The Logic of Strategy in July 2020

Reuters: Vietnam imports first U.S. coal shipment, state coal miner says

Vietnam has imported the first shipment of coal from the United States, state-owned coal miner Vinacomin said on Wednesday.

From 2014: The Logic of Strategy: Yuan Devaluation and the Road to Trade War

Russiagate Was Bootloader for China Trade War

Back in February 2018 I wrote: Russia Collusion Narrative Dead, Long Live Chinese Collusion!

The Russians sowed discord mainly by being present, allowing the creation of a false Trump-Russia collusion narrative. Basically, they got America to shoot itself in the face. The return on investment is incredible, particularly if FBI and DOJ officials eventually get indicted for turning government agencies against a political opponent and sitting president.

Now with Russia collusion out of the way, make way for Chinese collusion and trade war. Instead of an intrapolitical battle, Chinese collusion will be a bipartisan effort.

In a worst case Russiagate scenario, high-level government officials engaged in the greatest scandal in American history and potentially crossed the line into sedition/treason once President Trump was in office. In a best case, the spying on domestic political opponents was legal and won't result in a tit-for-tat escalation in using domestic spy agencies against political opponents. One thing we know for sure, however, is the Russiagate included extreme anti-Russian propaganda and was very jingoistic. The left was whipped up into a patriotic xenophobic fever, including all the major media outlets. When China came on the scene as the issue, the left was primed. With much of the right in agreement, anti-China narratives have almost no opposition.

Here's "The World is Flat" globalist cheerleader Thomas Friedman agreeing with Steve Bannon:
Globalists and nationalists also agree on anti-China. Globalists and American imperialists are anti-China because it is a competitor to the United States' position as global hegemon. Russia is not a competitor without China. China can be a competitor without Russia in the future. If it comes to it, they'll start WWIII in the Pacific to maintain U.S. hegemony.

Have you noticed anti-China stories getting more attention lately? Here's the latest: China is killing the ozone layer.

ZH: Scientists Expose World-Killer: Where Ozone-Destroying Chemicals Are Coming From

After much speculation, the whereabouts and magnitude of these harmful emissions has been confirmed in scientific research. As earlier reporting in The New York Times had already suggested, they seem to be coming from the northeast coast of mainland China.

...Between the periods of 2008-2012 and 2014-2017, in fact, CFC-11 emissions increased here by roughly 110 percent.

...These violations are likely going unreported because even though CFC-11 is illegal, it is also one of the cheapest ways to produce new foam insulation in refrigerators and buildings.

The Anti-China narrative is out of the box and has a life of its own now.

As for the Logic of Strategy: Toshiba Joins Huawei Blockade, Suspends Hard-Drive Shipments

Toshiba is at least the third major Japanese supplier to cut ties with Huawei, the other two being smartphone chip-maker ARM and Panasonic, which also supplies parts for Huawei phones. Japan's enthusiastic support of the White House's crackdown on Huawei shows that the world's third-largest economy has picked a side in the battle between China and the US, potentially risking the trade war (and possibly even a hot war) across the East China Sea (and perhaps more riots).

No surprise Vietnam is on board too.

February, Nikkei Asian Review: Huawei remains 'confident' of winning Vietnam 5G deals
April NAR: Vietnam's top telecom to adopt 'self-developed' 5G tech

The key word in the "Logic of Strategy" is logic. Once an actor tips the first domino, other players will follow because there is a logical progression through the decision tree. The world was waiting for someone to make a move. President Trump moved the U.S. in a new direction and suddenly other nations are following. Read my post based on the book if you haven't, the extensive review linked in that post, or the book itself. The U.S. is yelling at its very close UK ally about Huawei, but Japan and Vietnam need no prodding because the logic speaks for itself.

Finally, the narrative of trade war grows on both sides. ZH: iPhones Are Now "Embarrassing" In China As Trade War Deepens.

In March of last year I posted, Prepare for Smashed Up KFCs and McDonald's

If I was running a visible American brand in China, I'd be thinking about lowering my profile right now. China could unleash nationalist riots in response to a trade spat. I don't know that they would do that, but a serious trade dispute with the U.S. would be more significant than Japanese history textbooks. I suspect it would be more negative than the South China Sea ruling by the Hague in 2016 (see below).

I'm not sure what Apple could do given the prominence of its brand. This trade war could be far from over and any prominently "American" brand is at risk.

Logic of Strategy: New Crisis as U.S. Identifies China as #1 Threat

Zaobao: 学者李晓：中华民族到了新危险时候

Dark clouds are forming over Sino-US trade, Li Xiao, dean of the School of Economics and Finance at Jilin University, said that for today's China, the biggest crisis is not a trade conflict, but the world's most powerful hegemonic state has made public that it thinks of China as its main opponent, "The Chinese nation is in a new and dangerous time."

According to the WeChat public number of Jilin University School of Economics released on June 30, Li Xiao gave a speech entitled "National Destiny and Personal Destiny" at the 2018 graduation ceremony of the Institute. What is the essence of China-US trade war and what China should learn? Kind of lessons to present views. He said that the trade war launched by the United States is the most humiliating behavior of the United States against China. "But there is nothing we can do because we are too dependent on the US market."

He goes on to explain the Logic of Strategy and why those focused on GDP are seeing only a part of the picture:

Li Xiao pointed out that the more important national strategic interest of the United States is to contain China's rise. He believes that the purpose of Trump's trade war is probably not only in the trade field, but also in "Made in China 2025", more likely to force China to make greater concessions through trade wars, and it is likely to force China to be more open in monetary finance.

Li Xiao said that for the average country, they will lose a trade war on economics. "But for big countries, the key is who can afford to lose."

He pointed out that historical experience has proved that the contest between big powers, especially the "boss" and "number two", is so much an economic act, not for economic benefit, but an international political act for national benefit. International political competition is not a "positive game", but a "zero-sum game." The political logic is "as long as I win, defeat the opponent, sacrifice no matter how much, do not hesitate."

This is the Logic of Strategy as explained by Luttwak. I laid out my brief review of his book and combined it with my expectation of yuan devaluation, political change in the U.S. that would favor manufacturers and a retreat on free trade, back in 2014: The Logic of Strategy: Yuan Devaluation and the Road to Trade War.

China's expansion (and claims of territory) into the South China Sea is driving the logic of strategy. China is pushing many nations towards the United States. Australia, for example, has been more proactive than the U.S. when it comes to regional security. Many economists correctly criticize President Trump for poorly implementing tariffs, offending long-term allies such as Canada and the United Kingdom. (#AnglosphereNow) However, they miss the question of sovereignty for nations such as Australia, Vietnam and the South China Sea nations. The Logic of Strategy argues they should voluntarily slow their GDP growth by reducing trade ties with China, thus also slowing China's growth and its military modernization. The greater goal is protecting national sovereignty.

