ENB-WORLD080101

Interesting times for India-China relations
Nikhil Lakshman in Beijing January 13, 2008 22:34 ISTLast Updated: January 14, 2008 05:07
ISTHawks in search of appropriate atmospheric metaphors to describe Prime Minister Manmohan Singh's [Images] visit to China would have been heartened by the constant turbulence accompanying Air India One's flight to Beijing [Images] early on Sunday and the below freezing temperatures -- minus eight degrees Centigrade -- that greeted the Indian delegation in the Chinese capital that morning. But forecasts of a frosty, rough patch in India-China relations, observers in New Delhi and Beijing told rediff.com, may be inaccurate for now.
The Chinese would neither like controversy nor conflict till the Olympics [Images] conclude this August. The Games are Beijing's long awaited moment to seize what it believes is its rightful place in the sun and it won't allow anything -- not even next week's referendum in Taiwan (read more here) -- to rain on its parade.
Even though the Chinese have been vocal about their claim to Arunachal Pradesh in the past 14 months, these observers believe no movement is expected on the contentious border issue during the prime minister's visit.
The Chinese know the prime minister has been weakened by the political stalemate over the India-US nuclear agreement, but Dr Singh, these observers say, begins his official talks with the Chinese leadership on Monday confident that India today has a minimum credible deterrent vis-a-vis China.
The successful test of the Agni 3, which can carry a nuclear warhead and has a 3,000 km range in the weeks leading up to the visit -- accompanied by Defence Research and Development Organisation Chief Controller V K Saraswat's assertion at the Indian Science Congress in Vishakhapatnam on January 8 that India will test the Agni 3 +, a ballistic missile capable of hitting targets more than 5,000 km next year -- indicate enhanced defence capability, earning Chinese respect.
Yet, adds a China watcher, India is not confronting China in the short or medium term.
India and China being nuclear powers, he says, makes it almost impossible for both countries to go to war again over the border issue that remains unresolved 45 years after the 1962 conflict.
Unlike his predecessors Rajiv Gandhi, P V Narasimha Rao and Atal Bihari Vajpayee who all called for the border issue to be resolved immediately, Dr Singh has been characteristically measured, saying the dispute was not 'unidimensional,' and India and China should go about building a strong relationship, regardless of the disagreement over where each nation's boundary ends and the other's begins. It is a theme India has already, unsuccessfully, employed with Pakistan, telling Islamabad that, regardless of Kashmir, it should engage and improve relations with New Delhi.
Unlike the Line of Control, which divides India and Pakistan in Jammu and Kashmir [Images] and remains in violent ferment all year around, the Line of Actual Control, as the India-Chinese border is called, remains almost sonorously peaceful through the year, barring the non violent transgressions into each other's territory by Chinese and Indian troops. The last time a soldier died on the border was in 1975 when he strayed to the other side in deep fog and was shot accidentally.
Last year, Chinese soldiers are said to have committed 140 such transgressions according to the Indo Tibetan Border Police. Quizzed about it in Beijing on Sunday night, an Indian diplomat played down the impact of these violations of the border as routine assertions by either side of their territorial claims.
Prime Minister Singh, an observer in New Delhi told rediff.com on condition that he would not be identified for this report, has not been as forgiving. He is said to have insisted that Chinese Ambassador Sun Yuxi -- who highlighted the Chinese claim to Arunachal Pradesh in an interview to CNN-IBN's Surya Gangadharan ahead of President Hu Jintao's visit to India in November 2006 -- be recalled before communicating the dates for his visit to Beijing. Sun has since been replaced by Zhang Yan who has served as China's arms control chief.
Clearly, India has reactivated its China initiative in recent months. Some observers believe this activity is linked to the India-US nuclear deal's current residence in limbo. After 23 months, the India-China strategic dialogue was activated in December, the first time since January 2006. Both defence ministries too exchanged notes in November after a substantial hiatus; there was, of course, also the much ballyhooed India-China military exercises in Kunming last month, a first in its defence histories.
Trade is booming and has been pegged at $34 billion in the period January to November 2007, though India confronts a dismaying trade deficit ($9.02 billion). Both China and India are deeply worried about the developments in Pakistan, and its potential to spill over to Kashmir and Xinjiang provinces. Yet, despite the current convergence of some strategic interests, a trust deficit continues to dog India-China relations.
Both sides have been eloquent about heralding 'a relationship that will transform the world' -- one Chinese diplomat even resurrected 'Hindi Chini Bhai Bhai' at a luncheon for the visiting Indian media on Sunday. Dr Singh's three-day visit make stabilise relations, but may not effectively bridge the deep chasm of mistrust. India and China will continue to be wary neighbours for some more time to come.

Paper no. 2548 12-Jan.-2008
China: “Friendship with India not to be at cost of ties with Pakistan ”, say scholars prior to Manmohan visit
By D. S. Rajan
On the eve of Indian Prime Minister, Manmohan Singh’s visit to Beijing, the Party and State-controlled domestic Chinese language media in the People’s Republic of China (PRC), have carried statements of some of the country’s prominent leaders and scholars on Sino-Indian ties, which are notable for their new points and emphasis different from what has so far been seen in the despatches meant for international audience. For reasons which are obvious, the question as to what extent such statements may be relevant for its foreign policy, becomes important for India, which now finds itself at an important moment in history facing compulsions to ‘engage’ China.
