Tuesday, September 29, 2009




It is one year since the last reported terrorist attack (in New Delhi in September last year) by the Indian Mujahideen (IM) and its mentor the Students' Islamic Movement of India (SIMI). Not only has there been no jihadi terrorist attack in Indian territory outside Jammu & Kashmir (J&K) attributable to the IM for a year now, there has been no propaganda offensive by the IM either during this period. There was no evidence of IM involvement in the spectacular terrorist attack launched by the Lashkar-e-Toiba (LET) of Pakistan in Mumbai from November 26 to 29,2008. A message purporting to be from one Deccan Mujahideen claiming responsibility for the Mumbai attack had originated from Pakistan at the time of the attack, but it was believed to have been sent at the instance of the LET set-up in Pakistan to confuse the Indian security agencies.

2. The period between November 2007 and September,2008, saw repeated terrorist strikes with timed improvised explosive devices (IEDs) by a group of jihadis originally belonging to the SIMI, who claimed to be operating as the Indian Mujahideen. These explosions, with many human fatalities, took place in three cities of Uttar Pradesh on the same day in November,2007, in Jaipur in May,2008, in Bangalore and Ahmedabad in July,2008 and in New Delhi in September,2008. Messages purporting to be from the IM received by some media outfits claimed responsibility not only for these explosions, but also for some others which had taken place before November,2007, such as the explosions targeting suburban train passengers in Mumbai in July,2006.

3.The attacks between November,2007, and September,2008, were well-planned, well-orchestrated and well-executed and indicated the involvement in their planning and execution by some well-educated members of the Indian Muslim community, some of whom had attended so-called secular educational institutions. Some of the educated Muslims involved and arrested by the Mumbai police were adept in the use of information technology (IT). One of them was reportedly working for a reputed IT company.

4.The Indian intelligence agencies and the police of the affected States, which were taken by surprise by these attacks, mobilised their resources and succeeded in arresting many of those involved. The investrigation brought out that long before launching these attacks, the SIMI had been planning for them and holding training camps for those to be used for these attacks in different parts of Indian territory,
including in Kerala and Gujarat. The investigation also brought out that prompt follow-up action by the police of different States on the revelations about these training activities contained in the reports of the Madhya Pradesh police on the interrogation of some SIMI cadress arrested by them in the beginning of 2008 might have prevented at least some of these attacks.Unfortunately, the interrogation reports were allegedly not widely disseminated and no alert was sounded. The details of the planning and training came to be known only after the Ahmedabad explosions.

5. The credit for the one-year lull since September,2008, should go to the Indian intelligence agencies and the police of all the states. They have not allowed their preoccupation with detecting and neutralising the cells of the LET, the Jaish-e-Mohammad (JEM) and other Pakistani organisations come in the way of their hunt for the remnants of the IM and the SIMI, which have escaped attention and arrest so far. Many suspected cells of the SIMI and the IM in Kerala, and other places have been detected and neutralised by them during the last one year.

6. The details out of these detections and arrests as reported by the media periodically indicate that the SIMI and the IM have been re-strategising their operations for the future and biding their time before striking again. The one-year lull in the terrorist strikes of the IM and the SIMI should not be interpreted as indicating any set-back suffered by them. The arrests made during this period of lull indicate continued planning and training for more attacks.

7. The IM and the SIMI continue to be as serious a threat to our internal security as they were in 2008. (30-9-09)

( The writer is Additional Secretary (retired), Cabinet Secretariat, Govt. of India, New Delhi, and, presently, Director, Institute For Topical Studies, Chennai. E-mail: seventyone2@gmail.com )



It is well known that the bilateral trade between India and China is galloping towards the targeted figure of US $ 60 billion and that China has already emerged as India's largest trading partner.

2. What is not that well known even in India is the inroads which Chinese business companies have been making into key sectors of the Indian economy for the last four years----and particularly since the visit of President Hu Jintao to India in November 2007.Not only Hu, but also some leaders of the Communist Party of India (Marxist) were reported to have taken with the Government of India the inordinate delay in the issue of work visas to Chinese employees of Chinese construction companies which had won contracts in India. The Marxists were particularly upset over the delay in the issue of visas to a large number of Chinese employees of a company, which had won a contract for the construction of a gas pipeline.

3.Between 2004 and 2008, the Government of Dr.Manmohan Singh was dependent on the Marxists for its survival in office. The Chinese and the Marxists took full advantage of this to sort out the difficulties faced by Chinese companies. This was the time when the Chinese inroads into the Indian economy started in a big way and it has continued even after the Marxists stopped supporting the ruling coalition in the second half of last year. Now, there is not much love lost between the Congress (I) and the Marxists. The Government is no longer dependent on the Marxists for its survival.

4. Despite this, there has been no slowing-down of the Chinese inroads into the Indian economy. This is because many Indian corporate houses find it easier and more profitable to do business with Chinese companies than with companies from other countries, including Japan. They manage to persuade or pressure the Government to approve their decision to award construction and equipment-supply contracts to the Chinese.

5. Contracts with the Chinese are more profitable because Chinese construction companies bring their own engineers and labourers, who are allegedly prepared to work for less emoluments than their Indian counterparts and do not resort to strikes. The Chinese too insist on bringing their own work force in large numbers from China because this solves their problems arising from the poor command of the English language of the senior Chinese executives. The Chinese companies also claim that if they bring their own work force they could ensure timely completion of the projects and the quality of the construction. Nobody had challenged their arguments till now.

6. This has been creating resentment among unemployed Indian engineers and other skilled personnel who complain that at a time when there is growing unemployment in India due to the economic melt-down the Chinese companies should be bringing in thousands of their workers. Uncorroborated allegations have been made by those critical of the Chinese inroads that in order to get over difficulties in getting
work visas some Chinese companies bring their employees on three-months tourist visas. It is alleged that after three months they are replaced by a fresh lot of Chinese workers with tourist visas.

7. For the first time, an indirect reference was made to the resentment over Chinese companies bringing their own nationals to work in India by S. Jaishankar, India’s new Ambassador to China, during a seminar organized by the Federation of Indian Chambers of Commerce and Industry and the China Council for Promotion of International Trade in the third week of September. The "Times of India" quoted him as saying as follows: : “An India-specific approach will have to be thought through by Chinese companies.I have personal experience in working with many of India’s other major economic partners. I cannot recall their investments and projects requiring such large manpower support from home.It is possible that business models of non-Chinese investors are based more heavily on collaborating with local Indian
capabilities.” He was replying to complaints from Chinese businessmen about difficulties in getting work visas from the Indian diplomatic and consular missions in China.

8. Apart from the resentment from unemployed Indian engineers and other skilled personnel, there is also some resentment among Indian construction companies, which had lost out to Chinese companies while bidding for contracts for the construction of power stations.On July 27,2009, the "Times Now" TV channel reported that in a letter written to the Finance Minister in June before the Union Budget, Larsen &
Toubro's Chairman and Managing Director A M Naik had expressed concerns over the import of Chinese power equipment to India that totalled nearly $8.3 billion, while Chinese taxation model struck down any hopes of Indian exports to China. The TV channel quoted his letter as complaining that India is following the 'buy Chinese' policy in which international tenders are not floated to give China advantage.
It also said that "Indian power companies changed specifications to suit Chinese manufacturers and that the Indian manufacturers are being overlooked and Chinese exporters incentivised."

9. There have also been complaints about the inadequate quality of construction by the Chinese companies. Such allegations of poor construction quality were being denied vehemently by the Chinese companies. But, they have been embarrassed by the collapse of a chimney in a power plant under construction in Central Chattisgarh by China's Shandong Electric Power Construction Company. Forty-one people were reported to have been killed in the accident on September 26. The Chinese company, which was engaged in the project with some other non-Chinese companies, has reportedly brought in 80 Chinese workers to work at the site. A news agency has reported that the Chattisgarh Police has told the owners of the project that the Chinese personnel should not be allowed to go back to China till the enquiry into the accident was completed and the responsibility for the accident fixed.

10. Apart from the power sector, Chinese companies have also come in a big way in the telecommunications sector as suppliers of equipment and hand sets and for laying networks. It is said that for security reasons the Government has allowed the Chinese companies to participate in telecom projects mostly in South India away from the border areas. While this is in respect of construction, there are no geographical restrictions on their selling their equipment and hand sets anywhere.

11. In a New Delhi datelined report of September 14,2009, the Reuters news agency reported as follows: " China's ZTE Corp said on Monday (September 14) it has started selling mobile handsets free of usage contracts in India, having previously sold them only through tie-ups with local mobile operators. ZTE, China's second-largest telecoms equipment maker, said it wanted to raise its Indian sales to 20 per cent of its global handset sales from 16 per cent currently.Nokia , the world's top cell phone maker, dominates the Indian market with an about 60 per cent market share.About 120 million mobile phones are sold every year in India and this is expected to rise to 160 million a year by 2013. "

12. There have been reports that the Indian intelligence agencies have been concerned over the security implications of the growing Chinese inroads into the telecom sector. They do not accept the explanation that since the Chinese telecom companies operate mostly in South India, the security implications will not be serious. They reportedly want stricter security-related guidelines to be laid down in respect of the Chinese companies.

13. Concerns such as these were there even earlier, but they have grown since last year because of the allegedly aggressive manner in which Chinese companies have started winning contracts in India.Participating in an interactive session on ‘India and China to drive global economic growth’ at Kolkata in April last,the Consul General of China in Kolkata, Mao Siwei, said, as reported by "the Hindu" of April
12,2009, that while China had now become India’s largest trading partner, for the first time, (with bilateral trade of $51.8 billion in 2008),India had become the largest overseas market for Chinese companies undertaking contract projects. According to him, in 2008, Chinese companies were awarded contracts worth $12.9 billion for various construction projects in India.

14. Critics of China allege that the Chinese companies are treating India like they treat African countries, where they have a free run importing their own work force and bringing Chinese construction equipment when ample skilled Indian personnel and good quality equipment are locally available in India.

