Friday, July 1, 2011

China update

Chinese Homes Prices Soar, Even As Government Paper Announces "Cities Rein In Home Prices"

Lying About Profits Runs Rampant Through China's State-Owned Enterprises
At least 17 Chinese government owned companies have conducted irregular activities that include inflating earnings, concealing information about overseas investments, tax evasion, excessive bonuses and forged invoices, according to China's National Audit Office.
And all those irregular activities are adding up, according to Societe Generale analyst Wei Yao:
It was estimated that the average real profit rate of SOEs (state owned enterprises) was negative 6.2%, instead of the positive 5-6% on their financial statements. This latest auditing report actually indicated an even lower efficiency level for this increasingly powerful group of enterprises.
By releasing the auditing results, the central government seems to be keen to find out the scale of the problem. However, at the moment, it is unclear what it wants to do next. Reforming SOEs has been on the agenda of several five-year plans, but little progress has been made in the past five years.
For instance, Sinosteel Corporation reported earnings of $306.48 million, more than reality from 2007 to 2009. The company was also found to have more problems related to investment overseas.
For the moment, the State-owned Assets Supervision and Administration Commission (SASAC) has hoped to limit criticism and announced that it would replace Huang Tianwen, president and deputy Party Secretary of the Sinosteel Corporation, according to the Global Times.
Marc Faber On The Massive Proliferation Of Fraud In China

Now This Is Why Nobody But China Is Producing Rare Earth Metals

Michael Pettis On The Disturbing Part Of That Austrian Town Being Reproduced In China

Blue Water Dreams: Why China wants an aircraft carrier.

China's Top Auditor Warns of Chinese Local Government Defaults

China's Small Business Are Going Bankrupt, Disinvesting And Increasing Capital Outflows

China's Local Governments Really Want To Default On Their Debts

China Just Issued A Warning To Anyone Worried About Inflation
China's government has announced that it will boost the country's minimum wage by an average annual rate of 13% over the next 5 years, according to China Daily
Chinese Economist: Monetary Policy Is Not The Reason For Small Business Slowdown

Jim Rogers: The China Shorts Have Had It All Wrong, But At Least Hugh Hendry Admits It

More American Companies Bring Factories Back Home From China
The new trend for American manufacturing companies is bringing your factory back to the good old U.S. of A, says a CNN report.
Mark Krwyko, the owner of Sleek Audio, decided to move his factory from Florida to Guangdong province in 2007. His experience, he said, was less than desirable.
"Even though there's a tremendous cost savings when you go to China, in the end it really isn't that much," says Mark Krwyko, the owner of Sleek Audio, a company that manufactures headphones. "It's the hidden costs -- the delays, the shipping costs, you pick all that up on a learning curve."
There were issues with product quality and communication, he found the travel too taxing as the cost of manufacturing kept rising, and he was almost put out of business when a shipment of 10,000 earphones were ruined. That foible cost him millions.
So Krwyko shopped around the U.S., and he found that the recession had lowered costs enough to make keeping his factory in the U.S. worth his while. He's not the only one, says CNN.
China is a hassle and that they want to bring their operations closer to home, where the recession has lowered costs, created workers eager for jobs, and made it easier to justify U.S. manufacturing. Reports have emerged from California, Texas and all across the country as small businesses -- and even large ones like GE (GE) and Caterpillar (CAT) -- take advantage of local incentives and move back at least some of their manufacturing operations for products sold in the U.S. market.
U.S.-China relationship: A shift in perceptions of power

