Sunanda K Datta-Ray  April 19, 2013 Last Updated at 22:46 IST

Sikkim's clash of civilisations

The old faultlines of identity remain despite aggressive modernity

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The seminar on "Tibet's Relation with the Himalayas" that the Foundation for Non-Violent Alternatives (FNVA) organised in Gangtok last week recalled Jigdal Densapa who died recently. Descended from Sikkim's ancient Lepcha chiefs and a hereditary Kazi of Barmiok, Densapa was secretary to the last Chogyal of Sikkim. Sir Patrick Shaw, a former Australian high commissioner to India, called him "the only modern man in Sikkim".

That's what I remembered as learned seminar papers by Sangeeta Thapliyal of the Jawaharlal Nehru University, the Institute for Defence Studies and Analyses' Col P K Gautam or Nani Bath of Itanagar's Rajiv Gandhi University focussed on threats to national identity in Nepal, Ladakh and Arunachal Pradesh. With modernity run riot in Sikkim, I didn't see a single man in the ankle-length robe called baku or kho, which is the Sikkimese male's traditional attire. Densapa wore it with dignity.

The empty desolation of the Chogyal's palace is as indicative of the new Sikkim as bustling crowds in the wide walkway of Mahatma Gandhi Marg. Its crowded shops and cafes cater mainly to budget tourists whose colloquial Bengali rises stridently above the hubbub. But here and there, pleasant sanctuaries like Baker's Cafe and the just-opened Coffee Shop, offer a touch of more sophisticated leisure. Where smelly, run-down Dewan's in the bazaar was once the only hostelry, hotels now sprout every few yards, ranging from the ostentatious Mayfair and elegant Denzong Residency to hole-in-the-wall hovels. Two boast casinos where locals squander their new-found wealth on the turn of the wheel.

Rajiv Gandhi's calculation that only 15 per cent of development funds reach the target means that 600,000 Sikkimese are making money hand over fist. In their past innocence, my Sikkimese friends didn't think of exploiting the absence of excise duty under the Chogyal. But the shrewd Indian businessmen who flooded Gangtok after the protected kingdom became India's 22nd state quickly grasped they needed only an address in Sikkim, a front man and a dummy company to make a killing from duty-free goods. Soon, greed overcame prudence. Factories elsewhere in India began rolling out manufactures stamped "Made in Sikkim". The exchequer may have lost Rs 3,50 crore on evaded tobacco duty alone.

Despite aggressive changes, however, Sikkim cannot afford to abandon its past. The 300,000 registered "Sikkim subjects" (meaning they or their ancestors were bona fide residents of the kingdom) pay no income tax. About 225,000 of them are ethnic Nepalese. Another 35,000 Nepalese probably have fake certificates.  Sikkim's Tibeto-Buddhist ethic has been watered down, and some indigenes complain of existing on sufferance. Kazi Lendhup Dorji, the first chief minister whom many Sikkimese regard as the "country-seller" even while they formally honour his memory, once chided me for not speaking Nepalese. "It's the language of the people," he said.

The monarchy would never have been overthrown and the kingdom merged without Nepalese cooperation. Since they accused the Chogyal and his Bhutiya-Lepcha courtiers of trampling on their Hindu Nepalese identity, you would expect them to make common cause now with West Bengal's militant Nepalese, especially as Darjeeling district once belonged to Sikkim. Gangtok's fairy-tale Assembly even recently passed a resolution supporting Gorkhaland. But do they want to join it? Certainly not. As Kazi's Hindu ethnic Nepalese successor Nar Bahadur Bhandari put it, Sikkim had merged but would not be submerged.

Since they are no longer fighting a durbar that derived its symbols and rituals from Manchu China, the Nepalese who constitute 75 per cent of Sikkim's population don't need to reinvent themselves as Gorkha. They are proudly Sikkimese, masters in their own home. Merger would erode an identity that synthesises the legacy of six centuries of Tibet's cultural influence. Sikkim can be put in India, but Tibet can't be taken out of Sikkim. Merger would also cost the Sikkimese their protected jobs and special privileges.

Uttam Lal, a young idealist who teaches geography and natural resources management at Sikkim University, spoke passionately of the threat that both man and beast face on Sikkim's border with Tibet. He meant mines, barbed wire fencing and other defensive measures. The menace of modernity is no less serious. It is as much in need of the attention of organisations like the FNVA, which calls itself an "institute for developing peace studies". There can be no peace unless healthy survival is ensured.

