The Screaming Pen

Providing Global Insight, Context, and Perspective

Classic Pen: The New Amsterdam

Minorities Crime & Drugs in China

The meanest bowl of la mian – steaming sweet noodles and meat that renew life on a frosty winter evening – you’ll ever find will be in a Uighur restaurant. Fortunately for survival, the dish can be found for 40 cents in noodle stalls located in neighborhoods throughout China. Less auspiciously for Chinese authorities, the widespread presence of ethnic minorities is, combined with the drug trade, making domestic control increasingly harder to maintain.

People from the Xinjiang (the place) Uighur (the people) Autonomous Region, China’s most western province, are noticeably different-looking than the ethnic Han that make up around 95% of the nation’s population. On average, the Uighurs are taller, with sharper features and lighter eyes. They appear more like Central Asians as they are indeed from that corner of the world. Unlike the officially atheistic Chinese, they are Muslim and wear a doppa, or Uighur hat.


Visine: Gets the Red Out

Uighurs are overwhelmingly a friendly, hospitable, and decent people. As is inherent in human nature, however, a small minority exists with less savory motives and the will to resist. They also have legitimate grievances: Xinjiang was only really pulled into Beijing’s orbit in the 1950’s when the People’s Army arrived. In a successful effort to prevent independence – similar to that witnessed in former Soviet states with similar histories in Central Asia – China has been moving its citizens to the province by the millions in an effort to pacify the Uighurs through demography and breeding; the Han now make up 50% of Xinjiang’s population. Furthermore, widespread human rights abuses and the absence of choice in the political arena lead to increasing frustration and unrest among Uighurs. Beijing’s solidarity with America’s war on terror is frequently thought to stem from domestic desires in Xinjiang. Remember the screeching woman on the White House lawn during Chinese President Hu Jintao’s speech in April? She was Uighur, and never would’ve been heard in China.

Yet as long as the central government possesses a monopoly on force restive groups find it virtually impossible to challenge its rule directly. Instead, dissent will undermine the state through other outlets. With little stake in a system that discriminates against them, some minorities seek profit through street crime and drug smuggling. Noodle stalls and niu rou (meat stick) vendors often sell hasheesh alongside their edibles. During 2005 they became even bolder, approaching shaggy-looking foreigners on Shanghai’s main tourish promenade. They also sustain a healthy trade in stolen goods, lifting cell phones and wallets, and push imitation Marlboros.

An Unhappy Bunch

The Uighurs are not the only groups in China with varying loyalties: Tibet has long been a high-profile cause celebre, and the people in Southern China – Guangdong and Hong Kong – don’t consider themselves Chinese because they aren’t Han and don’t speak Mandarin, but Cantonese. Economic dynamism has led to relative calm from Hong Kongers who were more than a little uneasy when the People’s Army arrived as the British pulled out in 1997. And while they have very different aspirations and live under widely divergent conditions than the Uighurs, they are increasingly pushy about their freedoms. Mongolian, Laotian, and Burmese groups also call the PRC home.

Definitely Worth the Trip

Nationalities from far beyond Asia are developing a presence in the country as well. In May, in conjunction with the United States, China seized 300 pounds of cocaine from a Colombian narco-gang with local partners in Hong Kong and mainland China.

Even more disturbingly, less than a mile from Zhongnanhai – the Chinese leadership’s central headquarters in Beijing- lies Sanlitun Rd and its shady cousin, Sanlitun South. The former is a dull stretch of karaoke bars with awful beer that guidebooks tout as having the best nightlife around. Just a few blocks away, hidden on all sides by apartment blocks, emerges an expatriate college student’s dream: a dusty dirt road where animals roam freely, lined by tiny alleys with wild-west bars that stay open all night serving Coronas for 50 cents. Indeed, the latter looks more like Mexico than what you’d expect to find in the heart of the Chinese capital. Less benignly are the Nigerian lookouts that man each end of the street offering everything from marijuana to crack to the passerby.

In a country that places a premium on prying into both its own citizens’ and foreigners’ lives, combined with the blatant visibility of the practice, one wonders how it can exist without the authorities’ complicity. This is doubly so given that the Nigerians are legally in China on student visas. How they got the visas is not so difficult to discern: Nigeria is a significant source of Chinese oil imports, and thus the necessary immigration papers get filed rather quickly. Yet the opacity of the government means that its role in the drug trade – whether through tacit approval and taxation or active facilitation – cannot be ruled out. Do high-ups have knowledge of it? Could it be that the Colombian drug bust accomplished two tasks at the same time: cracking down on a rival gang without connections while showing America’s Drug Enforcement Agency that it’s a good-faith partner in the War on Drugs?