Last year, when China broke off military-to-military talks following the Obama administration's long-expected sale of defensive arms to Taiwan, a high American official asked his Chinese counterpart why China reacted so strongly to something it had accepted in the past. The answer: "Because we were weak then and now we are strong." On a recent visit to Beijing, I asked a Chinese expert what was behind the new assertiveness in China's foreign policy. His answer: "After the financial crisis, many Chinese believe we are rising and the U.S. is declining."
These Chinese are not alone. A recent poll shows there are more Americans who believe China will be the dominant power in 20 years than believe the United States will retain that position. Some analysts go further and argue that China's rise will result in a clash similar to that between a rising Germany and a hegemonic Britain that led to World War I a century ago.
One should be skeptical about such dire projections. China still has a long way to go to catch up in military, economic and soft-power resources. In contrast, by 1900, Germany had surpassed Britain. Even if Chinese gross domestic product passes that of the United States at some point in the 2020s, the two economies would not be equal. China would still have a vast underdeveloped countryside, and it would almost certainly have begun to face demographic problems and slowing economic growth. As some Chinese say, they fear they will grow old before growing rich. China is a long way from posing the kind of challenge to America that the Kaiser's Germany posed when it passed Britain.
But many Chinese do not see the world this way. They believe that the recession of 2008 represented a shift in the balance of world power, and that China should be less deferential to a declining United States. This overconfident power assessment has contributed to a more assertive Chinese foreign policy in the last two years. The shift in perceptions seems to have emboldened the Chinese government, even though the judgment is wrong.
For years, China followed the advice of Deng Xiaoping to keep a low profile. However, with its successful economic recovery from the recession and 10% growth rate, China passed Japan as the world's second-largest economy last year, and many in China pressed for a stronger foreign policy. Some blame this on President Hu Jintao, but that view is too simple. The top leaders still want to follow Deng's strategy of not rocking the boat, but they feel pressured from below by rising nationalism, both in the bureaucracy and the blogosphere.
China's new assertiveness affected its relations with others besides the United States. Its policies in the South China Sea created fear among countries in the Assn. of Southeast Asian Nations, and its overreaction to Japan's actions after a ship collision near the disputed Senkaku islands led Tokyo to reaffirm its alliance with Washington. Beijing alienated South Korea by failing to criticize North Korea's shelling of a South Korean island, irritated India over border and passport issues, and embarrassed itself in Europe and elsewhere by overreacting to the Nobel Peace Prize granted to jailed dissident Liu Xiaobo.
How will these issues play out in the coming year? It is likely that China's leaders will draw back somewhat from the overly assertive posture that has proved so costly. Hu's stated desire to cooperate on terrorism, nonproliferation and clean energy should help reduce tensions, but powerful domestic interest groups in export industries and the People's Liberation Army want to limit economic and military cooperation. And most important, given the increasing nationalism of the Chinese people that one sees on display in the blogosphere, it will be difficult for top Chinese leaders to change their policies dramatically. Hu's state visit to Washington in January helped improve matters, but the relationship will remain difficult as long as many Chinese suffer from hubris based on nationalism and a mistaken belief in American decline.
Given that China and the United States face global challenges such as financial stability, cyber security and climate change, the two countries have much to gain from working together. Unfortunately, faulty power assessments have created hubris among some Chinese, and unnecessary fear of decline among some Americans, and these shifts in perception make cooperation difficult. Any American compromise is read in Beijing as confirmation of American weakness. But with more realistic projections and policies, China and America need not repeat the disastrous experience of Germany and Britain a century ago.
Joseph S. Nye Jr. is a professor at Harvard's John F. Kennedy School of Government and author of "The Future of Power."
In late March, the British-Dutch consumer-products giant Unilever moved to raise prices up to 15% on such staples as shampoo and laundry detergent in the Chinese market. But Beijing asked Unilever to hold off, because officials were worried about inflation-related unrest. Chinese customers had already flooded stores, clearing the shelves of dry goods on rumors of price increases.
It's easy to see why Unilever acquiesced. The stakes are as high for the company as they are for China. China doesn't want to experience unrest unleashed by rising prices, and Unilever doesn't want to lose access to China's more than 1 billion potential consumers — or investors. In fact, Unilever recently issued its first bond in the Chinese currency, helping it raise funds cheaply.
The Chinese government has treated Unilever exactly as it has treated Ai. That is, the government has restrained Unilever's ability to express itself freely. (To add some irony, Unilever is the sponsor of Ai's sunflower exhibit at the Tate Modern.)
The American economy has been in trouble for more than a decade, and no amount of right-wing tax cuts or left-wing fiscal stimuli will solve the primary structural problem underpinning our slow growth and high unemployment. That problem is a massive, persistent trade deficit — most of it with China — that cuts the number of jobs created by nearly the number we need to keep America fully employed.
To understand why huge U.S. trade deficits represent the taproot of the nation's economic woes, it's crucial to understand that four factors drive our gross domestic product: consumption, business investment, government spending and net exports. This discussion focuses on net exports.
Net exports represent the difference between how much we export and import. A trade deficit means net exports are negative, and that directly reduces both the GDP growth rate and rate of job creation.
America's trade deficit is costing us close to 1% of GDP growth a year at a loss of almost 1 million jobs annually. That's millions of jobs we have failed to create over the last decade; and if we had those jobs now, we wouldn't see continuing high unemployment numbers, padlocked houses under foreclosure and empty factories pushing up weeds.
It follows that if we want to get America back to work, we need to sharply reduce our trade deficit. As a statistical matter, that means sharply reducing our trade deficit with China.
Every business day, American consumers buy $1 billion more in Chinese exports than American manufacturers sell to China, and China alone accounts for about 70% of America's trade deficit in goods, excluding oil imports. This "Chinese import dependence" has led a democratic America to owe the largest communist nation in the world more than $1 trillion, while China holds more than $3 trillion in foreign reserves, most of them in U.S. dollars.
To put these dollar reserves in perspective, that's more than enough money for China to buy a controlling interest in every major company in the Dow Jones Industrial Average, including Alcoa, Caterpillar, Exxon Mobil and Wal-Mart, and still leave billions to spare.
So how can we eliminate, or at least drastically reduce, our trade deficit with China? For starters, we must puncture the myth that China's main manufacturing edge is solely its cheap labor. Indeed, while low labor costs are a factor, when you carefully research the biggest source of China's manufacturing advantage, it is actually a complex array of unfair trade practices, all of which are illegal under free-trade rules.
The most potent of China's "weapons of job destruction" are an elaborate web of export subsidies; the blatant piracy of America's technologies and trade secrets; the counterfeiting of valuable brand names like Nike and Chevy; a cleverly manipulated and grossly undervalued currency; and the forced transfer of the technology of any American company wishing to operate on Chinese soil or sell into the Chinese market.
Each of these unfair trade practices is expressly prohibited both by World Trade Organization rules as well as rules established by the U.S. government, e.g., the Treasury Department has sanctions against currency manipulation (which, alas, the Obama administration refuses to use against China despite campaign promises to do so).
In addition, there is the Chinese Communist Party's incredibly shortsighted willingness to trade tremendous environmental damage and a surfeit of workplace deaths and injuries for a few more pennies of production cost advantage, all because of ultra-lax regulatory standards. For example, according to the World Health Organization, almost 700,000 Chinese citizens die annually from the effects of air pollution — that's like losing everybody in Wyoming every year — while Chinese officials acknowledge more than 2,000 coal mining deaths annually, compared with fewer than 50 in the United States.
Make no mistake. All of these real economic weapons have led to the shutdown of thousands of American factories and turned millions of American workers into collateral damage, all under the false flag of so-called free trade.
The second myth we must expose if we are to ever reverse the job-killing trade deficits we now run with China is the idea that free trade always benefits both countries. That doesn't hold true if one country cheats on the other. Instead, when a mercantilist China uses unfair trade practices to wage war on our manufacturing base, the American economy is the big loser.
Given America's structural problem with China and absent constructive trade reform, our economic prospects can only dim further. The presidential candidate who grasps that essential truth, which is becoming increasingly understood by much of the electorate, will be the one who wins in 2012. We need someone who can lead this country to a trade relationship with China founded on the American ideals of free and fair trade rather than a set of mercantilist and socialist trade policies that employ the Chinese masses at the expense of American workers.
Peter Navarro is a business professor at UC Irvine, a CNBC contributor and the coauthor with Greg Autry of "Death by China: Confronting the Dragon — A Global Call to Action."

