The Unbalanced Triangle

Bobo Lo, a former Australian diplomat in Moscow and the director of the China and Russia programs at the Center for European Reform, in London, has written the best analysis yet of one of the world’s more important bilateral relationships. His close examination of Chinese-Russian relations — sometimes mischaracterized by both countries as a “strategic partnership” — lays bare the full force of China’s global strategy, the conundrum of Russia’s place in today’s world, and fundamental shortcomings in U.S. foreign policy.

China’s shift in strategic orientation from the Soviet Union to the United States is the most important geopolitical realignment of the last several decades. And Beijing now enjoys not only excellent relations with Washington but also better relations with Moscow than does Washington. Lo calls the Chinese-Russian relationship a “mutually beneficial partnership” and goes so far as to deem Moscow’s improved ties with Beijing “the greatest Russian foreign policy achievement of the post-Soviet period.”

Precisely such hyperbole drives the alarmism of many pundits, who believe that the United States faces a challenge from a Chinese-Russian alliance built on shared illiberal values. But as Lo himself argues, the twaddle about Russia being an energy superpower was dubious even before the price of oil fell by nearly $100 in 2008. Even more important, Lo points out that the Chinese-Russian relationship is imbalanced and fraught: the two countries harbor significant cultural prejudices about each other and have divergent interests that are likely to diverge even more in the future. More accurately, the Chinese-Russian relationship is, as Lo puts it, an “axis of convenience” — that is, an inherently limited partnership conditioned on its ability to advance both parties’ interests.

But even Lo does not go far enough in his debunking of the Chinese-Russian alliance: he argues that it “is, for all its faults, one of the more convincing examples of positive-sum international relations today.” This is doubtful. The relationship may allow the Chinese to extract strategically important natural resources from Russia and extend their regional influence, but it affords the Russians little more than the pretense of a multipolar world in which Moscow enjoys a central role.

STRATEGIC MISTRUST

The year 2006 was the Year of Russia in China, and 2007, the Year of China in Russia, with both states hosting a slew of exhibits, cultural programs, trade talks, and state visits. At the opening ceremony in Moscow in March 2007, Chinese President Hu Jintao remarked, “The Chinese National Exhibition in Russia is the largest-ever overseas display of Chinese culture and economic development.” (It is worth noting that every year could be called the Year of China in the United States and that the U.S. consumer market is essentially one endless Chinese National Exhibition.)

By showcasing in Moscow 15,000 Chinese products from 30 industries — machinery, aviation, ship building, information technology, home appliances — Beijing sent the message that regardless of the substantial role the Soviet Union played in China’s post-1949 industrialization, there is now a new ascendancy, with China enjoying the dominant position. This, in fact, is a return to the historical paradigm — China has generally set the agenda for relations between the two countries. The Chinese-Russian relationship dates from the Russian conquest of Siberia in the seventeenth century. The Russian empire, then not very rich, sought to trade with China, then the world’s wealthiest country. The two empires also discovered a common but often rivalrous interest in crushing the Central Asian nomads, leaving China and Russia with a 2,700-mile border, the world’s longest. Since then, this shared border has shifted numerous times and served as a source of intermittent tension. As recently as 1969, the two countries clashed along the Ussuri River, which separates northeastern China from the Russian Far East, and Soviet leaders discussed retaliating with nuclear weapons if China launched a mass assault.

Now, as Lo writes, their relations are, in many ways, better than ever. In June 2005, both sides ratified a treaty settling their border disputes. Cross-border business and tourism are brisk. In 2006, two million Russian tourists went to China and nearly one million Chinese visited Russia.

Still, as Lo subtly demonstrates, the Chinese-Russian “axis of convenience” is bedeviled by “pervasive mistrust” rooted in historical grievances, geopolitical competition, and structural factors. Moreover, it is a secondary axis. China and Russia talk about being strategic partners, but neither actually is central to the other’s concerns. China’s indispensable partner is the United States; Russia’s is Europe or, more specifically, Germany. In 2007, Chinese-Russian trade reached $48 billion, up from $5.7 billion in 1999, making China Russia’s second-largest trading partner after the European Union. But current Russian-EU trade exceeds $250 billion — the lion’s share of it being between Russia and Germany — and Chinese-U.S. trade exceeds $400 billion. China and Russia, Lo demonstrates, “pay far more attention to the West than they do to each other.” Their relationship is opportunistic. As Lo puts it, the two giants “share neither a long-term vision of the world nor a common understanding of their respective places in it.”

In addition — and this is the most important aspect of Lo’s argument — whatever opportunity does exist in the relationship, China is in a better position to exploit it. China extracts considerable practical benefits in oil and weapons from Russia. In return, Beijing flatters Moscow with rhetoric about their “strategic partnership” and coddles it by promoting the illusion of a multipolar world. In many ways, the Chinese-Russian relationship today resembles that which first emerged in the seventeenth century: a rivalry for influence in Central Asia alongside attempts to expand bilateral commercial ties, with China in the catbird seat. Lo politely calls this incongruity an “asymmetry.”

GIVING AWAY THE STORE

The profound asymmetry in Chinese-Russian relations is most visibly illustrated by the two countries’ roles in the Shanghai Cooperation Organization (SCO), a six-member security group founded in 2001, and by their energy and weapons trades.

So far, China has consistently resisted Moscow’s lobbying for building the SCO — whose other members are the former Soviet states of Kazakhstan, Kyrgyzstan, Tajikistan, and Uzbekistan — into a quasi-military alliance that could counter NATO. In addition, the SCO declined to publicly endorse Russia’s account of its August 2008 war with Georgia (Moscow claimed that the Georgian army attacked first, an assertion implicitly recognized even by the U.S. ambassador to Russia). China, it seems, is unwilling to impart any strategic significance to disputes in the Caucasus.

Meanwhile, using the SCO and business investments, China has been making economic inroads into Central Asia, a region that Russia has traditionally considered within its sphere of influence. Chinese companies have been on a buying spree in recent years, making investments throughout Central Asia in minerals, energy, and other industries. Beijing appears to have cracked even the difficult nut of Turkmenistan — a pipeline now under construction is slated to run from the natural gas fields in Turkmenistan to Xinjiang, in western China. To a large extent, it is Russia’s single-minded focus on pushing the United States out of Central Asia — lobbying Kyrgyzstan, for example, to eject U.S. forces from a military base in Bishkek — that has allowed China’s influence there to grow relatively unhindered. And whereas the United States can scarcely hope to maintain a permanent presence in Central Asia, China can be counted on to stick around.

Lo is doubtful about the prospects of a major Chinese-Russian energy deal. But in February 2009, after his book had gone to press, the two governments signed a deal under which Rosneft, the largest Russian state-owned oil company, and Transneft, the Russian state-owned oil-pipeline monopoly, would get $25 billion from the China Development Bank in exchange for supplying China with 300,000 barrels of oil a day from 2011 to 2030 — or a total of about 2.2 billion barrels. Factoring in the interest payments the Russian companies will owe on the loan, the deal means that China will pay under $20 a barrel — less than half the global price at the time of the deal and less than one-third the market price for future deliveries in 2017.

