Gradualism and "Democracy with Chinese Characteristics"

At Simonworld, HK Dave has a great discussion on Reuter's report on Wen's comment (Note that the media has been reminding us that Wen Jiabao stood right next to Zhao Ziyang on Tiananmen Square, May 18, 1989), that China will be pursuing democracy, now after successful testing of suffrage at the village level ('中国将推进其民主政治发展，坚定不移地重新构建（民主），包括举行直接选举......如果中国人民能够管好一个村子，我相信几年内他们将能管好一个镇。这个制度将循序渐进。) Anti resonated with cautious optimism. He actually already said that a week ago, unawared by himself, when he commented on Super Girl's implications. "Let a subset of our girls get democracy first" (让一部分女人先民主起来). In fact, China already has "let a subset of our peasants get some sort of democracy first", and now they finally are confident enough to enlarge that subset!

In 1987, Hu Yaobang almost convinced Deng to take those important steps. Then they were scared. In 1989 CCP and Deng demonstrated their total lack of self-confidence. Ironically, What happened in China encouraged peaceful evolution in Eastern Europe, and what happened in Eastern Europe subseequently helped CCP to convince its citizens the importance of "stability".
Today, with the booming economy, it seems to be a good time to push that baby-step. This baby step is made possible after a number of more minor steps, such as SARS, sacrifice of Sun Zhigang and the adorable Super Girls. This is a "path to democracy with Chinese characteristics". Like "socialism with Chinese characteristics", the color of the cat is not important, as long as it catches the mice. China has its own solution for reform. Examples are the way they introduced competition into the telecom sector, by creating China Netcom and let CT and CNC compete as incumbent and new entrants at different geographies. Maybe they would split up CCP to create bipartisan politicis, who knows?

I remember there is a mathematic puzzle in elementary school. "A Frog climbs up a well. Every day it moves up 3 meters, during the night it drops 2 meters. The well is 10 meters high. How long does it take for the frog to climb out?" This is a frog's race. But I am optimistic, because

1. Now we already got 2 days covered, only 6 more to go
2. For every meter up, even if it retreats, there will be a net advance of (at least) 1/3 meter
3. The last day end at dusk, the frog will not drop down during the night

"Big changes usually happen through a series of smaller steps, and big decisions are taken only after intermediate steps are tried and found wanting." the best illustration on gradualism is still this line by Brad.

update (Sep5): To understand what has been implemented in rural China, see this: via daveinchina, "The United States Institute of Peace did an excellent look at China's move towards democracy titled, 'Muddling toward Democracy.' You can give the website a look or download the entire pdf here."

update (Sep6): On Jun 14, a commentary on People Daily about Super Girl sated:

• "[We] cannot understand, why some people are so supportive of the anti-democracy election of 'little mayors' among students (in which candidates are nominated by teachers), but they are so eager to get rid of Super Girl, which promote democracy, competition and trains our new generation..." 不明白，为什么有人对于在学生中评选“小市长”、“小县长”之类明显违背民主政治原则、助长“官本位”意识的活动持肯定态度，却对于有着民主、竞争意识、有利于锻炼人的“超级女声”横眉冷对，非去之而后快？

Katrina, New Orleans, Hans Brinker, Metastable state, Speculation, Oil price, RMB, and others

How are these connected? Ans: through the concept of "metastability" and "equilibrium point". Look at the diagram to the right,

• The ball in the diagram on the left is in a stable state. Whichever side you push the ball, it is going to go back to the point as shown, its equilibirum state
• The ball in the middle is at a meta-stable state. Move it a little, it roll to one of the sides
• The ball in the right is in neutral equilibirum. Move it and it stays wherever it is put at.

Now to Katrina. The water in the Mississippi around New Orleans is above sea-level (that is why it would continue to flow into the sea) and 80% of the city of New Orleans is below sea-level, and therefore, further below the Mississippi water level. NO is in a metastable position and Katrina is the finger that moved the ball. That is why the flood never recede in New Orleans. The water in Mississippi is like the ball in the middle figure of the 1st diagram. Look also at the 2nd diagram (source LSU, click for details) to the right where the yellow areas are portion of the city below sea level, and green areas above sea level but below river level. The 3rd diagram here is a cross-section diagram showing how dangerous the situation has always been. We are familiar with the legend of Hans Brinker who plugged his thumb into the dike to save Holland but not many (including myself) knew that New Orleans is a Holland in the US.

The Yellow River (Huang He) in China, through thousands of years of flooding and dam-reinforcing, has its riverbed a few meters above the cities around it. In 1931 the flood killed millions of people. But water eventually receded because the ground is still above sea-level and there is somewhere for it to flow to.

New Orlean is different. The only solution is to reinforce the dikes, then pump out all the water. In future, we still need our hero Hans Brinker on guard. Even more so if one believes in the theory of global warming and polar ice melting. Because sea level can only be rising in such scenarios.

Now what does this have to do with speculators and oil price? In my previous post, I suspected the current oil price has surpassed what demand and supply should dictate. If that is the case, $70 would represent a metastable price (1st diagram, middle figure) while the left figure is probably somewhere between $70/barrel and the $20-30 price a few years ago. No one really knows where the equilibrium point (right figure) is, and in reality price never really settles at the equibrium, as trading activities will move it around and the equilibrium itself shifts as demand and supply change every second. When speculators are moving in a direction following the "natural law" toward the equilibrium, no one can really stop them. (e.g. Asian Financial Crisis, Oil price from 2000-2004). But once they sail beyond where equilibrium is, it is like New Orleans' altitude situation. You can defend it in short term. Sooner or later it is going to move back toward its point of equilibriums. Like the release of a pendulum, it always overshoots. Speculators want to maximize their profit and will always push to the other extreme. But sooner or later it will move back. (See RMB in 1998 vs today). The Hans Brinkers of the world are admirable, but like the Asian central bankers in 1997, their effort will be futile (螳臂挡车). Same for speculators who ignore the fundamentals.

This applies to the RMB exchange rate regime as well. Before July 21, RMB was tied to USD, and at some point has been driven way passed the equilibrium point. One can argue RMB is still undervalued today, but at least it is not going to drift away further with the new mechanism in place. The objective should be to bring it closer to where it belong, slowly. The huge dike of capital control should insulate the flood, but its job would be easier if the differentials in water level is not too drastic.

