## 2005-11-30

### Why the RMB USD swap is set at 7.85

Macroblog (via Simonworld) noted WSJ's report on a swap transaction for RMB between PBoC and the state banks. As the strike price was set at 7.85 12 months later, some interpret this as an indication for potential appreciation and some thought PBoC was testing the water.

Macroblog has also kindly provided some link to the definition of swap. So let's try to understand whether it is fair deal to the banks, or if not who is going to be benefited if RMB appreciates (or depreciates).

A swap is basically an exchange of interests earned by the two parties involved.

1. Say, A has USD1, in 12 months, he will earn interest based on US interest rate, i.e. 4.74%. (see here, but number might change slightly every day)
2. But if he changes this into RMB and puts it into the bank, he could only earn the RMB interest rate, at 1.8%. (note: PBC's website shows 金融机构存款利率 is 2.25% set on Oct/2004, which is what i used initially, so there is a smaller basis point adjustment. According Jorge (see update below), after 20% tax the effective return is 1.8%.)
3. The difference in interest rate is 2.84%, which is quite significant (this is one of the reason that speculators believe the exchange rate could change)
4. The state banks have RMB8.0805, they have two options to invest
• (A) earn 1.8% interest, have 8.0805 x 1.018 in 12 months;
• (B) exchange to USD with PBoC, earn 4.74% interest in 12 months, then exchange USD1.0474 back to RMB, if at the same rate of 8.0805, it will make 1.0474x8.0805 in 12 months
• (B) is obviously a better option for the state banks, but a bad deal for PBoC
5. PBoC is not stupid, so it enters into a swap contract with the state banks, making sure it is a fair deal. i.e. the state banks will earn exactly the same return of 8.08x1.018. Therefore, the exchange rate for this particular trasnsaction 12 months later should be 8.0805x1.018/1.0474=7.8537! Now option (B) will become 1.0474 x7.85 = 8.0805x1.018, same as (A)

In short, this is just a simple mathematical exercise. If the swap contract is for 24 months, the strike price wil be 8.0805x(1.0216/1.0486)^2=7.67. (2-year rate for USD is 4.86%; 2-yr rate for RMB is 2.70% in PBC's site with 20% tax applicable)

This tells us NOTHING about the expectation of RMB excahnge rate. Because the return for PBoC and the statebanks are not affected by any change in the currency market.

P.S. In reality PBoC should take into account the volatility (though there is no historical data) and charge a premium if it expects USD to appreciate, and a discount if otherwise. PBoC probably wants to use some RMB to cope with the capital inflow (FDI + speculator) and expect the flow may reverse in future, so it is willing to do the swap. This provides an additional avenue to sterilize the USD (vs issuing RMB bonds).

Update (Nov 29 evening): Standard Chartered Bank's Wang Zhihao apparently did the same calculation in a report titled "RMB Silent and important move 人民币：沉默而重大的举措" It was also reported that NDF contract converged from 7.74 up to 7.77 immediately after the news was heard. Wang commented that traders correctly interpreted the signal that the x-rate will be more stable.

Update (Nov 30) to explain the 1.8% RMB interbank yield: Jorge explained the tax (at 20% of the interbank rate 2.25%) in a comment; Dan Slater of loomberg said "China's banks are being squeezed by deposit rates of around 2.25%, compared to money market rates, which are just over 1.5%."

Categories:

## 2005-11-29

### The quiet appreciation of RMB

By November 18, RMB has appreciated by about 0.33% against the USD since July 21st. Small Change, but signficant, especially for USD has appreciated against other currencies.

In fact, the trade weighted index for USD has increased from 85.2653 to 87.2376 from Jul 21 to Nov 18, by 2.31%. This means RMB has appreciated by about 2.31+0.33=2.64% against the trading partners of USA (using USA's trade weight).

Meanwhile, RMB has appreciated by 8.61% to the Yen and 6.42% to the Euro. China's trading partner is not the same as that of US. So I set out to make a simple calculation to see what the trade weighted exchange rate index has changed, using historic data from http://www.oanda.com/convert/fxhistory and http://www.x-rates.com/cgi-bin/hlookup.cgi, and trade weight estimate by Morgan Stanley. (some approx. is made by lumping "other countries" into the major currency zones as contracts for these trade partners use one of these major currencies. HKG and TWD were lumped into USD)

 Trade Weight % change Contribution USD 43.0% 0.33% 0.143% JPY 18.0% 8.61% 1.550% EUR 14.0% 6.42% 0.899% KRW 9.0% 2.48% 0.223% SGD 3.5% 5.24% 0.183% MYR 3.0% 1.85% 0.055% GBP 2.5% 4.33% 0.108% RUB 2.0% 3.10% 0.062% AUD 2.0% 6.90% 0.138% THB 1.5% 2.00% 0.030% CAD 1.0% 0.12% 0.001% Total 100% 3.39%

It turns out RMB (measured by China's trade weight index) has appreciated by 3.39%.

There is still one puzzle, that RMB is still effectively tied to USD. But some light might be shed on the puzzle if USD's trade weighted index decreases signifantly. The hypothesis is that RMB might not follow USD's decline, like a cart does not stop immediately if the horse that pulls it slows down since the rope slacks. This would effectively result in a direct appreciation of RMB over USD.

(Update Nov 30) However, such 'manipulation' with no discipline is dangerous, even if it is for a transition period. PBoC needs to set a (secret) target number and a clear set of rule in the transition period, to ensure no human decision is made, otherwise, the exchange regime will not be credible and it will invite disaster.

When China stuck with an objective peg. it was accused of manipulation. when it manipulated the x-rate, US said there is no more manipulation. Perhaps Snow and Bush were shown the table I did in their trip, and were asked, would you like us to manipulate or for us to leave it to a computer?
Categories:

### Coal mine accidents in a "properous dynasty" (盛世"的矿难), - solution simple, but takes determination

Another 134+ workers perished in Heilongjiang, this time in a state owned coal mine. "Accidents killed more than 2,700 miners in the first half of this year alone."