First, the acknowledgement by top Chinese leaders in the Party journals of India’s rising status both in the region and the world, signifies the fact that their perceptions of a rising India, which have been evolving in recent years, are reaching logical conclusions. Also, it has been symbolically important in providing a positive atmosphere prior to the visit. In specifics, the mention of India by Foreign Minister Yang Jiechi in the theoretical organ of the Chinese Communist Party (CCP) Central Committee “Qiushi” (‘Seeking Truth’, Chinese, 1 January 2008), stands out. Yang has highly evaluated the rise of newly emerging powers like India, Brazil etc, as the main motivating forces for the world economic growth. That was followed by similar comments from General Xiong Guangkai, former Chief of Military Intelligence and now Chairman of the China Institute of International Strategic Studies (CIISS), in the journal of the CCP Central Party School “Study Times” (7 January 2008). He named China, Russia, India and Brazil, all ‘developing countries’, for their increasing roles in the world economic structure with their collective economic output reaching the level of 15% of the world economy.
Secondly, analysing the significance of Indian Prime Minister’s visit, the CIISS ‘online’ edition (Chinese, 7 January 2008), quoted in detail what Professor Fu Xiaoqiang told the People’s Daily-affiliated Global Times. The scholar, belonging to the Ministry of State Security – affiliated China Institute for Contemporary International Relations (CICIR), assessed that the visit would lead to regularisation of bilateral high-level visits and that the two prime ministers, would be able to exchange views on a fresh plan concerning the future directions of Beijing- New Delhi relations. He expressed confidence that the visit would have a healthy impact on removing the lack of trust on matters of security and military, prevailing in bilateral ties.
Admitting that the trilateral China-India-Pakistan relations remain a factor in Sino-Indian ties, Prof. Fu stated that China couldn’t afford to ‘sabotage’ its long-term and close relations with Pakistan, for the sake of improving relations with India. The vice-versa would also hold good for China. He then pointed out that this position of China is being understood by India and in the last two years, New Delhi’s approach to China- Pakistan relations has become more ‘realistic’.
Referring to the Sino-Indian border issue, Prof. Fu commented that there can be no short-term solution for it, which stand appears somewhat in contrast to the upbeat note in the statement of the Chinese Foreign Ministry spokesperson (11 January 2008) that after the meetings between special representatives of the two sides, China and India have much in common, despite differences. The scholar’s position also varies with that of the Chinese Foreign Ministry Spokesperson (8 January, 2008) that the border negotiations have been positive and that ‘important progress’ has been achieved over the past years with both the sides showing ‘positive, political willingness’.
Professor Fu’s another notable remark has been that the existence of the border problem is not going to affect Sino-Indian relations. This may reflect CCP General Secretary and the PRC President Hu Jintao’s thinking that border issues have become irrelevant to China’s foreign policy. Thus, he made no mention of border conflicts in his political report to the very recent Party Congress, deviating from the line of his predecessor Jiang Zemin who in the CCP Congress (2002) referred to border disputes (also religious conflicts) as affecting China’s foreign policy. Also in the view of the scholar, for finding a final solution to the border issue, the wisdom of Indian and Chinese leaderships will be put to test. China-India mutual beneficial cooperation, which is gathering momentum in various fields like international affairs, economy and trade and security, will lead to creation of mutual trust, which would in turn create conditions conducive to the evolvement of a ‘new thinking’ towards solving the boundary question.
The pre-visit atmosphere in China is however not free from materials, critical of India. The Bulletin Board of the CIISS (7 January, 2008) carried remarks of a contributor who found that India is viewing the completion of the Qinghai - Tibet railway as resulting in a shift of the strategic balance in the Sino-Indian border in favour of China. The Tibet issue is also a key factor in Sino-Indian relations, as New Delhi wants to change Tibet into its ‘buffer zone’. The unnamed writer then revealed what the Chinese representative told recently in the new round of India-China border talks- “the Chinese government would protect the Chinese territory and will not hesitate to take all measures needed in this regard”. The writer added that this has been the first occasion for China to take a hard-line position against India in the border negotiations, indicating that ‘China has already completed its strategic preparedness to defend its territory, even to fight a second war with India’. Admittedly, the views are not from the CIISS, which can claim that the same are from a contributor in his individual capacity. But, this writer seems to have some authority as he could reveal confidential information on border negotiations. Is it a deliberate a leak by China intended to convey a message to the Chinese population that the government will not make any compromise on the Sino-Indian border issue?
The comments above, coming from the authoritative Chinese media and scholars, can unmistakably be considered as inputs to the foreign policy making in the PRC. Herein lies their importance. In this context, it would be important for New Delhi to factor the message being given by China through its analysts, in its policy towards Beijing - bilateral ties could be improved without waiting for a border solution which may take a long time. India should not miss the parallels in this regard as “ Seeking common ground, while shelving the disputes”, remains the PRC’s formulae in respect of China’s disputes relating to South China Sea Islands, Japan etc. Deserving India’s attention is another signal from Beijing that its ties with Islamabad would continue to be important, irrespective of the Sino-Indian bonhomie. The border and Sino-Pakistan nexus remain most serious problems in Sino-Indian relations. The pronouncements as given above, have on the other hand given an indication that Beijing may not be in a position for a long time to adequately address India’s sensitivities on the two issues. Realisation of a Sino-Indian strategic cooperative partnership in a full sense would therefore appear a difficult task under such circumstances.

Paper no. 2549 14-Jan.-2008
Is China Wary of India’s “Look-East Policy”?
By D.S.Rajan
Both the People’s Republic of China (PRC) and India agree over the need for building a ‘harmonious, peaceful and prosperous’ East Asia and assess positively the significance in this regard of the roles of mechanisms like the ASEAN partnership summits and the East Asian Summit (EAS). The two rising powers however basically differ on the leadership aspect concerning the EAS mechanism. Admittedly, Look East Policy per se is not a China-India issue, but as it is closely linked with New Delhi’s ability to benefit from such mechanisms, the implications of China’s emerging perceptions, especially on the EAS, become crucial for India, with potentials to affect even the future course of bilateral ties.