Tailpiece: When Densapa led a group of fellow Bhutiya-Lepcha notables to Delhi to seek Scheduled Tribe (ST) status, Kunwar Natwar Singh, then a minister, remarked wryly he had never seen such a sophisticated bunch of tribals. But ST status was granted.

Reach out to China, via Sikkim

Apr 19, 2013

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Sunanda K. Datta-Ray

It must be nearly 40 years since I made my way to Nathu-la, the pass at 14,400 ft that is supposed to be one of three Himalayan trade routes between India and China. It was a different world. Sikkim was a monarchy then and India and China bitterly critical of each other.

My travelling companion, Prince Wangchuck, was an engaging youth full of fun and promise. Now revered by legitimists as the 13th consecrated Chogyal of Sikkim, he is a 60-year-old recluse lost in meditation in some Nepalese sanctuary.
Wangchuck had a smattering of Mandarin. “Ni hao ma … How are you?” he asked the Chinese soldier on the other side of the barbed wire beyond the crudely painted “India Wall”. The man stared at us in surly silence. Wangchuck repeated the question. Again, there was no reply. Finally, when he yelled, “Ni hao ma?” a third time, the Chinese sentry grunted “Wo hen hao, xiexie… I am well” in an angry tone that suggested the opposite.
India probably hoped that China’s willingness to trade through this gap in the Himalayas implied acceptance of Sikkim’s status as an Indian state. For China did not reciprocate when India acknowledged Chinese sovereignty over Tibet in the 2003 “Declaration on Principles for Relations and Comprehensive Cooperation” between India and China. An American scholar, David Scott, points out in Sino-Indian Territorial Issues: The Razor’s Edge?, “the text shows a one-way agreement, one-way obligations and one-way concessions”. As for the complacent claim of implicit Chinese acceptance of Indian sovereignty, Scott warns “that was implied rather than explicit, de facto rather then de jure.” As if to bear out Scott’s doubts, China contested Indian control of the 2.1-sq-km Finger Area tract in northern Sikkim five years after the Declaration.
Delivering the K. Subrahmanyam Memorial Lecture, “China in the Twenty-First Century: What India Needs to Know About China’s World View” in New Delhi last August, Shyam Saran, former national security adviser, observed that although China handed over maps during Wen Jiabao’s 2005 visit “showing Sikkim as part of India… recently, some Chinese scholars have pointed out that the absence of an official statement recognising Indian sovereignty leaves the door open to subsequent shifts if necessary.”
Even the ostensible commercial rationale for reopening Nathu-la (ironically, on the Dalai Lama’s birthday, July 6, 2006) doesn’t appear to have been realised. Traditionally, trade between Sikkim and Tibet was conducted along 13 routes. The British preferred Nathu-la because of its gentler gradients and shorter distances (54 km from Gangtok, 520 km to Lhasa). Its closure in 1962 together with all the other passes marked the end of an era in history. The only person permitted for 44 years to cross the barbed-wire frontier at Nathu-la was a Chinese postman with an Indian military escort, who would hand over an empty mailbag to his Indian counterpart in a building at the border.
The closure sounded the death-knell of Kalimpong in West Bengal, once the meeting place of kalons (ministers) from Sikkim, Bhutan and Tibet and the nerve centre of the Tibet trade. More than 10,000 men were employed in sorting mounds of dirty white, grey or black wool from Tibet into neat bales for export to Britain and the US. Thousands more provided fodder and maize for mules, and exotic entertainment for their masters enjoying a 10-day respite from the privations of a bleak and dangerous road. The daily turnover of more than `400 million persuaded the State Bank of India to open a branch in Kalimpong.
Apart from wool and Kuomintang silver dollars, the caravans brought yaks’ tails, musk, borax, curios and Chinese rice. They took back cement, kerosene and all the manufactures of Indian factories. A car for the Dalai Lama was dismantled and carted up piece by piece. Indian officials turned a blind eye when rations and equipment for Mao Zedong’s forces, including jeeps from Kolkata, were similarly exported and reassembled at a factory at Phari on the Tibetan plateau.
Two new marts were set up at Sherathang in Sikkim and Rinqingang in Tibet under the 1991 Sino-Indian memorandum of understanding. But only local people can use the marts. However, Sikkim can now import several new items including readymade garments, shoes, quilts and blankets, carpets and Tibetan herbal medicines. The earlier list was restricted to 15 items like wool, cashmere goat, yak tails, sheep skins, horses and salt. Traders complained these items were of little value. “Who wants yak tails nowadays?” they asked.
The original export list of 29 items (including clothes, tea, rice, dry fruits and vegetable oil) has also been expanded to include processed food, flowers, fruits and spices, and religious products like beads, prayer wheels, incense sticks and butter oil lamps. The Sikkimese would like much more relaxation. They say the restriction to locals only encourages Rajasthani traders to operate benami through Sikkimese front men.
Two other passes — Gunji in Uttarakhand and Shipki in Himachal Pradesh — have also been opened. But the total trade isn’t even an infinitesimal fraction of the $66 billion bilateral trad. It makes no dent in India’s $23 billion trade deficit. Smuggling is rife through Nepal and, to a lesser extent, some north-eastern states.
But even if neither the political nor the economic argument for reopening the three passes has been fulfilled, it doesn’t mean they should be closed again. On the contrary, more passes should be opened and imaginatively administered on both sides of the border to encourage the human contact that is now sadly absent from Sino-Indian relations.
Back in Gangtok after many years, I couldn’t visit Nathu-la again. Severe hailstorms had blocked the road.