Trade is no longer a purely economic issue beholden to free trade ideology, but one component of an overall national security strategy. On the one hand, by blowing up the TPP and shifting U.S. policy, President Trump has made as Pacific alliance less likely, but on the other hand, his direct confrontation with China has advanced the issue. Using Europe as a counterpoint, many NATO allies are upset at President Trump's demand that they increase their military and monetary contributions to NATO. They don't want to increase military spending and don't like that the United States will either reduce its military presence or find other means of extracting monetary support. However, in the Pacific there is a desire for greater security cooperation. The best way for Pacific nations to reduce trade tensions with the United States will be through greater military and financial support for joint security.

All that said, I think the scholar and many others assume far more planning than really exists. The Logic of Strategy isn't planned. It is emergent order based on strategic goals and the desire to avoid a war between great powers. It is based on interest groups, shifting social mood, and regulatory capture. A switch wasn't flipped in 2016, rather it was a tipping point when emerging trends converged. Previously, China policy was mainly decided by the Treasury and Commerce Department, which had been wholly captured by Wall Street. The 2008 financial crisis was the peak of Wall Street's political power as it extracted trillions of dollars from U.S. taxpayers through the federal budget and Federal Reserve. In short, Capital drove China policy. It wanted access to new markets and cheap labor. Losing in the debate were manufacturers, Labor and national security.

Manufacturers and labor unions have opposed free trade (or at least demanded concessions) for decades. American workers reached the breaking point after the 2008 crisis as opioid addiction burned through hollowed out communities. The Defense Department had long identified China as a threat, but other concerns such as Russia and jihadists gained the most attention. Economists such as Steve Keen exposed the flaws in free trade ideology. Falling social mood was the final piece of the puzzle that created the impetus for action. The United States had its own internal Logic of Strategy as manufacturers, labor unions, American workers in Middle America, the defense department, anti-Wall Street activists on Left and Right, foreign policy and economic dissidents converged.

Overseas, the same logic will play out. Nations such as Vietnam can experience faster economic growth at the cost of falling into China's sphere of influence, or they can accept slower economic growth in exchange for greater sovereignty, particularly if a more self-interested United States continues shifting foreign policy in a pragmatic direction.

Back to Li, he sees a Cold War unfolding:

Li Xiao pointed out that the biggest crisis facing China is not a trade conflict, but the United States, the most powerful hegemonic country in the world, and has publicly regarded China as its main opponent. "In the peaceful period, using economic means to launch China. The comprehensive containment and attack, while also using its superior global military strength, is increasingly deterring China, creating peripheral conflicts and even crises to interfere with our peaceful development process."

Li Xiao believes that the Sino-US trade war is "essentially a national war" and will not be resolved in the short term. Taking the US-Japan trade dispute as an example, he pointed out that from the 1960s until the end of the 1980s, the long trade dispute between the United States and Japan played for 30 years. As a result, the Japanese bubble economy collapsed and fell into a "lost 20 years," and the conflict between China and the United States A big country game, I am afraid it will take at least 50 years or even longer. "Everything today is just the opening of a historical drama."

He mentioned that some Chinese media are "extremely irresponsible and unprofessional, and often use a narrow nationalist sentiment to fool people's feelings."

Li Xiao analyzed that when China is full of blind arrogance, the Sino-US trade war, especially the "ZTE event", is a strong clearing agent. In addition to exposing the huge technological gap between China and the United States, "it makes us even more I am soberly aware that China’s economic growth model has been unsustainable so far, and we must carry out more profound reforms in terms of economic structure and economic operation mechanism."

Li Xiao’s speech sparked a heated discussion on the Internet, which was called “the most sharp speech of the year” and “a public speech that was shocking.” Many netizens said that Li Xiao’s point of view is “pertinent” and “in-depth”, and that “this is definitely not an alarmist, the Chinese must be vigilant”.

However, some netizens do not agree with Li Xiao’s point of view, saying that this is “risk-talking” and that “the analysis is incomplete and the economic resilience is not considered”.

China May Use Offshore Banking to Secure South China Seas

China considers killing two birds with one stone, turning Yongxing Island (Woody Island) into an offshore financial center. Aside from the economic benefits, it would secure China's political claim on the South China Sea.

21st CBH: 南海岛礁能成为百慕大式离岸注册地吗?

Two of the country this year, the South China Sea once again become the focus of the parties. NPC press conference, spokesman Fu Ying was asked three times to the South China Sea. There are also proposals for motions involving the South China Sea. Two of the most notable of the CPPCC National Committee, deputy director of the Foreign Affairs Committee, submitted Han Fangming "Yongxing Island will build a Bermuda registered offshore" proposal.

Registered offshore, through low-tax policy or tax-free, loose financial regulation and open management program, set up to attract foreign companies registered offshore companies. Proposal suggested that the central and Hainan through policy and legal support, allowing the Xisha Yongxing Island, the development of offshore financial services, and thus promote the development of the South China Sea and the central economic zone in the South China Sea strategic layout.

I believe that, and regardless of the specific content of proposals, one on its own logic - the economic development of the island as a means of distribution of the South China Sea should be able to provide new ideas for breaking the increasing complexity of the South China Sea game.

In fact, economic development has become the main means to safeguard the sovereignty of the South China Sea. From the initial joint development of South China Sea oil and fishery resources initiatives, to the exploration of deepwater oil and gas fields, economic instruments are to highlight its significance. The difference is that the role of fisheries and oil and gas development is mainly reflected in the sovereign sea waters especially controversial declaration, and the development of offshore financial sector would help to strengthen the management of the actual controlled islands.

Although China has already realized over the Paracel Islands and administrative development, its economic function has often been watered down. A real problem is that China's legitimate military and civilian deployment in these reefs, likely to cause unnecessary tension in neighboring countries, and become some of the United States, Japan and other countries outside the South China Sea issue of multilateral excuse. In this context, clearly some of the reefs controlled economic development function, can also be regarded as reducing misjudgment, an effective means of reducing external intervention.

I doubt outside parties will be mollified by China securing its interests, but it undoubtedly strengthens China's claims.

There are drawbacks though. Foreign investors will be wary of China's claim on the islands and China's legal system is unable to deal with offshore banking at this time:

Security Capital is also an important factor. The vast majority of offshore centers away from geopolitical disputes, and maintaining political stability through effective government. In contrast, the South China Sea tensions in the South China Sea islands and reefs will hinder the development of the financial industry has brought. This is why a lot of people are not optimistic about Yongxing Island Offshore Financial reasons development. Of course, this view underestimates the Chinese South China Sea as a "real master" determination to maintain peace and stability on the South China Sea. However, for Yongxing Island as an international financial capital registration, we also need to make some effort to highlight Yongxing Island demilitarization of use and so on.

In addition, the legal system, now known global offshore centers use the Law Department. This system was considered for a higher degree of financial innovation tolerance, and ease of integration with Western multinationals legal system. And China, as in civil law countries, the ability to "compatible" an offshore centers?