The painting shows Mao Zedong on his way to Anyuan (安源), Pingxiang City (萍乡), a coal mine in the west of Jiangxi province, just north of the famous Jinggangshan (井岗山)

• "Everyone old enough in China will know this picture...Mao (and Liu Shaoqi) went to Anyuan to tell the workers, "your working condition was horrible, what you dug is your own blood, you live a live worse than that of cow and horse, this is all due to an unreasonable system; therefore, you should stand up, organize your own union, protect your own interests, and overthrow the unreasonable system"... 80 years have passed, what are the fates of the mining workers?... I am reminded of a black joke, thanks to the Party, we finally can live like the cows and horses now!"
• "现在中年以上的中国人都会清楚地记得一幅曾经铺天盖地的画——穿长卦的青年毛泽东手拿一把伞走在去安源煤矿的路上，画名就叫《毛主席去安源》。
且不论搞农运起家的毛泽东进入以刘少奇为主导的工运圈是否偷天换日违背史实，重要的是，毛或刘去安源干什么？他们是去那里告知矿工，你们的工作条件很差，你们挖出来的是你们的血，你们过的是牛马不如的生活，而这一切都是一个不合理的制度造成的，所以，你们必须站起来，组织自己的工会，维护自己的利益，推翻不合理的剥削制度。这，是不争的史实。 将近八十年过去了，中国矿工们的命运如何？......我想起一个黑色笑话：旧社会，我们是牛马不如，感谢党，我们终于过上如牛马的生活了！" - "盛世"的矿难

-----

To be sure, China's mining workers do make more money now than many rural farmers and migrant workers (picture compares the condition of coal miner in Manchuria 1940 and Yunnan 1990s, not much improvement from the Japanese colonists). That is because they are risking their lives on a hazardous job. According to this post (in Chinese, more pictures in the link)

• Mining workers can make twice as much as their counterparts who operate on top of the mines, i.e. RMB1000-1500 a month. The highest paid worker in the large mines in Shanxi could make RMB3000.
• However, a portion of the pay is "taxed" by corrupted managers.
• Many mines operate on minimum facilities. i.e. no breather, minimum machinization, hence slashing the cost of mining by as much as 70%, to about RMB 40/ton
• The miners are paid by the amount of coal they mined, so they often continue to work even if the gas concentration in air exceed the recommended safety standard of 1%
• There is a back-of-the-envelope calculation on the economics
• Worker can move 50kg per trip, 20 trip/day, making about RMB30 for 1 ton he moves
• Wholesale price is about RMB135 (450-500 for hig quality coal), miscellaneous other cost about RMB20-30, owner makes about RMB80/ton
• The right to mine a 50k ton pit costs about RMB0.8M. So the owner can recoup the cost in the first year

What does the economics tell us? There is significant profit margin even if the mine owners spend more to improve the safety of these mines.

-----

I have previously discussed about the need of a quantifiable incentive system for China's bureaucracy. I am aware of the fact that such scoring system do exist for the high level official, especially in terms of key figures such as GDP growth. What I am not sure is how such system can be improved and implemented. A few weeks ago The Economist has a great report on the "Greening of China" (or here), about the points systems and the inadequacy of it.

• "AN ELABORATE points system that determines the careers of officials is often blamed for many of China's problems. Targets are usually set by the next-highest level of the party (for party leaders) or government (for government officials). To minimise the need for subjective judgments, they are often very precise.
• A leader is told that his area must achieve a certain rate of GDP growth, attract a certain sum of inward investment and increase government revenues by a specified amount.
• Some of these are designated as “veto” targets: failing to meet them will ensure that the cadre is rated as underperforming, even if he scores well in other areas. GDP growth, population control and social order are often among the veto categories.
• In their drive to meet targets for economic growth, local mandarins squander money, ride roughshod over citizens and ravish the environment. So now China is trying to devise and embed into its assessment of officials a way of calculating a “green GDP”—which allows for environmental costs in national accounts—to help mitigate some of these excesses.
• Last February, the government said that ten regions, including Beijing, were carrying out a pilot project in green GDP assessment. Pan Yue, the deputy director of the State Environmental Protection Administration, said a “framework” for a green GDP accounting system could be unfolded within three to five years. This would make China the pioneer of a statistical approach that no other country has adopted—and which many economists around the world eschew as an attempt to quantify the unquantifiable."

This is good. I am glad that China is using an objective measure to achieve its objectives. This is really how China Inc should be run. The measure and the system are bound to be imperfect from the start. But any thinking along this line is already a great start.

The safety of the coal mines and the responsibility to control pullution can also be enforced by such system.

• First, "veto" scoring needs to be implemented in the local official appraisal system. Recently China imposed fines for those violating safety standard and even shut down some of the privately operated mines. That is a good start, but far from enough. Heads need to roll, at least some heads in the officials and some in the commercial side. Incentive needs to be tough and quantifiable.
• e.g. is 200-220k RMB per life enough for the Qitaihe accident? should there be punitative penalty? For smaller mine owners, should there be deposit (and insurance) in case they would go bankcrupt?
• Should the local government also be punished and fined?
• But the top down approach is not enough. Someone needs to be given the incentive to monitor the situation. For example, insurance need to be enforced, with high pay-out floor. Then the insurers will do their job in checking and enforcing safety standards are followed. And insurers should be empowered to do so by law.

650billion Yuan, 6% GDP. Dear President Hu, and the local officials, here is the economic incentive to justify the cost for doing this.

## 2005-11-28

### To dispel another myth: "China finding excuse from Yasukuni to instill popular 'hatred' to Japan"

The Asiapage quoted Japan Today about China asking W Bush to persuade the Japanese hardliners to stop visiting the Yasukuni shrine.

The pro-Yasukuni camp and the China-demonizing camp have been pouring myths like these, e.g.
• "The Chinese Communist Party, for lack of a better way to vent popular restlessness and rationale for demonizing Japan, are picking at an historical wound and refusing to let it heal." - Naruwan Formosa

Most analysts believe China used the popular discontent (in spring 2005) to support its position on the UN Security Council issue. And it might need the excuse when Japan renews its bid to UNSC again. So solving the Yasukuni problem may weaken China's objection on Japan's bid UNSC.

The question is, which of the following represents China's objective

• As China announced, "You can be a normal nation if and only if you behave like normal nation" - i.e., Geneuinely wants to solve the Japanese militarism revisionist problem, (Yasukuni being the major problem, textbook the other) and is willing to accept Japan as a "normal" nation once it behaves like Germany, or once it is clear that militarism revisionism will not revive.
• The myth as believed by defenders of Japan's right wing or advocates of "China containment" - To continue using the Yasukuni as an exccuse to "demonize Japan"

The conversation between Hu and Bush provides us with a crucial data point in finding the truth.

If your objective is to instill hatred, you would like to keep the 'excuse' to feed on it. The myth will not be contradicted if China would keep protesting, knowing that LDP would not back down. But then why would it try to solve the problem by asking Bush to mediate and persuade Japan? Wouldn't this eliminate "a better way to" rant?

### Light viewing: horny bear, shaolin graduation, and panama canal

1) A metaphor of Russo-Japanese relationship. (Anyone volunteer to translate the voice-over?)

3) One week in Panama Canal condensed into 11 min (10,000 x Fastforward, via Boing Boing), if you cannot get into one of those cruises, you can experience the same in Sanxia (Three Gorges) tour in Yangtze River.