The writer is a senior journalist, columnist and author

The Geopolitics of the Yangtze River: Developing the Interior

April 1, 2013 | 1045 GMT

source; Stratfor

Stratfor

Editor's Note: This is the first piece in a three-part series on the geopolitical implications of China's move to transform the Yangtze River into a major internal economic corridor. Part one provides a broad overview of the geography and history of the Yangtze River region and its role in shaping Chinese politics and statecraft. Part two examines the strategic river city of Wuhan, and part three considers the political economy of Beijing's push to develop the Yangtze River corridor. 
As the competitive advantage of low-cost, export-oriented manufacturing in China's coastal industrial hubs wanes, Beijing will rely more heavily on the cities along the western and central stretches of the Yangtze River to drive the development of a supplemental industrial base throughout the country's interior. Managing the migration of industrial activity from the coast to the interior -- and the social, political and economic strains that migration will create -- is a necessary precondition for the Communist Party's long-term goal of rebalancing toward a more stable and sustainable growth model based on higher domestic consumption. In other words, it is critical to ensuring long-term regime security.
The concept of developing the interior is rooted in the dynastic struggle to establish and maintain China as a unified power against internal forces of regional competition and disintegration. Those forces arise from and reflect a simple fact: China is in many ways as geographically, culturally, ethnically and economically diverse as Europe. That regional diversity, which breeds inequality and in turn competition, makes unified China an inherently fragile entity. It must constantly balance between the interests of the center and those of regions with distinct and often contradictory economic and political interests.
Currently, the Party's stated intent is eventually to achieve greater socio-economic parity between coastal and inland regions, as well as between cities and the rural hinterland. But Beijing also recognizes that underlying broad categories like "inland," "central" and "western" China is a complex patchwork of regional differences and inequality. Mitigating these differences will require more varied and nuanced policies.
Against this backdrop, the central government has targeted the Yangtze River economic corridor -- the urban industrial zones lining the Yangtze River from Chongqing to Shanghai -- as a key area for investment, development and urbanization in the coming years. Ultimately, the Party hopes to transform the Yangtze's main 2,800-kilometer-long (1,700-mile-long) navigable channel into a central superhighway for goods and people, better connecting China's less developed interior provinces to the coast and to each other by way of water -- a significantly cheaper form of transport than road or railway. By positioning this "second coastline" to become one of the nation's new economic cores, Beijing seeks to build what no previous dynasty could: a truly unified Chinese economy.