15. The Chinese authorities and the Government-controlled media in China have started noting with concern the growing resentment in India over the inroads made by Chinese companies, particularly in the telecom sector. Chinese critics of the campaign in India have been deploring the allegedly imaginary fears being created in the minds of the Indian public about the dangers of a Chinese mole in every
computer and mobile handset bought from China.

16. Xinhua, the Government-controlled news agency, came out with a detailed despatch from New Delhi on this subject on September 9,2009. A copy of it is annexed. (29-9-09)

( The writer is Additional Secretary (retd), Cabinet Secretariat, Govt. of India, New Delhi, and, presently, Director, Institute For Topical Studies, Chennai. He is also associated with the Chennai Centre For China Studies. E-mail: seventyone2@gmail.com )


The Xinhua-circulated despatch of September 9,2009

Restrictions on Chinese telecom equipment good for India?


by Mao Xiaoxiao

NEW DELHI, Sept. 9 (Xinhua) -- Telecom and electric power equipment are two fields where Chinese companies have made the most breakthroughs in Indian market over the past several years.

However, some voices about "Chinese products threat" have been rising recently from some government bodies and business groups here in the name of safeguarding national security and interests of Indian industry.

Restrictions imposed upon Chinese products equipment will no doubt increase the risk and costs of Chinese companies operating in India. But by doing so, will India gain in the fields of security, commerce and economic development?


On Aug. 28, the Department of Telecommunication (DoT) of India held a meeting with top executives of local telecom companies. DoT officials reportedly asked Indian telecom companies to stop using China-made telecom equipment in sensitive border areas, as the Home Ministry and intelligence agencies are concerned that these equipment could have spyware or malware built into them capable of tracking
voice and data traffic from a location outside the country.

At the end of July, India's leading industry body Association of Chamber of Commerce and Industry of India (Assocham) asked the government to levy import duty on Chinese power equipment. It said the domestic industry is being hampered by the products from China.

Assocham also accused Chinese power equipment producers of offering very low prices under the government subsidies. It said that India imported 8.3 billion U.S. dollars worth of Chinese power equipment in 2008, and therefore asked the government to restrict such imports.

Xinhua has learned from local sources that recently, there has been a trend that some Indian government bodies have been raising the tone of "security threat" from Chinese products.

While expanding its regulation list from state-run telecom companies like the BSNL to private telecom companies, the Indian government on Aug. 28 organized the meeting of telecom companies, making the issue clear and public.


An expert on telecom security told Xinhua that Chinese equipment producers are committed to meeting domestic and international standards of security and post-sale security issues are actually taken care of by the local vendors. If there exists a potential security threat,the vendors will have all responsibility.

He said as most media people lack real knowledge of technological issues in telecom production, they have become unconsciously a collaborator in producing the fiction of "software spy".

The Chinese telecom companies are now worried that restrictions on the using of their products could suffocate their development in the Indian market.

Like the telecom industry, Chinese power industry has been known with a similar story of high growth and is facing direct competition from domestic industry, such as India's heavy electricity machinery Producer BHEL.

BHEL previously protected by government granted monopoly, has lost all leverage against outside competitors due to lack of competitive capability, and its production has been on the decline.

Some local analysts believe, the flawed government policy and poor productive forces are main reasons behind India's failure to realize half its goal to increase electric power in the past five-year-plan.


According to local media reports, many Indian private telecom vendors have openly expressed opposition to government plan to ban Chinese equipment.

They warned government officials that such measures could only hurt Indian telecom industry itself, because most of them have signed contracts with such Chinese producers as Huawei Technologies and the ZTE.

They said the price of Chinese telecom equipment is lower than those of Ericsson, Nokia and Siemens. Most Indian telecom companies newly entering the local market signed buying contracts with Chinese companies because of the high competitiveness in price, while some established old brand companies are using Chinese price as a bargain in talks with European producers.

Local news reports said some DoT officials have already hinted that the government might soften "compulsory measures" against Chinese products into "security guidelines", and might also minimize the number of states to be designated as "sensitive border area" banned from Chinese products.

Editor: Xiong Tong

Monday, September 28, 2009


B. Raman

(What will be the impact of the global financial and economic melt-down on the Chinese economy? This question should be of interest to the other countries of the South and the South-East Asian region. If the Chinese economy is badly affected, they too are likely to feel the negative consequences of the down-turn in the Chinese economy. Keeping this in view, we have been bringing out a periodic "Chinese
Economy Monitor" based on open information. This is the eighth in the series)


The Chinese authorities have reasons to be gratified over the economic indicators for the first half of 2009. After touching a record low of 6.1 per cent in the first quarter of the year, the GDP growth rate has risen to 7.9 per cent in the second quarter. If this improvement is maintained, the authorities are confident of reaching or even exceeding the targeted growth rate of eight per cent for 2009. According to Chinese experts, this is the minimum growth rate required for preventing an aggravation of the unemployment situation.

2. The Chinese authorities admit that they are keeping their fingers crossed as to whether this significant recovery could be maintained since that would depend not only on their economic management, but also on the improvement in the rest of the world. State-aided improvement in domestic demand has contributed considerably to the recovery despite the fact that exports of Chinese goods have not recovered significantly and foreign trade, which contributes significantly to the health of the economy, continues to decline though not as fast as it did last year and in the first quarter of this year..

3. State-aided domestic demand has contributed to a significant recovery in the real estate and automobiles sectors. Civil aviation is another sector, which has been improving.The textile industry continues to suffer due to the steep drop in overseas orders. The iron and steel industry is facing difficulty due to over-capacity, many uneconomic units and high cost of local production and local iron ore mining. This has necessitated imports of both lower-priced steel products and large-quantities of iron ore. The Chinese have undertaken a programme for re-structuring the iron and steel industry. Under this, there has been a three-year freeze on the setting-up of new units. Technologically backward and under-developed units are to be shut down and the remaining units are to be merged to reduce the number operating. This could have an impact on future imports of iron ore from India, which now constitute a little over 50 per cent of India's total exports to China. The uneconomic units prefer Indian ore because of its lower transportation cost. The bigger, efficient and modern units are able to afford the import of the more expensive and reportedly better quality ore from Australia and Brazil.In July-August, the "People's Daily" had come out with a series of reviews of different key sectors of the economy. Extracts from these reviews have been incorporatred
in this note.

4.In the past, foreign analysts used to express doubts about the accuracy and dependability of Chinese economic statistics, particularly relating to the GDP growth rate. Now, such skepticism is being voiced even by sections of Chinese analysts. Significantly, the Chinese authorities have not tried to stop the publication of such notes of skepticism about official economic statistics. In one of my earlier notes, attention had been drawn to the skepticism being voiced by some Chinese experts as to how power production and consumption continue to be sluggish at a time when the Government has been claiming an improvement in industrial production. Now, the "Global Times", the English daily of the party-owned People's Daily group, has come out with an editorial questioning the accuracy of the claims relating to the GDP growth rate. It has also questioned the wisdom of the excessive focus on the GDP growth rate for judging the health of the economy. It is being pointed out that there are other indicators, which are equally, if not more, important such as the data regarding uneployment. Reliable statistics regarding unemployment are hard to come by. Ordinary people may not be able to find out the fudging of GDP statistics,but they can easily sense from their experience and that of their relatives and friends about any downplaying of the seriousness of the
unemployment situation. The "Global Times" editorial has alo been incorporated in this note.

5. Even after taking into consideration such skepticism about the reliability of the Chinese statistics, one has to admit that the Chinese economy has been showing signs of a recovery. This is conceded by even some foreign experts monitoring the Chinese economy as well as by foreign business companies operating in China. It will be unwarranted cynicism to doubt every claim being made by the Chinese. Many
claims are corroborated by independent sources.

6. There is a debate going on among the Chinese analysts about the wisdom of what they view as the excessive investments of China's huge foreign exchange reserves (US $ 2.13 trillion ) in the US Treasury Bonds. They have been advising the Government to consider other options such as stepping up the investment in gold, more Chinese investments abroad and the acquisition of foreign companies facing difficulties due to the global economic melt-down. They have been pointing out that among the major economic powers of the world, China has the least investment in gold. It is said that while China has invested about 35 per cent (US $ 776.4 billion) of its foreign exchange reserves in the US Treasury Bonds, only 1.6 per cent of its reserves is invested in gold.

7. While the Chinese political leadership is showing an awareness of the need for caution in stepping up the investments in the US Treasury Bonds, it is at the same time conscious of the political pressure point which Beijing has over the US through its huge investments in the Treasury Bonds. The Chinese feel that this pressure point has enabled Beijing to bring about a moderation in the US attitudes and policies towards China since President Barack Obama took over. The comparative silence of the Obama Administration on human rights issues relating to Tibet and Xinjiang as compared to the Bush Administration is attributed by Chinese observers to the US need for continued Chinese purchae of the Treasury Bonds at a time of economic melt-down. Power comes out of not only the barrel of the gun, but also out of investments in the US Treasury Bonds. Obama's frantic request to His Holiness the Dalai Lama not to come to Washington before Obama's visit to China in November and embarrass him with a request for a meeting is an eloquent indicator of the political clout over the US which China has built up for itself by becoming the largest foreign investor in the US Treasury Bonds.


8.China, the biggest foreign holder of US Treasury Bonds, off-loaded 4.4 billion USD worth of US Treasury Bonds in April,2009. but increased its holdings by $38 billion to $801.5 billion in May, according to a US Treasury Department report released on July 17,2009. The total amount, which exceeded $800 billion for the first time, was equivalent to 37.6 per cent of its $2.13 trillion foreign exchange reserves then.On the contrary, Japan, Russia and Canada were sellers of US assets in May. Japan, the second-biggest international investor in US Treasury Bonds, reduced its total holdings by $8.7 billion to $677.2 billion.

