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2006

 

North Korea Talks in Beijing: Last Chance for Conventional Diplomacy    Dec 17

Iran Sanctions: Will Tuesday’s Elections Derail Russia’s Grand Bargain?    Nov 12

New North Korea Talks    Oct 31

Iran Sanctions Discussions: The Most Important Event This Week    Oct 29

The World’s Largest Initial Public Offering    Oct 22

The Montaperto Defense    Sept 10

Iran and the U.N: A League of Nations Moment    Aug 26

Will North Korea Test a Bomb?    Aug 19

Is China a Responsible Stakeholder?    Aug 13

WWIII?    July 24

North Korea Rejects U.N. Missile-Test Resolution. What’s Next?    July 16

The World Aflame    July 15

Ahmadinejad Goes to Shanghai    June 14

Should We Try to Block a North Korean Missile Test?    June 10

Bank of China’s Initial Public Offering    May 30

The “Spoiled Child”    May 21

The End of Diplomacy?    Apr 30

Hu Comes to America     Apr 16

Will the Chinese Economy Slow Down this Year?    Apr 16

An End to the Consensus on China    Mar 25

Premier Wen Jiabao Sparks Protests    Mar 19

Dark Clouds over Korea    Jan 29

Russia and China: Where Do They Stand?    Jan 12

What Should We Do about Ukraine?    Jan 11

A New Forum for North Asia?    Jan 2



 

December 17, 2006

North Korea Talks in Beijing: Last Chance for Conventional Diplomacy

Talks to disarm North Korea reconvene tomorrow in the Chinese capital. Moscow is counseling patience, Beijing urges flexibility, and Pyongyang says “everything’s on the table.” Nonetheless, few observers are truly optimistic about a breakthrough. The negotiations have been dormant for more than a year due to North Korea’s boycott. Since the parties last met in November 2005, the North tested a long-range missile and a nuclear device. At first glance, it appears improbable that Pyongyang will give up its most destructive weapon.

Despite North Korea’s tests—or perhaps because of them—the United States has devoted substantial effort in recent weeks to make sure that the talks, now in their fourth year, are a success. Chief American negotiator Christopher Hill has suggested that Pyongyang “stop and seal” its reactor in Yongbyon so that it cannot produce more plutonium for bombs. In November, President Bush signaled that he was willing to sign a peace treaty with North Korea’s leader, Kim Jong Il. For their part, the Chinese, stung by Kim’s defiance, seem willing to exert pressure on their only formal military ally.

The upcoming session, formally designated as the second stage of the fifth round of the talks, is the last real opportunity for a deal to come out of the six-party process. North Korea has already played its last major card, this October’s nuclear test, and the United States has offered about all it can give to Pyongyang. American diplomats have recently been talking about the next few days as a “fork in the road” or a “last chance.” They’re right. Either the North Koreans are willing to deal, or they are not.

What happens if the upcoming talks do not succeed? In this case, the United States will have to try something radically new because a failure of multiparty negotiations will represent an exhaustion of the middle-of-the-road approaches. If a conventional solution is not possible, Washington will have to enforce even more coercive measures, engage in “transformational diplomacy,” or devise a combination of the two tactics. In the absence of real progress this month, the present course of action is not sustainable.

 

November 12, 2006

Iran Sanctions: Will Tuesday’s Elections Derail Russia’s Grand Bargain?

Russia, with assistance from China, is trying to arrange a grand bargain on Iran’s nuclear program. Last week Moscow revealed the two parts of its strategy. Unfortunately for the Russians, American electoral politics—or at least Tehran’s understanding of them—may get in their way.

In the beginning of last week, it looked as if the world’s major powers had irrevocably split over proposed U.N. sanctions. For almost two decades Tehran’s “atomic ayatollahs” have been trying to build nuclear weapons based on uranium cores. In July, the United Nations Security Council demanded that Iran stop the enrichment of uranium by August 31. Tehran refused to do so.

European nations then proposed a sanctions resolution, which Russia proceeded to gut last week. Moscow simply did not want the Security Council to impose any penalties or restrictions on Iran. According to Russian proposals, sanctions would have been left to member states. China, Iran’s other primary sponsor, had indicated that compromise was not possible. “Clearly, I think in a number of difficult areas the differences cannot be bridged,” said Wang Guangya, Beijing’s ambassador to the U.N., this Tuesday.

On Friday, People’s Daily, the flagship newspaper of the Chinese Communist Party, reported that Russia expected Iran to freeze enrichment. At about the same time Iran said that it might consider Moscow’s proposal to enrich on Russian soil. Such a solution, even with all its faults, would look more attractive to the West if the Security Council was hopelessly deadlocked on sanctions. Both Russia and China, permanent members of the Security Council with veto power, looked as if they were about to stalemate the U.N.

Moscow’s ability to broker a deal, however, may have been undercut by the Democratic sweep in Tuesday’s elections. On Friday, Iran’s supreme leader, Ayatollah Ali Khamenei, said that “the defeat of Bush’s hawkish policies in the world” was “an obvious victory for the Iranian nation.” Iran’s president, the incendiary Mahmoud Ahmadinejad, released a similar statement. Comments from academics in Iran confirm that the leaders believe they can be even less accommodating in the wake of the elections in the United States. Their analysis of this Tuesday’s results is flawed—there is zero support for Tehran in either major political party—but the perceptions of Iran’s leaders will undoubtedly harden their already intransigent views.

Joint enrichment, as proposed by the Russians, would do little to stop Iran from accumulating the knowledge necessary to build an atomic device—Tehran’s technicians would still gain the expertise they are seeking. This April the Iranians announced they had already enriched uranium, which means they are just a few years from mastering the techniques for producing fissile material. Washington, therefore, may soon have to abandon its policy of seeking Russian and Chinese support for its brand of coercive diplomacy. At this point, a lowest-common-denominator solution just does not appear to be good enough. No deal looks better than a weak one at this late stage.

 

October 31, 2006

New North Korea Talks

The Chinese Foreign Ministry announced today that North Korea has agreed to return to the six-party talks. The talks, held since 2003, have been stalled for a year while Pyongyang has refused to participate.