Joseph Yam on RMB basket "reference" peg

Mr Joseph Yam, Chief Executive of Hong Kong Monetary Authority (the 'central bank') listed 10 questions about the new RMB basket peg mechanism. I am sure he knows the answer to some, given the close communications between HKMA and PBC. Updates: I found his original in HKMA's site, so I am replacing my tranlation (it was quite accurate though, considering I started with the Chinese translated text) as below:

Reference Currency Basket of the Renminbi

The People’s Bank of China is right in taking a gradual approach in releasing further information about the new renminbi exchange rate regime.

The disclosure of the composition, although not the weightings, of the reference currency basket for the determination of the renminbi exchange rate is a courageous step by the Mainland authorities. It is a demonstration of confidence in monetary management, as the People’s Bank of China (PBoC) makes impressive progress in the reform and liberalisation of the Mainland monetary system. There are quite a few jurisdictions operating with a currency basket, whether it is used for reference or as an anchor, and the composition of the basket is, more often than not, kept confidential.

It is always very difficult to strike the right balance, particularly in exchange rate management, between withholding key information, for the purpose of retaining some constructive ambiguity on the one hand, and transparency that theoretically enhances efficiency and credibility on the other. As we are all aware, financial market behaviour is never easy to predict and it has become increasingly less so with globalisation. Much as we would like to promote the operation of free market with full transparency, in order to achieve the highest efficiency in price discovery and allocation of scarce resources, the free market does not always give priority to public interest. It is indeed advisable to keep something up our sleeves, whether it is key information or the right to change the rules of the game.

There are other areas of the renminbi exchange rate regime in which information disclosure may similarly be rather delicate. It will be interesting to observe how information disclosure is handled by the PBoC, following the encouraging comment by Governor Zhou Xiaochuan on 29 July 2005. While supporting transparency, he wisely pointed to the need to consider the ability of the public and the market to digest and absorb the relevant information, and advocated gradualism in its release. I fully support this approach. Meanwhile, I am sure second guessing the PBoC will become a popular pastime of observers, whether they have an academic or market or political interest in the renminbi exchange rate regime, and PBoC watching (like Fed watching) will become the career of many in the financial world.

We closely monitor the renminbi exchange rate, for the obvious reason that the reform of the renminbi exchange rate regime will present us with challenges in managing the monetary system of an economy that is so closely integrated with the mainland. Fortunately, our lines to the PBoC are kept open to ensure that we can carry out our responsibility for monetary stability in the best interests of Hong Kong.

Currently, the focus of market attention seems to be on a number
of issues.

1. First, the details of the currency basket reference; for example, how frequently are references made, what is the nature of those references (directional or quantitative) and what is the action plan associated with those references?
2. Second, the actual weightings of the currencies in the basket; no doubt for the purpose of tracking the extent to which the actual exchange rate eviates from the imputed exchange rate if the renminbi were fixed against, rather than determined with reference to, the basket.
3. Third, whether there is a band within which the actual exchange rate is allowed to deviate from the imputed exchange rate and what happens if one of the limits defined by the band is reached.
4. Fourth, whether there is a transitory operational cap for the daily fluctuation in the exchange rate that is smaller than the announced maximum daily fluctuation of plus or minus 0.3%, given that the largest daily movement seen so far is 60 pips or 0.07% on 11 August.
5. Fifth, the degree of autonomy that the PBoC has in determining the daily movement and the cumulative movement over a period of time.
6. Sixth, the set of circumstances in which changes to the exchange rate band may be contemplated.
7. Seventh, how references are made to market supply and demand in determining the exchange rate.
8. Eighth, whether, in the context of referring to market supply and demand, there is a cap for the rate of further accumulation of foreign reserves.
9. Ninth, the relative importance of the two references – the basket and market supply and demand – in the determination of the exchange rate.
10. Tenth, the extent of involvement of the PBoC, if any, in determining the forward exchange rate and making a market for renminbi forwards.

I can probably think of twenty more of such questions, but I am not pressing for any answers. It is up to the PBoC, having regard to the public interest, to decide whether the relevant information should be disclosed.

Joseph Yam
1 September 2005

I guess Yam's points are

1. These are the most important issues in understanding the new basket regime
2. Despite Zhou's gradual release of information (such as basket weight), PBC still has full control in a duel vs speculators
3. In coming days, some more information may be released, but may be not. PBC needs to think through the implications carefully before doing so
4. Some of the questions might not have a clear answer even among PBC, they need to think through them clearly and set a clear internal rule of operation (and procedure) if that is the case

His insights should provide a good answer to those who do not understand the situation, especially on how translucent this box is and why it is so. In addition, for the 'hard to please' school, who tried to bash PBC first when they thought the basket was opaque and again when it became more transparent, they should read Joseph Yam, whose track record includes successfully managing the HKD peg through the 1998 crisis, and again under appreciation pressure recently.

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Below is my told text. See what had changed after 2 translations (loss of fidelity).

1. How does the "referencing" of the basket work? (directional vs quantitative, frequency of referencing, and action procedures)
2. Weight within the basket (Zhou revealed the principle, but actual split is still unclear): obviously this is for judging how far the actual (market trading) rate departs from the calculated rate (based on the weight/formula), and hence when to intervene
3. Has there been an objective range (gap) set for the calculated weight, and what to do when the boundaries (upper and lower) is touched (the only gap announced was 0.3% for USD, and that the gap would be different for each currency)
4. Up till now (Sep 2nd) the largest gap observed was on Aug11, for 60 base points (0.07%). Does this mean that there is another (transitional/temporal) operating gap which is much lower than the announced 0.3% gap for USD
5. How much leeway PBC has on deciding the daily range, while considering the cumulative drift within a period of time
6. Under what circumstances will PBC (or State Council) consider to adjust for a new gap
7. How to reference demand/supply and determine (quantify) into the desired rate
8. While referencing demand/supply, is there any upper limit on forex reserve
9. Which one of these two factors are more important: basket calculated rate, and market demand/supply. How do they interact?
10. (If there is,) How much would PBC involve itself in the determining of Forward contract and as a forward under-writer

Yam said "I could think of 20 more questions like such, but I am not eager to get the answers. After all, whether to release such information is for PBC to determine, based on its consideration of how it would impact public interests."

Super Girl (Voice) phenomenon

I was not sure if I wanted to talk about the "Super Girl" phenomenon. But then I recognized this is too big a phenomenom to ignore, politically, sociologically, and even busines-wise. For background story in English see:

• Danwei's report on the Finale
• Times UK
• ESWN's clipping and translations
• For the pictures and performance see 李宇春(Li Yuchun), 周笔畅(Zhou Bichang), 张靓颖(Zhang Liangying), click the last video clip icon to view the final performance.

