Everyone is familiar with the concept of China’s politics as being experimental rather than ideological. “Socialism with Chinese Characteristics” says it all by saying nothing—the ultimate disclaimer. “Chinese characteristics” are as indefinable as “Chinese thinking,” “Chinese fashion” or “Chinese culture.” To a novelist in a crumbling hutong, they may be one thing. To Hu Jintao, they are quite another. What has not been examined quite coolly enough is the project called the Chinese economy. China is and isn’t a part of the world market. It is and isn’t comparable to all other major economies. It is and isn’t a plutocracy. While Ben Bernanke might disagree, the Chinese leadership are not just robotic, money-grubbing ubercapitalists. They are scientists conducting the world’s most costly, long-running, and risky experiment. Their lab is the length and breadth of China, with each region and municipality a workshop for low-level tinkering. This makes over a billion ordinary Han Chinese, Tibetans, Uygur, Miao, Bai, Hui, and, yes, foreigners, laboratory mice. We are the “consumers” that the government purports to assist through their economic policies, the people who will, eventually, benefit from the Solomon-like wealth the Chinese government has successfully appropriated from, well, us in the past three decades. But when does any right-minded entity pass the savings on to the customer? Yes, we can sometimes benefit indirectly from a favorable exchange rate or a temporary policy introduced before an Expo or Asian Games. But we can also suffer. Food prices are still on the rise; I pay as much for shoes here as I would in London, and a sleeper train ticket from Guangzhou to Chengdu over the Chinese New Year will set you back more than a night in the Peninsula.

These aberrations are the result of miscalculations in planning. While they hurt the laboratory mice, the boffins don’t care too much—there are always new rodents to prod, poke, inject, and immolate. What they are interested in is reconfiguring their formulae, tweaking, calibrating, and recording the results. Sometimes it goes wrong. Leasing a Beijing apartment with no elevator or thermostat from the State for a maximum of 70 years will cost you more than most downtown Manhattan condos which you will own for life, but that’s what happens when the scientists running the lab turn the “real estate” sector over to their inexperienced children. Base government performance evaluation entirely on short-term GDP growth, and of course you open the floodgates to reckless investment, mindless construction, the printing of money to cover costs and, finally, rampant inflation. But sometimes it goes right—forcing foreigners who want to transfer their earnings from Chinese companies back to their countries of origin to first convert yuan into U.S. dollars means the banks (i.e. the State) can cream a nice chunk off the top. Forcing returning Chinese tourists to pay tax on all luxury goods bought outside the country costs nothing and makes a tidy sum. Land transfer fees, arbitrary sales taxes, hospitals charging through the nose for essential vaccinations—it all adds up.

Of course, people the world over are subject to taxation as well as the whims of math aces who wasted their otherwise valuable skills to dick around on the stock market.  In America, that very dicking around caused the Great Recession. The difference is that in the West, money controls government. In China the two are interchangeable: money is government and government is money. All the big corporate hitters, bar none, are state-owned enterprises. The State has cunningly created entities like the Agricultural Bank of China, Sinopec, and China Unicom to disguise the fact that you’re only ever buying from the State. Your money, like it or not, goes straight into central coffers. You might as well just pay 100% of your income as tax. Such is planned economics.