In the coming days many analysts will praise Beijing for bringing the North Koreans back to the bargaining table. China certainly should be credited with skilful diplomacy. Yet it is much more likely that Kim Jong Il, North Korea’s leader, decided to resume negotiations primarily because of the Bush administration’s tough financial sanctions, which were imposed because of Pyongyang’s counterfeiting of American currency. During the past year the Treasury Department has been able to constrict the flow of funds in and out of North Korea by persuading nations around the world to close the country’s bank accounts. Washington’s efforts were so successful that the North tied the resumption of the six-party talks to the ending of these sanctions.

Resumption of the talks is a step forward. Yet talking is not an end in itself. The United States has been talking with the North Koreans about their nuclear program since January 1992. Negotiations since 1992 have been bilateral and multilateral, formal and informal. They have been conducted in the capitals of the participants and in neutral settings. Every conceivable format has been tried at least once. Talks have been everything but successful.

Almost everyone says that we should talk because diplomacy carries no cost. Yet that is not true. In January 1992 North Korea did not have the bomb. Today it does. In short, negotiations have given dangerous despots the one thing they needed most in order to arm themselves: time.

So let’s by all means talk. But we must remember that talking is not an end in itself and that coercive measures produced this apparent breakthrough.

 

October 29, 2006

Iran Sanctions Discussions: The Most Important Event This Week

The most important event in the world this week will take place in New York. In the halls of the United Nations the international community will discuss sanctioning Iran for refusing to halt enrichment of uranium. Tehran claims that its program is entirely peaceful, but evidence suggests that it is really trying to develop its own nuclear weapons. Once it has mastered techniques to purify uranium, it can use the material to both power civilian reactors and make bombs.

In late July the Security Council demanded that Tehran suspend the enrichment of uranium by August 31. The “atomic ayatollahs” refused to do so. They are willing to talk to the international community about their nuclear program, but they refuse to stop enrichment during the course of any negotiations. On Friday, an Iranian news agency reported that the country had started a second cascade of centrifuges—the devices that take uranium in gaseous form and enrich it to bomb-grade purity.

Washington wants relatively mild sanctions, and Europe is suggesting even weaker ones. China and RussiaTehran’s primary backers—are against sanctions of any kind. Beijing and Moscow propose engaging Iran, but the recent experience with North Korea demonstrates that this tactic is ineffective in stopping a determined regime from acquiring a nuclear arsenal. The North Korean example also shows that the combination of tough rhetoric and weak sanctions does not work. According to an unidentified Western diplomat quoted in The New York Times, the Iranians think they can live with mild sanctions because the North Koreans have been able to do so.

Last Friday, President Bush said it was “unacceptable” for Iran to have the bomb. He is certainly correct, but the time for words is over. Now, everyone is watching to see what he will do to disarm the mullahs. For his part, U.N. Secretary-General Kofi Annan has said that confrontation is in no one’s interest. He is also correct, but he and the rest of the international community have tried negotiating with the Iranians without success for years. Confrontation now appears inevitable unless we acquiesce to Iran’s present course of action. Analysts say Iran, unless it is stopped, will have the bomb anywhere from two to ten years.

So this is a critical moment. The failure to disarm North Korea has encouraged the Iranians to go ahead with their own weapons program. Our response to Tehran’s unmistakable challenge is where we write our history for decades. After all, Mohammed ElBaradei, the head of the U.N.’s International Atomic Energy Agency, estimates that forty nations or more could develop nuclear weapons within a few years’ time.

An international system that cannot defend its most vital interests against its weakest members—in this case North Korea and Iran—cannot last. The stakes, therefore, could not be higher.

 

October 22, 2006

The World’s Largest Initial Public Offering

China is now launching the world’s largest initial public offering. The sale of about 15 percent of the Industrial and Commercial Bank of China is expected to take in around $22 billion in simultaneous Hong Kong and Shanghai listings.

It seems the investing world is now going crazy over financial institutions in China. When this sale closes, Chinese banks will account for three of the ten largest public offerings in history. All three bank deals will have occurred within a year of each other. China Construction Bank went public last October, and Bank of China followed this May.

Not surprisingly, the Industrial and Commercial Bank listing is creating a frenzy among Asian retail investors, some of whom have mortgaged their homes to buy shares. Goldman Sachs, American Express, and Allianz have already paid $3.8 billion to buy stakes in the bank, China’s largest in terms of assets, loans, and deposits. Institutions and corporates from Hong Kong, Malaysia, Singapore, Kuwait, and Qatar have signed agreements to buy big blocks of shares in the offering. The IPO has attracted $200 billion in orders from eager institutions.

Both large and small investors assume that ICBC, as the bank is known, has cleaned up its balance sheet, tightened lending practices, and reformed management. This financial behemoth—it has more than 18,000 branches in China and almost 100 locations offshore —has done all these things. In offering materials released by the Hong Kong exchange, ICBC announces it had a NPL—nonperforming loan—ratio of 4.1 percent as of June 30. This compares favorably with its announced ratio of 24.2 percent at the end of 2003. The marked improvement in the bank’s condition is due in some part to the Chinese government’s non-recourse acquisition of $76.7 billion in bad loans in the middle of last year. Moreover, several capital injections and recent operating profits have permitted the bank’s management to write off additional doubtful assets.

ICBC may be in better shape today than just a few years ago, yet it is unlikely that the bank’s NPL ratio is in single digits as claimed. As an initial matter, for the last ten years China has consistently fibbed about the condition of its banking institutions. A decade ago Dai Xianglong, when he headed China’s central bank, announced that bad loans constituted no more than two percent of the total then outstanding. At the time, foreign observers thought the correct figure was somewhere around 25 to 30 percent. When the foreign consensus moved up to about 40 percent, Beijing began releasing figures showing ratios of around 25 percent.

China is now claiming low nonperforming loan ratios. The China Banking Association announced that at the end of this May 8.0 percent of loans held by the 19 largest banking institutions were nonperforming. This translates into bad debt of approximately $150 billion.

Foreign estimates are many multiples of the domestic ones. This May Ernst & Young estimated that nonperforming loans on the books of the four largest banks amounted to $358 billion. The accounting giant subsequently withdrew its report under pressure from Beijing, but its findings nonetheless highlighted the dimensions of the problem. Fitch Ratings and Standard & Poor’s subsequently came up with lower, but comparable, numbers and essentially confirmed E&Y’s views of the general magnitude of the bad-loan situation. Congress’s Joint Economic Committee in July cited the Fitch estimate with approval.

