Predicting RMB exchange rate - Ronald McKinnon

Ronald McKinnon examined the interest rate differential between RMB and USD, observed that the return for putting the money in RMB and USD are approximately the same over a year, and speculates (and suggestes) that this may be how the target zone for RMB is managed.
  • 1 year bond yield for USD is 5.7% (spot in London, May 2006), meanwhile PBOC's 1 year RMB bond yield is 2.6%. interest rate differential 3.1%
  • cumulative appreciation for RMB from Jul/21/2005 to Jul/21/2006 is 3.28%, approximately equals the interest rate differential
Yes, the exchange rate will be managed such that it would be hard for the speculator to profit, as I have speculated a year ago,or other investment pathway neutral rationale. McKinnon has provided the economic rationale (of inflation targeting) for managing such target. The quantitative results are similar.

Does this mean speculators can pack and go home? Not really, if you are really good, you could spot the discrepany (e.g. 2H 2005 vs 1H 2006) and make some reasonable profit, but the rate of return will only be proportional to your effort and risk.

McKinnon's Original in op-ed in WSJ requires subscription but cached temporarily below.
A Chinese translation is available here.

The Yuan and the Greenback
Ronald I. McKinnon. Wall Street Journal.(Eastern edition). Aug 29, 2006. pg. A.14

China's central bank anchored the national price level from 1994 to Sept. 21, 2005, by keeping its currency, the yuan, fixed at 8.28 yuan to the U.S. dollar. The policy was a great success: Over that period, China's consumer price inflation dropped to around 1% to 2%, from more than 25%, and inflation-adjusted GDP grew at a healthy 9% to 10% clip per year.

Today, however, the U.S. monetary anchor isn't as stable as it once was. U.S. inflation is spiraling up, with consumer prices rising to 4.1% and producer prices to 4.2% on a year-on-year basis through last July. Clearly, China's foreign monetary anchor is slipping. Worse, the Federal Reserve Bank has been indecisive about caging the inflation dragon, leaving the interbank federal funds rate at just 5.25% -- an unduly stimulatory level -- at its August meeting.

So what should China do? Since July 21 last year, when the People's Bank of China unhooked the yuan and allowed a discrete appreciation of 2.1%, the mainland's policy makers have allowed the currency to appreciate slowly. The total appreciation equaled 3.3% after a year -- and seems to be continuing at about this annual rate.

The initial motive for unhooking China's peg to the dollar was probably to defuse -- or confuse -- misguided American political pressure to appreciate the yuan's value versus the greenback. The premise of such arguments, that yuan appreciation would reduce China's large and growing trade surplus, is widely held but wrong. The trade imbalance between China and the U.S. results from China's high savings combined with the opposite tendency in the U.S., neither of which is predictably affected by changing the yuan-dollar exchange rate.

China's inflation is, however, predictably affected by sustained exchange-rate changes. Although unhooking the yuan-dollar exchange rate to reduce China's trade surplus was wrongly motivated, the subsequent small appreciation has had a positive effect: It's helped to insulate China from surprisingly high U.S. inflation. So should small controlled exchange appreciation now become China's monetary guideline for maintaining internal price stability?

Consider the evidence: China's consumer price inflation registered just 1% over the year through last July, while the U.S. rate hit 4.1%. This inflation differential of 3.1 percentage points was consistent with the yuan's appreciation of 3.3% year over year, as the chart nearby shows. That the inflation differential mimicked the appreciation so closely is partly a statistical coincidence, and probably unlikely to happen again. Nevertheless, cause and effect are also important. Beyond just U.S.-China trade, the dollar is an international currency widely used for pricing foreign trade in goods and services in Asia and the world. When a highly open economy such as China's gears its domestic monetary policy to a slow, but well signaled, appreciation against the dollar, its price inflation can be expected to fall correspondingly below the American rate.

This reasoning leads to a new monetary rule for China: Pick some target rate for annual inflation in China's CPI, say 1% (it could be as high as 2%), then see how much higher American inflation, say 4.1%, is above China's internal target rate. The difference, in this case 3.1%, then becomes the planned annual gradual appreciation of the yuan rate against the dollar. As is already the case, the exchange rate would be tightly controlled by China's central bank, with only tiny movements on a daily basis -- around which the narrow band fluctuations would continue. And the exact timing of these movements would be arbitrary, so that speculators don't get any free lunches. Finally, if Fed Chairman Ben Bernanke does succeed in reducing American inflation, China's exchange rate appreciation would slow accordingly -- and stop altogether when American inflation stabilizes at China's internal target rate.

