The Monica Factor

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>STRATFOR's
>ASIA INTELLIGENCE UPDATE
>October 8, 1998
>Volume: 1, Number: 4
>________________________
>
>
>In This Issue:
>
>* Asia Watch
>
>* Red Alert: Economics Displacing Geopolitics in Chinese Foreign
>Policy
>
>* The World and Asia: U.S. Splits with Rest of World on IMF
>
>_________________________________________________________________
>
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>_________________________________________________________________
>
>ASIA WATCH
>
>CAMBODIA: Cambodian leader Hun Sen has announced that the current
>government will carry on until a new coalition is formed.  The
>negotiations toward forming the coalition are still deadlocked as
>opposition party members continue to leave the country.
>
>CHINA: The central bank has shut down the Guangdong International
>Trust and Investment Corporation....  The State Development
>Planning Commission is tightening control of treasury bonds in
>order to achieve the planned eight percent growth....  The Vice
>Trade Minister Sun Zhenyu has announced a crackdown on unlicensed
>international freight agents....  The State Administration of
>Foreign Exchange has given a 48-hour extension until October 9
>for companies to either repatriate foreign currencies held
>overseas or else face stiff fines....  Although U.K. Prime
>Minister Tony Blair's visit has not resulted in the number of
>trade and business deals expected Blair has taken credit for the
>release of dissident Xu Wenli....  Yukihisa Nakatsu, a reporter
>for the Japanese newspaper Yomiuri Shimbun, has been expelled
>from China for allegedly reporting state secrets.
>
>INDONESIA: The Jakarta Post reported on October 7 that the
>government is considering softening current regulations in order
>to speed up privatization....  The Rupiah climbed from
>10,100-10,200 against the dollar to break the 10,000 mark and
>close at 9,600-9,700....  Police in East Java say they suspect
>members of the armed forces and government officials are behind
>the recent murder spree in the area.
>
>JAPAN: The opposition Democracy Party of Japan (DPJ) has said it
>will submit its own bank reform bill in response to the one
>presented by the ruling Liberal Democratic Party (LDP)....
>Speaking at the World Bank/IMF meeting, state secretary for the
>finance ministry, Sadakazu Tanigaki, said the world monetary
>system would be more stable if the yen were treated on equal
>level with the U.S. dollar and the euro....  The Economic
>Planning Agency (EPA) announced that the August forward-looking
>economic index remained at 50.0 for the second consecutive
>month....  The Nikkei index gained more than 800 to close at
>13,825.61....  Prime Minister Keizo Obuchi is expected to
>formally announce on October 8 Japan's desire to be included
>along with Russia in six-way talks on the Korean peninsula....
>In a meeting with South Korean President Kim Dae Jung, Emperor
>Akihito expressed his sorrow for the way the Korean people were
>treated by the Japanese in the past.
>
>NORTH KOREA: The United Nations Command has said that North Korea
>will repatriate the remains of several U.S. soldiers on October
>9.
>
>SOUTH KOREA: South Korea's big five chaebols (conglomerates),
>Hyundai, Samsung, Daewoo, LG, and SK, failed to meet an October 7
>government deadline to work out details of a merger of their
>semiconductor units.  The government responded by threatening the
>companies with liquidation, and lending banks threatening to cut
>off all new loans....  Fourth quarter talks with the
>International Monetary Fund are scheduled to begin on October 15.
>
>MALAYSIA: The first in an announced series of anti-government
>demonstrations sponsored by the opposition Malaysian Justice
>Movement was held late in the evening on October 6....  The
>ruling United Malays National Organization (UNMO) has expelled 10
>members for supporting dismissed former Deputy Prime Minister
>Anwar Ibrahim, and has called in nearly 20 more for
>questioning....  Prime Minister Mahathir Mohamad delivered a
>terse reply to U.S. Vice President Al Gore's letter regarding the
>treatment and detention of Anwar.  Mahathir said Malaysia is not
>"beholden to the U.S." and that it is better for other countries
>to mind their own business.
>
>MYANMAR: 54 people were arrested for creating unrest and trying
>to undermine the government.  The government also said it would
>continue to detain members of the opposition National League for
>Democracy (NLD) as long as the NLD continued to try to convene an
>opposition parliament.  In both instances, the government said
>foreign interests are at work in Myanmar in an effort to
>undermine the country's stability.
>
>PHILIPPINES: Opening the two-day ASEAN economic ministerial
>meeting in Manila, Philippine President Joseph Estrada called on
>ASEAN nations to work together to find a unified regional
>solution to Asia's economic troubles....  Philippines Airlines
>resumed flights on October 7....  President Estrada will visit
>Singapore on October 11-14.