ICBC says that it maintained a 30.4 percent share of the loans of the four largest banks at year end 2005. If we apply that percentage to the Ernst & Young estimate of bad loans, then ICBC’s share is $108.8 billion. In contrast, the bank claims that its bad loans at that date amounted to only $19.1 billion. Could ICBC have done a substantially better job than the other three large banks in avoiding NPLs? Not likely. It is generally acknowledged to be the third weakest of the Big Four—which is the reason that it is the third of them to go public. The $108.8 billion figure may not be precise, but it nonetheless casts doubt on the accuracy of the bank’s numbers in its offering materials.

Chinese officials have complained about Ernst & Young’s methodology of compiling NPL statistics, yet over the last decade institutional analyses have usually underplayed the magnitude of the bad-debt situation in the Mainland. And there is reason to believe that they are doing so now, especially because fast economic development has weakened the banks in the past and appears to be doing so at this moment as well.

More than half of China’s recent growth is attributable to investment, and half of that is attributable to state spending. State spending is ultimately unsustainable because no government, and especially China’s, has been able to direct the use of capital efficiently over time. Unfortunately, Beijing has funneled much of this stimulus through the banks. Bank lending accelerated during the first six months of this year: the amount of outstanding loans as of June 30 was an astounding 10.4 percent higher than at the end of 2005. Beijing has pushed the banks to make commercial and residential real estate loans, and many of them rest upon defective mortgages. A large portion of today’s consumer loans, also made at Beijing’s behest, appear to be in trouble as well.

ICBC’s recent loan growth, at first glance, appears modest. Total loans at June 30 of this year were 5.2 percent greater than at the end of last year. Yet the bank is shifting asset growth to new forms of lending, such as reverse repurchase agreements—up 18.3 percent in the same period—which are not considered “loans” in the offering materials. ICBC’s total assets grew at an extremely fast clip of 9.3 percent in the first six months of this year.

This growth is unsustainable, even for well-managed banks in well-regulated economies. ICBC, unfortunately, is not in good condition today. Like the other three large banks in China, ICBC is undoubtedly insolvent from a balance sheet point of view. It remains in business only because it is extremely liquid. ICBC’s problem, disclosed in its offering documents, is that the ratio of its longer-term loans to total loans is growing at a fast pace. This trend aggravates the classic mismatch of possessing short-term obligations—primarily deposits of individuals—and long-term assets—loans to enterprises and the like. Any loss of confidence in ICBC could result in severe liquidity problems.

The only thing that prevents the Chinese people from withdrawing their savings from ICBC is that they do not know its true financial condition. A bank that depends on the continued ignorance of tens of millions of depositors is always at risk. And so will ICBC’s new shareholders.

 

September 10, 2006

The Montaperto Defense

On Friday a Federal judge sentenced Ronald N. Montaperto to three months in jail for unlawful retention of classified documents he obtained while working as an analyst for the Pentagon’s Defense Intelligence Agency. Montaperto will also forfeit his government pension and serve three months of home detention. Prosecutors had requested a much stiffer sentence in line with Federal guidelines.

Montaperto has admitted to passing highly sensitive information to two Chinese agents in approximately 60 meetings stretching back to 1983. In addition to other things, he revealed sources, information, and intelligence gathering methods. The Washington Times reported that an American electronic eavesdropping operation against China failed at a time Montaperto, according to his own admission, passed secret data to Chinese agents in 1988. He claimed he was trying to obtain useful intelligence from China during the course of his surreptitious disclosures to the agents. “I never meant to hurt my country in any way,” Montaperto said according to The Wall Street Journal . “My reasoning was wrong, but my intentions were good.”

Montaperto received the light sentence after current and former intelligence and military officials wrote letters to the court on his behalf. The judge, Gerald Bruce Lee, also cited Montaperto’s cooperation with law enforcement officials and his lack of financial gain.

As an initial matter, it is hard to accept Montaperto’s assertions as to his motive in light of the length of time of his disclosures to the Chinese intelligence operatives. Moreover, there is reason to doubt the voluntary nature of his cooperation. This is not a case where someone has a change of heart and turns himself in. Montaperto talked when he had few, if any, viable options.

Even if Montaperto’s motives were as innocent as he claims, the justice system should take into account the nature of the crime and the injury it has caused when sentences are handed down. Although we may never know the extent of the damage, it is probable that almost two decades of disclosures have seriously harmed the security of this country.

Most important, the light sentence helps remove the element of deterrence from spying against the United States. In fact, we may be encouraging others to claim what will eventually be known as “the Montaperto defense.” Beijing, I am sure, has noticed the extraordinary leniency and will be counseling its agents on what to say should they too be nabbed.

 

August 26, 2006

Iran and the U.N: A League of Nations Moment

Today the Los Angeles Times reports that Washington is thinking of forming a coalition to impose sanctions on Iran if the United Nations Security Council fails to do so.

In late July, the Security Council gave Iran until the end of this month to halt its enrichment of uranium or face the threat of U.N. sanctions. Various sources report that at that time China and Russia informally assured America and the EU-3 (England, France, and Germany) that, if Iran failed to halt its atomic work by the deadline, they would support the imposition of minor sanctions, such as travel bans on top Iranian officials and freezes on their assets.

This week Iran delivered its official reply to the international community: Tehran stated it will not stop enrichment. This refusal followed the U.N.’s announcement this Monday that the Iranians barred inspectors from the International Atomic Energy Agency from entering their underground facility in Natanz, two hundred miles south of Tehran. This refusal constituted an apparent violation of the Nuclear Nonproliferation Treaty. By now it is clear that Iran has not been in compliance with this global pact for about nineteen years.

A few days ago Russia signaled that it did not favor sanctions, and China, in less direct ways, noted its approval of the Russian approach. Both of these nations are permanent members of the Security Council and can veto any proposed imposition of sanctions. Evidence suggests that, at least up to the end of 2003, China was supplying nuclear technology to the Iranians in violation of its own NPT obligations. Both Russia and China maintain important commercial links with Iran.

The concept of a global organization ensuring collective security is truly inspiring, but in practice the mechanisms of the U.N. are breaking down. For example, the notion of collective security did not work with regard to Iraq. The 2003 war would not have occurred had the Security Council enforced more than a dozen of its resolutions that Saddam Hussein was ignoring at the time.