The Yangtze as a Core

The Yangtze River is the key geographic, ecological, cultural and economic feature of China. Stretching 6,418 kilometers from its source in the Tibetan Plateau to its terminus in the East China Sea, the river both divides and connects the country. To its north lie the wheat fields and coal mines of the North China Plain and Loess Plateau, which unified China's traditional political cores. Along its banks and to the south are the riverine wetlands and terraced mountain faces that historically supplied China with rice, tea, cotton and timber. The river passes through the highlands of the Yunnan-Guizhou Plateau, the fertile Sichuan Basin, the lakes and marshes of the Middle Yangtze and on to the trade hubs of the Yangtze River Delta. Its watershed touches 19 provinces and is central to the economic life of more people than the populations of Russia and the United States combined. The river's dozens of tributaries reach from Xian, in the southern Shaanxi province, to northern Guangdong -- a complex of capillaries without which China likely would never have coalesced into a single political entity.

VIDEO: The Strategic Importance of the Yangtze River

The Yangtze, even more than the Yellow River, dictates the internal constraints on and strategic imperatives of China's rulers. The Yellow River may be the origin of the Han Chinese civilization, but on its own it is far too weak to support the economic life of a great power. The Yellow River is China's Hudson or Delaware. By contrast, the Yangtze is China's Mississippi -- the river that enabled China to become an empire.
Just as the Mississippi splits the United States into east and west, the Yangtze divides China into its two most basic geopolitical units: north and south. This division, more than any other, forms the basis of Chinese political history and provides China's rulers with their most fundamental strategic imperative: unity of the lands above and below the river. Without both north and south, there is no China, only regional powers. Only after the Qin captured the Yangtze's three primary regions -- the Upper, Middle and Lower stretches -- in 221 B.C., thereby gaining access to the southeast coast, did "China" as a single unit come into being. In the two millennia since, the Yangtze has continued to mark the boundary between kingdom and empire. The constant cycle between periods of unity (when one power takes the lands north and south of the Yangtze) and disunity (when that power breaks into its constituent regional parts) constitutes Chinese political history.
If the Yangtze did not exist, or if its route had veered downward into South and Southeast Asia (like most of the rivers that begin on the Tibetan Plateau), China would be an altogether different and much less significant place. Its population would be much smaller, isolated to the southeast coast, Loess Plateau and North China Plain -- the only parts of Han China where economic life does not depend on the Yangtze. The provinces of central China, which today produce more rice than all of India, would be as barren as Central Asia. Regional commercial and political power bases like the Yangtze River Delta or the Sichuan Basin would never have emerged. The entire flow of Chinese history would be different.

Three regions in particular make up the bulk of the Yangtze River Basin: the Upper (encompassing present-day Sichuan and Chongqing), Middle (Hubei, Hunan and Jiangxi) and Lower Yangtze (Jiangsu and Zhejiang provinces, as well as Shanghai and parts of Anhui). Geography and time have made these regions into distinct and relatively autonomous units, each with its own history, culture and language. Each region has its own hubs -- Chengdu and Chongqing for the Upper Yangtze; Wuhan, Changsha and Nanchang for the Middle Yangtze; and Suzhou, Hangzhou and Shanghai for the Lower Yangtze. Each region has its own internal market networks, and each historically is more interested in protecting its autonomy and prosperity than uniting under the north's control. Conquering and integrating them from the outside therefore required not only overwhelming military power -- historically, northern China's advantage -- but also complex bureaucratic and internal security apparatuses. Finally, it required a transport and communications infrastructure comprehensive enough to make the exercise of central authority over vast distances and diverse populations feasible.
Between 1949 and 1978, the Communist Party expanded those networks and laid that infrastructure with brutal efficiency. In many ways, China was more deeply united under Mao Zedong than under any emperor since Kangxi in the 18th century. After 1978, the foundations of internal cohesion began to shift and crack as the reform and opening process directed central government attention and investment away from the interior (Mao's power base) and toward the coast. Today, faced with the political and social consequences of that process, the Party is once again working to reintegrate and recentralize -- both in the sense of slowly reconsolidating central government control over key sectors of the economy and, more fundamentally, forcibly shifting the economy's productive core inland. The first phase of this process will be driven in large part by urbanization along the Yangtze River corridor, especially in the provinces that make up China's traditional Upper and Middle Yangtze regions.