Private enterprise is kept small through the judicious use of monopoly, coercion, and red tape. If you want to set up a business bigger than a noodle stand and succeed, you’ll need state backing just to get past the planning stage. Big private enterprises were by and large sweet sixteen gifts from Party officials to their offspring—a chunk of state monopoly with state backing that keeps a steady flow of income back into, you guessed it, the State. It’s an open secret that most of the major real estate developers in China are owned by the children of the Politburo or top National Party Congress members. Same goes for oil, coal, steel, weapons and power. Folks cry “nepotism,” and the government can holler back “Chinese characteristics.” Such is the wondrous middle ground of being able to employ the free market or a planned economy wherever and whenever it suits, and yet, unlike the United States, being forced to pay lip service to neither. As the entire Chinese economy is an isolated, locked-down laboratory experiment, rather than a sacred cow, the government is freed of responsibility when things go wrong, because they can blame economics and justify tightening their stranglehold on the market. If government policy causes a catastrophe—well, we’re experimenting here, things go wrong sometimes. Without those pesky elections to worry about, lean years can be weathered and fat years indulged, because the higher-ups know they’ll remain in power no matter what happens. People will still bank with us, buy their gas from us, and pay us for the food they produce. They have no choice, unless they bury their cash in the backyard, strike oil, or grow their own corn. And even if they did all that, the State could, with minimal fuss, repossess their backyard, oil well, or cornfields, because the land belongs to the State anyway. Thus China is ever more adept at accessing the benefits of market economics (immense corporate tax revenues, bullish growth, limitless influx of luxury commodities) and few of the drawbacks (corporate accountability, private sector tax evasion, the fickle tide of consumer trends).

I don’t believe China is, as is often claimed, moving toward a more liberal economy. I don’t believe any regime run by human beings seeks to relinquish money for a morality. I believe that it is, step-by-step, ensuring that the State becomes so interchangeable with corporate China that they ultimately fuse as one. China’s “sinomists” aim to create a watertight oligarchy that Woodrow Wilson could have only dreamed of. Democracy is the final barrier to a similar state of affairs in the West—the vote remains the one free and open choice the average citizen has. China never had this stumbling block to contend with in the first place, and thus holds its people captive without even having to think about hearts and minds. One economy, one government, one China, fused together in one giant, inescapable test tube. Perhaps those in the labcoats are just opportunistic profiteers, or perhaps they are truly in search of the holy grail that is a perfectly balanced economy. One thing’s for sure, they’ll have to go through a lot more mice before we hear a “Eureka!”

The United States Treasury Department issues bonds as a form of debt financing. Government bonds are considered free of credit risk because of the government’s ability to raise taxes to service these bonds at maturity. The undeclared “bearer bonds” included 249 certificates worth $500 million apiece and 10 "Kennedy bonds" of $1 billion each.

There are few news reports these days that inspire confidence in the U.S. economy. Unemployment levels rose to a 26-year high of 9.5% in June and word of a second stimulus package (vehemently opposed by Obama) has investors balking at earnings projections and questioning whether we are in fact on the road to recovery. Amidst the worst recession since the Great Depression, a mind-boggling news story has emerged which poses questions pulled right from the pages of a Tom Clancy novel.

In early June, Italian authorities seized two Japanese men attempting to cross the border at Chiasso, 50 kilometers north of Milan, into Switzerland. Hidden within a false bottom inside their briefcase were $134 billion in undeclared U.S. bonds. The lack of explanations, as well as U.S. media coverage, about this inexplicable event has lead many to question whether there is more to this story than the powers that be would want us to believe.

As William Pesek of Bloomberg recounts, “These two guys were carrying the gross domestic product of New Zealand or enough for three Beijing Olympics. If economies were for sale, the men could buy Slovakia and Croatia and have plenty left over for Mongolia or Cambodia. Yes, they could have built vacation homes amidst Genghis Khan’s Gobi Desert or the famed Temples of Angkor.”

So the question emerges, who were these men? The bonds in their briefcases could classify them as one of America’s largest creditors, just ahead of the UK. One report claims that these were Japanese nationals working for the Finance Ministry. If this is true, it implies that Japan may have been attempting to dump their U.S. bonds somewhere else using Swiss financial institutions. Japan’s confidence in the U.S. dollar hinges on their belief that the U.S. government can repay such bonds. A news story such as this does not exactly promote belief in America’s economic stability.

