http://news.ft.com/cms/s/fbe87b18-dafd-11da-aa09-0000779e2340.html

Here is the original report....

Link

The big problem with the report is that it uses worst case situation numbers and comes up with a conclusion which I personally think is far too pessimistic.

Page 14)

To come up with US$900 billion they had to have a total stock of NPLS in 1998 of $620 billion which is really high estimate for which they do not provide a reference. The number, I've seen quote is US$400-$500 billion. This is important because if the starting number was $620 billion, there is about $100 billion of NPL left in the banks, whereas if the starting number was US$400 billion, this means that the banks have clean balance sheets.

They also had to add US$225 billion in possible new NPL's. The strikes me as highly implausible. Lending per bank was about US$50 billion/year/bank which with five years and four banks gives you about US$1 trillion in new credit. Personally, I think that a 20% NPL rate for new loans is implausibly high. If you assume 10% NPL (which I think is still high). That cuts the numbers down by $300 billion.

So instead of getting $300 billion in the first row, you end up with about $50 billion. You can argue about these numbers, but in column 2, E&Y make a mistake which I think is shocking for an accounting firm.

On the first row, E&Y lists $358 billion for the losses for the "big four banks." In row three, E&Y lists $323 billion for loses of "other system-wide NPL's." ***THEY ARE DOUBLE COUNTING NPL'S***.

The consensus view is that the any problems with new NPL's are not likely to come from the big four banks but rather from joint stock commercial banks, and I'd be surprised if the UBS report didn't make that point. So we have the possible new NPL's counted both in row one and row three. This is important because while the factors that go into NPL's is subject to dispute, the mistake that the report seems to make of double counting NPL's is just wrong.

Here are my numbers

Say $550 billion for the initial NPL's. Subtract the writeoffs, and you get about $50 billion in NPL's still on the books of the big four.

Let's assume that $100 billion in JSCB loans will go bad. Put in $230 billion for the AMC's, and another $50 billion for the rural credit cooperatives. That gets you about $400 billion. Pay that off over ten years, and you don't have much of a problem.

The part I really disagree with is that the E&Y report, quoted the numbers and didn't give error bars, and used the word "conservatively" to come up with a number that likely include at least $225 billion of double counting.

Then again may be not - 4 April 2006

The Presidental office has restated saying that Chen will "respect" the "92 consensus" but not "accept" it, so it looks like that Chen is still playing word games. Pretty pointless word games. Possibly two years ago, and definitely five years ago, there would be some room for Chen to publicly negotiate the meaning of "one China" but that train has left the station.

The importance of theology - 3 April 2006

I noticed something very interesting. Chen Shui-Bian said that he would accept the condition of "one China, different interpretations" if Hu Jintao says that this isn't the same as the "one China principle" (yige zhongguo yuanzi). The interesting thing is that the standard formulation of "one China" is the "one China policy" (yige zhongguo zhengce).

I think this is significant.

Chen's and pan-green's position is that governmental power on Taiwan arises from the democratic will of the Taiwan electorate (which is slightly different from the pan-blue position that governmental power arises from the Republic of China constitution). What I think Chen is trying to do is to concede the "one China policy" but make it not a "principle" which is to say that "one China" is subordinate to Taiwanese popular will. Which is to say that Chen can argue that he accepts the "one China policy" subject to the support of the Taiwanese electorate, but that Taiwan has the right to change its mind, since one China is a policy and not a principle.

I suspect that the likely response of Beijing is to restate its position, which will be close enough to Chen's position in order to start talks.

Now what to watch out for. If in the next week, you don't hear anything from Beijing, this means that Chen came up with this idea on his own, and that means that there will still be a period of negotiation to see what Chen means, which might or might not result in something by the time of Hu's visit to Washington.

If in the next 72 hours, Xinhua and the People's Daily gives a lot of coverage to Chen's statements, this means that people already have been talking with each other, and that there is already a script in place.

Also, I suspect that Chen's goals for the next two years is to establish some sort of dialogue with Beijing in a way that doesn't eliminate the theoretical possibility of a declaration of independence at some future date.