9.However, subsequent data published by the US Treasury Department on August 17,2009, showed that by the end of June,2009, China's holdings of US Treasury Bonds came down to 776.4 billion USD, a fall of 25.1 billion, or 3.13 per cent compared with the country's 801.5 billion USD T-bonds holdings in May. This indicated China's first massive offload of US debt in 2009.Japan purchased 34.6 billion USD of US
T-bonds in June, pushing up its total US T-bonds holdings to 711.8 billion USD. The UK, US debt's third biggest holder, held 214 billion USD worth of T-bonds by the end of June, up 50.2 billion, or 30.6 per cent compared to its 163.8 billion USD worth of US debt holdings in May.

10.Chinese experts have been saying that China should reduce its dependence on US Treasury Bonds and look at other avenues like gold."The surge in May does not mean that China will continue buying more US debt in the future," said He Maochun, director of the Research Center of Economy and Diplomacy of the Tsinghua University.China has already tried to reduce its reliance on the US bonds in some ways. It signed 650 billion yuan worth of currency swaps since December, 2008, with six nations including Indonesia, Argentina and Belarus, and it is encouraging trading partners to use the yuan for cross-border trade settlements.China had also announced that it would buy $50 billion worth of bonds denominated in Special Drawing Rights, the International Monetary Fund's unit of account, to be issued by the IMF. Russia and Brazil have committed to buying $10 billion each.

11."China does not have a better option than the US Treasuries, which are relatively secure compared to other options," He said. On the contrary,Li Lianzhong, who heads the economics department of the Central Policy Research Office, said that China should use more of its foreign exchange reserves to buy gold, energy and natural resources assets.He cited the high percentage of gold in the foreign exchange
reserves of the United States, Italy, Germany and France, to argue that China's gold holdings, which accounted for about 1.6 per cent of its reserves, are too small.In addition, he felt that China should consider buying good overseas companies and also acquire technologies during the economic crisis.

12.China has expressed concern about the prospects for the US economy and the health of its investment in the US."We have lent a massive amount of capital to the United States, and of course we are concerned about the security of our assets," Premier Wen Jiabao said during a March 13, 2009, press conference. "To speak frankly, I do indeed have some worries," he said.

13.Chinese experts have also been suggesting that the country should reduce the size of its trade surplus, either by importing more from other countries or by doing more overseas investment."We understand China's currency policy is aimed toward an eventual balance between inflows and outflows. But for now, inflows are dominant," said Patrick Bennett, Asia Foreign Exchange & Rates Strategist with Societe Generale in Hong Kong.Bennett believes that a modest appreciation of the Chinese yuan would also work to slow inflows and would be a dampening influence on the trade surplus.

-----CHINA DAILY of 18-8-09.


14. China's imports and exports continued falling in June from a year earlier, but the pace of decline eased, the General Administration of Customs announced on July 9,2009.Exports dropped by 21.4 per cent year on year in June to $95.41 billion. June imports totaled $87.16 billion, down 13.2 per cent compared with the same period last year. This was the eight consecutive decline. In May,exports fell by 26.4 per cent from the same period a year ago to $88.758 billion, compared with a decline of 22.6 per cent in April. Imports were down 25.2 per cent to $75.37 billion.The trade surplus was $13.39 billion.Total foreign trade in May was worth $164.13 billion, down 25.9 per cent from a year earlier, and down 3.9 percent month on month.Exports in the five months to May totaled $426.14 billion, down 21.8 per cent, and imports were down by 28 per cent to $337.35 billion.Zhang Yansheng, Director of the Institute of Foreign Trade of the National Development and Reform Commission, said the further decline of exports should be attributed to shrinking global demand, growing trade protectionism and a grim real economy."Global policies that lowered interest rates and injected liquidity into the market had helped sustain a sound financial system, but they did not effectively beef up the real economy," he said. Companies were reluctant to invest, consumers would not borrow to
purchase, and unemployment rates were still climbing, said Zhang, noting that these phenomena would not disappear very soon.Zhang called for preparations for "a long-term battle" before global trade returned to normal.In the first half, Zhang predicted, China's exports would fall by more than 20 per cent, and exports for the entire year would drop by 5 to 8 per cent.There was little room for export-support
policies such as rebate hikes, and the government should launch more policies to encourage structural changes, including tax cuts,improving trade financing and promoting credit insurance for exports, Zhang said.China raised export tax rebates on June 10 on more than 2,600 items, including processed farm products, machinery, shoes, hats and toys, with effect from June 1. It was the seventh such announcement since last August.According to the Ministry of Finance, China's taxpayers enjoyed tax reductions of 120 billion yuan ($17.65 billion) in the first quarter, after the reform of value-added tax (VAT) from January 1 to stimulate the slowing economy.

---- Xinhua of 11-6-09 and 10-7-09

15.China's foreign trade figures continued to fall in August, but the downward rate slowed, the General Administration of Customs said.The imports and exports value of August was 191.7 billion US dollars, a decrease of 20.6 per cent compared with the same month last year, but a 2.3 per cent increase from July.Zhuang Jian, a senior economist with the Asian Development Bank, said the trade figures indicated that China's foreign trade was still weak amid a slowdown in international demand, but it had shown signs of recovery."As the country's economy is on a track of recovery boosted by stimulus measures, foreign trade is expected to improve gradually, " he said.

---- Xinhua of 12-9-09


16.The State Administration of Foreign Exchange (SAFE) released the preliminary data of the country's international payment on its website on August 20, 2009. The figures showed that China continued to have a surplus of both the current account and the capital account in the first half of 2009.In the first six months of the year, China's current account surplus reached 130 billion USD, down 32 per cent year on year. The surplus in goods stood at 118.3 billion USD while there was a deficit in service of 18.6 billion USD.The surpluses in income and in current transfers were 16 billion and 14.3 billion USD respectively.The capital and financial account had a surplus of 33.1 billion USD in the first half of the year, a year on year slump of 54 per cent. The net FDI inflow reached 20.6 billion USD. The inflow of portfolio investments valued 16.9 billion USD. Outflow of investments reached 5.6 billion USD.The country's forex reserves increased by 185.6 billion USD to 2.1316 trillion USD by the end of June from the end of 2008--- an increase of 17.84 per cent..

-------- People's Daily Online of 21-8-09


17.China's gross domestic product (GDP) growth increased in the second quarter of 2009 to 7.9 per cent from 6.1 percent in the first quarter, the National Bureau of Statistics (NBS) said on July 16,2009.The NBS data for June,2009, depicted an economy successfully making up for a slump in exports through domestic demand, especially capital spending, generated by a 4 trillion yuan ($585 billion)
pump-priming package and record bank lending. The data strengthened the possibility that this year's growth target of 8 per cent could be achieved , an NBS spokesman Li Xiaochao said. According to Chinese experts, this is the minimum growth rate necessary to prevent the unemployment situation from aggravating."We see more people shopping and prices beginning to rise. The economy is recovering and the
recovery is intensifying. All the government's policies have worked together to help us overcome the financial crisis," Li said. Economists,who had earlier forecast a growth rate of 7.5 per cent only during 2009 as against the Government projection of 8 per cent, revised their forecasts upwards after seeing the latest data.Frank Gong, head of China research with JP Morgan Chase, raised his GDP forecasts to 8.4 per cent during 2009 from 7.8 per cent as forecast by him earlier and to 9.0 per cent from 8.5 per cent for 2010.Some analysts said if they simply kept the previous quarter-on-quarter assumptions for the third and fourth quarters, the expected annual GDP growth could reach even 8.9 per cent, comparable to its level in 2008. At the same time, they cautioned that the recovery was not yet on a solid footing and the economy was growing below potential.The NBS spokesman warned that "prices were still falling; overall demand was weak; some industries faced overcapacity; and the industry use rate was low." The consumer price index declined by 1.7 per cent year-on-year in June from a negative 1.4 per cent in May, while the producer price index fell by 7.8 per cent year-on-year in June from a negative 7.2 per cent a
month earlier.But analysts said that while prices would continue to fall in the coming months on a year-on-year basis, deflation is unlikely to become a long-term trend."China's expansionary monetary policy, coupled with rebounding commodity and asset market prices, suggest that China will emerge from deflation in the second half of 2009," Li Jianfeng, an analyst with Shanghai Securities, said.

----- China Daily of 17-7-09

18.China's economy would continue to recover from the world financial crisis in the second half of 2009 and expand at the rate of 8.5 per cent for the whole year, said a report from the Bank of Communications on August 2.The country's economic development was expected to accelerate the pace and expand at 9 per cent in the third quarter and 9.8 per cent in the fourth quarter, according to the report. The report indicated that the country would achieve the set goal of 8 per cent economic growth for the full year, thanks to robust domestic investment and consumption.In the second half, investment would increase fast, particularly in the infrastructure construction, real estate, and the industrial sectors.

------ Xinhua of 3-8-09

19.Addressing an economic forum at Shanghai on September 19,2009, Yao Jingyuan, chief economist of the Chinese National Bureau of Statistics, said that China's economy would be able to achieve the 8 per cent GDP growth this year set by the Central Government, although there are still difficulties ahead.He said that the global economic downturn did not change the fundamentals of the country's economic
development, buoyed by the ongoing industrialization, urbanization and marketization.He claimed that China’s economy had taken a turn for the better from the slowdown in the second half of last year, presenting better recovery than in the United States, Japan, Europe,Brazil,Russia and India.According to him,the economy expanded at 7.9 per cent from a year ago in the second quarter of this year, faster than the 6.1 per cent in the first quarter, which was the worst quarterly growth in 10 years, dampened by a slump in exports.The recovery was boosted by the active fiscal policy and moderately loose monetary policy the central government put into place in November last year.However, he warned against "blind optimism" toward what has been achieved and underlined that the economic recovery is not on a solid footing yet and there are still many uncertainties ahead.He also downplayed the possibility of inflation in China in the short term, at least within this year as demand fell short of supply in the country because of overcapacity. "Less demand will prevent prices from rising," he said.

