China Confidential

A Hong Kong legislator has filed a complaint with the local privacy commission against Internet company Yahoo, alleging it helped Chinese officials convict a dissident journalist.

Hong Kong legislator and lawyer Albert Ho told reporters on Friday that he filed a formal complaint regarding the case of journalist Shi Tao. Shi was sentenced to 10 years in jail last year on charges of revealing state secrets.

Chinese officials cited an e-mail message Shi sent in 2004 that made public a government order barring Chinese media from marking the anniversary of the 1989 crackdown on pro-democracy activists in Beijing's Tiananmen Square.

Ho showed reporters a copy of the court verdict against Shi that he said confirms Yahoo's Hong Kong affiliate provided Chinese authorities personal information about the journalist.

Yahoo co-founder Jerry Yang said last year that his company was complying with Chinese law when it handed over information that led to the imprisonment of Shi.

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The United States and Japan need to cooperate more closely to safeguard intellectual property--against Chinese piracy.

That's the message, basically, from US Commerce Secretary Carlos Gutierrez (pictured here). On the heels of his visit to Beijing, he wrapped a week in Asia by telling American business executives Friday that they must work with Japanese businesses on the IP front.

Gutierrez a day earlier met Japan's trade minister, Toshihiro Nikai. The two agreed to what Nikai calls an "all out effort for the protection of intellectual property rights."

Speaking to the American Chamber of Commerce in Japan, the commerce secretary said one of his highest priorities is to safeguard patents and trademarks.

"We can't allow a world to be created where our intellectual property is not respected," he said. "So it affects both American and Japanese companies and workers probably more so than any other two countries in the world."

Under the accord, Tokyo and Washington will create a manual for companies to explain how they can seek remedies when their intellectual property rights are infringed.

Japanese officials told reporters the main target of the agreement is China, where piracy of trademarks and patents costs foreign businesses billions of dollar annually.

Gutierrez, who spent five days in China before arriving in Japan on Thursday, said he believes China is entering a phase of economic development that will prompt it to become more serious about cracking down on piracy.

"Interestingly in their five-year plan they're talking about becoming an innovation society," he noted, " which we think is very favorable because it forces them also to think about things like intellectual property, which we think is good for the world trading community."

US businesses complain they suffer major losses from piracy of music and films in China. For the Japanese, their major complaint is about Chinese theft of designs and trademarks, especially of appliances and motorcycles.

Last year, Washington and Tokyo began a process under the World Trade Organization to obtain more information about Beijing enforcement of intellectual property rights. But Japanese officials say China has yet to present any of the requested data.

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Some Chinese policymakers and diplomats are quietly counting on the Japanese governing coalition's junior member--the humanitarian oriented New Komeito party--to improve strained relations between Beijing and Tokyo.

The party's championing of bilateral ties dates to the instrumental role played by its predecessor, the Komeito (Clean Government) party, in the 1972 normalization of diplomatic relations between China and Japan.

New Komeito has repeatedly protested Japanese Prime Minister Junichiro Koizumi's annual visits to the controversial Yasukuni shrine for Japan's war dead. A symbol of state Shintoism, the shrine includes several condemned (Class-A) war criminals. New Komeito leaders have urged Koizumi to refrain from future shrine visits and are calling for the construction of a secular national war memorial.

Most recently, the party criticized Tokyo's decision to freeze the flow of yen-denominated loans to China because of worsening relations between the countries.

"What meaning is there in putting this off?" New Komeito leader Takenori Kanzaki (pictured here) was quoted by Japan's Kyodo news agency as saying. "Such action that could delay the improvement of Japan-China ties should not be taken."

A relatively small party not well known outside Japan, New Komeito is essentially an offshoot of Japan's largest Buddhist lay organization, Soka Gakkai, whose leader, Daisaku Ikeda, has long advocated improved relations with China.

Soka Gakkai follows the teachings and practices of the Nichiren Shoshu branch of Buddhism (though the vibrant lay movement has split from the more traditional temple-centered sect).

While it is formally independent of Soka Gakkai, New Komeito can draw on the Buddhist organization's dedicated membership base for support; and the party's distinct focus on international diplomacy reflects its religious roots.

In sharp contrast with other domestic Buddhist groups, Soka Gakkai's founding leaders vigorously opposed Japan's pre-war militarist government, warning it would lead the country to disaster. The group's founders were persecuted and jailed; and the organization reconstituted and rebuilt tself after the war into a major force in Japanese society.

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China's rise will be neither peaceful nor prosperous if fails to reform its outdated authoritarian system of government, according to a new study by the Australian Strategic Policy Institute.

"China's rise is generally to be welcomed," said the study's author, veteran China expert Ross Terrill. "It brings cultural enrichment and a market for Australian products....

"A united and strong China is more desirable for Australia, the United States and others than the sharp alternative--common historically--of a fragmented China.

"Not welcome on the other hand would be a rising China with territorial claims and a mandate of history based on self-entitlement, a China that grows strong while remaining authoritarian, threatening Taiwan, locking up democrats, making a vassal of Burma, squeezing religion in Tibet and blocking internet sites.

"Such a China could neither be stable nor a true friend to its neighbors."

Contrary to those who argue that China can keep its economics and politics separate, Terrill contends that an alarming array of social strains--including pressure for clearer property rights, rural discontent, use of the internet, huge unemployment and an aging population--are intensifying the contradictions of Communist Party rule over an increasingly free-market economy.

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A day for dire warnings.

Hours after United States Commerce Secretary Carlos Gutierrez warned China that it needed to do more to help counter a growing and potentially devastating protectionist trend in Washington, a top US Treasury official said Beijing should move faster toward adopting a market-based exchange rate because of US "isolationist" tendencies.

China has been "far too cautious" in its efforts to loosen the peg between the yuan and the dollar, Timothy Adams, undersecretary for international affairs, told members of the US Senate Finance Committee in a hearing on Wednesday. While Beijing has made some "important achievements" on the currency reform front, it "could easily move more rapidly towards greater flexibility" and "should do so now," Adams said in wide-ranging testimony on the unique US-China relationship.

Adams reiterated the Bush administration's opposition to proposed US legislation that would impose punitive tariffs on Chinese goods in retaliation for Beijing's alleged manipulation of the yuan--a practice allegedly aimed at keeping the currency artificially low in order to fuel the export engine driving China's economic expansion.

"There are several bills in Congress that would close our markets to Chinese goods if China does not move more on its exchange rate," Adams said. "We do not support those isolationist approaches. They would damage our economy and not achieve our shared goals."

While vowing to resist US (and European) pressures for currency reform, China did take small but perhaps significant steps last July to loosen the peg between the yuan and the dollar. The Chinese currency has since appreciated by around 3.2 percent against the dollar. But critics charge that the currency remains undervalued by as much as 40 percent--making Chinese goods more inexpensive than they should be and threatening further US job loss.

China has maintained the peg by buying hundreds of billions of dollars worth of US Treasury bills, corporate bonds, and mortgage-backed securities.

Though they tend to choose their words carefully, Bush administration officials are keenly aware of the incredibly complex ironies in the US-China relationship. In stark terms, the Cold War's surviving superpower is increasingly dependent on--and potentially threatened by--an ascending regional giant with global aspirations.

No wonder the undersecretary's testimony was wide-ranging.

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America's Secretary of Commerce, Carlos Gutierrez, ended a trip to China Wednesday with a warning to Beijing that protectionist sentiment is growing in the United States. Gutierrez urged China to do more to help stem the trend, which, he said, could have a "very significant impact" on a still-fragile Chinese economy.

Addressing a gathering of American business executives in Beijing, Gutierrez suggested that proposed US laws threatening China are signs the country is in danger of slipping into a protectionist era.

This, he later told reporters, could hurt both the US and China.

"We are China's number-one customer, and I recall that in my days in the business world, the thought of my number-one customer changing strategy or changing policies that would affect my sales was a major issue for us," Gutierrez said. "So any time your number-one customer goes through a change as dramatic as would be going from an open market to a protected market, that would have a very significant impact on the Chinese economy and Chinese society."

America's surging $202 billion trade deficit with China is fueling the rise in protectionist thought. The deficit is certain to be high on the agenda when when Chinese officials travel to the United States for regular trade discussions on April 11 and when President Hu Jintao visits there later that month.

Many American politicians, manufacturers and labor unions blame China's currency policy for a big part of the imbalance. They accuse the Chinese of manipulating their currency, the yuan, to keep it undervalued--and Chinese products artificially inexpensive--in a further threat to US jobs.

Chinese officials deny the importance of the currency issue, say a drastic revaluation of the yuan could hurt China's economic growth, and vow to resist outside pressures for hasty change.

With the aim of pressuring the Chinese into allowing the yuan to float, two US Senators who have been consistent critics of China--Lindsey Graham and Charles Schumer--have sponsored legislation that would slap 27.5 percent tariffs on all Chinese imports into the US. A vote on the legislation was supposed to take place this week, but after visiting China themselves last week, the Senators on Tuesday decided to postpone the vote until September.

Gutierrez said the Bush administration is generally opposed to legislation that calls for sanctions against China.

"What we don't want is to convey contradictions and different points of view," he said. "However, we believe that the way to address issues, to address any conflicts that we may have with any of our trading partners, is through negotiation, is through dialogue, is through engagement, and not through legislation."

The Commerce Secretary said he urged top Chinese officials to help fight the protectionist trend. He also praised Beijing's efforts to combat intellectual property piracy, but added that China still needs to do more in this area. Washington says the illegal copying of US products is another major factor in the trade imbalance.

Gutierrrez also asserted that China is not meeting its World Trade Organization commitments to open its market to US products.

"Our companies still don't have the access that they were promised under the terms of China's (2001) WTO entry," he said.

Gutierrez would not say if Washington would back the European Union if it complains to the World Trade Organization about Chinese policies on auto component imports.

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China has overtaken Japan as the world's largest holder of foreign exchange reserves.

A report in the state-owned China Business News Tuesday says the country has amassed nearly $854 billion in foreign currency assets.

Analysts say the reserves are growing quickly and might top $1 trillion by the end of this year.

The foreign currency flood comes from payments for China's surging exports. The country's trade surplus with the rest of the world was nearly $102 billion last year.

China's critics, including officials and lawmakers in the United States, accuse Beijing of keeping its currency, the yuan, artificially low to unfairly boost exports.

