Varyag's island is almost complete

Having just got back today from an one week vacation, I found that Varyag's island is almost complete. It has been completely painted and the scaffolding have been taken down. The only obvious missing part are the four MFR panels. Although, it does look like some other sensors will be installed before all is said and done.

Submarines + Cutters in Wuhan

Recently, I just got some new photo of ships that are under construction in WuChang shipyard. If you guys don't already know, many of the new submarines and cutters are produced here.

It looks like most of what WuChang had on order for China Maritime Surveillance (CMS) have already been delivered. Most recently, Haijian-50, which is the largest cutter on order at over 3000 tonnes, was launched. The only other CMS cutter that is this size is Haijian-83. That was delivered as part of the last 5 year plan. In case you are wondering, CMS places orders for cutters at the start of a 5 year plan (the current one of 2011-2015 is the 12th). They will send RFPs to different shipyards in the country, who then respond with their design and pricing. Once the selection is done, you will start to see them getting built in the shipyards. That's why we generally don't see CMS cutters getting built until around the end of the 5 year plan. Here are some of its photos:




There has been some articles like this this week about Pakistan acquiring Chinese conventional submarines. I don't think it's official, but such talks have been going on for the past couple of years. I think that if it does happen, it will be for the Yuan class submarines that are currently under mass production. They won't be as quiet as the Western options, but they do satisfy the AIP requirement. At the same time, they have much improved combat system and sonars compared to previous Chinese submarines. Here are some of the photos of the most recent variant of Yuan:

This picture shows the 6th Yuan next to that new mysterious submarine type at WuChang shipyard

This picture shows the 7th Yuan from WuChang shipyard

This picture shows the 5th Yuan at WuSong naval base

China's military budget for 2011 + Jasmine Revolution

As you guys probably have heard by now, China is planning to raise its military budget for 2011 by 12.7% (or 12.6% in other reports). You can see CNN's piece on it here. Now, I'm sure that there have been the usual alarming articles about China's rising military expenditures and the much higher real military expenditures, but I think that's often overstated. For example, I often read mention of arms import and other security forces like PAP not been included in the defense budget. However, China currently spends very little on arms import compared to the overall budget. In fact, the largest recent defense purchase are for 18 Ka-28/31 and a number of Mi-171 helicopters. Gone are the days where it spent billions on Kilo submarines and Su-30 fighter jets. On top of that, the budget allocation for PAP can be found on both the federal and provincial budget, so they are not as hidden as claimed by "experts". When one consider that the real inflation is China is running at probably 10%, a 12.7% hike is really not that much. And I think that when people spends too much time on the defense budget, they miss out on more important subjects like the following.

This WSJ piece is a far more interesting story in my opinion.

China projected bigger spending on internal security than on defense in 2011–after spending more last year too–as the government tightens physical and technological controls to quash calls for a “Jasmine Revolution” like the one shaking the Arab world.

On the first day of the annual meeting of China’s legislature, a Finance Ministry budget report showed that actual spending on law and order last year was 548.6 billion yuan ($83.5 billion), slightly more than what was budgeted for the year.

That compared with officially reported military expenditure of 533.5 billion yuan ($81.2 billion) in 2010.

The same report showed that spending this year on police, state security, armed civil militia, courts and jails would total 624.4 billion yuan ($95 billion), an increase of 13.8% over 2010.

China’s 2011 military budget, by comparison, is 601.1 billion ($91.5 billion), representing a rise of 12.7% over last year, a government spokesman announced Friday.

That means that China’s internal security spending is growing faster than its defense spending.

Actual spending on defense is probably far higher as the official budget omits key items such as arms imports, according to foreign analysts, but they say the same is also true of the public security budget, which does not include all covert surveillance for example.

The report did not detail what exactly the internal security budget would be spent on, but Premier Wen Jiabao suggested in his annual work report Saturday that some of it would be channelled towards Internet controls.

“We will strengthen and improve the system of public security,” he said. “We will improve the contingency response system, and enhance society’s capacity to manage crises and withstand risks. We will intensify our information security and secrecy, and improve management of information networks.”

The increase in the headline figure for law and order reflects Chinese leaders’ concerns about the potential for the kind of unrest which has racked the Middle East and North Africa over the last month, analysts say.

