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Archive for the ‘China’ Category

A run on Chinese Banks

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My co-blogger Nick K had already flagged one of the first signals of a China bubble bursting when he wrote about the problems of one of their giant property developers, China Evergrande, in September of last year, all $US 300 billion worth of it.

Where’s there’s one there’s bound to be more if the underlying problem is not fixed, and so…:

Multiple sources contacted by Asia Markets, have confirmed deposits at the following six banks have been frozen since mid-April.

  • Yuzhou Xinminsheng Village Bank (located in Xuchang City, Henan Province)
  • Zhecheng Huanghuai Bank (City of Shangqui, Henan Province)
  • Shangcai Huimin Rural Bank (Zhumadian City, Henan Province)
  • New Oriental Village Bank (City of Kaifeng, Henan Province)
  • Huaihe River Village Bank (Bengbu City, Anhui Province)
  • Yixian County Village Bank (Huangshan City, Anhui Province)

It’s understood the banks with branches across the Henan and Anhui Provinces successively issued announcements in April, stating they would suspend online banking and mobile banking services due to a system upgrade.

At the same time, clients reported their electronic deposits in online accounts, mobile apps and third-party platforms could not be withdrawn.

This led to depositors rushing to local bank branches, only to be told they were unable to withdraw funds.

The report includes various videos of long lines at banks and protests so it appears to be a real thing and not just a rumour. The real question is whether the authorities can stop it, and that comes down to two questions to be answered: the degree of authority that can be exerted and the trust people have in the system. Nobody should doubt the power of the central Chinese State but when a people’s faith in institutions begins to waver there’s no force that can impose it:

Some depositors such as Xu have already lost trust in the system. The 39-year-old said he had withdrawn all of his deposits from 10 other small banks that had promised him an annualised yield of more than 4 per cent.

The Chinese Communist Party probably does not accept that last point, as can be seen in this sad article, The Dismantling of Hong Kong, by one Karen Cheung, who is approaching the tipping point of escape:

After the national security law passed in June 2020, friends began leaving Hong Kong every few weeks. One by one, they disappeared from the camera reel on my phone, leaving me with things they couldn’t take with them: an oven, a Sodastream, a sous-vide machine, a stone diffuser, and five bottles of ground cinnamon. From 2020 through 2021, it was reported that 116,000 residents had left, often departing for countries like Britain and Canada…

This has been coming for a long time; certainly since the first mass protests in 2014 but only really since the Great Chinese Sinus AIDS Pandemic hit:

Under the guise of pandemic social-distancing, public gatherings were banned, and protests disappeared from the streets. Later in 2020, a teacher had his license revoked after showing his class a documentary featuring a pro-independence activist; in the years since, prominent commentators, including Apple Daily writer Fung Wai-kong and academic Hui Po Keung, have been arrested at the airport while attempting to leave the city. New election rules implemented in 2021 now dictate that only “patriots” can administer Hong Kong. By early 2022, at least 50 civil organizations have disbanded in the ongoing crackdown, including a pro-democracy trade-union coalition and an activist group that commemorates the Tiananmen massacre.

My, how convenient is the claim of Public Health for tinpot dictators to exert minute control over the lives of their subjects. And as she outlines, the end result was a massive increase in cases and deaths anyway, plus the usual scenes of empty supermarket shelves and a failing public health care system:

Health officers would sometimes appear on your doorstep to inform you that your building had been locked down for mandatory testing; should you test positive, you would have to undergo quarantine at an isolation facility, which Hong Kong residents have described as a “madhouse.” A Hong Kong woman told a local news outlet that despite two negative rapid tests, she was not told when she could leave; some in quarantine attempted suicide inside the facilities, according to local media reports. The uncertainty and severity of the measures made me feel like the city was collectively being punished.

I’m absolutely sure it was. In that world it’s hard to tell the difference between political prisoners arrested for leading protests or writing articles and people who failed the dreaded C-19 test, since there seems little difference in treatment between the two.

I last visited Hong Kong in 1990 and it was great: a vast, teaming, lively city with beautiful views, whether from the waterfront or The Peak. But when the British handed back control to China in 1997 I knew the place was doomed, even if it might take years to show it. The CCP and their One Country: Two Systems always smelled like propaganda to me, but I relied on the CCP’s self-interest in hanging on to a rich crown jewel, especially as Communism became more honoured in the breach in China itself, hence more than two decades of peace, relative freedoms and prosperity. But I always knew that if a clash between the “Two Systems” ever occurred then the system of Chinese Communism would prevail and be imposed, whatever the cost.

Between the rise of Xi Jinping and the return of his cult of personality as well as the re-empowering of the Central State, the myriad little Cultural Revolution touches appearing again, the Hong Kong protests and finally the C-19 disease, it’s obvious that Hong Kong will soon be no more than another grim Chinese metropolis.

Something was fundamentally broken: If Hong Kong could botch the handling of a pandemic outbreak it had two years to prepare for, what does that say about future governance? Hong Kong used to be a city that understood its capitalism depended upon appearances; ever since the national security law was enacted, however, it no longer cared about the mask slipping.

Survivors guilt and all, it is time for Ms Cheung to get the hell out – and time for us to cut as many cords with China as we can afford.

Written by Tom Hunter

June 16, 2022 at 4:14 pm

Engaging with a Foreign Business Culture

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Our family have bought rather a lot of electronic equipment from PB Tech here in NZ over the years, in my case mainly small stuff, in my son’s case, everything required to build a computer.

They’re well-known and New Zealand’s largest chain of stores that specialise in computer gear. This gushing Spinoff article (gushy mainly because it raved about their policy of demanding vax passes from customers before they entered a store) explains the “PB” in their name:

“In the early years, [Pat] Huo was supported in the accounts department by his wife Brenda Yu, hence the company name PB Tech.”

That would explain all the Chinese immigrants running the store in Penrose. I may have seen the occasional Indian or White chappie but they’ve been rare. I guess you go with the culture you know.

According to the blurb in the link above, they deliver lower prices by “cutting out the middleman”, doing direct deals with manufacturers and so forth. Then there’s this:

Being able to support the products we sell in-house gives PB Tech a huge advantage when it comes to rectifying faulty hardware quickly and painlessly for our customers. The scale of our in-house service operation and our team’s vast experience are the reasons why we’re an authorised repairer for leading brands such as HP, Samsung and LG, as well as top insurance companies within New Zealand.

Oh really? About six months ago my son’s two year-old PB Tech supplied monitor began glitching so he contacted them since it was still under warranty. Bit of a run-around but he finally was able to drop it off.

Then silence. No response to emails or phone calls where he left messages. Buck passing as to who to talk to and just a general run-around.

However, a couple of months later a box appeared at the door. It was “a” monitor: not the original one repaired but a replacement. No contact made to say it was on the way. Before opening the package he tried to find out via email and phonecalls what the story was. Same run-around again but worse.

Finally he opens the package and this is what he found.

They sent him an identical, replacement monitor – that’s damaged.