Top Foreign Holders of U.S. Treasuries (March 2009)
Holder                        Total
China                         $767.9 Billion
Japan                         $686.7 Billion
Caribbean                     $213.6 Billion
OPEC                          $192.0 Billion
Russia                        $138.4 Billion
United Kingdom                $128.2 Billion

“They are clearly fakes,” said Stephen Meyerhardt, a spokesman for the U.S. Bureau of the Public Debt in Washington. “That’s beyond the fact that the face value is far beyond what’s out there,” he said. “No such ‘Kennedy bonds’ exist.” The total of Treasury paper “bearer” bonds outstanding is only $105 million. The Treasury has been issuing bonds solely in electronic form since 1986.

Clearly fakes, but then what purpose would two men such as these have for counterfeiting and transporting such a massive amount of U.S. debt? Another discrepancy is the fact that original and recent bank documents were seized as proof of their authenticity. Were banking institutions duped in this counterfeit ring as well? How much “counterfeit” U.S. debt exists in the international market? And why did it take nearly two weeks for this statement to be released if authenticity could be verified simply by looking at a photograph?

Italy’s Guardia di Finanz, a financial police agency, also expressed doubts about the bonds’ authenticity, especially the “Kennedy bonds,” but noted the others were so well made that it was hard to tell them apart from real ones.

Had the bonds been authentic it would have been a boon for Italy. The perpetrators could be fined 40% of the total value for attempting to smuggle them out of the country.

The Japanese nationals were subsequently released because they had committed no crime. Their whereabouts are unknown (read: missing) according to a reporter sent to Como by the Mainichi Shimbun to investigate the matter. Would the Italian financial police really release such sophisticated “counterfeiters” without tracking their whereabouts?

Market guru Karl Denninger thinks a more deceptive plot may be at hand:

You’re not going to walk into a bank with $130 billion in bearer bonds and cash them. Nor are you going to sell a bond with a $500 million face value to someone without them authenticating it. They will be authenticated before you get one dime out of them—no matter who you think you’re going to “give” them to.

So if they’re fakes and you’re “just screwing around,” there is no reason to hide them. Nor is there any particular reason to have authentic and recent original bank documents in your luggage with them, as has been reported.

…

Ok, who has $130 billion in bearer bonds? Remember, bearer instruments haven’t been issued by the Treasury since 1982, when they became illegal to issue, at least to U.S. institutions and residents (there was an exception carved out for Treasury instruments issued to non-U.S. residents in 1985—a time of high deficits). The answer to that question: it is rather unlikely that there remains $130 billion of legitimate U.S. Bearer issuance outstanding anywhere—to anyone.

The many unanswered questions have conspiracy theorists chomping at the bit, speculating as to the hows and whys of transporting such massive amounts of U.S. currency.

Could the U.S. have issued clandestine bonds to Japan in order to finance budget deficits in the past decades which went unreported? Was Japan trying to hand off the bonds due to concerns that the U.S. government would be unable to service the debt? Were the smugglers victims of a Nigerian counterfeit scam? Is foreign confidence in the American dollar in jeopardy? Where are the bond smugglers and the bonds?

And what about this German article that claims the bonds are legitimate?

Readers can draw their own conclusions from the facts of this fascinating story but the notion that something like this could have happened with barely any U.S. media coverage speaks volumes in itself.

The first Cold War ended with the fall of the Soviet Union almost 20 years ago. Economic implosion was ultimately responsible for the collapse of the USSR. The USSR’s economy simply could not compete with the pressure from the financial and spending power of the United States. The Cold War was marked by an arms race, and the two superpowers were, as the theory goes, held at bay by mutually assured destruction. The United States could flatten the Soviets 27 times over had the Communists decided to start a hot war, and vice versa.

But the present situation in Sino-U.S. relations is one move past mutually assured destruction. The USSR was bankrupted by the arms race and folded, while China has modernized and continues to fund its military while maintaining a healthy economy. Its military spending is set to increase 17.8% this year (up to around $45 billion) while its economy grew a reported 11.1% in 2006.

Today, a hot war serves the interests of no country. As Henry Kissinger and others point out in the Wall Street Journal, nuclear proliferation and mutually assured destruction are no longer viable options in the modern world. Instead, the way to succeed in a competitive struggle for influence is through economic warfare. What has emerged is a chess match between governments, moving piece by piece in a coordinated effort to outmatch and trap competing countries’ economies into reliance or even suffocation.