In short, the Yongxing Island, the reality limited by a variety of conditions, even if the island's offshore area can be entered substantive stage of development, it is difficult to attract transnational capital in the short term. However, we could have based on their own business, and then through a series of innovative laws, the financial system, reducing barriers on legal convergence.

Of course, both can develop from the Yongxing Island offshore financial business, the South China Sea policies are ultimately in order to safeguard China's sovereignty and territorial integrity. Under this theme, we might open my mind, bold innovation, and explore more effective path of development and rehabilitation of the South China Sea.

PBOC Chief Economist: Exclusion from TPP Could Cost 2.2% of GDP

iFeng: 央行首席经济学家：不加入“大TPP” 会因此损失2.2%的GDP

Simulation results show that, with China's accession ("big TPP") compared to the scenario of China not joining, China will lose 2.2 percent of GDP. TPP is assumed that the transitional period of four years, the average annual opportunity cost in this stage of slightly more than 0.5 percent of GDP. If China does not join a number of other countries will also result in the loss of opportunity cost. For example, South Korea, Japan and other countries with close trade China will bear the equivalent of 1.5 percent of GDP and 0.6% of the GDP of the opportunity cost, while the European Union, Singapore, Vietnam and other countries and regions will benefit because the Chinese do not join.

...If the 16 potential member states have joined the Trans-Pacific Partnership Agreement, the Agreement (the "big TPP") implementation will boost GDP by most member states, which benefit from Korea's GDP accumulated 2.2%, Vietnam 2.1%, China 2.0 %, Japan 1.3%, Australia 1.2%, US 0.3%. Instead of "big TPP" countries will suffer some negative impact, which will also involve non "big TPP" countries in the corresponding free trade negotiations. On the industry level, the main beneficiaries of TPP, including Vietnam, Thailand and China's textile and garment industry, Australia's food processing industry, as well as China and South Korea's electronics industry. Japan and South Korea in the agricultural sector, the United States and Australia textile, garment industry will suffer a greater negative impact.

Related: The Logic of Strategy: Yuan Devaluation and the Road to Trade War

The ultimate containment strategy for the U.S. and regional partners (who all have access to U.S. markets) then, is an economic strategy. Yes, these nations will suffer slower growth, but they will retain their sovereignty.

South China Sea Naval Arms Race Underway

Strategy Page: Background to Asia's Expensive Naval Arms Race

Using land reclamation techniques, China has constructed "territorial facts" in the South China Sea by turning uninhabitable "features" like rocks, shoals and reefs into islands. From these fabrications, China projects economic claims and military power.

...Hence, the warship binge. StrategyPage provided very approximate but illustrative numbers. In the next 20 years, Asian nations will buy some 400 major warships and 1,000 small patrol vessels and support ships. At least 80 (perhaps 100) of the major vessels are submarines. China loves subs. Chinese subs trail U.S. ships. But worried neighbors know that their diesel subs can ambush Chinese ships trying to protect, well, Fiery Cross.

TPP Aims to Slow China's Growth Rate

Exactly the strategy outlined in Luttwak's The Rise of China vs. the Logic of Strategy

WSJ: Fabric of a Trade Deal: U.S. Asks Vietnam to Cut Out Chinese Textiles

To that end, American trade negotiators are demanding that Vietnam, a major garments exporter, reduce its reliance on textiles made in China, which isn’t part of the trade pact, to get preferential market access to the U.S.

The goal is to create new markets in Vietnam for the U.S. textile industry, which employs a quarter of a million Americans and exported $20 billion last year.

“The U.S. and Mexico are especially large textile producers,” said Eliza Levy, a spokeswoman for the National Council of Textile Organizations. “Vietnam would simply have to shift its sourcing of yarns and fabrics from China to the U.S. and Mexico.”

...U.S. fashion brands oppose this approach, which they say ignores the complexities of global supply chains. Vietnam is the second-largest exporter of apparel and footwear to the U.S., behind China, with $13.1 billion in sales last year. But the country only produces enough fabric to meet a fifth of its needs and buys about $4.7 billion worth from China, or about half its total annual imports.

They'll adapt to new complexities.

WTF: Meat From the 1970s Smuggled Through Hong Kong

SCMP: Meat From the 1970s Smuggled Through Hong Kong

This isn't the first time.

Telegraph: Chinese police discover chicken feet for sale 46 years past sell-by date

U.S. Derides China's Sandcastles

US warns China over provocative ‘sandcastles’ in South China Sea

Recent satellite images suggest that China has made rapid progress in filling in land in contested territory in the Spratly Islands and in building an airstrip suitable for military use and that it may be planning another.

“As China seeks to make sovereign land out of sandcastles and redraw maritime boundaries, it is eroding regional trust and undermining investor confidence,” Blinken said on Wednesday.

“Its behavior threatens to set a new precedent, whereby larger countries are free to intimidate smaller ones, and that provokes tensions, instability and can even lead to conflict.”

China should invite the seasteading people to go live there. They'll have far more productive use of the land, foreign civilians on their soil and a stronger claim of sovereignty over the man made islands.

Is the Seasteading Dream Really Dead?

U.S. May Scuttle Free Trade Deal And Send Ships To South China Sea

The failure of the TPP may mark the high water mark in this era of globalization. The next step will be an anti-China economic policies designed to cut China's military expansion. Community and identity have supplanted economics in most domestic Western politics. Sovereignty will rise above economics in international relations, as laid out in The Rise of China vs. the Logic of Strategy.

U.S. Military Proposes Challenge to China Sea Claims

The U.S. military is considering using aircraft and Navy ships to directly contest Chinese territorial claims to a chain of rapidly expanding artificial islands, U.S. officials said, in a move that would raise the stakes in a regional showdown over who controls disputed waters in the South China Sea.

Senate Democrats gang up to delay fast-track trade bill

U.S. Senate Democrats delivered a major blow to President Barack Obama's trade agenda on Tuesday, blocking debate on a bill that would have smoothed the path for a Pacific trade pact.

...The failure to garner the necessary votes came after pro-trade Democrats, including Senator Ron Wyden of Oregon, insisted that fast track be bundled together with three other trade bills, including one that would impose import duties on countries that manipulate their currencies for unfair trade advantage.

Who's that?

Logic of Strategy: Vietnam Seeks Philippine Alliance to Stop Chinese Aggression

Vietnam asked Philippines to form pact to counter China, Aquino reveals

A new “strategic partnership” being negotiated between two states fending off China’s maritime claims in the South China Sea was suggested by Vietnam, Philippine President Benigno Aquino has revealed.

It had been widely assumed that the proposed pact between Vietnam and the Philippines was initiated by Manila, which has taken a high-profile stand against China.

In an exclusive interview with the South China Morning Post, the Philippine president said China’s moves in the South China Sea were even more alarming than a year ago, when he likened global inaction to China’s push to appeasing Hitler – comments that angered China.

In the interview last Thursday, Aquino stood by his remarks. Pulling out a map of the South China Sea, he said: “Perhaps it’s even worse today.”