Specifically dividing China and India is an issue, which has geo-political dimensions - participation of non-regional powers in the EAS process. Beijing is laying heavy emphasis on the role of ASEAN + 3 with the PRC providing ‘long term and strategic guidance’, as the ‘main channel’ for East Asia cooperation. In its view, China will be a powerful promoter of and a pillar to such cooperation, which has the potentials to develop into an ‘East Asian Commonwealth’. As a sign that India’s participation is not welcome, in early 2005, Beijing was diplomatically active in dissuading nations in the region from lobbying for India’s membership; this received no support from any country except for Malaysia, which was interpreted as reflecting in general the keenness of regional powers to balance China’s growing profile in the region. Consequently, China was forced to choose the next best option, by attempting to divide the EAS membership into two blocs- ‘Core’ states with China leading inside the 10 plus 3, as main channel for building ‘East Asia Community’ and the three peripheral states of India, Australia and New Zealand, described in the Chinese media as ‘outsiders’.[1] China also quickly moved for Russian participation, in an effort to balance the presence of US allies in the EAS.
The Chinese approach has not changed yet, with Beijing still talking about “promotion of the regional integration by the countries in the region, with characteristics of the region and suited to the needs of the region”, while simultaneously pleading for giving “full consideration to reasonable interests in the region of non-East Asian countries”.[2] The term “full consideration” implied a secondary status to the three EAS partners from outside the region, India, Australia and New Zealand. The EAS Statement’s assertion (Singapore, 20 November 2007) that the ASEAN plus 3 mechanism would be the ‘main vehicle’ and the ASEAN the ‘driving force’ in building East Asia Community and failure to mention the three non-regional powers, were largely seen as a result of Chinese pressures; a Singapore official during the summit, even named China for blocking the entry of the three, while talking to the press. China’s approach, by inference, appears to be based on a premise that if outside regional powers are allowed to play prominent roles in building East Asian Community, it may result in a shift in the regional power balance, damaging its strategic interests. As against this, New Delhi, in the interest of its ‘Look East policy’, is pitching for the roles of ASEAN plus 6 in the regional integration process, with full backing from countries like Japan and Singapore.
The Chinese also have different perceptions on another aim of India’s Look East policy - to form a Pan Asian Free Trade Area (PAFTA) as a starting point for an Asian Economic Community (AEC). Though the PRC was a party to the decision in the Cebu meeting of the EAS for initiating a Track II study on Comprehensive Economic Cooperation in East Asia involving all EAS partners (India’s PAFTA concept in essence), it is maintaining a silence over India’s AEC proposal. In fact, so far no Chinese leader or document have ever mentioned about the AEC. The PRC’s State-controlled media have however given a negative connotation to India’s AEC proposal by observing “India’s AEC proposal is not being warmly responded to by any country, as each has its own considerations”.[3] India had already expressed its support to Japan’s proposal (August 2006) for a Pan Asian trade bloc, consisting of ASEAN plus 6 nations including India. Through its media, Beijing had strongly attacked the intention of Tokyo to ‘maintain Japan’s dominant position in the East Asian economic order, contain China and South Korea and restrict ASEAN’.[4] Such attitude of China could reflect its suspicions that PAFTA or AEC schemes may ultimately lead to an erosion of China’s influence in East Asia.
Also on the desirable security order in East Asia, the formulae of India and China are at variance. New Delhi’s prescription for a ‘polycentric’ security concept for East Asia would imply India’s opposition to any one country (read China) dominating the regional security architecture when set up. Beijing, on the other hand, talks about a ‘regional security environment of mutual trust guaranteeing stability by bridging differences through dialogue on an equal footing’. The think tanks in the PRC are also questioning India’s intentions in the field of East Asian security order. In their view, India’s Look East policy towards ASEAN has maritime implications and at the second stage of the policy, New Delhi will expand the scope into political and security realms and bring the India-East Asian cooperation on counter-terrorism, maritime security etc under its grand strategy aimed at controlling the Indian Ocean, particularly the Malacca Strait.[5] They are at the same time assessing that India, despite its Look East policy, will always have limitations in interfering in regional hotspots like Taiwan, South China Sea islands and North Korea and that as such, the countries in East Asia may see India as an Indian Ocean power only, rather than that of the Asia Pacific. [6]
As another point of Sino-Indian differences, China is strongly opposed to ‘exclusivity’ in the matter of East Asian integration. It has stated that “China supports open regionalism, has an open-minded approach to regional integration and opposes self-enclosed or exclusive East Asia cooperation or cooperation against any particular party. Cooperation should grow in a balanced way, bringing benefits to all and bridging differences through dialogue on an equal footing. Disputes should be resolved through holding friendly consultation and seeking common ground while shelving differences”. This stand exposes China’s apprehensions about possible efforts in future on the part of external powers to somewhat exclude from or weaken its leading role in East Asia integration process. Beijing’s such a position also reflects its fears over likely pressures against China’s interests at some point in future on unsolved regional issues (e.g. South China Sea islands, Sino-Japan conflict on gas exploration in East China Sea, Taiwan etc). In contrast, it is obvious that India has no such concerns. The only task for New Delhi will be to skilfully handle its ties with and ‘engage’ China, which it is already doing.
China may also feel that India’s Look East policy may result in a Sino-Indian competition in capturing the East Asian markets. China-ASEAN trade remained robust (more than US$100 billion in 2006). India is trying to augment its trade level with ASEAN (below US$ 20 billion in 2006). India is also losing no time in responding to China-ASEAN FTA, with quick steps to sign a similar FTA with ASEAN.