Politics and Economy of the Yangtze

Today, the Yangtze River is by far the world's busiest inland waterway for freight transport. In 2011, more than 1.6 billion metric tons of goods passed through it, representing 40 percent of the nation's total inland waterborne cargo traffic and about 5 percent of all domestic goods transport that year -- up 250 percent from 2004. Over the last decade, dramatic increases in waterway freight traffic have been seen in some provinces along the Yangtze River corridor, such as Anhui (840 percent, to 364 million tons), Chongqing (640 percent, to 117 million tons) and Hunan (500 percent, to 179 million tons). By 2011, the nine provincial capitals that sit along the Yangtze and its major tributaries had a combined gross domestic product of $1 trillion, up from $155 billion in 2001. That gives these cities a total wealth roughly comparable to the gross domestic products of South Korea and Mexico.
This growth, since roughly 2003, has been underpinned by a massive expansion in centrally allocated fixed-asset investment into the interior, and specifically to those parts of the interior Beijing considers most viable as potential alternative or supplemental industrial bases to the southeast coast. Unsurprisingly, areas with ready access to the Yangtze River system have been targeted as cores of future inland urbanization. In part, this is because cities like Chongqing and Wuhan already possess well-developed urban industrial infrastructures, the legacy of Mao's intensive focus on inland industrialization. This legacy in turn gives these cities comparatively more influence and leverage than less developed parts of the interior when it comes to extracting central government financial support. Finally, cities along the Yangtze benefit from geography: Transport by road is roughly 30-35 times more expensive than transport by water, and rail is 3-3.5 times as expensive, meaning that cities without direct access to the Yangtze are inherently less viable as manufacturing and trade hubs.
Investment in further industrial development along the Yangtze River reflects not only an organic transformation in the structure of the Chinese economy but also the intersection of complex political forces. First, there is a clear shift in central government policy away from intensive focus on coastal manufacturing at the expense of the interior (the dominant approach throughout the 1990s and early 2000s) and toward better integrating China's diverse regions into a coherent national economy. But how that policy shift plays out on regional, provincial and local levels is shaped less by dictates from Beijing than by the political maneuvering of local and provincial governments for central government favor. Access to navigable waterways enables the cities of the western and central stretches of the Yangtze River to lobby more effectively for credit and tax rebates that might otherwise have gone to less competitive, landlocked provinces.
Investment in the interior accelerated rapidly in the wake of the 2008-2009 financial crisis, when the sudden evaporation of external demand revealed just how fragile and imbalanced China's economy had become. Thirty years of export-oriented manufacturing centered in a handful of coastal cities generated huge wealth and created hundreds of millions of jobs. But it also created an economy characterized by deep discrepancies in the geographic allocation of resources and by very little internal cohesion. By 2001, the economies of Shanghai and Shenzhen, for instance, were in many ways more connected to those of Tokyo, Seoul and Los Angeles than of the hinterlands of Sichuan and Shaanxi provinces. For most of the 1990s and 2000s, this lack of cohesion was viewed as an unfortunate but necessary and temporary byproduct of an economic model that was otherwise doing its job. After the 2008-2009 financial crisis, internal economic disunity -- like the growth model it embodied -- became a social and political liability.
The foundation of this model was an unending supply of cheap labor. In the 1980s, such workers came primarily from the coast. In the 1990s, when coastal labor pools had been largely exhausted, factories welcomed the influx of migrants from the interior. Soon, labor came to replace coal, iron ore and other raw materials as the interior's most important export to coastal industrial hubs. By the mid-2000s, between 250 million and 300 million migrant workers had fled from provinces like Henan, Anhui and Sichuan (where most people still lived on near-subsistence farming) in search of work in coastal cities.
This continual supply of cheap labor from the interior kept Chinese manufacturing cost-competitive throughout the 2000s -- far longer than if Chinese factories had only had the existing coastal labor pool to rely on. But in doing so, it kept wages artificially low and, in turn, systematically undermined the development of a domestic consumer base. This was compounded by the fact that very little of the wealth generated by coastal manufacturing went to the workers. Instead, it went to the state in the form of savings deposits into state-owned banks, revenue from taxes and land sales, or profits for the state-owned and state-affiliated enterprises that controlled not only many of the major coastal factories but also the various inputs that made manufacturing possible: roads, rail and port construction; power generation; mining; and oil and natural gas. (Notably, state-owned enterprises continue to dominate heavy industrial manufacturing).
This dual process -- accumulation of wealth by the state and systematic wage repression in low-end coastal manufacturing -- significantly hampered the development of China's domestic consumer base. But even more troubling was the effect of labor migration, coupled with the relative lack of central government attention to enhancing inland industry throughout the 1990s and early 2000s, on the economies of interior provinces.
Remittances from the coast kept families in the interior alive and paid for children of migrant workers to attend school, but they did little to improve the overall vitality of inland provincial economies. As a result, when the children of the first generation of migrant laborers reached working age, many of them followed their parents to the coast, where employment opportunities were far more abundant. However, unlike their parents, who had families to care for back in Henan and Sichuan, the new generation of migrants had far less incentive to one day return inland, let alone send money back. With the possible exception of a handful of inland cities (Hefei, Wuhan, Changsha and Chongqing, all of which saw marginal to moderate population growth between 2001 and 2011), the interior came to represent poverty and backwardness, a place to abandon rather than to develop.
Beijing has long understood that it will have to change that perception -- and the economic and policy realities underlying it -- before it can hope to address the growing structural imbalances of its current economic model. But in China, this is easier said than done. In trying to urbanize and industrialize the interior, Beijing is going against the grain of Chinese history -- a multimillennia saga of failed attempts to overcome the radical constraints of geography, population, food supply and culture through ambitious central government development programs. Though its efforts thus far have yielded notable successes, such as rapid expansion of the country's railway system and soaring economic growth rates among inland provinces, they have not yet addressed a number of pivotal questions. Before it can move forward, Beijing must address the reform of the hukou (or household registration) system and the continued reliance on centrally allocated investment, as opposed to consumption, as a driver of growth.
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Read more: The Geopolitics of the Yangtze River: Developing the Interior | Stratfor