This Chinese money is slated to underwrite the completion of an oil pipeline that will run from eastern Siberia to the Pacific Ocean, with an offshoot going to Daqing to serve the Chinese market. The proposed pipeline would increase roughly to eight percent Russia’s share of China’s oil imports, up from four percent now. Russian energy companies, laden with debt, lack the capital to build the pipeline by themselves or, for that matter, to drill for new hydrocarbons. With a projected capacity of 600,000 barrels per day, the pipeline is expected to supply Japan with Russian oil, too — provided enough is available. Still, the $20-a-barrel price borders on the shocking. Considering the perhaps more advantageous energy deals that have been on the table with U.S. and European multinationals, Rosneft and Transeft’s deal with China looks like a giveaway. It appears to be a consequence of the obsession many Russian officials have with denying the United States a strategic foothold in Russia’s energy sector at all costs — even if one of those costs is opening themselves up to exploitation by the Chinese.

Energy is not even the most fruitful aspect of China’s relationship with Russia. According to U.S. estimates, Russia supplies China with 95 percent of its military hardware, including Kilo-class submarines and Sovremenny-class destroyers. So far, Russian officials have not viewed the buildup of the Chinese navy as a direct threat to Russia; instead, they see it as a potential problem for Japan and the United States. Also, the post-Soviet Russian military was long unable to afford weapons produced by domestic manufacturers, making arms exports a necessity. Still, whatever benefits Russia gained by keeping its defense industry alive while waiting for better times, the benefits to China have been beyond compare. After the Tiananmen Square crackdown in 1989, many of the world’s largest arms merchants — France, the United Kingdom, and the United States — imposed an arms embargo on China. As Russia moved to fill this gap, China began to reverse engineer weapons systems and pressure Russia to sell it not just the finished products but also the underlying manufacturing technology. For reasons that have yet to be explained publicly, Russian arms sales to China have declined in recent years. Nonetheless, China has the money and remains an eager customer for Russia’s blueprints.

According to Lo, the terms of Chinese-Russian trade “are becoming more unbalanced every year” — so much so that he compares the role of Russia for China to that of Angola, China’s largest trading partner in Africa. Russia will remain important as long as the weapons and fossil fuels keep flowing (and no economically viable alternatives to hydrocarbons emerge). Lo does not say so explicitly, but in an imagined multipolar world, Russia looks like a Chinese subsidiary. China treats Russia with supreme tact, vehemently denying its own superiority — a studious humility that only helps it maintain the upper hand.

WHAT KIND OF PARTNER?

Lo quotes Yuri Fedorov, a Russian political analyst, who laments that Russia is “doomed to be a junior partner to everyone.” In fact, it is China that has accepted the role of junior partner to the United States, and the payoff has been impressive. It is a calculated position and part of China’s global strategy sometimes known as “peaceful rise,” a term first introduced by the Chinese leadership soon after the Tiananmen massacre. One vital element of this strategy is for China to take advantage of its de facto strategic partnership with the United States while sometimes swallowing hard in the face of U.S. dominance. China guards its sovereignty no less than does Russia, but, as Lo writes, China, contrary to Russia, “does not deem it necessary to contest Western [i.e., American] interests and influence wherever it finds them.” Nor does China view Russia as a strategic counterweight to the United States — whereas Russia hopes to use China to balance against the United States. Chinese leaders go out of their way to emphasize that China is still a developing country and that the United States will remain the sole global superpower for a long time to come. It is a concession that leaves them ample room to pursue China’s interests, and so they see little point in paying the enormous costs of opposing the United States.

The second main element in China’s “peaceful rise” strategy is using Russia for all it is worth — weapons, oil, or acquiescence in China’s expanding influence in Central Asia. Under Vladimir Putin, Russia became more practical in its relations with China than it had been under Boris Yeltsin, in the 1990s. Moscow has made sure to trade its support for China’s intransigent policies toward Taiwan, Tibet, and Xinjiang for Beijing’s endorsement of Russia’s heavy-handed approach to combating domestic instability in Chechnya and the North Caucasus. But the deal remains uneven. Moscow’s closer ties with Beijing, meanwhile, have not increased its leverage with Washington one iota. By rejecting the role of junior partner to the United States, Russia has, perhaps unintentionally, become China’s junior partner — an arrangement, furthermore, that will last only as long as it is convenient for Beijing. Lo concludes, “China’s rise as the next global superpower threatens Russia, not with the military or demographic invasion many fear, but with progressive displacement to the periphery of international decision making.”

One should not forget China’s many vulnerabilities, nor Russia’s numerous foreign policy achievements over the last decade. After the abject humiliation of the 1990s, the sovereignty of the Russian state has been restored — no longer can foreign capitals dictate Russian policy or the appointments of government officials. Russia’s annual GDP has soared from a low of $200 billion under Yeltsin to around $1.6 trillion today (a turnabout in which China’s insatiable demand for global commodities and manufactures has played an enormous role). Russia enjoys strong relations with France, Germany, and Italy and cultivates these bilateral ties in Europe in order to blunt the collective power of the EU. Its European partners compete with one another for Moscow’s favor. At the same time, Russia has — from its point of view at least — demonstrated anew its influence in the former Soviet republics.

But despite its revival, Russia, in contrast to China, remains unable to figure out how to benefit from the immovable fact of U.S. power and wealth. Under the Obama administration, the United States has stopped — for the time being — approaching Russia as a state to be reformed or disciplined. But a softening in tone cannot make up for the fact that the U.S.-Russian relationship lacks the kind of deep commercial basis that undergirds U.S.-Chinese ties. Although an interest in both Russia and the United States in renewed arms control negotiations may help restart bilateral relations, such gestures are no substitute for the kind of economic interdependence Washington has with Beijing.

The ultimate stumbling block between Russia and the United States — and what differentiates China from Russia from the United States’ perspective — is the clash over influence in the former Soviet republics. Two factors have led to this clash. The first is that Moscow has lost its empire yet will not relinquish its assertion of “privileged interests” in Georgia, Ukraine, and the other former Soviet republics. Russia’s influence in the former Soviet territories — which remained strong even during Russia’s perceived weakness in the 1990s — has only grown. This reality, moreover, is an outgrowth not of military occupation or of Russia’s clumsy bullying but of mutual interests forged through economic ties.

The second factor is that the United States will not cease to view these lands in terms of promoting or defending democracy, even under the Obama administration’s more pragmatic foreign policy. Compare, for example, the relatively small role Tibet plays in U.S.-Chinese relations with the disproportionate hold that now-independent countries such as Georgia or Ukraine have on U.S.-Russian relations. For Washington to appear to abandon the nominal democracies living in Russia’s shadow for the sake of more constructive relations with Russia is politically impossible. No matter how badly those countries misgovern themselves or provoke Russia, a withdrawal of U.S. support would be an abandonment of one of the central tenets of U.S. policy toward the region since the end of the Cold War.