Two US senators, Lindsey Graham, a South Carolina Republican, and Charles Schumer, a New York Democrat, have sponsored a bill that would punish China for allegedly manipulating its exchange rate. But the Senators said Tuesday that they would postpone pushing their bill--which would slap a 27.5 percent tariff on all goods imported into the US from China--because they had detected encouraging signs of currency reform during their recent trip to China.

At a news conference, Schumer expressed guarded optimism about China's efforts.

"Let me be clear: we expect continued progress on this issue," he said. "For the first time ever, the Chinese five-year plan says the currency should float. For the first time, they have put mechanisms in place that allow the currency to float, and we believe the progress we have seen in the last two or three weeks will continue."

Schumer said the bill enjoys strong bipartisan support.

Graham warned Beijing that he would not hesitate to call for a vote if currency reform slows in China over the next six months.

"If the Chinese renege on the efforts to reform their currency, they do so at their own peril," he said. "They will face the wrath of the Senate."

Graham added that he hopes Chinese President Hu Jintao will announce additional currency reforms when he visits Washington next month.

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China's Internet cops are scanning the Web for signs of subversive activity--on the left.

From Marx to Mao, Communist keywords constitute potential red flags in the eyes of the hyper-sensitive e-police--thousands of trained analysts armed with the latest (American made) censor- and spy-ware. Unorthodox, repeated references to Lenin, say, or Lin Biao (Mao's Long March comrade-in-arms, who disappeared after a supposed coup attempt during the Cultural Revolution but nevertheless remains an inspiration to heretical overseas Maoists because of his theory of guerilla warfare) are as likely to attract attention as the taboo terms of democratic dissent and Tibet independence. But whereas the latter are automatic triggers for filtering and blocking by Beijing's Net guardians, irregular Internet use of the words of world communism invite snooping and monitoring.

Reason: Perhaps nothing frightens China's ruling Communist Party more, ironically, than the specter of serious leftwing opposition and rebellion. A regime that long ago abandoned its Marxist faith and for all practical purposes now bases its claim to legitimacy strictly on continued economic expansion and growth cannot entertain uncontrolled radical or activist tendencies in the name of The People. It's one thing to tolerate left-leaning party officials and intellectuals, as shown by unusually open debates over property law reform at the recently convened National People's Congress; another thing, entirely, to allow an underground movement to take root and flourish. A thing like that must be destroyed at the earliest signs of life.

China's leaders know that threats on the left, while still remote, are far from academic. The country's economic ascent has been meteoric, lifting some 300 million people out of poverty. But a widening gulf between rich and poor is creating conditions for rural and urban unrest. Left-behind farmers and city dwellers--a seething urban underclass growing in the belly of the boom--are increasingly restive and outspoken. People like this, China's rulers reason, could be tempted by the legacy and language of the left. Rising-up workers and farmers ... uniting and losing their proverbial chains ... unfurling red banners ... marching, storming ... advancing ... these nightmarish images, anchored in China's not-so-distant past, truly terrify the powers that be.

Which, along with more obvious and widely reported fears of democratic reform and freedom of the press, helps to explain why they deploy all those cops--more than 30,000 in all--to patrol and daily do battle in that most dangerous (for China) of all arenas--the commercially thriving but relentlessly troublesome and unruly Internet.

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Several cash-rich Chinese growth companies--the kind backed by blue chip venture capitalists--are pursuing mergers with cash-rich special purpose acquisition companies (SPACs) in the United States.

Similar to blind pools, SPACs are private equity investment vehicles that are run by senior management teams to acquire or capitalize as yet unidentified companies. Investors get the comfort of structured investment guidelines and a commitment to return their invested capital, minus a small management and expense fee, if an acquisition doesn't occur within a specified time period.

A typical SPAC sits atop $20 million in cash, though war-chests of up to $100 million have also been raised.

The additional SPAC cash is a tempting asset for China's new breed of young, elite entrepreneurs who have successfully started and built fast-growing companies in Internet, technology and other sectors. Unlike their struggling, old school counterparts--bloated outfits that are either entirely state owned or partially state owned--the lean and mean go-go companies can't qualify for loans from China's state-owned banks.

Some of the newer companies are already listed on foreign stock exchanges, where, for reasons unrelated to the actual running of their businesses, share prices have often been disappointing. So the prospect of a dual listing on a larger US exchange, such as NASDAQ, is attractive.

US investors are likely to be impressed by the quality of the Chinese management teams--executives educated at America's top business schools and accustomed to the style and ways of the country's most prestigious investment banking and venture capital companies. In contrast with the party hack-types involved in state-owned and second-tier outfits, the managers of the high-flying private companies naturally fit in with the global economy's emerging class of financial engineers and superstars.

"These are Chinese managers who would feel comfortable at Davos," said a SPAC investor, referring to the annual world economic forum in Switzerland.

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Lawmakers and officials are not the only people in the United States rooting for Chinese currency reform.

Wealthy, sophisticated investors seeking to hedge against a possibly declining dollar are eyeing late-stage venture capital deals in China in part because of the potential to profit handsomely from a free-floating yuan.

Leading Chinese entrepreneurs and major US investment banking firms are promoting the deals, which have attracted big-name investors--institutional level individuals--including prominent business personalities in the entertainment and media industries, among others. Minimum investment is usually around $10 million, though investments of $2 million or less are reportedly also permitted.

The deals are typically structured as phased investments--the banks can call on investors for additional funds as needed, subject to certain terms and conditions--over a period of six years or so. Investors who ignore the funding requests run the risk of death by dilution: their equity can essentially be wiped out in future financing rounds.

"The real risk is political," says a venture-savvy US investor, who, like many of his peers, believes the dollar is likely to fall by as much as 30 percent in coming years. "It's not just a question of currency reform, though the prospect of a free-floating yuan rising in value relative to the dollar is certainly a sweetener. There are other questions. Will China crack up from within or continue to expand and grow? Will free market reforms continue? Will the rule of law be strengthened and enforced? Could an international crisis--an attack on Taiwan, for instance---trigger a conflict with America that would interfere with capital repatriation? These are serious questions."

Serious indeed.

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The Vatican's foreign minister says "the time is ripe" to work out differences with China and establish diplomatic relations.

Archbishop Giovanni LaJolo (pictured here) made the comment Saturday in a lengthy interview shown on a Hong Kong cable television station (I-Cable). He said the Vatican is ready to move its embassy from Taiwan back to Beijing.

LaJolo said it is clear the spiritual needs of several million Roman Catholics in China are more urgent than those of the 300,000 Catholics in Taiwan. He said now is the time for open and trusting relations between the Holy See and the Communist government in Beijing.

The two sides have begun talks aimed at repairing their strained relations. Diplomatic ties were cut 55 years ago, shortly after the Communist Party came to power in China.

Beijing rejects the authority of the Vatican and allows Catholics to worship only in state-approved churches. But millions of other Chinese belong to underground Catholic congregations loyal to Rome.

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In the weeks leading up to Chinese President Hu Jintao's April visit to the United States, Beijing shows no signs of bending to US pressure on the politically potent currency reform issue.

Chinese Commerce Minister Bo Xilai said Washington should not "play up" trade and currency issues, according to a report posted Frday night on his ministry's Website.

Referring to a bill threatening sanctions on China for failing to loosen controls on the yuan, Bo said: "If high tariffs are rashly imposed on Chinese goods, that will inevitably lead to a severe set-back in China-US trade. It would also affect jobs created in distribution thanks to Chinese exports."

On Saturday, the two US Senators sponsoring the bill--which would punish Beijing with a whopping 27.5 percent tariff on all goods imported from China--asserted it was in China's best interests to move to a freely floating currency.

"The bottom line is China's economy has evolved to the extent that they need to consume more and save less," Senator Charles Schumer, Democrat from New York, told a news conference in Hong Kong, following a five-day trip to China in which he and South Carolina Republican Senator Lindsey Graham met with officials.

"Allowing the yuan to float would help China in terms of increasing consumption and reducing savings," Schumer said.

China has a high savings rate equivalent to 45 percent of gross domestic product. Beijing says it is trying to encourage domestic consumption to make economic growth more balanced and less dependent on exports.

US officials and lawmakers partly blame their country's surging trade deficit with China on an artificially undervalued--manipulated, to put it less diplomatically--Chinese currency. Accoding to rules in effect since last July, the yuan can only rise or fall by 0.3 percent daily.

The Senators' bill is presently scheduled for a vote on March 31. However, there is a possibility that Schumer and Graham will postpone pushing the bill and use the threat of reviving it to further pressure China to let the yuan float freely.

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Yes!!

America's greatest motorcycle maker is returning to China after an absence of more than 50 years.

Harley-Davidson will open its first dealership in China next month. The retail outlet, on Beijing's Fourth Ring Road, will employ 14 people. It will be managed by Wan Jidong, founder of local dealer Feng Hou Lun, with which the iconic company has teamed up to enter the Chinese market.

The plan is to sell several models of Harley-Davidson bikes, parts, accessories and collectible goods, while also sponsoring special events and training.

Wisconsin-based Harley-Davidson, which began selling motorcycles in 1904, said it expects market entry into China to be a "gradual process."

The leisure-oriented market for premium, heavyweight motorcycles is just beginning to emerge in China, with market development limited by ownership and riding restrictions in most large cities and on highways, and by limited but growing disposable income.

In July 2004, China's first Harley-Davidson club opened in Guangzhou, in Guangdong province. It attracted 15 members after Chinese authorities approved their application to form the club.

Last year, Harley-Davidson sold 266,500 motorcycles in the United States and 62,500 through its global operations.

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Like we said earlier this week, there is more to the worldwide problem of disappearing forests than disposable chopsticks.

China's globalization of the timber industry is devastating forests and forest communities around the world.

So says Forest Trends, an international nonprofit organization based in the United States. The group's newly released in-depth study says imports of illegally cut timber into China are a major factor contributing to the destruction of many of the world's forests.

It's a vicious cycle. China imports mountains of raw wood--illegally sourced from rain forests and other environmentally sensitive areas--to turn it into cheap furniture, plywood and other processed products, some 70 percent of which China then exports to the US, Japan, and Europe.

This booming trade, coupled with China 's own domestic growth and demand for paper products, spells doom for forests.

The Forest Trends study says exports of wood based products going from China to Europe and the US have gone up 900 percent in just eight years, as China has captured one-third of the global trade in furniture.

"Few consumers realize that the cheap prices they pay are directly linked to the exploitation of some of the poorest people on Earth and the destruction of their forests,” says Andy White, lead author of the report, which is entitled China and the Global Market for Forest Products: Transforming Trade to Benefit Forests and Livelihoods.