Interesting - Don't know what it means - 3 April 2006

Chen Shui-Bian met with Ma Ying Jiou.

http://www.libertytimes.com/2006/new/apr/4/today-t1.htm

http://udn.com/NEWS/NATIONAL/NATS3/3245397.shtml

The problem with Chen Shui-Bian is that he say things that no one knows the meaning of. UDN summarizes one of his statements as saying that if Hu Jintao states his commitment to the One China/different interpretations policy then of course he would accept. However, the Liberty Times statement seemed to have more qualifiers (or may be not), namely that Beijing would have to accept "one China different interpretations" but reject the "one China policy."

The trouble is that I don't know if Chen is playing more logic and word games. I can think of a situation where Chen is trying to get Beijing to define "one China, different interpretations" to mean "one China only means the Mainland" which is unacceptable to Beijing and isn't the understanding of the KMT.

My head hurts, trying to sort through what is going on.

We'll see how this develops in a few days. A lot depends on what Chen Shui-Bian really wants.

What I've been up to lately - 31 March 2006

I've finish first pass coding of the volatility models for QuantLib^?. Also wrote a lot of C++ code for modelling time series. Templates are cool. Iterators are also cool. Getting them working right is a bit of a mess. I haven't been able to check anything in because the CVS server on SourceForge^? is down. I should be able to do some volatility calcuations of Shanghai shares next week.

I've good a book on the PRC Civil Code on order. Looking forward to reading that. Also doing some more research on the politics of getting a civil code together.

The interaction between civil law and securities law in the PRC is rather interesting and quite different from the way it developed in the West. In the West, you had the fundamental foundations of contract law and corporate law done in the 19th century and these provided some general rules. Then in response to fraud and other nasty things you had in the early 20th century securities law which restricted the general principles in the contract and corporate law. So in the West, the ability to say write an option is grounded in general principles of contract and corporate law. What is restricted is the ability to sell these options to the general public.

In the PRC the situation is reversed. The securities law came at around the same time as the contract and company law, so the ability to write an option doesn't come from general principles of contract and company law, but rather is authorized by the securities law. Maybe. The trouble with having a lot of laws around is that you get some weird conflicts. For example, the securities law makes it sound like that all derivatives would be under the jurisdiction of the securities regulators, but foreign exchange derivatives actually come under the control of the foreign exchange folks and there are large classes of derivative like objects that are under the control of the banking regulators.

Sorting all of this out is going to take a few more years.

Really wish newspapers would start hyperlinking - 31 March 2006

Here is a Financial Times report that describes an IMF report as saying that the outlook for Chinese banks is "grim."

http://chinadigitaltimes.net/2006/03/imf_gives_grim_assessment_of_china_bank_lending_richard.php

Here is the actual working paper. It's really interesting, but the outlook on Chinese banks can't really be described as "grim" (And the paper also explicitly stated that it should not be cited as an official view of the IMF.)

http://www.imf.org/external/pubs/cat/longres.cfm?sk=18952.0

What the paper actually does is to try to figure out if the big banks lend to profitable companies, by taking the loan rates for each province and then doing a factor analysis. Results are interesting but there are a lot of possible other variables not taken into account, and the alarmist tone of the Financial Times isn't warranted.

Personally, I tend to be optimistic about the PRC big banks. It's already been about six years since the big banking reforms took place, and if a large fraction of the new loans were going bad it would have started showing up about now.

The other bit of economic reading is with the Austrian school. It's interesting because a lot of my economic thinking seems very Austrian. In particular, I tend not to be that interested in complex mathematical models in economics. The problem is that in trying to figure how the Chinese economy works, a lot depends on the politics and sociology of the situation and these tend not to be well represented by numbers. Also what numbers do exist are often misleading and wrong.

The other thing is that I (ironically) tend not to be too much of an advocate of privatization. The core problem with central planning is the economic calculation problem (i.e. you need a pricing system to figure out costs and benefits of doing something). That has already been implemented in China. One big different between me and people like Minxin Pei is that I don't think that China is a "transitional economy." China has already made a "transition" out of socialist central planning since there is a market pricing system in place, and we are now in new uncharted waters.