China is regularly accused of abusing the global intellectual property system, either by ignoring it completely, or aggressively incorporating technology that was developed by outsiders into its own products that it sells (which is something of a gray area, it seems).
Now they're taking it to the next level.
According to China Daily (via Daily Yomiuri), China is now filing patent applications on high speed rail in United States, Brazil, Europe, Russia and Japan. 8 of its 21 original patent applications have already been successful.
The outrage in Japan, which is a home of high-speed rail technology, is predictable.

California saved $400 million dollars by going with the Chinese workers who make $12 a day toiling from 7 a.m. till 11 p.m., seven days a week, and sleep in a company dorm room.
So the $400 million estimated saving is largely a result of cheap Chinese labor. But is that a pure saving? If California and/or the United States have no unemployed workers who could make steel or polish it or do fabrications, then it is a pure saving. But last time I looked both California and the United States have close to 10 percent reported unemployment and closer to 15 percent if we count part time workers who want full time work and those who have become discouraged from even looking for work. Now those unemployed workers get some unemployment compensation and their health care has to be paid for by public means if they can't pay it themselves, and the banks have to repossess their homes when they can't make the mortgage payments, and then states and the Feds have to bail out the banks. I can count way over $400 million in unemployment costs pretty quickly and that's without even considering the downward pressure on all wages in the United States that arises from the import of these low wage products in the midst of high unemployment. I mean, I guess we could have had a cheaper Golden Gate Bridge in 1937 if we had just brought over a bunch of Chinese workers to do the job. But that would have defeated the purpose of building the bridge which was a major project in the effort to cut U.S. unemployment in the midst of the Depression.