Today, the international community simply cannot permit Iran’s leaders, who espouse end-of-the-world views and send arms to subnational groups, to continue to violate their treaty obligations by building a nuclear arsenal. Of course, the Iranians might ultimately become responsible custodians of atomic weaponry, but we have to take them at their word when they tell us how they want to reorder the world—and whom they seek to kill.

So the United Nations, like the League of Nations before it, is facing a critical moment. Should the Security Council fail to disarm the “atomic ayatollahs,” America, either by itself or in conjunction with others, will have to do so. There are no good solutions outside the U.N. framework. Yet there must be a solution. It need not be American, unilateral, or military, but it does need to be near at hand. Iran is taking on the world, and we have no choice but to act if we wish to preserve the international system.

 

August 19, 2006

Will North Korea Test a Bomb?

ABC News, citing “suspicious vehicle movement” and the unloading of cable reels at an underground facility in northeastern North Korea, reported on Thursday that Pyongyang may be preparing to test a nuclear device. Speculation that the North would detonate a bomb began soon after the failure of its new long-range Taepodong-2, which was launched on July 4 (U.S. time) along with shorter-range missiles. Many analysts believe that North Korean leader Kim Jong Il needs to regain prestige lost after the Taepodong-2 blew up early in its flight. Since 2003 Kim has staged events that appeared to presage a nuclear test. So will the isolated nation actually go ahead this time and detonate a weapon?

As we know, there are virtually no coincidences when it comes to North Korea. There are three developments that have so far not been linked to a possible nuclear test. First, events in Lebanon are returning to normal, which means Kim can grab the world’s attention again. Moreover, he probably believes the relations between United States, his main adversary, and China, his principal ally, were strained by Washington’s support for Israel in its struggle against Hezbollah.

Second, Prime Minister Junichiro Koizumi has just riled China and South Korea with a visit on August 15, the 61st anniversary of the end of the Second World War, to the Yasukuni shrine. Kim, therefore, probably feels he can split Asia while anti-Japanese sentiment is at a high point. The Japanese were instrumental in getting the United Nations Security Council to pass a resolution condemning Pyongyang for the July missile tests. Perhaps Kim thinks he should act while Tokyo, another adversary, is more isolated than usual.

Finally, North Korea needs aid due to the recent floods. Pyongyang has indicated that several hundred have died. It is perhaps significant that Good Friends, a Seoul-based aid agency that has good ties with the North, stated this week that approximately 54,700 North Koreans died or were missing and that 2.5 million people were displaced. The Good Friends report is probably exaggerated. It could be part of Pyongyang’s effort to obtain additional assistance. This week the North has accepted aid from both the South Korean government and the U.N.’s World Food Program, donors that it had spurned after the July missile tests. A nuclear test probably will not occur until Pyongyang has obtained the aid it needs to get through the winter.

A nuclear test appears to be just a matter of time. And the next few months look to be the perfect opportunity for Kim to act up. To borrow an old Soviet term he undoubtedly knows well, the “correlation of forces” is now looking good for him.

 

August 13, 2006

Is China a Responsible Stakeholder?

The United States wants China to become a “responsible stakeholder” in the current international system. As a result, Washington engages Beijing in the hopes that the Chinese will support its efforts to maintain global stability.

Yet can China be considered a stakeholder if it is continuing to proliferate nuclear weapons technology to the world’s most dangerous regimes? In 2003, Reuters reported that the staff of the International Atomic Energy Agency, the U.N. nuclear watchdog, identified China as one of the sources for enrichment equipment used in Tehran’s suspected nuclear weapons program. As noted in The Wall Street Journal Chinese atomic weapons scientists were working in Iran as late as the end of 2003. And as late as last year, various sources, including non-governmental American intelligence analysts, reported that China sold either centrifuges or centrifuge parts to Iran. There are other allegations. A decade from now we may learn that some of these reports were untrue, but there are too many to dismiss all of them at this time and say that China is a responsible member of the international community.

Beijing’s defenders say that China’s behavior has changed for the better since Maoist days and even since the middle of last decade. Yes, this is true. Nonetheless, China’s improvement is not the point. As an initial matter, a decrease in Beijing’s proliferant activities may be because it has already transferred all necessary technology to its three main beneficiaries, Pakistan, Iran, and North Korea. These days, China provides diplomatic and economic support to these allies. Now, this may be the only help they need.

More important, the issue is not whether the Chinese are headed in the right direction. The issue is whether they are moving fast enough. The existing international system could completely fail if hostile and unstable regimes obtain the ultimate weapon. Unfortunately, that kind of rapid nuclearization may soon occur. In 2004, the IAEA estimated that at least forty nations could build a bomb within a few years’ time. Not all of these countries would be a threat to global order—but many of them would. Like Iran and North Korea.

With regard to Iran and North Korea, Beijing recently sided with the United States and the other members of the international community in the United Nations Security Council by supporting resolutions to stop their missile and nuclear weapons programs. Beijing’s diplomats, unfortunately, worked hard behind the scenes to water down the strength of the texts. As a result, the two votes were only symbolic victories, not real ones, for the United States and Europe.

The Security Council will have to revisit both matters if Pyongyang and Tehran choose to disregard the United Nations resolutions. The real test whether China is indeed a responsible stakeholder will come when the world body takes up these matters again. Will Beijing act like a stakeholder when it really matters?

 

July 24, 2006

WWIII?

“World War III has begun,” wrote the thoughtful Michael Goodwin of New York’s Daily News earlier this month. He dates the beginning of this conflict to the fall of the Berlin Wall or the first bombing of the World Trade Center in 1993. On Friday’s Lou Dobbs Tonight he even suggested it started with the storming of the American embassy in Tehran in 1979. Others say the war on terror is really World War IV—World War III, in their view, was the Cold War.

It’s clear the United States is involved in a global struggle against Islamic fanatics and their allies, but the use of “world war” debases this term and even the concept of war itself. For one thing, actual military conflict is confined to one part of the globe, primarily Afghanistan, Iraq, Israel, and Lebanon. The broader contest with militants is global but is not first and foremost a military struggle. We can talk about a War on Terrorism, but that is more like the War on Drugs than anything else. Yes, much is at stake, but not all consequential contests are wars.