By now – seriously pissed – he went looking for reviews of PB Tech to see if he was an exception. He wasn’t. Click on the image to read.

There’s plenty more where those came from, and you can read about the $77,000 fine here.

I don’t understand how a company can continue to remain in business while pulling this shit on its customers – even in the wake of that fine, although given that the company is worth $280 million perhaps they don’t give a shit about such a number. Perhaps it’s simply that they sell a lot of tech gear to companies that chuck it quickly before it even hits the depreciation age and operate at such volumes that they don’t care about the occasional failure? Perhaps such business customers have … replace and fix arrangements with PB Tech that the latter accept because they’re not individual customers? Although I see some small business owners also getting screwed in those reviews.

But it’s this one that gives the clue as to the real problem with that third point.

I know a number of companies that have dealt with Chinese businesses, both here and in China, and that last one is a symptom of the real problem with their business culture:

They just assume everyone is lying and trying to rip off everyone else, so why are you complaining? In fact you’re probably lying to us now about your “problem”.

Which is exactly the experience several reviewers talk about and which my son is now experiencing; they’ve accused him of damaging the monitor. At first this might seem shocking, but that just how it be in Chinese business. Next stop is the small claims court: it seems they do respond to legal threats – which is also another aspect of Chinese business culture.

Written by Tom Hunter

June 7, 2022 at 2:49 pm

Changing messages on China

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A couple of years ago on this blog one commentator complained about my “tiresome China bashing”, the implication being that, as with so many other things, I was not in the middle of the crowd on this issue and needed to get with the program.

Part of this was the argument that Trump’s approach to China had been an aberration and that things would return to the Clinton-Bush-Obama normality of ever-increasing trade between the USA and China, together with ever more involvement of China in the USA across many spheres.

It turns out that it wasn’t just Trump: he was merely one of the first to raise the issue. Since Biden’s election it’s become apparent that the anti-China brigade is bi-partisan between Democrats and the GOP and although not well organised, exists in greater numbers than previously believed.

And it would appear that the feeling is spreading fast in, of all places, Hollywood, with the release of the movie Top Gun: Maverick, Tom Cruise’s sequel to the massive and iconic 80’s hit movie.

In a 2021 post, Hollywood’s ugly cost of catering to China, I noted a story that had been running since a 2019 trailer for Top Gun: Maverick had shown the Japanese and Taiwanese flags being pulled from Cruise’s 1986 fight jacket so as not to offend the valuable Chinese market. The movie was then held up for two years because of the ongoing pandemic, with Cruise in particular insisting to the production company Paramount, that it not be released to streaming as some other big movies had been.

My, but things have changed in just two years. Apparently the Taiwanese audiences were cheering when they saw this.

That also means this was edited late in post-production, which is not a cheap process even in the era of CGI, and certainly not something you do on a whim. The producers, Paramount, are sending a message:

To the joy of Taiwanese audiences hitting the theaters this week, Top Gun: Maverick features a prominent shot of the Japanese and Taiwanese flags—national symbols that were scrubbed from a 2019 trailer.

The flags were initially replaced by random symbols, drawing sharp criticism as an example of Hollywood caving in to China’s political demands. But in a rare U-turn, which has yet to be explained, they have reappeared in the film’s worldwide release.

“It is unprecedented,” Ho Siu Bun, a film critic in Hong Kong, told VICE World News. “Major film studios have never been shy about pandering to the Chinese market. And even if it is a simple scene, editing is very costly. So no one knows why they changed it back.”

The message was received according to the Wall Street Journal, with no less a reaction than the huge Chinese tech and gaming company Tencent, whose involvement had been an agreement that Paramount had boasted about during production in 2018.

The reason: Tencent executives backed out of the $170 million Paramount Pictures production after they grew concerned that Communist Party officials in Beijing would be angry about the company’s affiliation with a movie celebrating the American military, according to people familiar with the matter.

Association with a pro-American story grew radioactive as relations between the U.S. and China devolved, the people added. The about-face turned “Top Gun: Maverick” from a movie that once symbolized deepening ties between China and Hollywood into a fresh example of the broader tensions forming between the U.S. and China.

Excellent news. Aside from anything else, recent Hollywood blockbusters have bombed in China despite all the groveling and Tencent has lost out on a movie that has already grossed $US 150 million domestically on Memorial Day weekend, the unofficial start to summer and the blockbuster movie season. It promises to do huge business in the coming weeks and is already Cruise’s biggest opening weekend in his career.

Sure, you can say that it’s just a movie, but given the way Hollywood so relentlessly followed other American businesses in kowtowing to China, and given the cultural impact and money involved this is perhaps the biggest public signpost to date of changing Western approaches to The Heavenly Kingdom.

Written by Tom Hunter

May 30, 2022 at 6:08 pm

MORE EVIDENCE THAT YOU BUCK THE PARTY LINE IN CHINA AT YOUR PERIL

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With the news that Beijing is intensifying its crackdown on basic human rights and freedoms in Hongkong with the arrest of four trustees of the now defunct 612 Humanitarian Relief Fund for ‘collusion with foreign forces’. Included in the four are Margaret Ng, an internationally respected barrister and 90 year old Cardinal Cardinal Joseph Zen.

Commenting on the arrest of Cardinal Zen in particular, the last Governor of Hong Kong, Lord Patten of Barnes, said “The arrest of Cardinal Zen, one of the most important figures in the Catholic Church in Asia and in the Catholic Church’s advocacy for human rights in China and elsewhere, is yet another outrageous example of how the Chinese Communist Party is hellbent on turning Hong Kong into a police state”.

And our response … well, I guess you need to go no further than this comment from Foreign Minister Mahuta made following her meeting with her Australian counterpart when she suggested that “New Zealand needed to maintain and respect China’s particular customs, traditions and values”.

Clearly China has nothing to fear from the NZL government.

Written by The Veteran

May 14, 2022 at 2:15 pm

Posted in China

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An RNZAF Air Combat Capability Redux – Part 2

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Could an ANZAC solution be the way forward and how could it work?

Op Ed by Ueda Station

In Part One I proposed that a workable solution to revive a Kiwi Air Combat Capability was for New Zealand to acquire and then integrate an air combat component into the RAAF Air Combat Wing structure. I prefaced this by noting that New Zealand is likely to be seriously tested as grey zone threats (“The grey zone includes cyber attacks and disinformation campaigns and falls short of an actual shooting war”) and geo-strategic competition ramps up across all relevant domains – especially in the merged air-maritime context of the South Pacific and that a tactical air combat capability is becoming increasingly an imperative for New Zealand.