...Asked to assess China’s possible reclamation of more reefs and shoals in the disputed waters, Aquino said: “I will tend to sound like a rabble rouser. Can I just say, I hope not.”

“I don’t see the logic of their move. Therefore I hope that logic and rationality prevail. Since there is no gain, why embark on something like that?”

He said the world was watching China.

...“Perhaps, we should also focus on the fact that, to a large degree, this is the only contentious issue between our relations. And removing that is really, I think, a worthwhile goal.”

It may be the only contentious issue, but it is a big enough issue to blow up everything else should social mood take a turn for the worse.

China Will Register the Spratly Islands

There is English coverage here:

China’s new real estate registration system will cover disputed waters and islands in the South China Sea, according to an exclusive report from the Beijing-based Economic Observer.

Citing sources from the newly established Real Estate Registration Office of China’s Ministry of Land and Resources, the report said all territory regarded as part of China will be subjected to the new land rights system, with real estate owned by enterprises and residents living on seas and islands within Chinese territory afforded legal protection.

Specifically, the new land registration regulations stipulate that “real estate” refers to “land, sea and subsidiaries houses and other buildings, structures and forests, trees and other fixed objects.”

The rules also provide that anyone seeking to register real estate rights in the sea for the first time will need to submit a sea boundary map and project approvals, as well as relevant contracts, grants and certificates.

It has been confirmed that Sansha, a prefecture of China’s southernmost Hainan province established in 2012, will be included in the new scheme. Sansha administers, either actually or nominally, several island groups and undersea atolls in the South China Sea, comprising the Paracel (Xisha) Islands, Macclesfield Bank (Zhongsha) and Spratly (Nansha) Islands.

独家：南沙群岛等海岛将启动不动产登记

June 16, reporters from the Ministry of Land Resources (hereinafter referred to as "Homeland") Real Estate Registration Bureau: Department of Homeland way through the data exchange interface to achieve approval of real estate registration, real-time exchange trading and registration information sharing As an important part of real sea island will also be involved in the registration of real estate construction. By then, businesses and residents in the waters of the island's private estate will be protected by law. As China's most southern location, the maximum total area (including the sea area), the smallest and least populated land area three Shashi Real Estate Registration will also work. Shashi is a prefecture-level city of Hainan Province, one of three (the other two of Haikou, Sanya), has jurisdiction over the Paracel Islands, the Dongsha Islands, the Nansha reefs and waters.

The first Chapter 2, "Real Estate Registration Ordinance" Show: "real estate of this Ordinance, including land, sea and its subsidiaries houses and other buildings, structures and forests, trees and other fixed objects.

"Real Estate Registration Ordinance" Chapter V Section 42 Show: "The parties apply for the right to use the waters of the initial registration shall submit cases of sea boundary map, necessary items approved by the sea or sea use rights grant contract and pay using gold certificates and other waters . "

The two started the registration of real estate registration content of marine areas, "shot", Hainan Province Land and Resources Department, said the environment, to achieve registration approval Sea islands, trading and registration information is shared in real time interoperability work.

Reporters noted that the current registration of real estate rights registration mode will use the German model, complex patterns Australia Torrens registration mode and France deed registration mode. Specifically, land registration authority to review the documents of land registrant applications submitted upon registration enters compulsory registration status, will be awarded the right credentials, cadastral maps, and finally issued a "real estate registration book", such a step, once executed in three Shashi , real estate registration Paracel Islands in the sand, the Nansha reefs and waters will be fully integrated real estate registration information platform.

June 12, from land and resources, government and university housing construction land registration researcher, agriculture, forestry, marine and other common information platform focusing top-level design of real estate registration, property registration and registration information management platform for query-based system will be completely in 2018 achieved. Registration of real estate property will protect the waters of the island's sea island residents, property rights and laid a solid foundation for the development and construction of the waters of the island.

Meanwhile, reporters learned, registration requires careful study of marine waters, so they need from the administrative area of ​​real estate registration fees, registration information to extract the appropriate use of income funds, real estate registration establish a compensation fund to be used to advance the registration errors for damages caused to others compensation. Specific extraction ratio compensation fund of real estate registration, use and management by the financial department of the State in conjunction with the competent departments of land and resources separately, but such a move would keep the waters of the island's real estate registration accuracy.

Social Mood in Europe, Russia & SE Asia

Russia wants its own 'straight' Eurovision

Lawmakers in the Kremlin-controlled parliament picked up on swelling outrage in the socially conservative country at Conchita Wurst's weekend triumph by proposing a Russian-based contest in which family values prevail.

"The last Eurovision contest's results exhausted our patience," Communist Party deputy Valery Rashkin told the Interfax news agency.

"We must leave this competition. We cannot tolerate this endless madness."

Rashkin said he would push for the creation of a "Voice of Eurasia" songfest instead, which would primarily group nations from the former Soviet Union.

It was a suggestion picked up quickly by advisers to Belarus President Aleksander Lukashenko - a ruler who has overseen his isolated country for 20 years and was once branded by Washington as the last dictator of Europe.

"Conchita Wurst's Eurovision victory symbolizes the complete collapse of the European Union's moral values," the country's advisory Slavic Committee said in a statement.

"We do not need Europe!"

This shows how far along things have gotten in the battle between the post-Christian West and the increasingly Orthodox Russia. Culture has truly become a weapon of war, similar to how in Nigeria, education of girls has become a weapon. The Islamic reaction is different from the Russian reaction because the Russians are playing the game at the level of state. Russia kicked out US-EU front groups and the anti-gay propaganda law is designed to keep these groups out. In contrast, the Islamists use targeted violence.

Behind it at all is a direct state vs state confrontation between the US and Russia, but on the surface it appears as a cultural battle. There is no ideological war taking place (or if there is, it is the American government that is pushing ideology, not Russia), but culture is being used to whip up anti-Russia sentiment in the West, which plays into the current social mood. People will look for an enemy and at this point, it appears that enemy is Russia. The target of public anger can shift quickly though, and if social mood declines, one can only hope that Russia is no longer the target because violent conflict, internal or external, is more likely in the coming years as social mood declines.

Vietnamese mobs ransack foreign factories in anti-China violence

Yue Yuen Industrial, the world’s biggest sports shoe maker, which supplies Nike, said it was not affected but had suspended production in Ho Chi Minh City as a precaution. Li & Fung, the world’s biggest sourcing company, said some of its suppliers in Vietnam halted production on Wednesday as a precautionary measure.

On Wednesday evening, the industrial zone’s management said police and security guards had “re-established security control”. It said 99 tenants had been hit by the protests and that four Chinese and Taiwanese factories had been set on fire.

The attacks, in a country like Vietnam whose economic strategy is pinned to foreign investment, highlight the effect of a spat between China and Vietnam over disputed parts of the South China Sea.