---- Xinhua of 20-9-09

20."China’s economy grew by 7.1 per cent in the first half of this year, a figure that dazzled the world. But local economic statistics have puzzled the public. During the same period of time, 24 provinces scored a growth rate higher than the national rate, including 15 that grew by more than 10 per cent, while only five were below the national level.Put together, the local provincial GDP was 1.4 trillion yuan more than the national GDP, which stood at 13.9862 trillion yuan. In other words, the total of local GDPs is around 10 per cent higher than the national
figure.The central and provincial governments conduct dual GDP measurements, whereas the national figures are based on data collected by the National Bureau of Statistics (NBS), and are considered more accurate. The NBS reviews the provincial figures and may request verification when it thinks the numbers are questionable.Technically, the discrepancy between national and local figures exists due to problems such as repeated counting and different data sources. But it seems the gap between total local GDPs and the national figure is growing. It is a good reminder of how China’s economic performance evaluation is too centered on the GDP.The GDP is only one indicator to gauge whether the economy is headed in the right direction or not, but it has been excessively emphasized in China to the extent that simply increasing the GDP itself has become a goal.The daunting challenge of getting China’s economy out of recession this year is oversimplified as “securing eight” making sure the country achieves an 8 per cent growth rate. This has been elevated to the level of a political mission.At the local level, this mandate will no doubt result in the reporting of exaggerated figures, especially considering that it is also what the political careers of local officials hinge on. Statistics more directly related to the populace, like the unemployment rate and
the Consumer Price Index, are being questioned as well. In early July, the Ministry of Education put the employment rate of college graduates this year at 68 per cent. With young graduates struggling to get a job an everyday scene, the Ministry has come under public fire for making up such an absurd number.China’s statistics have made certain progress since the start of reform and opening-up. The country’s
statistics law has clear clauses with penalties for falsification of data, but in reality, officials are seldom disciplined or held legally responsible for fabricating figures.China’s statistics increasingly carry global implications.The world is eyeing China as the engine of global economic recovery, but confidence in the Chinese economy must be based on statistics that reflect the true situation. And proper economic stimulus policies can only come from credible statistics."

----------- “ Global Times” editorial of 13-8-09


21.The National Bureau of Statistics reported as follows on September 11,2009:

(a).China's economy is on a track of quick recovery as major economic figures soared in August,2009.

(b).Industrial output grew 12.3 per cent in August from a year earlier, 1.5 percentage points up from July.

(c).Fixed-asset investment also increased in the first eight months. It rose 33 per cent from a year earlier, and the growth rate was 0.1 percentage point higher compared to the first seven months of this year.

(d).Rising retail sales reflected an acceleration in China's social consumption. Retail sales grew 15.4 per cent in August to 1.01 trillion yuan (148.1 billion US dollars) from a year earlier. The growth rate was 0.2 percentage point higher than July.

---------Xinhua of 12-9-09

22.Zhang Liqun, a researcher with the Development Research Center of the State Council, told Xinhua: "Rising investment and consumption data indicated an increasing demand from the domestic market, which contributed to maintaining the rising momentum."In comparison with a rising domestic demand, weak demands from overseas markets still placed a big pressure on the country's foreign trade and the overall economy, but analysts believe the situation will turn better.Under the moderately loose monetary policy, the country's banking sector extended more loans this year to aid the economic growth.The People's Bank of China,the central bank, said China's new yuan-denominated lending in August rose to 410.4 billion yuan from July's 355.9 billion yuan.The August figure brought new yuan-denominated loans in the first eight months to 8.15 trillion yuan, 5.04 trillion yuan more than the same period last year.

---------Xinhua 12-9-09

23.In a statement issued on July 30,2009, Su Ning, Vice-Governor of the People's Bank of China, which is China's central bank, pledged to maintain a loose monetary policy to support the economy and said the Bank would ensure sustainable credit growth without resorting to heavy-handed quotas to rein in a lending spree.The statement was posted on the bank's website after a 5 per cent fall during the day in the Chinese stock market, its biggest daily drop in eight months, which had been sparked in part by worries that Beijing would restrict bank lending.At the same time, an unnamed official was quoted by Xinhua as saying that the central bank would "fine tune" its loose monetary stance and keep prices "within a reasonable and controllable range."Officials have expressed concern over the risk of stock and property bubbles inflating because of an unprecedented surge in bank lending. According to the central bank, consumer prices, now in a mild deflationary phase, could start rebounding after the third quarter.China had in the past used a quota system to control lending, telling banks not to exceed specific ceilings. This credit management was a key prong of China's monetary tightening in 2008.Su's comments appeared to rule out an imminent return to a strict, central bank-directed quota system. "They are responding to an incorrect interpretation by the
market," said Ting Lu, economist with Merrill Lynch in Hong Kong.Beijing has come down a little on the tide of money washing through the economy, but it is seen as unwilling to shift to more substantial tightening until a full-fledged recovery is assured."There will not be credit quotas this year, though there could be window guidance," Lu said, referring to more informal directions that Beijing gives banks to
influence their decisions.

------- Xinhua of 31-7-09

24.China's consumer price index (CPI), a main gauge of inflation, dipped by 1.8 per cent in July,2009, from a year earlier, the National Bureau of Statistics said on August 10,2009.The producer price index (PPI), a major measurement of inflation at the wholesale level, fell by 8.2 per cent year on year in July, 2009.The decline compared with a 7.8-per cent drop in June and 7.2-per cent drop in May from the same period last year. The urban fixed-asset investment rose by 32.9 per cent in the first seven months of this year from a year earlier.The industrial output accelerated by 10.8 per cent in July from a year earlier,after gaining by 10.7 per cent in June.The power generation expanded by 4.8 per cent in July from a year earlier.

----------Xinhua of 11-8-09

25.The Purchasing Managers' Index (PMI) of China's manufacturing sector stood at 53.3 per cent in July, the China Federation of Logistics and Purchasing said on July 31,2009.The figure was up 0.1 percentage point from June. The June index had gained 0.1 percentage point from May.A reading of above 50 suggests expansion, while one below 50 indicates contraction.

-------Xinhua of 1-8-09

26.Industrial output expanded 10.7 percent in June from a year earlier, faster than the 8.9 per cent rate in May, the National Bureau of Statistics (NBS) said on July 15,2009.It is the first time since last September that the output reached double-digit growth after China launched the 4-trillion-yuan ($586 billion) stimulus plan and scrapped lending restrictions to boost economy."The industrial production is
accelerating, and the profit drop is easing," said Li Liaochao, a spokesman of the NBS at a press conference.The industrial output growth rose to 7 per cent for the first half, down 9.3 percentage points from the growth rate of the same period last year.The figure rose to 9.1 per cent in the second quarter from 5.1 per cent in the first quarter, said Li.Large industrial enterprises (those with annual revenue of more than 5 million yuan) made an aggregate profit of 850.2 billion yuan during the first five months, down 22.9 per cent year on year, said Li.Experts attributed the stabilization of the industrial sector in the first half to de-stocking process, which refers to a cut-down on inventories and spending."Industrial production is recovering, but it is yet unclear whether the trend is sustainable, for the consumption end has not improved," said Fan Jianping, chief economist with the State Information Center.Light industry, which includes garment manufacturing and
home appliance manufacturing, grew by 8.2 percent in the first half, compared with 6.6 percent of the heavy industry, said Li.The subsidization of home appliance sales in rural areas, higher tax rebates for some export products and larger taxation and credit support to exporters effectively eased the impact of the economic downturn on light industry, according to a report released by the industry research
institute under the National Development and Reform Commission.The growth of heavy industry could be attributed to accelerated investment, higher auto sales, and recovering raw material prices, said the NDRC research report.The industrial output in western China saw a major gain of 13.2 per cent, against 5.9 per cent and 6.8 per cent in eastern and central China respectively.The sales ratio of industrial
products for the first half was 97.2 per cent, showing a well-connected chain from production to sales.China's power consumption also ended a downward trend and reported a year-on-year growth of 3.79 per cent to 305.22 billion kilowatt hours in June, according to the China Electricity Council.Economic slowdown has sapped China's power use since October last year as the global downturn took a toll on the
country's economy.The economic data showed that central government policies are "correct, timely and effective," said Li.But he noted that excessive output capacity remained a major problem for Chinese industry."In the first half, our major task is to boost economic growth.But in the latter half, more emphasis should be given to upgrading industrial structure. Otherwise the development would not be
sustainable," said ZhuangJian, senior economist with the Asian Development Bank.

---Xinhua of 16-7-09

27.Profits of China's State-owned enterprises (SOEs) slid 27 per cent year-on-year in the first half of the year, but the decline rate started to narrow in the second quarter as the industrial expansion is gradually recovering.Their profits totaled 553.4 billion yuan ($81.38 billion) between January and June, according to the Ministry of Finance.The decline was 3.3 percentage points smaller than the figure for the first five months.Sales revenue fell 5.9 per cent year on year to 9.79 trillion yuan.Profits of the 138 central government-administered SOEs decreased 20.9 per cent to 416.4 billion yuan.China's SOEs have seen a smaller profit decline for four months as the economy started to rebound in the second quarter from the worst growth in a decade.The industrial output tumbled to 3.8 per cent in the first two months, but bounced back to 8.3 percent in March as the government's 4-trillion yuan stimulus package started to take effect.The industrial output rose 7.0 percent in the first half, according to the figure released by the National Bureau of Statistics.

-----CHINA DAILY of 18-7-09

28.China's foreign direct investment (FDI) dropped by 17.9 per cent to $43 billion in the first half of the year from last year's level, said Yao Jian, spokesman of the Ministry of Commerce.In June, FDI fell 6.8 per cent year on year to $8.96 billion, up 11 percentage points from the May level, Yao said. This is the ninth straight monthly fall in FDI since last October.A total of 2,529 foreign companies had got permission to set up in China in June, down 3.8 per cent from the same period last year, according to Yao.