China wrestles with food safety problems. From steroid-spiked pork to glow-in-the-dark meat to recycled cooking oil collected from sewers, a series of illnesses and scandals linked to tainted food has put officials on guard. But tougher measures have had little effect amid an official culture of secrecy.
China wrestles with food safety problems
It was a wedding the guests would never forget. Everybody of consequence in the village had been invited to a banquet to celebrate the marriage of the son of one of the wealthiest families. Fifty tables groaned under a lavish spread of dumplings, steamed chickens, pork ribs, meatballs, stir fries, all of it exceptionally delicious, guests would later recall.
But about an hour into the meal, something seemed to be wrong. A pregnant woman collapsed. Old men clutched their chests. Children vomited.
Out of about 500 people at the April 23 banquet in Wufeng, 286 went to the hospital. Doctors at the No. 3 Xiangya Hospital in nearby Changsha, capital of Hunan province, blamed pork contaminated with clenbuterol, a steroid that makes pigs grow faster and leaner. Consumed by humans in excess quantity, it can cause heart palpitations, nausea, convulsions, dizziness and vomiting.
"It was as though he was poisoned," said a villager named Dai, whose husband was hospitalized for five days.
To eat, drink and be merry in China is done at a risk: Weddings increasingly end with trips to the emergency room. During the May Day holiday weekend, 192 people from two weddings elsewhere in Hunan fell so ill they had to be hospitalized.
Since 2008, when six children died and 300,000 were sickened by melamine-tainted baby formula, the Chinese government has enacted ever-more-strict policies to ensure food safety, including a directive last month from the Supreme Court calling for the death penalty in cases where people die as a result of tainted foods.
It hasn't helped. If anything, China's food scandals are becoming increasingly frequent and bizarre.
In May, a Shanghai woman who had left uncooked pork on her kitchen table woke up in the middle of the night and noticed that the meat was emitting a blue light, like something out of a science fiction movie. Experts pointed to phosphorescent bacteria, blamed for another case of glow-in-the-dark pork last year.
Farmers in eastern Jiangsu province complained to state media last month that their watermelons had exploded "like landmines" after they mistakenly applied too much growth hormone in hopes of increasing their size.
Such incidents cut to the quick of the weaknesses in China's monolithic one-party system. Chinese authorities are painfully aware that people will lose confidence in a government that cannot give them assurances about what they eat. They are equally aware that tainted foods could cause what communist authorities fear most: social unrest.
"Food safety concerns the people's interests and livelihoods, social stability and the future of socialism with Chinese characteristics," is how the Supreme Court put it in its notice last month accompanying the announcement of the death penalty.
The government's efforts are looking frantic.
Propaganda posters put up in recent weeks in Beijing restaurants show a clenched fist about to smash into a man in a chef's toque with the message, "Crack down on illegal additives!"
The mass poisoning at the April 23 wedding in Wufeng village prompted provincial authorities to decree that samples of ingredients must be inspected in advance for banquets with more than 100 people.
It's doubtful, however, that anybody will heed the regulation — China is famous for promulgating laws that are never enforced. There is no equivalent of the U.S. Food and Drug Administration: A myriad of different agencies reporting to various ministries, including the Agriculture Ministry and Health Ministry, tend to kick responsibility from one to another. Offenders are not usually prosecuted until something goes badly wrong, as in the baby formula case, in which two people were executed.
The incentive to cheat is greater than ever before, with inflation at its highest level in nearly three years. Food prices in May were up 11.7% from last year, and flooding this month is expected to push them even higher.
"On the one hand, ordinary people pay more attention to food safety and nutrition, but on the other hand, whenever you see a big crowd at the market it is because something is on sale," said Luo Yunbo, dean of the food sciences college at China Agricultural University in Beijing.
Bigger, cheaper, faster is the name of the game.
To make some breeds of fish mature more quickly, aquatic farmers feed them ground-up birth-control pills, which cost virtually nothing because of China's strict limits on family size. In April, authorities in Hefei province busted businesses that were selling a glaze that makes pork look and smell like more expensive beef — bad news in a country with more than 20 million Muslims.
Until recently, directions were circulating on the Internet about how to make fake eggs out of a gelatinous compound comprised mostly of sodium alginate, which is then poured into a shell made out of calcium carbonate. Companies marketing the kits promised that you could make a fake egg for one-quarter the price of a real one.
Shanghainese love their steamed buns and were outraged this year to learn that the manufacturer of a popular brand was using dye to make cheap wheat buns look like the more expensive black rice buns. In the southern city of Dongguan, 17 noodle manufacturers were caught adding ink and paraffin wax to give their products the look and texture of more expensive varieties.
"We have a saying in China that 'food is the people's god,' so obviously it is very scary for ordinary people when things like this happen," said Xiao Andong, a veterinary feed expert with the Hunan Institute of Veterinary Feed Control. Xiao was one of the investigators in the wedding poisoning case, but he said tests were inconclusive because the food had been consumed by the time experts were called in.
Clenbuterol, the suspect in the poisoning, results in a larger, leaner pig that yields more expensive meat. Although it was banned in pig feed in the 1990s, it is still used under the name "lean pork powder," because lean pork commands about 60 cents more per pound than fatty pork.
"The profit margin is bigger than drug trafficking if you add the lean pork powder to the pig food," said Zhou Qing, an author and dissident, who has styled himself as China's equivalent of Upton Sinclair, whose 1906 novel, "The Jungle," exposed the horrors of the U.S. meatpacking industry.
In 2006, Zhou published a book about the Chinese food industry that would extinguish the heartiest appetite. He wrote about foods tainted with pesticides, industrial salts, bleaches, paints and, especially nauseating, imitation soy sauce made from clippings swept up from hairdressers' floors, sold for 5 cents per pound and sent to factories that extract from it an amino acid solution. Zhou wrote that fish farmers confessed to pouring so many antibiotics and hormones into their ponds that "they never eat the fish that they farm."
Although Zhou's book has been published in 10 countries — it sold 50,000 copies in Japan alone — it is not available in China. After failing to get the book in shops, receiving threats from police and getting beaten up by thugs, Zhou left China in 2008. He now lives in Germany.
"In China, the reflexive desire to cover up and hide has trumped transparency and the need to protect public health," said Phelim Kine, a researcher for Human Rights Watch.
The poor treatment of whistleblowers makes it nearly impossible for a consumer movement to take root. The Health Ministry went so far as to announce this month that it would set up a blacklist of journalists who were deemed to report irresponsibly on food safety issues.
Last year, He Dongping, a professor of food sciences at Wuhan Polytechnic University, in Hubei province, published results of an investigation into the recycling of discarded cooking oil, which was being scooped out of sewers outside restaurants, reprocessed and then sold at a fraction of the cost of fresh cooking oil. He found that one in 10 restaurants in his area bought the recycled oil, even though it was known to contain a carcinogenic fungus.
Afterward, the professor was reprimanded by the university and ordered not to speak again about cooking oil. Contacted this month, he hung up when told the caller was a foreign journalist.
Even victims are punished if they complain too loudly. Zhao Lianhai, an advertising executive who led a campaign for safer baby formula after his son developed kidney stones as a result of the melamine-tainted baby formula, was sentenced in November to 2 1/2 years in prison for "inciting social disorder."
As a result, people are often too frightened to speak up. More than a dozen who were contacted about their experience at the wedding in Wufeng begged not to have their full names used. They said their medical bills had been paid by the local government and the newlyweds' parents, who were connected to the local Communist Party branch. They said they never got answers about what had happened.
"We asked many times, but there were no answers. The doctors wouldn't say. So we stopped asking," said one woman, adding nervously before hanging up the phone, "Don't tell anyone I told you this."
Auditor Warns of Risks From Local Debt in China
Some analysts say an economic slowdown could expose huge hidden liabilities in the banking system. Many of the problems are tied to a $586 billion stimulus package Beijing announced in late 2008 and a huge wave of state-backed lending in 2009 and 2010. Those money infusions were aimed at buffering China from the global financial crisis.