More here: Vietnamese Mob Burns Foreign Factories In Anti-China Riots (21 Dead, 90 Injured)

A loss for Vietnam, China or both? In The Logic of Strategy: Yuan Devaluation and the Road to Trade War, I mainly focused on the currency, but the main point of Luttwak is that slowing China's economy should be the main strategic goal of any nation that is worried about China's rise and that this can be done peacefully by enacting policies that also one's own economies—although in the case of a trade deficit nation like the U.S., restrictions on trade can boost GDP in the short-term. The U.S. might enjoy faster growth for much longer than a presidential term, since the loss of competitiveness might take a decade or more to set it, which could make it a very attractive twofer policy for American president.

The mob reaction in Vietnam is neither peaceful nor logical, but it does move events in the direction of reducing economic growth by disrupting the global supply chain because, if Vietnam can riot, why not Malaysia, Indonesia or the Philippines, all nations with similar maritime disputes? To this point, no nation has talked openly about trade sanctions against China, but logically that has to be a consideration for nations that cannot hit China militarily. It can be done in indirect ways, such as allowing riots (as China did against Japan) or shifting domestic policies, and it can be done directly.

Political and military tensions are going to add to any economic slowdown in the region, and any slowdown will lead to more political and military tensions. China no doubt recognizes this potential threat, which is why domestic economic reform is paramount.

China Also Fueling Vietnam Real Estate Market

Aside from Sydney, Vancouver and Palo Alto there is also Ho Chi Minh City.

The strongest capital flow to real estate sector is from China

The investor of an apartment project in District 2, HCM City, revealed that he sold 200 apartments within a short time, despite the fact that only the foundation of the building has been completed.

How could the investor sell so many apartments under the current economic climate, with the real estate market still hibernating with very few successful transactions? Who were the buyers of the apartments?

The answers to the questions could be found at a meeting between the investor and the clients. Of the first six clients, two were foreigners. One of the two said he was from Taiwan. He bought five apartments. The other, from Singapore, bought three.

One could see in the list of customers of a resort real estate project in Da Nang that prior to 2012, the buyers were mostly from Hanoi, the northern provinces and HCM City. However, things have changed notably in the last two years. The real estate developer realized sales of $12 million from early 2013 to the end of the first quarter of 2014, and most of the buyers were from China, Hong Kong, Singapore and Macau.

These are just a very small part of the huge capital that investors from China and the Chinese speaking community are bringing to Vietnam. Analysts are noting that something which no one imagined before is coming to pass: China is becoming the biggest funding source for the Vietnamese real estate market.

Third Attack in Two Months on Rail Station

Social mood in China is falling: internal conflict is on the rise with the third attack on a rail station in the past two months, while rhetoric aimed at China's neighbors also intensifies. These tensions will only grow if the economic slowdown accelerates.

Six wounded in knife rampage at Guangzhou Railway Station

Chinese media threatens Vietnam with a ‘lesson it deserves’ over oil rig row

China should give Vietnam a “lesson it deserves to get” if Hanoi ratchets up tension in the South China Sea, an aggressive editorial in state-run media said on Tuesday.

The editorial in the Global Times newspaper comes after Vietnam reacted furiously to a decision by Beijing to move a deep-water drilling rig into disputed waters for the first time.

China Ramps Up Military Spending; Move Will Strengthen Anti-China Alliance

In The Logic of Strategy: Yuan Devaluation and the Road to Trade War, I look at the economic angle and Edward Luttwak's book, The Rise of China and the Logic of Strategy. One of his points was that a major military buildup by China is alarming to its neighbors and sending them into the arms of the United States, to the point where they are prodding the U.S. to play a role in the region.

This latest news means there will be no easing of tensions.

China's Xi ramps up military spending in face of worried region

The government said it would increase the defense budget by 12.2 percent this year to 808.23 billion yuan ($131.57 billion), as China seeks to develop more high-tech weapons and to beef up coastal and air defenses.

Will the United States eventually decide that the way to slow Chinese military spending is to slow the Chinese economy? As I mentioned in the prior post, there are growing economic arguments against free trade. Trade deficit nations such as the U.S. also benefit in the short-run from trade restrictions because it means the domestic economy must supply more goods and services. The odds are certainly above zero that a politician will see a way to boost the economy and appeal to nationalism with one policy.

The Logic of Strategy: Yuan Devaluation and the Road to Trade War

There's an excellent post for anyone interested in China: Review of “The Rise of China vs. The Logic of Strategy” by Edward Luttwak. I just finished the book and I don't think I can add much to that complete and thorough review. Read through it to get an idea of the arguments put forth in Luttwak's book, plus a summary of all the players.

If you're lazy, the quick and dirty summary can best be given by a comparison with Germany and England prior to WWI, with China as Germany and the USA as England. Germany was the up and coming power and had surpassed England economically, culturally and academically. What got Britain very nervous was Germany's decision to build a large navy. England responded with a new ship, the dreadnought, and with a diplomatic flurry to move enemies into the neutral or friendly category. The result is well-known: although eclipsed in many areas, British superiority in diplomacy and war defeated Germany twice.

China's rise was similarly peaceful, but China's aggressive military buildup and claims to South China Sea territory have all of the surrounding nations on alert. Due to the advent of nuclear weapons, logic dictates that total war will be avoided in Asia. However, the U.S. and a group of allies could effectively deter Chinese aggression in the Pacific, and even though the U.S. has not sought out a coalition, Chinese aggression has pushed Southeast Asian nations (and even Mongolia) into the arms of the U.S. Finally, due to its size and the desire to avoid an outright conflict, the United States has a very powerful weapon if it can overcome the free trade ideology: economic policies designed to slow China's economic growth. Using economic policy, the U.S. could deliver an effective blow to Chinese growth that will keep its military from exceeding U.S. capabilities without requiring a massive buildup in military spending, a policy which would further slow GDP growth in China. If the U.S. and regional economies prefer U.S. influence in the region to that of Chinese influence (and putting aside all ideology, the distant hegemon remains more attractive than the near), they can choose a path of slower economic growth designed to keep China from becoming the dominant power.

The reason for this policy is not a U.S. desire to keep China from rising. Instead, it is China's increasingly aggressive policies in the region that make neighbors nervous. China makes claims to territory based on very loose evidence, such as a map from hundreds of years ago. Using the same logic, Italy could claim all the land formerly held by the Roman Empire or Sri Lanka can claim India (one example given by Luttwak). No one would fear a claim by Italy or Sri Lanka, but imagine Italy was among the fastest growing economies in the world, rapidly building up its military capabilities and it was openly making bold claims to territory. Everyone in Europe, North Africa and the Middle East would be nervous.

There's a talk by Luttwak on the topic of his book:



The "logic of strategy" coincides with social mood and current events. Protectionism is on the rise due to economic factors tied to declining social mood, but Luttwak's book adds a geostrategic grounding for protectionism as part of an economic cold war in the Pacific designed to restrain China's ambitions. Luttwak doesn't delve into economics in his book, but it is very easy for me to imagine the path to protectionism.

