Kandahar again

April 21, 2011

India is facing a Kandahar like situation again .However, this time it is not set in the bleak wind blown barrenness of Kandahar , but in the warm tropical waters of Indian ocean off the coast of Somalia.

Over the weekend, a group of pirates holding the Asphalt Venture, a Panamanian-flagged merchant vessel, were supposed to let the ship’s Indian crew go after receiving a $3.5 million ransom. But in a first for Somali pirates, the brigands decided they wanted to punish India for its aggro anti-pirate stance.

The pirates kept the money and released only eight hostages, holding onto seven. They then demanded India swap their 120 comrades captured by the Indian navy over the past weeks, vowing to hold onto any Indian nationals taken until then.

 

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And true to its style , the Indian government doesn’t appear to know what to do yet. On Monday, it announced that the INS Talwar, which conducts anti-piracy patrols in the Gulf of Aden, will set sail for the eastern coast of Somalia towards the Asphalt Venture. Officially, the Talwar won’t launch any swashbuckling boarding operations, as it’s just there to “keep a close eye on the situation.” Officials have ruled out using their special forces to free the hostages.

Whether the Talwar launches a raid to free the remaining hostages or not, it’s clear that some kind of threshold has been crossed here. The pirates holding the Asphalt Venture aren’t just looking to pressure a company for ransom now, but to scare off India from launching rescue missions later.

This could be just another example of pirate solidarity which was much threatened but never actually carried out. Or perhaps this is another manifestation of the commonly held perception of  India as a soft state which can be easily cowed into submission. Or perhaps it could be part of a wider terrorist-pirate complex with wider aims and probably backing from some powerful third party actors.

But whatever it is , it is no less an ominous portent then Kandahar was . As Kandahar singled out India as a soft state to the terrorists and convinced them to redouble their efforts in trying to destabilize India, this incident too is going to decide whether India , the logical custodian of Indian Ocean , can establish its will on the waters of its ocean.

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Piracy is a growing danger.  India is already facing more pirate attacks closer to its shores and a further proliferation of piracy would be disastrous for India’s trade much of which passes through these waters. Moreover, India has over 35,000 nationals employed globally as seamen on commercial ships sailing under various flags. If pirates now won’t release Indian hostages, this may have an effect on insurance premiums for ships employing Indian crew.

However, appeasement definitely wont work . Any bad precedent set by the Indian government, as was set in Kandahar, would only further embolden pirates. This could turn out to be even more worrisome if there is a sort of pirate-terrorist alliance which would have more than monetary reasons to target Indian shipping.

India needs to aggressively  take the lead in stamping out piracy . This might not be a painless process in the short term but would help protect not only our vast seaborne trade but also consolidate India’s profile as the pre eminent naval power in Indian Ocean.

But perhaps I dream too much. In this country , fixated with Amar Singh and his political shenanigans, this incident is not even front page news.

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Reading Chinese tea leaves

October 22, 2010

China’s GDP and Inflation figures for the quarter ending September are out . And they look promising indeed . GDP at 9.6% although a tad lower is still pretty impressive. Inflation at 3.6% per cent is a little more than August’s 3.5% .

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The figures mean that  China is growing robustly and the economy is not yet on the threshold of overheating . And this provides an interesting perspective to Tuesday’s interest rate hike by the Peoples Bank of China .

The 25 basis point interest rate hike, the first in three years ,  was in itself not a ground shaking event. But it had a huge psychological impact . Markets all over the world were spooked amidst fears that the world’s fastest growing economy is overheated and planning to curb growth .

Although the markets are right to worry about the overheating of Chinese economy, Tuesday’s move by the Central Bank ,like all things Chinese , was based on  much more complex, and political, reasons.

This rate hike is to be seen as a signal to US before the coming G-20 summit . One of the major argument proposed by US favouring a devaluation of the Yuan was based on the premise that a weak Yuan causes inflation in China , and in todays era of sluggish economic growth it is in China’s interest to let the Yuan appreciate rather than going for the more risky option of interest rate hike. China has hit back by doing the exact opposite.

China has let it be known that it has enough confidence in its growth to accept the risk of interest rate hikes. Tuesday’s cuts are a signal to the world that the China is not going to do much about its currency and would prefer to handle any inflationary pressures through domestic policies.

Impressive indeed . But behind all this nationalistic grandstanding , lurks a very real and potent danger to the Chinese miracle : a rapidly building asset price bubble. And  the Chinese leaders, who are busy proclaiming the resurgence of their nation and letting it be known to the whole wide world that China would not cave in to any external pressure ever again,  are doing precious little to tackle it.

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China is awash in money. As the great Chinese middle class becomes richer and richer, a boom mentality is setting in . Interest rates in the Chinese informal market are running at 20%, rates that were last seen during the dot com bubble in US. There is a mad rush towards the real estate sector. Couples are faking divorces to get past the “one house per  family” policy. High-end property prices in dozens of Chinese cities have doubled during the global financial crisis.   An asset price bubble, particularly in the real estate sector , appears to be rapidly building up.

Sooner or later this asset price bubble would spill over as inflation in the customer price index . Although, the September figures show only a marginal increase, there is a clear and persistent danger of inflationary trends in the Chinese economy.

Precious little is being done by the Chinese political mandarins to rectify the situation . Much of Chinese competitiveness , as this article points out , is based on low interest rates. The Chinese government is worried about the potential adverse effects any monetary tightening could have on this competitiveness. More worryingly, powerful political interests in China have vested interests in not letting the rates rise . Tuesdays interest rate hikes, by their relative ineffectuality, serve to demonstrate, at least for the time being,  the unwillingness of the government to tackle the situation head on .