Although this new monetary-cum-exchange-rate rule is straightforward enough, it has strong implications for the behavior of yuan interest rates. Those that are not officially pegged are already endogenously determined by the expected path of the exchange rate. The chart shows the paths of one-year interest rates for China and the U.S., and the corresponding yield spread. In May, the yield on dollar bonds quoted in London was 5.7%, while the yield on bonds issued by China's central bank was 2.6% -- a spread of just 3.1%. The chart then superimposes the path of the yuan's appreciation since July 21, 2005. Remarkably, by July 2006, the two curves conjoin: The 3.28% appreciation over the year roughly equals the interest differential! Investors in yuan assets were willing to accept a lower return because they expected the yuan to appreciate a little over 3%. This interest differential of 3% or so will continue as long as investors project that the yuan will continue to appreciate by that amount -- as per our new monetary rule for targeting China's domestic rate of price inflation at a lower level than in the U.S.

It is important to keep the rate of yuan appreciation moderate and in line with the inflation differential between the two countries. Suppose the rate of appreciation was accelerated to 6%, with U.S. inflation remaining at 4.1% and the dollar interest rate at 5.7%. Financial markets, which are quick to adjust, would bid interest rates on yuan assets toward zero -- from which they would be bounded from below: the infamous liquidity trap. In goods markets, where prices are slower to adjust, inflation would begin to fall below the 1% target -- and then could even fall below zero, so as to create outright deflation.

Alternatively, suppose that U.S. inflation slowed to, say, 2% and dollar interest rates came down toward 3%. Then, if China's central bank stayed with its current policy of a slightly more than 3% annual appreciation of the yuan, Chinese interest rates would again be forced toward zero, with the threat of outright deflation in the general price level. Instead, the correct strategy for China's central bank then becomes to slow the rate of appreciation to 1% per year, or slightly less.

Floating the yuan, which would lead to a large initial appreciation, would be a major policy mistake. China's trade surplus would continue unabated, with a continued accumulation of dollar claims by the private sector that would force successive appreciations of the yuan until the central bank was again forced to intervene and stabilize the rate at a much appreciated level. By then, expectations of ongoing appreciation and deflation in China would be firmly in place. That scenario could mimic what happened to Japan with its ever higher yen in the 1980s through the mid-1990s -- a deflationary slump, coupled with a zero interest liquidity trap and its "lost" decade of the '90s.

The bottom line is that China's central bank must carefully watch inflation and interest rates in the U.S. when formulating its own exchange-rate-based monetary strategy. Any exchange-rate changes against the dollar should be tightly controlled and gradual -- as with the appreciation over the past year.


Mr. McKinnon, professor of economics at Stanford, is author of "Exchange Rates under the East Asian Dollar Standard: Living with Conflicted Virtue" (MIT Press, 2005).



The lesson of Taiwan

Much has been said about how Taiwan' economy went into the doldrums since 2000, coincidentally after Chen Shui Bian took control of the government. While it is clear that the DPP government was initially inexperienced and has been bogged down by ideology, there are so many factors (both internal and external) that could influence the economic development, it is impossible to pinpoint conclusively that it is a result of government incompetence or its ostensible denial of the China factor.

To be sure, Lee Tenghui's KMT government in the 1990s also discouraged investment in the mainland. Therefore, one cannot simply blame CSB's interference for the deterioration since he took over. However, in 1990s Lee's regime needed to deal with the opposition inside KMT and the "anti-China" factions had not consolidated their power base yet. So the damage LTH's government could inflict was much smaller than CSB's.

The often cited defense for CSB were external factors such as the tech crash between 2000-2002. However, one only needs to compare Taiwan with Korea (which has a similar industry and economic profile and exposure to tech sector) to refute such apologies.