There are three U.S. China policies according to Luttwak. The first is the Pro-China Treasury Department. This wing also represents the capture of American government by Wall Street and the financial industry: Treasury doesn't care about manufacturing and pursues a China policy solely almost aimed at profits for Wall Street. The Treasury also represents the idea of free-trade as ideology. Manufacturers have almost no voice in American policy these days.

Next is the State Department, which confronts China in Asia. The State Department is mainly concerned with the "Asia Pivot." It was not U.S. policy to encircle China by forging closer alliances with Southeast Asian nations, rather China's own aggressive posturing pushed these nations into proactive efforts to attract the United States. There are areas where the U.S. was proactive though, such as working to strengthen ties with India.

Finally, there is the national defense establishment. They view China as potentially the main enemy of the future, though this is as of yet undecided. China is a cyber threat and potential military threat. The Defense Department is involved with strengthening regional military ties, such as the naval visits to Vietnam.

Prediction

The protectionists are ever so slowly gaining the upper hand thanks in part to negative social mood. 2008-2009 will probably mark the peak moment for Wall Street and the Treasury Department, even though there is as yet no sign of it in Washington. Changes can be seen in the form of issues such as immigration, which has turned the grassroots of the conservative movement against the Chamber of Commerce and large corporations (due to an attack initiated by the latter against the former). This has pushed the Overton window of acceptable debate among conservatives who can now take shots at big business. There is also the growing libertarian faction pulled together by Ron Paul that supports his son, Rand Paul, that consistently attacks the Federal Reserve and Wall Street. Put it together and it is not hard to envision an anti-Wall Street, pro-manufacturing political consensus emerging. This will cut across party lines, with manufacturing unions pulling in Democratic support if there are specific bills to vote on.

There are also the academic attacks on free trade. Australian economist Steve Keen discusses the work of Dani Rodrick in 1,000,000 economists can be wrong: the free trade fallacies - See more at: http://www.debtdeflation.com/blogs/2011/09/30/1000000-economists-can-be-wrong-the-free-trade-fallacies/.

But there is an obvious fallacy to this neat and plausible argument: To effect specialisation, England has to shift labour and capital from wine to cloth (and Portugal has to do the opposite). Arguably labour can be retrained—a vigneron can become a machinist—but how do you convert wine press into a spinning jenny?

The obvious answer is that you don't. Instead, you sell the wine press and buy a spinning jenny with the proceeds. But because of the introduction of trade, the price of wine in England would have fallen, so that the sale price of the wine press will also fall (economists have modified Ricardo's model to introduce curves where Ricardo had straight lines, so that total specialisation is no longer required and there would still be some wine production in England under the "new" model of Free Trade), while the price of spinning jennies will have risen, given the new export market to Portugal. Some capital is necessarily destroyed by the opening up of trade and it applies in reverse in Portugal as well.

Since capital is destroyed when trade is liberalised, the watertight argument that trade necessarily improves material welfare springs a leak. If economics were a real science, this real-world complication to Ricardo's argument would be considered, but it has never been seriously addressed.

Ricardo also assumed that British businessmen wouldn't uproot their life and open a factory in Portugal. As the real life modern example of free trade has shown, thanks in part to modern travel and telecommunications, that is exactly what happens. Not only does the factory close in America, but the capital follows it to China. Instead of building a new industry in the United States, the entire manufacturing sector is hollowed out. There are small diverse benefits to lower consumer goods prices, but the vast bulk of the gains go to two groups: workers in the destination country such as China, and to the holders of capital, which are mainly the nation's wealthiest citizens. The nation's capital base is sold off or relocated, with the profits going to the top. The median male income is flat since the 1970s in the U.S., with trade playing a huge role (along with the increase in labor supply from immigration and feminism, both of which also benefit the wealthiest Americans who own most of the capital).

With a growing economic case against free trade, a shift in social mood making anti-free trade opinion more popular, plus the loss of political support for the financial sector, free trade will become a centerpiece issue in American politics. The trigger will be one of two factors. One is economic. China's credit bubble isn't going to slowly ride off into the sunset. There will be pain, it is only a matter of where it lands. The path of least resistance is devaluation of the yuan, something I have been looking for here for several years now due to the growth in credit. A target of ￥8 to $1 is a reasonable ballpark figure, with ￥10 to 1 not unbelievable given the rise of the shadow banking sector. The actual number isn't as important as the size of the devaluation: it will likely be large and set off the anti-China arguments that have been growing in the United States. The left and right have their beef with China's economic policies and the right has provided the main rhetorical cover for business. When that goes, there will be a bipartisan push for policies that counteract China's "predatory" currency policies. A Chinese devaluation could be the trigger.

The second factor is geopolitical. Do take the time to read the lengthy review linked above, and/or watch the video. Luttwak's main point is that China cannot simultaneously build up its economy and influence at the same time it builds up its military, and not run into resistance from surrounding states. He cites the Chinese policy on the island disputes as the case in point: instead of increasing China's power in the region, it has pushed Vietnam, the Philippines, Japan and Indonesia into the arms of the United States. An anti-China coalition is building up due to each nation following the logic of China's inevitable rise in power along with the perception of an increasingly aggressive China. China has "tipped its hand" so to speak and these nations are moving preemptively. Due to the nuclear arsenal of the United States and China (to say nothing of Russia's interest in the region), there isn't going to be a major war for survival. This reduces the options for confrontation, with one of the most powerful being economic. If there is a minor military confrontation that is too large to be ignored, the most politically acceptable response will be economic.

Either the economic or the geopolitical event can happen first then, but in time, the two will be seen as inseparable. Once events move in this direction, the logic to continue down the path is compelling.

Anyone can run GDP numbers for the U.S. and China. One simple calculator is here: Catching the eagle. The default is 7.1% GDP growth, 4% inflation and 2.9% yuan appreciation for China. For the U.S., 2.4% GDP growth and 1.4% inflation. With these numbers, China's economy overtakes the U.S. in 2019. If growth is more like the 4% that Marc Faber believes (and the debt growth/gdp growth ratio suggests is correct), China overtakes the U.S. in 2022. Lowering that GDP growth to the 3% low end forecast of Michael Pettis adds one year, to 2023. However, take down the inflation number (due to credit deflation) or factor in a devaluation of the yuan, and China quickly falls behind the U.S. and can "never" catch up. See: China may not overtake America this century after all.

The ultimate containment strategy for the U.S. and regional partners (who all have access to U.S. markets) then, is an economic strategy. Yes, these nations will suffer slower growth, but they will retain their sovereignty. For East Asian nations, a distant hegemon is better than the near one with an appetite for your territory.