China’s labor force is aging. Its consumers save too much and spend too little. Its political and economic policy tools remain crude. Its state bureaucracy seems likely to curb spending just as exports weaken, and thus risks deflation. As U.S. consumers retrench, and as the global commodity bubble begins to dissipate, these fundamental weaknesses will combine in a way that’s unlikely to end well for China -- or for the rest of the world.
To start, China is much more vulnerable to an international slowdown than is generally understood. In late 2007, my firm’s research found that too few people in China had the discretionary spending capability to support its economy domestically. Our analysis showed that it took a per-capita gross domestic product of about $5,000 to have meaningful discretionary spending power in China.
About 110 million Chinese had that much or more, but they constituted only 8 percent of the population and accounted for just 35 percent of GDP in 2009, while exports accounted for 27 percent. Even China’s middle and upper classes had only 6 percent of Americans’ purchasing power.
...
But before you worry about China’s becoming No. 1 any time soon, consider the remaining gap between its economy and the U.S. economy. In 2009, China’s GDP was $4.9 trillion, only 34 percent of the U.S.’s $14.3 trillion. Because China has 1.32 billion people, or 4.3 times as many as the U.S. has, the gap in per-capita GDP was even bigger: China’s $3,709 was only 8 percent of the U.S.’s $46,405.
Just to maintain this gap at current levels, Chinese GDP will need to grow at double-digit rates for four years before tapering off, or rise sixfold in three decades (assuming that U.S. real GDP increases 2 percent per year on average for the next 30 years, and using government population projections). To close the per-capita GDP gap in 30 years, Chinese GDP would need to grow about 10 percent per year for three decades, or expand to 17.8 times its current size in that period.
Such rates of growth seem close to impossible if the global economy slows.
Part 2, Part 3, Part 4 and Part 5