>
>SINGAPORE: Singapore received six F-16 C/D Fighting Falcons from
>the U.S. on October 7.  The Singapore armed forces now has 10
>F-16s.
>
>TAIWAN: Central bank governor Perng Fai-nan said the bank was
>looking into allegations that $200 million in illegal money from
>mainland China was coming into Taiwan through dummy accounts in
>order to manipulate the Taiwanese markets.
>
>THAILAND: Thailand signed an agreement with Vietnam on October 7
>to combat cross-border drug traffic....  The Commerce Ministry
>announced that Thai inflation has fallen slightly in the first
>nine months of 1998 by 0.2 percent to 9.2 percent.
>
>VIETNAM: The State Bank of Vietnam has announced that the Prime
>Minister signed Decree No. 82, which determines capital
>requirements for financial institutions.
>
>________________________________________________________________
>
>RED ALERT
>
>Economics Displacing Geopolitics in Chinese Foreign Policy
>
>On Wednesday, October 7, China's State Administration of Foreign
>Exchange (SAFE) announced a two-day extension of the grace period
>for repatriation of foreign currency held overseas illegally by
>Chinese companies.  Chinese companies have reportedly transferred
>billions of dollars to foreign banks, in fear of a devaluation of
>the yuan.  Last week, SAFE announced that Chinese companies had
>until October 1 to repatriate foreign exchange earnings held
>offshore illegally, or they would face unspecified punishment.
>On October 7, SAFE announced a tiered system of fees and
>penalties that will be imposed, depending on how much of a
>company's earnings remain abroad after the deadline.   SAFE also
>announced plans to strengthen its monitoring of invoice
>falsification and misuse of short-term working capital loans
>methods SAFE claims are being used to transfer hard currency
>abroad.
>
>China's efforts to tighten currency controls are understandable,
>as Beijing's already questionable claim of $140 billion in
>reserves has now slipped to $120 billion.  What is interesting is
>Taiwan's apparent willingness to help.  On October 7, Taiwanese
>Central Bank Governor Perng Fai-nan said the Central Bank was
>investigating reports that 200 million USD had been funneled into
>Taiwanese markets from mainland China through 60 dummy accounts.
>Responding to a question in parliament, Perng said, "We are
>watching closely if there are mainland funds flowing in Taiwan to
>manipulate our markets."
>
>Perng's implication that $200 million would have a noticeable
>effect on Taiwanese markets is, of course, patently ridiculous.
>But that was not the real point of his comments.  By declaring
>that Taiwan has an interest in stemming these capital flows,
>whose net effect on Taiwan is zero, Perng was offering Beijing
>yet another inducement to improve relations with Taipei.  Taiwan
>has been offering a host of incentives, from increased investment
>and banking in China to relaxed immigration regulations, in
>advance of the October 14-19 meeting in Beijing of top Taiwanese
>negotiator Koo Chen-fu with his mainland counterpart, Wang
>Daohan, and Chinese President Jiang Zemin.
>
>However, Taiwan has also stated its price for assisting China out
>of its economic morass.  Taiwanese Premier Vincent Siew said last
>week that in order for Taiwan to move ahead with establishing
>direct transport, trade, and communications links with China,
>Beijing must cease its hostilities toward Taiwan, stop trying to
>isolate Taiwan from the international community, and treat the
>Taiwanese government as an equal.  In short, Taiwan is willing to
>pour dollars into stabilizing and building the Chinese economy if
>Beijing ceases its incessant threats to invade and subjugate the
>island.
>
>For China, desperate to avoid being engulfed by the full force of
>the Asian economic meltdown, Taiwan offers a lifeline.  But is
>Beijing willing to pay the price?  To what extent is China
>willing to suppress its politico-military imperatives in the
>service of its economic imperatives?  The test case for Chinese
>quiescence may be the otherwise unrelated crisis brewing in
>Cambodia.
>
>Despite recent elections, declared relatively free and fair by
>foreign observers, the political situation in Cambodia is, if
>anything, deteriorating.  Opposition leaders Prince Norodom
>Ranariddh and Sam Rainsey left Cambodia for Bangkok on September
>25, after a string of mass demonstrations against Cambodian
>leader Hun Sen and alleged election fraud failed to stop the
>swearing in of the new parliament.  Arrests of opposition members
>in connection with the demonstrations and with two alleged
>assassination attempts on Hun Sen, topped by pressure from Hun
>Sen as he has attempted to form a coalition government, have
>driven at least 34 opposition parliament members to flee to
>Bangkok.  All 15 parliament members from the Sam Rainsey party
>and about half of the 43 parliament members from Ranariddh's
>FUNCINPEC party have joined opposition leaders in Thailand.
