Week of August 20, 1999
Week of August 20, 1999
ECONOMY: Escalating economic difficulties in China
On August 18 Xinhua news agency reported that China’s State Economic and
Trade Commission announced a ban on all new products, involving the manufacture
of a broad range of consumer items, such as refrigerators, air conditioners,
candy, apple juice, and certain types of liquor. By placing caps on the production
of consumer goods, China hopes to reverse the recent trend of price deflation.
The ban is scheduled to take effect September first.
In part due to the fear created by the threat of unemployment, Chinese citizens
are choosing to stash their money under mattresses rather than spend it. China’s
producers, reacting to a oversupplied market, are slashing prices, driving
themselves into bankruptcy and threatening to make unemployment fears come
true. Beijing has already attempted to combat this situation by imposing price
floors on certain products. Prices for consumer goods have fallen for 22 months
in a row. Deflation is causing many factory stockpiles to overflow, forcing
producers to suspend their output, even though most are required to keep paying
the same number of workers. Nicholas Lardy, a senior fellow at the Brookings
Institution who specializes in China, was quoted by the New York Times as
saying that the ban could actually aggravate the situation by forcing cutbacks
in construction jobs. "It could mean less employment and more deflation,"
he said. "With fewer people working, demand will go down."
While state regulators have set minimum prices in an attempt to prevent producers
from undercutting each other in price wars, financial authorities have also
authorized interest rate reductions to encourage consumption by lowering the
cost of borrowing. However, the success of these efforts have been limited.
Central to the problem is a grave deterioration in consumer confidence. With
this collapse in consumer confidence has also come a downturn in domestic
demand. In addition, despite generous tax subsidies on exports, China has
not been able to export its way out of its problems.
Many Chinese economists are already beginning to tentatively recommend that
Beijing at least consider a devaluation of the yuan. In theory this would
help stop deflation by raising the cost of imports and would stimulate the
economy by raising foreign demand of China’s exports, which have been falling.
However, such a devaluation would have serious destabilizing effects in China
and throughout Asia. Not only would it unnerve foreign investors, but it would
make it more difficult for China to repay foreign loans. Despite optimistic
estimates of economic growth, China is not doing well. Price floors have not
boosted consumption and tax subsidies have not boosted exports. These exports,
in turn , are being subsidized by loans expected to fall victim to default,
and devaluation is a very strong possibility.
Allowing market forces to reconcile themselves is an unacceptable policy
for the Chinese government, given the potential social unrest that could be
aggravated by high unemployment. Chinese President Jiang Zemin, currently
on a tour of troubled SOE’s in China’s Northeast, supports the development
of those enterprises rather than the release these large employers to market-driven
fates. Priority in Chinese economic decision-making is now leaning towards
maintaining social stability, and not market-style reforms.
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CAMPAIGN CONTRIBUTION SCANDAL: Huang Pleads Guilty
John Huang, a pivotal figure in a two year investigation regarding fund raising
abuses during the 1996 elections, as part of a plea agreement reached earlier
with federal prosecutors, pleaded guilty yesterday to conspiracy to defraud
the Federal Election Commission. In a Los Angeles US District Court, Huang
was sentenced to one year’s probation, a $10,000 fine, and 500 hours of community
service. Prosecutors said a condition of the probation is that Huang will
continue to cooperate with government investigatiors.
The conspiracy charge to which Huang pleaded guilty did not involve the 1996
campaigh but rather earlier contributions to California Democratic campaigns
in 1993 and 1994. Huang helped raise about $2 million in 1996 contributions
when he was an official of the Commerce Department and the Democratic National
Committee. The DNC returned these contributions because the funds came from
illegal or suspect sources. However, Huang never provided evidence linking
other White House and Democratic Party officals to criminal activity.
Chairman Dan Durton (R-Ind.) of the House Government Reform and Oversight
Committee, originally asked for a delay in Huang’s sentencing, pointing out
that once sentenced, Huang would have no incentive to cooperate with the House
committee seeking his testimony.
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DEFENSE: Clintion Administration Dismisses Fears over Panama Canal Security
Senate Majority Leader Trent Lott, R-Mississippi, recently voiced fresh concerns
regarding Panama’s 1997 decision to award a Hong Kong-based shipping company,
Hutchinson Whampoa Ltd., a long-term contract to operate the shipping facilities
on either end of the Panama Canal.