"Anti" has an excellent series of commentaries which tracks Supergirl (in Chinese), esp on its political ramification

• 超级女声：数千万人对数千万人的民意决选 (Super Girl: Millions vs Millions, People's Choice)
• '(...the contestant and audiences of Super Girl, practiced and demonstrated democracy with their superb performaces... depite all the criticisms, they have shown respect to their opponents, respect to the rules, respect to people's verdict, and put in their best effort, step down gracefully when defeated... someone attacked this program as the "evil of grp (gross point rating)"... but the fact that these adorable, innocent super girls are so well received and followed by our citizens, has demonstrated that we are too much in need of [a platform for] people's choice like this show...总有论者批评中国人没有民主素质。但是“超级女声”中的选手和观众，却以极其出色的表现实践并且示范了民主。虽然有太多太多对大赛的批评，但至少在这场数千万人对抗数千万的票选中，他们都尊重对手、遵守制度、服从民意、努力进取、认赌服输。亲身参与这样的过程是令人激动而有意义的。这就是“超级女声”的核心秘密。　　　　打造这场民意决选的湖南卫视，也在商业上获得了成功。虽然长沙不是北京，但“超级女声”让长沙成为了娱乐之都。有人攻击这个节目，说“收视率乃万恶之源”，但这些可爱、纯洁的超级女生受到国人的追捧，却说明我们需要太多这种民意决选了，给国人这种机会的人再怎么成功都是应该的。)'
• 抵制超级女权猖狂新世界，旗帜鲜明保卫美女叶一茜 (I don't know how to translate this title :) )
• 安替终身做叶一茜粉丝宣言 (Anit's declaration to be the life-long fan of Ye Yiqian)
• 【网文推荐】刘须：被青春和民主彻底击溃(total triump of youth and democracy)
• 超女结束了，什么才是中国的超男决选？(Now that supergirl is over, what can be counted as China's super-"boy" final?)
• 'I was among those who first wrote an opinion column to lift the Super Girl toward the democratic path, but all these time I feel this line from a netfriend speaks best of my heart: "CTMD ($%$%#!?#)! I am afraid it will be futile to hope for voting a president in this lifetime, so I'll just [grab this opportunity to exercise my right to] choose a babe I like." Super Girl is obviously not the same as democracy, but it is the fantasy for the 1.3 billion Chinese people who do not have democracy. When I think about this, I feel sad for my China. (我是比较早写社论把超女往民主方向拔高的，至今我还觉得网友的这句话说得最得我心：“CTMD，这一辈子想选个总统恐怕是办不到了，我就选一个喜欢的女娃子。”超女当然不是民主，但它是缺乏民主的13亿中国人对民主的幻想。想到这里，我为我中华悲凉。)'
• "Let a subset of our ladies find democracy first 让一部分女人先民主起来..." (Note the parallel to Deng's famous baby-step gradualism quote, "Let a subset of our people get rich first")
• 写给许纪霖教授的公开信——既然您不敢反专制，那就请别逻辑混乱地反超女 (An open letter to Prof Xu)

Updates (Sep 2): I don't have much to add to the political implications, except noting that political election is not too different from "idol election". example, Taiwan, Ma Ying-jeou went on stage to sing a few times and the election nights are usually carnival parties.

Updates (Sep 2): South Metro News (based in Guangzhou, which has been well praised for its reporting of Sun Zhigang incident and SARS in 2002) has an editorial: Super Girl Voice: The Victory of the People

"The average people love it, because on stage stands not the privileged class or shining stars, but the average people like themselves; they voted, because Super Girl Voice has been a carnival participated by the average citizen throughout... millions of votes every week, demonstrated the enthusiasm of the public's participation, and also another kind of 'equality and freedom', that of free voting... first, every SMS is equal... second, against the millions of total votes, everyone has good faith and confidence in his own vote that it would be importance, non-negligible and effectual... lastly, they have the right to vote or not vote, the right to choose who to vote, without having to look at the insinuation of others, or owing of any thankfulness... There will be discords and confusion in the its birth, just like anything new to us, such as various accusations on under-table deals, and backstabbing from other camps and confusion among the public -- as a mother is uncertain about the fate of her embryo, but what we can say is, a new life has been born."

Updates (Sep 2): Southern Metro in another op-ed:

"About a month ago, one of the committee judges pointed out, those with a pure heart will have boundless future... the future greatness of China, and also that of our economic take off, relies on the forming of an open society... [people] will look for the opportunities that belong to themselves in an open and transparent society... an open society must have also an boundless future"

Why do I think the Super Girl is important, other than its commercial success? Here are a few

1. the power of technology has fundamentally changed the balance of power in business competition, in this case it is possible for a marginal player (Hunan Satellite TV) to overcome the entry barrier with innovation: although each province has its own satellite TV for about 1o years now, and most have been able to reach virtually every corner in China (vie Cable relay), their rating has been miserable. This is the first time a provincial satellite station (and one from a relatively "less developed" province, Hunan) to have beaten CCTV. The era of CCTV monopoly is gone. CCTV CPM premium will be diluted. No doubt CCTV will still be dominant, due to the audience inertia (compare TVB in HK). But there are 30+ national TV stations now, at any point of time one of them would find a niche and steal audience from CCTV. Innovation will be rewarded, because technolgy encourages "business democracy"
2. With more and more channels to reach consumers (e.g. Bittorrent), and a much 'freer' environment (I mean, piracy tolerating) China may be the market where one discovers the post-iPod business model for the record and video industry

3. Once again, it confirmed the similarity between the US and China consumer market (Walmart, American Idol,...). They are not that different. Fundamentals apply, and scale matters
4. It also demonstrated that Chinese consumers are open to innovatice business ideas and products. For the Americans who lament about trade imbalance, take notes, if you failed to sell something, it is never the buyer's fault. (For a working girl in Hunan, RMB1 is 1/3 of her lunch, and she is not getting anything tangible for it.)
5. SMS and the business opportunity associated with it - not a news
6. Consumer marketing (and sociological insights - e.g. here): Female voters dominated the contest (election), as (perhaps) they are more involved and more willing to spend RMB1 for the vote. This is evident from the results that the Feminine 叶一茜 Ye Yiqian (ranked 7th, pictured in orange-colored vest above, and the links here) lost to the boyish finalists (the top picture, and links in top paragraph). (However, let's also note that it is simplistic to assume the 'boyish' biase, as the personal charisma must have played a major role in such vote determined contests) NTT Docomo found exactly the same pattern 6 years ago, when it was discovered that girls in15-30 are the biggest users of i-mode