## 2005-11-25

### Profitability of foreign investment in China

China Herald talked about the profitability of P&G and Unilever in China.

It linked us to a McKinsey interview with P&G's head in China, who dodged the question diplomatically (but answered qutie accurately)

• "Our profitability in China today is comparable to the company average. With developing markets—and China, in particular—becoming an increasingly important part of the company's total operations, our shareholders would not accept a dilution of its financial performance. It is a financial imperative to continue delivering superior returns to our shareholders.
Some companies may take the attitude that China is a growth market where they need to build a position for tomorrow, thinking that eventually they could raise profitability to target levels. This is not what we are trying to accomplish in China. We have set adequate, definable profit objectives for ourselves and believe that from both a strategic and an organizational focus this is the best way to take on the cost challenge involved in serving the midtier consumer segment in China. Tough profit objectives force you to get your cost structure competitive."
Many multi-nationals are more profitable than they appear to be (and how they reported in their accounting books), mainly because the profit tax is higher in China, or that the China subsidiary is a Joint Venture where you have less % share of the profit, plus other reasons as explained below.

What explains (and how to create) the difference between 'real' profit and 'book' profit? Here are some examples:
• Transfer price:
• Pharmaceutical companies: cost of good is typically 5-10% of sales (or less), but when it is sold to the China JV (from Ireland or an intermediate in HK), the price is immensely inflated for 3 reasons: (1) profit tax in China (33%) is higher than in HK or Ireland (under 20%); (2) JV is not 100% owned and profit has to be shared with local silent partner; (3) China's price control in drugs, the higher the cost you can demonstrate, the higher the price you can charge; the higher the unit price, the more commission hospitals and physicians can earn
• Similar case for Coca-cola, the bottler JVs have to pay for an inflated price for the 'secret formula', and hence is less profitable
• Consumer goods that export (P&G and Unilever): the wholesale price for the exported goods is underpriced, because the HK subsidiary pays much less profit tax than the mainland factory.
• The reverse may be done in the initial years of tax exemption in the 1990s, or if the operation in China is really in a deep mess and does not have to pay for profit tax anyway, but such examples are rare.
• Equipment and machinery: inflate the price of the equipment. Inflating the size of the investment has good PR effect and will surely make local mayors happy (their promotion depends on such stats)
• Other costs (cross charging expenses, salaries, to the China subsidairy)

Now you understand why so many companies are still so eager to exapnd their investment in China, even though some may appear to be unprofitable, because they are actually quite profitable.

• Almost all pharmaceutical companies are profitable in China
• Most of those with sales over \$20M are also profitable in China, mainly because of scale (fixed cost) factor; the scale required may be higher if there is major investment in the production lines (e.g. auto industry)
How can China cope with the leak in taxation? perhaps lower its tax (for some industries) to increase its competitiveness. I guess the whole discussion above also applies to many other countries as well.

## 2005-11-24

### Map: a detailed but old ethnolinguistic map for China

This is a very detailed map, but it is dated in 1967. To be viewed together with my previous post on ethnic minorities.

## 2005-11-23

### Siberia pipeline odyssey

Putin signed an accord with Japan on the Siberian pipeline

China had negotiated and reached a deal with Yukos to build a pipe line from since 1992, from Angorsk via Chita to Daqing (yellow line). Unfortunately when Yukos was nationalized the deal was terminated. Japan has then seized the opportunity and tried to shut China out and the current pipeline was proposed (with a detour to north of Lake Baikal due to environmental concern - Baikal is the deepest lake (1637m or 5369 feet!) in the world and perhaps also the cleanest large lake remains on earth, the shaded areas are natural reserves oir national parks. It is also for environmental reason that the terminus was changed from Vladivostok/Perevoznaya Bay to Nakhodka).

Here is another myth that I scratch my head very hard:

• I can understand why Japan can be concerned about the pipeline passing through China, even though the route is shorter and the cost cheaper, because the Koizumi regime's general hostility and distrust on China. However, why does Japan try so hard to shut China out? The "reason" Japan provided is China will "siphon" away the oil at upper stream (they learned a lot from Saddam, it seems). But don't the Russian make the decision of which branch it open the taps to? Don't price and market determine who gets the goods? It should be noted that China does not try to shut Japan out, it just wanted a branch to deliver the hydrocarbon to Daqing.

Putin is not Chen Shui Bian or Annette Lu, he knows the more customers he has the better price he can command. He wants to be able to sell his oil to everybody, not just China, also to Korea and US via Nakhodka.

Had the Angarsk-Daqing line been completed, there would have been much less pressure on world oil demand because China could shift its sourcing to the extra capacity Russia has. Maybe we could all have been able to enjoy cheaper gas. Japan's bullying has hurt the world's oil importers including itself, as it has paid a lot more to import oil at a higher price today.

Update SEP/2006: Dili blog
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## 2005-11-22

### Cancer in China's healthcare system

The Economist (see below for more text) talks about China's failed healthcare reform
• "Hospitals, deprived of many of their subsidies, have become highly dependent on medicine sales, income from which now typically accounts for more than 40% of revenue (see chart).
• After mark-ups by hospitals and distributors (also mainly state-owned), the retail price of medicine can be 20 times higher than it is at the factory gate. [note: for most drugs it is about 3 times higher]
• In the half-reformed mess that is China's health-care sector, selective price controls are of little use. Without any significant increase in government support (the share of China's total health expenses borne by private individuals has increased from a little over 20% in 1978 to a touch over 58% in 2002), state-run hospitals will continue to regard patients as a primary source of revenue. "

China's healthcare reform is based on a half-hearted attempt to adopt the Singaporean system. It failed because it only copied half of the system. For example, without rationalizing diagnostic fees, the hospital cannot cover its cost and the physicians are badly paid, hence there is no way to correct the problem of overprescibing drugs. Without a proper insurance and reimbursement system, it is impossible to align reimbursement to insurance premium and hence no accoutnability on spending. When you have a good solution and you only get half of it, it is worse than importing a bad solution.

There is a cancer in China's healthcare system, corruption. Such corruption is hard to cure because it interwines with the whole system. Healthcare providers (hospitals and hysicains) are not paid for what they do. Diagnostic fees are capped at 10-20RMB, so they have to cover their cost through kickback at overprescibing drugs. This further exacerbates the problem because of the waste over unnecessary drugs, medical materials, equipments and operations. Cancer cells feed on the nutrients supposedly for healthy cells, but if you try to kill the cancer cells, you end up killing more healthy cells.

The Economist correctly stated the problem as the corruption in overcharging and overprescibing drugs. But the Economist wrongly scapegoated the government's lack of subsidy. The core of the problem is the hospital fee and insurance/reimbursement system, not the amount of government subsidy. Without a transparent pricing and reimbursement system, corruption will eat away any subsidy the government is giving.