The findings are the result of five years of collaborative research by organizations in the US, Indonesia, and China itself (the Center for Chinese Agricultural Policy, which is part of the Chinese Academy of Agricultural Science).

The report also finds that China has a tremendous opportunity to boost its own timber production, reduce its reliance on raw materials imports and alleviate rural poverty by strengthening property rights and removing policy barriers that have prevented local communities and people from investing in forest production.

"It is clear that China is in the middle of a global commodity chain, feeding consumption by consumers in the US and EU who are demanding low-priced forest products," says Forest Trends president Michael Jenkins. "There are key roles for consumer countries to play in transforming this trade into one that benefits forests and people.”

The report highlights connections between China 's domestic growth, the global economy's demand for cheap wood products manufactured in China , the widening gap between rural and urban populations within China itself, and environmental destruction and poverty in forest areas around the world. It also presents a number of recommendations for the importing country governments and industry.

Specifically, the report encourages the government of China to strengthen tenure and policy reforms, allowing the rural poor to boost timber production, while simultaneously allowing forestry to contribute more to rural development and reduced rural conflicts. In particular, the report urges Beijing to strengthen efforts to improve productivity within its own forestry sector and reduce its reliance on imports, and engage with other governments to explore new options to achieve the twin goals of ecosystem protection and timber production.

“For a number of years the global forest community has expressed disdain with the Chinese government and industry for driving illegal logging and negative impacts on forests, and encouraged greater action on their part,” Jenkins says. “While, to date, the US government has had a limited and ambivalent approach to addressing illegal logging and trade, US producers are beginning to recognize that they are being undercut by illegally sourced and traded wood."

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More than 20 Chinese companies have established a chamber of commerce in Angola, one of the largest oil producers in sub-Saharan Africa.

Member firms include Sinosteel Corporation, China National Overseas Engineering Corp. and China Petroleum and Chemical Corp. (Sinopec).

China's increasing involvement in Angola--a country recovering from a ruinous 27-year civil war--is indicative of Beijing's aggressive push for African resources and markets.

China is the second-largest consumer of Angolan oil after the United States. Angolan crude accounts for just over 13 percent of China's crude imports.

Formation of the chamber of commerce follows Tuesday's news that Angola has chosen China Petroleum & Chemical as its partner in the development of a $3 billion refinery in the port town of Lobito.

The refinery, which at 240,000 barrels a day will be the country's biggest, will be 70 percent held by Angola's national oil company, Sonangol, with the rest owned by Sinopec, which outbid Total of France and PetroSA of South Africa.

Angola has favored Sinopec over Total before, forcing it to relinquish lead-operator rights to one of the country's large offshore oil concessions.

Construction of the Lobito plant will reportedly begin next year and will be carried out in two parts, with the first stage processing 120,000 barrels a day. The refinery will employ as many as 5,000 people in the first stage and as many as 8,000 people when finished. About 80 percent of its output will be exported to other African countries.

Angola already has a plant producing 65,000 barrels a day in Luanda, the capital.

Chinese companies have played a key role in Angola's oil-driven reconstruction boom.

In 2004, China's Eximbank approved a $2 billion oil-backed credit line to Angola to rebuild its infrastructure. As expected, many large contracts have gone to Chinese firms--for example, the contract to rebuild the Benguela Railway, which is valued at $300 to $500 million. Chinese companies are also refurbishing two other rail lines, several government buildings, and Luanda's new airport.

In addition to China's Sinopec and France's Total, the top foreign oil companies operating in Angola are US-based ChevronTexaco (which also recently lost concession rights) and ExxonMobil; UK Â’s BP; UK /Dutch Shell; and Italian Agip/Eni Oil.

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Japan announced today that it was putting a hold on new yen-denominated loans to China because of worsening relations between the countries.

Japan decided in March 2005 to extend about billion yen ($735 million) worth of loans, bringing its total loan aid to China to more than three trillion yen since 1979.

This is the first time the loans have been interrupted since the program began.

Chief Cabinet Secretary Shinzo Abe (pictured here) attributed the decision to the souring of relations between Tokyo and Beijing, telling reporters Japan needs time to consider its options.

A popular personality, known for his love of video games and manga comics--and candid comments to reporters--Abe said Japan won't give any more of the loans to China during the current fiscal year, which ends March 31. He said the government may release the loans again next month if the situation improves.

"We have decided to waive a plan to provide loans for fiscal 2005, considering the current situation surrounding the Japan-China relations," Abe said. "We will monitor future development in Japan-China relations while continuing discussion (on the loans) within the government."

Japanese Foreign Ministry spokesman Tomohiko Taniguchi tried to put the situation in more diplomatic terms. He said it is not a question of freezing the loan program; rather, the two sides failed to exchange required documents in time for the fiscal year that starts in nine days.

"There have been reports that the Japanese government has decided to freeze new yen loans to China," Taniguchi said. "That's not correct. What's correct is that we have been unable to make the exchange of notes about it."

Such exchanges normally take place near the end of one fiscal year, to arrange disbursements for the next. But the two countries have not held such a meeting since March 29 of last year.

China's reaction to Japan's announcement was quick--and cool.

Foreign Ministry spokesman Qin Gang told reporters in Beijing that his government was disappointed, and that the Japanese decision would not help to improve Sino-Japanese relations.

Qin said the loans from Japan have played a positive role in China's economic and social development, but have also benefited Japan. Therefore, the loans should not be seen as charity, Qin said.

Beijing says it needs new funds to keep its modernization on track, despite its huge trade surpluses. The official People's Daily newspaper wrote recently that China is still a developing country, and is in urgent need of capital for its many projects.

But many Japanese do see the loans as handouts--to a rising rival with a booming economy, modernizing military, and seemingly boundless needs and ambitions.

The leader of the junior partner in Japan's ruling coalition took a different view, however, expressing concern about the impact of the loan freeze on bilateral ties.

"What meaning is there in putting this off?" Takenori Kanzaki, leader of the New Komeito Party, was quoted by Kyodo news agency as saying. "Such action that could delay the improvement of Japan-China ties should not be taken."

A relatively small party not well known outside Japan, New Komeito is an offshoot of Japan's largest Buddhist lay organization, Soka Gakkai, whose leader, Daisaku Ikeda, has long advocated improved relations with China.

The Japanese Foreign Ministry spokesman sought to diminish the significance of the announcement by pointing out that Tokyo and Beijing had already agreed to end the program in the near future.

"By the time Beijing is going to host 2008 Olympic Games, the amount of new yen loans is supposed to become zero," Taniguchi said.

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Relations between the world's most populous nation and largest Christian denomination are apparently improving.

The Roman Catholic bishop of Hong Kong, Joseph Zen, seen here on the left, says the Vatican and China have begun talks aimed at repairing their strained relations, and that the church may offer concessions to Beijing on the issue of who has the right to appoint Catholic leaders in China.

The Vatican insists that only the Pope can select Catholic bishops; but Zen says the church may soften its position by agreeing to consider China's nominees for such positions. However, Zen, who is visiting Rome, told an interviewer for Hong Kong's cable television network Thursday that the church will not give Chinese authorities total control over such such appointments.

Diplomatic ties between the Vatican and the Beijing government were cut in 1951, two years after the Communist Party came to power in China.

Pope Benedict recently named Zen a cardinal, the clerical rank known as "prince of the church". He is in Rome to be formally elevated to his new position at the Vatican on Friday.

Zen has been an outspoken advocate of human rights and democracy.

The issue of bishops' appointments is one of the central disputes between the Vatican and Beijing, which recognizes a state-controlled group as the country's only Catholic church.

China rejects the authority of the Vatican--which represents about half of the world's more than two billion Christians. Beijing allows Catholics to worship only in state-approved churches, which claim four million followers. Millions of other Chinese, however, are known belong to unofficial Catholic congregations loyal to Rome.

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Efforts to bring United Nations Security Council pressure on Iran to curtail its nuclear ambitions have faltered in the face of stiff opposition from Russia and China--former rivals now increasingly aligned on international issues.

Britain and France are considering forcing a vote on the Iran issue.

Two weeks after the International Atomic Energy Agency (IAEA) referred Iran's controversial nuclear program to the Security Council, the council's five permanent, veto-wielding members are deadlocked on how to respond. The first preliminary step was to have been a statement listing Tehran's failures to comply with IAEA demands. The statement, drafted by Britain and France--with US support--urges Iran to suspend activities that could lead to nuclear weapons production.

But Russia and China object to large parts of the text. China's UN ambassador, Wang Guangya (seen above at a recent news briefing) told reporters Beijing and Moscow want a briefer document that concentrates on expressing support for the atomic energy agency.

"From the beginning, I proposed that if the Security Council is to support IAEA authority, it is to have a brief political statement," Wang said. "Support the IAEA, call on Iranians to cooperate, then put some pressure."

The full council was to have met Tuesday to consider adopting the statement by consensus. But the meeting was canceled when it became clear Russia and China would not budge.

Another meeting of the Council's so-called "Perm-Five" was held Wednesday to try to work out differences, but it too ended inconclusively.

The prospect of stalemate has prompted Western nations to consider replacing the statement with a resolution. While a statement requires support of all 15 Council members, a resolution could be adopted by a majority of nine.

That would force Russia and China to either approve or abstain--or kill--the measure by vetoing it.

British Ambassador to the UN Emyr Jones-Parry suggested that bringing the matter to a vote is a possibility. He said if there was no prospect of amending the text, efforts to do so would be abandoned.

French Ambassador to the UN Jean-Marc de La Sabliere told reporters he prefers a consensus statement, but would not rule out forcing a vote.

"I never ruled out that, but I am working hard for a consensus, but I never rule out another solution, but today we are working for a consensus, and I hope consensus is still possible," he said. "That's my assessment. It is still possible."

Senior US officials remain confident that agreement could be reached. Speaking to reporters during a visit to the Caribbean, Secretary of State Condoleezza Rice said: "Sometimes diplomacy takes a little bit of time but we are working very hard on it."

US President Bush said Wednesday it is important that Iran not be allowed to have a nuclear weapon. But he noted that diplomatic efforts are continuing.

"We're dealing with this issue diplomatically by having the Germans and the French and the British send a clear message to the Iranians, with our strong backing, that you will not have the capacity to make a weapon, to know how to make a weapon," Bush said.

A senior Iranian official Wednesday warned that US pressure on the Security Council to penalize his country for its nuclear policy would not succeed. News agencies quoted Iranian Foreign Minister Manouchehr Mottaki as saying what he called "the irrational American view" would not prevail in the council.