The upshot is that Russia and the United States are left with something of a paradox. Although Washington can refuse to defer to Russia’s claim of “privileged interests” in the former Soviet states, it cannot undo the fact that such a Russian sphere of influence does exist, extending to property ownership, business and intelligence ties, television programming, and the Internet. Moscow, meanwhile, cannot hope to both claim its interests in its neighbors and emulate China’s approach of accepting the role of junior partner to the United States for practical benefit.

This suggests that “the new geopolitics” Lo promises to illuminate are not so new, after all. As Russia pursues the chimera of a multipolar world, the United States pursues the delusion of nearly limitless NATO expansion. And in the process, both unwittingly conspire to put Russia in China’s pocket.

THE TRIANGLE TIPS OVER

Lo’s book inspires three broad observations. First, although Russia has been known as the world power that straddles Asia and Europe, today it is China that has emerged as the force to be reckoned with on both continents. Russia’s Pacific coast serves not as a gateway to Asia — as San Francisco and Los Angeles do in the United States — but as a natural geographic limit. At the same time, China, as the dominant power in East Asia, denies Russia a significant say in the region.

Russia’s failure to become an East Asian power over the past several centuries is amplified by emigration from Russia’s Far East, where the population has shrunk from a peak of around ten million in the Soviet period to around 6.5 million today. Meanwhile, the population of China’s three northeastern provinces directly across the Russian border is estimated at 108 million and growing. As Dmitry Rogozin, now Russia’s ambassador to NATO, quipped on Russian radio in 2005, the Chinese are crossing the border “in small groups of five million.” Actually, as Lo indicates, the number of Chinese residents in Russia — mostly laborers and petty traders — is probably only between 200,000 and 400,000. Yet Rogozin’s quote reflects domestic anxieties about Russia’s weak footprint in Asia, a problem for which Russia has no discernible strategy. And on Russia’s western border, China’s relations with Europe are at least good as Russia’s. In other words, Russia’s bluff of maintaining an influential presence in Asia is becoming an ever more pronounced strategic weakness.

Second, not only has China shifted its strategic alliance from the Soviet Union to the United States; it has learned how to have its cake and eat it, too. China manages to preserve relations with its Cold War patron, Russia, while hitching its growth to the world’s current hegemon, the United States. From 1949 until the Sino-Soviet split in the 1960s, China was an eager junior partner to the Soviet Union, slavishly imitating the Stalinist developmental model. In 1972, the courting of Mao Zedong by Richard Nixon and Henry Kissinger opened up a global option for China that Mao’s successors would later exploit. Under Deng Xiaoping, who in 1979 became the first Chinese Communist leader to visit the United States, China began to forge its de facto strategic alliance with the United States. Then, under Jiang Zemin, a post-1991 rapprochement with Russia became a major additional instrument for Beijing. It is as if China went to the prom with one partner, Russia, went home with another, the United States, and then married the latter while wooing its jilted original date as a mistress.

Third, although the Soviet Union ultimately capitulated to the United States in the Cold War, Russia today does not feel compelled to similarly bow down to the United States. Such a proud stance may not offer many rewards for Russia, but it does confront the United States with some difficult policy questions. Simply put, if Moscow’s fantasy is multipolarity, Washington’s own delusion has been the near-limitless expansion of NATO. That game, however, is exhausted. For years, the cogent argument against continued NATO expansion was not that it would anger the Russians — after the Soviet collapse, the Russians were going to emerge angry regardless. Rather, the problem was that the bigger NATO became, the weaker it got. Poland agreed to install Patriot missile interceptors — a U.S. and not a NATO missile defense system — only because the United States provided Poland, a member of NATO, with a security guarantee above and beyond that offered by the NATO charter. What, then, is NATO for? Russia will never join, and for all its historic achievements, NATO is not up to solving the contemporary security dilemmas of Europe, such as those linked to energy, migration, and terrorism.

Russia has recovered from its moment of post-Soviet weakness but nonetheless remains a regional power that acts like a global superpower. China, on the other hand, has been transformed into a global superpower but still mostly acts like a regional power. Meanwhile, the United States is still busy trying to consolidate its triumph in the Cold War 18 years on. Recently, many people in Russia and the United States have begun to speak of a “new Cold War.” This idea, however, is doubly wrong — wrong because Russia, a regional power, cannot hope to mount a global challenge to the United States, and wrong because the old Cold War tilting never went away, with the battleground merely having been downsized, shifting from the whole globe to Kiev and Tbilisi.

There are domestic advantages for the Russian regime in continuing to talk of a new Cold War. But what does a preoccupation with the supposed Russian menace do for the United States? And alternatively, what would the United States gain from resetting U.S.-Russian relations? At the moment, the most important U.S. policy questions are domestic, not foreign, and Russia will be of little help in solving them. Russia has no role to play in reforming the U.S. health-care system — whose cost structure is the single greatest threat to U.S. power and prosperity — nor can it help fix the crumbling U.S. retirement system. If the United States were to imitate China and indulge Russia in its fantasy about its own global relevance, it would not realize the same kind of concrete benefits the Chinese get. On the international front, although many in Washington see Moscow as Tehran’s main backer — even though China has deeper commercial ties to Iran — Russia does not have the leverage over Iran to forestall the development of that country’s nuclear weapons program.

The overall importance of Russia for the United States, then, is widely exaggerated. There is one crucial exception, however, an area in which Russia’s power has not depreciated: in Europe, Russia remains a dominant force, and its strategic weight in the region is reason alone for the United States to pursue better bilateral relations. During the Crimean War of 1853-56, Lord Palmerston, the British prime minister, fantasized that “the best and most effectual security for the future peace of Europe would be the severance from Russia of some of the frontier territories acquired by her in later times, Georgia, Circassia, the Crimea, Bessarabia, Poland and Finland. . . . She would still remain an enormous power, but far less advantageously posted for aggression on her neighbors.” This flight of imagination has since become reality, and then some. But still, Russia remains a regional force. Indulging the claims that Russia’s recent revival is solely attributable to oil — a code word for “luck” — or that Russia’s demographic problems will make the country essentially vanish cannot alter the fact that enduring security in Europe cannot be had without Russia’s cooperation or in opposition to Russia. An expanded NATO, meanwhile, is not providing the enduring security it once promised. It is only a matter of time before a crisis, perhaps on the territory of a former Soviet republic and now NATO member, exposes NATO’s mutual defense pact as wholly inoperative.

There is another reason the United States should care about Russia: because China does. As Lo writes, “China will become steadily (if cautiously) more assertive, initially in East Asia and Central Asia, but eventually across much of Eurasia.” In other words, even under a strategy of a peaceful rise, China will increasingly force the United States to accommodate Chinese power. China’s development of a blue-water navy recalls the rise of the German navy in the years before World War I, a process that unnerved the United Kingdom, then the world’s great power. It seems that China is already trying to recalibrate the balance of power in East Asia, as evidenced by its harassment of the Impeccable, a U.S. Navy surveillance ship, in the South China Sea in March 2009. In the event of a crisis, China does not want its thoroughly globalized economy to be vulnerable to a blockade by either the Japanese navy or the U.S. Navy, and it likely envisions being able to hinder U.S. access to the Taiwan Strait. Meanwhile, China is counting on the Russian navy’s not rising again in East Asia and on continued strained ties between Japan and Russia over the disputed Kuril Islands, a few rocks in the Pacific Ocean.

