THE CHINA SYNDROME
Part 7: Anarchy in the Middle Kingdom
by Joe Duarte, MD
Joe-Duarte.com & IntelligentForecasts.com
October 5, 2005

Editor’s note:

Doctor Duarte’s unique series on the Chinese economic miracle and its profound and diverse potential consequences on the geopolitical state of the world and the financial markets.

In this seventh installment, Dr. Duarte reports and explores a dramatic disclosure by a highly ranking member of China’s Politburo just a few days before China celebrated 56 years of Communism.

For further reference read the following by Dr. Duarte:
Rate Hikes May Create 'Perfect Storm'

Part1 of The China Syndromeconcluded that China is not just a power to be reckoned with in the future, but rather that China is a major player in the world now.
Part 2 of The China Syndrome set forth evidence for irregularities in the way China does business, and how the world is looking the other way.
Part 3 of The China Syndrome explores the implications of China's activities on the Asian region.
Part 4 of The China Syndrome described the key aspects of the relationship between China and the world’s other emerging potential Super Power, India.
Part 5 of The China Syndrome explored the bid by Chinese oil company CNOOC for the U.S.’s Unocal.
Part 6 of The China Syndrome explored the Yuan revaluation that occurred on July 21, 2005, as well as other key developments that made it something that had to be done by the Chinese Government, due to mounting political pressures.

Politburo Official: China’s Guangdong Province In Crisis
by Doctor Joe Duarte, www.joe-duarte.com
September 30, 2005

Today�s Analysis: Report: China�s Guangdong Province On The Verge Of Anarchy

A member of China�s Politburo told Hong Kong lawmakers and Chief Executive that the poster child Guandong province in the midst of a multi prong crisis, characterized by the fact that �its residents' living conditions are deteriorating, and law and order are on the verge of breaking down.�

According to Hong Kong�s The Standard, citing the text of a speech given by Guangdong�s �provincial Communist Party secretary Zhang Dejiang admitted (Hong Kong) Chief Executive Donald Tsang and Hong Kong legislators during a private meeting last Sunday, (September 25, 2005.)

The speech was part of a two day meeting between dignitaries from both countries, but was, at least on the surface seemingly out of character. To be sure, as The Standard noted: �it is rare for a top Communist Party official to paint a grim picture of its prospects to outsiders, as Zhang did.�

What is clear, based on the reporting by the Standard, is that China is facing an internal threat, competition for resources from rival regions of the republic. According to the article, �Zhang told the Hong Kong officials Guangdong faces fierce challenges from the Yangtze River Delta and Baohai-Rim regions. What Zhang had to say is a major comedown for the province, which received its impetus from Deng Xiaoping, China's late paramount leader, in 1978, when he visited Guangdong and kicked off China's opening to the outside world, which sparked a massive economic boom in Southern China.�

According to the Standard, Zhang�s speech zeroed in on five key points:

1. ["Guangdong has been the nation's pioneer for economic reform in China and a miracle in the eyes of the world ... but, in fact, Guangdong is now in crisis management," Zhang said.]
2. ["There are various hidden worries and risks. If we took a wrong step, we might be overtaken by Jiangsu, Shandong, Zhejiang and Shanghai.�]
3. ["The Pearl River Delta has prospered as the most affluent place in the country, but northern Guangdong is suffering the most severe poverty and underdevelopment.�]
4. ["Guangdong faces [serious] problems arising from our rapid economic growth. The land area is getting smaller. Water and air pollution is serious and getting worse. We are worried about the safety of what we eat and drink."]
5. And sounding rather fatalistic and grim �Zhang said the province's target of becoming a middle-class society may be an impossible dream, and ["in the long run, we may not achieve this."]

Zhang alluded to a rise in crime and a fall in security with an interesting focus, without mentioning drug abuse, prostitution, the spread of sexually transmitted diseases, including HIV, or violent crime. Nevertheless, he noted: �Adding to the economic and environmental woes, Zhang said: "There is also a security problem in the province. Our open economic reform has attracted nationwide talent to the province, but Guangdong has also become a magnet for pickpockets from all parts of the country. So our social order is another serious problem.

The Government�s Take

According to the People�s Daily Online, though, a totally different meeting took place.

On who was at the meeting, there was agreement: �Hong Kong's Chief Executive Donald Tsang and legislators on Monday ended their two-day visit in south China's Guangdong Province, which is adjacent to Hong Kong. It is the first time that all HK's legislators were invited to visit the mainland as a group. The group led by Tsang included Legislative Council President Rita Fan, Secretary for Financial Services & the Treasury Frederick Ma and the Secretary for Commerce and Industry & Technology John Tsang and 59 lawmakers.�

On what happened at the meeting, though, there was a bit of a different perception: �HK officials and legislators were deeply impressed by the development of high and new technology, the ecological and environmental protection effect, foreign investment and community building in four major cities in Guangdong, namely Guangzhou, Shenzhen, Dongguan and Zhongshan. On Monday, the group visited Honda's production base, a high-tech base and a university town in Guangzhou, as well as a village-turned urban community in Zhongshan City."

Hmmm. There was no mention of pickpockets or fear of Guangdong being replaced as the number one province by others. And oh yeah, there was no mention of any sort of pending crisis, etc.

