The story so far: Weak yuan, bellicose China

My article The story so far: Weak yuan, bellicose China appeared yesterday in the Edit Page of The Pioneer.

Here is the link...

Communist leadership in China believes that China is ‘big and strong', but the Shanghai and Chinese stock exchanges have shown that China is shaky too. A weaker China may, however, become more aggressive

On Monday, the Shanghai Composite index dropped down by 8.52 per cent. Can you imagine, markets in China lost a paltry one trillion dollar as the sell-off deepened not only in Shanghai, but also in Shenzhen and Hong Kong. The world’s markets followed suit and started crumbling.
The South China Morning Post said, “Chinese stocks closed at their lowest level in six months as a wave or risk-off selling pummeled the market with only about 100 stocks listed in Shanghai still trading late as the other 993 stocks listed on the benchmark index.”
A first ‘explosion’ had occurred on August 11, when the yuan was devaluated for three consecutive days; at that time, many predicted long-term consequences for the Middle Kingdom.
Different explanations, often contradictory, have been given about the risky move: Some ‘experts’ explained that since a few years, Beijing kept the rate of the yuan more or less fixed at 6.20 per dollar, hoping to become a member of the exclusive club of reserve currencies of the International Monetary Fund. However, the IMF recently announced that China’s immediate inclusion was not on the cards as the fund would like Beijing to undertake more in-depth reforms, for example, by letting the exchange rate fluctuate. It is, however, doubtful if the devaluation was a first step in this direction.
Others have argued that the move would help China’s exports, but it will also push the dollar higher, making imports more expensive for China, the world’s largest user of energy, metals and grains. The question is: Has the leadership lost control over what is happening? Perhaps not, but the trust of the investors is fast vanishing.
Strangely, it is ‘holiday times’ in Beijing and all the big bosses have moved to a more clement sky in the sea resort of Beidaihe in Hebei province. On August 5, Xinhua published a news item titled, ‘Do Not Wait Anymore; No Meetings in Beidaihe.’
The news agency explains that every year since the Mao Zedong era, current and retired Chinese Communist Party leaders meet at Beidaihe in July or August.Xinhua however adds: “Not long ago, the CCP Central Politburo met twice, on July 20 and on July 30, which was unusual. …Is it meaningful, necessary, or possible to talk about these issues again in Beidaihe several days or 10 days later?”
So, no talk, though the communist leadership is on a warpath for something else. On August 10, the People’s Daily published an article mysteriously titled: ‘Dialectically View the Phenomenon of Tea Turns Cold When People Are Away.’
The article explains, “People come and go; the present day replaces old times. Over the years, many of our party cadres have correctly treated their status changes after having stepped down from their leadership positions. They consciously have not intervened in the work of the new leadership team …they have thus won everyone’s respect.” This targets former President Jiang Zemin and his clique.
Since then, websites in China have reported that Mr Jiang was under house arrest. It is difficult to check the veracity of the information, though a full-fledged war seems on the cards between Chinese President Xi Jinping and the ancient regime. Who will win is open to bets.
Simultaneously, Beijing is becoming more aggressive; not only in the South China Sea where it reclaimed number of large reefs, but also in the Pacific and elsewhere. Take the preparation of the military parade to be held on September 3, to commemorate the 70th anniversary of victory over Japan in World War II.
Xinhua announced that the People’s Liberation Army will unveil hundreds of new domestically developed pieces of armament. The grand show will feature 12,000 soldiers and 500 pieces of China’s latest military gadgets.
According to Xinhua, the Second Artillery Forces, the PLA’s strategic missile force, will display seven types of missiles, “The scale and number of the missiles will surpass any previous outing.”
During the National Day parade in 2009, China showcased five types of missiles, including the DF31A, a long-range intercontinental ballistic missile capable of reaching the shores of the US.
Will the DF41, the latest inter-continental ballistic missile with a range upto 15,000 km be displayed? A Pentagon report recently asserted, “China is developing a new road-mobile ICBM, the DF-41, possibly capable of carrying multiple independently targetable re-entry vehicle.”
The parade is “partly aimed at sending a message of warning to the us,” said Huang Dong, president of the Macau International Military Institute in an interview with Ming Pao, a Hong Kong newspaper. Mr Huang asserts that the purpose of the parade is “warning Washington to not ‘interfere’ in its regional activities, in particular its territorial disputes in the East China Sea and the South China sea.” The aggressiveness does not stop here.
On August 18, the PLA daily published an editorial, ‘Be Ready to Fight at All Times’. It re-emphasised the importance of building a strong Army which should be ready to fight ‘at all times’.
The article, later re-published (in Chinese) by all the major media, states: “Through these phenomena, we can easily see that Japanese militarism’s desire to eliminate China has never died, that is has refused to recognise the defeat in that war, and that it has secretly been gathering strength in an attempt to stage a comeback.”
It concludes, “China is at the critical juncture of becoming big and strong. Some Western countries are unwilling to see the rise of China, doing everything possible to contain and suppress China, repeatedly squeezing China’s strategy for development …thus the likelihood of disturbances and war taking place on our doorstep has increased.”
Closer to the Indian border, on August 24, the People’s Daily Online reported that three more unattended radars were soon to be installed in Tibet. The mouthpiece of the Chinese Communist Party reminds us that China’s “first unattended radar station has stood eight years on the top of Ganbala mountain, with a height of 5,374 meters above the sea level on Qinghai-Tibet plateau.”
The website affirms that the unattended radars would form a radar network with the previous one. Kampala (Ganbala in Chinese) is located in Nagartse county of Shannan Prefecture, not far from Lhasa.
Incidentally, on August 11, China Military Online published photos with this comment: “Air force J-11 regiment boosts night combat power, the PLA Air Force conducted night combat training in Tibet on August 9.” The pictures show a high plateau military airfield (Lhasa Gongkar) surrounded by snow-clad mountains and a group of J-11 heavily-Armed fighters taking off amid twilight.
The communist leadership believes that China is today ‘big and strong’, but the Shanghai and other Chinese stock exchanges have shown that China is very shaky too.