------ Xinhua of 15-7-09


29.The real estate sector, a pillar of the national economy, picked up after more than a year of decline and showed a clear trend of recovery.Housing transactions doubled in some cities. According to data from the National Bureau of Statistics, in the first half of 2009, 315 million square meters of new commercial and residential housing were sold across China, up by 33.4 per cent year-on-year. This growth rate
was 24.7 percentage points faster than that in the first quarter.In terms of regional distribution, sales in eastern China fully recovered, with those in Beijing, Jiangsu, Zhejiang, Fujian, Guangdong up by more than 50 per cent year-on-year. Beijing, in particular, had a growth rate as high as 142.2 per cent compared to the same period last year. Sales in central China recovered steadily, with those in Henan, Hunan, Jiangxi and other provinces up by more than 20 per cent year-on-year. And sales in western China recovered fully and steadily, with the Xinjiang Autonomous Region, Chongqing, Sichuan, Qinghai and other provinces up by more than 40 per cent year-on-year. Second-hand housing transactions in most regions increased year-on-year.The gradual recovery of investment in real estate development also helped the recovery of the market. In the first half of this year, investment in real estate development across China stood at 1.45 trillion yuan, up 9.9 per cent year-on-year. This growth rate was 5.8 percentage points faster than that in the first quarter.Capital of real estate enterprises has also increased significantly. From January to June, real estate developers newly obtained 2.37 trillion yuan capital, up 23.6 per cent year-on-year. To be specific, 538.1 billion yuan came from domestic loans, up 32.6 per cent, and 282.9 billion yuan come from personal mortgage loans, up 63.1 per cent. The recovery of investment in real estate development is also driving the steady growth of many up and down stream industries. An official from the China Construction Industry Association disclosed that since March, the recovery has spread to construction enterprises, and the number of new orders and projects under-construction have picked up steadily. Meanwhile, decoration, fitting, building material and other related industries have also benefited from the recovery. The series of measures implemented by the Central Government to stabilize the real estate market and cope with the financial crisis have achieved some initial success.

----- People's Daily Online of 30-7-09


30."Thanks to a package of government policies to revitalize the automobile market, the automobile market in China continued to grow rapidly in the first half of 2009, becoming a highlight in the international automobile market," said Dr. Winfried Vahland, President and CEO of Volkswagen Group (China).He added that the Volkswagen Group (China) and the other two joint ventures--Shanghai Volkswagen and
FAW-Volkswagen delivered a total of 652,200 automobiles to customers in the first half, representing a growth of 22.7 per cent year on year.According to Klaus Maier, President and CEO of Mercedes-Benz (China) Ltd,in the first half, sales volume of Mercedes-Benz in Chinese mainland achieved a six-month consecutive growth. 27,000 automobiles were sold, representing a growth of 50 per cent year on year. In
June alone, Mercedes-Benz sold more than 5,100 automobiles, a growth of 52 per cent year on year. Maier said: "The rapid growth of 50 per cent is not only a highlight in the Mercedes–Benz’s global market, but also indicates that Mercedes–Benz has taken the lead in the industry and among its rivals in the luxury automobile market."The excellent market performance of Volkswagen and Mercedes–Benz was just a
fraction of the overall growth in China's automobile markets that bucked market trends in the first half of 2009. Statistics from the Association of Automobile Manufacturers of China showed that China's automobile sales were 6.11 million from January to June, representing a growth of 17.69 per cent year on year and surpassed the United States to become the world's largest auto market. In particular, sales of passenger cars reached 4.53 million, a growth of 25.62 per cent year on year. "Compared to nine other industries where plans for revitalization and adjustments were introduced, and to other countries where policies encouraging automobile consumption were introduced, China's automobile industry has recovered faster and shown a trend of continuous growth, thanks to rigid demand,” said Xu
Changming, Director of the Marketing Information Division of the State Information Center.He explained that when the demand for new cars in a country mainly came from first-time buyers, then its demand is rigid, otherwise it is flexible. In 2008, first-time buyers accounted for 83.1 per cent of all purchases in China’s automobile market, compared to a merely 10 per cent in Europe and the US. That is why China’s
automobile market is thriving amid the financial crisis."Strong, rigid demand is the foundation of growth in the automobile market. The introduction of automobile-related incentives for consumers is one way for China to quickly propel its way out of the shadow of the current financial crisis," said Zhang Raoda, secretary of the National Passenger Car Market Information Association. He added that the reason for
the growth in the passenger car market in February of this year was clearly due to government policies. He further explained that from January to May, consumer sales of passenger vehicles with engines smaller than 1.0 liters and vehicles with 1.0 to 1.6 liter engines increased by 46.6 per cent and 52.7 per cent respectively year on year. These two market segments enjoy two main preferential policies, a 50 per cent discount on sales tax as well as subsidies for cars going to the countryside. Xu Changming pointed out that the history of the Japanese and Korean automobile markets showed that a country's automobile market has two periods of rapid growth.The first occurs when growing from 5 cars per thousand people to 20 cars per thousand, a period lasting approximately 5 years with the annual sales growth averaging 30 per cent. The second period occurs during a growth of 20 cars per thousand people to 100 cars per thousand people, a period lasting approximately 10 years, with annual sales growth averaging 20 per cent. Currently, this figure stands at 38 cars per thousand people and thus China is in the second period of rapid growth. "Policies to promote economic growth will continue in the second half, and the macro economy will also stabilize and recover.We expect that automobile sales for 2009 will reach 11.5 million units," said Xu

--------- People's Daily Online of 3-8-09


31.According to statistics from the Iron & Steel Association, the price of steel, which stayed at a rather low level, went up in May. The average output of crude steel climbed back to 1.5 million tons a day, up by 29.3 per cent from the lowest level in October, 2008, and the output of steel products increased by 7.4 per cent. Insiders remained pessimistic despite the welcome recovery. According to estimates,
there is little hope for the steel and iron industry to turn the losses into profits. According to the indices on the performance reports of 22 industries across the country released by the National Bureau of Statistics, the profits of the steel and iron industry shrank by 97.5 per cent year on year during the first four months this year. From last quarter, the price of steel products plunged sharply in spite of the rebounds from the beginning of this year, setting an all-time low.Li Xiaobo, chairman of Taiyuan Iron & Steel (Group) Company Ltd, noted that demands on steel products in the international market showed no substantial changes, and the export of domestic steel products would remain at a rather low level for a fairly long period. Latest figures showed that the export of steel products in the first four months this year decreased by 59.46 per cent; while exports of billets stood merely at 24,000 tons, down by 97.6 per cent over the same period last year. An official with the Ministry of Industry and Information Technology said that the improvement of productive capacity resulted in large stocks of iron and steel products, which greatly dragged the price down.Among the problems that are hindering the development of the iron and steel industry, redundant construction requires the utmost attention. As productive capacity continues to climb, iron and steel producers compete with each other in developing high-end products, resulting in redundant construction. Some experts predict the structural problems of China's iron and steel industry will intensify this year.With the declining price for iron and steel products, most of the iron and steel producers have chosen to lower production costs. During negotiations with major iron ore suppliers, Chinese producers have always been put in an awkward position. Following the recent Rio Tinto spy case, relevant departments called for forceful measures to regulate the iron ore market, strengthen the structure of the domestic iron ore market and safeguard the interests of domestic iron and steel producers.

------ People's Daily Online of 27-7-09

32.Li Yizhong, Minister in the Ministry of Industry and Information Technology (MIIT), stated on August 13,2009 that his Ministry was drafting a guide to mergers and acquisitions in the iron and steel industry. He also called for a stop to new iron and steel projects for the next three years.He said there was a significant excess of production capacity in the iron and steel industry. The capacity of production was 660 million tons while demand was only 470 million tons - a surplus of 190 million tons. But at the same time, there were a number of new iron and steel projects with an additional capacity of 58 million tons under construction. “If this situation continues, there is no way out for China's iron and steel industry," he said.He believed that a solution was to eliminate backward production capacity. The "Eleventh Five-Year Plan" has identified 100 million tons of annual production capability of iron as backward, and another 50 million tons of annual production
capability as under developed. “We are making progress to eliminate these enterprises," he said.Among the nation's 660 million tons of iron and steel output, 120 million tons are produced in Hebei Province. “Hebei has a great determination to make efforts in the next two or three years to reduce this number to 80 million tons. Mergers and acquisitions is one of the measures, and results are beginning to appear,” he claimed.