It is also likely to reinforce concerns among some Chinese scholars that China’s immense internal security apparatus is diverting funds away from welfare and other public services that might address the root causes of social unrest.

China’s security services are currently engaged in an intense and prolonged crackdown on dissent triggered by anonymous online calls for silent “strolling” protests in dozens of Chinese cities every Sunday. There have been few signs of actual protests since the appeals began circulating two weeks ago on Twitter and other sites which can only be seen in China by wealthier urbanites who use proxy servers or virtual private networks to circumvent web filters.

But China has responded with a massive show of force, detaining or confining to their homes dozens of political activists, and tightening Internet controls, especially on hugely popular Twitter-like micro-blogging sites.

Chinese police have also re-imposed some of the restrictions on foreign journalists that were lifted in the run-up to the Beijing Olympics in 2008, and warned them that they will have their visas revoked if they violate those restrictions.

Police summoned dozens of foreign reporters last week to video-recorded meetings in which many were told they were no longer permitted to go to the places where the protests were supposed to happen.

The Beijing Daily newspaper, which is the mouthpiece for the Communist Party in the capital, issued one of the loudest public warnings yet on Saturday against people taking part in anti-government protests.

“Everyone knows that stability is a blessing and chaos is a calamity,” it said in a commentary. “Those people intent on concocting and finding Middle East-style news in China will find their plans come to nothing.”

Now, I'm not sure exactly what China's internal spending really include. It could be including PAP or the civilian militia, but a large part of that is use to spy on its own citizens and keeping order around the country. If anything, I find the recent calls for Jasmine revolution to have raised far more anxiety from the Chinese political elite rather than the common folks. Unlike the middle eastern countries, the Chinese economy has done quite well in the past couple of years. People are reasonably satisfied with the government and willing to give up some freedom for stability and continued prosperity. However, with the inflation problem already here and a possible deceleration in the economy coming, we could reach a point where a large portion of the population become dissatisfied. If there is one thing that the Chinese political and the wealthy elite are fearful of, it would be a gathering of all of the people who have lost out of this capitalism movement. So, when we look at China's spending on internal security vs defense, is China's elite more afraid of America or of its own people?

The present and the future direction of J-10

As readers of this blog probably know, I have been a fan of J-10 for a long time. In many ways, the J-10 project marked a turning point in Chinese military aviation industry. When its development first started in 1986, the Chinese aviation industry was constantly abandoning new development projects due to lack of funding, technology and development experience. China was forced to go the conservative route and continue to develop J-7 and J-8 variants. Many J-7 and J-8 variants were delayed due to delays in avionics, engine and missile projects. With the exception of J-8, China had not successfully developed a fighter jet since the Soviet split. The J-10 projects succeeded in large part because China finally opened up itself to the West. The help that China received from Israel is well documented. However, I would say that another important help to J-10 and all recent aviation projects is the improved manufacturing capability, improved funding, access to advanced civilian technology and improved project management that came through the trade liberalization. For example, how would companies like NRIET be able to develop radar and avionics for PLA if China did not become competitive in the electronics industry? After 18 years of hard work by CAC, J-10 finally achieved operational status in 2004. With the success of the J-10 projects and advancement in civilian industry, we have seen a lot more stories of successes in Chinese military aviation industry in the recent years. I have read some real praises recently toward the aerospace engineers at CAC about their youthfulness and energy. I don't think we would've seen something like J-20 come out this soon, if CAC did not gain so much experience from the J-10 program.