A country that devotes its attention to Bart Simpson, Jessica Simpson, and O. J. Simpson does not feel like it is at war. Some may argue that we should be fighting a world war, but in fact we are not.

 

July 16, 2006

North Korea Rejects U.N. Missile-Test Resolution. What’s Next?

Yesterday afternoon North Korea publicly rejected a United Nations Security Council resolution minutes after its passage. The unanimously adopted resolution demands that Pyongyang “suspend all activities related to its ballistic missile program.” It also requires all U.N. members to stop trade with the North in missiles, missile-related items, and materials that can be used to manufacture weapons of mass destruction. The resolution, passed in response to Pyongyang’s missile tests earlier this month, was the first by the Security Council on North Korea since 1993.

Now that the North has denounced the U.N.’s action—Pyongyang’s U.N. ambassador used the words “unjustifiable and gangsterlike”— what will happen? The resolution, although mandatory, does not contain an enforcement mechanism because China threatened a veto if it contained a reference to Chapter 7 of the U.N. Charter. A Chapter 7 resolution would have paved the way for the use of military force.

Although Beijing protected him in the United Nations, Kim Jong Il faces unpleasant options at this crucial moment. Before the missile tests, North Korea’s leader was in an enviable position. Both China and South Korea were supplying him with all the material and diplomatic support necessary to sustain his regime, and the United States, by ignoring him, was giving him time to enlarge his arsenal of nuclear weapons. Now, however, South Korea has unexpectedly suspended humanitarian assistance and taken a tougher diplomatic line. Washington, by extending economic incentives to Russia, peeled Moscow away from Pyongyang. Even Beijing, the North’s staunchest ally, distanced itself from Kim. Finally, Japan, which took the lead in pressing for the U.N. resolution, found a new vigor in containing the North.

Although North Korea is a one-man state, there is intense politics inside the regime. Kim, therefore, needs to turn this developing debacle into stunning triumph to maintain his position. What will he do? Submission to the will of the international community, although the responsible course of action, would undoubtedly jeopardize his standing in Pyongyang. Obvious options for him involve testing more missiles or even a spare nuke.

Kim did not need to start this crisis. Now that he has and the world has responded, it appears he has no choice but to continue his provocative behavior.

 

July 15, 2006

The World Aflame

Today, the Bush administration is being tested by escalating conflict between Israel and its neighbors, a resilient insurgency in Afghanistan, an arduous war in Iraq, intractable nuclear crises involving Iran and North Korea, and a seemingly endless struggle against Islamic terrorism across the globe, just to name the most prominent crises.

Moreover, there are general trends that are undermining the United States. Russia and China are emerging as unmistakable challengers to Washington. In Latin America there is a leftist wave. To make matters even worse, the underpinnings of the West are under attack: democracy is failing to consolidate in strategic locations and the global trading system is about to suffer a major setback. “I am hard-pressed to think of any other moment in modern times where there have been so many challenges facing this country simultaneously,” says Richard Haass, the president of the Council on Foreign Relations.

Any one of the ongoing crises would be hard to manage, but each one becomes more complex when it occurs in conjunction with others, especially when one problem cascades into the next. For example, it appears Iran instigated the Hezbollah attacks on Israel to divert attention away from impending U.N. Security Council deliberations on its nuclear program. If we remember problems are occurring simultaneously, we can see why the international system is particularly vulnerable at this time. “Every situation makes it more difficult to deal with another,” says Zbigniew Brzezinski, who as Jimmy Carter’s national security adviser learned something about facing more than one problem at a time.

So we have to ask: Can the American-led international system fail at this juncture? Change, of course, is the one precondition for a collapse of the current global order. And today there is change aplenty. The risk for America—indeed for all countries—is that the convergence of crises overwhelms the ability of nations to cope. It is this complexity that makes crisis especially dangerous.

 

June 14, 2006

Ahmadinejad Goes to Shanghai

Today, Iran’s fiery president, Mahmoud Ahmadinejad, arrived in Shanghai for the meeting of the six-nation Shanghai Cooperation Organization. Iran is one of four countries holding observer status in the Central Asian security bloc and is seeking full membership. The SCO, formed in 2001, consists of China, Russia, and the Central Asian nations of Kazakhstan, Kyrgyzstan, Tajikistan, and Uzbekistan.

China insists that the SCO is not “an eastern version of NATO” and is not directed against any nonmember country. Nonetheless, last year the SCO, prompted by Moscow and Beijing, demanded that the United States leave an air base in Uzbekistan. Beijing was largely responsible for organizing the SCO and apparently sees the organization as a means of countering American influence on China’s western border.

Ahmadinejad’s presence at the SCO summit comes at a particularly sensitive time in Tehran’s relations with the international community. Iran has yet to formally reply to a Western package of incentives to halt enrichment of uranium. Ahmadinejad has been defiant of the West and the U.N.’s International Atomic Energy Agency in part because of diplomatic and commercial support from both China and Russia. The Iranian president is using his trip to Shanghai to show that his country is not isolated on the nuclear issue, as Washington claims.

Beijing often criticizes America’s “Cold War mentality” and claims that China’s rise will be peaceful. Hosting renegade Iran in Shanghai at this moment, however, is an indication that Chinese intentions may not be so benign. At the very least, Ahmadinejad’s visit is another sign that Beijing’s foreign policy goals are inconsistent with those of the West.

 

June 10, 2006

Should We Try to Block a North Korean Missile Test?

Since the middle of last month various news organizations have been reporting that the North Koreans are preparing to test a ballistic missile, possibly a Taepodong-2. Their last test of a long-range missile occurred in August 1998.

If North Korea conducted a test of a ballistic missile, it would be in violation of a self-imposed moratorium declared in September 1999.

Washington has been urging Pyongyang not to test a missile. In the past, Washington has also tried to block North Korea from testing a nuclear weapon.

Should the United States continue to urge North Korea not to test its weapons and missiles? Most everyone assumes we should maintain our efforts in this regard.

We should not try to prevent North Korean testing. It’s not as if time favors us. It does not. The North Koreans, unfortunately, can improve their inventions with computer simulations and continue development in secret. If they have the capability to detonate weapons or launch missiles, we need to know about it. An actual test, therefore, can help us as much as it helps them.

Moreover, it’s not as if a test would inspire other bad actors around the world. They’re already moving ahead at full speed. Iran is proof of that.