Grassley-Baucus versus Graham-Schumner - 28 March 2006

Looks like some sort of China trade bill is going to go through this year, and Grassley-Baucus seems pretty well thought out. Both Grassley and Baucus are from rural states that export heavily to China and they are interested in reducing the trade deficit with China, but by boosting exports (good for Montana) rather than reducing imports (good for South Carolina).

Graham-Schumer threatens to set off a nuclear bomb if China doesn't do certain things. Grassley-Baucus threatens some annoying wrist slaps if China doesn't do certain things. If you really want China to change its behavior and you aren't just looking for an excuse to shut down trade, a wrist slap approach makes more sense.

The trouble with threatening to set off a nuclear bomb (i.e. 27.5 across the board tariffs) is that it lacks credibility. Setting off a nuclear bomb causes so much collateral damage that one really wonders if the other side is going to go through with it.

By contrast "annoying wrist slaps" got attention and if they are "annoying" and Beijing could go in either direction, it might encourage Beijing to do some things which it might otherwise not do. Also since they are "annoying" rather than "destructive" they are really unlikely to cause a bad counterreaction.

It will be interesting to see what happens. I think that Graham-Schumer is dead, but it will be interesting to see if there is enough interest to pass Grassley-Baucus or if people will just forget the issue in six months.

Implications of Lien Chan's Journey of Peace - 27 March 2006

Someone at the CSISTaiwanConference asked me about the implications of Lien Chan's journey of peace last year. The journey of peace had actually been in planning probably before the 2004 presidental election, since Lien Chan in his later stages of his campaign made reference to it. It became untenable after the pan-blue defeat, but the pan-blue victory in the legislative elections provided an opening.

The journey of peace has one major implication for Taiwan politics in that it removed the "treason card." It's now possible for a Taiwanese politician to shake hands with a member of the CCP, and talk about working with Beijing without being labelled a traitor and having that label stick. This is important because it changes the discourse to allow discussions of things and positions that were impossible before the trip.

The trip also had two implications for US impressions of Taiwan. The first was that it illustrated how complex and divided public opinion on Taiwan was. Before the Lien Chan trip and the 2004 legislative elections, the main discourse in the US was in terms of how Taiwan was inevitably moving toward independence. The trip and the elections revealed that things were more complex than that.

The other implication is that it illustrated that Beijing is far more flexible than most observers in the US believed. Beijing has no ideological or political reason to oppose Taiwan self-government or status quo, and its main interest is to stabilize the current situation since Taiwan is a distraction for other more major issues.

These two factors also have had major implications for Taiwanese politics. In November 2004, pan-Green honestly believed that the tide of history was in their direction, and they choose an electoral strategy that assumed this and was disastrous when it didn't happen. Sure the polls didn't note a shift, but the polls had been dramatically wrong in the 2004 Presidental election. The last two elections seem to illustrate that it was the March 2004 election that was unusual.

If you go back to the late 1980's, one of the remarkable things is how stable voting patterns are in Taiwan. The problem for pan-Green is that if there isn't a historical tide toward independence, then it has some very difficult issues in political strategy. If voting patterns are stable, then pan-Green needs to attract moderate voters, but it will have huge problems doing that without alienating its base.

Also, a lot of the issues that it was able to use in 2000 to elect Chen Shui-Bian, no longer apply. In 2000, DPP could argue "it's time for a change," "the KMT has a legacy of authoritarianism" and "the KMT is corrupt." After eight years in power, you can't argue the first, the second issue is fading into history, and a few recent corruption scandals have really deprived DPP of the third issue. This is going to be particular bad for the DPP because the voters that are "swing voters" are the young, and someone who is 20 is going to only have very vague memories of KMT in power and KMT corruption and no memories at all of KMT dictatorship.

The other thing is that notion that Beijing is willing to be flexible with regard to Taiwan has put pan-Green on the defensive. Pointing out how mean and nasty Beijing is no longer works as a vote getter. The DPP has been trying to make an issue of Beijing's missile building, but missiles that you can't see just don't have the impact of a threatening statement from Beijing, and this just isn't getting the public angry.