As a believer in free market economy, I think any interference from the goverment (whether retricting or forcing business to go to any market, China or SE Asia) is a bad thing. Decisions are better left to the business owners themselves. To further elaborate on this point, Associate Professor Hong Lung-tsai of Taiwan Economic Research Institute offered some great analysis in today's Apple Daily Taiwan (also cached below)
  • Frequent change in leadership (i.e. Minister of Economy) paralyse long term policy, if there is any
  • Political appeals lead to emphasis on redistribution of wealth [one should not blame DPP for this, as this is typical of any democracy]
  • Vicious circle of outsourcing research of economic policies to under-funded external think tanks, resulting in decline in quality [the author noted this is also not entirely DPP's fault, as it merely followed KMT practice. But the author weighed in to say that the problem was obvious that DPP should have done something to change that]
Hong finally talked about the China investment issue. He wrote, "Large amount of overseas investment has its pros and cons, but if the profit cannot be repatriated to home, this is defintely a minus. Today 70% of Taiwan's investment outside the island concentrates in the mainland China market, the government has imposed various restrictions to these investment [and re-investment] and the result is that enterprises become reluctant and unwilling to repatriate profit back to Taiwan [scared by the restriction imposed upon them when re-investment is needed], this exacerbates the negative impact of Taiwan's external investment."

Hong is right. For every restriction a bureacracy impose, there is a trick to bypass invented by savy businessmen. Result: bureacratic objective fails, but cost of operation for businesses hikes. Taiwan's restriction in mainland investment (40% of net asset) has led to the effect diametrially opposite to its objective, i.e. profits will stay in the mainland. In addition, capital employment by Taiwanese companies become less efficient, as effort was spent on working against the restriction. This lesson has been learned many times by the CCP government in the mainland (上有政策,下有对策) and it seems now that CCP has finally got it. Unfortunately, as long as political ideology continues to overshadow pragmatism in Taiwan, CSB's government has no incentive to fix the economy. Nor will KMT (as it now seems very likely to win in 2008) care much when it takes rein in future.

715觀點 民進黨政治經驗害了經濟



台灣對外投資的金額累計已高達GDP(Gross Domestic Product,GDP)的4成(南韓只有6%),不僅高於世界平均的24%,也大過工業國家的30%,而和歐盟國家相當。唯須注意的是,工業國家的對外投資多半屬於購併行為,而台灣絕大部分都是新創設的對外投資。這也隱含著台灣的對外投資模式,對本國經濟所產生的衝擊必然相當深遠。


作者為台灣經濟研究院副研究員 洪財隆


Blogspot unblocked in China again

Between Aug 1 and Aug 8 this site recorded only 9 unique visitors from mainland China (officially), all out of Beijing and Shanghai, except one from Xiamen, Fujian.

From Aug 9 to Aug 16 there were 107 unique visits, a 12-fold increase despite light blogging. Visits originated from Beijing, Shanghai, Chongqing, Guangzhou, Shenzhen, Dongguan, Yancheng(JS), Changzhou, Wuxi, Xiamen, Ningbo, Hangzhou, Urumqi, Chengdu, Changsha, and other cities (for which google analytic was notr able to name) in Shanxi, Hunan, Shandong.

In the last 5 days (Aug 17-22), visits from mainland China have surged to the 3rd place (after US, HK), adding locations such as Wuhan, Tianjin, Foshan, etc. Based on IP log mainland China has ranked outside of the top 20 countries for this blog.

It seems blogspot has been unblocked in China since Aug 9th, and that more and more provinces are unblocking. Let's hope it will not dissappoint us this time.


Commodity peg to export price vs peg to import price

Jeff Frankel examined the impact of commodity price and menetary policy. He proposed to "Peg the Export Price" (PDF, HTML)
  • This idea is a much moderate version of a more exotic-sounding proposed monetary regime that I have written about elsewhere, called Peg the Export Price – or PEP, for short. I have proposed PEP explicitly for those countries that happen to be heavily specialized in the production of a particular mineral or agricultural export commodity. The proposal is to fix the price of that commodity in terms of domestic currency, or, equivalently, set the value of domestic currency in terms of that commodity. For example, African gold producers would peg their currency to gold – in effect returning to the long-abandoned gold standard. Canada and Australia would peg to wheat. Norway would peg to oil. Chile would peg to copper, and so forth. One can even think of exporters of manufactured goods that qualify: standardized semi-conductors (that is, commodity chips) are sufficiently important exports in Korea that one could imagine it pegging to the won to the price of chips.