What lies beneath the Yuan devaluation

My article What lies beneath the Yuan devaluation appeared a few days ago in NitiCetral.

Here is the link...

It was a week of explosions.
At around 11:30 pm on August 13, two consecutive explosions blasted warehouses containing hazardous chemical materials in Tianjin, a city located at a 30 minute train-ride from Beijing.
A day after the mishap, 50 people had already been confirmed dead (among them were 17 firefighters) and some 700 had been hospitalized. This is what the world came to know as a partial blackout was declared on the information coming from Tianjin.
Another explosion, with perhaps longer-term consequences, was the devaluation of the yuan for 3 consecutive days.
On Tuesday (August 11), the Central Bank of China lowered the rate of the Chinese currency by 1.87 %; then, the next day in another move, it was further devaluated by 1.6% and once again on Thursday. It was the first time since 2005, when the current mechanism of change was set up, that Beijing went for such brutal and unexpected moves.
More than 4% in 48 hours is a lot.
The South China Morning Post (SCMP) commented: “The Central Bank shocked the markets by devaluing the yuan by the most in a day in more than 20 years.”
The Hong Kong daily added: “With a dramatic devaluation of the yuan, Beijing brought out the bazookas in a move that might escalate a regional currency war that it had until now chosen to avoid.”
Why the bazookas?
This reminded me of the book Unrestricted Warfare, written in 2001 by two Senior PLA Colonels about the ‘Many Forms of Total War’. It says: “Terrorism may be the most transparent form of total war, but it is just one of the many forms of unconventional warfare. ‘Financial warfare’ in which a country is subjugated without a drop of blood being spilled, means entering and subverting banking and stock markets and manipulating the value of a targeted currency.”
Was the devaluation a guerilla tactic? Was it the beginning of a new war?
Experts are yet to agree on the meaning of Beijing’s sudden move.
Will it make China’ exports more competitive against its Asian rivals? Could this restore China’s competitiveness vis-à-vis other currencies such as the Japanese yen and the Korean won? It is not certain.
It is true that the Korean won reached its weakest level since June 2012 and the Taiwan dollar was also at its lowest since 2010.
The Indian rupee followed suit. But India’s Chief Economic Adviser, Arvind Subramanian affirmed that the impact of the devaluation of the yuan on the Indian rupee will only be ‘temporary’, given ‘adequate’ foreign exchange reserves; for him, “China is responding to its own internal development of slowing down of growth and exports in order to give its economy a boost. All of us policymakers around the world, including India, have to take notice of this action.”
Another explanation was that China had, for a few years, kept the rate of the yuan more or less fixed at 6.20 per US dollar, hoping to become a member of the exclusive club of reserve currencies of the International Monetary Fund (IMF). However, in a recent report, the IMF said that China’s immediate inclusion was not on the cards as the Fund would like to see China undertaking more in-depth reforms, by letting exchange rate fluctuate. Is it a first step in this direction? It might be.
Others have argued that the move to push the US dollar higher can only make imports more expensive for China, which is the largest user of energy, metals and grains. The devaluation could worsen the crash in the commodities market.
Interestingly, analysts also differ on what is going to happen next. 
Reuters has another reading: “There are a bunch of reasons why China decided to devalue the yuan, ranging from falling exports to an ailing property market. The most worrying, though, is probably a destructive change happening in the country's labor market.”
Benjamin Robertson in the SMCP commented: “Regardless of other factors, Chinese firms with high non-yuan denominated debt holdings, and reliance on imported components, are now out. Chinese commodity producers, Chinese exporters, and Hong Kong companies with strong yuan cash flow, are in.”