Rise of the Asian megacity
Three decades of sustained economic growth, concentrated along the booming coast, has lured millions from the impoverished Chinese countryside. This great migration - unprecedented in human history - has put 46 Chinese cities over the one million mark since 1992, out of a national total of 102.
And this is just the start.
Continue reading the main story
Currently only about 40% of China's population lives in cities, roughly that of America in 1885.
It is estimated that another 350 million Chinese will become urban by 2025, raising China's urban numbers to a cool billion.
Accommodating all these people has meant building on a scale the world has never seen before.
In the first 20 years of China's economic revolution, begun under Deng Xiaoping in the late 1970s, China built some 6.5bn sq m (70bn sq ft) of new housing - the equivalent of more than 150 million average-sized apartments.
In Shanghai there were no skyscrapers in 1980; today it has twice as many as New York. Between 1990 and 2004 developers erected 85m sq m of commercial space in the city - equivalent to 334 Empire State buildings.
Nationwide, China's construction industry employs a workforce of about 37 million.
Nearly half the world's steel and cement is devoured there, and much of the world's heavy construction equipment has relocated to the People's Republic. Tower cranes, for example, have become the ubiquitous symbol of urban China.
China's super-rich: Dai Zhikang

Inequality in China: Rural poverty persists as urban wealth balloons

Chinese Consumers Still Spending Like Crazy On Nikes

The Navy Bought Fake Chinese Microchips That Could Have Disarmed U.S. Missiles
Last year, the U.S. Navy bought 59,000 microchips for use in everything from missiles to transponders and all of them turned out to be counterfeits from China.
Wired reports the chips weren't only low-quality fakes, they had been made with a "back-door" and could have been remotely shut down at any time.
If left undiscovered the result could have rendered useless U.S. missiles and killed the signal from aircraft that tells everyone whether it's friend or foe.
Apparently foreign chip makers are often better at making cheap microchips and U.S. defense contractors are loathe to pass up the better deal.
The problem remains with these "trojan-horse" circuits that can be built into the chip and are almost impossible to detect -- especially without the original plans to compare them to.
The Intelligence Advanced Research Projects Agency (IARPA) is now looking for ways to check the chips to make sure they haven't been hacked in the production process.
Expect to see a whole lot more funding directed to this goal. Or, considering  IARPA is the research and development section of the intelligence community -- expect the money to be spent -- don't expect to see where.
Senators want China to assist probe of counterfeit weapons parts
China's government is refusing to assist Senate investigators probing Chinese firms that are selling counterfeit parts that have been found in high-tech U.S. weapons systems, the leaders of the Senate Armed Services Committee said Tuesday.
Committee Chairman Carl Levin, Michigan Democrat, and Sen. John McCain, Arizona Republican, told reporters that a panel investigation revealed that U.S. defense contractors and government agencies traced the sources of most fake defense parts to Shenzhen, in Guangdong province near Hong Kong.
China has rejected requests for committee staff to visit Shenzhen as part of the probe, Mr. Levin said, noting that investigators are meeting with U.S. officials in Hong Kong to seek help.
“The Chinese have said, well, even if this could be arranged, there would have to be a Chinese official present during the interviews,” Mr. Levinsaid. “That is a non-starter, somebody looking at our staff while they’re interviewing people who are relevant to an investigation.”
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China's Economy Faces Three Contradictions
But rising wages appear to be diluting the competitiveness of Chinese factories. A tell-tale sign: T-shirts in The Gap stores in China say: "Made in Malaysia," and the cheapest toothbrushes are made in Vietnam. The solution is to migrate to more sophisticated manufactures and services. That requires a bigger, better, freer education system than the existing one, which is, as one official says, handicapped by a Soviet-style management model for scientific research and shunned by Chinese elites who send their offspring abroad.
Second, the latest fad in Beijing government circles is "internationalization of the yuan," a currency whose use is nearly entirely domestic now. This is one part national pride, one part a trading power's desire to buy and sell in its own currency, and one part Chinese determination, if there's ever another financial crisis, to be able to borrow as freely and cheaply from abroad as the U.S. did.
So far, so good. But China can't get there from here unless it stops holding interest rates so low that savers aren't even keeping up with inflation. Playing the global game means subjecting an economy to global markets.
Some officials see danger in too-low rates. "You need to do something about negative interest rates in real terms before you lose control," says Guo Shuqing, head of China Construction Bank and possibly China's next central banker, in an interview. "Lots of people feel that putting their money into deposits is no good, so they rush to buy things like gold and silver. A lot of people buy property not because they need a home but for an investment."
Indeed, the rich are speculating by buying third and fourth apartments, while others can't afford one home with prices too high. Asset bubbles in China are driven by Chinese monetary policy, not the U.S. Federal Reserve's.
U.S. interest rates are low because the Fed is trying to spur borrowing. China's central bank wants less borrowing, but politically powerful corporate and government borrowers block higher rates. Global economic analyst Nouriel Roubini describes Chinese policy as "a massive transfer of income from politically weak households to politically powerful corporates: a weak currency makes imports expensive, low interest rates on deposits and low lending rates for corporates and developers amount to a tax on savings."