    How would this work operationally? Conceptually, one can imagine the government holding reserves of gold or oil, and intervening whenever necessary to keep the price fixed in terms of local currency. Operationally, a more practical method would be for the central bank each day to announce an exchange rate vis-à-vis the dollar, following the rule that the day’s exchange rate target (dollars per local currency unit) moves precisely in proportion to the day’s price of gold or oil on the London market or New York market (dollars per commodity). Then the central bank could intervene via the foreign exchange market to achieve the day’s target. Either way, the effect would be to stabilize the price of the commodity in terms of local currency. Or perhaps, since these commodity prices are determined on world markets, a better way to express the same policy is stabilizing the price of local currency in terms of the commodity.11 The PEP proposal can be made more moderate, and more appropriate for diversified economies, in a number of ways.12 One is to interpret it as targeting a broad index of all export prices, rather than the price of only one or a few export commodities. This part of the paper proposes targeting just such an export price index. This moderate form of the proposal is abbreviated PEPI, for Peg the Export Price Index.13 The argument for the export targeting proposal, in any of its forms, can be stated succinctly: It delivers one of the main advantages that a simple exchange rate peg promises, namely a nominal anchor, while simultaneously delivering one of the main advantages that a floating regime promises, namely automatic adjustment in the face of fluctuations in the prices of the countries’ exports on world markets. Textbook theory says that when there is an adverse movement in the terms of trade, it is desirable to accommodate it via a depreciation of the currency. When the dollar price of exports rises, under PEP or PEPI the currency per force appreciates in terms of dollars. When the dollar price of exports falls, the currency depreciates in terms of dollars. Such accommodation of terms of trade shocks is precisely what is wanted. In recent currency crises, countries that suffered a sharp deterioration in their export markets were often eventually forced to give up their exchange rate targets and devalue anyway; but the adjustment was far more painful -- in terms of lost reserves, lost credibility, and lost output -- than if the depreciation had happened automatically.

    The desirability of accommodating terms of trade shocks is a particularly good way to summarize the attractiveness of export price targeting relative to the reigning champion, CPI targeting. Consider the two categories of adverse terms of trade shocks: a fall in the dollar price of the export in world markets and a rise in the dollar price of the import on world markets. In the first case, a fall in the export price, you want the local currency to depreciate against the dollar. As already noted, PEP or PEPI deliver that result automatically; CPI targeting does not. In the second case, a rise in the import price, the terms-of-trade criterion suggests that you again want the local currency to depreciate. Neither regime delivers that result. But CPI targeting actually has the implication that you tighten monetary policy so as to appreciate the currency against the dollar, by enough to prevent the local-currency price of imports from rising. This implication – reacting to an adverse terms of trade shock by appreciating the currency – seems perverse. It could be expected to exacerbate swings in the trade balance, and output.

A couple comments on Frankel's proposal
  • An anchor as Frankel proposed basically a controlled "free floating", i.e. taking a few of the most important market drivers and actively manage the "peg" accordingly, mimicing what free float would do, but excluding market drivers which are not in the 'recipe'. The effect is, the currency would appreciate when the demand for one's export is high and vice versa.
  • The benefit is that it provides a relatively objective measure for the exchange rate, so that speculation factors are partially excluded (speculators cans still indirectly bet on the underlying commodity, but that would be much less efficient as it impacts a lot more countries)
  • When the 'peg' is controlled, overshoot (such as 1997 Thai Baht) can be avoided
  • However, with every benefit it comes with a price. In this case, the anchoring and hence the unfriendliness/inconvenience for speculation would also mean that the currency regime would become "metastable" as market hedging is more difficult -- but this is a minor inconvenience as one can still speculate/hedge even on a fixed peg (e.g. non-deliverable forward for RMB)
  • That commodity price (or a basket of commodity index) is chosen as the proxy is simply because it is standardizable and tradable (and that it is a 'fundamental' price driver). There is no theoretical (only pratical/technical) hurdle to pegging to the price of T-shirts, furniture, computers or anything that sells in Walmart (and "made in China"). However, these are 'secondary products' and the prices are dirven by that of more fundamental cost drivers such as commodity, energya nd labor. In an ideal model one could take everything a country exports minus everything it imports. However, for an anchor only a selection is good enough (and at least better than the more arbitrary peg to USD or some currency basket).
Frankel also commented on the issue of "peg-to-import-price"
  • But for a country that is a net importer of oil, wheat, and other mineral and agricultural commodities, such a peg gives precisely the wrong answer in a year when the prices of these import commodities go up. Just when the domestic currency should be depreciating to accommodate an adverse movement in the terms of trade, it appreciates instead. Switzerland should not peg to oil, and Norway should not peg to wheat.
This deserves some discussions.