This is particularly bad, because DPP has no coherent plan for dealing with a "nice Beijing." Chen Shui-Bian has been reduced to arguing that there was no "92 consensus" because if there were, he wouldn't have any clue what to do with it.

Sometimes I'm amazed - 26 March 2006

http://taiwansecurity.org/CP/2006/CP-250306.htm

It looks like that the big "China debate" that the pan-green has tried to have has fallen apart. The whole idea of having one big public debate to resolve things was never a good idea anyway. What should have happened is that pan-green should have talked about these things internally and quietly over a long period of time.

In any case this bodes very badly for pan-green's chances in 2007 and 2008. The main message that pan-blue is going to present is that pan-green is simply incompetent, and things like this (as well as the issue with electronic toll collection on freeways) just reinforces this.

One thing that I try to keep in mind is that I'm crazy. I have this positive Pavlovian reaction to flags of the Republic of China and maps of China with very odd borders. People that have similar reactions form only a very small fraction (less than 10%) of the Taiwanese electorate. To get people to vote the way I'd like them to vote, I can't talk about what interests me, I have to talk about what interests them. "Unification is good" isn't a vote winner. "The DPP is incompetent and is dragging the economy down with it and is threatening *your job*" That's a vote winner.

Pan-green has the following weaknesses for 2007 and 2008.....

1) It has some serious internal divisions. Right now it seems that people within the DPP are screaming at each other. If that is the case then there is no way that it can get TSU on board. The KMT had a potentially crippling fight between Ma Ying-Jiou and Wang Jing-Ping but that was resolved months ago. There is still the matter of getting the PFP on board, but that's unlikely to be a serious problem. In another timeline, Chen Shui-Bian might have had a chance to divide pan-Blue, but he has tried that already and he has stabbed people in the back.

One should note here that democracy in this case is greatly constraining elite politics. Any pan-blue politician that sacrifices a pan-blue victory for his own political gains (hmmm why did I just think of James Soong) is going find lots of screaming people at his door.

The other thing that illustrates the contrast is my reaction. Remember, that I'm a "crazy deep blue." When I saw that ad in the Liberty Times saying "independence is a choice" and when Ma Ying-Jiou says that Taiwan is practically independence, it's like eating a lemon. But...... Those are the compromises that you have to make to win elections, and since what Ma's general program is saying is basically what I want, I'll eat the lemon. As long as Ma keeps talking about how wonderful the Republic of China is and keeps waving those flags, I'm in the tent. Most Taiwanese are indifferent to that sort of flag waving, and Beijing would much rather have red and blue flags than green ones.

This isn't the case at all with "deep green." I don't think you can get any more compromises from pan-Green moderates that will keep them in the tent. The logic is that if DPP moves to the center, then I suspect that TSU will just bolt.

2) Pan-green has no alternative proposal. Pan-Green has offered a lot of sharp criticisms of Ma's proposals, but it has presented absolutely nothing that looks like an alternate proposal. It basically has the same problem as the Democrats in the United States over Iraq. You really have only two options, propose something that is more or less the same as what Ma is saying or something radically different.

3) Pan-green has no idea how do deal with a "friendly China." There is an old saying that you should be nice to your enemies since it confuses them. The recent statements of pan-green are basically that China isn't serious and that it is mean, nasty, and untrustworthy. What if that isn't the case? The two points (92 consensus doesn't exist, missiles are bad) that pan-Green have raised provide Beijing with a huge amount of leverage assuming that Ma gets elected. Suppose, Beijing announces a unilateral freeze on missile deployments after the first meeting?

Now for the good news for pan-Green. None of this is fatal. One thing I remember back was a few years ago when pan-Green was talking about the death of the KMT and pan-blue. The thing about mature democracies is that parties don't die, they just argue about different things.

Suppose, Ma gets elected, and Beijing is all sweetness and everything works according to plan. Pan-green is dead right? No. Suppose Taipei and Beijing does reach some sort of accord, then all of the issues that we are arguing about get resolved, but there will be a whole bunch of new issues and some of them will doubtless energize pan-Green again. Remember that Churchill lost the first election after WWII. If peace does break out in the Taiwan straits, pan-Green and pan-Blue will find some other issues to define themselves.

