Sinomania!

Secretary of State Condoleeza Rice leaves Beijing for Moscow today capping off a frenzied effort to revive the "six party talks" on North Korea's nukes (minus North Korea). After her meeting with Chinese Foreign Minister Li Zhaoxing Rice and Li wished each other "happiness" and revealed that the real focus of Ms. Rice is on forming another multi-party talks, this time on Iran.

There has been no rejection nor qualification from the USA of Chinese special envoy Tang Jiaxuan's declaration that diplomacy is the only option to deal with Pyongyang. Indeed, the American and Chinese response to the North Korea nuke crisis is characterized by a general weariness. Neither of the Koreas' putative parents seems that interested in finding a real solution to their 53 year-old custody battle. Of course the Chinese have no real concern in finding a solution. Kim Jong-Il's bombs now ensure that someday a reunified Korea won't feature American bases anywhere near the Chinese border. And besides, Kim now says he is "sorry." What parent wouldn't accept that?

Seismic shifts are shaking East Asia. Over just the past week or so, the USA military announced plans to deactivate from Korea by 2009, the Japanese Prime Minister (Abe) broke with tradition and reported first not to Washington but Beijing and Seoul, and North Korea for all practical purposes became a member of the nuclear club.

North Korea’s nuclear ambitions are well known and are not a surprise. Further, there is a big difference between testing a crude atom bomb (which may not have successfully detonated) and becoming a nuclear power of strategic significance. In its official announcement North Korea said the bomb “will contribute to defending the peace and stability on the Korean Peninsula and in the area around it." More than 40 years ago, the Chinese used a similar argument emphasizing the defensive necessity of obtaining nuclear weapons due to the threat of American military invasion. The invasion and occupation of Iraq has made the Korean (and Chinese) fears of American military presence on their borders and outside their harbors real. A nuclear arms race in the area is now a very real possibility.

Korea, north and south, were born of nuclear threats and as much as Americans might not like it, there are probably millions of Koreans on both sides of the 38th parallel very proud and excited today. The majority of South Koreans have said they want their country to have nuclear weapons. And the Koreans are still seeking reunification. Less than a year ago the highest-ranking delegation from North Korea was in Seoul. The effort goes back to 2000 when South Korean President Roh visited Pyongyang.

What keeps the Korean peninsula apart isn’t just Kim Il-Jung and his anachronistic Stalinist state but the presence of 50,000 American troops, contractors, and their families in 100 military installations spread across South Korea. The USA continues to preside (in the same building in Seoul used by the Japanese when Korea was their colony) over a 53 year stalemate with China symbolized by the heavily armed “DeMilitarized Zone.” But all that conventional firepower and heavy troop presence is rendered moot by nuclear weapons.



And change is coming from the American side too. The commander of the 8th US Army in Korea said his command will deactivate and fall back to Hawaii within three years. Is this a signal that the long expected reduction of American presence in South Korea is begun?

But the biggest story may be the growing independence of Japan. Although President Bush gave his blessing prior to the trip, new Prime Minister Abe’s summits with China and South Korea are a positive sign and an indication that Japan may yet tire of being Asia’s “Britain.”

Almost a half century after the first Japanese cars entered the US auto market (the 1957 Toyota Toyopet), American car makers are in a frantic scramble to prepare for Chinese car exports beginning as early as next year. At Ford, the Ford family stepped down to allow new leadership to restructure (layoff thousands) and prepare for the competition. Meanwhile General Motors though not for sale (it's a bargain at around $10 billion) is desperately seeking a merger with either Renault or Nissan. But the Germans may trump them all with a new joint venture with Chinese carmaker Chery (which is already scheduled to start delivering cars next year under its own brand and dealership network). Under the agreement, whose details are under wraps, Chery would produce subcompacts for sale under the Chrysler brand in the United States.

Of course, the real story here may be what's happening at Malcom Bricklin's (he of Subaru and Yugo fame) Visionary Vehicles which was to start importing Chery cars directly into the USA with its own network of dealerships. Seems now Bricklin is delaying his launch until end 2008 or later.