A point of strategic concern for the PRC could be India’s increasing role in China’s neighbourhood. Through its ‘Look East’ policy, New Delhi is getting closer to Thailand, Cambodia, Laos, Myanmar and Vietnam in the fields of economy, politics and security. China, particularly through the media, has already alleged that India’s Look East policy is geared to hedge against China through developing military relations with the PRC’s surrounding countries. Particular accusation has been that India is following a three-pronged strategy to monitor China’s missile systems including in the border areas – CARTOSAT 2A satellite programme, radar station in Mongolia (to monitor space activities in Gansu, south of Mongolia) and cooperation with US, Japan, Australia and even Taiwan (in the field of signal intelligence).[7] Reference to India-Taiwan collusion marks a new trend. The media is also pointing out towards the port calls by Indian naval vessels in Vietnam, Philippines and the expected visit of India’s aircraft carrier to Malacca Straits and the Pacific, subsequent to the Bay of Bengal Joint Naval Exercise, held in September 2007.[8]
What do the Chinese perceptions mean for India? They reveal a clear picture towards the PRC’s existing reservations on India’s Look East policy, which cannot yet be called obstacles. They only imply Beijing’s grudging acceptance of that policy at this stage, based on the thinking that India is still a weak player in terms of trade and security in East Asia and it will take a long time for New Delhi to consolidate its position in the region, to be able to challenge China. China’s fears have now extended beyond India’s Look East policy, to strategic questions like whether India is on the way to becoming a part of Western alliance. Chinese State-controlled media have for the first time criticised what they called the common wish of the US and India, to balance the forces in Asia through their nuclear and defence cooperation. [9] The media is also seeing the Japan’s proposal for a ‘quadrilateral’ democracy initiative involving New Delhi, Canberra, Washington and Tokyo, as directed against China and are noting India’s receptivity to it. They have also viewed the India-Japan-US military exercise held last year off Japanese coast and the five-nation (India, US, Japan, Australia and Singapore) Naval drill in the Bay of Bengal in September 2007, as targeting China. Overall, Beijing’s strategy for the present can be to compete or cooperate with India depending on the circumstances, while taking care in ensuring that a peaceful periphery continues to prevail in the interest of China’s modernisation.
What India can do, is to respond to China’s sensitivities. The converse is also true. India’s policy to address China’s doubts on the implications of Look East policy should be constructive, without ganging up with others against China. To inject further confidence and trust in its relation with China, New Delhi needs to take further imaginative steps to draw Beijing firmly into the bilateral economic and trade web. No doubt, the trade ties are on the upswing, but the process towards signing a Comprehensive Economic cooperation agreement with China should be speeded up by India. In this way, China may willy-nilly become prepared for offering quid pro quo to India in the matter of connectivity to East Asia. New Delhi should also take advantage of the sentiments of countries like Singapore, Thailand, Vietnam and Japan, all of which wholeheartedly perceive India’s role as of crucial importance to East Asia. More the support India gets from the ASEAN, China’s surrounding nations and Japan, stronger will be the position of India to neutralise China’s apparent doubts on India’s Look East policy. The ASEAN-India Free Trade Agreement has to be concluded sooner than later. The US-India civil nuclear cooperation and defence agreements have introduced a new element to India’s Look East policy, which should be exploited by India for entering the APEC as a member. The statements of the Indian External Affairs Minister Mr Pranab Mukherjee on China relations while he was in Thailand and South Korea last year go to prove that India has already started taking certain pro-active remedial steps aimed at reassuring China on contentious issues.
A long-term regional scenario however seems to be fraught with uncertainties. China and Japan have become economic and political equals now, for the first time in the history, thanks to the former’s rapid rise. In response, Japan is revamping its political, defence and security policies. As a consequence, a power play among the two is already on in East Asia on the issue of regional leadership, notwithstanding the tactical steps taken by the two sides, like exchange of high level visits, to defuse tensions. South Korean power is also on rise and if and when India, with the help of its Look East policy, is able to join the race, the regional situation can become further complex, posing tough challenges to the China-Japan-India triangular relations. The three nations, as major players in Asia, will have a heavy responsibility at that time to act together for guaranteeing peace and stability in Asia.
(The writer, Mr. D. S. Rajan, is Director, Chennai Centre for China Studies, Chennai, India)

[1] People’s Daily, 7 December 2005
[2] Premier Wen Jiao Bao speech at the East Asia Summit (Kuala Lumpur, 14 December 2005)
[3] People’s Daily, 7 December 2005
[4] People’s Daily, 26 August 2006.
[5] Testimony before US-China Economic and Security Review Commission, by Professor James Holmes, US Naval War College, 14 June 2007.
[6] Professor Zhao Gancheng, Director of South Asia Studies, Shanghai Institute of International Studies, Shanghai (Paper at SIIS-Brookings Conference on Regionalism in Asia, Shanghai, 11-12 December 2006)
[7] International Herald Monitor, (Chinese), Xinhua affiliated journal, 22 August 2007 and China Defence Daily, 20 August 2007
[8] China Institute of International Studies website (Chinese), 9 march 2007
[9] People’s Daily, 30 August 2007

BIS warns of Great Depression dangers from credit spree
By Ambrose Evans-PritchardLast Updated: 9:02am BST 25/06/2007
The Bank for International Settlements, the world's most prestigious financial body, has warned that years of loose monetary policy has fuelled a dangerous credit bubble, leaving the global economy more vulnerable to another 1930s-style slump than generally understood. The BIS said China may have repeated the disastrous errors made by Japan in the 1980s "Virtually nobody foresaw the Great Depression of the 1930s, or the crises which affected Japan and southeast Asia in the early and late 1990s. In fact, each downturn was preceded by a period of non-inflationary growth exuberant enough to lead many commentators to suggest that a 'new era' had arrived", said the bank.