Also, there is the possibility that Beijing isn't sincere. If Beijing goes back to talking about Taiwan being an integral part of the PRC, you'll have all these "deep green" people coming out of the woodwork saying "I TOLD YOU THAT THEY WERE EVIL NASTY PEOPLE." That's actually not a bad thing in the long run as insurance. Personally, I hope that Beijing is sincere. Everything I've seen suggests that it is sincere. But you never know about people's true motivations (why did I just think of James Soong?) and having a political situation that encourages people to do the right thing is good.

Chen had a chance to go down in history as a great statesman. He lost it. That opportunity is not sitting in front of Hu Jintao and Ma Yingjiou.

Don't mess this one up.

I figured out why I got angry - 25 March 2006

I thing I figured out what the President of the NED, Dr. Carl Gershman, said at the CSISTaiwanConference that totally made me angry for about sixty seconds. The trouble with these sorts of emotional reactions is that it's really hard to piece together what happened. He is a nice well-meaning guy, and the NED is a nice well-meaning organization, so this isn't clear what he meant, but this is what I heard.

What I heard (and I want to emphasis that he didn't mean this) was

:: We smart Americans know more about political development than you stupid Chinese.

I really, really want to emphasize that this isn't what he meant, this isn't what he said, this isn't what he or the NED believes. But it is significant, because that is what I heard, and I don't think that I'm the only one who hears this when the head of the NED speaks. (You can substitute "Arab" for "Chinese")

What he actually said was closer to this

:: The Chinese government is wedded to ancient 19th century ideas of sovereignty rather than 21st century ideas, so there there has been substantially economic progress but no political progress. Perpherial communities can join forces and pressure the Chinese government see the error of its ways.

Let me go through point by point to explain why I have huge problems with that statement

• New good. Old bad. If you ask most Chinese (or for that matter most Arabs) what they are proud of, you see talk about a grand glorious civilization that needs to be reconstructed. This idea isn't unique to Chinese or Arabs, if you look at the White House and US Capitol and most Western government buildings, they are done in Greeco-Roman architecture.

So complaining that Chinese are wedded to bad old 19th century ideas of national sovereignty and good new 21st century ideas are automatically better, immediately hits at a core piece of Chinese identity, and it's also a bad argument. I mean, the United States is still fundamentally based on some 18th century ideas, which in turn were developed from ideas of democracy and republicanism that date back from Greco-Roman days.

A core part of many forms of Chinese nationalism is evoke a (somewhat imagined past) when China was rich and strong. Yes there is a lot of silliness and historically questionable ideas in Chinese nationalism, but there is a lot of silliness and historically questionable ideas in all nationalist ideologies, and Chinese nationalism isn't that worse than any other.

Also, the nice thing about dealing with nationalist myths and the past is that you can pick and choose. I doubt when the built the US Capitol that they intended to bring back cruxifiction.

(Finally, I note the irony in the specific case of ethnic relations, 19th century ideas of Chinese sovereignty probably in some ways are superior to 20th or 21st ideas. One major issue that the Qing emperors had was that they had to develop an idea of "Chinese" that included them and that identity. The other thing that I want to point out is that both the Tibetan and Taiwan issues are complicated by the fact that international law and the Western concept of the nation-state creates these sorts of controvesies.)

• Lack of political progress in the PRC - Actually, I beg to differ. There has been huge amounts of political progress in the PRC. If you compare the current situation where there are institutionalized legislatures, courts, some degree of press freedom, there has been some amazing progress since 1978 or even since 1989. Yes, the PRC is not anywhere near the United States in terms of human rights, but things have improved and are continuing to improve.

• Open-mindedness of the PRC officials - I also had some major issues with the idea the major problem with the PRC is that they are not open minded. This is a bit condescending since it implies (not in so many words but the implication is there) that anyone that doesn't support Western liberal democracy is stupid. In fact, I don't think that this is the case at all. If you talk to people in the PRC and read government documents, you'll find that people are actually thinking and open to new ideas. The main roadblock into getting Beijing to adopt multi-party liberal democracy is that it isn't clear to a lot of people in the PRC that multi-party liberal democracy is the best system for the PRC right now. To be honest, it isn't clear to me.