In the end, there can be no resetting of U.S.-Russian relations without a transcending of NATO and the establishment of a new security architecture in Europe. And without such a genuine reset, China will retain the upper hand, not only in its bilateral relationship with Russia but also in the strategic triangle comprising China, Russia, and the United States.

Autor: Stephen Kotkin

Sursa: Foreign Affairs

China: Crunch Time

The global system is undergoing profound change. Three powers — Germany, China and Iran — face challenges forcing them to refashion the way they interact with their regions and the world. We are exploring each of these three states in detail in three geopolitical weeklies, highlighting how STRATFOR’s assessments of these states are evolving. First we examined Germany. We now examine China.

U.S.-Chinese relations have become tenser in recent months, with the United States threatening to impose tariffs unless China agrees to revalue its currency and, ideally, allow it to become convertible like the yen or euro. China now follows Japan and Germany as one of the three major economies after the United States. Unlike the other two, it controls its currency’s value, allowing it to decrease the price of its exports and giving it an advantage not only over other exporters to the United States but also over domestic American manufacturers. The same is true in other regions that receive Chinese exports, such as Europe.

What Washington considered tolerable in a small developing economy is intolerable in one of the top five economies. The demand that Beijing raise the value of the yuan, however, poses dramatic challenges for the Chinese, as the ability to control their currency helps drive their exports. The issue is why China insists on controlling its currency, something embedded in the nature of the Chinese economy. A collision with the United States now seems inevitable. It is therefore important to understand the forces driving China, and it is time for STRATFOR to review its analysis of China.

An Inherently Unstable Economic System

China has had an extraordinary run since 1980. But like Japan and Southeast Asia before it, dramatic growth rates cannot maintain themselves in perpetuity. Japan and non-Chinese East Asia didn’t collapse and disappear, but the crises of the 1990s did change the way the region worked. The driving force behind both the 1990 Japanese Crisis and the 1997 East Asian Crisis was that the countries involved did not maintain free capital markets. Those states managed capital to keep costs artificially low, giving them tremendous advantages over countries where capital was rationally priced. Of course, one cannot maintain irrational capital prices in perpetuity (as the United States is learning after its financial crisis); doing so eventually catches up. And this is what is happening in China now.

STRATFOR thus sees the Chinese economic system as inherently unstable. The primary reason why China’s growth has been so impressive is that throughout the period of economic liberalization that has led to rising incomes, the Chinese government has maintained near-total savings capture of its households and businesses. It funnels these massive deposits via state-run banks to state-linked firms at below-market rates. It’s amazing the growth rate a country can achieve and the number of citizens it can employ with a vast supply of 0 percent, relatively consequence-free loans provided from the savings of nearly a billion workers.

It’s also amazing how unprofitable such a country can be. The Chinese system, like the Japanese system before it, works on bulk, churn, maximum employment and market share. The U.S. system of attempting to maximize return on investment through efficiency and profit stands in contrast. The American result is sufficient economic stability to be able to suffer through recessions and emerge stronger. The Chinese result is social stability that wobbles precipitously when exposed to economic hardship. The Chinese people rebel when work is not available and conditions reach extremes. It must be remembered that of China’s 1.3 billion people, more than 600 million urban citizens live on an average of about $7 a day, while 700 million rural people live on an average of $2 a day, and that is according to Beijing’s own well-scrubbed statistics.

Moreover, the Chinese system breeds a flock of other unintended side effects.

There is, of course, the issue of inefficient capital use: When you have an unlimited number of no-consequence loans, you tend to invest in a lot of no-consequence projects for political reasons or just to speculate. In addition to the overall inefficiency of the Chinese system, another result is a large number of property bubbles. Yes, China is a country with a massive need for housing for its citizens, but even so, local governments and property developers collude to build luxury dwellings instead of anything more affordable in urban areas. This puts China in the odd position of having both a glut and a shortage in housing, as well as an outright glut in commercial real estate, where vacancy rates are notoriously high.

There is also the issue of regional disparity. Most of this lending occurs in a handful of coastal regions, transforming them into global powerhouses, while most of the interior — and thereby most of the population — lives in abject poverty.

There is also the issue of consumption. Chinese statistics have always been dodgy, but according to Beijing’s own figures, China has a tiny consumer base. This base is not much larger than that of France, a country with roughly one twentieth China’s population and just over half its gross domestic product (GDP). China’s economic system is obviously geared toward exports, not expanding consumer credit.

Which brings us to the issue of dependence. Since China cannot absorb its own goods, it must export them to keep afloat. The strategy only works when there is endless demand for the goods it makes. For the most part, this demand comes from the United States. But the recent global recession cut Chinese exports by nearly one fifth, and there were no buyers elsewhere to pick up the slack. Meanwhile, to boost household consumption China provided subsidies to Chinese citizens who had little need for — and in some cases little ability to use — a number of big-ticket products. The Chinese now openly fear that exports will not make a sustainable return to previous levels until 2012. And that is a lot of production — and consumption — to subsidize in the meantime. Most countries have another word for this: waste.

This waste can be broken down into two main categories. First, the government roughly tripled the amount of cash it normally directs the state banks to lend to sustain economic activity during the recession. The new loans added up to roughly a third of GDP in a single year. Remember, with no-consequence loans, profitability or even selling goods is not an issue; one must merely continue employing people. Even if China boasted the best loan-quality programs in history, a dramatic increase in lending of that scale is sure to generate mountains of loans that will go bad. Second, not everyone taking out those loans even intends to invest prudently: Chinese estimates indicate that about one-fourth of this lending surge was used to play China’s stock and property markets.

It is not that the Chinese are foolish; that is hardly the case. Given their history and geographical constraints, we would be hard-pressed to come up with a better plan were we to be selected as Party general secretary for a day. Beijing is well aware of all these problems and more and is attempting to mitigate the damage and repair the system. For example, it is considering legalizing portions of what it calls the shadow-lending sector. Think of this as a sort of community bank or credit union that services small businesses. In the past, China wanted total savings capture and centralization to better direct economic efforts, but Beijing is realizing that these smaller entities are more efficient lenders — and that over time they may actually employ more people without subsidization.

But the bottom line is that this sort of repair work is experimental and at the margins, and it doesn’t address the core damage that the financial model continuously inflicts. The Chinese fear their economic strategy has taken them about as far as they can go. STRATFOR used to think that these sorts of internal weaknesses would eventually doom the Chinese system as it did the Japanese system (upon which it is modeled). Now, we’re not so sure.