Super Girl is not new. Some "sour grapes" in China claimed that they had tried that idea before. Even when compared with American Idol's rating of around 10%, Super Girl's grp was spectacular, think Bravo suddenly got NBC's highest rating. So, the ultimate question is, why is it so successful? Among other reasons,

• it is original, and innovative. Yes, original. It tried to democratize singing contest through 3 different systems: SMS, professional judge, and mass judge. It relied on the first two to select 2 contestants on the PK (originated from the Japanese shorthand for Penalty Kick in Soccer) stage. Then the vote of the latter to eliminate one from the two
• it adhere to its recipe (or strategy) or "audience first", and in the finale used SMS as the sole criteria. While it is no different from the American Idol mechanism, but it is the first time in China, a country where democracy is kept for the privilege of village mayor candidates
• if positioned itself on the mass market (middle tier cities, instead of SH/GZ), with Hunan being at the middle of the GDP/cap among Chinese provinces

Super Girl is also an unplanned success. If you look at the location of the 5 prelim cities on a map of China, you will find that they are Hangzhou, Chengdu, Guangzhou, Zhengzhou + Changsha. i.e. a radiation on four directions from the center Changsha. It is obvious that Hunan Sat TV's original ambition was only to expand to the neighboring provinces. Shanghai and Beijing were not among its planned audience area. With the right strategy and brilliant execution, the result can well exceed the plan, just like Google, Net-ease, iPod, or Shanda

Updates Sep 5: economic benefits

• According to ACNielsen, MongCow's Yogurt sales increased by 400% from Jun/2004 to Jun/2005. All product sales for 1H/05 was 4.75BN, up 37%. Brand recognition increased by at least 4-6% (from below 14.5% to 18.3% in May) according to Sofres
• If we conservatively assume the increased sales to be 500M, comparing this to 14M sponsorship fee it is really cheap (only 3% sales)
• 15 sec spot cost 112.5k, based on 10% (130M) grp, CPM (for 30 sec) is RMB1.7; however, based on the finale of 30% (400M), CPM only 0.56, very good deal for ad buyers

Oil price will peak after it cross the $70 mark, and US has full control on oil price now

Click this link to look at the chart at EIA. Notice the pikes since 2004

• 67) OPEC delegates agree to lower the cartelÂ’s output ceiling by 1 million barrels per day, to 23.5 million barrels per day, effective April 2004.
• 68) OPEC agrees to raise its crude oil production target by 500,000 barrels (2% of current OPEC production) by August 1—in an effort to moderate high crude oil prices. Price onlfellened slightly but quickly shoot up (compare the quantitative adjustment of 68 with 67)
• 69) Hurricane Ivan causes lasting damage to the energy infrastructure in the Gulf of Mexico and interrupts oil and natural gas supplies to the United States. U.S. Secretary of Energy Spencer Abraham agrees to release 1.7 million barrels of oil in the form of a loan from the Strategic Petroleum Reserve. Price corrected briefly and shoot back right afterward

The above is for what happened from 2004 till Mar/2005. More recently (number labels added by me),

• 70) Aug/1/2005: King Fahd died, although Saudi has been effectively ruled byt he heir for about 10 years already, oil price continued to hike with this excuse
• 71) Aug/27/2005: Hurricane Katrina send oil price to $69, do we expect oil price to correct when production resumes in Gulf of Mexico?

You can see every single time when there is an event favorable for oil price to rise, it rises. Even if that temporal event has ceded, the price does not correct to its original value, as it should have (because it is unlikely the demand/supply scenario changed that much during a couple weeks). However, when there is an event indicating the other way, oil price did not adjust to the same scale. What am I getting at?

1. There is a fundamental trend of continuous rise in demand, no question about it, China and India, 2.3 bn people consuming oil. However, this rate of increase is not new in 2004. We had it coming since 1998, or may I say 1978?
2. The pikes seems to be pushing beyond a normal upward trendline (which can be plotted using x-day average), So it is very likely that someone is trying to manipulate the market (on top of reason 1 above), the speculators, the hedge funds

These are no news to any of us. After all, speculators are riding the general market expectation, and very often, helping market close in to the "equilibrium price". However, when we study the one-sided adjustments above, it is hard not to believe that oil price has already passed the "equilibrium point". Dong Tao of CSFB seems to agree. He said that "hedge fund are responsible for today's high oil price". (Via 东亚经济评论 East Asia Economic Review, in Chinese)

In CSFB, Tao has first hand contact with hedge fund managers, and commodity traders. His logics are: crude oil futures dictate spot price, and he knows that 20-30% of the future contracts are hedge fund bets, which are all highly leveraged bets. When leverages and stakes are so high, the underlying motivation is no longer driven by economic fundamentals (or the "expectation" of these fundamentals). Irrational bets are common. He quoted some examples ("educated rumors", I suppose):

• some hedge fund managers have been buying information from Mossad agents (Israel's secret agent, they are 100 times better than CIA) for first haninformationns in the Middle East
• some even tried to meddle with Venezuela politics (Tao did not say how, maybe sponsoring both sides so that the fight continues? or bribing the ministers?)

The implication: this is a metastable position and that it could collapse when the one-side bets are no longer sustainable (like LTCM in 1998) e.g., if there is a sudden increase in supply (e.g. Venezuela, Iraq stabilizing, Iran compromising, or US selling "strategic reserve") or a sudden drop in demand (a looming recession), triggering stop-loss order circles. Dong thinks it is now very risky to bet on oil price to rise further, and trouble is waiting the speculators.

Update: One more important point to add. Higher price will lead to higher supply, and eventually lead to the correction in supply (deep water drilling and oil sands) and demand (alternative energy). The price of silver in 1979-1981 is a good lesson.

Now, US announced it may use its strategic reserve. Government should not intervene on market activities. But since Katrina affects US, it gives a perfect reason.

"Obviously, the Strategic Petroleum Reserve is there for emergency situations, and that would include natural disasters," [White House Spokesman] McClellan said. "But it's just too early to know at this point."

It seems Bush administration is finally trying to act. Because the price hike is threatening the economy and more importantly, the financial risk for invention is very low now. What is better than invention while making huge profit at the same time (selling the "strategic reserve" high and buying low later)?