Back when J-10 first came out, there were a lot of skepticism about its capabilities and deployment status. Even though the first J-10 regiment achieved operational status by 2004, many people questioned its status until it was officially declassified in late 2006. At the same time, I read many reports about its successes in exercises against different flanker variants. Most people were rightfully skeptical toward such reports. As time went on, it became more and more obvious that J-10 was taken over the reign as the backbone of PLAAF from flankers. Even now, we still often read reports about J-10s crushing flankers and J-8s in different training exercises. Even with all of its successes, the J-10 program still has experienced some stumbles along the way. I think most people would agree that propulsion is the biggest bottleneck for J-10. Due to lack of available domestic options and the Western arms embargo, China was forced to select AL-31FN as the powerplant. After the initial batch for J-10 prototypes, China has since placed orders for batches of 54, 100 and 122 AL-31FN engines for production variants. Many of us thought WS-10A might be available after the second batch of engines, but its production problems in the past 2 years have been well documented. As a result, China had to make that third purchase in 2009 for 122 AL-31FN costing $500 million. Due to the delays in WS-10A, J-10 production basically came to a standstill for most of 2008 and early part of 2009. Although, it is believed that some of the first product batch of J-10s delivered to 44th division were brought back to CAC to be upgraded to the latest configurations. From the first 154 AL-31FNs, CAC delivered J-10s for FTTC (60x8x), 131st regiment of 44th division (50x5x), 8th regiment of 3rd division (10x4x), 5th regiment of 2nd division (10x3x) and 2nd regiment of 1st division (10x2x). After signing the 3rd AL-31FN contract, CAC produced a 4th batch of J-10s to 70th regiment of 24th division (30x5x) and the special August First flight demonstration squad of 24th division. In this past year of 2010, CAC produced a 5th batch of J-10s of 37 single seaters + a good number of twin-seaters to fully convert the 25th regiment of 9th division (20x0x) and a good portion of the 12th regiment of 4th PLANAF division (83x4x). Since late last year, we have started seeing test trials of a 6th batch of J-10s from CAC. This batch will most likely be delivered to fill the 12th regiment of PLANAF and also convert a new PLAAF regiment. I think this will be the last batch of J-10s that can be produced from the third AL-31FN contract. Here is a breakdown of production J-10s at the moment:

• 6 PLAAF regiments (28 J-10s each  6 x 28 = 168)
• 12 J-10s serving in the August First demonstration squad
• Around 16 J-10s serving in the FTTC aggressor squad
• 10 to 20 J-10s serving in the 12th regiment of PLANAF

So, my guess is that there are around 200 to 220 J-10s in service at the moment for different branches of PLAAF and PLANAF.

So, where does the J-10 program go from here? Some fans are already gushing over the first flight of J-20 and about ready to stop J-10 production very soon. Some question whether or not J-10B is needed at all. I definitely think those talks are crazy. China will have many J-7 regiments retiring in the coming years. I think some regiments will not be replaced, but PLAAF also does not want the fleet to shrink that much. I have brought up the talk of using JF-17 to fill a good number of the third tier regiments, but J-10s are still needed to replace more strategically located J-7 regiments. CAC has shown that it can mass produce J-10s at relatively low cost of less than 200 million RMB. Until J-20 joins service, J-10 and J-11 will form the core of PLAAF. Even though J-10 is smaller and cheaper than J-11, it has been the more capable air defense fighter jet. Therefore, even after J-20 becomes available, J-10 should still be continually produced. As we saw with J-7, CAC kept producing newer variants for PLAAF until at least 2007 even though J-10 was already operational with several regiments. So I think different variants of J-10s will be produced for the foreseeable future. In the immediate future, CAC will finish the 6th batch of J-10s to fully convert the 12th regiment of PLANAF and possibly fully convert another PLAAF regiment. I think this should be the end of J-10/A production run (about 240 to 250 using 276 AL-31FNs).

After this point, I think the production should shift to J-10Bs. We’ve seen the Y-8 radar test bed recently testing with what appears to be the nose of J-10B, so all signs are pointing toward J-10B production starting sometimes late this year or early next year. As stated before, J-10B should represent quite an improvement over J-10A when it comes to new avionics architecture, latest range of sensors (AESA radar, IRST and MAWs), new generation of MMI and more integrated EW installations. It should also have better multi-role capability and be able to fire all of the latest generation of AAMs, AGMs and PGMs (many shown in Zhuhai Airshow). The other question with J-10B and future J-10 variants is how it will move into the future world of stealth fighters. Clearly, future J-10 variants can be designed to have reduced signature like hornets to super hornets or eagle to silent eagle, but it cannot be redesigned into a LO aircraft. In fact, we are already seeing some greater consideration for stealth on J-10B when it comes to greater usage of composite material, integrated IRST/ECM, LPI radar and adoption of DSI inlet (although this could be more of a weight/subsonic performance vs supersonic performance tradeoff). There are also plenty of claims on Chinese forums that J-10B has also adopted plasma stealth, but I do not know how I can verify that. The other question is what engine will be used by future J-10s. Will China make a new large order for AL-31FN or will WS-10 series finally reach acceptable performance/reliability level to be installed on J-10B? We will have to keep the wait and see approach to find out. I would say that at least one more order of AL-31FNs is needed before WS-10 can become ready for both J-10 and J-11.