A recent media blitz has focused on the use of what are called “sovereign wealth funds.” Such funds are essentially government-run investment groups that invest in and acquire companies that serve the government’s interests. According to The Economist, the United Arab Emirates’ fund, founded in 1976, has an estimated worth of almost $900 billion. The United States fund, also founded in 1976, is a modest $35 billion. China’s funds, founded in 2007, are estimated in total to be worth $300 billion. Such monster funds can easily swallow majority shares or acquire key companies such as GE, Ford, or Dell. Fears of foreign takeovers are behind the recent blocking of China’s attempted acquisition of Unicol, an American oil company, or the failed bid that would have given a Dubai company control over some American ports.

State-owned enterprises are listed on foreign and United States stock exchanges, such as the oil company Sinopec. The desire to buy stock in such companies is enticing—after all, if a company is owned by the government and considered essential to national strategy, it’s natural to assume the firm would never be allowed to fail. By giving money to Chinese government companies, are U.S. investors funding an anti-U.S. strategy? Or, is the act of allowing foreign ownership in a Chinese government-owned company a sign of trust in a country that was shut off to foreigners less than 30 years ago?

As The Economist reports, sovereign wealth funds were behind the massive bailout of Citigroup and Merrill Lynch this past week. However, this bold move onto Wall Street is also potentially building public backlash. But that doesn’t mean sovereign wealth funds will go away—they’ll just start using more clandestine and obtuse routes in order to achieve the same ends.

Since direct investment in a competing country is controversial—regarded as xenophobic by some and justified by others—countries can instead encircle and thereby pressure another by investing heavily in neighboring countries and jockeying for resources. Take, for example, the 2005 acquisition of Ecuadorian oil field rights by Chinese government-owned CNPC for $1.42 billion, a deal brokered by a group called Andes Petroleum. Pawn to E4. CNPC also in 2005 acquired the Canadian company PetroKazakhstan for $4.2 billion. Bishop (non-Vatican approved, of course) to C4. In 2007, CNPC acquired a majority stake in an oil sands project in Alberta. Qh5. This competition for positioning in turn could leave smaller countries, such as Bolivia, Ecuador, and Nigeria, with much to gain by leveraging access to their resources. And with current U.S. popularity declining abroad, these countries might be more favorable to firms from other countries.

The 1997 currency crash in Southeast Asia bears witness to the power of economic weaponry, if focused. Soros’ funds had, earlier in 1997, taken positions that shorted the baht. Soros is being held as a scapegoat when the cause of the crisis may have been due to weak financial institutions. Investors such as Soros simply capitalize on the opportunities presented to them by what are often poor policy decisions by central banks.

However, the difference between private investors and sovereign wealth funds is the motivation behind investments. Private investors seek to make a profit—governments seek national strategic gain, and also profit. But governments can forgo monetary gain and even take a loss, yet profit by gaining strategic advantage. And unlike individual investors, it’s much more difficult for state-owned funds to run out of money after a bad investment.

China’s intentions in the long term are unknown to the West. Throughout its millennia of history China has been an imperialist in few instances, in stark contrast to Soviet Russia, which saw itself as propagator of the faith by forced conversion. On the other hand, there is little transparency in countries’ sovereign wealth funds. Countries may form “patriotic funds” that pairs a government’s strategic goals with private capital. Such a strategy is by no means new—private enterprises were conscripted to help the United States government in both World Wars.

As John Ikenberry points out in a recent Foreign Affairs article, the United States’ power is declining and China’s is rising, leading one scholar to remark that if such trends continue “the United States and China are likely to engage in an intense security competition with considerable potential for war.” Checkmate (Qxf7#) may come when one country gains a stranglehold on resources, or the financial ability to ravage another’s economy. Ultimately, whether growth comes with the help of other nations—or at the cost of them—will be determined by forces inside each government. The board may not be so black and white.