Price control was also blamed by the Economist article. But that is not a major problem either. Chinese people have learned to circumvent price control, exacly the way we buy discounted tickets from airlines. i.e., there is an officially approved price-tag, and there is a real '(discounted) transaction price'. Unfortunately, due to lack of competition in the healthcare provider, the discount only reach the hospital/wholesaler level, and the patients end up paying for the "listed price" most of the times. As a matter of fact, the lowering of list price does help to alleviate the burden on patients. (France and many EU countries has price control for drugs as well) Then why was the drug revenue still stands at the 40% of total hospital revenue? Reasons:

1. Quantity: physicians can prescibe many differnt types of (unneccessary and even useless) drug
2. Price: physician can switch to newer products ("new" or "innovative" drugs are effectively not under price control) even if there is no visible difference in efficacy, because physician+hospital take a cut of 20-60% of the amount the patients pay

The problem of China's healthcare system is not due to lack of subsidy. It is the result of a totally screwed up system which does not align cost to price, thus creating the opportunity for corruption. It does not reward healthcare providers properly, thus encouraging and even forcing widespread corruption.

The cancer in China's healthcare system can be cured. It requires a transparent system with accountability. Moreover, to prevent corruption (and hence waste) the providers need to be rewarded for what they do. China did not fail because it imported Singaporean or American healthecare solution. It failed because it imported fragments of it and left out a number of loopholes.

The solutions to corruption in hospitals and in the city government are the same: reward them properly and align what they are rewarded to what they actually do.

---

Medicine in China Gouged
Nov 17th 2005 BEIJING

Market forces have left patients hurting
“GETTING your appendix out, is a year's farming up the spout,” goes the jingle in China, where the collapse of a once widely admired state-subsidised health-care system has left many citizens unable to afford even the most basic treatment. But the government's efforts to tackle the problem by ordering big cuts in medicine prices are winning it few admirers. Demands are growing for far more profound reforms.
While most prices have been freed from state control in the past 15 years, those of prescription medicines remain government-regulated. This has been of little comfort to patients, many of whom were once able to reclaim their expenses but now have to pay themselves. Hospitals, deprived of many of their subsidies, have become highly dependent on medicine sales, income from which now typically accounts for more than 40% of revenue (see chart). After mark-ups by hospitals and distributors (also mainly state-owned), the retail price of medicine can be 20 times higher than it is at the factory gate. A government survey published last year said nearly 30% of city residents recommended for hospitalisation refuse to be admitted, with some 70% citing the cost—though the cost of medicines would only account for part of that.
In the past eight years, China has ordered 17 price reductions affecting a wide variety of prescription drugs. In September the biggest cuts yet were announced. From October 10th, retail prices for 22 types of medicine, comprising more than 200 brands, were to be reduced by an average of 40%.
The numbers were headline grabbing, but have failed to impress patients and have been greeted with scepticism even by the state-controlled media. Not surprisingly, the pharmaceutical industry has been especially vocal. It says the latest move could further damage a sector whose profit margins have already been plummeting thanks to repeated price cuts, rising raw material costs, new quality standards and growing competition. Thinner margins, the drug firms complain, mean less money for developing new products.
In the half-reformed mess that is China's health-care sector, selective price controls are of little use. Without any significant increase in government support (the share of China's total health expenses borne by private individuals has increased from a little over 20% in 1978 to a touch over 58% in 2002), state-run hospitals will continue to regard patients as a primary source of revenue. To circumvent price cuts, doctors simply prescribe more, prescribe medicines not affected by the cuts, or recommend more (and often unnecessary) tests for which patients have to pay.
The government has tried to introduce greater price competition by relaxing restrictions on the medicine retail sector. But there have been problems: some of the new pharmacies have had their windows smashed by “unknown” attackers. Some hospitals have reportedly put pressure on distributors not to deal with them. Some have found their stocks rapidly bought up by distributors' agents—great for sales, but not for consumers. And in a market awash with fake medicines, the well-established chains are often considered a safer choice, despite their higher prices.
The price cuts this year would have been bigger—an average of 60% had been proposed—were it not for the pharmaceutical industry's pleas. But for consumers, it is unlikely that this would have made much of a difference either. Poorly-paid doctors have every incentive to find ways of keeping the revenue flowing.

In recent months, debate about the need for more thorough-going reform has intensified. The debate has been given extra momentum by an unusually hard-hitting report by a government think-tank early this year. It declared medical reforms to be “basically a failure”. One proposed solution is to concentrate government resources in key hospitals (giving them sufficient funds to avoid the need to gouge patients) and turn the rest over to private control. But there are also some who argue that introducing market forces into the medical system has been the root cause of the current problems. While officials struggle to reach a consensus, the pharmaceutical industry fears there is more meddling with prices to come.

## 2005-11-19

### China is the source of US trade deficit? and other myths

The Economist plotted US merchandise trade deficit for the past 10 years, and concluded China represents only 1/4 of the sum today, sort of commensurate to its share of world labor outside US, and quite contrary to what we have heard all these days from the media (and WSJ op-ed).

If you count non-merchandise trade (service, license fees, etc), China is running a deficit against US so the figure is even smaller.

The Economist also shows some interest tidbits
• "According to a recent Harris Poll, four in ten people believe that China will be stronger than America within a decade. More than half are concerned about China becoming militarily stronger within that same period; and the same proportion reckon China will have a negative effect on the future of America's economy."

I suppose we can use GDP and military spending as the proxy for comparison

• In 2004
• In 10 years, assuming GDP growth for China is 8% and US 4% (chances are that 8% is way too optimistic), population growth 1% for both
• GDP: \$3.56tn vs \$17.39 tn; GDP/cap: \$2,462 vs \$53,194
• Even if we use the dubious PPP to measure (assuming prices of food and houses remain at current relative level, compared with the US), China's GDP will only be at \$15.56tn and \$10,832/cap
• Assuming defense budget/GDP ratios do not change (1.45%-2.3% for China and 3.4% for USA), in 2014 it would be \$52-82bn for China and \$591bn for USA (PPP does not make sense here according RAND/etc, since a lot of the spending is to purchase arms using hard currency)

The media has now trained us to do our own homework and research.