Pregnant and Bound for America: Why Chinese Moms Want to Give Birth on U.S. Soil
Giving birth to a child abroad is not a privilege reserved to the stars and the very wealthy. An increasing number of expectant middle-class parents also fancy giving their children passports that they can feel proud of. "The return on investment is higher than robbing a bank," the consultancy agent tells women such as Liu. When Chinese children are born in America, they automatically become U.S. citizens. Once they reach 21, their parents will be able to apply for green cards and emigrate.
Is Ben Bernanke Sabotaging The Chinese Economy?
Here's where Chang's theory comes in: when a currency is appreciating, it might put a damper on exports. As a currency appreciates, the price of goods in foreign currencies becomes more expensive.
Essentially, if the yuan were to appreciate, the Chinese would lose their exporting-price advantage.
So, the Chinese government maintains a peg between its currency and the U.S. dollar. When the Federal Reserve creates more dollars, the Chinese create more yuan. This keeps the value of the yuan stable against the dollar, and ensures that the yuan does not fully appreciate, and thus Chinese manufacturers can maintain their advantage.
Bernanke, through multiple rounds of quantitative easing, has greatly expanded the supply of dollars in the global economy.
To maintain their peg, the People's Bank of China has had to follow suite, printing more and more yuan to prevent if from appreciating.
Of course, as in many things in economics, the policies of the PBC have had unintended consequences.
Inflation is currently spiraling out of control in China. The Chinese CPI is up 0.20% month-to-month, and is now sitting at 5.5% on an analyzed basis. Most concerning is inflation in the price of food, which is appreciating in price at an annualized basis of nearly 12%.
China is systematically hacking into U.S. networks, stealing source code, research, manufacturing advancements, and government plans.
In an opinion article at the Wall Street Journal, national security specialist Richard Clark says the attacks have been happening for years and they're getting nastier.
Three years ago the director of the British Security Service instructed hundreds of CEOs in the U.K. that it was likely all of their companies had been hacked by the Chinese government.
The Aurora attacks earlier this year targeting Google, Cisco, Adobe, and Juniper were widely publicized, The Night Dragon attacks followed, with Chinese hackers targeting worldwide oil and gas companies seeking "bid data" -- the location, size, and value of oil deposits around the world.
The most disturbing known attacks came in 2009, however, when spies from China gained access to the U.S. electrical grid, installing a system of "back doors' allowing intruders to regain access at any time and cripple the power distribution network in the U.S. Military strategists say this may be how China would attempt equal footing with the militarily superior United States.
Late last month U.S. officials declared cyber-attacks an act of war, but in private, officials admit America has no strategy to stop the Chinese assaults, and no directive on what to do when they occur.
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China's 'Wealth Drain': New Signs That Rich Chinese Are Set on Emigrating
Is China facing a "Wealth Drain"? Do too many of the best and brightest — and above all, richest — Chinese dream of packing up their accumulated capital, and going to live abroad?
According to a new study, a majority of Chinese who have more than 10 million Yuan ($1.53 million) worth of individual assets find the idea of real—estate investment a lot less tempting than so—called "investment emigration." Nearly 60% of people interviewed claim they are either considering emigration through investment overseas, or have already completed the process, according to the 2011 Private Wealth Report on China published by China Merchants Bank and a business consulting firm Bain & Company. The richer you are, the study suggests, the likelier it is that you resort to emigration. And among those who possess more than 100 million yuan, 27 % have already emigrated while 47% are considering leaving.
The fact that more and more rich Chinese are seeking to emigrate is turning into a hot topic in China, and statistics prove that the trend is a real one. According to Caixin online, a Chinese website specialized in finance, the compound annual growth rate of overseas investment by Chinese individuals approached 100% between 2008 and 2010. The compound growth rate of the Chinese who used investments to emigrate to the United States in the past five years is 73%.
So why are wealthy Chinese so eager to leave their country? The simplest answer is that there are a lot of things in China that even the richest cannot buy (emigration is obviously not one of them). China's rich are fond of saying that nothing "is a problem if money can solve it." Among the irresolvable problems that spark emigration, there are material ones, and emotional ones.
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China's Troubled Neighbors
No longer does the region assume that peace is a given and Chinese economic growth will not create other problems. Instead, the focus is on managing conflicts and attempting to allay mutual suspicions through dialogue.
China is trying hard to make up for its diplomatic setbacks in 2010, when, in quick succession, it picked territorial fights with Vietnam, the Philippines, Japan and India, and angered South Korea by not condemning Pyongyang’s aggressions. Partly as a consequence, the United States was spurred into declaring that peace and freedom of navigation in the South China Sea were among its vital interests. The U.S. focus is on the importance of open access to the commerce that is the lifeblood of most of East Asia.
Now China is making every effort to put on a smiling face, while the United States is keen to show it wants dialogue with China’s military, recently hosting the P.L.A.’s chief of staff. President Hu Jintao has visited the United States, Prime Minister Wen Jiabao has been conveying good will around the globe, and China has been emphasizing how far behind the United States it lags in armaments. But it is too late for China to restore the status quo ante.