Whichever path is chosen, the economic and geostrategic paths will line up. An economic crisis in China will add the economic component to the emerging geostrategic China policy. A geostrategic decision to confront China economically would set in motion an economic crisis that would propel the strategy forward since China would respond in kind. The decision to halt rare earth exports to Japan and the widespread anti-Japanese riots of recent years already show how China will respond. A major confrontation from the U.S. would require an even larger policy response. Luttwak lays out some possible policy choices, starting with small ones such as banning technology transfers in a limited area such a military or telecom. I fully expect that were a Chinese crisis and devaluation to accompany another recession in the United States, the push for tariffs would find a bipartisan majority in the House and Senate.

Yuan devaluation is inevitable as soon as China enters a serious financial crisis. If the government refused to devalue, the nation would go through a 1930s style deflationary Great Depression. China is unlikely to allow the market to take the yuan lower in a panic collapse like a replay of 1997. At some point, it would announce a large devaluation designed to end the selling and the crisis. This will be called a political act in the United States (those who understand the economics will nonetheless spot the political opportunity) and the political push for protectionist policies will be too attractive to be ignored. The United States will retaliate with sanctions and the world will follow. This will put even more pressure on the Chinese economy and lead to a massive rise in nationalist sentiment (either that or anti-CCP sentiment, so expect the CCP to redirect it into nationalism). A chill wind will blow across the Pacific that will last a generation or more.

With Yuan Approaching 6 to 1 Dollar, Factories Leave for Vietnam

China missed it's window of "cost free" reform from 2005 to 2008, when party insiders shut down the reform agenda. The Ministry of Finance took power away from the reform minded PBOC and when 2008 hit, the response was a lending spree that directly benefited insiders who control state owned companies. The result is China is now trapped between Scylla and Charybdis: the situation is at an extreme where choosing a new path entails great cost. Reform in 2008 would have been costly as well, but a recession then could have been blamed on global conditions. Had they accelerated currency appreciation before 2008 and caused more pain in the short-run, they would have been better positioned in 2008 because the bubble in real estate would have been much smaller. Now, if they tighten credit and the currency rises, the risk of a major slowdown is great. If they instead follow the developed world and weaken the currency, they risk high inflation.

China Manufacturers Survive by Moving to Asian Neighbors

Leaving China, Samsung heading towards Vietnam to optimize profits

Cambodia versus ‘cheap China’

Exporters Leave China but Find Rising Costs Elsewhere

Stung by local cotton prices, Chinese yarn makers go global

Chinese article, Google Translated:
RMB exchange rate approaching 6.0 Enterprise, said the plant can only be moved to Vietnam jumped to

RMB exchange rate approach "6.0" manufacturing "labor pains" difficult to stop

"If the yuan to rise, I can only go to the factory moved to Vietnam. "

RMB against the U.S. dollar exchange rate has been close to 6.0 mark, and failed to reverse the appreciation trend. However, faced with the national foreign reserves hit new high of Downcast and Chinese manufacturing industry resisted calls for renewed appreciation of the renminbi.

January 13, the central parity of RMB against the U.S. dollar surged 58 basis points to 6.0950, a record high, at the same time, the spot exchange rate broke through 6.05 mark, closing at 6.0434 highs. Although the upward trend in the next two days has been suppressed, but some analysts believe the yuan continues to rise this year, has become a high probability event, but the pace of increase may be slowing.

2013 yuan hit a new high of 41, the central parity against the U.S. dollar has risen by nearly 3%. China and even to some extent, played a role as an international safe haven, when the rapid withdrawal of international capital from the emerging markets, not all returned to the U.S., but hoarding in Hong Kong Or go directly to mainland China.

2013 as a whole, the only BRICS strong performance of real effective exchange rate appreciation, the other four countries have different degrees down.

RMB "thriving"

January 16, the latest data released by the Bank for International Settlements show that in 2013 the annual increase of RMB real effective exchange rate of 7.89 percent, the nominal effective exchange rate of increase of 7.18%. 2013 People's Bank of China announced central parity of RMB against the U.S. dollar cumulative increase of 3.09%, current cumulative increase of more than 2.91 percent.

It is understood that the RMB real effective exchange rate is the trade-weighted index, the greater the influence of exchange rate movements of major trading partners. In BRICS, the real effective exchange rate appreciated sharply only China, India and South Africa, rates dropped by a big margin.

RMB exchange rate in the first quarter of 2013 experienced a non-volatile direction, when the central bank governor Zhou Xiaochuan re-election, with the foreign media, "RMB internationalization will accelerate" as a comment. Sure enough, from the beginning of April RMB skyrocketing, rising first followed by another four-seven rising, 1 April to 31 May 40 trading days, the RMB exchange rate reform 17 times hit a new high.

Correspondingly large inflows of hot money, financial institutions, foreign exchange soared, according to a rough estimate of the residual method, 2013 to April 1 arbitrage funds into the country the size of more than 700 billion yuan. The face of surging hot money, SAFE issued in early May "on the strengthening of foreign exchange inflows management issues related to notice", aimed at addressing the country's capital inflows through trade channels situation. Strengthen supervision, the external environment continues to deteriorate, while the market expected the Fed may begin after September exiting QE, RMB appreciation is expected to weaken.

Conditions in June and July hot money inflows inhibited financial institutions increased sharply the amount of foreign exchange, or even a reduction in the situation. Zhou Xiaochuan at the annual meeting of the International Monetary Conference 2013 statement, China will not come to the country to improve their competitiveness through currency devaluation competitive, this story had expressed dispel market concerns about China joined the ranks of pursuing a weak currency.

After July, the center launched a steady growth, and China's economic outlook showed a good situation, and in September the Fed has not scheduled exit QE, 10 month our country's new foreign exchange renewed surge of financial institutions, hedge funds continued influx of RMB October and early December again speed up.

Face of 2014, Zhou Xiaochuan, eighteen of the reporting period in the interpretation put forward in a timely manner to reduce the foreign exchange market intervention in normal type, making exchange rate fluctuations reflect the real needs of the market, regulators hope to increase the yuan shows the volatility.

Fudan January 13 release of "2013 Index of Fudan RMB exchange rate," said the beginning of 2014 will be a favorable opportunity to promote RMB exchange rate of the first stage of reform, suggested that the relevant authorities to seize the favorable opportunity to reform the RMB exchange rate formation mechanism appropriate relaxation volatility limits.

The report concluded that, under strong U.S. economic recovery, reduce the size of the background of QE, the dollar may recover strength, the RMB against the U.S. dollar this year, there may be a slight devaluation.

From the beginning of January this year, the United States began to reduce the size of the monthly purchase $ 10 billion debt, began gently introduced quantitative easing, the Fed will not raise interest rates repeatedly said recently. But "if the next two meetings of the Federal Reserve continued to buy the current pace of reduction can be expected in the first half 2014, the yen , Asia-Pacific and emerging currencies will be gradually subjected to greater selling pressure. "first vice president of Fubon Bank (Hong Kong) and investment strategy and research director Pan Guoguang said, could once again become a safe-haven during the renminbi in Hong Kong, which is the first half of the external pressure of RMB appreciation as it thinks.