China's second liberalisation

China's second liberalisation

Until China frees its financial markets, it will continue to suffer from corruption and rent-seeking

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Source: Business standard

On March 1, China's State Council announced a new batch of restrictions aimed at reining in property prices by curbing speculative demand. The measures include tighter limits on home purchases by non-locals in cities with excessive price gains, a reinforced 20 per cent capital gains tax, mandatory 70 per cent down payments, and a 30 per cent benchmark interest rate premium for second mortgages.

While the previous round of housing sector restrictions, implemented less than two years ago, dampened market sentiment temporarily, it failed to curb rising property prices. Likewise, although the latest measures might have some impact, cooling China's turbulent property market - which relies on cheap credit - in the long term will require addressing underlying monetary policy weaknesses.

In order to control the money supply, the People's Bank of China has long used credit quotas as "window guidance" to banks. The policy is rooted in central planning, which, three decades ago, led to artificially low prices and, in turn, to shortages of basic necessities and key production inputs, such as grain and steel. As the free market developed, a dual-price system emerged, in which those with access to quota-allocated goods paid less. As a result, the government was compelled to grant subsidies to the system's "losers" - such as urban residents and state-owned enterprises (SOEs) - until strong supply responses to rising market prices eliminated the need for quotas on manufactured products.

A decade later, in response to the global financial crisis, China loosened credit quotas and planning controls on SOE-run local government infrastructure projects. Between November 2008 and June 2009, China's banks issued more than ¥8.6 trillion ($1.3 trillion) in new loans. As a result, the rate of credit growth increased from 14 per cent in September 2008 to 35 per cent a year later, and property prices more than doubled in many cities.

Excessively low interest rates have generated a mismatch between housing prices and the available supply, because they serve as hidden subsidies for those who can borrow - for example, the rich and SOEs - and thus stimulate demand for luxury property. In order to curb this trend, policy makers have reverted to the quota as a macroeconomic tool, but this time for housing credit.

Like quotas on manufactured products, these new quotas are generating a dual-price allocation system, in which SOEs can borrow at significantly lower interest rates than small and medium-size enterprises (SMEs), which must rely on the informal market at interest rates as high as two per cent monthly. But eliminating quotas in order to allow prices to reach market-clearing levels is not an option this time, owing to the complexity and competitiveness of the real estate and bank credit markets.

Three major factors are impeding policy makers from raising interest rates to market-clearing levels. First, the domestic interest groups that benefit from low borrowing costs have become a barrier to their liberalisation. There is a "common sense consensus" among borrowers - in China, as well as in highly indebted advanced economies - that raising interest rates would undermine GDP growth, employment and asset prices.

Second, many argue that raising interest rates would trigger a flood of speculative capital from low-yielding advanced economies. With the People's Bank of China unable to sterilise the inflows, upward pressure on the renminbi's exchange rate would threaten competitiveness.