And finally, we should also see more export deals with J-10 in the coming years. As we’ve seen in numerous reports, PAF will be the first export customer for J-10, although we don’t know the exact configuration yet. After Pakistan, J-10 will probably be offered to most countries around the world. It will actually be interesting to see how that will affect JF-17’s export prospects, since most potential export customers would only select one of the two fighters. China will also not be able to export to many countries until WS-10 becomes a viable engine option.

The other side of PLAN

When people talk about PLAN in the West, the modernization and the naval shipbuilding program are often the focus. There is no question that the current shipbuilding program for both PLAN and the Coastal Guard agencies are impressive. However, China began this streak from a very low starting point. What people often miss is how PLAN keep really old and ineffective ships in service to save cost.

Among the frigates that are still in service, no where is more evident than the 4 Jianghu-I ships that are still in service with East Sea Fleet. The 513 and 514 ship shown below first joined PLAN in the 70s and really have no use other than training and patrols. In fact, 2 Jianghu-I ships have already been converted for the Maritime Police agencies (much to their chagrin I must add).



Another big example of extremely old PLAN ships are the Luda destroyers in service with North Sea Fleet as covered by China-defense blog. The sailors on this 40 years old ship is their newly issued cold weather gears. Some of them are still using silkworm anti-ship missiles, manually controlled AAA guns for air defense and antisubmarine rocket launchers for ASW.

At the same time, the current upgrade program gives us an insight on the extension of the relative old ships still in service with PLAN.

The 052 Luhu class ships (112 & 113) joined PLAN after a full production run of the 3600-ton Luda class. These 4200-ton class ships were the first PLAN surface combatants to use gas turbines. 112, the lead ship of the class, uses LM-2500 (imported before the embargo) and joined service in 1994. 113, the other ship of this class, had to use GT-25000 and joined service in 1996. These two ships were upgraded once in 2003/2004 to use YJ-83 anti-ship missiles and upgraded main guns. However, their current weapon systems are vastly outdated when compared against the similar sized 054A class. They are still using HQ-7 and outdated Type 76A guns for air defense. 112 uses a bunch of imported (and now outdated) sensors and combat system. Due to the arms embargo, 113 was forced to use the downgraded domestic copy of those sensors and combat system. Either way, support for these sensors are unlikely to be too great going forward. At the same time, it's usage of Z-9C helicopters, DUBV-43 VDS and DUBV-23 hull mounted sonar are unlikely to allow it to fully perform its original designed role of ASW destroyer.

As such, it appears that 112 is undergoing a hull scale of changes for the past year at the HuDong shipyard. It is likely that LM-2500 will be replaced by QC-280 after 20 years of service. At the same time, the rest of the ships have been ripped apart. I have not seen this kind of upgrade with any other PLAN ships. When looking at the amount of work they are performing on this ship, it makes me wonder why they do not just use that money to build more 054As. Either way, it looks like 112 will remain in service for another 20 years after this kind of mid-life rebuild.



Also as stated in a recent China-defense blog entry (originally from fyjs forum), the Jianghu-V ships are getting an extensive refitting. These 6 ships were built for the South Sea Fleet from 1992 to 1995. They were the result of an emergency program at that time due to the worsening situation in South China Sea. Today, it is hard to see PLAN needing such a program these days to protect its waters, but China did have tough time against the Vietnamese there in 1988. Compared to other Jianghu ships, these ships had more modern and reliably sensors/weapons and much better living quarters. It's certainly not easy for sailors to stay out for long patrols in South China Sea without air conditioning. Even so, these ships are really archaic in terms of hull design, sensors and weapon systems. From the photos below, we can see that they have installed two quadruple YJ-83 launchers, PJ-33A dual-100mm guns, new air search radar and decoy launchers.








From these recent photos of the inside of the ship, it looks like they have also installed new control terminals and combat systems.