Iran has repeatedly denied it is trying to build nuclear weapons, saying its atomic program is for generating electricity.

But Western diplomats briefing reporters in recent days have said Iran is close to having 164 centrifuges. That would allow them to enrich uranium that could be used in weapons. One senior US official said if Tehran suddenly came into possession of several hundred pounds of highly enriched uranium, it could possibly produce a nuclear weapon within a year.

From chopsticks to cars--consumption taxes in China will increase as the government moves to protect its ravaged environment and reduce energy use.

China is one of the world's most environmentally unsound countries--and deforestation is a major problem.

Environmentalists warn that at the current rate of timber use, China will soon have no forests left.

Disposable chopsticks are a big part of the problem. Around 25 million trees are cut every year in China to produce some 45 billion disposable wooden chopsticks. Most are used in restaurants and canteens around the country. Approximately a third are exported to Japan, South Korea and other countries.

To discourage the use of throwaway chopsticks, the Chinese government announced on Wednesday it will impose a five percent tax on them, starting April first.

A small step in a thousand-mile journey? More or less, say Chinese environmentalists, for whom the cheap, ubiquitous utensils are a prime target. Activists contend that a tax increase will not deter people from using disposable chopsticks, and that more action is urgently needed.

"For example, maybe the government should take the leading role not to use the disposable chopsticks in the first hand, then the government will lead a very good model for the rest of the people and to the community," says Hahn Chu, who works with the Hong Kong branch of Friends of the Earth. "But now in China they only use the tax as a means or a tool to do it. It's not enough, just only a first and very small step."

Of course, there's more to the deforestation story than throwaway chopsticks. Production of commercial lumber is a major cause of deforestation in China. Another contributor is slash-and-burn agriculture, which destroys vast areas. More forests are mowed down to make way for railroads, highways, and high voltage lines; and forest fires take a huge annual toll.

As one observer puts it: "Anyone who travels in the west of China will soon encounter entire hillsides where the timber has been razed to the ground, or travel on roads where the trees on both sides have been felled for tens of kilometers."

Each year, an average of 2,460 kilometers km (950 square miles) of vegetated land in China deteriorates into desert and a additional million hectares of land suffers from serious land erosion.

The damage extends way beyond China's borders.

China will soon be the leader in the global wood market. Increasing demand for wood products is putting pressure on forests in other countries. Much of China's timber imports come from countries where logging is poorly regulated.

So much for wood. Faced with growing pollution and energy shortages at home, China said it also will increase taxes on cars with high fuel consumption to encourage the production and use of more efficient cars. The top tax rate for cars with the largest engine will surge to 20 percent from eight percent. Tariffs on cars that have an engine capacity of less than a 1.5 liters will be cut to three percent.

Rising incomes in China's cities have spurred the sale of cars in recent years, making the country the third-largest auto market in the world. About half of the cars used have larger, 1.6 to two-liter engines.

The government said it also will tax a number of luxury goods--a move China's leaders hope will help narrow the gap between the rich and the poor in the country.

Buyers of luxury watches will face a 20 percent tax, while yachts, golf balls and golf clubs will be taxed at a rate of 10 percent. When the consumption taxes were imposed years ago, almost no mainlander would have thought of buying a yacht or playing golf, but economic development in the past 20 years have produced millions of wealthy Chinese.

Interestingly, Beijing will no longer tax soaps and shampoos. Considered luxury items a decade ago, they are now viewed as daily necessities.

China hit back at the United States this week, rejecting a White House national security report that criticizes Beijing's military buildup and trade policies.

China's state media on Monday quoted Foreign Ministry spokesman Qin Gang (pictured here) as saying the report was an interference in China's internal affairs, and harmed relations between the two countries.

At a Tuesday briefing, Qin dismissed suggestions in the report that China might pose a challenge to US foreign policy.

"China is resolutely following a path to peaceful development," Qin said. "China has made its due contribution to push forward mutual development of peace and stability in the world."

The White House report, entitled National Security Strategy, was released last week. It says China needs to abandon "old ways of thinking," such as not revealing true military spending.

Official Chinese figures show a double-digit increase in military spending over the past several years. But foreign experts say real military spending could be up to three times as high as the publicly released figures.

In an unusual linkage, the White House report also expresses concern about China's trade strategy, saying Beijing is trying to control markets instead of opening them up. The report says Beijing is acting as if it could "lock up" energy supplies around the world. It criticizes China's dealings with governments regardless of how they treat their people or behave internationally.

The Chinese spokesman also rejected a report by a United Nations torture investigator calling for extensive changes to China's police and court systems, in order to reduce what it called the "widespread" use of torture.

The UN report urges China to release political prisoners and to eliminate vague offenses such as "subverting state power," which are often used to prosecute political and religious dissidents.

Qin said much of the UN report's content was based on facts that had not been verified. He also said it exceeded the scope of the UN investigator's authority.

No more surprises.

That's the message from Taiwan President Chen Shui-bian, who assured the United States Tuesday that he will not push for formal independence from mainland China during the rest of his term.

Meeting with the new US envoy to Taiwan, Stephen Young, Chen said there will be "no more surprises."

The Taiwanese leader was referring to his decision last month to scrap a dormant but politically significant government body dedicated to unification with mainland China. The US requested clarification on the issue. China, meanwhile, reacted angrily to Taiwan, warning that the decision could bring disaster to the island.

Chen told Young he will maintain the status quo with China, and that Taiwan's government will continue to serve as a responsible contributor to maintaining peace across the Taiwan Strait.

China and Taiwan split in 1949 after a civil war; but Beijing considers Taiwan a renegade province. China's official position is that it seeks peaceful reunification with the island--while maintaining a military option against it.

The Anti-Secession Law, which China adopted last year, authorizes use of force to prevent Taiwan from achieving statehood.

It's no empty threat, as Taiwan well knows. With nearly 800 missiles aimed at the island--and dozens added annually--China has the ability to pulverize Taiwan's cities and military bases with waves of bombardment.

The US, which is obliged to protect Taiwan, wants the island to do everything possible to avoid a military confrontation. Chen's pro-independence moves--including an emotional speech before a huge anti-China rally that his governing Democratic Progressive Party (DPP) held in Taipei last Saturday on the occasion of the first anniversary of the Anti-Secession Law--are viewed by Washington as dangerously provocative gestures.

In sharp contrast with Chen and the DPP, Tapiei mayor Ma Yng-jeou, who heads the opposition Koumintang party, and is favored to win Taiwan's 2008 presidential race, basically supports Beijing's sacrosanct "One China" principle, subject to certain terms and conditions.

Ma, who is visiiting the US this week, yesterday warned that escalating cross-Strait tensions could lead to a military confrontation with Beijing. He made his comments in a speech at the Council on Foreign Relations, America's most influential foreign policy advisory group and think-tank.

Though Washington clearly prefers Ma's tone and approach, his party has complicated matters for the Bush administration by opposing a proposed US arms sale to Taiwan, which administration officials say Taiwan needs to modernize its defenses. The $11 billion deal has been delayed since 2001.

Today's meeting between Russian President Vladimir Putin and his Chinese counterpart, Hu Jintao, failed to produce news about a key energy project--construction of a 2,500 oil pipeline from Siberia to the Pacific coast.

China, which has been eyeing Russia's vast oil and gas reserves as Chinese dependence on oil imports has ballooned in recent years, wants the pipeline to include a southern branch that would bring it 600,000 barrels of oil a day.

Another Russian oil customer--Japan--has also lobbied hard for a favorable routing.

So far, neither China nor Japan has been able to pin Moscow down.

But China, with whom Russia is developing close political and economic ties, appears to have the inside track.

Both countries announced plans Tuesday to step up energy supplies to China with a gas pipeline opening within five years; and a Russian minister said Moscow would finance a feasibility study for the oil pipeline that would lead to a timetable.

Putin told reporters the gas pipeline, also yet to be routed, will deliver up to 2.8 trillion cubic feet of gas annually.

The announcements followed Putin's meeting with Hu--their fifth meeting in less than a year. In a joint statement, the two leaders pledged to promote energy, telecom, transportation and other industrial ties.

China is Russia's top customer for oil--presently delivered by railway tank car--and weapons. Trade between the two countries reached more than $29 billion last year and is growing. Some experts predict it may double during the next four years.

China has been frustrated by Russia's refusal to open up its energy sector to Chinese investment. Chinese state-owned companies have been scouring the planet--from the Congo to Canada--in search of stable and secure supplies of oil and gas.

For decades, the two neighbors were bitter rivals, competing for leadership of the communist world. Nowadays, they assert a shared commitment to a "multipolar world"--a diplomatic way of saying they oppose attempts by the United States, acting on its own or through the United Nations, to dominate world politics and interfere in other nations' internal affairs.

On that score, Putin's two-day visit also is expected to focus on efforts by Moscow and Beijing to resolve the Iranian nuclear standoff. Talks among Russia, China, the United States, Britain, France and Germany failed to reach an agreement Monday on a UN Security Council statement on Iran's nuclear programs.

Whereas, the US and other countries fear Iran is trying to build nuclear weapons, in violation of the Non-Proliferation Treaty, China and Russia want the Security Council to proceed slowly.

China and Russia, says Czeslaw Tubilewicz, a China studies professor at the University of Hong Kong, want to prevent the UN from becoming "too deeply involved in a crisis that, in their view, does not require the international community's involvement."

Russia has tried to prevent Security Council action against Tehran by proposing a plan for Iran to enrich uranium on Russian soil where it can be more closely monitored. China supported the plan, which Iran has rejected.

On Tuesday, Putin also endorsed China's claim to Taiwan, the self-ruled island that Beijing regards as a renegade province and with which it seeks eventual reunification, by force if necessary.

Russian President Vladimir Putin (seen here on the left) arrived in Beijing Tuesday to begin a two-day state visit likely to focus on China's energy needs and bilateral investments.

Putin landed at Beijing International Airport, accompanied by a large delegation of senior officials and executives, including Energy Minister Viktor Khristenko; Resources Minister Yuri Trutnev; and Sergei Bogdanchikov and Alexei Miller, heads of the state oil firm Rosneft and gas giant Gazprom, respectively.

Putin was scheduled to meet with Chinese President Hu Jintao later in the day.

The two leaders were also scheduled to attend the opening event of a Year of Russia in China. In all, more than 200 events are planned. The Year of China in Russia is scheduled for 2007.

Trade between China and Russia was valued at about $30 billion last year. The two countries intend to increase trade value to between $60 billion and $80 billion by 2010.