Since its economic opening in 1978, China has taken advantage of a remarkably friendly economic and political environment. In the 1980s, Washington didn’t obsess overmuch about China, given its focus on the “Evil Empire.” In the 1990s, it was easy for China to pass inconspicuously in global markets, as China was still a relatively small player. Moreover, with all the commodities from the former Soviet Union hitting the global market, prices for everything from oil to copper neared historic lows. No one seemed to fight against China’s booming demand for commodities or rising exports. The 2000s looked like they would be more turbulent, and early in the administration of George W. Bush the EP-3 incident landed the Chinese in Washington’s crosshairs, but then the Sept. 11 attacks happened and U.S. efforts were redirected toward the Islamic world.

Believe it or not, the above are coincidental developments. In fact, there is a structural factor in the global economy that has protected the Chinese system for the past 30 years that is a core tenet of U.S. foreign policy: Bretton Woods.

Rethinking Bretton Woods

Bretton Woods is one of the most misunderstood landmarks in modern history. Most think of it as the formation of the World Bank and International Monetary Fund, and the beginning of the dominance of the U.S. dollar in the international system. It is that, but it is much, much more.

In the aftermath of World War II, Germany and Japan had been crushed, and nearly all of Western Europe lay destitute. Bretton Woods at its core was an agreement between the United States and the Western allies that the allies would be able to export at near-duty-free rates to the U.S. market in order to boost their economies. In exchange, the Americans would be granted wide latitude in determining the security and foreign policy stances of the rebuilding states. In essence, the Americans took what they saw as a minor economic hit in exchange for being able to rewrite first regional, and in time global, economic and military rules of engagement. For the Europeans, Bretton Woods provided the stability, financing and security backbone Europe used first to recover, and in time to thrive. For the Americans, it provided the ability to preserve much of the World War II alliance network into the next era in order to compete with the Soviet Union.

The strategy proved so successful with the Western allies that it was quickly extended to World War II foes Germany and Japan, and shortly thereafter to Korea, Taiwan, Singapore and others. Militarily and economically, it became the bedrock of the anti-Soviet containment strategy. The United States began with substantial trade surpluses with all of these states, simply because they had no productive capacity due to the devastation of war. After a generation of favorable trade practices, surpluses turned into deficits, but the net benefits were so favorable to the Americans that the policies were continued despite the increasing economic hits. The alliance continued to hold, and one result (of many) was the eventual economic destruction of the Soviet Union.

Applying this little history lesson to the question at hand, Bretton Woods is the ultimate reason why the Chinese have succeeded economically for the last generation. As part of Bretton Woods, the United States opens its markets, eschewing protectionist policies in general and mercantilist policies in particular. Eventually the United States extended this privilege to China to turn the tables on the Soviet Union. All China has to do is produce — it doesn’t matter how — and it will have a market to sell to.

But this may be changing. Under President Barack Obama, the United States is considering fundamental changes to the Bretton Woods arrangements. Ostensibly, this is to update the global financial system and reduce the chances of future financial crises. But out of what we have seen so far, the National Export Initiative (NEI) the White House is promulgating is much more mercantilist. It espouses doubling U.S. exports in five years, specifically by targeting additional sales to large developing states, with China at the top of the list.

STRATFOR finds that goal overoptimistic, and the NEI is maddeningly vague as to how it will achieve this goal. But this sort of rhetoric has not come out of the White House since pre-World War II days. Since then, international economic policy in Washington has served as a tool of political and military policy; it has not been a beast unto itself. In other words, the shift in tone in U.S. trade policy is itself enough to suggest big changes, beginning with the idea that the United States actually will compete with the rest of the world in exports.

If — and we must emphasize if — there will be force behind this policy shift, the Chinese are in serious trouble. As we noted before, the Chinese financial system is largely based on the Japanese model, and Japan is a wonderful case study for how this could go down. In the 1980s, the United States was unhappy with the level of Japanese imports. Washington found it quite easy to force the Japanese both to appreciate their currency and accept more exports. Opening the closed Japanese system to even limited foreign competition gutted Japanese banks’ international positions, starting a chain reaction that culminated in the 1990 collapse. Japan has not really recovered since, and as of 2010, total Japanese GDP is only marginally higher than it was 20 years ago.

China’s Limited Options

China, which unlike Japan is not a U.S. ally, would have an even harder time resisting should Washington pressure Beijing to buy more U.S. goods. Dependence upon a certain foreign market means that market can easily force changes in the exporter’s trade policies. Refusal to cooperate means losing access, shutting the exports down. To be sure, the U.S. export initiative does not explicitly call for creating more trade barriers to Chinese goods. But Washington is already brandishing this tool against China anyway, and it will certainly enter China’s calculations about whether to resist the U.S. export policy. Japan’s economy, in 1990 and now, only depended upon international trade for approximately 15 percent of its GDP. For China, that figure is 36 percent, and that is after suffering the hit to exports from the global recession. China’s only recourse would be to stop purchasing U.S. government debt (Beijing can’t simply dump the debt it already holds without taking a monumental loss, because for every seller there must be a buyer), but even this would be a hollow threat.

First, Chinese currency reserves exist because Beijing does not want to invest its income in China. Underdeveloped capital markets cannot absorb such an investment, and the reserves represent the government’s piggybank. Getting a 2 percent return on a rock-solid asset is good enough in China’s eyes. Second, those bond purchases largely fuel U.S. consumers’ ability to purchase Chinese goods. In the event the United States targets Chinese exports, the last thing China would want is to compound the damage. Third, a cold stop in bond purchases would encourage the U.S. administration — and the American economy overall — to balance its budgets. However painful such a transition may be, it would not be much as far as retaliation measures go: “forcing” a competitor to become economically efficient and financially responsible is not a winning strategy. Granted, interest rates would rise in the United States due to the reduction in available capital — the Chinese internal estimate is by 0.75 percentage points — and that could pinch a great many sectors, but that is nothing compared to the tsunami of pain that the Chinese would be feeling.

For Beijing, few alternatives exist to American consumption should Washington limit export access; the United States has more disposable income than all of China’s other markets combined. To dissuade the Americans, China could dangle the carrot of cooperation on sanctions against Iran before Washington, but the United States may already be moving beyond any use for that. Meanwhile, China would strengthen domestic security to protect against the ramifications of U.S. pressure. Beijing perceives the spat with Google and Obama’s meeting with the Dalai Lama as direct attacks by the United States, and it is already bracing for a rockier relationship. While such measures do not help the Chinese economy, they may be Beijing’s only options for preserving internal stability.

In China, fears of this coming storm are becoming palpable — and by no means limited to concerns over the proposed U.S. export strategy. With the Democratic Party in the United States (historically the more protectionist of the two mainstream U.S. political parties) both in charge and worried about major electoral losses, the Chinese fear that midterm U.S. elections will be all about targeting Chinese trade issues. Specifically, they are waiting for April 15, when the U.S. Treasury Department is expected to rule whether China is a currency manipulator — a ruling Beijing fears could unleash a torrent of protectionist moves by the U.S. Congress. Beijing already is deliberating on the extent to which it should seek to defuse American anger. But the Chinese probably are missing the point. If there has already been a decision in Washington to break with Bretton Woods, no number of token changes will make any difference. Such a shift in the U.S. trade posture will see the Americans going for China’s throat (no matter whether by design or unintentionally).