The last two photos were taken from 562 conducting New Year's patrols. It is clear that these ships still play a very important part in patrolling the coastal waters. With the extensive refitting we are seeing, they are likely to be in service for quite sometime. So even with the induction of many 054As, PLAN still consist of a large number of old ships.

Activities around Chinese shipyards

Happy Chinese New Year to everyone. In case you missed it, Thursday marked the beginning to the year of rabbit.

With the new year celebration just starting this past week, shipyards around the country have probably stopped work. Having said that, we did get a lot of good photos from the shipyards around the country this past week as numerous people posted pictures in celebration of the new year. Since the work in these shipyard are likely to be interrupted for much of February, these probably won't update much until sometimes in March.

First of all, we have a bunch of new pictures from Dalian showing the latest works on Varyag. It's clear that they still have plenty of work before this thing will start sailing off. Just by the look of all the cranes, boxes on the deck, modules on the side and uninstalled sensors, the installation will continue for a few months longer in my opinion.







We also have some updates of 054A around the country. First of all, it looks like the 4th 054A from HD shipyard is finally ready to sail off. It is all painted in PLAN schemes and ready to join ESF. It will have to wait until after New Years before join service though.

We also have what appears to be the 5th 054A from HD shipyard getting ready to be launched. There are also traces of a 6th 054A at HD shipyard, although it is not confirmed yet.

The 5th 054A from HP shipyard is also remarkably far along. I am not sure if it has started sea trials yet, but looks like all of the sensors have been fitted at least.

The 6th 054A from HP shipyard is hidden behind one of the rescue ships from maritime agencies. It looks to be quite far along and will be ready to be launched soon.

Remarkably, the 7th 054A from HP shipyard is also taking shape. As you can see, the ship module next to the 5th 054A looks like the front section of a new 054A.

We also got an updated photo of the recently launched 052C from JN shipyard. I don't think much has changed since the last set of photos.

At the same time, low rate 022 production appears to be continuing in this remote inland shipyard. It is also building cutters for the maritime police and the maritime surveillance agency.

We also have a picture of Haijian-26 here. It is the final cutter of the 4 that is produced by HP shipyard. The third one, Haijian-66, was recently delivered to CMS.

Finally, it appears that the 5th yuan has been delivered and doing sea trials in Shanghai for a while now. The 2 Yuan submarines in Wuchang should be the 6th and 7th. The word on Chinese forums is that Yuan submarines are also being built by JN shipyard. It looks like Yuan production run might be over very soon if they are continuously churned out at the current rate.

Some thoughts about the growing US/China rivalry

As President Hu Jintao visits USA this week, I have seen a wave of articles about China vs US. They often try to explore the following the following subjects:
1) Has China surpassed USA?
2) China's unfair trade policies and currency manipulation.
3) China may seem impressive on the outside, but the communist system is hiding a lot of brewing problems.
4) What should US do about the growing PLA?
5) Is a crash imminent in China?

I will start by looking at China's current economic situation and social stability. I think that will answer what US should do about the growing Chinese military and has China surpassed US. At the current time, there are often two extremes when people look at China. The first extreme is created by look at China's impressive new infrastructure, clean energy initiatives, trade surplus and foreign exchange reserves. When you just focus of these, it will be easy to think that China has surpassed US in certain areas (especially economical strength). In the sphere of military, one can be easily impressed with PLA with the news about J-20, DF-21D and aircraft carrier programs. The other extreme is created by looking at the some substandard exports (lead paint for example), cheap knockoff products, piracy and "communist" system. In the sphere of military, one can dismiss China when looking at hundreds of J-7 fighter jets, Jianghu frigates and T-59/69 tanks that still form large parts of PLA.