In addition to energy and other industrial issues, Hu and Putin are expected to discuss disputes over the Iranian and North Korean nuclear programs.

As permanent members of the United Nations Security Council, Russia and China are playing key roles in diplomatic efforts to resolve the dispute over Tehran's nuclear ambitions.

The two countries also participate in six-nation disarmament talks on North Korea's nuclear program, along with the United States, the two Koreas and Japan.

Before he left Moscow, Putin said that he expected his two-day visit to Beijing to produce new agreements "that will help considerably to strengthen the Russian-Chinese strategic partnership."

Chinese officials were hopeful that the agreements would include a feasibility study for building a branch to China of Russia's planned trans-Siberian oil pipeline.

Taiwan's opposition leader Ma Ying-jeou (pictured on the left) warned Monday that cross-Strait tensions could spin dangerously out of control.

Ma, who is visiting the United States this week, called for multilateral talks with China to avoid confrontation.

"Without negotiations, I think the current state across the Taiwan Strait could move from stagnation to confrontation," he said.

The 55-year-old chairman of the Koumintang (KMT) and mayor of Taipei, who is favored to win Taiwan's 2008 presidential elections, issued the dire warning in a talk before America's most important and influential foreign policy think-tank, the New York-based Council on Foreign Relations.

Relations between Taiwan and China have been strained since February, when pro-independence President Chen Shui-bian scrapped the National Unification Council, a defunct but symbolically important body tasked with eventually reuniting China and Taiwan.

Ma called abolition of the council "unnecessary and unwise."

He said he would reopen talks and aim to sign a peace agreement with China if his party regained power in the next presidential election.

In comments to reporters after his speech, Ma called for immediate talks including Taiwan's ruling and opposition parties, as well as "governments".

Beijing refuses to deal with Chen, whose Democratic Progressive Party (DPP) stands for Taiwan statehood.

China, which has nearly 800 missiles aimed at Taiwan, and views the island as a renegade province, has threatened to attack if it pushes for formal statehood. Analysts say China can launch waves of missiles--reaching all Taiwanese cities and military bases--in an effort to overwhelm the island.

"Mainland China is not particularly noted for its rule of law," Ma told reporters following his speech. "They don't need a piece of law in order to invade Taiwan."

Ma made no mention of another irritant in the US-Taiwan relationship--a weapons package Washington wants to sell to Taipei, which the KMT opposes. The $11 billion deal has been delayed since 2001, largely because the opposition party says the weapons are too expensive and do not meet the island's defense needs.

US Secretary of State Condoleezza Rice, testifying in a Congressional hearing last month, lamented Taipei's apparent lack of cooperation with Washington in modernizing the island's military.

On Saturday, Taiwan President Chen took his policy of confronting China to the streets, when he told an estimated 100,000 anti-China demonstrators that only Taiwan's 23 million people would decide the island's sovereignty, not the people of the mainland.

The KMT, which once ruled all of China, fled to Taiwan after losing the Chinese civil war in 1949. The party established a brutal dictatorship and enjoyed uninterrupted rule of the island until 2000, when, following democratic reforms, it lost to Chen's DPP.

For decades, the KMT claimed sovereignty over all of China, including the mainland, Today, the party promotes its own interpretation of Beijing's "One China" principle, saying it would reunite with a democratic mainland. In reality, the GMT would probably settle for autonomy--a variation of the "One China, Two Systems" policy that was applied to the return of Chinese sovereignty over former British colony Hong Kong.

China's state owned Xunhua news agency reported today that representatives of the Anti-Defamation League (ADL), a Jewish organization based in the United States, visited Harbin City, in northeast China's Heilongjiang Province, on Sunday.

Xinhua said the delegation exchanged views with Chinese researchers on Jewish history and people, watched an exhibition on the history and culture of Jews in Harbin and visited a Jewish memorial park.

In the 1920s, Harbin was the largest Jewish community in the Far East, with a thriving economic and cultural life.

Numerous Jewish relics of those days, including assembly halls, schools, banks and memorial parks, have been preserved.

The ADL is the largest and most powerful of the so-called defense organizations that exert enormous influence over America's organized Jewish community. The others include the American Jewish Committee and the American Jewish Congress.

Like the other defense groups, ADL maintains a branch operation in Israel and vigorously supports the Jewish State. ADL's international activities are generally in tune with official Israeli policy and thinking.

China is Israel's largest trading partner in Asia--bilateral trade almost reached $3 billion last year--and an important supplier of arms and military technology for Beijing. Over 1,000 Chinese students are studying in Israel and many Chinese technical experts regularly visit Israel.

Abraham Foxman (pictured above), head of the ADL delegation, described China as a country that has historically welcomed and respected Jews.

Considered one of the most influential figures in organized Jewry, Foxman praised Harbin as a model of respect and understanding between nations and thanked the Chinese government for "great efforts" in protecting Jewish relics.

Jewish settlement in China dates to the 8th Century. The first Jews in China are believed to have arrived from Persia along the Silk Road. In 1163, the Emperor ordered the Jews to live in Kaifeng, where they built the first Chinese synagogue.

Westerners lost touch with Kaifeng Jews (some of whom can be seen in the antique photo on the left) in the mid-1700s. It was not until 1900 that an effort was made to re-establish contact. But by that time, the Kaifeng community had virtually disappeared. A letter from a member of the community, sent to a US Jewish charity, pleaded for help in religious matters--urging the Americans to send a rabbi or Hebrew teacher--noting that assimilation and intermarriage had taken its toll.

The Jewish community in Harbin began in the late 19th Century as a result of a Russian railway project that was centered there. The anti-Semitic Czarist government provided incentives to minorities, including Jews and Karaites, to settle in Harbin; and in the early art of the 20th century, Jews fleeing Russian pogroms joined them, raising the Jewish population of Harbin to approximately 8,000 by 1908. The Russian Revolution of 1917 practically doubled the size of the community.

In contrast with Kaifeng and Harbin, the development of Shanghai's Jewish community paralleled that of Hong Kong. Wealthy Jewish families from Baghdad, Bombay and Cairo established a communal structure in Shanghai in the 19th century. By 1903, there were three synagogues in the city, and the number of Jews totaled to 30,000. However, most of them fled when the Communists took over in 1959.

Today, Judaism is not an officially recognized religion in China. But last December, the staff of Israel's embassy and some 200 members of the Beijing Jewish community, comprised of Israeli and Jewish expats, were allowed to celebrate the holiday of Hanukkah with the first-ever lighting of a traditional menorah on top of the Great Wall of China.

The ceremony, which was presided over by a rabbi from the internationally active Chabad (Lubavitch Hassidic) movement, took place at Mutianyu, in Huairou County, 70 kilometers northeast of Beijing.

Asia's ascending economic giants--China and India--are seeking to strengthen commercial cooperation.

After a meeting in New Delhi last week, China's Commerce Minister Bo Xilai (seen here on the left) and his Indian counterpart Kamal Nath (pictured below) have set an ambitious new target--trebling bilateral trade to at least $50 billion by 2010.

The two countries say they will lower barriers to cross border investment, and develop uniform manufacturing standards to fuel further growth.

Nath says these measures will help the two fast-growing economies, which together account for more than one-third of the world's population.

"If China and India are going to be the largest consumers, are going to be the largest manufacturers, it is important for us to harmonize our standards," Nath says.

If the targets are met, China could overtake the United States as India's largest trading partner. China has already become India's second largest trading partner with two-way trade galloping from $2 billion in 2000 to more than $15 billion last year.

But although bilateral trade is booming, it is still restricted to a narrow range of goods. The bulk of Indian exports to China consist of primary commodities such as minerals and iron ore. China sends electronic goods, such as computer hardware, manufactured goods and silk fabric to India.

Analysts fear that India's exports of primary commodities to China may dry up as its own growing economy guzzles more of its raw materials.

As a result, businesses on both sides are exploring ways in which the Asian giants can capitalize on each other's economic strengths--namely, manufacturing and computer hardware in China, and services and software in India.

Madhu Bhalla, an expert in East Asian Studies at Delhi University, says the two countries need to look at new ways to cooperate if they want to sustain the growth in trade.

"They have to change the nature of the relationship from merely trading to joint ventures, joint investments overseas," Bhallah says. "I think in areas where we have the skills, where we have the knowledge base, where we have people with good management techniques which the Chinese lack, I think we can get together with the Chinese who have entrepreneurial skills which are beyond us, and of course the capital to invest, which is also beyond us. I think we can go across the world together. But with each other I am not sure how far we can sustain the present level of trading."

Signs of cooperation are not hard to spot. In the energy sector, for example, China and India are exploring joint bids for overseas oil and gas fields, which both countries want to feed their energy-hungry economies. The strategy paid off last December, when the oil companies of the two countries jointly won a bid to acquire Petro-Canada's stake in Syrian oil fields.

Protest, counter-protest--today, it was the Koumintang's turn to take to the streets.

More than 20,000 demonstrators waved flags and chanted slogans in Taipei Sunday to protest pro-independence moves by Taiwan President Chen Shui-bian.

China's opposition Kuomintang (KMT) organized the rally, a day after a much bigger rally in Taipei (see Saturday's story) to support Chen's ruling Democratic Progressive Party and protest China's military threats against the island.

KMT chairman Ma Ying-jeou told supporters there were many problems Taiwan needs to address, including corruption and the economy. He said if Taiwan gets its priorities wrong there will be a huge price to pay.

Ma, who is mayor of Taipei and considered a presidential favorite in Taiwan's 2008 elections, is scheduled to visit the United States this week.

In the last several months, Chen has escalated tensions across the Taiwan Strait by formally suspending a defunct but symbolically important commission responsible for reunification with China. He also scrapped reunification guidelines and proposed amending Taiwan's constitution to change the island's name from "Republic of China" to "Taiwan."

China's ruling Communist Party interprets these actions as moving dangerously close to a formal declaration of statehood by the breakaway island, which Beijing regards as a renegade province.

Yesterday's rally marked the first anniversary of China's Anti-Secession Law, which authorizes war if Taiwan formally declares independence.

With nearly 800 short-range ballistic missiles targeting Taiwan's cities and military bases, China has the weaponry to back up its words. Analysts say Beijing has the ability to launch multiple barrages of missiles without warning.

The US, which has pledged to protect Taiwan, is clearly unhappy with the cross-Strait situation. Washington has urged Chen to avoid provoking China.

Tensions across the Taiwan Strait are escalating.