The BIS, the ultimate bank of central bankers, pointed to a confluence a worrying signs, citing mass issuance of new-fangled credit instruments, soaring levels of household debt, extreme appetite for risk shown by investors, and entrenched imbalances in the world currency system.
"Behind each set of concerns lurks the common factor of highly accommodating financial conditions. Tail events affecting the global economy might at some point have much higher costs than is commonly supposed," it said.
The BIS said China may have repeated the disastrous errors made by Japan in the 1980s when Tokyo let rip with excess liquidity.
advertisement"The Chinese economy seems to be demonstrating very similar, disquieting symptoms," it said, citing ballooning credit, an asset boom, and "massive investments" in heavy industry.
Some 40pc of China's state-owned enterprises are loss-making, exposing the banking system to likely stress in a downturn.
It said China's growth was "unstable, unbalanced, uncoordinated and unsustainable", borrowing a line from Chinese premier Wen Jiabao
In a thinly-veiled rebuke to the US Federal Reserve, the BIS said central banks were starting to doubt the wisdom of letting asset bubbles build up on the assumption that they could safely be "cleaned up" afterwards - which was more or less the strategy pursued by former Fed chief Alan Greenspan after the dotcom bust.
It said this approach had failed in the US in 1930 and in Japan in 1991 because excess debt and investment built up in the boom years had suffocating effects.
While cutting interest rates in such a crisis may help, it has the effect of transferring wealth from creditors to debtors and "sowing the seeds for more serious problems further ahead."
The bank said it was far from clear whether the US would be able to shrug off the consequences of its latest imbalances, citing a current account deficit running at 6.5pc of GDP, a rise in US external liabilities by over $4 trillion from 2001 to 2005, and an unpredented drop in the savings rate. "The dollar clearly remains vulnerable to a sudden loss of private sector confidence," it said.
The BIS said last year's record issuance of $470bn in collateralized debt obligations (CDO), and a further $524bn in "synthetic" CDOs had effectively opened the lending taps even further. "Mortgage credit has become more available and on easier terms to borrowers almost everywhere. Only in recent months has the downside become more apparent," it said.
CDO's are bond-like packages of mortgages and other forms of debt. The BIS said banks transfer the exposure to buyers of the securities, giving them little incentive to assess risk or carry out due diligence.
Mergers and takeovers reached $4.1 trillion worldwide last year.
Leveraged buy-outs touched $753bn, with an average debt/cash flow ratio hitting a record 5:4.
"Sooner or later the credit cycle will turn and default rates will begin to rise," said the bank.
"The levels of leverage employed in private equity transactions have raised questions about their longer-term sustainability. The strategy depends on the availability of cheap funding," it said.
That may not last much longer.
Information appearing on telegraph.co.uk is the copyright of Telegraph Media Group Limited and must not be reproduced in any medium without licence.

US recession is already here, warns Merrill
By James Quinn, Wall Street CorrespondentLast Updated: 12:05am GMT 08/01/2008
The US has entered its first full-blown economic recession in 16 years, according to investment bank Merrill Lynch.
Get the latest news and analysis of the credit crisisThe full financial outlook for 2008Merrill, itself one of Wall Street's biggest casualties of the sub-prime crisis, is the first major bank to declare that a recession in the world's biggest economy is now underway.
US Treasury Secretary Hank Paulson has admitted that the US economy faces severe challenges David Rosenberg, the bank's chief North American economist, argues that a weakening employment picture and declining retail sales signal the economy has tipped into its first month of recession.
Mr Rosenberg, who is well-respected on Wall Street, argues: "According to our analysis, this [recession] isn't even a forecast any more but is a present day reality."
His comments are the strongest sign yet that the gloom on Wall Street over the US economy is deepening as the sub-prime mortgage crisis and the credit rout show little sign of easing.
Mr Rosenberg points to a whole batch of negative data to support his analysis, including the four key barometers used by the National Bureau of Economic Research (NEBR) - employment, real personal income, industrial production, and real sales activity in retail and manufacturing.
advertisementMr Rosenberg notes that although the NEBR will be the final arbiter of any recession, such confirmation may be two years away as it typically waits for conclusive evidence including benchmark revisions.
However, he believes that all four of these barometers "seem to have peaked around the November-December period, strongly suggesting that we are actually into the first month of a recession."
His view is at odds with some otherl forecasts on Wall Street, with Lehman Brothers going so far as to issue ten reasons why the US economy will not enter into a recession.
Mr Rosenberg argued that "This isn't about 'labels.' What is important about recessions is that while each may have its own set of particular characteristics, there are also unmistakable investment patterns that emerge time and time again."
His views were cemented by last week's jobs numbers, which showed the unemployment rate hitting 5pc, an increase of 13pc year-on-year and the highest in two years.
Despite the increasingly weak economic data, Treasury Secretary Henry "Hank" Paulson said the immediate goal of the Bush administration "is to minimize the impact of the US housing downturn on the economy."
Apparently dismissing calls for immediate tax cuts amid suggestions that President George W Bush might announce a fiscal stimulus package as early as his annual State of the Union address later this month, Mr Paulson said it is more important to get policy right rather than announced policy changes quickly.
He said that no single policy or action would undo the "excesses" of recent years, and urged for patience as the next steps to aid the country's economy were revaluated.