I do think that the Dr. Gershman and the NED are great, well intentioned people, as were the former officials in the State Department that were in the room, but still found that there seemed to be an element of condescension. There seemed to be this notion that people in the developing world would be easily swayed by public relations campaigns.

But that strategy for democracy promotion IS DEAD. Trying to convince the world that liberal democracy is the best form of government in the world died with economic collapse of Russia and the mess in Iraq. Trying to "shape China's behavior by getting it to abide by international norms" also died with the US rejection of the International Criminal Court, Kyoto, and the intervention in Iraq. Having the Bush administration arguing in favor of indefinite detention without trial and questioning the loyality of people who oppose the war also drives a nail in the coffin.

Let me end this entry with a provocative question which I hope will lead to constructive program for change. That question is this.

• Why does the website of the National Endownment for Democracy seem so much like the websites of official Chinese state media?

You have cheery reports on "progress in Iraq". You have lots of attention on visits with leaders of minor nations. You have lots of rather dry and boring reports. But

• No bad news
• No talk about about what on the street are talking about
• No real debate

My suggestion is to have a real debate over the issues which are on the mind of people in the world. Talk about Guantanamo. Talk about Abu Ghurb. Talk about Iraq. Talk about ICC. Let the world know that Americans passionately disagree on these issues, and show the world the passion. Have someone post a well argued paper that says that Bush ought to be impeached over Iraq, and then have someone post a well argued paper that says that Bush ought to be declared a national hero for Iraq. Have someone post a well argued paper saying that the Bush administration in detaining prisoners without trial are fatally compromising democracy promoting efforts. Have someone else post a well argued paper trying to justify the efforts of the Bush administration at using detention without trial and extreme measures.

I think I know what the NED will reply with....

The day that the NED posts on its website a paper saying that Bush ought to be impeached over Iraq, it is going to get tons of angry hate mail from Republicans. The day that the NED posts on its website a paper saying that Bush ought to be a national hero, it is going to get tons of angry hate mail from Democrats. If it posts both, it is likely to get tons of angry hate mail from everyone and is likely to get its funding questioned or even cut.

Let me respond with the following. It's a bit sharp, and I hope it captures some of my anger as well as being constructive.

You guys are in the business of democracy promotion. The politically tricky issues that you mentioned are NOTHING compared to the politically tricky issues that government officials in China, Iraq, or most of the rest of the world face.

If you quys can't figure out a way of having a real debate over issues that people really care about, then what the HELL are you trying to do promoting this liberal democracy ideology to the rest of the world.

Just another constructive idea for NED. Have a reality TV producer follow the NED around when it tried to get funding, or when it considers grant proposals. These sorts of things are some of the essence of democracy.

Back from Washington - 23 Mar 2006

I'm going to write up some notes of mine at CSISTaiwanConference

Missing his chance at greatness - 14 Mar 2006

Something that all political leaders have to aware of is that at the end of one's term of office the public will generally grow sick and tired. So in looking at one's actions, one has to look at the big picture, which is how historians a century or more from now will look at you.

Chen Shui-Bian had two or three chances at true greatness, but each time he didn't take the opportunity. Looking back, what would have been viable would have been do what Ariel Sharon did and ditch the hardline members of his party, create a coalition from the center, and then negotiate a deal with Beijing. If he had done this, he would have totally remade history.

As it is, he has spent all of his political capital and has no more room to manuever. At this point he is trusted neither by Beijing and the pan-Blue coalition on Taiwan. Right now, his main efforts are devoted to preventing electoral disaster in 2007 and 2008.

Washington Post article on Taiwan - 14 Mar 2006

http://www.washingtonpost.com/wp-dyn/content/article/2006/03/13/AR2006031

Actually very little new is going on, and the article garbled a few important details that illustrates Chen Shui-Bian's tactical brilliance and strategic stupidity.

The debate on the constitution that Chen wants to have is not a national debate but rather a debate within his party. Within the DPP, he isn't constrained by his promises. So what will happen is that the DPP will come up with a proposed hardline constitution which will get all the pro-independence people on his side, and then he can blame the opposition for the fact that their is no chance that the constitution will pass.