Taiwan President Chen Shui-bian (pictured here) and Vice President Annette Lu joined a rally by the ruling Democratic Progressive Party (DPP) today after a march through downtown Taipei to protest China's military threats against the breakaway island.

The rally marked the first anniversary of China's passage of the Anti-Secession Law that authorizes war if Taiwan formally declares statehood, or--maybe more ominously--if efforts to reunite with the mainland ultimately fail.

"Taiwan is an independent sovereign state and Taiwan's future should be determined by its 23 million people,'' Chen said in an emotional speech. "The great Taiwanese people oppose annexation and invasion.''

China has nearly 800 short-range ballistic missiles targeting Taiwan and is believed to be adding as many as 45 missiles a year to its anti-Taiwan arsenal as part of a massive military buildup that has alarmed the United States, which, while urging Taiwan to avoid provoking Beijing, has pledged to protect the island.

Just eight years ago, Taiwan analysts say, China had no more than 150 missiles aimed at the island. They say the buildup means that Beijing now has the ability to fire barrages of missiles at Taiwan--reaching all its cities and military bases--with no warning.

In line with its sacrosanct "One China" principle, China's ruling Communist Party regards Taiwan as a renegade province.

China's leaders earlier this month criticized Chen for formally ending a defunct forum on unification with the mainland; and the annual meeting of the National People's Congress ended with veiled threats of force. Chinese Premier Wen Jiabao scolded Taiwan's government for "highly risky and dangerous'' actions, said his government was monitoring developmentss closely, and threatened to respond to any steps toward independence. China, Wen said, was "preparing for all eventualities."

The DPP said it organized today's rally, which was held in front of Taiwan's presidential office building, to raise awareness of the threats and mobilize public opinion. The DPP estimated a turnout of 100,000; but police put the number at 45,000.

Ridiculing China's recent offer of two pandas to Taiwan while aiming missiles at the island, some marchers dressed as giant pandas and waved toy rockets and red balloons symbolizing the dreaded weapons.

Taiwan's opposition Nationalist Party or Kuomintang (KMT), which last week held an anti-independence rally, strongly opposed today's event. The KMT urged Chen not to escalate tension with China, which is Taiwan's biggest trade partner and the recipient of an estimated $100 billion in investment from Taiwanese companies and individuals.

China and Taiwan have been ruled separately since a civil war ended in 1949, when the Communist Party came to power on the mainland. The KMT fled to Taiwan--along with two million refugees and a horde of treasure--and established a rightwing, authoritarian regime that ruled over the local inhabitants with an iron fist.

For decades, the KMT upheld its own interpretation of the One China principle by claiming sovereignty over the mainland and dreaming of reunification as a result of an eventual overthrow or collapse of the Communist government. In recent years, a modernized, pro-democratic KMT has repurposed and reinterpreted the principle to signify peaceful reunification coupled with mainland democratization and, though it officially denies this, probably also autonomy for Taiwan--essentially a more acceptable version of the "One China, Two Systems" policy that Beijing applied to Hong Kong and which the KMT criticizes as inappropriate for Taiwan.

Most Taiwanese seem to prefer keeping things the way they are--though fewer Chinese missiles would no doubt be a welcome change. Opinion polls consistently show 80 percent in support of the status quo.

Dual-use technology.

This rather esoteric term, referring to items--from rockets to railroads--which can be used for both peaceful and military purposes, is about to make news. In fact, dual-use technology--more precisely, the controls the United States places on the export of this kind of technology--is certain to be on the agenda when US President Bush meets with Chinese President Hu Jintao in Washington next month.

As in the case of the politically potent currency manipulation/trade issue (China's alleged manipulation of the yuan to keep it artificially low relative to the dollar in order to boost exports), the pressure to raise the dual-use issue is coming from the US Congress.

So it goes in a democracy.

Members of the US-China Economic and Security Review Commission are turning up the heat on the dual-use issue. Established six years ago to monitor and investigate the national security implications of the US-China trade and economic relationship, the bipartisan panel--chosen by Republican and Democratic leaders of the Senate and House of Representatives--is concerned that the Bush administration, in its desire to boost trade with the world's most populous nation, could be turning a blind eye to security concerns when it approves exports to China of dual-use technology.

In hearings on Friday that examined China's military modernization, former Senator Fred Thompson, a Tennessee Republican and commission member, whose photo appears above, took aim at the Export Administration Act, which establishes dual-use export guidelines.

"The last iteration I saw of it still gives more and more power to commerce at a time when national security aspects of things and defense aspects of things, I think, are becoming more and more important," Thompson said.

Commission members said the issue is particularly important given China's rapid military build-up and heightened tensions in the Taiwan Strait.

But Beth McCormick, acting deputy undersecretary of defense for technology security policy, defended administration policy, saying national security considerations are weighed heavily.

She said her agency has received about 1,000 dual-use export license applications from China annually for the past four years, and of those about 70 percent have been approved. The remainder were denied or returned without action.

McCormick said most of the applications have been for chemical manufacturing equipment, toxic gas monitoring systems, equipment used in handling biological materials and technology and electronic and semiconductor equipment.

She said her agency has approved only a few of the more sensitive munitions export license applications for China in the last two years.

"The approvals include an explosive ordnance disposal containment vessel for Chinese security training in preparation for the Beijing Summer Olympics, an inertial reference system for use in railway track curvature measurements, and several commercial satellite licenses," McCormick said.

Commission chairman Larry Wortzel questioned why the administration approved technology to support China's railway, which he says will play a key role in the country's military modernization.

"As China moves to mobile, strategic intercontinental ballistic missile systems that can put warheads [aimed] on the United States, it is going to transport a lot of that stuff by rail," Wortzel said. "As China increases that military buildup against Taiwan and threatens Taiwan with shorter-range missiles by the second artillery, the principle way that the second artillery moves those missiles from plants to storage and moves its conventional and nuclear warheads is by rail."

Another US official said his agency is working to tighten controls on dual-use technology exports to China. Darryl Jackson, assistant secretary of commerce for export enforcement in the Bureau of Industry and Security (BIS), said: "BIS is currently working with its interagency partners on a new regulation that would require a license to export otherwise uncontrolled items to China when the exporter knows at the time that the export will be destined for military use in China. The regulation will be designed to control exports that can make a significant contribution to China's military modernization in a way that will minimize the compliance burden on US industry."

Jackson said his bureau has investigated a number of export control violations involving dual-use items to China. He said the probes led to 14 criminal convictions last year.

Jackson said agency personnel visit China regularly to determine whether licensed items are actually being used as authorized, a process known as post-shipment verification.

But panel member Thompson sounded skeptical.

"The post-shipment verification process is pretty much of a sham," he said. "We really do not have any effective way of knowing what happens to these goods once they get there."

Thompson suggested that Washington ban munitions exports to China until the verification process is improved.

As it hardens its line against China (scroll down for stories), the United States is clearly concerned about Beijing's increasingly close relationship with Moscow.

After decades of bitter rivalry--dating to Stalin's siding with the Nationalist Koumintang and historic betrayal of the 1927 Chinese Communist uprising--China and Russia have developed what they call a strategic partnership. The two powers, who once competed for leadership of the Communist world, have pledged their adherence to a "multipolar world," a euphemism for opposition to US domination.

The Irony is stunning: more than 30 years after the Nixon administration's historic China opening further divided Moscow and Beijing, the Bush administration is driving them closer together.

Diplomatically, China and Russia appear to be working in concert to resolve the dispute over Iran's nuclear programs; and Iran is expected to be high on the agenda when Russian President Vladimir Putin (pictured above) visits China next week.

Both nations have veto power on the United Nations Security Council, which is mulling possible sanctions against Iran.

The US and other Western nations want Tehran to suspend all nuclear activities, accusing the Islamist regime of trying to build nuclear weapons. Russia has posed a compromise solution, offering to enrich uranium for Iran to be used in nuclear energy reactors. But that proposal has yet to be accepted.

The Chinese-Russian relationship has a crucial military dimension, too. Since the 1991 Soviet collapse, China has purchased billions of dollars worth of Russian fighters, missiles, submarines and destroyers, becoming the main customer for Moscow's struggling defense industries.

US defense officials believe China acquires much of its high-end military equipment from Russia, while shopping for dual-use military technology in other European countries. And the US was disappointed that it was not allowed to observe last year's joint Chinese-Russian military exercises.

On the economic front, Russia and China aim to more than double bilateral trade--which last year reached nearly $30 billion--by 2010. Up by more than a third from the previous year, much of the trade increase is due to soaring world oil prices. Russia plans to ship 15 million tons of crude oil to China through railways in 2006 and is studying the possibility of exporting natural gas.

Beijing today brushed off calls from the United States and Australia for China to behave more responsibly in world affairs.

At a regular news briefing, Foreign Ministry spokesman Qin Gang rejected the criticism. Qin, pictured here, said China is a responsible country that is devoted to world peace and promoting mutual development among all nations.

But Washington and Canberra are apparently not so sure. In Australia Thursday, US Secretary of State Condoleezza Rice and Australian Foreign Minister Alexander Downer expressed concern that China as an emerging power needed to understand its responsibilities. They urged Beijing to be more open in its economy and its dealings with other countries.

Rice also said that Beijing is not being transparent about its military spending and purpose, essentially repeating a criticism made in the past by US Secretary of Defense Donald Rumsfeld.

The White House weighed in with additional criticism. It issued a policy statement on Thursday that said China could not maintain a peaceful path to development if political reforms do not come soon. The document, titled "National Security Strategy," also criticizes China for trying to "lock up" energy supplies around the world and trying to control its markets instead of opening them up.

The linkage--joining China's economic expansion and energy quest with its authoritarian political system--is somewhat unusual and appears to reflect growing frustration and concern on the part of the Bush administration over the real intentions and ambitions of an emerging superpower rival.

As one analyst put it: "For all the past US rhetoric about competition and cooperation, there is a growing realization among many in Washington, including administration officials and lawmakers from both parties, that China's rise may not be in the US national interest."

China's military buildup--and Washington's willingness to address the issue publicly--reinforces a view held by many analysts in Asia of increasing rivalry between two imperial powers, each in its own way seeking to change the status quo: China, which is striving for regional dominance with respect to Japan--and at least global parity with respect to the US--and the US, which, while seeking to preserve the status quo in some areas, openly admits to seeking the political and economic transformation of whole regions of the world.

"It's classic," said a Hong Kong-based analyst. " Classic competition between established and ascending powers. One can only hope the competition does not turn into a clash."