## 2005-11-17

### Interpreting Taiwan's law, "taken in the business sense"

Jujuflop noted the GIO of "ROC in Taiwan" Pasuya Yao 's brachiosaurus brain has issued an official statement 'admitting its TVBS [mis]-handling

• "Judging from the background and intention of the legislation as outlined above, it is clear that “directly held,” as stipulated in Article 10 of the Satellite Broadcasting Act, should not be taken in the literal sense to merely indicate “direct investment by foreigners.” Instead, it should go one step further to include foreign investors achieving the purpose of direct investment in satellite broadcasting enterprises through a 100 percent indirect investment. The GIO concludes, therefore, that the TVBS ownership structure clearly violates Article 10 of the Satellite Broadcasting Act" - GIO
Apparently Taiwan's law should not be taken in the "literal" sense, then what about in the "business" sense?

First, here are the different ways to deliver video signal to your home

1. Terrestrial (broadcast) TV: must have a local broadcast tower, limited bandwidth, wide reach (to anyone within 20-40km radius)
2. Cable TV: must have local infrastructure (HFC) to deliver, virtually unlimited bandwidth, 100s of channels
3. [ADSL TV]: this is similar to Cable TV; delivered through your telephone line (copper wire), bandwidth smaller than Cable TV, but technology will improve quickly
4. Satellite TV: a satellite's typical footprint is almost 1/6 of the earth surface (typically 6 to cover the whole earth), you only need a satellite dish to receive (in reality, many satellite TV signals were relayed through local Cable TV or ADSL TV); virtually unlimited bandwidth, 100s channels
5. Broadband TV/video: this delivers to your computer; no geographic or infrastructure restriction, your broadband internet bandwidth is the only constraint. Example: the streaming or downloadable video clip we watch over the internet today.
6. [IPTV is a technology which can be send via any network, but more pratical in 2-way networks such as 2/3/5]

Taiwan's broadcast law was drafted with extreme clarity, as part of the obligation to open market in its accession to the WTO, with good business rationale

1. Terrestrial TV: foreign shareholder strictly forbidden (due to its wide reach)
2. Cable TV: Direct+indirect foreign ownership must be less than 60%, in which direct ownership must be lower than 20%
3. Satellite: Direct foreign ownership must be under 50%. It is clear that here is no restriction on indirect ownership, since it must otherwise be stated there when this law was drafted together with the Cable TV law
4. Taiwan does not have ADSL TV yet (HK's PCCW is already in service and gain significant market share). There is also no regulation you can put on broadband TV, unless you set up a great-firewall-full-of-holes like mainland China does.

The legislation makes perfect sense because there is no point in regulating satellite TV to restrict foreign ownership. Because satellite stations such as NHK (Japan) and CCTV (mainland China) can be received anywhere in Taiwan already. Why not legalize it by requiring a local intermediate entity, so that you can retain control (such as when there is legal or financial dispute), enforce transparency and collect some fees? By granting such license you also allow local Cable TV to relay the signals to extend the coverage. But you retain the flexibility to block them because you still have full control on the Cable TV operators.

-----

The legal definition of direct and indirect ownership is very simple and straightforward

• Direct: the company that is immediately above in the org chart, and its name appears in the legal document as "shareholder"
• Indirect: the company that you can trace up the hierarchy of "shareholder's shareholder" in the org chart

These definitions are very clear, in ANY COUNTRY, ANY LANGUAGUE.

• Mainland China failed to clarify 'direct' and 'indirect' in its telecom law and opened a loophole in the 1990s, it only required the shareholder to be "Chinese". Many foreign investors set up the so called C-CF(China--China-Foreign) JV (joint venture) to circumvent the law, so that INDIRECT foreign holding can be over 50%. It was subsequently corrected in 1999, by re-drafting the law. At least even the "communist" did not try to apply literally interpretation to its own laws.

The legal discussion is a tired topic. It is amazing that Pasuya would so blatantly disregard the legal advice he received (I suppose someone must have given him some advice). It is even more amazing many people in Taiwan, including the Taipei Times and Hsiech Chang-ting (his superior and a lawyer) preferred to cheat themselves by supporting Pasuya's mistake. Perhaps Chen Shui Bian is happy to watch Pasuya dragging Hsieh down, as there may be a power struggle within DPP.

## 2005-11-14

### Lawyers, engineers and scientists: comparing Chinese and American politician bakcground

The 88s had a post on Lawyers vs. Engineers. Now Russel Seitz, a physicist in Cambridge, MA, has an interesting essay published in op-ed of WSJ (Nov 11): "Congressional Math"
• US Congress Assembled contains two physicists, two chemists, two biologists, one geologist, 234 lawyers and an astronaut.
• All nine members of the neo-Politburo running the People's Republic are engineers, just like Herbert Hoover.

Full text below:

-----

At last count, Congress Assembled contains two physicists, two chemists, two biologists, one geologist, 234 lawyers and an astronaut. This puts the lawyers within striking distance of an absolute majority in the 538-member Congress. No other profession approaches this 43.5% plurality, and, under quorum rules only lawyers can construe, for they wrote them themselves, it usually constitutes a de facto majority.
But look around: The sciences have a lot to brag about, too, and can be pretty fierce in their anthropological identities. Like the law, science has a pecking order of its own. Lawyers did not invent Physics Envy. Ask around academe, though, and you will find that any geologist worth his salt considers himself the equal of any 10 of his colleagues, who in turn assert that any oilfield hand is twice as good as a physics whiz, for without geophysics, physicists wouldn't have a planet to stand on.
Physicists in turn sniff that they are universally acknowledged to be worth 11 chemists each, for such was the ratio in the Manhattan project. This does not cut any mustard with biologists, however; they are quick to point out that the Manhattan project failed miserably in its goal of exterminating life on earth because chemists and physicists do not know bupkes about life, which is the province of the Intelligent Design movement. Since the ID movement is a legal construct, its being wrong persuades the biologists that -- even in their present, only mildly evolved form -- they are each worth 20 lawyers, maybe more.
Nonsense, say the chemists, we've done the math. Noting that other professionals are constituted entirely out of chemicals, chemists contentedly conclude themselves to be, conservatively, two to six orders of magnitude better than any of the rest, at standard temperature and pressure.
In sum, the eight scientists in Congress have the 234 lawyers so completely outnumbered that only an engineer could exactly quantify the size of science's occult congressional majority. Fortunately for the lawyers, there are no engineers whatsoever in the Congress, so the legislative life of the nation is not threatened by that contingency.
However, it is one of America's glories that while immigrants cannot aspire to the White House, they are still at liberty to run for Congress, and scores have been elected and will continue to be. Since our nation remains the world's greatest magnet for engineering talent, the strange dearth of engineers in the corridors of power may soon be remedied. China alone sends thousands of engineers to our shores each year, for despite China's astonishing economy, something makes the best and the brightest flee in droves -- and it certainly isn't the growing imperial power of the Chinese Bar Association. All nine members of the neo-Politburo running the People's Republic are engineers, just like Herbert Hoover. The Great Engineer's road to the White House ran through mine management in China. Were he still in power, he would note the profound difference between Chairman Mao's retromingent Great Leap Forward and what Beijing's new entrepreneurial technocrats have in mind. Being engineers, they actually have an energy policy.
Be very afraid, lawyers -- these are not Jimmy Carter retreads. They combine thermodynamic literacy and a grasp of energy economics with the Best Practices sensibility of the MBAs, which some of them have as well. Take light bulbs -- they have the bright idea that chucking incandescent bulbs into the dustbin of technology can save a bundle of money, and free even more for capital investment. So efficient are light-emitting diodes that replacing one-third of all the conventional bulbs in China would slash hydropower demand and render another \$24,000,000,000 Yangtze River Gigadam superfluous, saving a cool billion a year in power bills and a vast acreage of farmland from inundation. So farewell Adam Smith: The engineering mandarins have the Mandate of Heaven to invest the peoples' pension funds in, say, "The East Is Red Candlepower Corporation" and dictate to the proletariat that they screw in what they are told.
All of which leads to a clear political imperative -- the survival of the Republic hangs on the election to Congress of another geologist, two prospectors and a mule.