Tactically brilliant. Strategically stupid.

The minor problem with this plan is that is it is far too clever. Clever plans can go dangerously awry. Moreover, I suspect that there is more than a little impatience among hard-line independence supporters and the notion that they are just being pulled left and right.

The strategically stupid part of this plan is that it really doesn't do anything good for Taiwan. It's not part of any vision or long term plan that I can see. There is no strategic plan that I (or anyone else) can see.

Well maybe he has some sort of secret strategy. The trouble is that in politics secret strategies are useless. Politics is all about willing supporters and swaying the undecided. You can't do this effectively without little them have some idea that you are trying to do. Just by way of contrast, the PRC's strategy for recovering Taiwan has been very transparent. Talk to them or visit their websites and they'll tell you want their master plan is. There aren't any secrets there at all.

What worries Chen Shui-Bian - 11 Mar 2006

There is a reason why CSB is worried and why he doing things like playing with the NUC and taking a hard line generally, and that goes to the result of the new legislative allocation method.

What CSB was probably originally hoping for was that pan-Green would gradually increase its vote totals, and then once it was slightly over 50%, the first past the post system would give it a huge majority in the legislature and let him do whatever he wanted.

But it didn't work out that way, and what actually happening is very dangerous to him....

Roughly you can split the Taiwan electorate into two groups

KMT/PFP versus DPP/TSU

The thing about the KMT and PFP is that at this point their are basically no ideological differences between them and the only difference involve personalities. It will be a knock-down nasty fight to figure out who will represent pan-Blue in each district, but the KMT and PFP have been very good at being able to sort this out, and everyone knows that the PFP is likely to disappear when Soong Chu-yu retires, which is going to happen before 2008.

By contrast DPP and TSU have ideological differences. The DPP tends to be much more moderate on the independence issue than the TSU.

So lets suppose Chen Shui-Bian says something moderate like just repeating the "four noes." What he risks doing is to anger the TSU voters so that they continue to vote TSU or stay at home. If the TSU voters do this as a protest vote then the result is going to be an electoral wipeout of the DPP three months before a Presidental election. Yes this will put pan-Blue in office, but if the extreme independence voters see the DPP as "not really different" from the KMT then they might just vote as a protest, not caring about the consequences.

Now one might wonder how this fits into CSB's strategic plan.

I don't think he has a strategic plan...............

Why I think the Anti-Secession Law was a good thing - 11 Mar 2006

I think the ASL was a very important positive developments in the Taiwan Straits. Let me explain why

Don't shoot the messenger for the message - The Pentagon keeps complaining that the PRC is not transparent enough about its intention. Yet here you have a plain statement of what the PRC would use force on, and people get annoyed. The problem was that the message wasn't what people wanted to hear, but it was important to be stated anyway.

The political reality is that no Mainland Chinese government can withstand a declaration of independence without taking action. There are some nationalistic redlines that would cause the PRC to risk national suicide. That's just reality, and trying to avoid facing harsh reality just leads to confusion and miscalculation which leads to war.

Game theory "chicken" strategy There is a game of chicken in which two cars speed to each other. First one that turns loses, but if both turn away, both sides lose massively. The strategy for winning chicken is to let your opponent know that you are throwing away the steering wheel, and that you can turn away even if you want to. This avoids the temptation that your opponent will risk charging at you.

This is significant because in late-2004, you had Lee Denghui giving speeches saying that Taiwan should quickly declare independence since the United States would back Taiwan, and the PRC leadership being rational would back down. Total frightening, dangerous nonsense, but people seemed to be believing that.

I'm glad to say that no one in Taiwan or the United States is making these sorts of statements today.

This is the last threat The other good thing about the ASL was that it codified the threat to Taiwan. The PRC no longer needs to keep mentioning the possible use of military force since it is now codified, and this long term causes less erosion of public support on Taiwan. With the ASL, the PRC took one sharp hit in public support, but it is no longer faced with either mentioning a threat each time it opens its mouth (which is bad) or else giving people the impression that the threat is gone (which is dangerous if it hasn't left).