The Bush administration, of course, does not want another crisis at this time. But as more than five decades have proven, the North Korean problem only gets worse over time. We need to deal with Pyongyang now, whether or not it tests its capabilities.

 

May 30, 2006

Bank of China’s Initial Public Offering

The Wall Street Journal, in an article dated today, raises concerns that America is losing some of the larger initial public offerings from China because of the Sarbanes-Oxley legislation, which contains tough corporate-governance rules.  Bank of China’s shares begin trading on the Hong Kong Stock Exchange this Thursday.  If, as expected, the overallotment option is exercised in full, the offering will take in US$11.2 billion and end up as the fourth largest in history.

Wall Street, of course, should be concerned that it is losing any business, but the American investing public is better off without access to the Bank of China offering.  As an initial matter, the bank claims that its nonperforming loans at the end of 2005 comprised only 4.9 percent of its total portfolio.  The real number, however, is probably many times higher.  Official NPL statistics of Chinese banks have been—and remain—notoriously unreliable.  Bank of China and the other large Chinese banking institutions have been reporting sharp decreases in bad loans in recent years.  These decreases seem mysterious, however, in light of various factors.  The most important of them is a rapid expansion of lending that is inevitably creating new bad loans. 

Worse, Bank of China in the last few days announced plans to increase its corporate and retail lending in each of the next three years by 10 to 20 percent.  It is extremely unlikely that any bank, especially one in such a badly supervised market as China’s, can blow up its balance sheet and not suffer a large drop in loan quality. 

Bank of China, in sum, appears dangerously overvalued.  No wonder its management avoided Sarbanes-Oxley and America’s security rules by listing in Hong Kong.

 

May 21, 2006

The “Spoiled Child”

People’s Daily, the self-described mouthpiece of China’s Communist Party, called the American dollar a “spoiled child” on May 19.  Its long analysis says that the United States is behaving irresponsibly as the guardian of the world’s reserve currency.  The Chinese newspaper, without referring to the Federal Reserve by name, castigates the American central bank as “selfish” and “self-indulgent.”  Its general criticism of Washington’s economic policies is equally harsh.

People’s Daily has been carrying articles to the same effect for the past nine months or so.  The spoiled-child story, however, is markedly different in tone.  The paper’s May 19 rant does not use Cultural Revolution language—there is no mention of “running dogs” or “dunces” for instance—but it nonetheless goes far beyond the polite discourse governments typically employ in discussing the currency policies of other nations.

As we are seeing, Beijing is becoming more assertive than cooperative when it comes to currency and trade matters.  China is clearly a stakeholder in the global trading system, but it may not become a responsible participant if recent events are any guide.

Beijing’s leaders are continuing to make the wrong choices regarding currency and trade.  Therefore, we need to ask whether they will also continue to make irresponsible ones in geopolitical matters.

 

April 30, 2006

The End of Diplomacy?

The Bush administration, according to recent reports, has concluded that Kim Jong Il will not agree to give up his nuclear weapons under any set of circumstances.  As a result of this assessment—made toward the end of last year—Washington has taken steps to shut down diplomacy with Pyongyang and step up coercive measures against North Korea’s economy.  At this time it is not clear that there will be another round of the six-party talks sponsored by China

Yet if President Bush’s conclusion is correct about Kim’s intentions, now would be the time to accelerate diplomacy.  Diplomacy, at this time, carries no cost and potentially promises substantial benefits.  Virtually everyone says that the key to a resolution of the nuclear crisis is China, but the key to China is South Korea.  Chinese supremo Hu Jintao has been able to protect North Korean autocrat Kim Jong Il because South Korean President Roh Moo-hyun is doing the same.  As a result, South Korea provides cover to China to act irresponsibly.  So stripping Seoul from the Beijing-Pyongyang axis should be Washington’s most immediate tactical goal. 

The key to winning over Seoul is influencing South Korea’s almost evenly-divided public.  The election to pick President Roh Moo-hyun’s successor will be held in December 2007.  Roh has an approval rating just above 10 percent—he makes even President Bush look popular in comparison—and his Uri Party has lost every bi-election in the last year.  There is a growing New Right movement in South Korea so the conservative Grand National Party can win the presidency next time.  Between now and then the White House can help the conservatives take over the Blue House by making Kim Jong Il look bad and thereby discrediting the so-called “progressive” forces in the South.  America can do that best by making attractive proposals to solve the nuclear crisis because North Korea will turn them down anyway if the Bush administration is correct.

If Washington can help South Korea reverse course, the Chinese will be alone in their support of Pyongyang and will, therefore, have to take a clear stand.  They will have to choose between their future, cooperation with the United States, and their past, the alliance with North Korea.  In this situation, it is unlikely that Beijing would openly defy America.

 

April 16, 2006

Hu Comes to America

Hu Jintao’s itinerary for his trip to the United States is revealing.  From his schedule it is apparent that the Chinese leader is more interested in influencing the American people than cooperating with their government.  He will spend more time courting the presidents of Microsoft, Boeing, Starbucks, and Yale than the President of the United States.

There are, of course, many contentious and important matters to be discussed between the leaders of the world’s most populous state and its most powerful one, but Hu Jintao prefers to limit contact with George W. Bush.  Hu has consistently minimized substantive conversation with his American counterpart during previous meetings.  He is perhaps the only head of state to turn down a Crawford visit—an appointment in Texas would have made substantive discussion unavoidable. 

In short, our government is trying to engage the Chinese, but they see less need to engage ours.  If we can draw any conclusions from Hu’s continued reluctance to chat, it is that China fears there is more to lose than gain from a change in its relationship with the United States

Beijing is getting almost all that it wants from Washington, yet Washington is not getting what it needs from Beijing.  So it’s no wonder that the Chinese now appear intransigent.  China’s primary method of addressing the unsustainable trade balance, for instance, is to publicize purchases of American products that it would have made anyway.  There has been no substantial decrease in governmental interference in setting the value of the Chinese currency.  Despite our pleas, we have seen no progress in eliminating illegal subsidies to state-owned enterprises and almost none on stopping piracy of foreign intellectual property.  There have even been attempts to erect new trade barriers.  As the headlines indicate, the Communist Party has over the course of the last half year cracked down hard on Chinese society from the Internet to television to newspapers.  Beijing has not extended appreciable help to the West on North Korea and almost none on Iran.  The People’s Liberation Army is continuing to spend money at a fast clip and is doing so in nontransparent ways.  Beijing has intensified its efforts to remove American influence from Asia and the Pacific.  As Derek Mitchell of the Center for Strategic and International Studies says, “there is a sense that the Chinese are not giving on anything.” 