### Ying Ying the Chiru (Tibetan Antelope), try not to buy shahtoosh

Ying Ying is a Chiru (Pantholops hodgsonii, aka Tibetan Antelope). You can find all you need to know about at this site (also in WWF)
• It can be found at elevations from 3250 - 5500 m (10,660 - 18,000 ft)
• IUCN Status:
2003 - 2004: Endangered (Criteria: A2d) (Population Trend: Decreasing) (IUCN 2004)
• Population Estimates:
[wild populations only] WORLD
1950 - 60: 500,000 - 1,000,000
(IUCN 2000a)
1993: Probably exceeds 100,000 (East 1993)
1998: Perhaps fewer than 75,000 (Schaller 1998)
2000: Could be as low as 65,000 - 75,000 (IUCN 2000a)
2001: Less than 75,000 (Mallon & Kingswood 2001)

• Threats and Reasons for Decline:
Poaching is the most serious threat to the chiru. It is being slaughtered illegally by the thousands for its wool (actually, the underfur of the chiru), which is known in the international market as "shahtoosh" or "king of wool." Shahtoosh is considered to be one of the finest animal fibers in the world and, since the 1980s, expensive shahtoosh shawls and scarves have become high fashion status symbols in the West, selling for as much as \$10,000 each. Several chirus are killed to provide wool for a single shawl. (Collection of the underfur causes the death of the chiru.) Wool is smuggled from Tibet mainly to Kashmir in India, where it is woven into an extremely fine fabric from which the shawls and scarves are woven. Although the chiru is protected in China, it is still legal to weave shahtoosh in India.
They are beautiful animals. China has been protecting it agressively since 1990s and the population has been able to stay at 75,000 in the wild. But they are still endangered. Please use pashmina and cashmere shawls and scarves, and try not to buy shahtoosh. They feel just as fine, except they are a little more sticky than shahtoosh. Please help her uphill ride for survival.

## 2005-11-12

### Strategic location of the Luzon Strait

My earlier post about the Hormuz-Singapore-Yokohama sea route is right.

See (click to enlarge) below the "Major Asia-Pacific shipping lanes" - US Pacific Command (Source)

### Globalization and likelihood of war

Let's look at the two graphs by "Long run trends in world trade and Income", by Douglas Irwin of Dartmouth (accessible charts here), but I am going to use his data to demonstrate something else.

First graphs shows trade growth suffered some setback in the 1929 recession. Even though it grew in mid-1930s, export volume/output ratio of 1938 is lower than that in 1919 (reading from the graphs (95/145) / (65/90) = 0.91, i.e., 9% decrease). The trade did not become more interwined between the two wars. 25 years have elapsed.

Now look at the trade growth vs output growth after WWII. Export/output increased by 14/5.5=2.55 times. 44 years have elapsed. (for 25 years from 1950-75 (reading from the graphs (1250/100) / (650/100) = 1.92, i.e., 92% decrease)

• Over the period from 1950 (when the process of trade liberalization through the early GATT Rounds got under way) to 1994 the volume of world merchandise trade increased at an annual rate of slightly more than 6 per cent and world output by close to 4 per cent. Thus, during those 45 years world merchandise trade multiplied 14 times and output 5 1/2 times.” - WTO

If we ignore minor regional conflicts, which in most cases are related to trade isolation

• Trade growth = -9%/25 years: war
• Trade growth = +92%/25 years: no war

This is not a conclusive evidence that globalization would stop war. But this certainly dispels the myth that the world was as interwined in 1914 as it is today (This is inspired by a comment made by Michael Thurton in Cominganarchy)

We have enjoyed (relative) peace for 60 years now (vs 25 years between 1914-1918). There have certainly been many factors and efforts contributing to our peace.

• Is globalization one of them?
• Does continuing globalization mean we are going to enjoy more peace?
• Would the power of globalization interest parties (i.e. multinational), strong enough to sway votes in the powerful democracies to prevent war?
• Can we quantify the numbers below (Guisinger on Rubenstein's bargain game) ? Certainly CA and CB are much larger than p-x for WWI and WWII, even for the winners; and the gap is only going to increase as a result of globalization
• p is the present situation; 'favorite outcomes' are the idealized pre-war expectation which never realized in practice, even if one can predict and win a quick war (example, Iraq); CA and CB are the actually costs of war for A and B; x is the outcome of a negotiation.
• For cost of conflict data and analysis see this

## 2005-11-11

### Diametrically opposite figures in the top 100 public intellectuals

Coming Anarchy questioned my earlier post on China's "peaceful development", after Japan sent out its fighter jet 30 times in 7 months into the disputed water. Maybe we have another indicator here.

These are their ways of dealing with the dispute. I believe they will maintain restrained, and the little hip-cup should not be over-read. The only question is, why not use UN arbitration?

• China is uncomfortable of putting this in the hand of Western lawyers, arbitrating the East Sea will also mean resolving the Diaoyu dispute, of which China is not very sure who will win and it prefers to shelf it
• Japan knows it will most likely lose based on the continental shelf article for seabed (scroll down), because the Okinawa Trough is too deep and China has a valid point

Now Foreign Affair and The Prospect has selected their Top 100 public intellectuals, of which 5 are Chinese and 2 Japanese. The architect of "peaceful development', Zheng Bijian is on the list.