However he noted that officials within the Bush administration "recognise the risks we face" and will try to keep the economy "as strong as possible as we weather this housing correction."
The issue of the faltering nature of the US economy continues to play a large part in the race to replace President Bush, with the majority of candidates seeing it as a key battleground.
Ahead of tomorrow's New Hampshire primary, Democratic contender Hillary Clinton said the US middle class is under increasing economic pressure, as costs rise and house prices wane.

Blair takes advisory position at JPMorgan
By David Wighton in New York
Published: January 9 2008 22:56 Last updated: January 9 2008 22:56
Tony Blair is joining one of the Wall Street’s best-known banks in what the former prime minister told the Financial Times would be the first of a series of positions he expects to take in the private sector.
Mr Blair, who stepped down as prime minister last year, is to become a part-time adviser to JPMorgan, where he will use his experience and contacts to provide political and strategic advice to the US bank and participate in some client events. Mr Blair’s income from the job has not been disclosed. However, one New York recruitment consultant said it was likely to be more than $1m (£500,000) a year.
EDITOR’S CHOICEBlair’s new role is break with tradition - Jan-09Blair paid $500,000 for 20-minute talk - Nov-08Blair to avoid annual party conference - Sep-22Blair took Murdoch calls just before war - Jul-19Diaries tell of euro ‘cock-up’ - Jul-09Blair had no doubts on Iraq says Campbell - Jul-08Jamie Dimon, JPMorgan’s chief executive, said Mr Blair would be “enormously valuable” to the company. “There are only a handful of people in the world who have the knowledge and relationships that he has.”
Speaking to the Financial Times, Mr Blair said that he expected to agree to “a small handful” of similar appointments with other companies in different sectors.
“I have always been interested in commerce and the impact of globalisation. Nowadays, the intersection between politics and the economy in different parts of the world, including the emerging markets, is very strong.”
Such advisory jobs are popular with former world leaders. Sir John Major, Mr Blair’s predecessor, and George H.W. Bush, the former US president, both became advisers to Carlyle, the US private equity firm.
Since leaving office, Mr Blair, who is believed to have a large mortgage to pay on a house in Connaught Square, London, has joined the international conference circuit. He was paid $500,000 for one speech in China. Mr Blair declined to say how much he would be paid by JPMorgan.
Mr Blair’s move comes a month after Jonathan Powell, his former chief of staff, landed a full-time job with JPMorgan’s rival, Morgan Stanley.
Mr Blair, who is serving as an international envoy to the Middle East, said he planned to launch an interfaith foundation this year and was likely to do some work to help tackle climate change.
In the longer term, he is being promoted as a candidate to be the first full-time president of the European Union by Nicolas Sarkozy, the French president. “I have learnt not to speculate about those sorts of things,” Mr Blair said.
The JPMorgan job was brokered by Robert Barnett, the Washington lawyer who also negotiated a reported £5m advance for Mr Blair’s memoirs.
Mr Barnett said that when Mr Blair stepped down, he was approached by a variety of companies seeking relationships, including “more than half a dozen financial services companies”.
Mr Dimon, who is one of the leading Democrats on Wall Street, said he phoned Mr Blair personally. “I went to visit him and we hit it off.”
He said it was important to both men “to try to make the world a better place and have a bit of fun doing it”.

Blair paid $500,000 for 20-minute talk
By Jamil Anderlini in Beijing and George Parker and Alex Barker in London
Published: November 8 2007 20:24 Last updated: November 8 2007 20:24
Tony Blair has been paid more than $500,000 (£237,000) for a 20-minute speech in China, suggesting he has overtaken Bill Clinton to become the world’s most sought-after public speaker.
Britons might have tired of hearing from the former prime minister but in the southern Chinese industrial town of Dongguan his words appear to be worth their weight in gold.
EDITOR’S CHOICEMore UK Catholics than Anglicans go to church - Dec-23Blair to avoid annual party conference - Sep-22Blair took Murdoch calls just before war - Jul-19Diaries tell of euro ‘cock-up’ - Jul-09Blair had no doubts on Iraq says Campbell - Jul-08Blair’s role as envoy gets cold reception - Jun-27Dongguan Guangda, a local property developer, this week paid Mr Blair a post-tax speaking fee of $330,000 and paid another $175,000 in tax on his behalf, according to the Guangdong Provincial Tax Bureau.
Mr Blair’s lucrative speech to a group of about 600 Communist party officials, businessmen and investment bankers confirms he has shot into the super league of after-dinner speakers.
Mr Clinton, the former US president, was paid a mere $100,000 for a speaking engagement in Hong Kong last year, according to his wife Hillary’s financial disclosure statement. However, in 2002 he was reported to have earned $250,000 for a 30-minute speech in Shenzhen.
Rudolph Giuliani, the US presidential hopeful, has received no more than $100,000 for a single speaking engagement organised through the Washington Speakers Bureau this year.
Mr Blair has become a highly successful one-man industry since leaving Downing Street. Apart from public speaking, he is expected to receive up to £5m for his memoirs. His wife, Cherie, is also writing her personal story.
His supporters point out that he needs to make a living because he has a large mortgage to pay on a house in London’s Connaught Square. His job as an international envoy to the Middle East is unpaid.
Mr Blair’s spokesman declined to comment on the amount the former prime minister received for his speeches.
The brief appearance in Dongguan followed a speech to the Hong Kong Chamber of Commerce on Monday evening and another on Wednesday to the BusinessWeek CEO conference in Beijing.