If so, not only is it grossly illegal and disingenuous but illogical. Both petty and violent crime are on the rise in China, and figures will continue to climb in the future. China’s leaders should be careful about the short-term profits they seek from the trade, as the networks it creates will undermine their authority and prove impossible to stamp out. Politically, the communist party exerts a firm hold on power, but increasing revolts – numbering 87,000 last year according to party reports – will lead to a day, unlikely to be soon, when this changes. When it does the Uighurs, Tibetans, Cantonese and others will hardly help slow its fall.

August 26, 2006 Posted by | Asia, Business, China, Emerging Markets, War on Drugs | 1 Comment

Chicken the China, the Chinese Chicken

A Changing Tide, the Spigot is Tightened

Since hitting an all time high on May 8, the MSCI Emerging Markets Index has fallen over 20%, as inflation fears and global monetary tightening begin to mop up the loose liquidity that has helped emerging market exchanges, along with other riskier assets, achieve strong annualized gains over the past few years.

With China experiencing staggering economic growth, one would think that the Chinese Stock Markets would have been on the winning end of a several year long emerging markets run. In fact, on June 6, 2005, while many Asian markets were continuously breaking multi-year highs, the Shenzen Compositie hit a six year low, puzzling amateur investors across the globe. Possible answers to China’s equity market conundrum can be found by taking a closer look.

The Times, they are a Shenzen

The Late Bird Gets the Sub Par Market Returns

China, a late bloomer in the Capital Markets game, did not have a stock market until 1990, and not a single Chinese company was listed abroad until 1993. As of 2003 -the latest information thescreamingpen.com could muster- over 66 million Chinese citizens participate in the domestic equity markets, with only 35 companies listed as private. It is estimated that at least two thirds of the shares listed on the Shanghai and the Shenzen, China’s two largest stock markets, are owned by the government. It is apparent that investors, especially those abroad, are hesitant to invest in companies whose balance sheets, among other things, could be compromised because of government involvement.

The Reforms of 2005

Realizing that capital inflows are essential to sustainable growth, the powers that be in China undertook some important reforms in 2005, including:

  • Public listing of the “Big Four” Chinese banks on overseas exchanges
  • Selling large stakes of domestic banks to international investors, which will result in increased capital inflows and much needed international banking expertise.
  • Reform of China’s A share market, which has resulted in 1/3 of China’s A shares being tradable.
  • The removal of capital gains taxes on securities held by foreign investors
  • The issuance of sovereign “Panda Bonds”, issued in Chinese currency.

Outlook and Conclusions

With the initiation of a global tightening cycle, it is possible that China may have missed out on the latest emerging markets rally. The good news is that China’s Eleventh Five Year Plan, which began on January 1, 2006, contains many provisions that aim to reform China’s financial sector even further. Hopefully these provisions are enacted.  This would allow China to efficiently handle foreign inflows of Capital, as well as wealth created at home.  If China continues down the road of financial sector reform, it will be a much needed step on the path to possible market maturity.

*Look for an overview of the Indian Financial sector reform in the coming days.

-JPL

Links of Interest

http://www.washingtonpost.com/wp-dyn/content/article/2006/06/08/AR2006060801493.html

thescreamingpen.com is not liable for any loss resulting from any action taken or reliance made by you on any information or material posted by it. You should make your own inquiries and seek independent advice from relevant industry professionals before acting or relying on any information or material which is made available to you pursuant to thescreaminpen.com’s information service, as it may not prove accurate. You rely on this information at your own risk. thscreamingpen.com is not for profit.

June 9, 2006 Posted by | Asia, Author: JPL, China, Chinese Stocks, Corruption, Emerging Markets, Globalisation, Investing, Politics, World Markets | 1 Comment

Dude, Where’s My W-2?

Let me tell you how it will be;
There’s one for you, nineteen for me.
‘Cause I’m the taxman,
Yeah, I’m the taxman.

-The Beatles

 

A Possible Impetus For Change

Last fall, the international media focused much of its attention on European elections that promised to shake up the old European order. For those seeking real economic change in the form of market liberalization, those elections were partial letdowns. For instance, many analysts believe that a clear-cut Merkel victory in Germany could have provided the impetus necessary for much needed economic reform and market liberalization in other Western European countries. Following the formation of a grand coalition in Germany, it appears that constant compromise may prevent Angela Merkel, the new Chancellor of Germany, from carrying out her intended reforms. It is also uncertain what direction Poland’s newly elected center right coalition government will take the country. Before coming to the conclusion that all hope is lost regarding Western European change, one must consider an economic force that has been slowly moving westward, originating in the tiny nation of Estonia. The flat tax, which applies a constant rate of taxation, is exerting economic pressure in the form of tax competition on the high tax economies of Western Europe, slowly forcing economic change in those countries.