The political figures are diametrically opposite in these 2 countries:

• Wang Jishi ('China should search for stability with US'; top picture) and Zheng Bijian ('Peaceful Development', second picture); both pacifists
• Shintaro Ishihara (Tokyo Governor, the youngest winner (at 23) of the Japan's Booker/Pulitzer equivalent: Akutagawa Prize, 3rd picture), a racist, sexist hawk that would have made Abe or A--so in Koizumi's new cabinet saints, among his resume
• he flamed the French
• persecuted school teachers who refused to go hawkish
• shouted "shoot the nigger"
• For his "Little Red Book" see here, e.g. "Fifty years of subservience to the interest of the United States has deprived the Japanese of a national purpose and engendered a paralyzing identity crisis." [After all, Japan] "is the only non-Caucasian society to have created a modern superpower."
• ...I hope they chosed him for his talent in literature
• Others in the list include familiar names such as Jared Diamond, Freeman Dyson, Umbeto Eco, Vaclav Havel, Samuel Hungtington, Paul Krugman, Paul Kennedy, Kishore Mahbubani, and what? the new Pope Benedict XVI is an intellectual? maybe, at least he does not believe in 'intelligent design'

There are doves and hawks on both sides of the East China Sea. But it looks like China won a PR war, at least amoung intellectuals.

Do intellectuals influence how their fellow citizen think?

How do we explain a democracy which elected a racist, sexist lunatic? Déjà Vu?

---

(*) Non-political figures are Fan Gang (economist), Gao Xingjiang (Nobel Prize winner in literature, also a painter/sculpter), Ha Jin (writer, using English a medium, quite unknown inside China), Kenichi Ohmae (ex-McKinsey partner in Tokyo, strategy consultant).

(**) I wonder why Murakami Haruki is not on the list. He is, arguably, very influential in Asian pop-culture, including movies of Wong Kar Wai. He also has spent most of the past 15 years in US. He is better than Ha Jin, and as good as Gao Xingjiang.

## 2005-11-10

### China's "bargaining power" on East China Sea gas field: Very Strong

I am not talking about UN Sea Law of Continental Shelf (350km as long as seabed is less than 2500m deep, this applies to "seabed and subsoil of the submarine areas", not EEZ on surface), nor the fact that the gasfields are on China's side even according to the median line proposed by Japan. I am talking purely from a commercial (cost) perspective. It is virtually infeasible for Japan to pump gas back to Kyushu or Okinawa.

Here is why

1. The only economical way to transport gas is using pipeline, because gas is too bulky. For a distance of about 180km, the cost for LNG (liquefied and then use tanker) is 5 times higher (see graph below), and it is extremely impractical and dangerous to liquefy the gas using high pressure on a drilling platform.
2. Now look at this cross-section map, left side is China, the island on the right is Japan. the deepest point in the Okinawa Trough is 2940m under sea. The slope on Japan's side is also a lot steeper (Source: China claims A,B,C under UN Law). From Chunxiao to Zhejiang coast the depth is mostly less than 100m. (Note, the shape is more pronounced near the Diaoyu Islands.)
3. There is more bad news for Japan, The World's Deepest Undersea Gas Pipeline so far completed is only 2100m undersea (built by Italian below Black Sea). The engineering challenge for a North Sea pipeline (Ormen Lange to Britain) with undersea hill of 60 m high is considered as "enormous" (See note*). Unless there is technology breakthrough or take a huge detour up north via the south of Korea (also impractical as it passes China's EEZ), there is no way Japan can get that gas home.
This probably explains why Japan was unable to (or passive) exploiting the gas field all these time, apart form the reason that the field is on China's side or the disputed area.
Is this fair? Well, I think this is a result of the 'continental shelf' argument. Scientifically, you can say that all these fossils come from organisms flushed down from the continent or sea organisms live on the nutrients flushed down from the continent. But I better leave this to the legal experts.
• China: keep drilling at maximum speed, meanwhile negotiate slowly with Japan. If there is really "siphoning" effect, the longer the wait, the more China will be able to "siphon" the whole pool. Time is on your side. But make a deal if it is reasonable, don't under-estimate Japanese engineers.
• Meanwhile, try to engage the engineering firms who built the pipelines in North Sea, Black Sea and Canada into the game, to sign exclusive contract with them (for East China Sea and South China Sea) so that they won't be helping the competiting companies in these areas
• Japan: seek a co-development deal, in which China and Japan will form a JV to explore and extract the gas field, even if that means substantially smaller share for Japan. Also be flexible about the disputed area, if needed, exchange seabed exploration for fishing right in the disputed area. Because, it is impractical for Japan to drill without using China's shore to land deliver the gas.
Note (*): For those interested in undersea pipeline laying check out Ormen's construction chronology and a presentation.
1. A huge cutter and an undersea tench machine is used to open a 2 m deep and 10 m wide trench
2. Pipes are then layed and fixed on the trench

## 2005-11-09

### Map: Settled border with Vietnam

I mentioned that the China and Vietname have settle the border dispute in land and Tonkin Bay in an earlier post. Here are the maps

Border at Tonkin Bay (source: FYJS)
• Brown line: 1887 China-France treaty divided Tonkin Bay by latitude E108o03'18"
• Red line: New border (approximate) based on medium line
• Blue line: Shared economic zone, to be co-patrolled
• The disputed Bailongwei (Bechlongvi 白龙尾) Island is claimed by China and is now ceded to Vietnam. (It was reported that the 2000 residents on the islands are Chinese. But Zhou En-lai "loaned" this island to Vietnam during the Vietnam war to build it as a base to fight American bomber)

The land border does not have visible changes. A few mountain were ceded to Vietnam and perhaps some shifts of a few hundred meters here and there. The border is largely defined by natural landscape (river, watershed, etc), or has been well defined in the China-France Treaty. The disputed area is 227 sq km, China got 113 sq km and Vietnam 114 sq km, 50% to each side, fair deal.

Current claims on South China Sea by all different countries are shown in the map below (grey area = gas/oil field). China's claim on South China Sea is based on its claim on the coral islands Sisha (Paracel, controlled by China, disputed by Vietnam), Dongsha (Pratas, undisputed, controlled by ROC), Zhongsha (Macclesfield, claimed by China and Philippines, unoccupied but controlled by Philippines), and Nansha (Spratly).

Spratly, the most contested islands group, was inhabited by Chinese fishermen and has been controlled by ROC navy before the 1949 revolution. Current control of the Spratly is shown in the map below

• Taiwan still controls the largest islands on Spratly, Taiping (Itu Aba), there is a base there because there are Chinese fisherman and natural fresh water supply (well). The area is 0.45 sq. km, about the same size as Vatican City, aerial picture as shown above.
• China: 7 islands/reefs
• Vietnam: 29 islands/reefs
• Philippines: 8 islands/reefs
• Malaysia: 5 islands/reefs
• Brunei and Indonesia joined the claim but do not control any reef or island
South China Sea Claim Map (The best source of information is hosted at community.middlebury.edu/~scs/index.html, with the list of the Spratly Reefs)

Spratly Magnified

### Schelling on North Korea

I talked about Nobel laureate Thomas Schelling's game theory in an earlier post. Today's WSJ has an interview with Professor Schelling. He offered his great insight on how to deal with North Korea, and also Iran's nuclear problem .