In the next few days, if the threat of dumping reserve will not stave off speculators, there may be real dumping of the reserve. If the Bush government does it right, it should dump more the amount it needs to. i.e. pushing oil price back to under $50 or even $45 per barrel, to tricking a chain reaction of stop-loss orders by hedge funds. Then it should buy back the reserve slowly again.

However, the obstacles are the oil interest group lobbyist, and the family business of Bush himself. So, oil price would peak but it might not retreat as it should. It is all up to the Republican government. Unlike a few months ago, when no one is very sure whether the equilibrium point has been passed. The question is, do they want to win the next election? Bush himself does not care. But there are other side of the market force, as mentioned (4 paragraphs) above, or some of the dark arts of hedge fund might turn into a scandal. Collapse of one single hedge fund will suffice to trigger the stop-loss circle due to its high leveraging.

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Updates:

Econbrowser has a great analysis , looking much deeper into the supply and demand of oil than I did here.

• "The Energy Information Administration also reported that global oil consumption fell 0.1 mbd in the first quarter of 2005 compared with the fourth quarter of 2004... Taken at face value, the difference between global production and global consumption growth would imply either a build-up of inventories or less inventory drawdown during the first quarter of this year, though it could also reflect inaccuracies in either or both of the underlying statistics."

Let's set aside any urge to relate to a conspiracy theory about hedge fund with refinery prompted by the rumors Dong Tao heard, the fact is demand in 2005 did not increase over that of 2004, and supply did not decease. So what has happened to the price?

How much would RMB/USD rate drift (ii)?

Talk Talk China made a great observation that SAFE charged the big banks in China a hedging preimium of 3% to cover RMB appreciation till 2007 (or 1% per year). He concluded that there will be around 6% adjustment between 1/2005 and 1/2007, or perhaps a little more.

This is in agreement with my earlier "speculation" that RMB will appreciate at a rate of around (not more than) 2.5% p.a. on average, at random timing, based on the need to discourage speculative activities.

However, one should also note that 2-3% is the typical premium any investment bank (MS, CSFB, GS) would charge for hedging, for a 12 month contract. What this means is that the 1% p.a. option premium SAFE charges the bank is ridiculously cheap, because the duration of this option is 3% for 36-48 months (Xie said it was 1% p.a.). We know the risk is much higher if the duration for an option is longer.

According to Xie Ping (via Talk Talk China), the options were signed in Jan/5/2005, Jan/12/2005and Apr/20/2005 for BOC, CCB, ICBC respectively, for an amount of $18bn,$22.5bn and $12bn. Another point to note is from the original text of Xie Ping in Chinese, he offered to interpret that "the risk is shared between SAFE and the banks" means that they are merely following what an option underwriter would do. It does not neccessarily mean that they share the cost mathematically, as TalkTalk has interpreted. (是商业银行和汇金公司用市场化方式共同承担了风险。商业银行支付了期权费，我们执行约定的买入价格。这是期权交易，其他投资者既然关心这个问题，我们就用市场化的方式解决掉这个问题。汇金公司这么做是很市场化的，投资者看到资本金汇率风险已经对冲，就不用担心此事了。) In fact, Xie alleged that SAFE has hedged the risk in the market already, although I do not understand how it did that, maybe through issuing RMB bonds?

Another minor point worth mentioning is that the strike price is RMB8.277/USD for these options. Therefore, whatever TalkTalk predicts, we need to subtract 2.1% from his number because the rate today is already around 8.11. i.e. SAFE's gross profit is 0.9% only today, assuming RMB does not depreciate or appreciate further, and neglecting interests earned/lost from the premium and hedging operations.

There are two possible ways to interpret this

1. SAFE is pricing the option at a huge discount, in a way subsidizing the banks
2. SAFE did not expect major changes, or as TalkTalkChina reasoned, the range will not be much larger than 6% (from 8.277)

Another way to look at this, is to plug the premium of 1% p.a. (more accurately 3% for 3 years)into Black-Scholes and calculate the implied volatilities. I do not know how much the NDF underwriters are charging now (was reported to be around 3% p.a. before July 21), but the implied volatitily they use must be a lot higher than that used by SAFE. (Black Scholes theory shows that the higher the premium, the higher the implied volatility, which is a measure for the expected fluctuation of the strike price) If SAFE is acting rationally, or it knows something we do not know, the NDF underwriters are making obscene profit. In other words, RMB will appreciate at a rate much slower than NDF market expectation, or SAFE is going to lose a lot of money. My "epiphany"? let's go into the NDF underwriting business.

(also note: this may, in part, explain why the reval on July 21st was adjusted from pbc proposed (reportedly)5% to 2.1%, as SAFE might have joined force with Ministry of Commerce, unless they did hedge it by issuing RMB bonds)

Price control in Chinese hospitals

FT on China's price control (Aug22, also Chinese translation if you don't have subscription): other than the widely publicized price control on gasoline, it is probably about time to lift the hands on hospital diagnosis, and that on utilities

"When Gao Qiang, China's health minister, responded to scathing criticism of his country's health system this month he turned his ire on local hospitals, saying they had put profits ahead patients. Mr Gao raged that patients were being billed for drugs to cover the cost of everything from wages to building maintenance, leaving an increasing number of citizens unable to afford to see a doctor.

From the hospital's perspective, however, the picture is very different. A squeeze on government funding and strict price controls on most services mean they are forced to rely on drug sales for up to 70 per cent of their budgets.

"The problem with hospitals centres on the draconian capping of doctors' fees and in-patient beds," said a foreign pharmaceuticals executive. "The result is that they run these services at a loss and have to make up the money elsewhere." The cost of a bed in China's hospitals, even in large cities, can be as little as Dollars 1 a day. Prices are kept low in the name of maintaining what the government calls "social stability".

China has extensively deregulated price controls since it abandoned the command economy in 1979, with the prices of nearly all consumer goods now determined by the market. But the prices of a host of other services - including water, oil, power and cable TV fees - remain under the command of the National Development Reform Commission, the chief economic planning body.The NDRC even controls parking fees for cars and bicycles, the latter because it is a staple cost for many workers.The controls are designed as a political tool, to ensure that ordinary citizens are not driven to protest against spikes in prices for daily necessities, and also as an economic measure to cool inflation."