>Military forces loyal to Ranariddh also operate out of Thai
>territory along the Cambodian border.
>
>Thailand recently signed an extradition treaty with Cambodia, yet
>as it now appears to be hosting the political and military wings
>of the Cambodian opposition, efforts to enforce that treaty will
>likely strain Cambodian-Thai relations.  Not only do recent
>events threaten Cambodian stability and Cambodian-Thai relations,
>but they have drawn attention from Vietnam and Washington as
>well.  Vietnam, the historical backer of Hun Sen, has protested
>anti-Vietnamese demonstrations and actions by the Cambodian
>opposition. Vietnam's president this week visited Bangkok, the
>highest level contact between the two countries since they
>established diplomatic relations two decades ago.  While trade
>was foremost on the agenda of the Vietnamese-Thai talks, the
>situation in Cambodia did not go unnoticed.
>
>In addition, Vietnam's Foreign Minister last week discussed the
>situation in Cambodia in a meeting with U.S. Secretary of State
>Madeleine Albright.  The U.S. has cut off aid to Cambodia and has
>threatened to deny Cambodia's seat at the UN to the Hun Sen
>regime, unless a new government can be formed.  Cambodian
>opposition leader Sam Rainsey is now in the U.S. enlisting the
>support of the U.S. Congress in taking further action against Hun
>Sen.
>
>Yet through all this, China has been curiously, and completely,
>quiet.  Beijing considers Southeast Asia to be within its sphere
>of influence, and it has long clashed with both Vietnam and the
>U.S. over their attempts to wield power in the region.  But now,
>with the U.S. and Vietnam both moving to address the growing
>crisis in Cambodia, China has not commented on the situation.
>The only reason we can imagine for China to moderate its
>strategic agenda in the region is to maintain U.S. support for
>China's struggling economy.  By extension, that means maintaining
>U.S. support for Taiwanese initiatives toward the mainland, which
>brings us full circle.  We may be seeing in China's stance on
>Cambodia, and perhaps on Kosovo as well, the results of Beijing's
>decision to put economic needs ahead of strategic needs.  If so,
>the question remains, how far will this translate to China's
>policy vis-a-vis a far more important piece of Chinese strategic
>and economic policy, its relations with Taiwan?
>
>_________________________________________________________________
>
>THE WORLD AND ASIA
>
>U.S. Splits with Rest of World on IMF
>
>As expected, Italy fell in step with Germany and France in
>calling for an enhanced and more powerful Interim Committee on
>the IMF.  On October 6 Italian Finance Minister Azeglio Ciampi
>backed proposals put forward by France, Germany and Japan to give
>the Interim Committee the ability to approve and implement
>controls on a case by case basis.  This means that a majority of
>the G-7 is now in favor of enhanced IMF power.  In addition,
>Canada has gone on record as favoring the option of a "standstill
>agreement" in which nations could suspend international payments
>for a period of time in order to give themselves time to
>reorganize finances.  In effect, this proposal would permit a
>form of national bankruptcy in which nations would seek
>protection from creditors while reorganizing.  While it is not
>clear that the Canadian proposal would be managed by the interim
>committee, the proposal also puts Canada on the side of
>short-circuiting the free market.
>
>This leaves the United States completely isolated among the
>leading countries, appearing to enjoy only the wavering support
>of the United Kingdom.  Indeed, the United States is heading in
>the other direction.  Congress yesterday agreed to approve an $18
>billion infusion of funds into the IMF, but with the stipulation
>that the IMF must agree to substantial reforms, including greater
>transparency in the lending process.  Since this transparency
>would effectively limit the ability of the IMF to negotiate with
>nations whose internal politics are inevitably destabilized by
>the financial crises that have prompted IMF intervention, the
>United States will approve the infusion of funds only on the
>condition that the IMF's mechanisms be weakened.
>
>This split between U.S. thinking and that of the rest of the
>world on the economic crisis has become the most salient
>political fact shaping this crisis.  Essentially, most of the
>rest of the world is ready for a new Bretton Woods agreement,
>although it does not necessarily agree on what that new structure
>would look like.  Indeed, many nations have no idea what they
>want to see emerge.  But there is a general consensus that
>absolutely free movement of currency ought in some way to be
>limited.  Proposals range from using the IMF as an international
>money manager, to some sort of bankruptcy clause, to national
>control policies.  The common denominator is that it is time to
>roll back the radically free market in currency, and by necessary
>extension, in international trade, since control of currency
>inevitably reshapes international trade.