Of the current RAAF multi-role strike platforms, namely the F-35A, the EA-18G Growler, and the twin seat Boeing F/A-18F Super Hornet – it is my view that the logical solution is the Super Hornet. It has the best overall fit with what the RNZAF needs to generate an air combat component in terms of its affordability and our required employment contexts in the years ahead. Principally this is long-range maritime strike, tactical reconnaissance and airborne electronic warfare. Nevertheless as the Super Hornet is a multi-role combat aircraft it can be called upon to conduct a wide range of other missions as directed by the New Zealand Government. Since the Super Hornet uses the probe and drogue air to air refueling system it could quickly become interoperable with our new C-130J-30 Hercules. By retrofitting Cobham re-fuelling kits on the Hercules they can act as an air-tanker for a Kiwi Super Hornet mission package. That is something that its F-35A or F-16V brethren cannot do. Fitted with conformal and drop tanks, plus this air-tanker support, we would possess a strike platform that can then project out to a significant volume of airspace within our South Pacific and Southern Ocean areas of immediate strategic interest. All together as a package the Super Hornet is a very formidable multi-role force enabler and force projection capability – particularly within the cross-domain air-maritime context.

A Kiwi Super Hornet component that is integrated into the RAAF air combat fleet fleet solves the complexity and cost of trying to rebuild a tactical air combat capability from scratch. The synergies of learning and building up a new platform capability like the Super Hornet alongside a mature system operator like the RAAF, will greatly truncate the time, complexity and cost that the RNZAF will spend rebuilding the capability. It would be embedding into an established operational fleet, with existing training, support and sustainment structures in place and New Zealand would simply be paying our fair share of the bills to the contracted firms providing this – principally Boeing Australia, GE and Raytheon. New Zealand would also be expanding the operational synergies and strategic weight to the combined Anzac force structure and achieve economy of scale advantages to boot.

Though I do not have the latest annual cost of operations for RAAF 1 SQN’s Super Hornets the best projected estimate using Australian National Audit Office and Australian Budget figures are that the full extracted cost to operate their 24 F/A-18F capability is AU$245m per annum. A simple extrapolation of those figures means that if New Zealand were to contribute to the operation and sustainment of 12 additional aircraft to the existing 24 RAAF Super Hornet would it cost a further AU$122.5m p.a (NZ$135m) on top of this. Of that amount around $50 million would go towards the contracted support providers, the remainder is the cost of direct operational costs such as fuel, expended weapons, salaries, and administration.

However the clock is ticking if we want brand new Super Hornet aircraft. An incoming New Zealand government in 2023 would need to immediately start a dialogue with the Australian and United States governments to offer a proposal that focuses on the win-win aspect for all three nations in how a Kiwi component towards a joint RAAF-RNZAF Super Hornet squadron would work. It will have to move quickly to secure what might be the final production slots on the Super Hornet line at the Boeing St Louis plant. The US Navy wants to start redirecting money away from new-build Super Hornets and squirrel it towards its future NGAD (Next Generation Air Dominance) project as well as buy more carrier based F-35C’s. The House and Senate are not so convinced. A US$900 million budget extension in FY 2022 for the production of 12 new-build Super Hornets was a late inclusion in the revised 2022 National Defense Authorization Act unveiled by the House and Senate Armed Services committees on Dec. 7 last year following pressure from Mid-West based Senate and Congress members. But that was in extremis, and only for 12 further aircraft, to keep the St Louis production line busy through to Christmas 2024. Maybe another production block of 12 aircraft forced through in FY23 by House and Senate Armed Services committees could happen but that is as yet highly uncertain.

Like what happened with the final run of C-17’s these final 12 Super Hornets will possibly end up being “Whitetails”, meaning they are unlikely to be assigned USN serial numbers and will eventually become available on the open market as a commercial sale. So a narrow window of opportunity exists for New Zealand to take advantage of these final production aircraft – the worry would be if oil rich Kuwaiti grabs them first as they, along with the RAAF, are the only other operators of this aircraft type.

If the circumstances and timing were such that New Zealand could acquire these final dozen Super Hornets we should seize the opportunity. A Kiwi squadron of 10 operational aircraft and a training flight contribution of 2 aircraft embedded within the RAAF force structure would cost us US$900 million (NZD$1.33B). This is the “Gross Weapon System” (GWS) cost for the latest Block III Advanced Super Hornet variant, based on the US Department of Defence contract last December with Boeing for delivery in late 2024. Though the actual fly-away build cost of the Advanced Super Hornet is US$67.161 million per unit – the higher GWS cost is the true cost in that it allows for initial support, spares, training etc.

If new build Block III F/A-18F’s were not available there is the alternative option of acquiring used ex USN F/A-18E/F Block II Super Hornets that have all gone through the same spiral upgrades as the RAAF aircraft. To give you an idea of the cost of a used Super Hornet, the value of ex US military aircraft is based on a US Government Accounting Office calculation of current airframe hours deducted from the US Navy Specification SD-565-3-2 structural fatigue safe life standard, which in the case of the Super Hornet is 6000 flying hours. This is calculated by a percentage value that corresponds to the original GWS cost of the aircraft when delivered new to the US Navy. For example if the GWS cost was originally US$77.3 million per unit (the historical GWS average cost) and the aircraft in USN service had flown circa 4500 hours of its 6000 hour limit, then its present value would be 25% of its original GWS cost when new. In other words that Super Hornet would be now worth US$19.3 million dollars if sold to New Zealand as an US Excess Defence Article.

However, all these aircraft would require undergoing Boeing’s Super Hornet Service Life Modification (SLM) program. The first phase is an 18-month process of inspection, modification, repair and restoration that will extend the service life of the aircraft from its current 6000 flight hour (SD-565-3-2 limitation) to 7500 flight hours. During this phase, each Super Hornet is extensively disassembled, thoroughly inspected, and undergoes a restoration and repair process that takes 5000 man-hours at a cost of US$11.45 million per aircraft. At the end of this first phase the aircraft would be technically the same as the RAAF Block II but with an additional 2000 hours on their airframes. Nevertheless, an airframe that had 4500 hours prior to Phase 1 of the SLM would be able to fly for a further 15 years or around another 3000 flying hours in USN service flying off their Carriers. The reality though is that the refreshed Super Hornets would now be using military runways like RAAF Amberley and RNZAF Ohakea where the structural load stresses on the airframe are far less than the undulating short deck of a Carrier with catapults and arrestor gear. This alone can extend their structural fatigue safe life by a further 1000 flying hours (based on fatigue testing difference between carrier and non carrier airframes), which would give enough annual flying hours to see these ‘refreshed’ Super Hornets through to the late 2040’s.

For around NZD$46-50m per aircraft this “refreshed airframe” approach is a reasonable option. The only foreseeable issue is that the majority of them available would be the single seat F/A-18E model as they have numerically been the dominant variant of the USN Super Hornet fleet. This does have some repercussions in that the tactical reconnaissance role won’t have the same level of capability output or situational awareness due to the loss of the back seat role. It still can be done, but the pilot workload increases. If the decision is made to go down the cheaper “refreshed airframe” route it may be worth considering slightly increasing the number of airframes from 12 to 15, to allow for 12 single seat E models for operational tasking and 3 additional twin seat F models for training based at Amberley. These 15 airframes could be delivered in annual tranches of 3, starting with the 3 F models for training and the subsequent E models over the next four years. With the 2-year delay between ordering these “refreshed” aircraft and the Phase 1 upgrade process and delivery, prospective aircrew could start their training process. The expectation that 15 “refreshed” ex USN Block II Super Hornets would cost circa NZD$700-750 million to acquire. This compares to NZ$1.33 Billion for 12 new build Advanced Block III aircraft.