And the United States can do so with disturbing ease. The Americans don’t need a public works program or a job-training program or an export-boosting program. They don’t even have to make better — much less cheaper — goods. They just need to limit Chinese market access, something that can be done with the flick of a pen and manageable pain on the U.S. side.

STRATFOR sees a race on, but it isn’t a race between the Chinese and the Americans or even China and the world. It’s a race to see what will smash China first, its own internal imbalances or the U.S. decision to take a more mercantilist approach to international trade.

Sursa: STRATFOR

The cult of counterinsurgency

On the night of December 1, shortly after Barack Obama announced plans to send 30,000 more U.S. troops to Afghanistan, retired Lt. Colonel John Nagl appeared on MSNBC’s “The Rachel Maddow Show.” Maddow was dismayed by Obama’s new plan, which she called “massive escalation,” but, when she introduced Nagl, a counterinsurgency expert who has long called for a greater U.S. commitment to Afghanistan–even if it means raising taxes and expanding the military–she was surprisingly friendly. And, after Nagl spent the segment praising Obama’s plan, which he said would throw back the Taliban and enable more civil and economic development, Maddow may have remained skeptical–but she was also admiring. “It’s a real pleasure to have you on the show, John,” she said.

Had someone like Bill Kristol given that same assessment of Obama’s speech, Maddow might have tarred him as a bloodthirsty proponent of endless war. Which is why Nagl is one of the administration’s most important allies as it tries to sell the United States on a renewed commitment to Afghanistan. A former tank commander in Iraq and co-author of the Army’s landmark 2006 counterinsurgency manual, Nagl has become a fixture on television and in news articles about Afghanistan; he’s even made an appearance on “The Daily Show.” With the authority of a man who has worn a uniform in combat, and the intellectual heft of a Rhodes Scholar, he has helped to persuade many liberals that pursuing a counterinsurgency strategy in Afghanistan is the only viable path to success.

Certainly, that’s what Obama and his staff are hoping. During Obama’s Afghanistan review process this fall, top White House aides like Rahm Emanuel were immersed in Lewis Sorley’s A Better War: The Unexamined Victories and Final Tragedy of America’s Last Years in Vietnam, which argues that counterinsurgency techniques were turning around the Vietnam war until Washington pulled the plug in exhaustion. And, by committing 30,000 troops, plus winning almost 10,000 more from nato allies, Obama has effectively endorsed General Stanley McChrystal’s written assessment of the war, the first page of which calls for “an integrated civilian-military counterinsurgency campaign.” “I would say that the decision the president reached is an acknowledgement that counterinsurgency is the least bad of the options available,” Nagl says.

Another reason Nagl has sway with the left and the Obama administration–he was recently named to the Pentagon’s Defense Policy Board–has to do with where he hangs his hat. Nagl is currently president of the Center for a New American Security (CNAS), a Washington think tank established in February 2007 by a group of former Clintonites who wanted to reassert the voice of centrist Democrats on military and foreign affairs. Since then, a full 14 former CNAShands have landed jobs inside Obama’s Pentagon and State Department. Those who remain work on a variety of issues, from China to climate change. But these days, CNAS is most visible for its policy papers and commentary on counterinsurgency in Afghanistan and Iraq. Its Democratic roots have given CNAS cred from Capitol Hill to the White House to places like Maddow’s set. And its prominence, in turn, has effectively hitched the Democratic wagon to the ambitious ideals of counterinsurgency, with some liberals even arguing that the doctrine–with its emphasis on protecting and improving the lives of civilians–is thoughtful, humane, and, therefore, inherently progressive.

But there is risk in this approach. Washington’s current enthusiasm for counterinsurgency is based largely on its apparent success in stabilizing Iraq–even though it’s not clear that the doctrine’s sophisticated tenets deserve all or even most of the credit. Indeed, an argument is brewing in military circles about whether the doctrine’s potential has been oversold. What happens next in Afghanistan could settle it.

In early 2007, defense analyst Michèle Flournoy and Asia expert Kurt Campbell co-foundedCNAS with what they described as a mission of reclaiming the “pragmatic,” non-ideological center of the foreign policy debate. Supported with money from left-leaning foundations and defense contractors, including Boeing and Northrop Grumman, they hired a team of mostly Democratic foreign policy hands and produced policy papers with a generally hawkish bent, including one in 2008 that opposed a fixed timeline for withdrawal from Iraq.

CNAS wasn’t intended to be counterinsurgency central. After Obama was elected, however, he raided the think tank to staff the State and Defense departments. (Flournoy took a job as the Pentagon’s senior policy official, and Campbell became Foggy Bottom’s top Asia hand.) Filling the void has been Nagl, who joined CNAS in January 2008 and became its president in February 2009, along with several counterinsurgency-centric colleagues who have joined since its founding. One is Andrew Exum, a former Army Ranger who has served in both Iraq and Afghanistan. Exum, in his early thirties, is a bearded and wry native of East Tennessee who advised McChrystal’s review team this summer. Then there’s CNAS’s 32-year-old CEO, Nate Fick, who was a Marine captain in Baghdad and has served as a civilian instructor at a counterinsurgency academy in Kabul. Last year, CNAS also signed up the ultimate counterinsurgency guru in David Kilcullen, an Australian who served as a top adviser to General David Petraeus in Iraq. Together, this quartet has churned out a raft of policy papers, opinion pieces, and quotes about counterinsurgency in Iraq and Afghanistan, ranging from the best way to set benchmarks for progress to warnings about the use of aerial drone strikes. (Exum, Fick, and Kilcullen oppose heavy reliance on the tactic for fear that civilian casualties will cause blowback.)

Though CNAS is loath to be known as a one-trick pony–it recently completed a report encouraging U.S. cooperation with China and runs an energy and climate-based “natural security” program–it is effectively cornering the market on counterinsurgency thought. In addition to its staff hires, CNAS has provided fellowships to book-writing journalists like Tom Ricks, David Cloud, and Greg Jaffe, who have advanced the pro-counterinsurgency narrative. But perhaps the clearest indication of bothCNAS’s clout and its current focus came when the think tank held its third annual conference at Washington’s posh Willard Hotel. The keynote speaker was none other than Petraeus himself.

The stakes for the United States in Afghanistan are enormous. But, in a more parochial sense, so are the stakes for CNAS and what you might call the cult of counterinsurgency. Washington is already planning for a more counterinsurgency-oriented future–witness the latest Pentagon budget, which shifts billions of dollars away from high-tech weapons systems designed for fighting a great power like China, toward equipment like aerial drones and armored personnel carriers. Meanwhile, the liberal national security establishment has come to embrace a doctrine that went into vogue under the dreaded Bush regime. In an essay titled “Petraeus the Progressive” published in the journal Democracy last winter, Rachel Kleinfeld, president of the center-left Truman National Security Project, celebrated Petraeus for emphasizing the battle for Iraqi hearts and minds over “outgunning and outmanning the enemy.” Other liberals warm to the doctrine’s intellectual sheen. “Counterinsurgency is not just thinking man’s warfare–it is the graduate level of war,” states an epigraph in the Army’s counterinsurgency manual.