Organisers of the conference said they were forbidden from revealing how much he was paid for the speech under the terms of his contract. His final appearance in China was at the Diaoyutai State Guest House on Thursday morning where he was the guest of Ospraie, a large commodities hedge fund.
In at least two of his speeches on this trip Mr Blair mentioned that his seven-year-old son was learning Chinese at school.

Iraq death toll put at over 150,000
By Stephen Fidler in London and Steve Negus, Iraq Correspondent
Published: January 10 2008 00:55 Last updated: January 10 2008 00:55

At least 150,000 Iraqis died violently in the 40 months after the US-led invasion in 2003, according to an estimate derived from the most comprehensive survey yet of mortality in post-war Iraq.
The new estimate, based on an Iraqi government survey supervised by the World Health Organisation, falls in the middle of the two most commonly cited assessments of the death toll following the invasion. It is published in an article in the New England Journal of Medicine.
EDITOR’S CHOICEUS deaths in Iraq hit four-year low - Jan-02In depth: Iraq in crisis - Feb-13Turkish jets strike targets in Kurdish Iraq - Dec-27Iraqi minister allays fears over Sunni groups - Dec-24US cautions on Iraq progress - Dec-19Snub for Rice over Turkey airstrike on Iraq - Dec-18The article estimates with 95 per cent certainty a range of violent deaths between 104,000 and 223,000, with 151,000 as the central estimate.
The new estimate suggests violent deaths increased 17-fold when compared with the years immediately preceding the invasion.
There is no reliable death registration system in Iraq and past efforts to estimate the numbers killed have been controversial. One study, the Iraq Body Count, which uses media reports and is considered likely to underestimate the number of people killed, counted 47,668 deaths between March 2003 and June 2006.
Another study published in the Lancet, a leading medical journal, estimated more than 600,000 deaths.
The new estimate uses a survey of 9,345 households – five times more than the Lancet survey.
However, government researchers were unable to go to 10.6 per cent of the households they had planned to visit, mainly in Anbar province and Baghdad, because these areas were too dangerous. The article estimated fatalities in these areas using ratios of reported deaths in the Iraq Body Count statistics.
Ties Boerma, a WHO director, said the discrepancy between the new estimate and the Lancet estimate could have derived from the smaller sample in the earlier survey that might have exaggerated results from some unusually violent areas.
Les Roberts, one of the authors of the Lancet article, said the two articles had more in common than appeared at first glance.
“The NEJM article found a doubling of mortality after the invasion, we found a tripling. The big difference is that we found almost all the increase from violence; they found half the increase from violence,” he said.
Mr Roberts said the survey might have suffered under-reporting, because some people might not have wanted to report deaths to government employees.
The Lancet report, he said, showed a sharp jump in deaths to about 900 a day in 2005-06, an increase not reflected in the WHO-supported survey but reflected elsewhere, including in graveyards.

Bush Castigates Iran, Calling Naval Confrontation ‘Provocative Act’
Ron Edmonds/Associated PressPresident Bush, with Secretary of State Condoleezza Rice, before they left for the Middle East.
By SHERYL GAY STOLBERG and THOM SHANKERPublished: January 9, 2008WASHINGTON —

President Bush chastised Iran on Tuesday for committing a “provocative act” by confronting United States Navy warships in the Persian Gulf over the weekend. The Pentagon released video showing Iranian speedboats maneuvering around the American convoy.
Transcript of Iran-U.S. Navy Clash (January 8, 2008) “We viewed it as a provocative act,” Mr. Bush told reporters in the Rose Garden, just hours before he left for a weeklong trip to the Middle East. “It is a dangerous situation, and they should not have done it, pure and simple.”
The episode took place Sunday in the strategic Strait of Hormuz and was initially described by American officials on Monday. They said five armed Iranian speedboats approached three United States Navy warships in international waters, then maneuvered aggressively as radio threats were issued that the American ships would be blown up.
The confrontation ended without shots fired or injuries.
The video runs just over four minutes and, according to Pentagon officials, was shot from the bridge of the guided missile destroyer Hopper. It supported the American version of events, by showing Iranian speedboats maneuvering around and among the Navy warships, quite close to the convoy.
“I am coming to you,” a heavily accented voice says in English. “You will explode after a few minutes.”
Navy officials said the voice was recorded from the internationally recognized bridge-to-bridge radio channel.
An American sailor then is heard repeating the threat, stating, “He says, ‘You will explode after a few minutes.’” The American is also heard identifying the Navy vessel as a “coalition warship” and announcing: “I am engaged in transit passage in accordance with international law. I intend no harm.”
Iranian officials have played down the encounter, but administration officials say they believe that Iran was trying to provoke the United States on the eve of the president’s visit to the Middle East. Mr. Bush said pointedly on Tuesday that he would use the trip to remind American friends and allies in the region that Iran poses a danger.
“I’m going to remind them what I said in that press conference when I sat there and answered some of your questions,” Mr. Bush said.
“Iran was a threat, Iran is a threat, and Iran will continue to be a threat if they are allowed to learn how to enrich uranium,” he added. “And so I’m looking forward to, you know, making it clear that the United States of America sees clearly the threats of this world, and we intend to work with our friends and allies to make that part of the world more secure.”
Mr. Bush made his comments, his first on the event, during an appearance intended to put a spotlight on the first anniversary of his speech announcing a troop buildup in Iraq.
After conducting a videoconference with combat commanders and members of civilian “provincial reconstruction teams,” he sounded upbeat about progress in Iraq, saying that 2007, particularly the end of the year, had been “incredibly successful beyond anybody’s expectations.”