In a letter to Defense Secretary William Cohen, he stated that "US naval
ships will be at the mercy of Chinese-controlled pilots, and could even be
denied passage through the Panama Canal by Hutchinson Whampoa, an arm of the
People’s Liberation Army." He continued, "this administration is allowing
a scenario to develop where US national security interests could not be protected
without confronting the Chinese Communists in the Americas." In the past other
conservative Republicans have raised similar concerns about the arrangement,
but Lott’s was the highest-level congressional protest thus far.
The Clinton administration was quick to insist that the presence of the Hong
Kong shipping company was not a security threat. "The United States is stateside
our interests will be protected after the canal is turned over this December.
We have see no capability on the part of China to disrupt the canal’s operations,"
said David Leavy, spokesman for the White House National Security Council.
Bacon, the Pentagon spokesman, said the Hong Kong firm will operate terminals
at either end of the canal to unload containers from ships to large to fit
through the canal. The shipping company will then transport the containers
to the opposite end of the canal and load them onto other ships.
On Saturday, August 14, Hong Kong newspapers widely criticized Senator Trent
Lott’s claims, describing them as absurd. Lott’s "poisonous rhetoric illustrates
very well tow points . . . the misinformation clouding the China issue in
the West and the way in which Hong Kong frequently becomes a whipping boy,"
the Hong Kong Standard said. This paper and others saw the accusations against
the company as an attempt to damage Hong Kong’s business reputation.
The 1977 Panama Canal treaties guarantee the neutrality of the canal after
2000, requiring Panama to let all ships cross regardless of political conflicts,
and allows for the US to intervene militarily if it does not. Bacon stated
that the United States was prepared to use force, if necessary, to guarantee
that the canal remains open to international shipping.
"The United Sates has a unilateral right to maintain the neutrality of the
canal and to reopen if there should be any military threat," he said. "We
do not see Chinese-owned port facilities as a military or a national security
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DEFENSE/ESPIONAGE: Ethnic targeting issue raised as 3 lab employees disciplined
On August 12 Energy Secretary Bill Richardson recommended disciplinary action
against three employees of the Los Alamos nuclear laboratory in the wake of
espionage allegations. Former director of the lab Sig Hecker, and former intelligence
officers Robert S. Vrooman and Terry Craig were each found to have been remiss
in their duty to safe-guard the security of the lab by an internal investigation,
which reached conclusions similar to those found by the Cox committee and
a presidentially appointed review board headed by former Congressman Rudman.
Following this announcement, Vrooman accused those involved in the investigation
of focusing too quickly on Dr. Wen Ho-Lee, the chief suspect in the case,
because he is Chinese-American, despite a lack of hard-evidence that Dr. Lee
passed information of any sort to China. The charge of ethnic profiling has
been refuted by Secretary Richardson and a top intelligence officer in the
department of energy, Notra Trulock. Trulock stated that the names of approximately
12 individuals suspected of committing espionage at the lab--3 of which were
Chinese-American--were submitted to the F.B.I. at the outset of the case.
Vrooman’s comments echo those expressed by Chinese-American organizations
concerned about ethnic bias.
CROSS-STRAIT RELATIONS: Chinese officials test the waters on military response
Since Taiwan President Lee Teng-hui articulated a policy calling for Taiwan
and China to relate to each other on a "special state-to-state" basis in July,
the Chinese leadership and military have repeatedly denounced the statement
as tantamount to declaring Taiwan’s independence and issued warnings to both
the U.S. and Taiwan that they will respond with military force. President
Lee’s August 18 announcement that Taiwan would like to be included in a theater
defense missile system that is being considered by the U.S., further strains
relations on all sides. Recent exchanges between American and Chinese experts
and officials have led some to believe that China’s leadership has made the
decision to pursue some form of military action and is attempting to gauge
American response to the available options. Several military analysts have
stated in the press that the Chinese reaction is likely to be more forceful
than the missile exercises carried out in the Taiwan Strait in 1996 in response
to Lee’s visit to the U.S., but fall short of an amphibious invasion of Taiwan
which China is not fully equipped to execute. American officials also expect
that China will delay its military response until after a mid-September meeting
between Presidents Clinton and Jiang Zemin, and the 50th anniversary of the
Chinese Communist Party on October 1. The careful calibration of the Chinese
response could mean the difference between an event that passes without escalation
to one which induces strong Congressional support for Taiwan and a possible
military response by the U.S.
The U.S. and China This Week