We can understand why the Chinese want to take, take, take, but it’s a mystery why we desire to give, give, give.  By now it should be clear that we need to fundamentally change our policy toward China.

Yet we should not expect the Chinese leader to suggest altering his nation’s relationship with America.  Hu Jintao’s primary motive for coming to Washington, D.C. seems to be participation in elaborately staged photo opportunities so that they can be replayed on China Central Television, the state broadcaster.  Few things can more legitimize the rule of an insecure autocrat than the pageantry of a summit with the head of the world’s leading democracy.  In an era when America’s avowed goal is to end tyranny, why are we helping to buttress the uncooperative government led by President Hu?

 

April 16, 2006

Will the Chinese Economy Slow Down this Year?

A few days ago Yao Jingyuan, chief economist of China’s National Bureau of Statistics, suggested that his country’s gross domestic product will grow over nine percent this year.  The central government had earlier targeted growth of eight percent for this period.  GDP growth for 2005 was a sizzling 9.9 percent according to official statistics.  

There are, however, an increasing number of reports, both domestic and foreign, indicating that Chinese economic growth will be far lower.   For instance, Lombard Street Research, a London firm, has predicted that growth this year will be just a little more than half of last year’s.   The famous Jim Walker of CLSA, the Asian investment bank, forecasts a slowdown too, although his estimate of about 7 percent is less dire.  A think tank affiliated with China’s National Development and Reform Commission says that growth could fall to 7.5 percent.

There are many reasons to predict a slowdown of Chinese growth.  There are new investment curbs in China, foreign direct investment might fall, and American consumers may lose their capacity to buy Chinese goods, among other reasons.  Moreover, there is always the gravity argument: at some point, China’s economy must come back to earth.

Nonetheless, downbeat forecasts are probably off target due to the Olympics factor.  Even if the Chinese economy would slow on its own this year, it is unlikely that the leadership in Beijing will permit a downturn in growth rates before the Summer Games in 2008.  Since the end of last decade, the central government has been pumping up growth through it program of fiscal stimulus.  If the economy slows in the second or third quarter of this year, we will probably see increased pump priming.

At some point there will be a downturn.  Many countries have experienced economic difficulties after hosting the Olympics due to falls in tourist revenue and government spending.  China is particularly vulnerable to a correction.  The country has not had a recession since 1976, the year Mao Zedong died, according to government statistics.  The Chinese are due for a sizable downturn, but it’s unlikely to occur this year. 

 

March 25, 2006

An End to the Consensus on China

A consensus about China has underpinned American foreign policy for more than a decade.  Most of us have believed that our engagement of Beijing would lead to a more democratic and benign nation.  Therefore, Washington’s goal has been to integrate China into the international community.  The concept is simple: if we extend a hand to the Chinese, they will respond.

China has benefited from this indulgent approach, which is one of the reasons that it has developed so fast since the early 1990s.  We have helped Beijing and even overlooked irresponsible conduct in the hope that China would eventually evolve. 

As a result, we have, over time, inadvertently created a set of perverse incentives.  The Chinese engage in bad behavior.  We provide benefits in the hope they will change.  So they continue their irresponsible conduct.  We continue to reward them.  In these circumstances, the Chinese have naturally become more assertive than cooperative.

This is not to say that China has not taken some steps in the right direction, but many Americans, ever hopeful, exaggerate Beijing’s cooperation such as it has been.  We have been looking at China the way we want it to be, not the way it actually is. 

For a decade free-trade views have determined our relations with Beijing.  This is changing as the general consensus toward China is starting to break down.  And as trade frustrations mount, geopolitical concerns will come to prominence as well.  It is becoming increasingly clear that China is an obstacle—and perhaps the main obstacle—to America achieving its most important national objective, the denuclearization of rogue states.  China has been the primary proliferator of nuclear weapons technologies since the mid-1970s when it began helping Pakistan develop its first nuclear device.  It is also the principal supporter of North Korea, a main backer of Iran, and a friend of virtually every other nation that now wants the most destructive weapon in history. 

The U.S.-India nuclear deal is significant because it signals Washington’s frustration with China’s proliferation and even relations in general.  The subtext of the agreement is that the United States cannot stop China’s proliferation so it will counteract it with proliferation of its own.  This could be the first visible step to changing the general approach of cooperating with the Chinese.

Americans are beginning to see China as the present danger that it is.  As Beijing steps to the forefront as the primary enabler of the Irans and North Koreas of the world, security concerns will overpower free-trade considerations in Washington.  And that is the way it should be in this especially troubled time.

The past demonstrates that China will not be a constructive force until we act to make it one.  Because the international community is at an important, if not critical, juncture, now is the time for a comprehensive review of our general approach toward Beijing.  Hu Jintao’s upcoming visit to the United States is the perfect opportunity for Washington to begin a more sensible foreign policy.

 

March 19, 2006

Premier Wen Jiabao Sparks Protests

About four hundred peasants from Luxinhe, near Tianjin, protested the seizure of their land last week, according to Agence France-Presse.  The protests occurred in that village and in front of the Xiditou township government headquarters.  The villagers were apparently encouraged by Premier Wen Jiabao’s words at the recently-concluded National People’s Congress meeting in Beijing.  As one woman from Luxinhe said, “Premier Wen said our rights should be protected—we feel justified and heartened.”  The premier, at his televised NPC press conference, stated, “We need to respect the democratic rights of the farmers, especially their right to independently operate their contracted land.” 

Premier Wen’s words highlight the danger to authoritarian regimes when they try to reform.  Peasants, like the ones in Luxinhe, may take to the streets regardless of the attitudes of central officials, but their protests will become more frequent and defiant if they believe the central government supports their general objectives.  As many observers have noted, the Chinese demonstrate when they think they can get away with it.  Wen Jiabao, therefore, may be unintentionally encouraging even more demonstrations in China’s farming areas.