Finally, an inadequate understanding of structural inflation (the growth in prices for non-tradable assets) has generated the false belief that China can maintain similar levels of inflation and exchange-rate stability as the Organisation for Economic Co-operation and Development (OECD) economies. As a result, over the last decade, the Chinese authorities' implicit target for annual inflation and currency appreciation has been only about three per cent.

But China has attained much higher GDP growth than the OECD economies, driven largely by the rapid productivity gains that characterise the initial "catch up" phase of emerging market development. As China continues to implement market-oriented reforms, the prices of non-tradable assets - such as property, natural resources, utilities, services and wages - will continue to rise much faster than in the OECD countries, until they eventually converge. This process will inevitably lead to higher structural inflation and currency appreciation in China.

If nominal interest rates are lower than the real return on investment - associated with GDP growth - the result is financial repression and increased income and wealth inequality. To avoid this outcome, as long as China's GDP growth exceeds that of OECD economies, its nominal interest rates must also be higher, its exchange rate must be more flexible, and it must tolerate higher structural inflation.

Indeed, despite domestic resistance, the People's Bank of China must raise nominal interest rates so that they are in line with structural inflation. Such a move would deter excessive investment in productive capacity, and ease the implementation of a more flexible exchange rate regime. At the same time, one need only recall the damage that unregulated carry trades wrought on Asian economies in the 1990s to understand why China must erect barriers to protect its domestic markets from inflows of hot money.

The alternative to this price-oriented approach - continued dependence on the quota system - would incur considerable administrative expenses, efficiency losses, and social costs stemming from rent-seeking and corruption. Much like the quota system of 30 years ago, the current reliance on quotas is unsustainable in the long term.

To manage exorbitant demand for financial and physical assets, China's leaders must address its root cause: the low cost of capital. Doing so will require maintaining some capital account control, while raising interest rates to market-clearing levels. This, not the unsustainable imposition of quotas, is the real monetary policy challenge facing China today.

---

The writers are at the Fung Global Institute, Hong Kong.
Project Syndicate, 2013

Lt Gen East Command visits Sikkim

Gangtok : 17 Mar 2013

Eastern Army Commander, Lt Gen Dalbir Singh, UYSM, AVSM, VSM arrived
here to review the Op preparedness of troops deployed along the border
in Sikkim Sector and the security sit in the area. He was received by
Maj Gen D Anbu, YSM, SM, General Officer Commanding, Black Cat
Division at Gangtok.

The Army commander called on the Chief Minister Shri Pawan Chamling at
their official residence today. Army Commander discussed wide range of
issues related to defence matters in the region. During his meeting
with Chief Minister, the aspect of requirement of Sikkimese youth in
military service was stressed upon.
    During his visit to Sikkim, the Army Commander visited the troops
deployed in border areas. ( IPR-Sikkim)

WORLD AFFAIRS

China's gesture

P.S. SURYANARAYANA
in Singapore

sOURCE:FRONTLINE

Volume 21 - Issue 11, May 22 - Jun 04, 2004

China acknowledges India's sovereignty over Sikkim by issuing a revised map of the relevant region.

CHINA'S latest gesture of recognising Sikkim as an integral part of India, by issuing a revised map of the relevant region, has certainly helped tone up the quality of the current comfort level in the bilateral relationship.

A photocopy of the map published in the latest edition of the World Affairs Year Book 2003-2004. The official Chinese publication has stopped mentioning Sikkim as a separate country. This is the first time that China has done so, recognising Sikkim's merger with India in 1975.

India, therefore, has reason to feel vindicated in its belief that the status of Sikkim would cease to be a contentious issue in Sino-Indian interactions in due course and that the new "development" should be seen as a corollary to the understanding reached during Prime Minister Atal Bihari Vajpayee's visit to Beijing in June 2003.

However, China's carefully calibrated moves on the diplomatic front relating to Sikkim, evident for nearly a year now, have fallen dramatically short of a formal declaration or an official pronouncement which Beijing could perhaps have made to signal a categorical acceptance of India's sovereignty over Sikkim. The reasons at stake will be easier to comprehend in the light of the nature and scope of the step-by-step approach that Beijing has chosen to adopt.