But again , we must not rush to draw conclusions . One of the best strategy when dealing with the Dragon is patience. Let us wait and watch , because this could well turn out to be more complex than it seems .

 

 

There is war brewing. The guns are primed, the sights set, and the enemy marked.  The soldiers are jittery, and the atmosphere explosive. A rash action by either party could trigger a ferocious war causing untold mayhem .

No , I am not talking about Israel standoff with Iran. I am talking about the currency wars which government officials of both China and US are preparing to fight.

The innocuous sounding “H. R. 2378 — Currency Reform for Fair Trade Act” was passed by the US House of Representatives  by a vote of  348 to 79 on 28th of September .  The bill calls for the US Department of Commerce to start imposing – even without approval by US President Barack Obama — punitive tariffs on certain countries. The initiative specifically targets countries that have “a fundamentally undervalued currency,” “persistent global current account surpluses” and very large currency reserves – in other words, China.

Ahead of the impending elections and faced with massive unemployment and sluggish economy, the US politicians are baying for Chinese blood. They want to put and end to the deplorable Chinese practice of currency manipulation, which makes Chinese exports cheaper and causes US industries to shut shop.

 

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But the Chinese are in no mood to oblige. They are determined not to suffer the same fate as Japan of the 1980’s. Under US pressure the Japanese were forced to let yen appreciate. Within one year, the value of the yen had increased by some 60 percent. In order to balance out the negative consequences of the revaluation for the country’s export industry, the Bank of Japan lowered interest rates to nearly zero, thereby triggering a huge speculative bubble on the stock exchange and the real estate market. Even today, Japan has still not recovered from the prolonged crisis that ensued.

And then there are political considerations.  The Chinese government, which has long positioned itself as crusaders to restore Chinese glory, cannot afford to lose face in front of their domestic constituency by bowing to Chinese demands.

So I guess, the Chinese won’t do anything except a slow and gradual revaluation of their currency, which gives time to their export industries to adjust.

Uncle Sam can now either it its own words or proceed with sanctions. Under Republican pressure and increasingly being branded as a weak president, Obama cannot afford to do nothing.  He would  go for sanctions. And then we can kiss free trade and the recovery of the world economy goodbye.

It would be like the 1920’s and 1930’s. European powers bent upon reviving their sluggish economies indulged in protectionist policies that ultimately led to a deflationary cycle and ultimately the Great Depression.

There is a lot at stake, and I am keeping my fingers advised. In the meantime I am buying gold , I will advise you do the same.

 

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The New Silk Route

October 3, 2010

A cursory look at a map of Eurasia will shortly reveal a very interesting fact. All the major centres of civilization ( and power) are on its periphery. Whether it is India in the South, China in the East, Russia in the North or Western Europe in the West .  And for millennia these civilizations have traded and communicated with each other through that vast thoroughfare of humanity : the Central Asian Steppes.

Ever since the dawn of humanity , Central Asia has been crisscrossed by caravans laden with exotic items bound for distant lands.  These trade routes, sometimes collectively called the Silk Route have served as arteries of trade and also , and perhaps more importantly, conduits for exchange of ideas .

Silk Route in the first century AD( Courtesy : Wikipedia)

As networks connecting nodes of civilizations and wealth, they hade immense geopolitical significance.  Nations had vied for their control and much blood has been spilled on the steppes to decide who can tax the rich caravan trader . Some of the world’s most ferocious conquerors, Ghenghis Khan, Tamerlane started their careers with a desire to become the master of this lucrative trade route.

For India, participation in and control of these trade networks was always vital.  Through the millennia, access to and control of the southern part of this route was essential for the vibrancy of our economy and the safety of our country .In fact , the patterns in decline of Indian power and trade closely corresponds to loss of our ability to project power on the southern branch of the silk route.

This trade route eventually lost its importance with the Portuguese and Spanish discovery of sea routes to Asia. Soon, the Silk Road was forgotten and relegated to the history books as an exotic relic of a bygone era.

Now in the twenty first century, these trade routes are once again been revived.  And not just for trade.

From Kashgar to Constantinople, from Lhasa to Tehran, the Chinese are quietly reactivating these old trade routes that once served  not only as channels for the export of Chinese goods but also Chinese power projection.

And this time , it is not  silk that is the principal commodity and it is not the caravans of  two humped Bactrian camel , it is a motley collection of Chinese manufactured goods travelling on shiny new  railway lines that the  are being laid down to connect most of Central Asia and beyond with China.

The proposed extension of Qinghai- Tibet railway line and the proposed Kashgar- Gwadar railway line, would help integrate the Chinese rail network with that of Pakistan.  The Pakistanis on their part are in talks with the Turks and the Persians to create an Ankara- Islamabad link.  This network could eventually be extended all the way to Europe.  There are already talks of a Berlin to Beijing network .

For the Chinese, such a project would be immensely beneficial. Their goods would be able to find markets in not only Europe but also in the rapidly growing and populous economies of Pakistan, Iran, Turkey, Uzbekistan etc.  This will also help them in securing direct access to the oil rich Persian Gulf and Arabian Sea, thus reducing their vulnerability to disruption of their sea-borne oil imports.

The Middle kingdom could leverage this to integrate Central Asia more tightly into its sphere of influence. And combined with the dual nature of these projects, they will give China an unmatched ability to project power anywhere in Asia.

The ramifications of this project would be far-reaching and would change the whole structure of world trade and politics.  And if succesfully executed could indeed make China as the dominant world power of the 21st century.

There is no denying that this reactivation of the old Silk Route will be a seminal event in world trade and geopolitics. Sadly, India once again doesn’t have any means to participate or project power on this new avatar of Silk Route.