What Gao tried to avoid was the fact that diagnostic charges are under strict price control, which has forced hospital to find profit from drug prescription and charging for using imported diagnostic equipments. I have visited many Chinese hospitals in the past 10 years, while consulting for pharmaceutical clients, when you enter any hospital in China, there is a price board (like the timetable in a train station, as in the picture, via Bingfeng), specifying how much each consultation cost, how much it costs for using gastroscope (imported gastroscope can charge a higher price tham domestic equipments), etc. Usually a typical visit you will have to pay RMB 5-20 for diagnosis and 50-100 for drugs. Physicians will ask about your insurance before deciding what drug to sell you. In other words, what you get might not be what you need. Furthermore, some patients are subsidizing others, while pharmaceutical companies act as the "tax agent". Plenty of opportunities arise also for corruption among physicians and wardens, via drug rebate. I am also pretty sure the new building in this picture is funded, in part, by pharmaco "donation"

This is hospital's answer to price control, although not as visible as that of the oil's companies.

Until the price control on diagnosis charges is lifted, and competition opened, it is unlikely to see this problem solved. (As to Gao Qiang, I despise anyone among the leadership of MoPH before Apr 20, 2003. Gao got "promoted" only because no one was clean and he was seen as an outsider in the clan, though he was not. I still remember Gao defended Zhang even 2 weeks after Zhang was fired. They were on the same boat. Gao was as guilty as Zhang Wenkang. I do not expect bureaucrats like Gao would be willing to solve the problem.)

Fair enough, price control should only be lifted gradually. Following the wisdom of Dengs' gradualism, I do not believe it should be changed over-night. However, there needs to be a plan and a schedule for reform, where clear milestones are set. An example is, to first use foreign insurers' reimbursement limit as an index, slowly enlarge the price cap to 10%, 20%, and finally maybe 50% or 100% of that index (or benchmarking foreign insurers, e.g. Singapore's, then adjust to RMB using PPP). The problem for MoPH under the leadership of Zhang and Gao is, they have all talked the talk without walking the walk for the past 10 years.

Efficient ride-sharing - Inspired by Chinese taxi-driver innovation

This is in continuation of my previous discussion on Sromi (Ride-Share on 3G/GPS). This one concerns the picking up and dropping off of your friends or relatives over medium distance (ideally 50-200 miles, or 80 to 350 km, or longer range). The problem we try to solve is how to utilize the wasted return leg of the journey. The inspiration comes from the innovation of Chinese taxi drivers on routes between nearby cities, in particular, between Shenyang/Changchun/Harbin, which I learned about a couple years ago.

The Chinese Taxi Model: Background

• China has many cities of over 2M population, typically provincial capitals, separated by 1-3 hour drives. Examples are, Ningbo-Hangzhou-Shanghai, Nanjing-Wuxi-Suzhou-Shanghai, Harbin-Changchun-Shenyang, Shenzhen-Guangzhou, Beijing-Tianjin -- think NY-Philly-Baltimore-DC in US)
• There are bus and train services linking these medium sized (2M+ population) cities, but often the schedules are not as good and tickets hard to get during long weekend or breaks (situation probably worse for US)
• So taxi services are quite popular, costing RMB300-600 per one-way trip. In addition, there are also taxi-pooling to fill the market between taxi and bus services. These are loosely organized among drivers themselves, or sometimes with agents specializing in luring customers who couldn't get a train or bus ticket

The Chinese Taxi Model: The innovation is to ask the passenger to switch to a car coming from the opposite direction around the mid-point of the path, so that both vehicles only have to drive half the distance and can return with full load of passenger as well. This way both vehicles can save fuel costs, time, depreciation and even toll by halving the mileage, and part of the savings given back to the passenger via a price discount

• The passengers are typically charged at a discount (maybe 30%) to the full-trip taxis, but are told about that there will be a switch of vehicle -- (they are very confident that theywill find a car to switch with in long weekends, which means there is already a cirtical mass and scale in the network)
• In the case of China, the drivers usually skip the divided highway and instead drive on the undivided highways which usually run parallel to the toll highways. so that when he sees a likely counterpart approaching, they will flash the high-beam and there is mutual understand to stop by the road-side. The problem is that it is almost impossible to swap passenger on a divided highway, but as we will discuss later, with mobile internet and better planning, we can make it work in divided inter-states as well
• The passengers then switch car and neither driver owes the other any money, so that each takes what his original passengers paid
• There have been "return taxi pools" in almost every cities, (in many airports as well, e.g. taxi's at Shanghai going to Suzhou) where drivers try to fill passenger in their return trip, at a small discount. But the uncertainty is high and drivers usually have to line up and wait for half a day

Mobile internet can greatly enhance the efficiency of this model

While this is a great innovation, and proven in practice (according to passengers and drivers I have talked to), especially between cities with undivided highways where traffic is light (esp in Northeast China), the match-making is not as easy elsewhere. But mobile internet (Sromi) can change all that. Moreover, it can be applied to everybody, not just taxi drivers, e.g. parents who are driving their children to school after long holiday, or even shorter range lifts.

There are two types of match-making

1. Pre-trip arrangement: look for people who travels the reverse direction and make appointment on a gas station (or rest area) near the mid-point in a specific time. Good certainly, but potentially some waiting time if there is traffic delay or unexpected event from either side
2. Mid-trip ad-hoc arrangement: when unexpected event happens in method 1, or for those whose schedules are more unpredictable. Arrangement can be made instantaneously at rest areas (e.g. those on Inter-states-95 between Philly and DC where N and S bound share the same rest area), or when one driving and is about 20-30 minutes before the "mid-point".

The technology and the match-making process (customer experience) is almost exactly the same as that I described previously in "Hitchhikers of America - a business concept". In fact, google has some beta service called ride-finder already, mainly for taxi drivers, though they haven't yet combines this with eBay style match-making.

Unlike the previous case for ride-share or carpooling, the inter-user relationship is a lot simpler. This time both sides are both drivers and passengers, and there is likely to be no cash transaction involved and hence less complexity due to pricing. (except a match-making fee of $0.50-1.00 charged by the match-maker who keep track of user-reputation-rank/etc, and even this fee could be sponsored in part by government who encourages energy saving and reduce global warming). Also note in this application of Sromi, locational service such as GPS or Mobile Basestation Triangulation plays a bigger role, esp for ad-hoc match-making.

An enhancement of this model is that it can apply for longer distance hitchhiking, if rest area becomes a car switching hotspot. It can also increase the feasible lifting distance, i.e. now that a 4 hour drive will only take up 2 hour to complete for the driver.