But some thoughtful skeptics warn that the months ahead in Afghanistan may expose the promise of counterinsurgency as a mirage. One of them is Colonel Gian Gentile, a former cavalry squadron commander in Iraq with a Stanford University Ph.D. in history. Since his 2007 return from Iraq, Gentile, who now teaches at West Point, has relentlessly challenged the arguments of counterinsurgency proponents. Advocates of the doctrine say that it has been repeatedly tested and proved in conflicts ranging from Vietnam to Iraq. Through several articles in military journals, Gentile has been fighting this “narrative,” which he says has various historical flaws. He warns, for instance, that counterinsurgency campaigns are more violent than people understand. The British victory in Malaya involved brute force and mass resettlement programs, for example, while the more recent defeat of the Tamil Tigers in Sri Lanka involved a heavy military campaign that caused widespread civilian misery. Even the Iraq surge caused a dramatic increase in civilian casualties from airstrikes and led to a spike in the number of Iraqi detainees held by the United States, notes Michael Cohen of the New America Foundation.

Gentile is especially skeptical of the claim that counterinsurgency saved Iraq. To hear the likes of Nagl tell it, Petraeus implemented a new strategy in 2006 under which U.S. troops left the isolation of fortress-like bases and integrated themselves with Iraqi forces and the Iraqi people, improving training of the Iraqi army, winning the population’s trust, and helping to turn Sunni tribesmen in Anbar province against Al Qaeda. But some contrarian military thinkers warn that the story is far more complicated. It’s not clear that the Sunnis needed our encouragement to turn on Al Qaeda, for instance, and ethnic cleansing may have burned itself out. Celeste Ward, a Bush Pentagon official who advised Army Lt. General Peter W. Chiarelli in Iraq, says that some military units had been practicing counterinsurgency in Iraq, to little avail, before Petraeus overhauled the American strategy there. “To think that the reduction of violence was primarily the result of American military action is hubris run amuck [sic],” Gentile writes in the fall edition of the military journal Parameters.

Gentile is convinced that Obama’s “surge” in Afghanistan can’t work–at least not in a time frame that Obama or his country will accept. “I think history shows that if a nation is going to try this kind of military method–population-centric counterinsurgency, which is also nation building–it doesn’t happen in a couple of years. It’s a generational commitment.” And, if Afghanistan doesn’t turn around soon, the Democrats who founded and support CNAS, and who have come to embrace the Petraeus-Nagl view of modern warfare, may find themselves wondering whether it’s time to go back to the drawing board.

Michael Crowley is a senior editor of The New Republic

Credit: The New Republic

Obama must not rush into retaliation

American officials are still unravelling the failed terrorist bombing of a Detroit-bound Northwest Airlines flight on Christmas Day by Umar Farouk Abdulmutallab. While details remain unclear, it appears that Abdulmutallab received operational guidance and training in Yemen from al-Qaida in the Arabian Peninsula.

The revelation of the Yemeni-based group’s involvement has predictably brought pressure from congressional leaders and policy analysts to “do something” in response, including what is described by one administration official as “visible retaliatory military action“.

An overt and immediate US military strike in Yemen in response to the failed bomb plot may look increasingly likely, but it would be a bad short-term solution. As recent history demonstrates, counterterrorist strikes in retaliation for specific terrorist plots or operations have often proven to be militarily ineffective, and unsuccessful in deterring the targeted group from pursuing additional terrorist attacks. Consider three well-known examples:

• In April 1986, the US president Ronald Reagan decided to retaliate against Libya for its involvement in the bombing of a Berlin disco that killed two American servicemen. US aircraft bombed a range of targets associated with the regime of Muammar Gaddafi, including the Aziziyah Barracks compound in Tripoli, where it was believed the Libyan leader lived.

The results of the attacks were meagre: Libya’s infrastructure was not significantly damaged and Gaddafi survived, becoming more defiant than ever. Moreover, Libya’s support for international terrorism increased in direct response, with British and American hostages in Lebanon assassinated by Libyan-controlled terrorist groups, and most significantly, the explosion of Pan Am Flight 103 over Lockerbie, Scotland, which killed 270 people.

• In June 1993, after Iraqi intelligence agents allegedly plotted anassassination attempt on the former US president George HW Bush during a trip to Kuwait, President Clinton ordered the launching of 23 cruise missiles against one wing of the Iraqi intelligence agency headquarters in Baghdad.

The results of this retaliatory strike were a success, though it remains unclear if the cruise missiles played any role. The leadership wing of the Iraqi intelligence headquarters was destroyed, and according to Richard Clarke, counterterrorism tsar to presidents Clinton and Bush: “Subsequent to that June 1993 retaliation, the US intelligence and law enforcement communities never developed any evidence of further Iraqi support for terrorism directed against Americans.”

• In August 1998, in retaliation for the bombing of US embassies in Kenya and Tanzania, the US launched 13 Tomahawk cruise missiles against a pharmaceutical plant in Khartoum, Sudan, suspected of producing nerve gas, and 60-70 Tomahawks against three al-Qaida training camps in southern Afghanistan with the intention of killing Osama Bin Laden and other terrorist leaders.

While the pharmaceutical plant was destroyed during Operation Infinite Reach, the evidence supporting its connections to either al-Qaida or nerve gas production quickly evaporated. In addition, the attacks against the al-Qaida leadership killed a few dozen people, including Pakistani intelligence officers training militants to fight in Kashmir. Bin Laden, Ayman al-Zawahiri, Mohammed Atta – ringleader of the 9/11 attacks – and other key al-Qaida leaders survived, and were certainly not deterred.

These examples show that a more prudent immediate response to terrorist plots or operations is to understand why the existing counterterrorism plans and programmes failed, and how they should be adjusted and enhanced. While military force is undoubtedly an essential tool against individuals directly responsible for terrorist plots and operations, responding too quickly allows US adversaries to dictate the terms of US policy, and elevates and emboldens them in the eyes of the world.

In October 2000, the USS Cole was bombed while refuelling in Aden, Yemen, killing 17 sailors and wounding 39 others. Four months later, the intelligence community provided conclusive evidence to the Bush White House of al-Qaida’s direct involvement. Twenty-one months after that, after significantly increasing US counterterrorism co-operation with Yemen and methodically developing sources within the country, in November 2002, a CIA-controlled Predator drone killed Qaed Salim Sinan al-Harethi, the al-Qaida operative responsible with overseeing the Cole bombing.

In this instance, military retaliation succeeded. But as the Northwest Airlines plot demonstrates, without a long-term and comprehensive programme to enhance Yemeni security and governance capacity, there is little that the US can do to prevent terrorists from operating there.

Credit: The Guardian (UK)

US car market implodes

US car market implodes

USA Today reports that car dealers fighting to keep buyers of dying brands.