The future second phase of the SLM program, which can eventually run concurrently but over a further 12-month process, will see extensive additional modifications where the aircraft is effectively remanufactured to Advanced Super Hornet Block III standard like the most recent new-build aircraft now coming off the St Louis line. It is very likely that the RAAF Super Hornet and Growler fleet will be upgraded to Block III Advanced status within the next ten years. This Block III service life + upgrade which will roll out across the USN’s Block II fleet over the next 15 years adds another layer of utility and capability to the platform.

Some significant points stand out. Each airframe is essentially remanufactured to ensure a SD-565-3-2 airframe life of over 10,000 flying hours. Engine upgrades will see a 20% increase in thrust and fuel economy and combat range is extended by 20%. There is a 10% reduction in radar cross-section (RCS), and a further drop in RCS is achieved by use of ‘Have Glass IV’ like external stealth coating and a conformal fuel tank option is available increasing range even further. On the avionics side the mission computer, cockpit, and sensors have capabilities nearly on par with the F-35A. As yet there is no reported costing estimate available for the Block III upgrade as the Phase 2 SLM wont be given an allocated budget appropriation until FY24. Nevertheless consideration must be made for this future upgrade package, as it would seemingly be a wise synergetic circumstance in the context of the RAAF’s future F/A-18F and EA-18G developmental pathway.

But an air combat capability for New Zealand is not all about high level threats against the PLA(N) and PLA(AF) conducted under the umbrella of a joint Anzac air task force. Eventually, an Ohakea based squadron of 10-12 aircraft would also enable the RNZAF to conduct what is known as the Tactical Air Support for Joint Defence Operational Training role and thus provide the NZDF with greater integrated training across the land and maritime domains. These are tactical support and training roles that were a routine aspect of the former Air Combat Wing, which disappeared when the A-4K capability was disbanded.

Tactical Air Support (TAS) to Joint Defence Operational Training, are force enabler activities, which assist wider Defence Force elements in generating their readiness and training. TAS encompasses:

  • Air Defence training for RNZN and RAN Frigates,
  • Land-Air Integration Training for NZ Army Battalion Group Exercises,
  • JTAC/FAC training for 1 NZSAS and 1 RNZIR,
  • DACT for RAAF and other Pacific Forces,
  • OpFor(Air) for ADF/NZDF Exercises.

The TAS role is expanding now to include tactical support missions at the lower end of the threat spectrum such as Low Intensity Close Air Support for SASO (Stability and Support Operations) missions, Rapid Tactical Reconnaissance in HADR (Humanitarian Aid and Disaster Relief) situations, Maritime Enforcement Support in our Economic Exclusion Zone (EEZ – think the Kin Nan incident) and would give New Zealand a baseline domestic Air Security & Response capability for our AIDZ (Air Defense Identification Zone). Therefore just on these wider joint operational training and direct security benefits alone, bringing back a squadron sized tactical air combat component is not just a smart and prudent strategic hedge, but adds real depth to our wider force training competency and security posture. This is irrespective of it being primarily a deployable frontline kinetic combat asset within a Joint RNZAF-RAAF air strike package.

Building up to a 12-15 aircraft Kiwi air combat contribution would expand the joint RAAF-RNZAF Super Hornet fleet to 36-39 airframes, allowing for the eventual generation of two expeditionary squadrons each with 12 operationally tasked aircraft. The remaining element of 12-15 training aircraft based at RAAF Amberley would remain as the core pipeline for RNZAF and RAAF aircrew training as well as high level depot support and sustainment. If for any reason the Australian Government wanted to independently deploy its own “expeditionary” squadron and the New Zealand Government had reservations about such a move, the Australians are still free to do so within the context of their own existing airframe numbers. New Zealand would not detract from them being able to operationally uncouple and pursue its own defence needs. The core training structure would be intact. Likewise, if New Zealand noted a rise in direct grey zone security challenges, for example in the eastern South Pacific, to provide a presence and deterrence tasking, and Australia likewise did not feel it was in a position to commit its own assets towards this, New Zealand would still be in a position to do so with our own assets. Since both countries will always possess their claims of an independent foreign policy when push comes to shove, being integrated as per the above force structure does not restrict or force both countries to go against their independent stances on particular issues.

An incoming New Zealand government, as part of its air combat capability proposal to Australia, would also need to work with the RAAF in establishing a pipeline for Kiwi aircrew for Fast Jet Pilot (FJP), Air Warfare Officer (AWO) and ground technician courses – to prepare aircrew for that leap from our 14 SQN T-6C Texan II’s into the Super Hornet. The creation of a separate new LIFT (Lead In Fighter Trainer) capability like we had with the Aermacchi MB-339C is unnecessary and costly for the small size of our future air component. Obviously the New Zealand government would have to pay their way for each aircrew candidate seat on each FJP, AWO and Ground Support Technician courses. The competency of the RNZAF T-6C Texan is such that Phase 1 of the 14 week Introductory Fighter Course, can be carried out at Ohakea, before aircrew move to Phase 2 LIFT training on the BAE Hawk with RAAF 79 SQN at Pierce. Following Phase 2 of the LIFT course aircrew progress to a 20 week advanced air-to-air and air-to-ground weapons course with RAAF 76 SQN at Williamtown.

Fortunately there is some spare annual flying hours capacity within the RAAF Hawk fleet to train 2-3 Kiwi aircrew per annum, through both the Phase 2 LIFT course and advanced weapons courses as the RAAF are flying just 4050 annual flying hours on the Hawk fleet, which has the latent capacity to fly well over 6000 annual hours. Obviously, the New Zealand government will need to pay a pro-rata percentage of the AU$180m annual cost of the RAAF Hawk trainer capability for each candidate FJP and AWO. There are no current RAAF figures at hand regarding the cost per student pilot, however the closest comparison would be the Hawk T-2 at RAF Valley, which has a cost per student of £2.7m or NZ$5.2m through the Phase 2 LIFT and advanced weapons courses. The Canadian and RAF Phase 2 LIFT and Weapons courses possibly are alternate training options – if for any reason an RAAF course has a capacity issue.

Only once those two phases on the BAE Hawk are completed could Kiwi aircrew progress through to type conversion on the F/A-18F Super Hornet with 1 SQN’s training flight at RAAF Base Amberley. This eight-month long operational conversion course covers all facets of F/A-18F flight operations from the basics of flying the aircraft through to conducting complex tactical sorties including electronic warfare, tactical reconnaissance and maritime strike. From start to finish following around 3 years and 6 months of training on the Texan, Hawk and Super Hornet would the newly minted Kiwi aircrew will be considered operational.