Reactionary Yet Opportunistic

From a historical perspective, it is interesting that many of the countries who have enacted constant rates are ex-communist nations who have voluntarily moved in the opposite direction of Soviet central planning, the failed communist system that attempted to control every aspect of economic activity. Much like the iron curtain before it, the flat tax movement and free market values are slowly moving westward, with Greece facing a crucial decision this year regarding the adoption of a 25% flat tax. In the recent Polish election, the pro flat tax Civic Platform Party came in a close second, and will now share power with the victorious Law and Justice party. In Germany, the early election campaign of Angela Merkel featured a proposed finance minister who was an outspoken supporter of a flat tax. Unlike the spread of communism, however, the flat tax movement is being voluntarily implemented.

Mail Order Brides are no Longer Estonia’s Chief Export

 

The flat tax system, which uses a single tax rate that is applied to wage earners and corporations that begins taxing after a certain income threshold is reached, has been successful in several nations beginning in 1994, when Estonia introduced a 24% tax rate. By attracting business from abroad, Estonia’s economy grew at double digits in 1997, and has averaged about 6% GDP growth per year since. Russia, a nation whose complicated tax code caused widespread evasion, instituted a flat tax in 2001. It is estimated that in the years leading up to the 2001 flat tax, Russia’s biggest corporations ignored 29% of their tax obligations, while 63% substituted goods or services instead of hard currency. This made Russia susceptible to debt defaults as their coffers reached record lows. In 1998 Russian government revenues were 12.4% of GDP. By implementing a simplified tax code, Russia eliminated loopholes and increased its revenues in real terms by 28% in 2001, 21% in 2002, and 31% in 2004.

Opponents of a flat tax, who believe that a flat tax is meant to line the pockets of the rich and will result in lower government revenues, fail to realize that flat tax systems do not tax earners below a certain threshold, allowing the poorest workers to be exempt from taxes. The revenue question is answered by looking at Russia, a nation who learned that the best way to get higher revenues is to give people more incentive to report their taxes by keeping tax rates low. Ideally, a low tax rate would result in more wealth creation, which could generate even greater revenue. Remember, the examples cited in this article are from countries that had an insanely restrictive, command style tax code. The flat tax is also making Western Europe increasingly uncompetitive, as businesses and investment dollars flow into Eastern Europe.

Implications

In response to widespread eastern European acceptance of a flat tax, Western Europe is beginning to consider tax reform. According to the Economist, Germany has already made plans to cut its corporate tax rate from 25% to 19%, and the in Britain, the Opposition Conservatives announced on September 7, that they would set up a panel to study a flat tax proposal. As investment dollars and businesses continue to flock to Eastern Europe from Western Europe, it will be increasingly apparent to Western Europe that in order to maintain its standard of living, it will need to make radical changes in its tax policy.

Conclusions

It will be interesting to see how the Western European nations deal with tax competition from the east. It is apparent that the increasingly uncompetitive Western European nations will need to modernize their economies in order to compete. It will also be interesting to see how the continued success of an Eastern European flat tax effects the current tax situation in America, where our own tax code has broken the nine million word mark.

-JPL

Links of Interest

http://www.washingtonpost.com/wp-dyn/content/article/2006/05/31/AR2006053102043.html

 

May 31, 2006 Posted by | Author: JPL, Emerging Markets, Europe, Flat Tax, Germany, Globalisation, Politics, Russia, Unemployment, World Markets | 16 Comments

The Stampede of the Global Herd

Yesterday marked the eleventh day in a row that the MSCI Emerging Markets Index fell, an event that has not occurred since August 13, 1998, the very same day that Russia defaulted on her foreign debt. Russia’s debt default marked the spread of the Asian Contagion, a financial crisis that swept across Asia after the devaluation of the Thai Baht. This time it appears that things are much different, as the fundamentals of many emerging market economies appear quite strong. And although Indian Brokers, who witnessed shares drop more than ten percent before the government intervened yesterday, will probably not find solace in solid fundamentals, it appears that the current drop in the emerging markets is due to investors fleeing risky assets in the face of a global tightening cycle, possible inflation, and cooling global growth. And although some investors are losing their shirts, it appears that this may be a price correction, not a crisis.