--------- People's Daily Online of 13-9-09

33.Chinese steel mills, at an impasse over iron ore prices with Australian suppliers, plan to turn to Brazilian suppliers instead for the iron ore imports that feed economic growth in China, the China Daily has reported.According to shipping data provider ASXMarine, spot iron ore vessel bookings from Brazil to China surged to a record 39 in July after the Chinese Government detained four Rio Tinto employees , up from 24 bookings in the previous month. By contrast, vessel bookings from Australia's main iron ore ports to China dropped to 31 in July, the lowest level since February, and down from the 40 bookings in June. Iron ore price negotiations and shipments between Anglo-Australian miners Rio Tinto and BHP Billiton have been almost frozen since four Rio Tinto Shanghai-based staff were detained by China’s Public Security Bureau in early July on charges of bribing Chinese steelmakers to obtain "state secrets" about sensitive price information during the annual iron ore contract price negotiations. On a diplomatic level, there is also rising tension between Beijing and Canberra, with each accusing the other of unfair treatment.Zang Dongsheng, Deputy General Manager of Rizhao Port Group, told China Daily that some of his customers have cut their shipping orders from Australia and booked more from Brazil. Rizhao Port Group is China's largest iron ore port
operator, and handles a fifth of the country's iron ore deliveries. The company, however, could not provide the exact figures about previous shipments from Brazil and Australia before September.Official figures from China's Ministry of Transport showed that China's main ports received 56.5 million metric tons of iron ore in July, up 35% from last year. In the first half of this year, iron ore imports surged 29.3% on an annual basis to 297 million metric tons Amid unprecedentedly strong demand for iron ore for China’s rapid development, Chinese steel mills this year refused to follow the industry practice of agreeing to long-term contracts for iron ore at prevailing industry prices with the three major iron ore producers, including Rio Tinto, BHP Billiton, and Brazil’s Vale. The situation became especially tense after Rio Tinto turned down an offer from Chinalco to acquire its major mining assets and to subscribe its convertible bonds. Rio Tinto instead turned back to its
rival BHP to merge their iron ore assets in Western Australia.Chinese steel mills, led by China Iron and Steel Association (CISA), in the bilateral negotiation with Australian miners, refused in May to accept the 33% iron ore price cut offered by miners and walked away from the discussion table. Japanese and Korean steel firms agreed to the 33% price reduction and signed long-term contracts. Since then, China has been stuck buying ore at the higher spot prices, as tensions simmer between China and Australia.The future iron ore price bargaining between Chinese buyers and Australian sellers is expected to turn even tougher, Xianfang Ren, an analyst with IHS Global Insight said in a research report.Ren remarked that China’s dramatic arrests of four of Rio Tinto’s employees in early July was just a curtain-raiser for China’s decision to toughen up its stance in iron ore pricing.Ren pointed to signs that the Chinese Government, with its huge volume of ore purchases, was determined to seek greater bargaining power in iron ore pricing for the sake of Chinese development as early as the end of 2008, when the Ministry of Commerce, which oversees the iron ore talks, shocked the market by handing over the power of iron ore
negotiation from China’s largest steel company Baosteel, to China Iron and Steel Association (CISA)—a quasi-government-run entity.Baosteel had been representing China in the annual iron ore talks since 2003, yet the big steel brother was blamed for failing to take care of its little Chinese brothers when it agreed to what they saw as an outrageous 96.5% hike in iron ore prices in 2008.In order to have a greater
control over the iron ore industry, the Chinese authorities have reduced iron ore import licences to only 112 companies, which include 70 large steel mills and 42 trading companies. The remaining 1,200 small and medium-sized Chinese steel companies must buy their ore from the large companies.To further consolidate the steel sector, China's central planning unit revealed earlier this year an aggressive plan to form five giant steel plants through mergers and acquisitions. The big five are expected to account for 45% of the country's steel output by 2011. However, how this consolidation will play out remains to be seen, as the steel industry has been listed as a pillar industry in almost all Chinese regions and any capacity reduction will understandably meet strong resistance from local governments, said Ren.

----------Forbes.com of 5-8-09

34.China imported a record quantity of iron ore in April and was also a net steel importer for the second month running, as the industry grappled with falling domestic ore output and slumping steel exports.The country imported a record 57 million tons of iron ore in April, an all-time high, up 9 per cent from a month ago and 33 per cent greater than last April.Customs data also showed China was a net importer of nearly 900,000 tons of crude steel, marking the second month running that inflows have exceeded outflows for the country, which had been a net steel exporter since 2005."All of them are surprising figures. The figures show that oversupply is very likely to worsen in May and June," said a senior trading executive in a State-owned steel mill, who asked not to be identified, as he was not authorized to speak to the media."Domestic steel prices will not hold at the current level for a long time," he added.Steel product imports, at 1.62 million tons,
exceeded exports of 1.41 million tons, which were the lowest since October 2004.Traders said relatively high steel prices in China have encouraged eastern European mills to ship products to China.Record iron ore imports reflected slowing domestic output due to the high cost of production compared with mines in places like Australia, Brazil and India, and that hunger for foreign ore is also feeding into freight rates.

------ China Daily of 14-5-09


35.In the first five months of 2009, gross output by light industrial enterprises above the designated level increased by 8.7 per cent year-on-year, said Cai Daying, Director of the Light Industry Information Center under China National Light Industry Council. In May, the gross output value of light industry had increased by 9.3 per cent year-on-year, and the trend of monthly decline since the beginning of 2009 had reversed. In the first five months, the overall sales of light industrial enterprises above the designated level stood at 97.1 per cent. Output and sales by light industrial enterprises grew simultaneously, indicating that the distribution sector's confidence in the consumer market is gradually picking up, and the industry is showing signs of recovery.The export volume and value of light industrial products in the first quarter continued to decline. Of the 236 sorts of light industrial exports, 123 decreased in export volume and value. Meanwhile, the
proportion of domestic demand in sales volume continued to increase. Exports only accounted for 2.2 per cent of the total sales volume in the beverage industry, which had the largest year-on-year growth rate in the first five months this year. The beverage and food processing industries targeting domestic demand have become important forces to boost the development of light industry. However, although the
overall growth rate of the two food industries had increased by 0.28 percentage points from the first quarter, the proportion they accounted for in all light industries had decreased by 0.62 percentage points. This indicates that the development of other light industries accelerated in April and May.In addition, since April 2009, the export value of light industrial products has been increasing. The fast drop in exports was under control, showing positive signs of recovery after hitting the bottom.In the first five months of 2009, the year-on-year growth rate of
light industry profits had reversed the decline in the first quarter and began to rise. The year-on-year growth rate of profits and taxes in the industry also increased remarkably. The total volume of profits and taxes light industrial enterprises above the designated level generated reached 284.29 billion yuan, an annual increase of 6.91 per cent; the total profit reached 174.28 billion yuan, up 2.68 per cent year-on-year.It indicates that with the support of China's policies to stimulate economic growth, the operation of light industrial enterprises has improved.Meanwhile, investment in light industry in May greatly increased compared to April. An increase in investments by enterprises shows that
their confidence is picking up.

------ People's Daily Online of 28-7-09


36.China's textile and garment export output stood at 13.95 billion USD in June, up by 13.3 per cent over the previous month and down by 10.1 per cent year-on-year. The cumulative export output between January and June amounted to 72.79 billion USD, down by about 11 per cent year-on-year, according to statistics about the value of China's key export commodities issued by the General Administration of Customs. China's textile industry still heavily depends on exports, while the export market relies largely on global economic recovery. In March this year, China's textile and garment exports increased 2.59 per cent, thanks to overseas markets expanding their imports because of low inventories. This was the first increase for the past few months and the entire industry was encouraged. However, exports slumped again in April and the growth rate decreased by 13.07 per cent. A review of the first half of 2009 reveals a drop in China's total textile export output. Although the decline narrowed in June, prospects are still not optimistic.The third quarter is generally a slack season for textile and garment exports. At this year's spring session of the China Import and Export Fair, also known as the Canton fair, contracts for garments
and accessories worth 1.62 billion USD and textile products worth 1.61 billion USD were concluded, down by 15.2 and by 7.9 per cent respectively year-on-year. Moreover, overseas purchase orders made last year have already been delivered. Therefore, the third quarter will be the roughest time for textile export enterprises.The textile industry has shown a number of positive signs, despite a continuous decline in exports. According to statistics, the domestic sales volume of the textile industry has continued to increase, up by 9.42 per cent in the first five months. The growing effect of surging domestic sales on the entire textile and garment industry continues to show. The proportion of domestic sales increased from 77.07 per cent in 2008 to 80.03 per cent in 2009 over the same period. The growth rate of domestic clothing consumption increased from 15.6 per cent in the first quarter to 22.1 per cent in May, exceeding the 21.6 per cent growth rate for China's retail sales and representing a positive trend. In addition, statistics from the China Textile Industry Association showed that in the first five months of this year, China's textile enterprises above a certain scale achieved profits of 43.25 billion yuan, down by 0.14 per cent year-on-year. But the decline rate has narrowed by 10.87 per cent over January and February this year. The total profits made between
March and May increased by 5.06 per cent year-on-year. Of the 50,000 enterprises above certain scale, 32 per cent increased their total sales by 11.28 percent, 9.85 percentage points higher than the average growth for the entire industry, and their total profits increased by 34.23 per cent, again proving the significant role of science and technology and branding in market competition.

------ People's Daily Online of 28-7-09


37.China's electronics and information industry reported a notable fall in fixed asset investment growth in the first five months, according to a statement of the Ministry of Industry and Information Technology.More than 118 billion yuan ($17.45 billion) was invested in the industry's projects, valued at more than five million yuan each, during the January-May period, up 16.5 per cent year-on-year.But the growth was 2.7 percentage points lower than the same period last year and six percentage points lower than in the first four months.1,463 new projects, were launched in the first five months, up 21.8 per cent from a year ago. New projects mainly concentrated on sectors of optical and electric components, electronic equipment, mobile telecommunications equipment and optical fiber.The planned investment of those new projects totaled 136 billion yuan, up 68 per cent year-on-year.

-------CHINA DAILY of 18-7-09


38.According to statistics from the China Association of the National Shipbuilding Industry (CANSI), in the first half of 2009, each economic indicator for the shipbuilding industry maintained growth, but the growth rate considerably dropped. Between January and May, the total number of ships built in China increased by 61 per cent year-on-year to reach 12.16 million deadweight tonnages (DWTs). Export delivery value totaled 96.8 billion yuan, an increase of 25.8 per cent year-on-year. This growth rate dropped by 38.9 percentage points compared to the same period last year. The export delivery value growth rate for both the shipbuilding industry and shipbuilding businesses was slower than the total industrial output growth rate, reflecting an increasingly grim situation for export.Experts from CANSI estimated that, in the light of the current operating situation of China's shipbuilding enterprises, this year's key economic indicators for the industry could still
maintain certain growth, and expect the total output to exceed 40 million DWTs, keeping a double-digit growth.Despite surges in both output and operating revenue, cumulative profits by enterprises above a certain scale in the industry saw a 2.7 per cent year-on-year decline. Compared to the end of last year, the risk and pressure for the shipbuilding industry increased. Against the backdrop of a tumbling number of new orders in the market, by nearly 98 per cent year-on-year, the number of orders in the hands of China's shipbuilding enterprises dropped for eight consecutive months. The difficulty of smooth ship delivery increased due to the long-term reduction in demand for new orders in the shipbuilding market, the rapid price drop of new ships, an increasing number of contract negotiations between owners and
enterprises that involve price reductions, the adjustment of ship types, the postponement of delivery and payment, or a change in the method of payment. While shipbuilding enterprises feel growing difficulties over delivery, more ship owners are asking to cancel orders. According to incomplete statistics, between October 2008 and the end of May 2009, the cumulative number of canceled ship orders stood
at 152 units. "The recovery of the ship industry will happen after macroeconomic recovery," said an expert, adding, "If the global economic situation worsens, the impact on the shipbuilding industry will be even greater."