---

p.s. Digression of why we see innovation from developing countries like China, I think it is a direct result of the different economics in these markets

• Labour cost and time is cheap, compared to fuel and equipment (car). People are willing to make small trade-off of cost over convenience (switching cars in this case -- see also previous discussion on de-aumotation in China). As oil price reaching $67/barrel, there is more similarity to the relative economics in US now
• The innovation in China was probably there for a few years already, since they did not tried to use mobile phone at all. Perhaps it turns out that the ad-hoc match-making on the undivided highway works better, as passengers do not have to wait at all.
• An unrelated, but similar observation of how a different market environment can change business practice is HK, where the high rent has driving up sales/area to be many times higher than, e.g. US. It also helps to explain the low BigMac price in HK, the rents, labor cost per unit sold is much lower in HK, because of extremely high utilization

"The Long Tail" on DRM, downloading and digital media

(Updated Aug 25 pm)

The Long Tail (Chris Anderson) has great insight on the digital media, and in fact, the insight applies to many internet businesses, and business in general as well.

His has a new post about DRM, basically explaining why Movielink and CinemaNow have so far failed. While I do not fully agree with his argument, he made a few interesting points worth discussing

1. "Any protection technology that is really difficult to crack is probably too cumbersome to be accepted by consumers
2. Instead, efficient software and entertainment markets should exhibit just enough piracy to suggest that the industry has got the balance of control about right: not too loose and not too tight. That number is not zero percent (which requires protection methods so invasive they kill demand), and it's not 100% (which kills the business). It's somewhere in-between
3. piracy can actually let you raise your prices: The usual price-setting method is to look at the entire potential market, from the many at the economic lower end to the few at the top, and set a price somewhere in between the top and bottom that will maximize total revenues. But if you cede the bottom to piracy, you can set a price between the top and the middle. The result: higher revenues per copy, and potentially higher revenues overall."

His point #1 is intuitive and is supported by his other points.

I have another good example for his point #2, it proves the "could" but not his "should" assertion. See for example the encryption of DVD, CSS. Free DeCSS softwares such as DVD Decrypter and DVD Shrink are available across the internet (e.g., here). Does this damaged the $15bn DVD market? No. Does the ridiculous region code prevented decrypters at work? No. Those who went to length at DeCSS are not going to buy the legitimate products if pirated copies are not available. The only difference is that the region code has greatly reduced efficiency and increased the cost of manufacturing and distribution. In this case CSS is appealling to consumers, because it is not as cumblesone as DRM. The fact that CSS is cracked does not damage the key areas of its target market.

His point #3 is not really right, and it requires some elaboration and discussion.

• In making this point Anderson has implicitly assumed price uniformity across the world (for software, or media content products), which is fine. Unlike that of pharmaceuticals, it is easy for software and media content to surf cross national coundaries, thanks to the internet (and the small size/weight of the DVD which facilitates shipping). Therefore, we can assume that parallel import has will effectively equalize price, roughly, as we have observed in reality.
• The second assumption he has made is that the long tail (the yellow portion in the chart above) is not very sensitive to price. (i.e stiff price elasticity). This is where I do not agree. The x-axis of the graph is price, the y-axis the volume. Price is the line that separates the two areas. Total revenue is the yellow area times price (the cut-off). Therefore, if the revenue loss of the portion above the cut-off is not compensated by the increase in volume, Total revenue will decrease. (In pharmaceutical, it was possible to apply differential pricing to different markets (Canada and France, vs US) up to this moment, so the argument here does not really work. However, more and more people are importing drugs from Canada.) This is where his logic falls apart. As Brad at Panopticologist correctly pointed out, "When a firm with market power sets their price they are always making a trade-off between receiving a higher price from a few and a lower price from many. The rational firm looks at the entire market and chooses a price which maximises profit. If a portion of that market leaves, revenue will either decrease (if the price was sufficiently low to sell to that portion) or stay the same (if the price was too high for them anyway)." Brad's argument asserts that for a monotonic function volume(price), the revenue function (P * V) has only one maximum. The simple form of his proof assumes uniform pricing, but one can construct a more elaborated proof for tiered pricing as well.

However, what we have observed is that some degreee of piracy is associated with the successful marketed product (e.g., DVD), while none of the fully protected products make any success in the market (e.g., movielink), especially for software and media content products.

Now let me argue in defense of Mr Anderson, that there is an optimum point for tolerating piracy, and that optimum point is not zero piracy.

• There are two choices, 1) abandon the red portion (low end segment) and forbid them to use without purchase (they can't afford to), or 2) cede the low end to piracy. Microsoft's example has proven that ceded it to piracy (hence the total revenue decreased a tiny amount in the short term) will trap the market and train the potential customers, hence helping them the grow of the yellow part much faster when income level increases
• To prove Mr Anderson's hypothesis one needs to assume that the volume curve (the chart above) would expand, which is not difficult to show. Such volume increase due are found in the examples of LD vs VCD vs DVD, in Asia and US. The VCD market in Asia flourished largely as a result of the wide-spread of piracy (also see below). One could even argue that the Hollywood studios made more money over VCD than LD, for which piracy technology was too expensive. In short, the media industry has mistaken that it is a zero sum game, but it is not.
• Or alternatively, to maximize sum of revenue over time, instead of the static sum at current time. This is analogous to the free trial promotion for shampoo from P&G, except that the cost is zero for such promo. Bill Gates cleverly used piracy to accomplish his promotion campaign. The DVD Forum got their free promotion passively (see below).

In addition to Anderson's illustration with Windows OS, we could
also look at the DVD machine market, from DVD Consortium's perspective. It was the Chinese manufacturers
(assemblers) who have commoditized DVD machine, and in turn drived the DVD
market upward. Without the Chinese players, we will still have to pay for
$350-500 per DVD machine. It would not be surprising that DVD suffer the same
fate as LD in North America. And we may still be watching VHS today.

But how did the Chinese managed to cut the cost so much? A few
reasons

1. During the mid-1980s and mid-1990, Chinese companies have
   competed fiercely with each other on the home appliances, from refrigerator to
   microwave machine, to TV set and VCD players. The huge domestic market of 10-40M
   unit is great playground to move on the experience curve when they entered the DVD player
   market around 1999. As we can all see in Wal-marts and Best-buys
   today
2. The learning curve on DVD players is boosted by the learning
   from VCD player assembling (which is entirely absent in the US market, like the
   LDs)
3. Most importantly, before these Chinese players export en mass
   to the US, they perfected their skills within China, where they did not have to
   pay loyalty to the DVD consortium

The results are that the DVD consortium made a lot more money
from licensing to these Chinese factories than they could have otherwise.
Additional sales were also made in the DVD drivers, the chip and other stuffs.
Without some "piracy", Toshiba and Philip would not have profited so much in the
DVD market. This is in support of the Microsoft experience.