These are very simple and straightforward analyses, total cost vs total benefits. Professor Schelling said,
• "Iran and North Korea will think of [the nukes] as deterrant weapons...We really ought to give NK some kind of non-aggression assurance...We should volunteer it, on the grounds that the primary motivation for NK to get a nuclear weapon is to make sure the US can never attack." - Qadaffi was scared, there is no reason these two accused as the "axis of evil" is not
• "US would have a good sense and the cleverness and the ability to enter the black market and engage is what we used to call preclusive purchase...if NK thinks it can sell a nuclear weapon for \$1bn, we ought to be in there offering \$5bn" - Schelling quoted the outbidding of natural resources in WWII, I would add the successful control of balck market in ex-USSR states, and that it is cheaper to buy out North Korea today than tomorrow
• He also believes and argued convincingly that bargaining with NK and Iran will not lead to moral hazard, because "it is not a good game to get into" [unless you are labelled an axies of evil?]. I should add that Bush's complacency toward India and Pakistan served as encouragement for NK and Iran.
• The whole interview provides more insights and discussions, a temporary link is here. It is on Nov 7 WSJ, page A2.
Unfortunately solving the nuke problems are only the second priority for the Bush regime. Their first priority is to turn them into Iraq, and they need the nukes as an excuse. Otherwise, why was common sense never been able to prevail?

## 2005-11-08

### Map: India's ethno-linguistic map

Curzon was surprised to find a "little" 'buffer' state Nepal with 6 major ethnic groups. Nepal is actually not that small. It has 27.7M people (higher than Taiwan's 23M), 147 sq. km in area (4x Taiwan). Wiki names 12 major groups, with the total being 103 including caste groups. There are 90 languages/dialects.

Nepal's demographic, is actually very similar that of India's. Both being Hindu, its caste system problem also 'helped' to establish more genetic walls after thousands of years of segregation.

Look at India's map here, according wiki

• India has 19 languages each spoken by over 10M people
• "The official figure of 'mother tongues' spoken in India is 1,683, of which an estimated 850 are in daily use. The SIL Ethnologue lists 387 living languages for India."

Nepal's population is about 1/40 of India's. its number of language about 1/19. The scaling makes sense.

## 2005-11-07

### Taiwan's 25 friends, who is next?

ESWN reviewed Chen Shui Bian's bribery diplomacy. Meizhongtai asked who is the next to go in the phone book of Taiwan's Foreign Minster. I think I can try to answer MZT's question.

This is an overview of Taiwan 25 friends (plus the 26th, Senegal)
Source: Mike Dowling using CIA's databook 2001 (so PPP was used), wiki

 Nation Population Area/sq m GDP/PPP(\$bn) Belize 272,945 8,867 \$1.28 Burkina Faso 13,574,820 105,869 \$14.55 Chad 9,538,544 495,752 \$10.67 Costa Rica 3,956,507 19,730 \$35.34 Dominican Rep 8,833,634 18,815 \$52.71 El Salvador 6,587,541 8,124 \$30.99 Gambia, The 1,546,848 4,363 \$2.56 Guatemala 14,280,596 42,042 \$56.50 Haiti 7,656,166 10,714 \$12.30 Holy See(Vatican) 921 0.17 \$0.02 Honduras 6,823,568 43,278 \$17.55 Kiribati 100,798 313 \$0.08 Malawi 11,906,855 45,745 \$6.85 Marshall Islands 57,738 70 \$0.12 Nauru 12,809 8 \$0.06 Nicaragua 5,359,759 49,998 \$11.60 Palau 20,016 177 \$0.17 Panama 3,000,463 30,193 \$18.78 Paraguay 6,191,368 157,056 \$28.17 St Kitts & Nevis 38,836 65 \$0.34 St Vincent & G 117,193 150 \$0.34 Sao Tome & P 181,565 386 \$0.21 Senegal 10,852,147 75,749 \$17.09 Solomon Is. 523,617 10,985 \$0.80 Swaziland 1,169,241 6,704 \$5.70 Tuvalu 11,468 10 \$0.01 Total 112,615,963 1,135,163 \$325 World 6,379,157,361 196,939,757 \$51,480.00 TW26 / world 1.77% 0.58% 0.63%

• GDP/cap of the 26 is \$2884 (in PPP), about 35% of world average (\$8070), 1/6 of Taiwan's in \$17255 in that year (2001)
• Literacy 63%, vs world average 77%
• Life expectancy 58, vs world average 64

Now subtract Senegal, the stats change

• Pop, area, GDP shares drop to 1.60%, 0.54%, 0.60%
• GDP/cap improves to \$3024
• Literacy goes up to 65%
• Life expectancy stays at 58

Senegal was presumably lured away by a better offer from mainland China, which is not entirely a result of more generous bribery.

• Because a larger nation will have more economic interests in stake (that is why Taiwan cannot bribe India or Nigeria away). The mainland can offer more economic activities and the aid is less costly (comparatively) because some of activities in the form of aids may lead to profitable business.
• The other reason that bribery diplomacy works for the microstates is because a few million dollars represent a large sum compared with their GDP (PPP is not a good measure in this case, but I am lazy).

Sengal is among the largest of the 26 and not really a micro-state. Some micro-states are so shameless that they switched side as soon as there is a better price.

Therefore, I predict the next to go (other than the well anticipated Holy See) will be those with large population and/or GDP, Burkina Faso, Malawi, Chad and less likely, Guatemala, Dominican Republic, Costa Rica or Paraguay. Losing the latter two away will hit all stats, but losing the African 3 will improve the 'quality stats' such like GDP/cap, literacy and life expectancy.

But there is one important indicator, where they are all equal, which is the UN General Assembly vote. The UNGA was repsonsible for replacing ROC with PRC in 1971. Taiwan's friends have about 12% vote, way higher than any other indicators above. ZHJ commented in my previous post that it is not fair for Taiwan to get a Ukraine-under-USSR-style UN seat. I think it is unfair that these "shameless states" (*) get 12% of UNGA votes.

On a separate note, for those anti-Bush Californians who wanted an independent CA, how about splitting into 5 states and get 8 more seats in the Senate, or 30 states and 58 more seats. CA population is 32x RI's, and 68x WY's.

Note (*). Not all of them have been bribable, Paraguay, Panama, Dominican Rep and Haita's were loyal friends to ROC since 1950s.