Concede from strength not weakness The problem with making a concession is that if you concede something, people might conclude that you are weak and demand more concessions. If you make it clear what your bottom lines are, then it is easier to negotiate things which are not in the bottom line.

Finally, I should mention that all of this has some pretty profound implications for estimations of the PRC government. The conventional wisdom at the time, was that Beijing had blundered badly and that showed that Beijing's internal processes were inflexible and unable to understand or take into account public opinion.

In fact, I think that Beijing was thinking very much about the third point that I just mentioned. The PRC took a sharp dip in public opinion, but recovered quickly after the Lien Chan visit, and I think it figured out that the long term benefits of not having to repeat threats each time it says something are much greater than the hit it took in public opinion.

Talking about Taiwan - 11 Mar 2006

It turns out that I will be attending a conference on Taiwan's future constitutional development at the Brookings Institution and CSIS on the 22nd March. To save some time, I'm going to be posting a lot of my ideas on constitutional development on this blog over the next few days.

First, if we are to have a rational discussion, we absolutely must talk about the rhinocerous in the room, and that is this statement

::If the PRC continues to grow at current economic rates of development, then at some point (maybe 2015 to 2020), it will have the military capacity to successfully invade Taiwan over the objections of the United States.

If we don't mention this issue and discussion it squarely, then all we'll be doing is to flail around and talk about nothing. There are several possible unconstructive responses to this statement

• Deny the premise. Of course the problem goes away if you have magic fairies that prevent China from growing economically. The trouble is that it is becoming less and less plausible to assume that the problem will disappear. Yes, it is possible that China will have some irreconcilable barrier that keeps it from growing, but just assuming that something possible will happen to make a problem go away doesn't seem to be rational.

• Have the war now - This sort of may be what Chen Shui-Bian is trying to do. The trouble is that triggering World War III now doesn't make you toor make friends. Also, there is also a problem that history doesn't stop. Suppose the War for Taiwan Independence happens tomorrow, and the US destroys the PLA. History ends, and we all live happily ever after, right?

If it is one thing that we have learned since the fall of the Soviet Union, it is that history doesn't end, and this is the solution to what can deter the PRC from invading when it has the capacity to do so. It's 2020, and the PLA marches into Taipei. It now has to deal with a military occupation of a population that hates them, it's economy is now devasted, it is an international pariah, and even in the quickest of wars, there are large number of dead and wounded that are never coming back from the grave or be made whole.

Now for what I think Taiwan should do.

• Forget about hard power / work on soft power - At any moment between 1949 and 1997, the PLA could have just marched into Hong Kong and taken it over. It didn't. The reason it didn't was that Hong Kong was just too valuable for it to take over. It is absolutely essential that Taiwan develop its political and economic systems so that it is worth more to Beijing as a self-governing entity than the price of an invasion. It is also absolutely essential that Taiwan try to influence domestic events on the Mainland so that there is exists domestic support in the Mainland for Taiwanese self-government.

And talking about constitutional development has to be aimed at figuring out the best way of doing this, but it has to be an open public discussion, and you can't have a rational, open public discussion without putting on the table certain inconvenient facts like the one that I mentioned.

Back again 06 Mar 2006

Haven't been updating this Blog recently. Lots of interesting things happening in Taiwan the last month with the Chen Shui-Bian and the National Unification Council. Interesting, but it's not particularly fun to talk about, and so I'm just going to talk about things that are a bit more fun and personally relevant.

I think I have all of the pieces that I need to do an analysis of warrants on the Shanghai Market. I just downloaded all of the prices from Shanghai using a Perl script. The RSwig interface to QuantLib^? seems like it is in good shape. Now all I have to do is to feed in the data, and see what happens. I'll have to familarize myself with volatility models.

I'm hoping to get something useful by 5/31 so that I can submit a conference paper to TCFA.

I'm looking for another excuse to go up to New York City. There is a talk at Columbia Law School on the new securities law, but it seems a little overboard to fly up to NYC just for a one hour lecture.

set ALLOWTOPICCHANGE = joe

Archive