A Transatlantic View

The Financial Times noted the following: �Hong Kong democrats, some completing their first visit to mainland China in more than a decade, yesterday put a positive spin on their meeting with senior Chinese officials and urged more dialogue.�

Perhaps loosely alluding to Zhang�s speech the Times reported: [�There is no democracy here, but at least they allowed dissenting voices to be expressed,� said Martin Lee, a campaigner who last visited the mainland in 1989. Albert Chan, another democrat, said he was �quite impressed at the performance of the officials�.]

According to the Times: �The trip, instigated by the Chinese government, was a milestone in Beijing's traditionally tense relationship with Hong Kong's democratic movement. For the first time pro-democracy legislators were given an opportunity to air their views before Chinese leaders and were treated as equals with their pro-Beijing peers. This level of tolerance would have been difficult to imagine only 18 months ago, when a commentary in the state-run Xinhua news agency labeled Mr Lee a traitor. Leung Kwok-hung, a prominent activist who was elected last year to the legislature, is also anathema to mainland officials.�

The Real Reason Behind The Meeting

Indeed, there was likely an ulterior motive behind the meeting. For one thing, according to the Financial Times, the whole visit was extremely well choreographed in traditional Communist fashion: �The visit was a reminder of how far apart the two sides remain. Chinese officials arranged a tour of four Guangdong cities in two days for the legislators, leaving only 90 minutes for a face-to-face discussion with local leaders.�

Furthermore, �Beijing has extended olive branches to the democratic movement before, only to let the relationship lapse. Last autumn, several democrats were invited to Beijing to join the National Day celebrations but this produced little reconciliation. Now, however, Beijing needs the democrats' co-operation to avoid a messy confrontation over political reform. Donald Tsang, Hong Kong's chief executive, is expected to release proposals soon to make the way the territory elects its next leader in 2007 and legislators in 2008 more democratic.

Indeed, there is a bit of the old Sun Tsu at work here. You know, the bloodless coup part, about winning wars without destroying the enemy�s infrastructure, and waiting until he gives himself up without a fight, so that you can take all his stuff and turn it into your stuff without spending money to rebuild.

Yeah.. That part� According to the Times: �Ma Ngok, assistant professor at the Hong Kong University of Science and Technology, said Beijing's tolerance of such normally taboo topics reflected its acknowledgement of the democrats' pull with the Hong Kong public. �They don't want to see another half a million [people] march,� Prof Ma said, referring to the protests in 2003. Beijing realised that �a key reason for the chaos around 2003 was because both the [Hong Kong] government and the central government hadn't listened enough to opposition opinion.�

In other words, Zhang�s speech was likely part of the choreography. �The best measure of the visit's success, analysts and politicians said, would be how Beijing proceeded. �If [Beijing] can have more contact and dialogue with the democrats, they will learn eventually how to deal with the democrats,� said Prof Ma.�

Conclusion

Much can be learned from the developments at the Guangdong conference.

First, China is in no position to have a repeat of Tiananmen square. There is too much of a foreign press presence there now, and frankly, too much foreign money. In other words, the Chinese government realizes that much of its fate is now in the hands of foreigners. Ironically, free speech, in the form of the press, and the free flow of money, aka Capitalism, seems to have a bit of weight there now.

Second, it�s clear by the slow and methodical approach to this meeting, that China�s leadership has yet to fully grasp how the world works, and is actually researching the situation, much as an alien who lands on a new planet would, by probing the other side�s defenses.

Third, and perhaps more important, aside from the politics, the diplomacy, and the spycraft, it�s important to remember how this article started, with a reference to China�s most prosperous province currently existing on the verge of a social and economic calamity brought on by too rapid growth, and its consequences, meaning, pollution, crime, and above all, the maldistribution of wealth.

If the cream of the crop is in this much trouble, what is the rest of the country like? And what will GE, Microsoft, Bank of America, The Royal Bank of Scotland, Goldman Sachs, Merrill Lynch and Dell do, if and when they figure this out?

Even more important is what the Chinese economy does when the Fed continues to raise interest rates and money from China continues to trickle back into the dollar, reaching for higher yields.

Our view is only strengthened by this new batch of evidence. China�s economic miracle has a date with destiny, just as every other economy in the world has experienced many times in history. The difference is that the Chinese don�t seem to know what they will do when the inevitable happens.

Of course, now that Mr. Greenspan will retire from the Fed, we�re sure he�ll be available as a consultant. We�re also sure he�ll want to get paid in dollars, or maybe even in Swiss Francs, but not in yuan, and probably not in euros.

Special thanks go to The Beltway Bandit for the lead.

© 2005 Joe Duarte, M.D.
Dr. Duarte's Bio and Archive

Joe Duarte M.D. is founder and Editor in Chief of Joe-Duarte.com. Dr. Duarte is a board certified anesthesiologist, a registered investment advisor, and President of River Willow Capital Management, where he manages individual client accounts. His latest books "Successful Energy Sector Investing" and "Successful Biotech Investing" (Prima/Random House) are available on line at amazon.com, barnesandnoble.com, borders.com, Traders Press, and all major online and brick and mortar bookstores in the U.S., U.K. Europe, and Australia.

Dr. Joe Duarte's Daily Market I.Q. is a subscriber service that provides daily intelligence, trading strategies, and technical analysis at www.joe-duarte.com.