While Frankel made a generally good argument on the disadvantage of pegging to the import price, it is for a simple economy prior globalization. In today's world the matter seems to be a lot more complicated. For example, the oil and steel China imports are largely re-exported, both directly as products (hammers & nails, plastic toys) and indirectly (the machine and buildings that house the factories, and the power consumed by the manufacturers). Therefore, to determine whether an item (commodity in this case) should be present in the peg basket we should need to look at the overall export and import flow together.

If fact, peg-to-export may not be a good proxy to use for countries which re-export is a major component in its GDP. e.g. Singapore exports a lot of refined petroleum and petrochemical products. But it is unclear if Singaporean Dollar should be pegged to the price of petrochemical products for this reason. It would make more sense, if there is a system where Singapore's petrochemical industry would realize its value-added more or less unaffected by the short term fluctuation in oil price. This could be achieved if both the import price of its raw materials and export price of its products could somehow be linked. It could be achieved if Singapore Dollar is related to the price of oil and the petrochemical products it re-exports. Of course, Singapore has a lot more industries, and oil should only be one component of its basket. Moreover, Singapore is a small country, with signifcant value of its GDP in tertiary industry (IT, service, etc) the complexity for operating an elaborate commodity peg may not be as viable as a simple currency basket peg as it uses today.

For China, being a much large country, currency may present an new problem. Because its economy is so large that it affects the value of the currency it pegs onto. This is the main complain from the US. IMO China's currency reform is necessary not because of the trade imbalance. It is the responsibility of US itself to solve its imbalance problem. But China should not (unintentionally) prevent USD from depreciating against other currencies in the world through the RMB peg. Therefore, there are reasons for China to peg its currency to something other than other countries' currencies.

The most convenient choice, as Frankel proposed, the commodity peg. The commodities China can choose are 1) what it exports 2) what goes through in its process/re-export industry.

Since China today is a net importer for most commidities (both agricultural and industrial), (1) does not work. What China exports is actually semi-skilled labor, and China is the largest exporter of labor in the world. China is, therefore, the largest factor in determining the price of semi-skilled labor. Its currency rate affects the pricing of its primary export. Therefore, even if we can standardize the price of semi-skilled labor, it still does not qualify as a content of the RMB peg. Because, it is not independent enough to act as a measure for practical purpose, otherwise we are entering into a loop of circular formula.

As a result, we are left with only option (2). Therefore, if China is to peg its currency to a basket of commodities, the rationale will be to make the cost of its re-export transparent to its economy, or in other words, a currency that automatically hedges against the change in raw material costs. Following this rationale, the content and respective weight of the commodity basket can be determined.

Note: the implementation: Frankel offer some guideline in this paper. You can also see my earlier post on commodity basket.


"Brain damage from one way of loving Taiwan" - Tu Chenhua

The essay attached below is written by Tu Chen-hua, associate professor, Institute of National Development, Taiwan University.

The author examined the claim that investment in mainland China apparently leads to reduction in investment inside the island of Taiwan.