We've read for the past few years that China is not playing by the rules in its current trade relationship with US and that it is doing so by keeping its currency artificially low. I do agree that China is manipulating its currency right now, but I also don't know if it's really that undervalued. When China first fixed its currency to 8.28 against USD, it was doing so achieve currency stability at a time when all major Asian currencies were dropping in value against USD in the midst of a major economic crisis in 1997-1998. It kept its currency fixed against USD until 2006 to achieve this currency stability while USD was dropping like a rock. China has since then moved between semi-floating and fixing RMB. But is RMB really kept below it's value? If we go by the amount of credit that BOC has injected in the economy and the resulting inflation rate in the past 3 years, it would be hard to argue it is. If we compare pricing of comparable items like gas, non-processed food, household items and such, they are about the same price in China after the conversion. For luxury items like high end cars, brand name beauty products and high quality alcoholic beverages, they are actually more expensive in China even after conversion. In fact, RMB has been loosing so much purchasing power recently that people having started speculate on commodity prices by buying precious metals and copper. The argument has always been that if RMB goes up, Chinese people would have money to buy more stuff from the west and that the credit injection is caused by China's desire to keep RMB low. I think even the Chinese gov't cannot manipulate the market forces in the long run. If inflation goes up, then factory workers' wages will be forced to move up even more, which would eliminate currency fixing effects. On the other hand, Chinese workers would still be making significantly lower wages than American workers even after a 20 to 30% move up. In the industries where China is competing against other low cost nations, it is unlikely that increasing conversion rate would move those jobs back to America. In the most high tech industries, Chinese products would still be quite a bit cheaper than Western ones even after increasing conversion rate. Basically, as long as Chinese companies can reach the quality/safety standard for that product class, they will most likely be the cheapest even after a 20% to 30% move up for RMB. So I think even if China did loose its capital controls and let its currency float, the effect probably will not work out the way that the politicians think they would.

However, I do think there are measures that China can take which would help balance trade between the 2 countries. First of all, China would need to take intellectual property right more seriously in the software industry (primarily in terms of software piracy). This measure would not only help American companies like Microsoft, but also help China's aspiring domestic software firms. Secondly, US and China should work on a more stringent quality control framework for exports into America. This measure would prevent substandard product like toys with lead paint from coming into America and also improve the reputation of Chinese products. Thirdly, China needs to allow greater access for American companies bidding for hi-tech projects in China. Western countries have also had this problem with Japan and South Korea, where market access are not equal on the two sides of trade. There really is no reason that Western companies that have part of their production in China should not have equal access to those projects. Fourth, I think many of the complaints from GE and other hi-tech exporters would be soothed if a framework can be worked out to prevent local Chinese companies from blatantly copying designs and claim them as their own. Part of the framework should also prevent Chinese government from enforcing caps like 70% of wind power must be produced locally. Having such an accord would reduce trade tension and possibility of trade war, which would help nobody. Fifth, I think China should provide greater access of its domestic food market to American farmers. China has shielded its farmers from international competition due to its fear over domestic unrest from this group. However, such measures have only stoked a lot of inflation in food prices for ordinary Chinese citizens. So, allowing more competitively priced international farming produce in the country would reduce inflation and public outcry over rising food prices.

The topic of inflation and public outcry bring us to the question of whether or not crash is imminent in China. The topic of China sometimes refer to the potential problems in the Chinese economy, while other times refer to social problems facing China. They are some what related to each other. It's often been said that the Chinese government has made an implicit pact with Chinese people where they get to control government the way they would like as long as they can continue to deliver increased prosperity. In particular, Chinese government caters to the demands of big business, banks, the wealthy and the growing middle class. This broad group has gained the most from China's existing social system and would generally be the most opposed to changes in governance (become a democracy for example) that would create instability and give more voice to the rest of the population. To get an idea of the social problems that simmers under the surface in China, one would only have to go to the city hall of any municipality. You would see a bunch of policemen standing outside the city with no apparent task to do. They are there to stop demonstrations by people that lost out as part of China's move from socialism to capitalism. Back in the socialist days, city dwellers can keep their job regardless of how productive their enterprise may be and receive welfare for life. As part of the move to capitalism, a lot of state owned enterprises were allowed to collapse in the face of competition from far more efficient private companies in the late 90s. As part of this shift toward private enterprises, there was a huge migration of jobs from the less efficient central part of the country to the export driven coastal provinces. With less job around, some people were able to adjust to this new working environment, but a lot of people were forced into early retirement while others were laid off. So now, all of the local government have the headache of dealing with angry people from loosing their jobs, health care and cheap housing. In order to alleviate all of these angry and unemployed people, they launch infrastructure projects (many wasteful) and created a lot of low tax business zone to attract investment. Sometimes these things work out, while other times they are stuck with a lot of debts, but they always end up taking land away from some unfortunate souls. China gets over 50,000 protests every year for reasons like unfair compensation for seizure of land, job loss and environmental damage. Even among most of population whose living standards have really improved in the past 30 years, there are growing resentment toward the wealthy and the connected.