The military issue is a major source of concern. China this year again increased its military spending by double digits, but few serious observes believe the official figures. Some experts say China's real military spending could be three times higher than published figures.

Foreign Ministry spokesman Qin dismisses the assertions. During his briefing, he rejected accusations the government is hiding military spending and said China regularly publishes white papers on defense.

Qin said China's military spending is completely transparent, and that his government hopes all countries look at the issue objectively.

China says the increased spending is needed to modernize its large military and to improve the lives of soldiers.

As the analyst said ... one can only hope.

Three United States Senators will travel to Beijing next week to urge Chinese officials to revalue their country's currency. The trip comes ahead of a Senate vote on legislation that would impose high tariffs on Chinese goods if Beijing does not take action.

Senator Charles Schumer (pictured above), a New York Democrat, will join Senator Lindsey Graham, a South Carolina Republican, and Senator Tom Coburn, an Oklahoma Republican, on the week-long trip beginning Sunday.

Schumer said he and his fellow senators will express their concerns to Chinese officials that the value of China's currency, the yuan, is being held artificially low to give Chinese products an unfair advantage in US markets.

Said Schumer: "When they keep their currency artificially low, Chinese exports get an unfair advantage, American exporters get an unfair disadvantage. The playing field is not level. That must change. We plan to take that message face to face to the highest levels of government and business in China."

Graham echoed Schumer's comments.

"The Chinese government needs to understand that from all corners of this country, the frustration with our trading practices is at a boiling point," he said. "The only way to relieve the pressure is to have an honest discussion and real dialogue about relieving the pressure. The burden in my opinion falls on the Chinese more than it does us."

Graham and Schumer will also travel to Shanghai for meetings with Chinese business leaders and to Hong Kong to discuss port security issues with officials there.

The trip comes ahead of a March 31 deadline for a Senate vote on legislation sponsored by Schumer and Graham that would impose high tariffs on imported Chinese products unless Beijing agrees to allow its currency to rise in value.

The measure is one of several that reflect concern over what many lawmakers call China's unfair trade practices. One bill calls for revoking normal trade relations with China.

Support for the measures will rise if the US Treasury Department's semi-annual assessment of the currency issue accuses China of currency manipulation. The report is due in April.

Also in April, US and Chinese officials are scheduled to meet to try to resolve a number of trade disputes, including one relating to China's piracy of US intellectual property. That meeting is scheduled just days before a summit between President Bush and Chinese President Hu Jintao at the White House.

Chinese officials have been striking a tough tone on the currency reform issue. Zhou Xiaochuan, governor of the People's Bank of China, told reporters on the sidelines of the annual National People's Congress meeting in Beijing that China will determine the reform path of the yuan according to its own needs and not bow to foreign pressure. China's growing trade surplus with the US will not influence China's monetary policies and decision making, he stressed.

Taiwan reacted today to what was widely seen by many on the island as a veiled threat of military action by China.

Lin Chia-lung, the head of Taiwan's governing Democratic Progressive Party, said that he is dismayed by Chinese Premier Wen Jiabao's comment that China was "prepared for all eventualities" to prevent Taiwan from moving toward independence.

At the close of China's National People's Congress on Tuesday, Wen blasted Taiwan President Chen Shui-bian, calling his proposed constitutional changes and the scrapping of policy guidelines on eventual unification a provocation.

But the Chinese premier also offered an olive branch of sorts, saying Beijing is ready to hold talks with any party in Taiwan, including the DPP, on the condition that it gives up pursuing independence for the island.

Lin said Wednesday that while his party welcomes the willingness to talk, Beijing has to make such a proposal without any conditions.

"It seems like just empty rhetoric because China uses talk as a tactic to divide and rule Taiwan society," he said.

The DPP has advocated independence for the island, angering China, which considers Taiwan part of its territory.

The Kuomintang, or KMT, leads the opposition, and is against independence. The party favors improving the relationship with the mainland.

KMT Chairman Ma Ying Jeou, who is also mayor of Taipei, said his party is willing to talk with China.

Ma said both the DPP government and the leadership in Beijing must share the blame for the tensions across the Taiwan Strait over the past few years.

"We are watching all these developments with dismay and worry," he said. "We call upon both sides to cease doing that. They should really stick to the status quo."

Taiwan has been governed separately since KMT forces fled mainland China as the Communists took over in 1949, following a protracted civil war. The Beijing leadership vows to halt any attempts by Taiwan to declare formal independence, by force if necessary.

The United States has promised to help Taiwan defend itself against attack by mainland China. But the US urges both sides to avoid any unilateral action that would change the status quo.

Since his re-election in 2004, Taiwan's President Chen has seen his approval rating dwindle because of an economic downturn and a perception that he has not kept promises on a variety of issues, including easing tensions with China.

China is looking at heavy oil, including heavy crude and tar sands, to satisfy its growing demand for safe and secure energy supplies.

There are large, untapped heavy oil deposits all over the world; but two areas under close consideration by Beijing are in the Western hemisphere, in Canada and Venezuela.

In Canada, Alberta's oil sands are a major prize: an estimated 175 billion barrels of oil in proven and recoverable reserves under current oil prices. The output of oil squeezed from the sands is expected to nearly triple to 2.7 million barrels a day over the next decade.

Shipping the oil to China makes commercial sense to Canada in trade terms and as a means of attracting significant investment in related infrastructure. For instance, Chinese companies are considering some $3 billion in Canadian pipeline projects to facilitate tar sands oil exports to China.

In Venezuela, which, for all the anti-Americanism of its government, still sells 60% of its oil output to the United States, China is eyeing the vast Orinoco River belt. China's largest oil company, state-owned CNPC, has been granted licenses to explore the region, which sits atop awesome deposits of untapped heavy crude. China is also building a plant in Venezuela, which will be used to process Orimulsion, a heavy tar-like fuel used in Chinese factories.

China's involvement in Western hemisphere heavy oil could be embarrassing for the US in view of its reliance on vulnerable Middle Eastern oil supplies and the fact that heavy oil recovery has been economically feasible for decades, depending on the price of conventional crude and the depth and grade of a given heavy oil deposit. Ironically, many heavy crude production and upgrading technologies were developed in the US, where environmental rather than economic factors have been the main impediments to large-scale production and exploration of the resource.

Hong Kong's opposition Democratic Party--which, since its founding in 1990, has supported both the return of Chinese sovereignty over Hong Kong and the preservation of its democratic character--today turned to the United Nations for help.

The party asked the world body's Human Rights Committee to intervene in the debate over whether China's largely ceremonial national legislature should be allowed to interpret the territory's mini-constitution, known as the Basic Law.

In a report submitted to the UN, the party voiced concerns about autonomy in the special administrative region of China.

The report's author, party vice-chairman Albert Ho, said the group was "concerned that the repeated interpretation of the Basic Law issued by the Standing Committee of the National People's Congress would damage the independence of the judiciary and undermine the principle of "one country, two systems" and the high degree of autonomy promised to Hong Kong."

The promise of autonomy was made when the former British colony was returned to China in 1997. Hong Kong has its own courts, police force and political system and retains civil liberties not found elsewhere in China.

But the Standing Committee of China's National People's Congress, which wrapped up its annual meeting in Beijing on Tuesday, has made three rulings on how Hong Kong's constitution should be applied since the handover, the last time in 2005 at the request of the Hong Kong government.

Ho said the Hong Kong Democratic Party wants the UN Human Rights Committee to denounce the city's government for requesting the ruling and ask it to abstain from further attempts at interpreting the Basic Law.

The Democrats, according to Ho, are also concerned that interpretations of the constitution have delayed the implementation of universal suffrage in Hong Kong. The Basic Law guarantees eventual full democracy for the territory without stating a deadline or timetable. Ho's group wants the UN to urge Hong Kong's government to request a concrete timetable and road map from Beijing, in the hope it can be achieved by 2012.

Since the handover, a committee of 800 mostly appointed members has selected Hong Kong's leader from a list of candidates pre-approved by Beijing. Only a third of the legislature is directly elected.

The Democratic Party submitted the report one week ahead of a UN hearing about Hong Kong's political and civil rights. The hearing, which will be held in New York next week, will be the first such event since 1999.

China's largely ceremonial National People's Congress (NPC) wrapped up its annual 10-day session Tuesday as expected--with Premier Wen Jiabao (pictured on the left) issuing new warnings to Taiwan and unveiling a reform plan to ease unrest in the countryside.

Rural reform was high on the NPC agenda. Vowing to create a "new socialist countryside," Beijing has admitted to at least 87,000 outbreaks of unrest in the past year. Many experts beleive the true figure is much higher.

Chinese Premier Wen Jiabao told reporters at the end of the session his government will take unspecified measures to combat land seizures by developers, which have triggered many of the uprisings.

Wen said the government must enforce the "strictest land protection system." But he stopped short of promising farmers ownership of the land, which they have not had since the 1950s. The present system--in which farmland is held by village cooperatives and controlled by local officials--lends itself to corrupt wheeling and dealing at the expense of those who actually work and live off the land.

The government also shelved a proposed law to protect private property rights, a move apparently prompted by growing calls for closer adherence to socialist ideals.

Widening wealth gaps between China's rural and urban areas--and between a growing urban underclass and city dwellers who have made it into the middle and upper classes--is raising the specter of social instability. Party officials and intellectuals on the left are increasingly speculating about the plight of the masses--the always left-behind--who have yet to benefit from China's economic boom.

Turning to another issue, the Chinese premier also had new warnings for rival, break-away Taiwan, saying Beijing is "prepared for all eventualities" if the island persists in pushing toward a formal declaration of independence.

China's ruling Communist Party leadership last year adopted a law authorizing the use of military force against Taiwan if it opts for formal independnece. China has hundreds of missiles pointed at Taiwan; and Beijing's critics say the People's Liberation Army is upgrading its offensive capabilities in order to be able to quickly conquer and subdue the island.

Premier Wen on Tuesday sought to ease concerns over China's military buildup. He said China's military is for self-defense only and that any increase in defense spending is meant solely for improving China's military capabilities. He went on to say China does not intend to interfere with any other nation, even when it becomes a strong country.

The Chinese government this month announced it will boost military spending by more than 14 percent, but military experts outside of China estimate the final figure is likely to be much higher.

The leadership of China's ruling Communist Party is using supersized and normally dull official gatherings to both debate and promote the party line on potentially explosive issues.

The country's top advisory body ended its annual session Monday after adopting a resolution to strongly oppose Taiwan independence efforts.