China's latest cartographic recognition of India's sovereignty over Sikkim is actually a sequel to the memorandum on Sino-Indian border trade signed in June last and Beijing's move last October to erase Sikkim from the list of independent countries posted on the website of the Chinese Foreign Ministry.

China's latest World Affairs Year Book has, for the first time, portrayed Sikkim as a "subsumed part" of the overall Indian landmass in a revised map of the relevant region. No less important is the fact that the annual reference book, brought out by a publishing house affiliated to the Chinese Foreign Ministry, no longer classifies Sikkim under the index of independent states.

The Year Book is considered to be a valuable source material for the maps and basic data that would be widely accessible to the Chinese people. This should help sensitise the Chinese people to Beijing's gradual acceptance of the ground reality concerning India's sovereignty over Sikkim. In this sense, the new gesture to India is more important than China's earlier steps.

While the Chinese Foreign Ministry website has its place in reflecting the country's perceptions of the international scene at any given time, the Sino-Indian border trade protocol set up a new marker for bilateral exchanges. At one level, the memorandum, which identified "Changgu of Sikkim State" as a new "venue for border trade market", was portrayed by Chinese officials as a trade-related aspect of a "win-win solution". Tempering the temptation to read the memorandum as any kind of border agreement insofar as Sikkim was concerned, the Chinese Foreign Ministry spokesman Kong Quan emphasised last June that Sikkim, "an enduring question left over from history, ...cannot be solved overnight". It would require to be "solved in a gradual manner".

With the meaning of "gradual manner" now becoming clearer, it now remains to be seen whether China's next white paper on foreign policy, expected to be issued later this year, will amplify the reality reflected in the new official map. Until now Sikkim had been regarded as an independent entity for the purpose of China's overall world-view.

While critics of New Delhi point out that India declared its recognition of "the Tibet Autonomous Region as part of the territory of People's Republic of China" last June without securing a similar statement from China on Sikkim, two relevant aspects still need to be kept in focus.

First, while Sikkim is now shown as part of India in China's official map, the overall Sino-Indian border would still require to be politically defined and strategically outlined through a final settlement of the dispute through negotiations, including those at the level of special representatives.

The second and equally important reality pertains to the reasons why China has chosen a calibrated approach towards the Sikkim issue. Beijing's latest move is in line with the indications given to this correspondent by informed sources in the Chinese establishment last June that a suitable revision of the relevant map would best address Beijing's sensitivities in recognising the ground reality of India's possession of Sikkim. China's perception, it was pointed out, was that India had in the 1970s "annexed" Sikkim, which indeed enjoyed historical links with Tibet until the British "imperialist design" ruptured them.

Quite apart from China's perception of the international law regarding Sikkim, Beijing's hesitation so far to issue a formal statement acknowledging India's sovereignty in this case is an anomaly, although neither country portrays this as a lacuna.

REUTERS

A file photograph of the border between India and China at the Nathu La in Sikkim.

In a sense, the anomaly can be traced to the basic asymmetry that exists in the Sino-Indian equation. To underline the evident asymmetry, or at least an impression of some inequality, is not meant, however, to downplay the incremental dynamism in the Sino-Indian engagement at this point.

For China, which wants to play a global role in the current context of the U.S.' efforts to dominate the international scene, India is still little more than a giant neighbour or a potential competitor in a wider domain. This should explain the asymmetry. However, the Chinese foreign policy mandarins continue to echo what was eloquently stated by Sha Zhukang in the late 1990s: Beijing "always considers itself an equal member of the international community" although "it goes without saying, of course, that China has its own national interests to protect". While India's recognition of China's plenary sovereignty over Tibet is certainly a matter of "national interests", Beijing has calculated that its interests would be served by gradually accepting the ground realities regarding Sikkim.

Speaking from Beijing, Zhou Gang, China's former Ambassador to India, said in a telephonic conversation on May 11 that the "process" of adopting "a more flexible attitude" towards the Sikkim issue, as indicated by the Chinese leadership last June, "is moving in the right direction". A long-time Chinese expert on India, Wang Hongwei, told Frontline that the Sikkim issue in the Sino-Indian context was "now basically solved" through a "step-by-step" process. His "personal view" was that it might "not [look] good" for China to make a formal declaration on India's sovereignty over Sikkim, in view of the perception that India's annexation of that territory in 1974 was "not valid" in international law.

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