The problem of DRM, and that of Movielink and all the pre-iPod online music stores, in my view, lies in their business models. More precisely, the product itself. The restriction DRM imposed on the products just make them repulsive to consumers. There is no "ownership" under DRM, and the pricing for DRM content is totally wrong. If they call it "rental" instead of "sales" it might fare better. But then DRM cannot compete with streaming media. It is caught in the middle of no-man's land.

We learn from the above discussions

1. Highly successful products are often correlated with certain degree of piracy
2. Ceding the lowest segment to piracy might help nurture for future growth
3. Cumblesome anti-piracy measure such as DRM will drive away potential customer, simplifying the technology and making it more user-firendly will help boost volume significantly, even though that might mean losing a portion of potential volume to piracy, as that would be more than compensated by the volume gain in the other segments
4. The failure of DRM related products such as Movielinks are due to their business models, which is in part dictated by the inflexibility of the DRM technology itself

When it comes to new technology, one just has to bear in mind that this is not a zero sum game. Opportunity rewards the risk-takers.

Sun Tze: "supreme excellence is winning the war without fighting" - there's no point stocking weapons

Sun Tze said, (Chapter 3) "...Hence to fight and win in every single battles with 100% stat is not supreme excellence; supreme excellence is winning the war without fighting (是故百战百胜，非善之善者也；不战而屈人之兵，善之善者也)"

• The best modern example of winning a war without going into fighting is the cold war between US vs USSR post-1975, credit to the Nixon-(Carter?)-Reagan administration. Nixon's famous ping-pong diplomacy and Reagan's Star War Arms Race
• An earlier "close example", albeit controversial and not really a non-fighting war, was the dropping of the A-bomb on 60 years ago.

"The next best strategies in order are: (1)intelligent maneuvers, (2)diplomacy, (3)fighting in the field, (4)besiege the city. Besiege the city ONLY when you have exhausted all other options." (故上兵伐谋，其次伐交，其次伐兵，其下攻城。攻城之法，为不得已。) (1) and (2) are among the major means to achieve the supreme objective of "winning without going to war"

• This is what mainland China tried to do earlier this year, by passing its anti-secession law. To increase the stake so that they can avoid being pushed (by hawks from both sides of the straits) into war. They hope to buy time, perhaps 30-50 years of time in status quo, until China's GDP/cap is comparable to Taiwan's, and maybe also political system as we would hope. But first of all, they don't want any instability or give the hawks an excuse. The hawks in China would gain wide support if Taiwan cross the line.
• As Lee Kuan Yew pointed out, "I think they have put themselves into a position internationally that if Taiwan declares independence, they must react and if Beijing's leadership doesn't, they would be finished, they would be a paper tiger and they know that. So, they passed the anti-secession law to tell the Taiwanese and the Americans and the Japanese, "I do not want to fight, but if you allow Taiwan to go for independence, I will have to fight." I think the anti-secession law is a law to preserve the status quo."

Many politicians in Taiwan knows that. I suspect that includes Mr Chen Shui Bian himself, as he has been doing more or less what Lee Tenghui had done while he was in presidency. So are many in the opposition parties in Taiwan. They know that buying $15bn of weapons cannot prevent a war nor win a war with the mainland. And these weapons are getting obsolete almost as fast as our laptops. What's the point?

(This applies to mainland China as well, as they wisely chosen to
focusing on learning the technology, instead of building an arsenal. Meanwhile,
they tried to lay low to avoid any potential international conflict.)

Unfortunately, the supposedly brilliant Wall Street Journal editors seem unable to understand this. Or maybe they do, but someone paid them to say something they do not personally believe. WSJ Op-ed Aug 24 attacked Taiwan's democracy, blaming its Legislative Yuan for blocking the $15bn arms purchase from US, reminding me of China's Foreign Ministry "demanding" US Congress to reverse the Unocal vote. Apparently many people do not understand democracy. Then it said, in an 'optimistic' tone,

• "The good news is that recent Pentagon report on China's military has put opponents on the defensive by highlighting how Taiwan risks "being quickly overwhelmed" by Beijing's rapidly modernizing forces."

Oh, that is what's behind the China Military Report, to sell more arms ($15bn) to Taiwan (and to the US DoD). And there won't be price negotiation. Because "US [approved the sales] by taking some diplomatic risk". Lucky for Taiwanese people, they have a democracy now, and they are beginning to use their brains. WSJ hoped Ma Ying-jeou would support the arms purchase, but failed to mentioned that Lien Chan probably opposed the purchase because of his voter told him to do so. I hope Ma is not that stupid. At the end of the day (next decade), it would be the peopleo both sides of the strait who would win this "war", when they embrace democracy, if the rulers could just hold on to status quo and wait.

As for the WSJ op-ed, yesterday they had proposed another "brilliant strategy" against Iran, to bar them from playing in the FIFA World Cup, as discussed by Brad Sester. ROFLMAO.

(Updated Aug 29)

• Kishore Mahbubani in his recent essay on Foriegn Affairs, "China today is like a dragon that, waking up after centuries of slumber, suddenly realizes many nations have been trampling on its tail. With all that has happened to it over the past 200 years, China could be forgiven for awakening as an angry nation, and yet Beijing has declared that it will rise peacefully. This good disposition stems partly from China's awareness that it is relatively weak. But it is also a sign that Beijing has endorsed the vision of progress that the United States has extolled since World War II. States no longer need to pursue military conquest to prosper, the theory goes; trade and economic integration pave a surer path to growth. And Beijing has noted how much adhering to this philosophy helped Japan and Germany emerge from the ruins of World War II."

(Updated Sep 2)

• Ma Ying-jeou said (in a foreign press interview), the arms purchase is not only a price issue (noting the price tag has more than doubled since it was first proposed in 2001). He mention the priority is to avoid an arms race between the strait. -- Finally someone who makes sense.
• Ma further criticized the DPP governement for playing fire on one hand (create excuse for mainland intervention), and fire hydrant on the other (arm purchase at elevated price)