North China is dying.
A chronic drought is ravaging farmland. The Gobi Desert is inching south. The Yellow River, the so-called birthplace of Chinese civilization, is so polluted it can no longer supply drinking water. The rapid growth of megacities — 22 million people in Beijing and 12 million in Tianjin alone — has drained underground aquifers that took millenniums to fill.
Not atypically, the Chinese government has a grand and expensive solution: Divert at least six trillion gallons of water each year hundreds of miles from the other great Chinese river, the Yangtze, to slake the thirst of the north China plain and its 440 million people.
The engineering feat, called the South-North Water Diversion Project, is China’s most ambitious attempt to subjugate nature. It would be like channeling water from the Mississippi River to meet the drinking needs of Boston, New York and Washington. Its $62 billion price tag is twice that of the Three Gorges Dam, which is the world’s largest hydroelectric project. And not unlike that project, which Chinese officials last month admitted had “urgent problems,” the water diversion scheme is increasingly mired in concerns about its cost, its environmental impact and the sacrifices poor people in the provinces are told to make for those in richer cities.
Three artificial channels from the Yangtze would transport precious water from the south, which itself is increasingly afflicted by droughts; the region is suffering its worst one in 50 years. The project’s human cost is staggering — along the middle route, which starts here in Hubei Province at a gigantic reservoir and snakes 800 miles to Beijing, about 350,000 villagers are being relocated to make way for the canal. Many are being resettled far from their homes and given low-grade farmland; in Hubei, thousands of people have been moved to the grounds of a former prison.
...
Overseers of the eastern route, which is being built alongside an ancient waterway for barges called the Grand Canal, have found that the drinking water to be brought to Tianjin from the Yangtze is so polluted that 426 sewage treatment plants have to be built; water pollution control on the route takes up 44 percent of the $5 billion investment, according to Xinhua, the official news agency. The source water from the Han River on the middle route is cleaner. But the main channel will cross 205 rivers and streams in the industrial heartland of China before reaching Beijing.
“When water comes to Beijing, there’s the danger of the water not being safe to drink,” said Dai Qing, an environmental advocate who has written critically about the Three Gorges Dam.




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