There is also a way to truncate this length of time on the aircrew training front and kick-start a locally based capability faster. This can be achieved by the use of qualified FJP’s and AWO’s who are eligible for a lateral transfer into the RNZAF from Australia, Canada, United Kingdom and the United States of America. The NZDF already has a number of slots for personnel from our FVEY (Five Eyes) partner nations in highly specialist war-fighting roles who are eligible to serve as they either hold a Permanent Residence Visa with indefinite stay or following consideration from the Minister under s72 of the Immigration Act in light of their critical skills. This could be a way forward in that we would start with a mix of established experienced aircrew from our FVEY partner nations on short-service commissions, along with RNZAF graduate aircrew selected for the Super Hornet assignment. Of particular note this may be very useful with respect to getting hold of experienced Qualified Weapons Instructors, Qualified Flying Instructors and Qualified Air Warfare Instructors with Fast Air backgrounds.

When capacity is built up on the training and personnel side and sufficient New Zealand owned Super Hornets are in service, eventually we would begin to transfer operational aircraft and crew back home across the Tasman (leaving a permanent joint training attachment at RAAF Amberley for our ongoing training requirements). Working with Boeing Australia, who is the prime support and sustainability contractor to the RAAF fleet, a small Ohakea based operational maintenance and unscheduled repairable item replacement facility similar to what exists within RAAF 1 SQN would be required. This would include provision for hangar space, considerations for weapons storage, test and support equipment, administration, line maintenance facilities and potentially a flight simulator. A budget for this would have to be further investigated. However as an example of the size and scope of this facility, it possibly would be similar to RNZAF 3 SQN’s $43 million aircraft maintenance facility at Ohakea. Under this proposed integrated (though partially distributed) basing model our higher levels of depot level maintenance, engine sustainment, and general fleet support on the aircraft would still remain under the existing Boeing Australia, GE and Raytheon sustainment and support contracts that have already been in place for 12 years.

So there you have it folks, a pathway to a redux of the RNZAF air combat capability. One that can affordably provide New Zealand what it requires to cover our own direct air power needs, but also deliver a timely and appropriate force enabler to our closest and officially only defence ally – Australia. One that can get that 7th and vital Anzac expeditionary air combat squadron over the line in just about the time we and our other regional partners are going to need it. Without it the 2030’s could be very bleak.

Written by Tom Hunter

April 25, 2022 at 1:00 pm

An RNZAF Air Combat Capability Redux – Part 1

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Could an ANZAC solution be the way forward and how could it work?

Op Ed by Ueda Station

The strategic context we are now moving into is not benign and represents significant challenges for New Zealand. The South Pacific is now the soft underbelly of the Indo-Pacific region and the merged air-maritime domain is where we are likely to be increasingly threatened. China has now breached the first island chain with its defence ‘relationship’ with the Solomon Islands and this strategic foothold for Beijing will see it will begin to further engage in the use of sharp power tactics. China will increase the tempo of naval and air tasking deep into the South Pacific and indeed the foothold in Honiara will permit the opportunity for it to disrupt and coerce defence and civilian operations of both New Zealand and Australia from its newly acquired sphere of influence. Over time China will translate this advantage into an Anti-access and Area denial (A2AD) strategy. Simply put, freedom of access into the South Pacific as we know it will simply get much more harder, which will effect – trade, travel, communities, families, resources, the economy – indeed the South Pacific the way it wants to be. It is a modus operandi that is classic Sun Tzu as seen in the South China Sea over the last 15 years.

This is a radical change of circumstances for us in comparison to the context of how we as Kiwi’s saw the Pacific 10 – 20 – 30 years ago, when rational though naive decisions were made to let go of our core defence capabilities that possessed strategic projection and resilient deterrence. We seemingly believed that we did not need them at the time, nor ever would. Our political discourse made a ‘soft power’ approach to defence a more virtuous direction of travel. This introversion by New Zealand has created a strategic vacuum, particularly in our South Pacific front yard. One that is wide open to exploitation from state actors, like China and potentially Russia, who have a completely different set of value judgments concerning the environment, societal cohesion, free markets, human rights, rule of law and the positive role of liberal democracy in bringing about equity and prosperity.

Though our benign strategic environment is now dead, the issue our Defence Force faces, hindered by the Helen Clark era acquisition blunders, is that we are woefully unprepared for the challenges ahead. Furthermore, New Zealand must explicitly understand, as we have failed to do for the last 25 years, that Australia as the regional ‘smart power’ possessing actual combat capabilities – cannot alone do all the heavy lifting on behalf of us in the South Pacific. We as Kiwi’s need to share this responsibility and be proactive about it, because as a nation we could quickly lose favour with Canberra, Washington, Brussels, London, Tokyo, Singapore and other ASEAN nations to our economic detriment. Tokyo learnt the hard way in 1991 during the first Gulf War that being “content to benefit from the efforts of the rest of the international community while avoiding taking direct responsibility” had its costs. (Freedman and Karsh 1993, p121). Democratic Leader of the House Richard Gephardt sent a letter to Prime Minister Kaifu threatening major export restraints on Japanese automobiles into the United States if Japan failed to make what U.S. policy makers deemed to be a sufficient contribution to the war effort. Gephardt’s letter was reiterated by US Secretary of State James Baker and later by US Treasury Secretary Nicholas Brady. In the end the US, UK, the Gulf States and France forced Japan to pay for 20% of the costs of the first Gulf War, some US$22 Billion and Bush 41 then vomited all over the Japanese PM as a thank you. Don’t think for a minute that any of the above Capitals in our wider region will let a laggard New Zealand off lightly if things go pear shape and we prevaricate or want to virtue signal off our own song sheet.

In light of this strategic upheaval the reality is that it is not possible go back 25 years to a 40 aircraft, 3 Squadron, Air Combat Wing anytime soon. To build back an air combat capability at the level as we previously had is too hard, too time consuming and too expensive. Any future Kiwi air combat capability needs to address our existing capability gaps with respect to maritime strike, airborne electronic warfare and tactical airborne reconnaissance. To maximise and future proof the capability any platform will need to also have the fullest possible utility to deal with the spectrum of issues that are coming down the pipeline over the next 20 years. It will need to deal with grey zone disruptors and A2AD tactics. The employment context required is very different from the time of the A-4 Skyhawk. A re-hash of the traditional close air support role of the A-4 Skyhawk with a bit of maritime strike on the side is not what this capability is about in the 21st Century. In fact the cancelled F-16 was going to take the RNZAF air combat capability fully into the 21st century by the time it had been upgraded to Block 50 Falcon Up standard at the end of its 10 Year lease. These future employment contexts for the F-16 were known within air staff planners, but somehow those critics commentating from outside the acquisition team thought that the F-16 capability was simply just a faster A-4.