Premier Wen, the acceptable face of Chinese communism, will be overseeing a rural spending plan for this year.  Yet money is not the real issue, and spending more of it may just aggravate matters in the countryside, especially if government funds are wasted or embezzled by corrupt cadres.  The Communist Party, unfortunately, is not ready to provide the two things that are necessary to stem rising rural discontent: justice and enforceable property rights.

The National People’s Congress recently deferred passage of the long-delayed property law.  The law is considered too controversial to be enacted at this time.

 

 

January 29, 2006

 

Dark Clouds over Korea

 

“Dark clouds of a nuclear war are hanging low over the Korean Peninsula,” the official Rodong Sinmun said yesterday.  North Korea often makes exaggerated threats and dire predictions.  The international community for the most part ignores Pyongyang’s heated language.  And most of the time, that is the correct response.

 

But perhaps we need to pay attention now.  Today, the six-party talks, which have been held since 2003, are stalled.  None of the three main participants—North Korea, China, and America—seems to want a settlement.  Some observers are even beginning to say that these nations really hope the talks will fail.  It is not clear that this is in fact the case, but the current state of affairs—a deadlock—is nonetheless unsustainable.

 

Perhaps that is why the United States is stepping up efforts to improve its bargaining position.  Washington has been trying to cut off North Korea’s income for a long time.  In the last few months, however, the United States has redoubled its efforts by imposing sanctions to stop Pyongyang’s counterfeiting of American currency.  Kim Jong Il has a history of using violence to upset a status quo he finds unacceptable.  He undoubtedly finds it unacceptable for Washington to stop the flow of cash to his regime.  In these circumstances, any miscalculation—whether by North Korea or the United States—could have enormous consequences.

 

For more than a half century a nuclear war, even if foreshadowed by dark clouds, has been inconceivable.  We appear to be approaching a time, however, when conflict of that sort is less so.  If there were ever a moment to seek a lasting solution on the Korean peninsula, it is now.

 

 

 

January 12, 2006

 

Russia and China: Where Do They Stand?

 

Iran, asserting its rights as a sovereign nation, insists on enriching uranium with its own technicians, in its own facilities, on its own soil.  Europe and America suspect that Tehran is carrying on a nuclear weapons program.  As a result, they have threatened to bring Iran before the United Nations Security Council.  Some believe that it is pointless to do this because Russia, and especially China, will veto sanctions.

 

Perhaps they will exercise their veto.  Yet it’s time to put Moscow and Beijing on the spot.  We need to know whether their leaders stand with the West or against it.  We have patiently engaged Russia and China, and they in turn should act responsibly on a matter of great consequence. 

 

The Iranian nuclear crisis not only tests the resolve of Western nations.  It also is a test of Moscow's and Beijing’s intentions.

 

 

 

January 11, 2006

 

What Should We Do about Ukraine?

 

In the first days of this month Russian President Vladimir Putin, acting through the Gazprom monopoly, tried to undermine the new democracy in Ukraine.  Gazprom wanted to quadruple the price for natural gas delivered through a pipeline.  Putin ultimately stumbled and has had to make a more reasonable deal with Kiev, but his clumsy attempt raises an issue: Should the United States try to further encourage Ukraine to become part of the West and provide a security commitment?  Yes, I think we should, even at the risk of alienating Russia.

 

The ongoing insurgency in Iraq shows that building democratic institutions can be a chore, so defending existing democracies is especially important.  Putin is not going to stop making trouble just because he failed in his initial attempts to tame Ukraine through his control of energy supplies.  There are so many other former Soviet Republics for him to destabilize and so many more autocrats to support.  If he sees that the West is serious in assisting Kiev, however, he may learn to better accommodate his small neighbors.

 

 

 

January 2, 2006

 

A New Forum for North Asia?

 

Eurasia Group, a political risk consultancy based in New York, is sponsoring the creation of the Northeast Asia Regional Forum.  The forum is slated to include the United States, China, Russia, Japan, and South Korea.  If the new grouping is formed, the five nations will meet regularly to discuss “key energy, security, and economic questions.”  The next issue of Foreign Affairs will include an article discussing Eurasia’s plan.

 

Eurasia, among other goals, would like to help China and Japan settle their many differences.  The problem is not that there are no venues for these two nations to talk.  There are already many organizations in or covering East Asia—Apec, Asean, Asean Plus Three, the Asean Regional Forum, the Boao Forum, the new 16-member East Asia Summit, just to name the ones that come to mind at this moment.  The underlying problem is that neither China nor Japan really wants to accommodate the other.

 

Chinese leaders talk of peace yet deliberately miss opportunities to converse with their Japanese counterparts.  A pattern of irresponsible Chinese behavior, punctuated only too rarely by signs of cooperation, is hard to ignore.  Nor should we ignore the possibility that reforming totalitarians—or authoritarians if you prefer—with territorial ambitions may not be good dialogue partners.  History may not provide clear lessons, but it does show patterns for those who care to look.

 

Japan’s leaders may want to be accommodating, but they must listen to the Japanese public, which may have passed a no-return point recently.  For the first time since the end of World War II ordinary citizens have a say in Tokyo’s foreign policy, and the exasperation factor is evident, especially after the revelation of North Korean abductions of Japanese citizens.  So even if Prime Minister Koizumi wants to settle matters, he has little room for maneuver.  In short, Japan, a nation that once embraced pacifism, now is beginning to feel that it is counterproductive to exercise restraint.

 

These two countries don’t need confidence-building measures, more opportunities to talk, or even Dr. Phil.  They have serious disagreements that require settlement at this time.  They need pressure from outsiders to force them to come to terms, because it is unlikely that they will do that on their own.  The issue is whether that pressure can be applied in the multilateral setting proposed, the Northeast Asia Regional Forum.  In some multilateral settings countries disagree and produce nothing but deadlock.  The ongoing six-party talks on North Korea’s nuclear program is an example where talking has proven to be nonproductive—and perhaps even counterproductive. 

 

What is really needed is for someone to deliver tough words to China and Japan.  Preferably those words will come from neighboring Asians, but that’s not likely to happen.  The United States may not have more important priorities, but it is nonetheless focused elsewhere.  In this context, we have to ask ourselves what formalized multilateral diplomacy can realistically accomplish.

 

Of course, talking is preferable to other options, but only in general.  There are instances in living memory where negotiations have only made matters worse.

 

  

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 © 2006 Gordon G. Chang