He took the investment data of all Taiwanese companies from 1991 to 2005 and calculated the correlation coefficient, x=investment in mainland, y=investment in Taiwan

  1. correlation coefficient = -0.83 for the period of 1991 to 2005. So apparently the data supports the claim, the 2 investment numbers are anti-correlated
  2. He then break the data series into 2 parts. Lee Tenghui era (1991-1999) and Chen Shui-Bain era (2000-2005). Then the correlation coefficient for 1st series is -0.02. 2nd series -0.71. i.e. no correlation during LTH era, but anti-correlation during CSB era.
  • Technical note: those who are not familiar with statistics may wonder how the "sum" of -.02 and -0.71 would produce an out-of-range -0.83, suffice it to say the difference in "end-data" (i.e. 1991 and 2005) plays a much larger role in linear correlation. i.e. -0.83 is mostly determined by comparing 1991-92 numbers with 2004-05 numbers. An extreme example: 1990:1; 1991:1.....2004,0.9; 2005; 0.95.
The conclusion: there is clearly a counter-example (1991-1999 series) for the zero-sum hypothesis . So the competition for investment capital is not the main factor for explaining the apparent anti-correlation from 2001-2005. Tu concluded that too much love could generate fever, and leads to "brain damage".

The authors proposed a few hypothesis for the decrease in investment inside Taiwan

  • Decrease in investment in Taiwan is mainly a result of deteriorating investment environment in Taiwan, due to factors such as erratic changes in economic policies and decisions (so that enterprises are wary about long term investments)
  • The growth in investment in mainland China is due to improving environment
To see if there is a constrain in overall sum available for investment, we can look at this chart.
While the % of investment in mainland increased steadily, the total amount of investement by Taiwanese companies (in Taiwan and in mainland) decreased significantly during the period. This would explain the slowing down of the economy in Taiwan. Taiwanese business have lost the entrepreneurship and willingness to invest for future. The result has already been observed in the past few years. The remedy is not to discourage investment in the mainland (the businessmen must believe they can make a lot money, and repatriate to Taiwan to spend, if they are willing to take the 6-10 hour flight ordeal), but to better the investment environment in Taiwan. And it is not neccessarily a zero sum game.

p.s. LTH is very outspoken about curbing investment in China these days. But I doubt if this is what he would do if he still is the decision maker. There is a difference between doing it yourself and pushing it to others in order to advance one's political objective. There is also the issue of the trade-off around sacrificing economic development for political/ideological objectives.










Video map: Yakko's world!

Pretty great song, but the names are not all for "nations" and the data and maps are quite old. (It was probably produced in the early 1990s, soon after Germany was united in Oct 1990. "soon" because you still see the USSR map. However, the author probably failed to notice that Yemens were united in May 1990) So these notes are needed if you are teaching the kids
  • Carribean is a sea
  • Puerto Rico, Guam are US territories; Tibet, HK, Taiwan are parts of China (HK probably was still a British colony at the time it was produced, Taiwan is officially a province of the Republic of China)
  • San Juan is a city (capital of Puerto Rico)
  • Czech and Slovakia split
  • Middle East is not Europe (except if you buy a round-the-world ticket with the oneworld alliance), Scotland and England are not nations, UK is, Greenland is part of Denmark
  • Instead of Yemens, there is only one Yemen now
  • Kampuchea calls itself Cambodia again now
  • Asia is a continent
  • New Guinea has a full name, PNG
  • Sumatra is an island of Indonesia
  • Borneo hosts 3 countries, Malaysia, Brunei and Indonesia
  • Algier is a city, capital of Algeria in the previous line
  • Dahomey is the same as Benin in the previous line (name changed in 1975, before Cambodia was called Kampuchea)
  • Zaire is now another Democratic Republic of Congo (But there is still a smaller Congo to its west - with a capital called Brazzaville, opposite to the other capital Kinshasa across the Congo river.
  • I have no idea what Mahore is
  • Cayman is a British Colony, so is Bermuda
  • Abu Dhabi is an emirate within UAE
  • We all know what happened to Yugoslavia now. There was a lesser Yugoslavia even after the Bosnia and Kosovo wars. But Montenegro declared independence, Serbia followed suit as there was no point in a Yugoslavia with only Serbia itself. So long to the imperialist winners of WWI
  • Crete maybe a nation in 2500 years ago, it is just an island of Greece
  • Transylvania is part of Romania (home of vampire)
  • Palestine, unfortunately, is not a fully independent nation yet
  • Finally, don't be offended if your nation has not been included
  • There are also a number of irregularities in the map. e.g. Bhutan and Nepal were not shown. But I will leave this to our readers to explore

Despite all these faults, still an impressive task in puting them into an intersting song.

If you like it, there is also a flag version.

...and the solar system, american state capitals.