A modern multi-role air combat platform allows for air power to be distributed across not just the air domain, but also the maritime and land domains to achieve certain kinetic effects or assist another platform, like a P-8A or special forces element, in achieving those kinetic effects. These kinetic effects can be lethal or non-lethal, offensive or defensive in application. Due to their agility and pace within a hostile threat environment air combat assets are cornerstone force enablers to get things done – a flexible, fast way to deliver support at the tactical level, through a multitude of payload packages. The flexibility is such that these can be maritime strike, tactical reconnaissance, electronic warfare (EW), combat air patrols (CAP), close air support (CAS), interdiction, air security, air superiority, or suppression of enemy air defence (SEAD) – all on the single platform. It is not a silo capability but a combat capability that integrates the air domain with the land and maritime domains like no other. Air combat platforms have now become highly versatile and reconfigurable, allowing adaptation to a wide range of roles generating an even greater combat efficacy. Boyd’s loop of Observe, Orient, Decide, Act (OODA) is a key part of this cross-domain synergy and an air combat capability is a core determinant in connecting this loop.

It is becoming obvious that we as a country need to do something and fairly quickly, because the strategic context is now very different from when Helen Clark was on the 9th floor of the Beehive. So if rehashing the past approach we took with the former air combat wing is not viable and having no air combat capability is potentially an even worse state of affairs – what do we do now? How do we solve the problem?

The solution to the Kiwi air combat dilemma lies with New Zealand seeking capability integration with the RAAF. The overarching driver to make this happen is the 1991 Closer Defence Relations Agreement (CDR) between New Zealand and Australia, which exists to seek an evolutionary process of examining the practical possibilities of cooperation in aspects of training, doctrine and equipment procurement. Such mutual defence cooperation could be a transitional situation like the current RAF-Qatar Eurofighter/Hawk joint squadron set up, or could be a permanent RNZAF-RAAF joint force operation. Personally, I think a hybrid of the two would work best, where the sustainment, support, training and doctrinal development remains within the RAAF structure, but New Zealand is able to eventually generate an independent Ohakea-based expeditionary sized squadron.

The idea of a integrating our air combat capability within the RAAF force structure is not a new one. Back in 1991 our fellow No Minister contributor Wayne Mapp first suggested the idea in an article he published in the Spring edition of Policy titled Restructuring New Zealand’s Defence Force as one of the future options. Thirty years on as Cold War 1.0 ended and we are now well along the way inside Cold War 2.0 Wayne’s suggestion may have found its time and place.

The RAAF themselves are now taking a whole-of-force approach to airpower application where the capabilities of individual platforms are enhanced by networking across their joint force. This produces sophisticated cooperative engagement effects by linking their distributed sensor platforms with their effector platforms through the sharing of critical mission data and situational awareness to circle the Boyd OODA loop. Their air power strategy focuses on effects, including deterrence, denial, influence, counter-influence, counter-coercion and cost imposition. Through Project Jericho they have begun to arrange this strategy to ensure that their new sophisticated platforms, like the P-8A, MQ-4C, F-35A, KC-30, EA-18G Growler, E-7A, E-55 and F/A-18F all have relevance in the emerging cross-domain grey-zone scenarios and can then provide the Australian government with flexible options. Within that strategic air power context – and there really is no escaping it now whatever wishful conceits some may have here – New Zealand has to find its place in this reality and proactively contribute.

By 2023 the RAAF will fly 72 F-35A, 12 EA-18G Growlers and 24 F/A-18F Super Hornets, across five operational squadrons. They will also retain a residual number of 24 F-35A aircraft pooled in 2 OCU for training and fleet replacement reserve. They have future acquisition options under Phase 7 of Project AIR 6000, (link is to Phase 2A/B) which will consider an additional purchase of 28 further airframes to form a fourth and potentially fifth operational squadron at RAAF Base Amberley, generating a total of around 100 F-35A’s. The F/A-18F Super Hornet is tasked as their main maritime strike platform and is crewed by a Pilot and Air Warfare Operator in the back seat. The fleet of 24 aircraft usually average 4800 hours per annum, which is around 200 annual flying hours per aircraft. Finally the EA-18G Growler, which is an evolved F/A-18F is the main electronic attack platform with an Electronic Warfare Operator in the rear.

In the second part of this commentary I will offer my suggestion as to which of these RAAF aircraft is the platform that would work best for New Zealand in re-establishing an integrated air combat capability with Australia. Affordability is always going to be an issue, and people will ask why not the F-16’s as they are potentially cheaper? In reply I would say that a similar new capability of 12 F-16V Block 70’s, even though it is an absolutely cracker of a strike platform, would see New Zealand spend in the ballpark of twice the cost with respect to real acquisition costs. We would also have to spend a lot more time and money rebuilding such a capability, as we would lack the advantage of partnership integration with the RAAF. Going down that route will take twice as long and twice as much, unless the Singaporeans or Yanks help us big time.

By 2026 according to Treasury’s December 2021 HYEFU New Zealand is going to have a projected GDP of $413.7 Billion and core crown debt of $137.9 Billion, some 30.2% of GDP. Since New Zealand loves to benchmark Scandinavian countries in public policy, if we want to use them as a guide to where they are going with respect to defence spending, Norway and Denmark have set a target of 2% of GDP by 2028 and neutral Sweden and Finland are almost begging to be let into NATO, which also has a 2% target. If we take out the P-8A and C-130J projects New Zealand is still only spending around 1.2% of GDP. The bounce up to 1.4% and 1.5% over the last couple of years is entirely down to these two projects almost running simultaneously, once they’re delivered we will likely drift back to an underwhelming 1.2%, which will not gain influence and keep friends in a deteriorating Indo-Pacific region.

If New Zealand’s defence spending was held above 1.75% of GDP benchmark through the second half of the decade and through the first half of the 2030’s New Zealand would not only be able to afford all of its Future 2035 Defence Plan that came out of the 2015 Defence White Paper, but three or more capable frigates and the joint air combat capability (as Part 2 will detail), plus add an extra P-8A and a couple more C-130J’s above the bare bones minimums we have recently acquired. There are programmes within the United States Defense Security Cooperation Agency (DSCA) that could assist New Zealand as it is a NATO+5 nation and under the Biden administration the DSCA is looking to be more creative in assisting countries in the Indo-Pacific region who, are struggling to acquire new capabilities. With the clout of Australia in Washington backing us, we should be able to strike a deal to get a modest, yet effective air combat capability over the line. New Zealand would be helping the Anzac nations get that 7th and vital expeditionary air combat squadron just about the time we and our regional partners will very much need it.

New Zealand is likely to be seriously tested as not just as grey zone threats rise, but as geo-strategic competition ramps up across all relevant domains. Possessing combat capabilities in all of these key domains is becoming increasingly an imperative – especially in the merged air-maritime context of the South Pacific. The continuation of a piecemeal force structure approach that treats an air combat capability as a silo output, one that we can pick and chose to have or not to have is long gone. Time, tactics and technology have marched on – along with the deteriorating strategic environment. New Zealand cannot sit by and do nothing with respect to redeveloping an air combat capability, yet we are hindered by the fact that the cost of attempting to rebuild the previous air combat capability model from 25 years ago is too expensive and too hard to do by ourselves.