------ People's Daily Online of 28-7-09


39.China's total power usage stood at 1.65 trillion kilowatt hours (kWh) in the first half of 2009, representing a drop of 2.2 per cent year-on-year, while the growth rate dropped by 13.9 percentage points year-on-year. Between January and February total power usage dropped by 5.2 per cent year-on-year; and between March and May, the figure dropped by 4.3 per cent, 3.6 per cent and 2.6 per cent year-on-year respectively. In June however, total power usage experienced the first year-on-year increase since the beginning of the year, rising by 4.3 per cent. A drop in industrial power usage is the principal reason behind the decline in China's total power usage. In the first half of 2009, industrial power consumption stood at 1.20 trillion kWh, a drop of 5.9 per cent year-on-year. Industrial power usage accounted
for 72.6 per cent of the total, a drop of 2.9 per cent year-on-year. In terms of monthly power usage, between January and February, industrial power usage dropped by 10.4 per cent year-on-year due to the Spring Festival. The figure dropped by 5.4 per cent year-on-year in March, 7.2 per cent in April and 5.3 per cent in May. In June, industrial power usage rose by 1.3 per cent year-on-year.

-------People's Daily Online of 29-7-09


40.In the first half of 2009, China's railway transportation and operation situation gradually improved. In June, China's total railway freight volume reached 273.55 million tons, essentially even with that of the same period in 2008. On average, daily incremental freight volume stood at 100,000 tons, an increase of 1.1 per cent year-on-year. Freight and passenger transportation indices, as barometers of the national economy, have stabilized and are recovering.Coal freight volume is beginning to recover steadily after the significant drop of over 10 per cent since October 2008. Petroleum freight volume is recovering rapidly. After hitting the lowest point in November 2008, petroleum freight volume has gradually recovered since February 2009. In the first half, China's petroleum freight volume was essentially even with that of the same period in 2008.Since the beginning of 2009, the freight volume of metallurgical materials has maintained a high level, and was
essentially even with that of the same period of 2008. The freight volumes of both construction materials and cement have increased significantly. With the support of China's macroeconomic stimulus policies, freight demand in the construction industry is relatively stable, and freight volume is similar to that of the same period in 2008. These two materials' year-on-year freight volume growth rates reached 15.1
per cent and 5.6 per cent respectively. In terms of passenger transportation, 742 million passengers were transported by railway in the first half of 2009, up 5.2 per cent year-on-year. In June, passenger numbers recorded by 13 railway bureaus increased year-on-year. Of these, the growth rate recorded by Huhhot, Kunming, Lanzhou, Urumchi and Qinghai-Tibet railway bureaus exceeded 10 per cent.In terms of
investment in infrastructure, 201.46 billion yuan was invested in China's railway infrastructure in the first half of 2009, up by 155.1 per cent year-on-year. China constructed 2739.7 kilometers of new railway lines and 2435.9 kilometers of double-track railway lines. 1681.2 kilometers of electric railway lines were constructed and a batch of passenger-only railway lines entered the final construction phase. In
addition, 5.35 billion yuan was invested in upgrading and reconstructing China's railways, of which 4.49 billion yuan was invested in upgrading transportation equipment, up by 2.1 per cent year-on-year.

-------People's Daily Online of 29-7-09


42.China's civil aviation industry is experiencing an overall recovery. In the first half of 2009, total industry turnover, the best indicator,reversed its month-on-month decline. Total turnover rose by 7.6 per cent year-on-year in May and 12.1 per cent in June, showing noticeable signs of recovery. Passenger traffic volume showed rapid growth, with an average month-on-month growth rate of more than 13 per cent. In
particular, the year-on-year domestic passenger traffic volume growth rate stood at 20.4 per cent in the first half, pushing up total turnover. Although freight and postal traffic volume continued to drop in the first half, it improved in the second quarter and showed growth in June."The civil aviation industry has just entered its annual peak period. I believe that operations in the second half will be better than the first half," said Li Jiaxiang, Director-General of the Civil Aviation Administration of China.The civil aviation industry's recovery reflects the
overall rebound in the macro-economy. International experience shows that recovery of the transportation industry usually occurs earlier than the recovery of the macro-economy, and also rallies rapidly. In the first half, China's economic development has experienced some positive changes. Industrial production continued to improve, fixed-asset investment continued to rise and resident income showed a rebound. These factors have influenced the aviation industry directly or indirectly, leading to rapid growth in passenger traffic volume, and domestic passenger traffic volume in particular. In 2008, the civil aviation industry recorded losses of over 20 billion yuan. In the first half of 2009, the industry turned loss into profit, generating 4.86 billion yuan in total profit, of which 3.85 billion yuan came from airlines. Policy support played an indispensable role in generating profits. Airlines such as China Southern Airlines, China Eastern Airlines and Hainan Airlines have received direct capital injections from both the central and local governments. The aviation authority took steps to refund civil aviation levies to airlines after collection, and exempt airlines from the fuel tax surcharge for three years. These measures have lowered transportation costs for airlines.

------- People's Daily Online of 3-8-09


43.In the first half of 2009, large ports handled 3.27 billion tons of freight, an increase of 2.6 per cent compared to the same period last year. The growth rate rose by 0.6 percentage points compared to the first quarter. Port handling grew slightly. Due to the recovery of transportation demand by bulk commodities, such as foreign ores and crude oil, domestic coal and construction materials, the growth rate
of freight handling continued to increase for four consecutive months. Although the number of containers handled decreased, indicators show that this number is stabilizing. The volume of domestic trade cargo handled increased by 3.9 per cent, much higher than foreign cargo, a reflection of the active domestic demand and weak foreign demand.610 million tons of coal and coal products were handled by ports, a
decrease of 6.6 per cent over the same period last year. However, the rate of decline decreased by 6.6 percentage points compared to the first quarter. Due to factors such as the lowered price of foreign coal, the monthly handling of coal imports from April through June showed rapid growth. As demand for coal from major coal-importers in the Asia-Pacific region shrank greatly, the volume of foreign coal exports was 28.4 per cent of the amount handled during the same period last year.In the first half of 2009, China's ports handled a total of 160 million tons of crude oil, up 6.9 per cent compared to the same period last year, and the growth rate was 8.5 percentage points higher than that of the first quarter. Since the beginning of April, crude oil imports have increased sharply along with the development of domestic oil refineries. From April through June, the quantity of foreign crude oil handled exceeded 16 million tons, setting a record high.In the first six months of
2009, ports handled 500 million tons of iron ore, a 14.4 per cent increase compared to the same period last year, and the growth rate was 26 percentage points higher than that of the first quarter. In particular, the total quantity of iron ore imports handled increased by over 20 per cent for four consecutive months, largely due to the sharp drop in the price of "on-the-spot" international iron ore, which is even lower than the contracted price. China's investment in infrastructure also led to an increase in demand for steel, and some mills and traders purchased a large amount. The quantity of iron ore imports in the first six months of 2009 was nearly equivalent to the total amount of iron ore imports for the whole of 2006. A total of 55.97 million containers were handled, a decrease of 11 per cent compared to the previous year. However, the rate of decline decreased by 1.3 percentage points compared to the first quarter. After reaching its lowest point in February, indicators showing that the rate of decline of container volume was stabilizing appeared. The volume of domestic containers handled finally recovered in May after declining for four consecutive months. Impacted by shrinking overseas market demand, the volume of foreign containers handled continued the decline which had begun at the start of the fourth quarter of 2008. However, the rate of decline shows a fluctuating yet decreasing trend. (28-9-09)

------- People's Daily Online of 3-8-09

( The writer is Additional Secretary (retd), cabinet Secretariat, Govt, of India, New Delhi, and, presently, Director, Institute For Topical Studies, Chennai. He is also associated with the Chennai Centre for China Studies. E-mail: seventyone2@gmail.com )

Sunday, September 27, 2009



US policy-makers had hoped that the taking-over of Gen. David Petraeus as the commander of the US Central Command, and Gen. Stanley McChrystal as the US Commander in Afghanistan working under Gen.Petraeus would bring about a more proactive strategy to weaken the Taliban and create a divide between it and the Afghan people. The two had earned a reputation in Iraq for reversing the fortunes of Al Qaeda and the former Baathist soldiers of Saddam Hussein, creating a divide between the two and enlisting the support of different tribal leaders and through them their followers for the US military operations. The improvement in the ground situation in Iraq----though not yet irreversible--- was largely due to their thinking, planning and execution.

2. Hopes in Washington that the two Generals would bring about similar results in Afghanistan have been belied so far.The Af-Pak troika of the administration of Barack Obama---- Richard Holbrooke, Obama's special representative for the Af-Pak region, who handles the political and diplomatic angles, and the two Generals--- has not been able to come to grips with the problem almost six months after the new Af-Pak policy of the Obama adminstration was launched in March last. The present ground situation favours the Pakistan-based Neo Taliban. Since the two Generals took over, the Neo Taliban has been able to increase and strengthen its presence in the north too. The situation is still one of a bleeding stalemate, but the prospects of the US-led forces breaking the stalemate and prevailing over the Neo Taliban are not any the brighter since the two Generals took over.

3. The dilemma posed by the worrisome ground situation is reflected in the growing impression that Obama's Af-Pak strategy has failed to take off and is unlikely to take off and that the time has come to think of a new strategy in which the key to success would be in Pakistan and not in Afghanistan.Vice-President Joe Biden seems to favour a change of focus from a Neo Taliban-centric strategy in Afghanistan to an Al Qaeda-centric one in Pakistan.

