Week of August 20, 1999

SUMMARY:

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.

SUMMARY:

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.

SUMMARY:

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 threat."

SUMMARY:

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.

SUMMARY:

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