Some time may be necessary to see the full implications of Beijing’s move.
The New York Times remains optimistic: “Here are two things that China’s government wants very badly: first, for its economy to remain on an even keel, keeping growth and employment high. Second, for its currency, the renminbi, to become globally pre-eminent, helping promote the country’s diplomatic goals and solidifying the country’s centrality to the global economy. Frequently those goals are in conflict. But on Tuesday, China did something it thought would advance both at once.”
And of course, there are the believers in China’s collapse, the “I told you soers”, for whom it is the beginning of the end. They believe that the Communist regime is trembling, that its end is coming fast.
To relax the atmosphere, after three days of explosions, the Central Bank of China affirmed that an adjustment to close the gap between the yuan’s mid-price and its actual trading rate was ‘basically completed’ and that the currency will now remain strong in the long run.
Instead of doing more predictions, it might be more interesting to look at the situation in the Middle Kingdom at the time of the ‘devaluation’.
It is ‘holiday times’ in Beijing and all the big bosses of China have moved to a more clement sky in the sea resort of Beidaihe in Hebei province.
Was a council of war held there? Apparently not.
On August 5, 2015, Xinhua published a news item titled, “Do Not Wait Anymore; No Meetings in Beidaihe.”
It explains that every year since Mao Zedong era: “current and retired Chinese Communist Party leaders met at the Beidaihe summer resort in July or August.”
The Official news agency is not shy to admit: “The annual Beidaihe retreat meeting is one of the CCP’s most mysterious meetings. Many major decisions or policies have been made there.”
Though it adds, “sources have speculated on the themes of the Beidaihe meeting this August and whether or not one will be held.”
Xinhua’s conclusion is clear: “Not long ago, the CCP Central Politburo met twice, on July 20 and on July 30, which was unusual. They have already discussed ‘The Thirteenth Five-Year Plan’, the CCP Fifth Plenary Session, economic strategies, the ‘anti-tiger campaign’, and other important issues.”
The article asks: "Is it meaningful, necessary, or possible to talk about these issues again in Beidaihe several days or ten days later?”
It probably means that the decision to devaluate was already taken before the ‘holidays’ started.
But the Communist leadership appears to be on a warpath for something else. On August 10, 2015, The People's Daily published an article sending a strong political message. It is titled: "Dialectically View the Phenomenon of Tea Turns Cold When People Are Away.” It might be far more serious than the devaluation.
The article explained: "People come and go; the present day replaces old times. Over the years, many of our Party cadres have correctly treated their status changes after having stepped down from their leadership positions. They consciously have not intervened in the work of the new leadership team, which demonstrates the open-mindedness and noble sentiments of a senior Party member and veteran cadre. They have thus won everyone's respect.” This targets former President Jiang Zemin.
It was insinuated that ‘a highly positioned cadre’, when he was in power, arranged for his trusted aides to be in the top positions for the purpose of being able to manipulate power in the future: “This phenomenon causes a dilemma for the new leader and puts him in an inconvenient position.”
The People's Daily compares the retired cadre as ‘cold tea’. This, of course, triggered many comments on the Net; one example: "If ginger tea [Jiang Zemin] insists on being as hot as before, what should we do? In such a case, we should pour it (the ginger tea) out!”
A full-fledged war seems on the cards between Xi Jinping and the ancient regime. Who will win is open to bets?
In the meantime, the ‘devaluation’ may stabilize.