Mr. Bush has repeatedly said he will not tolerate a nuclear-armed Iran. But his efforts to convince the world that Iran is, in fact, a nuclear threat, have grown more complicated since the release of a new National Intelligence Estimate, or N.I.E., that concluded that Iran had abandoned its efforts to enrich uranium.
Mr. Bush conceded that the report had complicated his efforts. “One of the problems we have is that the intelligence report on Iran sent a mixed signal,” he said.
Mr. Bush will visit three Gulf states — Kuwait, Bahrain and the United Arab Emirates — during his stay in the Middle East. Experts on Iran said the episode in the Strait of Hormuz gave Mr. Bush an opening to press his message that Iran is a danger.
“I think he’s realized that a lot of the international steam on Iran has been lost in the wake of the N.I.E.,” said Michael Jacobson, an expert on Iran at the Washington Institute for Near East Policy, a research organization in Washington. “I think he’s doing what he can to try to refocus the international community on the dangers that Iran poses.”
The video may also help Mr. Bush make his case.
While it is difficult to judge exact distances, Pentagon officials said at least one Iranian boat came within about 200 yards of the Hopper, a distance that could have been covered in a matter of seconds at top speed.
In the tape, horns are sounded, and the American crew member also radios to the Iranian vessels: “Inbound small craft: You are approaching a coalition warship operating in international waters. Your identity is not known. Your intentions are unclear.”
The American warns the Iranians that if they do not “alter course immediately to remain clear,” then the small boat will be “subject to defensive measures.”
Pentagon officials said the commander of the Hopper had been on the verge of issuing an order to fire on the Iranian speedboat with a high-powered machine gun when the Iranian craft suddenly steered away.

US almost opened fire on Iranian boats, Pentagon says
By Kim Sengupta Published: 08 January 2008
The US and Iran have engaged in their most serious military confrontation in recent times, with American warships on the verge of opening fire on gunboats of the Revolutionary Guards which had threatened to blow them up.
The incident, details of which were confirmed by the Pentagon yesterday, came on the eve of President George Bush's visit to the Middle East and follows claims by US commanders in the Persian Gulf that Iran was trying to destablise the region.
The three US ships and five Iranian vessels clashed in the early hours of Sunday in the Strait of Hormuz, the stretch of water where a 15-strong British naval party was taken hostage by the Revolutionary Guards last year. American officials at the time said that a similar attempt to seize their personnel would have led to immediate retaliation.
The Pentagon claimed the American ships were in international waters, although the demarcation of the border between Iran and Iraq on the Strait remains a matter of dispute. An American official said that the Revolutionary Guards boats "swarmed" to within 200 metres of the USS Port Royal, destroyer USS Hopper and frigate USS Ingraham and the Iranians transmitted a radio message saying: " I am coming at you; you will explode in a couple of minutes".
The captain of one of the US vessels was "literally moments away" from giving the order to open fire when the Iranian vessels moved away, American officials said. The Iranian boats were observed before the stand-off, dropping "small white containers" into the water, the Americans said, an exercise for laying mines.
"It is the most serious provocation of this sort that we've seen yet," a Pentagon spokesman said. "There were no injuries, but there could have been." The White House has warned Tehran that such "hostile action" will not be tolerated.
The US State Department spokesman, Sean McCormack, said: "The United States will confront Iranian behaviour where it seeks to do harm either to us or to our friends and allies in the region. There is wide support for that within the region."
In Tehran, a Foreign Ministry spokesman, Mohammad Ali Hossein, confirming that there had been a confrontation, added: "The example that happened at the weekend was similar to previous cases and is an ordinary and natural issue."
Tensions between Washington and Tehran over Iran's nuclear programme continue, and both the Americans and the British have repeatedly charged the Iranians with supplying explosives which have been used to kill coalition troops in Iraq.
In October, the US accused the Revolutionary Guards of trying to obtain chemical and biological weapons and its Quds force of supporting terrorism. The following month, the US military claimed that the Revolutionary Guards have taken over operations in the Gulf from the Iranian navy.
One aim of President Bush's visit to the region is expected to be to reassure Gulf states nervous about Tehran's intentions of continuing US support. American officials have noticeably ratcheted up their rhetoric about Iran. At a security conference in Manama, Bahrain, last month, Admiral William J Fallon, head of the US Central Command, said: "Their behaviour has really been a problem ... to the extent it destablises the region, which it does."
Vice-Admiral Kevin J Cosgriff added that the main concern was Iran's " threat to attempt to close the Strait of Hormuz to normal merchant marine traffic ... mines, coastal cruise missiles, tactical aviation, submarines and ships could be used to close the waterway." An American-led multinational naval force of 45 vessels, including British ships, patrols the Gulf.
More than 45 per cent of the world's oil trade flows through the Strait. After revelations about the confrontation between the Iranians and the Americans, the price of crude jumped 49 cents to $98.40 a barrel before slipping back later.
The battleground
* Although only 34 miles wide at its narrowest point, the channel between Oman and Iran is of massive strategic importance, providing a crucial import and export route for world energy supplies.
More than 20 per cent of the world's total oil supply passes through the strait, with tankers carrying the liquid riches of Saudi Arabia and other Gulf states on to the Gulf of Oman and the Arabian Sea.
If the Strait of Hormuz was blocked, only a small fraction of the 17 million barrels of crude that travel along it every day would be able to pass along alternative routes. Iran has threatened to impede trade through the waterway if attacked, which would lead to a massive rise in energy prices.
Ownership of the region's waterways is disputed, particularly near the southern borders of Iraq and Iran, and hostile military action is not unheard of: last March, Iran seized Royal Navy personnel accused of trespass in Iranian waters. The channel is also used to transport heavy armour and military supplies to Iraq and other Gulf states.