In my opinion the practical solution is the development of a squadron sized air combat component integrated within the current RAAF Air Combat Wing structure. This can affordably provide New Zealand what it requires to cover our own direct air power needs, but also deliver a timely and appropriate force enabler to our closest and officially only defence ally – Australia. In Part 2 of this opinion piece I will explain in greater detail how it could work. Nevertheless, a redux of a Kiwi air combat component that is integrated into an RAAF strike wing will send a message to all our regional partners from Washington DC to Singapore, from Tokyo and Canberra, that we are once again serious about playing our part in building genuine deterrence capabilities as our contribution to the regional security architecture during this time of increasing geo-political challenges. That we Kiwi’s are becoming self reliant in partnership again and are going to step up and take responsibility in helping to address the strategic vacuum in the South Pacific with a force for good. That we are moving on from being a fading regional ‘soft power’ and looking towards a future as an emerging ‘smart power’ that, upholds the liberal democratic values, fair and free trade, and the rules based global order.

Written by Tom Hunter

April 24, 2022 at 11:35 pm

China and its problems – two videos

with 7 comments

We hear the phrase about the 21st century being the Chinese Century that it can come as a bit of shock when this is not just questioned but attacked on it’s fundamental premises.

There are some negative projections of the nation that have not aged well, of which my well-thumbed copy of Gordon Chang’s, The Coming Collapse of China, published in 2001, is one. Like The Great Depression of 1990, Chang nailed a lot of China’s problems but extrapolated them too far. However, there have been many more books pushing equally silly boosterisms of China and they’re not looking too good either.

The current negative takes are not a shock to me because I’ve adhered to the phrase first coined by Mark Steyn (who takes a great interest in demographics) around 2005 that, “China will get old before it gets rich”.

However, there are always new surprises coming out about this and they’re explored in the following video from geopolitical analyst Peter Zeihan. You can find a bullet point synopsis of it at the Battleswarm blog, of which the following three points are worth quoting:

  • They were going shrink in half by 2100. “Then they realized that they had been overcounting people for some time.” Then new data moved the date moved up to 2070. And now they’re saying it will be 2050. “For that to be true, the Chinese would have overcounted the population by 100 million.” And all of those missing people are of childbearing age. Their population actually peaked 15 years ago.
  • Xi’s instituted a cult of personality, and silenced anyone capable of independent thought. “He knows that the country’s current economic model has failed. And he knows he can’t guarantee economic growth, and he knows he can’t keep the lights on, and he knows he can’t win a war with the Americans.”
  • Xi’s solution? “Naked, blatant, ultra nationalism. Ethnocentric ultranationalism of the Nazi style.”

I don’t agree with all his points (I’ve always thought Stratfor, his former employer, is over-rated) but they’re interesting, and the increasingly extreme nationalism has been noted by everybody.

This second video focuses on that nationalism, especially in how China’s approach to the outside world has changed so dramatically from the 2008 Beijing Olympic Gamers to today. One of the strangest aspects has been Chinese diplomats the world over, hurling insults at their host countries, from Brazil, Canada, France, India and (of course) the USA. This is the exact opposite of what diplomats are supposed to do.

The video thinks it knows why and it’s summed up in three words, “Wolf Warrior Diplomacy”, designed to stir up nationalism as a way to control internal security problems. At the end it refers to the demographic problem – but also makes references to two other problems I was not aware of:

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UPDATE

Based on comments, and as a balance to the above there’s also this book mentioned in the latter video, China: The bubble that never pops.

The Chinese economy appears destined for failure, the financial bubble forever in peril of popping, the real estate sector doomed to collapse, the factories fated for bankruptcy.

Banks drowning in bad loans. An urban landscape littered with ghost towns of empty property. Industrial zones stalked by zombie firms. Trade tariffs blocking the path to global markets.

And yet, against the odds and against expectations, growth continues, wealth rises, international influence expands. The coming collapse of China is always coming, never arriving.

There’s also an interview with him on this subject:

Written by Tom Hunter

April 21, 2022 at 6:39 pm

Control your soul’s thirst for freedom

with 15 comments

Over the years I’ve read and seen a bunch of dystopian SF books and movies, stories that paint not a wonderful, sunny future enabled by miraculous technology, but a grim, dark, almost inhuman future where the technology oppresses us rather than freeing us.

Neuromancer, Bladerunner, Battlestar Gallactica (2003 reboot), Aliens, A.I., Gattica….

Yet somehow I never thought I’d get to see it.

That’s in Shanghai, one of the largest cities in the world: twenty five million people locked down by the Chinese government in pursuit of Covid Zero, which they still believe is possible even after two years of dealing with General Tso’s Syphilis. It feels like a repeat of the autistic focus on goals during the Great Leap Forward and the Cultural Revolution.

Between that and drones flying around apartment buildings broadcasting warnings while people scream from their balconies for food, plus beating corgies to death in the street and wrapping up cats in mesh bags on the sidewalks where they are collected to be killed, it’s safe to say that China is not a place anybody would like to be – and absolutely not a society we want to emulate, even though we increasingly do, starting with the concept of lockdowns.

I’d already covered a story about the CCP’s approach to pets in Time ran out for Pudding, where a little boy in Hong Kong had to hand over his pet hamster to be killed by the authorities. The cats in bags is another echo of the recent Chinese past:

Even China’s feline population suffered as Red Guards tried to eliminate what they claimed was a symbol of “bourgeois decadence”. “Walking through the streets of the capital at the end of August [1966], people saw dead cats lying by the roadside with their front paws tied together”

If you wish you can find videos of the cats in bags but I found the images too upsetting to put here, despite being not gory.

It’s not just events like this that have made me doubt the claim that the 21st century will be China’s. For various fundamental reasons arising from China’s history and culture I’ve long held the opinion that the current CCP control of the nation differs little from other dynasties stretching back 3000 years. A massively centralised, technocratic State government under which peace and prosperity increase for the population for a long time – followed by a decline in competence due to that centralised technocracy having no governing checks and failing to be refreshed with new minds and ideas, in-turn followed by peasant rebellions, the rise of feudal states and war. In the past the periods of peace might last for centuries, and the decline too, but today’s world moves faster.

Some of these problems are outlined in this article, Red Dusk, which discusses the problems of a declining working age population, the lack of state institutions that address health and retirement, and the growth of class divisions. I was especially amused by this:

Communist officials have been put in the awkward position of cracking down on Marxist study groups at universities, whose working-class advocacy conflicts with the policies of the nominally socialist government.

For all the talk of what their centralised goverment can achieve (and has achieved) – admired by the likes of Bill Gates, Justin Trudeau and Paul Krugman, among many other of the West’s ruling class – I see no evidence that the CCP has real answers to any of those problems. Worse still, their economic success has seen a rise in the old chauvinism that it’s all down to their superior culture, ignoring the fact that as recently as the 17th century, Europe ranked below China in almost any measure of power, but that it was the Western culture of allowing a diversity of ideas across a range of culture, from art to business to politics, that enables Europe to rise in power far beyond China.