But some analysts believe that the U.S. QE may completely withdraw before the end of 2014, the Fed rate hike is expected in 2015. Market trends will change, the dollar will regain strength in emerging markets, including hedge funds flowing into China will return to the U.S., which will also lead to downward pressure on the RMB against the U.S. dollar.

In the eyes of some economic analysts, as long as enough power to keep the domestic economy, the RMB appreciation trend will still remain. Jun Ma, chief China economist at Deutsche Bank believes that the U.S. and European economic growth this year will be significantly higher than last year, the recovery of external demand will significantly enhance China's export growth. Its expected appreciation of the RMB this year or 2%.

Chinese manufacturing difficulties encountered

Data from the General Administration of Customs show that last year China's foreign trade in Europe and America is still vulnerable to which the EU trade increased by 2.1%, the Japanese trade fell 5.1 percent, the U.S. recorded a 7.5% increase. Overall, China import and export value in 2013 was 25.83 trillion yuan, net of exchange rates, an increase of 7.6%, down from 8% at the beginning of the development goals for two consecutive years have not completed the goal. However, considering the continuous appreciation of the renminbi, under the background of shrinking demand in foreign markets last year, still recorded a trade surplus of 1.61 trillion yuan, an increase of 12.8%, also considered essential to complete the task.

"I think this data is somewhat water." Engaged in import and export trade in Dongguan businessman Wang (a pseudonym), said Wang as early as the 1990s, factories in the Pearl River Delta, engaged in the business of textile export trade. Due to rising costs and shrinking orders in recent years, which has already shut down the plant in the country, but its import and export trade volume reached 100 million yuan last year, remains. "Not afraid to tell you, before I was engaged in the import and export of goods, capital and export is now the main." According to him, this way is through false trade flows of funds.

Frequent cases of large-scale domestic trade make false entry of hot money, the first three months of 2013, exports from the Mainland "IC" number grew nearly 7 percent, but exports jumped nearly three times the amount of an. Meanwhile Statistics "precious metals" a situation also shows the soaring price of such an unreasonable price soaring, so that regulators realized that the presence of a false trade, thus beginning to strengthen supervision in May.

According to industry sources, most similar trade staging in Hong Kong, and import and export data last year, the contribution to the overall bilateral trade between Hong Kong and the maximum data growth, an increase of 17.5%.

Although the trade surplus is still expanding, but the ability to attract foreign investment in China seems to diminish. Commerce Department data show that in the first 11 months of last year China Manufacturing actual use of foreign investment 41.458 billion U.S. dollars, down 5.71%; while approaching the lower cost of production areas such as Vietnam, in 2013 foreign investment grew by 54%, most of which are concentrated in the manufacturing and processing industries. While appreciation of the renminbi, in 2013 most of the general decline in emerging market currencies, such as the rupiah against the U.S. dollar fell to five-year low, constant outlet pressure buildup in China.

"If the yuan to rise, I can only go to the factory moved to Vietnam." Zhongshan vigorous shoe chairman Liu Changning said that the RMB appreciation and the sharp rise in wages, so刘长宁export business is getting harder and harder .

"I also understand that the government wants us transition to domestic consumers." He said, had around 2009 channels and set about establishing the brand in the country, to now we have not yet succeeded. He had designed in accordance with the strategic planning, design and future domestic market, leaving only the marketing department, the manufacturer then moved to Vietnam and other Southeast Asian countries.

Bank run in Vietnam

Nguyen Duc Kien's arrest in Vietnam prompts ACB fears

Depositors in Vietnam have withdrawn hundreds of millions of dollars from one of the country's largest banks after the arrest of one of its founders.

Nguyen Duc Kien, one of Vietnam's richest businessmen, was arrested in Hanoi on Monday on suspicion of "economic violations".

Second tycoon arrested amid bank run in Vietnam

Vietnam arrested another top banker Thursday, state media said, widening a police probe into the communist country's banking sector which has rattled markets and triggered a run on deposits.

The arrest of Ly Xuan Hai for "deliberate wrongdoing causing serious consequences" came just hours after the Asia Commercial Bank announced he had resigned from the position of director general, Thanh Nien online reported.

Market Vectors Vietnam (VNM) fell 10% in the past three trading days, but the Vietnamese stock market is rebounding today.

Militant nationalism rising in China; odds of military conflict rise

Liu Junluo recently warned of a potential regional war in Asia, and both social mood and developing events are increasing the odds of some type of military confrontation.

Every single day, the South China Sea dispute is either headline news or, if not the headline, it's the next top story. It has dominated the airwaves for weeks now, and has equal space with news about China's weakening economy (now dubbed stabilization).

In this article by Minxin Pei, he puts all the dots on the table, but fails to connect the one that leads to conflict.
Beijing plays divide and conquer to win in South China Sea

But after recovering from its greatest diplomatic setback since Tiananmen, the Chinese government seems to have settled on a counter-strategy. Contrary to expectations of a more flexible negotiating approach - embracing a multilateral approach, declaring adherence to the United Nations Convention on the Law of the Sea and signing a code of conduct - Beijing refused to budge.

China has opted for a negotiating position that seems increasingly untenable and counterproductive. A possible reason is that Beijing understands that its much-criticised "nine-dotted line", which essentially claims the entire South China Sea as Chinese maritime territory, cannot be supported by existing international law.

...Beijing is obviously aware that its strategy, in the short term at least, incurs huge diplomatic costs. To offset these costs, China has tried to gain support from some South-East Asian nations so that the other claimants are not able to forge a regional alliance on this issue to isolate China.

...Because China has ample economic resources to achieve this goal, it may have already succeeded to a considerable degree.In last week's Asean summit of foreign ministers in Cambodia, the regional bloc was unable to reach a common position on the South China Sea dispute, a clear victory for Beijing.

China's economic policy cannot be divorced from it's military policy. An economic collapse would be tantamount to a diplomatic collapse for China, which relies on soft power to achieve diplomatic goals. Increased aggression from Beijing may be a result of its weakening economy, with a couple possible of reasons. Since it will need some other way to press its claims if the economy weakens and the military is increasingly nationalist, a stronger military posture is likely. Furthermore, they may be deflecting from the weak economy: when there is internal strife, turn the attention on diplomatic issues. This would be the more benign scenario, but still carry the risk of an accidental escalation.

If China's economy collapses or slows to the point where it hinders their diplomatic position, Beijing may increasingly rely on military power and/or it's rivals may sense the opportunity to press their case. Minxin Pei closes by warning naval skirmishes could result from accidents, given that confrontations with fishing boats and other vessels are occurring more frequently.

Another possibility, one I believe more likely, is that the weaker China's economy becomes, i.e. the more negative social mood becomes, the greater the likelihood of skirmishes, and if China's economy collapses (GDP growth of near 0% or negative), a skirmish would have a not-small probability of escalating into a larger military conflict.

More background is available here: South China Sea issue divides ASEAN