>
>The United States, however, appears to be absolutely committed to
>preserving the current structure.  It wants to use national
>fiscal and monetary policy to stimulate growth, plus an emergency
>fund available through the IMF.  Since this fund is entirely
>inadequate for the requirements, its primary use will be outside
>of Asia, in countries like Brazil, which have lesser problems and
>smaller requirements.  In essence, whether by intention or
>default, the United States has committed itself to a policy of
>containment.  Asia is left to solve its own problems.  The
>international financial system is to remain unchanged.  Available
>funds will be used to prevent the spread of the problem to Latin
>America and other places where the contagion might alight.
>
>The United States is going to call for an international summit of
>the G-7 leaders to discuss the crisis possibly some time in
>November.  There are two interesting aspects to this.  First, the
>White House clearly expects things to hold together until the
>meeting.  Second, what is going to be discussed?  At this point,
>the United States is completely isolated among the leading
>countries.  In calling this meeting, Clinton will find himself in
>an extraordinarily difficult position.  Regardless of whether the
>U.S. policy position is right or wrong, and reasonable men can
>disagree on that, he is going to come under extremely heavy
>pressure to change the U.S. position.  Politically, this is
>impossible.  Congress is not going to approve any measure
>strengthening the IMF.  So why is he going to, let alone calling,
>this meeting?
>
>The date is telling.  The White House is proposing a November
>date in London, following his visit to the APEC meeting in Kuala
>Lumpur on November 17-18.  The election will be held on November
>3.  If the Republicans retain their majority in the House, which
>is extremely likely, they will reconvene some time in the middle
>of the month to resume impeachment hearings.  The President is,
>in effect, proposing a round the world tour that will keep him
>out of the country through the third week of November.  Since the
>following week will be Thanksgiving in the United States, Clinton
>will defuse the first week of hearings with statesmanlike crisis
>management followed by the respite of a holiday.  This will
>diffuse the drama somewhat and at least insulate him.  It seems
>to us that this is the only rational explanation for this meeting
>and its timing.  Clinton has nothing to give and unless he gives,
>the meeting will fail to reach any agreement.
>
>There is, of course, more to American intransigence than this.
>There is a genuine ideological commitment to free trade that
>permeates American economists.  The consensus view is that
>controls can only make a bad situation worse.  Clinton is clearly
>responding to that consensus.  But there is another problem.  The
>pro free trade position is entirely defensible, but the
>Administration's adherence to it has more to do with inertia than
>with principle.  The President's Chief of Staff and his chief
>domestic advisor have both announced plans to resign, following
>the lead of his Press Secretary.  Other cabinet members want to
>leave but feel constrained to continue out of loyalty or concern
>for the country.  This includes Robert Rubin, the Secretary of
>the Treasury.  Washington rumors are consistent in saying that he
>would like to leave as soon as possible and that most others feel
>the same way.  In short, the reason behind the U.S. intransigence
>is the utter distraction of the President and his key advisors.
>Even if they wished to overrule the ideological consensus, there
>is neither the will nor the energy to do so.  Policy decisions
>are being made with an eye to the impeachment calendar, rather
>than to interest rates.
>
>Now, this may not be all that bad.  When governments act
>resolutely to solve crises, they usually foul things up.
>Interference in the free market is serious and the mere fact that
>the French and Italians want to interfere does not make it a good
>idea.  But it is essential that everyone understand that the
>management of this crisis is, on the U.S. side, on automatic
>pilot.  Like a strange theater, the dialogue on stage is being
>directed at actors on another stage altogether.
>
>The Japanese today once again floated the idea of a wider use of
>the yen as an international trade currency, suggesting that their
>own $30 billion infusion of cash to Asia might make the yen more
>of a trade, as well as financial, currency.  The comments were
>clearly intended to alarm Washington, causing it to be more
>responsive to the crisis.  The problem with these subtle, and not
>so subtle, gestures is that no one is paying any attention.  If
>the Japanese proposed invading China, the White House would think
>about whether the invasion could be used to deflect questioning
>concerning Monica Lewinsky.  This all sounds very strange, but it
>is also very true.  Asians must now introduce the Monica factor
>into all their calculations of White House responses.
>
>_________________________________________________________________
>
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