Seeing Red

Come On, Let Me See Ya Grill

Wait and See

While yesterday’s returns marked the end of an eleven day downturn in the emerging markets, it still did not end the doomsayers from predicting that today’s economic conditions are similar to either 1) the conditions preceding the October 19, 1987 crash or 2) the conditions that led to the Asian contagion. This could not be further from the truth, as there are crucial differences between now and 1987. In 1987, stocks were pricey, and treasuries were quite cheap. Today, equities are historically cheap, with investors paying a premium for treasuries. This is important because if investors flee equities all together, which would be required for a crash, they would have to pay a premium for treasuries as housing is showing signs of cooling, and the dollar is relatively weak. The spread of the EMBI+ to the Ten Year U.S. Treasury note still remains at close to record tights, signalling debt investor’s continued confidence in the fundamentals of the emerging markets. In 1998, the spread widened sharply, signalling falling confidence in the emerging market economies.

Conclusions

Although this is probably not a crisis, it could signal a change in investor sentiment, especially as monetary policy tightens worldwide. The managers of Large Cap mutual funds, some of whom have been predicting a return to their asset class for the past several years, may finally get their wish as investors may continue to flee assets that love loose liquidity such as emerging market stocks, commodities, housing, and small capitalization stocks. It will be important to keep an eye on the international markets, along with less risky asset classes that may benefit from the global herd fleeing risky assets in favor of traditionally safer bets. If there is not a change in sentiment, however, this may be a great buying opportunity.

-JPL
thescreamingpen.com is not liable for any loss resulting from any action taken or reliance made by you on any information or material posted by it. You should make your own inquiries and seek independent advice from relevant industry professionals before acting or relying on any information or material which is made available to you pursuant to thescreaminpen.com’s information service, as it may not prove accurate. You rely on this information at your own risk. thscreamingpen.com is not for profit.

May 23, 2006 Posted by | Asia, Author: JPL, Emerging Markets, Financial Markets, Investing, World Markets | Leave a comment

Out of the Shadows

Cambodia’s Good Fortunes

When speaking of the Asian tigers, Cambodia isn’t one of the countries that come to mind. For most of the past 40 years this Southeast Asian nation has been plagued by civil war, foreign domination, and even genocide. The reprehensible, murderous Khmer Rouge was beaten back long ago but it continued to play spoiler in the west and northwest near the Thai border until just five years ago, emerging from jungle sanctuaries under cover of darkness to battle despairingly against government soldiers. Ordinary Cambodians hated them.

Despite Rouge devastation, the highest HIV infection rate in Asia, widespread corruption, and ineffective and unresponsive government, it is perhaps astonishing then that Cambodia saw 13% GDP growth in 2005 according to the IMF. For a Cambodian or any visitor to the country though this is unsurprising: having endured so much privation and devastation for longer than most can remember, Cambodians are ecstatic to know peace and ready to get on with things.


Angkor Wat: At least they didn’t destroy this one

Helped by tranquility and the friendly and sanguine attitudes of the Khmer people (as Cambodians are known), tourism has been a boon. Cambodia has possibly the world’s most awe-inspiring and fantastic attraction in the world: the temples of Angkor. Each year brings increasing numbers of visitors flooding north from the capital and east from more prosperous Thailand to visit Angkor Wat, bringing with them valuable cash to a region often ignored –political retribution, many suspect, for the Rouge’s former influence in the area – by the central government in distant Phnom Penh. Instead, informal patronage networks distribute cash to those who need it most. Tourist operators ferrying busloads of foreigners to their destination slow while passing cash to women on foot along the muddy roads. Less blithely, they are also required to make payment to government soldiers manning antiquated checkpoints.

While Cambodians won’t leave their future to the whim of outsiders, there is much that other nations can do to assist. Governments and aid agencies looking for a positive model of development aid should look to Japan’s grant that established the building of National Route 6. Ask any resident of Siem Reap – the busy town adjacent to the Angkor temples – what he is most proud of and he is likely to name the flat and evenly tarred road, a bustling artery that facilitates so much commerce and industry. Other laudable assistance include efforts to create sustainable aid by rebuilding temples destroyed by the Khmer Rouge, thus generating greater tourist revenue in future. A solid next step would be the paving of the 100-or-so-mile ruin that runs from the Thai border to Siem Reap, and which takes about 8 nerve-wracking hours to traverse. And after that, the replacement of Hun Sen, Cambodia’s long-serving, ruthless, inexorable, one-eyed Prime Minister.

– DML

 2006. All rights reserved.

May 17, 2006 Posted by | Asia, Author: DML, Business, Cambodia, Country Profiles, Emerging Markets, Foreign Aid | Leave a comment