And don't forget Geely which was to start selling cars in America as soon as next year. Geely says now it may actaully build car plants in the USA, thereby jumping ahead to Toyota and Hyundai status.

Lastly, Nanjing Automobile plans to start producing MGs (they recently bought the British company and brand) as soon as next year and are planning to reopen an old GM plant in Oklahoma as well.

Is that most American of all industries, the automobile business, ready for the Chinese invasion?

Thirteen years after Barton Biggs' "maximum bullish on China" statement, Morgan Stanley finally has a China commercial banking license with the purchase of Nan Tung Bank, a small bank in Zhuhai (Pearl River delta) once owned by a Macao based subsidiary of Bank of China. The move puts Morgan Stanley well ahead of its rivals (Goldman Sachs, Lehman Bros, etc.) in China.

And at the end of last week, Morgan Stanley launched the Morgan Stanley China A Fund to trade on the NYSE (symbol:CAF). The composition of the fund will be at least 80% A shares listed in Shanghai and Shenzhen.

For more on China shares, visit Sinomania! China Sharewatch.

Morgan Stanley is losing Andy Xie, however, in an unexpected departure.

For almost a decade, the incomparable Andy Xie moved minds and markets with his wise words on China. His often daily comments at the GEF were invaluable insights that cut through the fog of most China reporting.

Speculation is Xie may join a fund management firm, work in the mainland,
or perhaps join a Wall Street rival?

Bon Chance! Andy, and I hope we hear from you soon, and regularly!

Upon returning from his first official trip to Beijing, Secretary of Treasury Paulson met with Senators Lindsey Graham (R-SC) and Charles Schumer (D-NY) yesterday to discuss the looming vote (postponed from earlier this year – see my previous posts) on their measure to slap 27.5% tariffs on Chinese imports. Graham now says they need a few days to further consider halting the effort that has been widely criticized as lunacy by the world’s financial big wigs and condemned officially today by the Chinese foreign ministry.

Meanwhile the US dollar continues to improve against China’s currency as the Yuan float accelerates.

Neither Graham nor Schumer is up for reelection this year but Graham has something to lose politically. South Carolina based Mt. Vernon Mills, which owns 17 textile mills in South Carolina, Georgia, Alabama, Mississippi, Texas, and California, is a major contributer to Graham’s coffers. And Mt. Vernon Mills owner, Reverend Bob Pamplin (lives in Oregon) is a Republican fundy middleweight. Will Graham be tempted to jeopardize the global economy to save a few 19th Century jobs and milltowns for a fading plutocrat?

Back in July, convicted Shanghai real estate tycoon Zhou Zhengyi was released from jail. He had been convicted in 2003 of stock manipulation a lessor charge and in some ways Zhou was a fall guy for the shady practices of Shanghai's government in speculating in rampant real estate development. Zhou was politically connected at high levels including Shanghai's party chief Chen Liangyu and officials of the Kuomintang party on Taiwan. Since he left jail Zhou's whereabouts are unknown.

Chen Liangyu, until today Communist party boss in Shanghai, is now out and accused of corruption that squandered hundreds of millions in retirement fund money. (Just think of a giant San Diego on the other side of the Pacific.)



Word is Chen's sudden departure is a sign of an internal power struggle in advance of next year's 17th Communist Party Congress and Presidential election (Hu Jintao is eligible for one more 5 year term according to China's constitution). Shanghai is an important town and political struggles there often signal big shifts in the Chinese government.

So says a report by Credit Suisse that says Shanghai may finally take off. Could the Shanghai market rival Tokyo before long after all?

If you ever need to find a Bush cabinet member or the head of one the administration's executive agencies, just check the Beijing airport.

The head of NASA, Michael Griffiths, arrives in China today to discuss USA - China space cooperation.

A potentially big development with typically little press in America. W suggested to Chinese President Hu last month that the USA and China establish a twice a year meeting at the highest levels to discuss economic cooperation. The Shanghai Daily has details. The announcment is from Wu Yi and Treasury Secretary Paulson who met in Beijing this week.