Video: the grandfather of 4GW

Nothing illustrates the comcept of guerilla warfare better than the "Tunnel Warfare". It is a "People's War", the guerillas swim in the people, with their full support. It also illustrate the concept of how to achieve local and temporal advantage by manipulating the environment to your advantage.

This teaser is from the Chinese movie "Tunnel Warfare" made in 1960s. Yes, the original classification of this movie is "educational", i.e. for teaching purpose in military academies. It was then used to teach the general people how to conduct guerilla warfare if China is invaded (guerilla warfare is in essence "People's War", so it is meaningless if it was taught to the army but not he public). The movie was so well made, with a very good plot as the backbone (apparently based on the trure story about the people in a small village in Hebei, North China called Ranzhuang and Jiaohuzhuang against the Japanese occupation around early 1940s), that it is now still widely remembered and regarded as a classic of the time.

Here is the lyric of the theme song
  • 地道战嘿地道战,埋伏下神兵千百万,嘿埋伏下神兵千百万,千里大平原展开了游击战,村与村户与户地道连成片,侵略者他敢来,打得他魂飞胆也颤,侵略者他敢来,打得他人仰马也翻,全民皆兵,全民参战,把侵略者彻底消灭完。
  • 庄稼汉嘿庄稼汉,武装起来千千万,嘿武装起来千千万,一手拿锄头,一手拿枪杆,英勇顽强神出鬼没展开了地道战,侵略者,他敢来,地上地下一齐打侵略者他敢来,四面八方齐开战,全民皆兵,全民参战,把侵略者彻底消灭完。全民皆兵,全民参战,把侵略者彻底消灭完。
  • The last lines said, "Everybody is a soldier, everybody participate in the war, until the invaders are totally annihilated." Of course, the prerequisite for such People's War is that everybody in the "People" is with you. You need "help" from the invaders to achieve this.
  • The Mao quote on the screenshot said, "Revolutionary war is a war by the mass, only by mobilizing the mass can a war be executed, only by relying on the mass can we proceed to war..."
I blogged about People's War in ("source" of) 4GW before. I hope this sheds some light on the current events in Lebanon.

以军遭遇地道战 真主党藏兵于民开展人民战争 (I think the reference on Tunnel is exaggerated, but People's War it is.

Appendix: tactics of tunnel warfare
Screenshot from the movie: illustration of how to construct tunnel (that could defeat smoke, water, and defensible with primitive weapon such as a lance)...

...and how to launch attack using the tunnel infrastructure.



Recommended reading list

As an experiment, I will put a few items of my most recent readings on the side-bar. It would include MSM, blog, video and other links. I will keep them for a few days (depending on how fast I update it, i.e. how busy I am).

I will lift the position of this post when there is update on the side bar in the beginning few weeks. Please let me know your feedback. e.g.
1) It is useless
2) It sucks
3) I don't care what you read
4) What topic will you prefer
5) Which recent recommendation is uninteresting (either because it is trite or everyone who reads this blog probably has already see it
6) Too many/frequent
7) Too few/infrequent
8) Any other comment and recommendation

In protest to the blatantly uncritical and brainwashing American reporting who has treated us like idiots, and particularly these few weeks, my first list will be from the honorable British people.

Map: Beirut levelled

Beirut on July 31st, after Israel bombed (vis Terrorism News)
The location is about 3.5km NE of Beirut Airport.

You can zoom in for the pre-bombing satellite image with Google map location at 33.853N, 35.509E.

Zoomed in the affected quarter,

This is probably where the Hezbollah headquarter building was located. But it is fair to say that
  1. Hezbollah is not stupid enough to store weapon at its headquarter building in Beirut
  2. Much more than that single building was levelled.

Update: wiki has the hi-resolution picture of the damage (not globalscape picture is rotated by 90 degrees. N is to the left hand side)



Definition of Terrorism: Israel is "only" half as bad as Al Qaeda?

The definition of terrorism is killing innocent civilian without targeting military target. There is no ambiguity in the case of Munich 1972, many of IRA activities, Bali/Madrid bombing, ETIM bombing of Chinese cities. All victims are civilians in these cases.

