China

The Economist (07/17) quotes Peter Bergen on Al Qaeda's self destructive tendencies.
iStock Analyst (07/17) features Steve Clemons arguing against claims of success in Iraq.
The New York Observer (07/17) reviews Michael Cohen's new book, Live from the Campaign Trail.
The Moderate Voice (07/16) cites Daniel Levy on evolving aspects of the Israeli Palestinian divide.
The Newshour with Jim Lehrer (07/16) interviews Daniel Levy on Israel's controversial trade with Hamas.
Financial Times (07/16) quotes Steve Clemons on the Cheney's loss of influence in the Bush Administration.
Policy Innovations (07/14) features Flynt Leverett discussing the rise of China on global business and security.

Falling currencies and rising prices for food and fuel are raising inflationary pressures to dangerous levels across Asia. Annualized inflation reached 4.9% in South Korea and over 11% in India. As domestic pressure mounts from consumers and labor unions, Asian central banks are reversing long standing policies designed to maintain weak currencies and benefit exports, and are instead actively intervening to push up currency values and lessen the blow from rising import costs.

The only nation not caught up in this wave is China. While consumer inflation reached its highest levels in a decade, the government has stifled domestic discontent and the trade surplus has held steady despite rising import costs.

Snapshot asks, will rising commodity and fuel prices force a greater Chinese response?

Central banks may be diversifying away from the dollar, but they are still buying more U.S. Treasury bills than ever. This may seem impossible until you look at central bank reserve growth in 2008 and realize that there may not be enough U.S. Treasuries to satiate the explosion in worldwide reserve growth.

The People's Bank of China's reserves increased $230bn in the first four months of 2008 - a figure beyond imagination just a couple years ago. The majority of sovereign wealth is still invested in safe and liquid US Treasuries.

Snapshot asks, will sovereign investors ever change their ways?

Politico (06/24) features William Hartung arguing for a crackdown on military spending waste.
New York Times (06/24) posts an analysis by Michael Cohen of Obama's perceived inexperience.
Foreign Policy (06/23) features Parag Khanna, Michael Cohen, and Maria Küpçü discussing the evolving challenges posed by failed states.
The Space Review (06/23) cites Jeffrey Lewis on China's modernizing military technology.
Kansas City Star (06/22) quotes William Hartung on Obama and McCain's negotiation policies.

China pushed up domestic prices of gasoline 16%-18%. Prices of jet kerosene will rise 25% while electricity will rise 4.7%. A gallon of gas in China now costs $3.29, just below the international market price. This increase in gas prices will have an impact on Chinese inflation, which edged slightly down in May and gave policy makers just enough room to increase energy prices.

Global crude prices fell following the announcement, but many still wonder whether pent up demand in China and the reduced costs to refiners who turn crude into petrol may actually increase consumption. Motorists who waited 6 hours in line for gas may actually buy more despite high prices.

Snapshot asks, if there is pent up demand, how much will higher energy prices push up global crude prices and Chinese inflation?

Saudi Arabia reported that it plans to increase its oil production in July by almost half a million barrels a day in an attempt to reign in the long running spike in oil prices that left oil trading at nearly $140 dollars in early trading on Monday. It is unclear whether this ambitious effort will succeed. While Saudi Arabia is by far the largest single producer of oil and played an influential role in previous OPEC machinations, strong demand growth in China and India has left it with little spare capacity available for sudden increases. It must instead rely upon costly and time consuming exploration and exploitation of new reserves. Even with a fourth of known global reserves, Saudi Arabia faces an uphill fight to bring down the sky high prices of the past year.

Snapshot asks, will global oil demand growth abate enough for Suadi Arabia's gamble to work?

Wall Street Journal - Saudi Arabia's Leverage in Oil Market Is Sapped
Financial Times - Oil hits new record near $140
New York Times - Plan Would Lift Saudi Oil Output
Financial Times - Saudis consider boost in oil output

In response to growing inflationary pressure, Chinese officials increased banks' reserve ratio last weekend by 100bp to 17.5%. On Tuesday, the first day of trading following the weekend decision (Monday was a Chinese holiday), the Shanghai stock market fell 7.7%. In Asia excluding Japan, headline inflation for April rose to a nine-and-a-half-year high of 7.5%. As inflation pressures increase and tightening policies become necessary, Asian stock markets will continue to adjust downwards.

Snapshot asks, how much further do Asian equities have to fall as a response to increasing inflation?

Morgan Stanley - AXJ's Inflation Challenege
Bloomberg - Asian Economic Miracle Is at Risk All Over Again: William Pesek
Citigroup - Inflation Risk Invokes Divergence
Financial Times - Asia markets plunge as inflation looms

They won't earn a living breakdancing. Photo credit: Reuters

5.6 million Chinese college graduates will enter the labor force this year (a 12% increase from last year) and many of them will have trouble finding jobs. In a country where many believe the one child policy has a firm grip on demographics, there is a boom of educated, optimistic youngsters who are about to be let down with a slowing economy and rising inflation. Reuters's Lucy Hornby reports:

"The birthrate in the 1950s through early 1970s was very high. The baby boomers born in those years are now adults," said Ha Jiming, chief economist at China International Capital Corp.

"Now it's the second wave, of baby boomers' babies. Their children are now in their twenties and many are in college," said Ha, whose research shows China will have a labor surplus through 2015.

Two years ago, I was in China and remember speaking to students about the job prospects after graduation. The word on the street was that roughly 50 percent of students would go unemployed. According to the Ministry of Education unemployment among college graduates last fall was 73 percent. I know many students who have gone on to get graduate degrees but would have preferred to work.

(Kishore Mahbubani speaks at New America Foundation reception on the "Rise of Asia and the Decline of the West. Pictured are Deputy Secretary of the Treasury Robert Kimmitt, Kishore Mahbubani, and New America Foundation/American Strategy Program Director Steve Clemons. photo credit: Samuel Sherraden)

My boss Steve Clemons is hosting a fascinating debate on the future of the international order over at his blog, The Washington Note. The debate is between some of the day's leading geopolitical thinkers, including Kishore Mahbubani, G. John Ikenberry, and Anne-Marie Slaughter. With that kind of fire power, I hesitate to step into the fray, but since I've been asked, here are my two cents:

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