Another source of growing discontentment is the shifting dynamics of the young people. I have read many articles talking about labour shortage problems in China. I don't believe there is a labour shortage problem, but rather a shortage in cheap labour. A large portion of the young people coming into the work force nowadays are the only child of their family and carry the hopes of doing better than their parents. Unlike their parents' generation, they are not willing to sweat out low paying blue collar jobs after getting college degree. As a result, a large portion of new college graduates are having trouble finding jobs while sweatshops and factories are having to constantly raise salaries due to the decline in migrant workers. As we move forward, these factories would have to raise compensation and improve work condition to attract the college grad and keep the migrant workers from going home. We are already seeing this happening in the past couple of years in big companies like FoxConn and Toyota and also in most of the low cost export factories in Guangdong. At the same time, Chinese companies have been retiring people from work force in the early 40s due to the influx of cheap young labour. As the number of young labours entering work force decline, these factories would also be forced to retire the better compensated older workers at later age. These are all factors that I think will prevent labour shortage, but will also drive up the cost of labour. Such natural economic forces will increase the cost of Chinese products in ways that no forced currency revaluation could. They will also force China to move up the value chain and face off against higher valued export nations like Japan, South Korea, Germany and Singapore.

So in short, I do believe there are a lot of social problems simmering under the surface in China. With all these potential social problems, is China also facing huge economic problems? I think the answer is yes and no. On the negative side, there is a huge real estate bubble in big Chinese cities across the country as a result of huge expansion in credit in the past 2 years. In order to stave off a short term economic decline in 2008, China ended up inflating larger bubbles across the country. A lot of speculative money went into new building in Beijing, Shanghai, Shenzhen and Chongqing. Even less developed inland cities were affected, although to a smaller degree. It's often said that a large portion of new homes are bought but vacant, because the buyer is waiting for the housing prices to go up. The housing prices are at such high level now that ordinary families simply cannot afford to buy homes. This housing bubble is no different than the ones that already burst in Ireland, Spain and Portugal or the ones that are forming in Australia and Canada. Another problem that I see is the excessive infrastructure projects by local governments funded by banks' cheap lending. As an example of wasteful spending, my hometown in China has built a city wall and a moat to try to transform itself into an historical tourist city (I'm not kidding here). Since a large number of these infrastructure projects are wasteful, the Chinese banks, who are implicitly backed by the gov't, will have to absorb the losses. These problems are similar to what has already surfaced in Iceland and Ireland and about to surface I think that once the housing bubble burst and debts problems from infrastructure projects surface, it will cause for some hard times for the Chinese economy. Unlike the PIIGS countries in Europe, the fundamentals in the Chinese economy is still very good. Even if the real estate sector and infrastructure suffer a slowdown, they still have enough productive industries around the country to keep lower level of growth. At the same time, the Chinese private sector also have very high level of savings, which creates enough capital for small businesses and new start-ups. While the public debts situation will become a problem when the government has to bail out banks, they do have enough currency reserves to deal with these losses. Most importantly, China does not have the same level of unfunded liability of public sector workers that Western countries have to deal with. For example, the current unfunded liabilities in America is greater than the total asset values of everything that America owns. This situation is well reflected in the 2 countries' fiscal deficit. While the American federal gov't has hovered around 10% in the past 2 years and many state gov't are swimming in debts, Chinese deficit has been 2.8% and 1.6% in the past 2 years after budget surplus in 2008. So when we factor in the public and private sector saving/debts, I think China is one of the few major economies that can survive the sovereign debts crisis. It will experience some pain once the credit bubble burst as part of the boom/bust cycle, but it will get out of this global economic downturn better than most countries. After all, America became the largest and most wealthy nation despite going through many downturns in the past 2 centuries.