Car dealers want to keep buyers of dying brands
Updated 12/28/2009
The closed Saturn of Colma sales lot sits empty on Sept. 30, in Colma, Calif. General Motors is closing its Saturn brand after negotiations with Penske Automotive to take over the brand fell apart.
By Sharon Silke Carty, USA TODAY

DETROIT — This Christmas and New Year, the auto industry is worried about the orphans.

There are about 3 million of them: Customers who either lost their dealer because of closings in 2009 or whose current car brand is going out of business. And it’s pitting carmakers and car dealers against one another as they fight for who’ll win that business.

Urban Science, a consultant firm in Detroit, says 1,467 dealers closed in 2009. The bulk were General Motors or Chrysler dealerships. They were forced out of business when the carmakers filed for bankruptcy and could close weak dealers.

Auto sales are expected to rise slightly in 2010, up to around 11 million, compared with fewer than 10 million sold in 2009. But dealers are still expected to close at a faster rate than usual, because GM isn’t done closing outlets.

GM is killing the Pontiac, Saab and Saturn brands. Its Hummer brand will likely be sold to a Chinese company. That leaves Pontiac, Saab and Saturn customers needing a new place to service their cars.

If GM can’t hang on to these customers, it risks losing sales to other brands.

“GM desperately needs those sales and that market share,” says Michelle Krebs, senior analyst and editor at consumer website Edmunds.com’s AutoObserver publication.
…

Chinese car market explodes

Msnbc reports that China’s rural markets have big appetite for cars.

China’s rural markets have big appetite for cars
Dealers run out of inventory; spike is major reason country is No. 1 market
The Associated Press
updated 12:20 p.m. ET Dec. 27, 2009

CHENGDU, China - Minivan salesman Zhu Yi has a problem that most auto dealers elsewhere would happily swap for their own — he doesn’t have enough vehicles to satisfy customer demand.

“Sales are exploding,” says Zhu, a 32-year-old manager at a General Motors Co. joint venture dealership in Chengdu, pointing to charts on his laptop that vividly plot the steep incline.

Car buyers in Chengdu, a grimy city in southwestern China’s Sichuan province best known for its giant pandas and spicy food, face waits of up to several weeks for some popular models, he says.

“We simply don’t have the cars people want. Sales could be climbing even faster.”

As growing numbers of Chinese shop for their first vehicles, or trade up for newer models, sales in China’s immense hinterland are booming,encouraged by tax cuts, government subsidies and growing consumer spending power.

In regions striving to catch up with relatively well-off coastal cities, families and small businesses are gladly swapping scooters and bicycles for the comfort and convenience of the automobile.

The supercharged growth has propelled China ahead of the United States as the world’s biggest auto market and provided a lifeline for automakers like General Motors and Toyota Motor Corp. as sales crashed around the globe.

The government’s role in spurring the market has been crucial but China’s still low level of car ownership points to the potential for decades of strong growth even as some analysts warn the future holds tougher competition and dwindling profits.

To counter a slowdown late last year as the global financial crisis unfolded, the government halved taxes on purchases of small autos and is spending 5 billion yuan (about $730 million) on subsidies for purchases of light trucks and minivans in the countryside, where most of China’s 1.3 billion people live.

Earlier this month, the purchase tax was raised to 7.5 percent, though subsidies also increased.

Happy with the results from this year’s rescue package for the industry, Beijing is leery of risking a relapse, analysts say.

“The message sent by the government is that they will not let the auto industry weaken, especially not in 2010,” said Jia Xinguang, chief analyst at China National Automotive Industry Consulting & Developing Corp., an investment management company.

Enticed by the potentially huge market, automakers have poured billions of dollars into ventures here in the past two decades. Total sales this year forecast to shoot past 13 million units, up a third from last year’s 9.8 million.

Meanwhile, sales in the U.S. have faltered, with January-October vehicle sales totaling 8.6 million, compared with Autodata CorpChina’s figure for 10.9 million in China during the same period.

The revival in sales has been opportune for GM as it struggles to restructure following a spell in bankruptcy court. Including minivans and other passenger cars, SAIC-GM-Wuling, GM’s minivehicle venture in China, led nationwide sales in November, with 83,753 units sold.

Car sales in the main cities like Beijing and Shanghai are robust, but the zippiest growth has been in so-called second, third and fourth-tier cities. Chengdu, a city of 11 million, now ranks in the top four auto markets, with sales jumping almost 60 percent over a year earlier in September, to 22,585 units.

The major city nearest the epicenter of a catastrophic May 2008 earthquake that left almost 90,000 people killed or missing, Chengdu did not suffer extensive damage, but it is now booming as money floods in to finance rebuilding in the quake zone.

Along the main roads ringing the city and to the airport stand cluster after cluster of newly built auto dealerships — luxury brands like Jaguar, Porsche and Rolls Royce as well as more affordable foreign and domestic brands.

Zhu’s dealership, which sells mainly SAIC-GM-Wuling compact minivans,has seen sales more than double to 37,000 units so far this year, he says.

The vans, which seat seven and go for 30,000 yuan-50,000 yuan ($4,400-$7,300), are the country’s biggest selling model, favored mainly by small, private businessmen like Wu Weizhong, a glove seller who was peering under the driver’s seat, where the vehicle’s engine is located.

“That’s the heart of the vehicle, the most important part!” Wu said before jumping inside to try out the seat and steering.

Chengdu’s dusty, smog-choked roads are jammed with a smorgasbord of brand names — big Toyota and Lexus SUVs, sleek Mercedes Benz, Buick sedans and smaller, compact Suzukis and Peugeots. Along with the foreign brands are plenty of Changans, Cherys and BYDs — fast-growing domestic automakers that are grabbing market share by catering to customers seeking affordable, fuel efficient cars.

The proliferation in choice has made buyers more discerning.

“Before, it was a seller’s market, and people would just buy whatever was available, but now they have all sorts of requirements,” says veteran saleswoman Chen Lin, who moved to BYD, a battery maker that branched into automaking this decade, looking for new opportunities.

BYD’s F3 compact is currently the country’s best-selling sedan, and nine out of 10 of Chen’s customers are first-time car buyers, though growing numbers of visitors to her brightly-lit dealership on the outskirts of town are looking to trade up to the automaker’s F6 midsize sedan, she says.

“People in Sichuan are very practical. They are focused on value for money, not prestige. So our cars seem to suit the local market,” Chen said.
…

… with car ownership at only 40 per 1,000 people, and even less in the countryside — a tenth that of the U.S. — dealers like Zhu and Chen have few qualms about the industry’s future.

“Customers are buying because, quite simply, they need a car, their incomes are rising, and they now have the kind of purchasing power they need to buy them,” Zhu says.

Conclusion: America outsourced its prosperity over the last three decades. Chinese quality of life is rapidly adjusting upwards to reflect their new prosperity (transferred so generously from the US), while America collapses into a third world nation. As the 2010 Food Crisisunfolds next year, the entire US will see the same economic disintegration already being experienced in places like Detroit and Las Vegas.

Credit: MarketSkeptics.com