4.Presently, the political pressure is on Pakistan to act against the Taliban and Al Qaeda elements operating from sanctuaries in its territory and on the Hamid Karzai Government in Kabul to improve governance, reduce corruption and pay better attention to the problems of the people in the areas controlled by the Afghan National Army (ANA) and the US-led Western forces.

5. Neither of these pressures has worked. Nor have the never-ending incentives offered by the US to Pakistan---the latest of which is the expected passage by both Houses of the US Congress of the Kerry-Lugar Bill making a long term commitment of US$ 7.5 billion to Pakistan in the form of non-military aid over a period of five years. The military aid, which too continues to increase, will be in addition. Original expectations when Obama assumed office in January last that strict benchmarks would be laid down for the periodic disbursements of this aid in order to ensure that Pakistan does act sincerely and firmly against the terrorists have been belied.The more Pakistan is pampered, the less it acts against the terrorists. That has been the lesson since 9/11 and this lesson has not been learnt by the officials of the Obama administration.This is evident even from the grim Assessment dated August 30,2009, prepared by Gen.McChrystal, on the basis of which he is reported to be planning to ask for another surge of 21000 US troops--- a request over which Obama is reportedly not enthusiastic.

6. The pressures on Karzai to improve governance have not worked either. This is partly due to the difficult ground situation, which would pose a dilemma to any ruler---however democratic and however competent. Moreover, instead of strengthening the position of Karzai, US officials have done everything to weaken his credibility in the eyes of his own people as well as the international community through allegations---some true, many unwisely inspired--- regarding his inability or unwillingness to act against corruption and narcotics production and rigging in the Presidential elections. Even if he wins the elections in the first round itself----as he is expected to--- the importance of that victory has already been diluted by these allegations. US officials take a lot of care not to say or do anything, which might weaken the position of the Pakistani leadership, but they do not take similar care in respect of Karzai.

7.In the existing gloomy scenario, there are only two positive factors, which provide some cheer. Firstly, the improvement in the flow of human intelligence to the US intelligence community from sources in the Federally-Administered Tribal Areas (FATA) of Pakistan, which has led to some significant sucesses in the form of eradication of some middle-level leaders of Al Qaeda and even senior leaders of the Pakistan Taliban known as the Tehrik-e-Taliban Pakistan (TTP) by US drone strikes. After having eliminated Baitullah Mehsud, the Amir of the TTP, the Drone strikes are now focussed on eliminating the Haqqani network consisting of the old Soviet era mujahideen warrior Jalaluddin Haqqani and his sons. If the US succeeds in eliminating the Haqqani network--- I hope it will--- the pressure on the US forces in Afghan territory could lessen--- at least in the short term. As against this, the impact of the elimination of Baitullah on the ground situation in Afghanistan would be minimal. His elimination was more a boon to the Pakistani security forces grappling with terrorists of their own creation in their territory than to the US-led Western forces in Afghanistan.

8.The second positive factor is the role of India as a force for stability in Afghanistan. Any objective analyst has to concede that the various road construction, democracy-promotion and people-oriented programmes undertaken by India in the areas controlled by the Government of Afghanistan have benefitted not only the people of Afghanistan immensely, but also the long-term Western objective of a democratic, modern Afghanistan.

9. One would have expected the US policy-makers not only to recognise the importance of retaining the role of India as a force for stability, but also encouraging India to expand further its people-oriented role in Afghanistan. In his assessment, McChrystal recognises --- though somewhat grudgingly-- the beneficial role of India and the support for that role from the Karzai Government, but one is surprised to find that he shows understanding for the Pakistani concerns over India's role and hints that these concerns have to be taken into consideration while formulating any revised strategy. He himself says that no strategy will work unless it is people-oriented, but at the same time wants something to be done to address Pakistani concerns over India's people-oriented role.

10.The Afghan people---whether Pashtuns, Tajiks, Uzbecks or others--- distrust and hate the Pakistanis after seeing the role played by Pakistan's Inter-Services Intelligence (ISI) in the creation and fattening of the Taliban since 1994. One saw the extent of the hatred for the Pakistanis when the American and Northern Alliance troops entered Kabul in 2001 under Operation Enduring Freedom. Pakistanis assisting the Taliban Government in Kabul were hunted, killed and their dead bodies thrown into the gutters of Kabul.

11. Gen.McChrystal's ideas, if implemented, would provide an environment for the re-assertion of the hated Pakistani role by paying attention to Pakistani concerns over India's positive role.This shows how short-sighted US policy-makers and military-officers can be.The General's assessment is disappointing because it fails to put its finger on the crux of the dilemma being faced by the US-led Western forces, similar to the dilemma which the Soviet troops faced in Afghanistan in the 1980s before they decided to quit in 1988.This dilemma arose in the case of the Soviet troops and has now arisen in the case of the US-led Western troops from the absence of a counter-sanctuaries component to the counter-insurgency strategy.

12.The reluctance of the Soviet troops to take their fighting to the sanctuaries of the Afghan Mujahideen in Pakistani territory led to a situation where the Soviet troops kept bleeding till battle fatigue and public disenchantment with the war set in. Similarly, the absence of an effective counter-sanctuaries component is leading to a situation where the US and other Western forces as well as the ANA are bleeding more and more. There are already the incipient signs of a battle fatigue as cound be seen even from the General's assessment and the beginning of a public disenchantment with the involvement in Afghanistan. This disenchantment is already pronounced in West Europe and Canada and one could see the beginning of it even in the US. Instead of allowing the Neo Taliban to infiltrate in increasing numbers from its sanctuaries and recruiting grounds in the FATA and the Pashtun majority areas of Balochistan and then fighting or countering their ambushes in Afghan territory, the US should take its counter-insurgency operations to the camps of the Neo Taliban in adjoining Pakistani territory----whether in the FATA or in Balochistan.

13. The US already has an air-mounted counter-sanctuaries strategy in the FATA with the help of the Drones, which provide a deniable way of hitting at the sanctuaries of Al Qaeda, the Pakistani Taliban and the Neo Taliban. This strategy has had its successes, but, despite them, has proved inadequate. Initially, these strikes were concentrated on the sanctuaries of Al Qaeda and its allies in North Waziristan. Earlier this year, when there was a danger of the TTP expanding its presence to the non-tribal areas and posing a danger to Pakistan's nuclear arsenal, the focus of the Drone strikes shifted to South Waziristan against the sanctuaries of the TTP.During the last six months or so, the objective of these strikes became not protecting the NATO forces and the ANA in Afghanistan from attacks mounted from the Pakistani territory, but assisting the Pakistan Army in reversing the advance of the TTP into the non-tribal areas. After killing Baitullah in the first week of August, the US has again changed the direction and is now focussing on the Haqqani network, whose threat is more in Afghan territory than in the FATA. The US has not been able to mount a full-scale operation against Al Qaeda sanctuaries in North Waziristan due to the dispersal of its resources to South Waziristan for use against the TTP.

14. Even this limited success has not been there against the staging grounds of the Neo Taliban in Balochistan.The US continues to depend on the Pakistan Army for action against the sanctuaries of the Neo Taliban. The ISI-sponsored Neo Taliban is the only asset left with the Pakistan Army for regaining its primacy in Afghanistan if and when the US and other Western troops leave Afghanistan. Pakistan wants to regain this primacy without the direct deployment of its own army as it did in the 1990s. If the US is waiting for the Pakistan Army to act against the Neo Taliban sanctuaries in Pakistani territory, this is not going to happen. The US has only two alternatives---either itself act against the sanctuaries in Balochistan and destroy the Neo Taliban leadership in order to restore the damaged image of the US forces in Afghanistan, thereby paving the way for an honourable exit or keep its operations confined to Afghan territory, thereby continuing to bleed and face the prospect of an exit forced on the US by the Neo Taliban under humiliating conditions.

15.The role of the Drones---even if extended to Balochistan-- may not be as effective as their role in the FATA. The places in the FATA where the sanctuaries of Al Qaeda,the TTP and the Haqqani network are located are far from inhabited areas. The dangers of civilian fatalities are not large. In the Quetta and adjoining areas of Balochistan, the sanctuaries of the Neo Taliban are located in inhabited areas. It would be very difficult---almost impossible---to avoid large civilian fatalities. Deniable ground operations would, therefore, be necessary to eliminate the sanctuaries of the Neo Taliban. The US has the capability for such ground operations, but does not have the political will to use it lest it add to the already high anti-US feelings in Pakistan and affect even the limited co-operration which it has presently been getting from Pakistan in the FATA.

16. This danger of adverse reaction in Pakistan has to be faced if the US wants to bring about better ground conditions, which would enable it to contemplate withdrawing from Afghanistan with honour and with some confidence that Afghanistan will not revert to its pre-9/11 position of being the rear base for Al Qaeda. Before contemplating withdrawal, the US has to destroy Al Qaeda sanctuaries, including Osama bin Laden and Ayman al-Zawahiri, in the FATA, the Haqqani network and the Neo Taliban sanctuaries in Balochistan. It has to come to terms with the hard reality that this is something which the US has to do without depending on Pakistan.Pakistan and Al Qaeda are biding their time hoping that after the US withdrawal, they can move into Afghanistan once again. This should not be allowed to happen.

17. Instead of discussing the various options available in this regard,McChrystal's report skirts the crux of the dilemma and discusses other issues having little relevance to a counter-sanctuaries strategy. His assessment reads more like one prepared by a senior officer attending a joint staff course than a recommendation for action prepared by an officer in charge of command and control. It is possible there is a classified part of the Assessment in which McChrystal discusses a counter-sanctuaries strategy. If not, his thinking doesn't bode well for the ultimate success of the US operations in the Af-Pak region.

18. This may please be read in continuation of my earlier paper of May 13,2009, titled "The Af-Pak Situation--An Update", at http://www.southasiaanalysis.org/papers32/paper3186.html (27-9-09)

(The writer is Additional Secretary (retd), Cabinet Secretariat, Govt. of India, New Delhi, and, presently, Director, Institute For Topical Studies, Chennai. E-mail: seventyone2@gmail.com )