But things are not always black and white, as Israel and Hezbollah are accusing each other of terrorism in the recent conflict. Both side also claimed their striking of civilian targets are part of their act of war. Israel claimed the civilians are sheltering the Hezbollah militants. Hezbollah claimed since all Israeli need to serve in the army, their rockets are attacking legitimate enemy soldiers. Israel said it has reason to believe the targets are related to the rocket attacks but occasionally missed; Hezbollah said it is targetting military targets but its weapons are less accurate than Israel's.

There is no end to this argument. Even Al Qaeda can claim its attack on the Pentagon is an act of war, not terrorism, as the victims of UA175 were collateral. So I decided to calculate the collateral damage quantitatively, by computing the Terrorism Ratio (T.R.), which I define as #collateral/#enemy combatant. Here is the result I got (using the wiki data as of today - Aug 6),

Killed Total (casualty+capture)
Enemy Collateral T.R. Enemy Collateral T.R.
Israel 62 706 11.4 416 4,182 10.1
Hz 53
Amal 8
Total (Israel claim) 400
Captured 16
Leb min/max 508 3,400
Neutral soldier 34 73
UN 4 3
Hezbollah 58 38 0.7 249 1,331 5.3
wounded 189 incl shock
captured 2
Al Qaeda: 911 125 2,851 22.8
WTC 2,605
AA11 88
UA175 59
Pentagon 125
AA77 59
UA93 40
Al Qaeda: Pentagon 125 59 0.5
Axis: WWII (M) 17 33 1.9
Allies: WWII (M) 8 4 0.5
US: Gulf War (k) 63 200 3.2
low estimate 25 100 4.0
high estimate 100 300 3.0

Al Qaeda's TR in 9-11 is 22.8. WTC alone is a full terrorism attack by any definition. But if you look at the Pentagon attack alone, the TR is only 0.5. However, one could argue even inside the Pentagon, there may be civilians who were innocent to this "war", such as secretaries and janitors. But then Al Qaeda can argue that they are no different from army chefs and engineers. I think I will just use 22.8 as a reference. a TR of 22.8 is way too high for any reasonable war, as we can compare it with figures from the WWII and the Gulf War.

Israel has a TR of 11.4 in its assault in Israel. It is half as bad as Al Qaeda!

Hezbollah's number is surprising low, at only 0.5. But wait a minute, this is not fair for Israel, because invader usually causes more civilian damage, as we can see in the TR number of the 2 sides in WWII (Axis invasion lasted a lot longer than Allies invasion, though the Axis did killed innocents on purpose). But even if you take this into account and multiple Hezbollah's number by a factor of 4 or 6, it is still no comparison to Israel's atrocity.

Wait another minute, the TR in discussion is calculated using the number of dead. If we use the total casuaty number (include enemy captured and wounded soldier and civilians), Israel's TR is 10.1 and Hezbollah's 5.3. The TR's are both higher than the TR of any other war (0.5-4).

I think Al Qaeda's act in 9-11 was definitely terrorism. I think Hezbollah was also guilty of terrorism, although most of what it has done was normal guerilla warfare until the rocket race. Israel's TR number in this conflict is sandwiched between Hezbollah's and Al Qaeda's. Israel is either extremely inefficient at achieving its goal (if such thing exists at all), or it purposedly planned to "punish" the Lebanese civilian by creating terror. So, is Israel guilty of terrorism?

  • At the beginning of the war you could see from the declarations of various Lebanese leaders that even they were quite satisfied that Israel took care of the Hezbollah. But we went into Lebanon like angry bulls into the arena, attacking anything that moved.
  • Olmert should have defined the objectives of the war from the beginning. But all he said was: "We will be victorious" without defining what victory means...What does [the destruction of the Hezbollah] mean? Is it getting all of them to crawl on their hands and knees and hand over their weapons?
  • We lost, when Olmert said, we will win. Despite that, we will win at the end, because the Israeli society is smarter than its political leaders.
Update (Aug 14 ceasefire #, no fundamental change in the terror ratios)

Total (casualty+capture)

Enemy Collateral T.R.
Enemy Collateral T.R.
Israel 127 908 7.1
498 4,611 9.3
Hz 65

Amal 8


Total (Israel claim) 180




Leb min/max



Neutral soldier



Hezbollah 114 52 0.5
518 150 0.3

402 1200 lightly