As a whole, I think the Chinese economy is not as rosy as some economists think. I share the prognosis of economist like Andy Xie, Marc Faber and Jim Roger, that China will go through some pain once the many bubbles in the country burst. At the same time, I also disagree with doomsday scenario of noted bears like Jim Chanos and the always anti-China Gordon Chang (who predicted that Chinese gov't would collapse by 2006). The Chinese economy will recover after some pain and some more protests. I think that although the current social tensions in China are bad, most people are thankful toward government for their improved quality of life and freedom. Most of the protests would be aimed at local governments rather than the central government, because people generally regard local governments to be far more corrupt and incompetent. As long as we do not see a complete economic collapse, we should see a stable central government that moves toward more openness and accountable. For an accurate depiction of the current Chinese social/political structure, I would recommend everyone to watch youtube clips of Orville Schell.

Building upon the past few paragraphs on China's current state, I can answer question 1) and 4). There are some areas that China has surpassed USA, but much more areas that it is still far behind USA. At the current time, China is in a lot of better financial position than America. As the largest creditor nation in the world, can go around the world bailing out bankrupt states, fund infrastructure projects and buy rights to natural resources. America on the other hand is the largest debtor nation and can only bail out other nations through secretive lending by Fed reserves. China still has a lot of poor people, so it will have a lot of room for growth and increasing productivity than America does. It also has a far more competitive manufacturing sector than America due to advantages such as lower wages, lower taxes, less regulations and lower financing cost. Despite being communist in name, China today has one of the world's most pro-business and capitalistic government. And finally, it is in a much better position in terms of public and private sector debts. China has huge private sector savings + low public sector debts, whereas America has huge private and public sector debts. And if state and federal government in America continue to try to pass on the debt problem by increasing taxes rather than fighting the powerful labour unions, the debt situation will simply get worse. So most of China's advantages are in the area of economy and finance, whereas USA is ahead pretty much in everything else. Despite the large number of engineers and scientists graduating from Chinese universities, they still lag far behind the high level education of top American universities. Simply put, China does not have any Harvard, Yale or Columbia. The top research labs in America are still the envy of the world. Along that line, America has an advantage in innovation due to more advanced research facilities and greater respect for IP. As a result of its advantages in innovation and research, America is likely going to stay ahead of China in technology for a while. America also is a more powerful voice around the world. Even though China has gained much influence and America has lot much respect in the past 10 years, most countries in the world still look at America for moral leadership. Most Western countries need China for its money and large market, but does not really have much respect for how the country is run. America has also been spreading its values to the world for the past century through film, music and other form of culture. Even though China has a much longer history, it is unlikely for China to ever spread its values the same way. When there are political problems and regional conflicts in different parts of the world, they look for America to come in as the mediator rather than China. And finally, America has a very large lead in its military prowess. Even though PLA has improved a lot in the past 10 years, it is still a generation or more behind America in most areas of military technology. I have read a lot of alarmist articles about J-20, Varyag and DF-21D recently, but they are nowhere near enough to tilt the balance of power in Pacific Ocean. In the best case scenario, China will have enough military prowess to deter America from entering a possibly costly Taiwan conflict in 10 years. China does not have the desire nor the ability to provide any kind of threat to America. Even if China builds 5 aircraft carriers, it would not be able to challenge US Navy in international waters. All of the political/economical objectives that China want to achieve can much easily be achieved through its financial prowess. So, when I read articles about how America needs to spend more on the military to deter a rising China, I'm often left to hang my head down and accept the higher taxes and inflation that I will be facing. USSR did not collapse because its military could no longer pose danger to USA. It collapsed because it was totally broke from spending too much money on its military and foreign adventure in Afghanistan. The British Empire did not loose its dominant place in the world because of the decline in its military. It lost its place in the world to US, because US had much stronger manufacturing and financial strength. So if US wants to maintain its leadership in the world, it needs to get its financial situation in order.

In conclusion, Hu Jintao's visit to America provides a good test for us to think about how the relationship between the 2 countries can develop and be beneficial to both side. I think that it is too simple to blame all of America's problems on China's currency. As I mentioned, China can make some other changes that will be far more helpful in balancing the trades between the two countries. In the long run, America will continue to be on the wrong side of the trade unless it can address its financial issues by having less tax burdens on everyone and save more money. China also has a lot of social and financial problems to address, but it will continue to grow in influence as its economy continues to grow. As a Chinese Canadian living in New York, I hope that people in both countries can realize the challenges facing both countries and learn to grow together in this increasingly interconnected world economy.