That has not changed, despite some pretty awful excesses that have developed recently in the West – excesses which mirror aspects of China under the CCP, primarily conformism and control. But those have their limits, as Nazi Germany, Imperialist Japan, the USSR, Mao’s China and a host of smaller nations have found.

We need to uncouple ourselves from China, although economically that may not be possible because we’re too far gone ourselves. But perhaps just focus on nothing but economic trade with them and dump everything else about the “relationship”. Twenty years ago the Free Trade people argued that we would be exporting our values to Communist China (I was one of them), but it’s become obvious that we’re not and instead are importing their values into our society.

Perhaps I’m too pessimistic about the Chinese situation? In a small way the fact that the CCP is using a phrase that acknowledges the human soul’s desire for freedom is perhaps a tell. I don’t recall any Chinese communist campaign of the past that even used the word “freedom”, let alone the idea of it being tied to an individual human soul.

In other words I’d have expected the drones to be shouting communist boilerplate propaganda in commanding tones – “No person and no force can stop the march of the Chinese people toward better lives!“, or some such shite – rather than making what almost feels like a spiritual appeal to the people.

Written by Tom Hunter

April 14, 2022 at 8:50 am

Money

with one comment

I’ve occasionally written before about the status of the US dollar as the global reserve currency, usually in comments in response to claims that the US dollar is finished as such, because the mighty, mighty Chinese economy is powering into the 21st century and America falls and yada, yada, yada.

These claims have been amped up by the invasion of Ukraine by Russia, not least because of the sanctions levied against Russia:

Blocs of nations have long been chasing dollar alternatives. These latest sanctions have merely forced the pace.

The world will no longer consider the dollar a dependable monetary bedrock. If the United States can kick Russia from the international payments system, it can kick other miscreants from the international payments system.

There’s also this from that same article, which actually focuses more on the realpolitik of the Ukraine invasion and US-Russian relations, than on economics but which has another interesting side-note on the latter:

The Western press was full of gloating stories about how Mastercard and Visa stopped handling transactions when Biden announced the sanctions. That’ll show ’em. But those companies had done the same thing back in 2014 when, with Barack Obama at the helm in the United States, Putin gobbled up Crimea. This time, Putin was ready. He had already implemented his own card payment system. Mastercard and Visa piggybacked on it. One irony of the situation, as the web site Daily Reckoning observes, is that:
“instead of Visa and Mastercard getting the fees, Russia’s central bank collected 8.2 billion rubles in net profit, or about $94 million at current exchange rates. Russia actually profited from Visa and Mastercard sanctions.”

The Rouble (or Ruble if you like) has also bounced back to pre-invasion levels against other currencies.

However, for a whole variety of reasons – and the fundamental, structural problems with the Chinese economy will not get even a look-in here – the US dollar is going to stick around as the reserve global currency and this article explains why, specifically in comparison to the Chinese Yuan:

The Federal Reserve calculates, for instance, that the dollar is a part of some 85 percent of all the world’s currency exchanges. The next most significant is the euro at 35 percent, which includes euro-dollar transactions. For all Beijing’s pushing, the yuan at most constitutes 5 percent of these exchanges. About 80 percent of all trade contracts globally are denominated in dollars, whether an American is involved or not. The yuan barely exceeds 5 percent. According to the International Monetary Fund (IMF) some 60 percent of all central bank currency reserves are held in dollars, down from 70 percent at the turn of the century but still an overwhelming proportion. The next highest is the euro at 20 percent. China’s yuan amounts to a mere 2 percent.

The article also goes into the same arguments I’ve made about the problems with having China holding the global reserve currency; there are a quite a number of issues but they boil down to the Chinese Communist Party’s hold on China, if you think America is capricious the world of Xi Jinping is one hundred times more so.

The article also notes that we’ve heard all this before:

  • During the fallout over Nixon’s collapse of Bretton Woods and the dollar-gold link in the early 1970’s.
  • The great inflation of the 1970’s and early 1980’s would doom the US dollar, not to mention all that “crazy” military spending by “Raygun Ronnie” (see Paul Kennedy’s The Rise and Fall of The Great Powers in the late 1980’s for the then fashionable academic wank on the end of the USA).
  • The rise of Japan in the late 1980’s when places like the Emperor’s Palace grounds were worth more than all the land in California and Japanese companies were taking over the world – paradoxically these claims came just as Japan peaked, after which two decades of low growth and periodic recessions became the new normal for her.
  • The rise of the Euro in the 2000’s produced a lot of chest thumping – right up until problems emerged with Greece, Italy, and a few other EU members.

So it goes. In the case of China, here are just some of the problems the world would face:

China, which pursues mercantilism and cronyism, can make no claim to operating a system under the impartial rule of law. Not only has the country violated patents and copyrights on every continent, but it has blatantly stolen technology and trade secrets from all its trading partners. It regularly alters rules with no recourse offered to either domestic or foreign interests, and Beijing threatens to expropriate assets from any who do not bow to its political demands.

Nobody will trust such a nation, and in any case, like Japan, China has not yet shown how it’s moving from being an export economy, and having to back the Yuan as a reserve currency would make that transition even tougher.

Written by Tom Hunter

April 5, 2022 at 1:00 pm

Food

with 9 comments

For a guy who is basically in the business of making food I’m embarrassed to say that this news got away from me until now.

The Return of the Third Horseman

As viewed from an agricultural point of view, the world’s largest wheat exporter invaded the world’s fourth-largest wheat exporter. That alone condemns the Middle East to its most volatile and violent period in at least the last century.

One should always be leery of people making apocalyptic predictions; they usually don’t come true.

However in this case there’s a lesson from the recent past:

In 2010, dry weather across Western Siberia prompted concerns about the Russian wheat crop. In preparation for a poor harvest, Russian President Vladimir Putin ordered temporary export limitations for wheat, Russia’s primary agricultural product. Within weeks global wheat prices had doubled; Prices tripled in Russia’s primary export market, the Middle East. Those increases contributed to the series of protests, riots, coups, revolutions and wars we now know collectively as the Arab Spring and the Syrian Civil War.

What’s happening now in Russian and Ukraine is a lot worse than that. Farmers are simply not getting Spring wheat planted, whether for reasons of war (Ukraine) or financial problems caused by the war (Russia). However, the article looks at another aspect, fertilisers, three in particular.

Phosphate: China is the largest producer and they’ve banned its export because they need it for a massive increase in their rice crop to compensate for the massive cut in the number of pigs due to the Swine Flu Epidemic a couple of years ago. They culled as many pigs as the rest of the world has in total.

Nitrogen-based fert. Produced using natural gas. Guess who is the largest supplier? Russia. So a threat to supply, which has already boosted the cost, especially in Europe, where it’s increased five-fold.

Potash: Russia and Belarus have 40% of the global supply.

All of these things can be worked around, but that can take years as new supply chains are created; building new pipelines, factories and so forth – all massive expenditure with the knowledge that if/when the Ukraine War ends and if/when sanctions against Russia end, the availability and price of these things might rapidly return to the 2020 status quo.

Written by Tom Hunter

April 5, 2022 at 9:34 am