As reported by the Xinhua news agency, the resolution notes that Taiwan's leaders have accelerated what it termed "dangerous" steps toward independence. The agency urged all Chinese to resolutely oppose and check independence forces and activities.

Taiwan President Chen Shui-bian recently raised cross-strait tensions by formally scrapping a defunct group dedicated to Taiwan's eventual unification with mainland China.

Today's resolution in Beijing wrapped up the National Committee of the Chinese People's Political Consultative Conference that opened in the capital on March 3.

Xinhua said the purpose of the body is to conduct political consultation and debate issues of state. This year's session was attended by more than 2,000 so-called advisors from across the country.

Also in Beijing, China's National People's Congress (NPC) is preparing to wrap up its annual two-week session on Tuesday without passing a long-expected law on private property rights. This is happening because of an unusually public dispute between members of the Chinese Communist Party who want stronger adhesion to socialism and those who want to stay the course of market reforms.

NPC meetings rarely feature any real debate, since the figurehead body usually does no more than ratify what has already been decided by the upper echelons of the Communist party. But this year, as China Confidential reported yesterday, the NPC
has opened a rare window onto elite thinking about pressing problems, concerns--and fears.

Factional differences apparently forced the government to delay a draft law to protect private property rights. The opposition was seemingly spearheaded by a small group of left-leaning hardliners, who have effectively cited the widening gap between rich and poor--blamed for triggering thousands of peasant uprisings--as a reason to stick with socialist ideals.

For China's leadership, the dispute highlights a growing dilemma over whether it should continue to espouse a communist ideology that has galvanized the poor in the past by promising social welfare for all, but that is incompatible with the country's modern free market system.

According to David Kelly, a senior research fellow at the East Asian Institute of the National University of Singapore, the party leadership is trying to appease angry peasants with socialist style reassurances that China's wealth still belongs to the masses, while at the same time propelling the economic growth that is crucial to keeping it in power. In other words, Beijing wants to be seen as socialist in the eyes of the countryside and capitalist in the eyes of the better-off urban classes and of course the West.

"They wish to maintain socialism in name but maintain market reforms in reality," Kelly said. "These market reforms are not necessarily creating an economy that resembles a western modern developed economy. The great worry is that it will develop into what is called 'Latin Americanization.' The Latin-Americanization of China implies that an elite of powerful wealthy private individuals will emerge from the government using their government privileges and connections and will take over a very large slice of the pie."

In Kelly's view, appeasing the poor while protecting the interests of the new wealthy elite is the main challenge facing China's Communist Party leaders.

"The party now consists of people who know how this looks from the countryside, and who know how dangerous it can be if it goes to an extreme, and who wish to redress the balance," Kelly said. "But it's a question of how far they can go. It's very hard to redress the balance. It's very hard to touch those interests who have already gained from the market reforms. Those interests have become--to put it in loose terms--elite mafias which have spread throughout the country."

Officials have unveiled a series of measures to fund development projects in the countryside. But many analysts agree that the measures are unlikely to work in the absence of wider reforms that address social ills.

Let a thousand companies bloom.

The international accounting firm Grant Thornton reports that China--including the mainland, Hong Kong and Taiwan--has more fast-growing mid-size companies than any country in the world.

The firm's annual survey shows that for the second consecutive year, Hong Kong ranks first in both East Asia and the world in having "above average growing mid-size companies." More than 82 percent of Hong Kong mid-size businesses recorded growth at above the global average. Mainland China ranks second; and Taiwan, fourth.

Interestingly, while more Hong Kong and mainland mid-size companies are recording above average growth, their counterparts in developed economies, including most of the Group of Eight economies (the US, UK, Japan, etc.) and Australia and New Zealand, are seeing fewer mid-size companies with above average growth.

So much for mid-size companies.

A large Hong Kong company that is not doing so well, to put matters mildly, is Cathay Pacific. Asia's second largest airline said its profit fell 25 percent to $425 million last year.

The drop was mainly caused by higher fuel prices, which prevented the airline from turning a strong growth in passenger numbers into a bigger profit.

Higher fuel costs have affected the profitability of the whole aviation sector. Peter Williamson, an airlines analyst at Macquarie Securities in Hong Kong, believes earnings of Asian airlines will continue to be low.

"They are putting through fuel surcharge to claw back some of the impact of the higher fuel price, but it's not enough to counterbalance the notional increase of fuel, so they'll all be suffering at the hands of fuel, primarily, this year," Williamson said.

In other business news, the former chief executive of the Singapore office of China Aviation Oil has said he will plead guilty to some of the charges related to the jet-fuel supplier's near collapse two years ago. The charges against Chen Juilin include fraud, insider trading, and failing to disclose the company's losses.

The fuel trader sought court protection from creditors in 2004 after revealing speculative trading losses of $550 million that had been concealed from investors.

China Aviation Oil's fall was the biggest financial scandal in Singapore since 1995, when Nick Leeson's trading losses caused the collapse of Britain's Barings Bank.

Still more news: China Confidential has learned that the US has begun free-trade negotiations with its 10th largest trading partner, Malaysia.

Washington is increasingly trying to tear down trade barriers for US products in Asia.

The US already has a free-trade pact with Singapore and is negotiating similar agreements with Thailand and South Korea.

The road to free-trade talks with Malaysia opened up after the country lifted its ban on US beef imports last week. The ban had been in place since 2003 after a cow in the US was found to have mad cow disease.

China's National People's Congress (NPC) showed last week that it is more than a rubber stamp legislature. It's a window into the thinking, concerns--and fears--of the ruling Communist Party leadership.

All the issues of historic importance to the party were on display during the first week of the parliament-like body's annual two-week session in Beijing: China's relationship with the West (economically, especially); the national yearning for wealth, power, prestige and social fairness; and the true value and meaning of an ideology that many Western observers had wrongly assumed to be dead.

The ideology is very much alive, of course, as The New York Times
reported Sunday in a fascinating, front-page lead story.

"For the first time in perhaps a decade," Times correspondent Joseph Kahn wrote, the NPC "is consumed with an ideological debate over socialism and capitalism...."

On the surface, the debate is about property rights and reform. On a deeper level, the ideological differences are rooted in fear--that the overwhelming majority of left-behind Chinese--namely, the always disadvantaged rural poor and urban underclass--will rise up in revolt.

It can happen. Contrary to the view of a peacefully rising and inevitably democratizing China, promoted by legions of Western media moguls and investment bankers, among other fawning types, the men in charge of the world's most populous nation believe that their survival simply depends on their continued capacity to lift the Chinese masses out of poverty. And democracy is not in the picture.

In fact, it's a non-issue. Old left, new left, center and right--for all factions that matter, except for a relatively tiny handful of far-sighted officials and intellectuals--democracy--at least, as the term is understood in the West--is irrelevant. The question of China's future is being debated by people who share an authoritarian ideal in one form or another.

The same holds true for a powerful faction that few in the West--except for folks at the Pentagon, perhaps--pay any attention to whatsoever: the men in uniform. Nationalistic to the core, China's lords of war are singularly focused on getting the weapons and resources they need to counter perceived threats from the United States and its ally Japan and to conquer and subdue Taiwan if the break-away island foolishly insists on formally declaring independence.

The military, too, are frightened by the specter of rural revolt. It's the legacy of China's Communist revolution, after all. Like Leninism itself, the role of the peasants is central to any appreciation and understanding of the Chinese Communist Party and the country it has molded and led for over a half-century. Put differently, it is one thing to mow down out-of-control students and intellectuals in Beijing, many of whom are anyhow seen by army types as belonging to a historically privileged bureaucratic class, and something else entirely to crush a widespread rural rebellion.

This is the specter--the ghost of Mao and the awesome power that he unleashed, one could say-- that haunts the Great Hall of the People (where the NPC convenes each year) and secretly terrifies all of China.

Chinese President Hu Jintao's trip to Washington next month could be overshadowed by an issue that is heating up on an almost daily basis.

More than human rights, Taiwan, or military modernization and expansion, the issue that is immediately most potentially damaging to China's complicated relationship with the United States is ... currency reform.

It may not be sexy--economic news doesn't naturally lend itself to tabloid or television coverage--but China's insistence on keeping its currency low versus the dollar is poised for prime time. Instead of trading freely, China keeps the yuan's value tied to a group of other currencies, preventing its rise despite a booming economy.

America's surging trade deficit with China, which hit a record high of $201.6 billion last year, is driving US criticism of the policy. US manufacturers and lawmakers are pressing the Bush administration to take a harder line with Beijing on currency and trade issues.

Simply put, critics charge China with deliberately manipulating exchange rates to gain an unfair competitive advantage. They say keeping down China's currency amounts to a back-door subsidy for Chinese exports. They speak in terms of a protectionist trade barrier--a great wall of protection--behind which China grows its economy at the expense of the US and Europe.

The US Congress is paying attention. A House of Representatives bill threatening trade sanctions against countries that manipulate currencies has 157 cosponsors; and Senate backers of a bill threatening tariffs on Chinese goods should China continue to hold down its currency have been promised a vote by the end of March.

Meanwhile, the US Treasury Department's semi-annual assessment of the issue is due in April. It could accuse China of currency manipulation, leading to tense talks with Beijing.

Chinese officials seem to be preparing for a fight. Striking a tough tone, Zhou Xiaochuan, governor of the People's Bank of China, told reporters Saturday that China will determine the reform path of the yuan according to its own needs and will not follow the dictates of other countries. China's growing trade surplus with the US will not influence China's monetary policies and decision making, he stressed.

The central banker's central message: China won't bow to pressure.

Speaking on the sidelines of the National People's Congress, Zhou made it clear that China has yet to decide on a timetable for making the yuan fully convertible. He attributed what he described as recent softness in the yuan--it has gained less than one percent since Beijing revalued it nearly eight months ago-- to movements in the dollar against the euro and the yen.

The world's top producer of pirated goods wants to go straight.

In fact, no longer content with serving as the world's factory, China aspires to become the world's inventor and designer.

That's the party line put forth at the annual two-week meeting of the National People's Congress, or NPC, a parliament-like body controlled by China's ruling Communist Party. This year, the need to increase innovation and reduce dependence on imported technology were topics high on the NPC agenda, as officials announced a package of measures to promote developments in technology, including increased spending on research and education.

The yearly gathering traditionally provides a rare opportunity for reporters to interact with party and government officials in an unscripted manner, and in this respect, the NPC did not disappoint.

Stung by international criticism over its rampant illegal copying of foreign products, officials this week laid out other reasons--self-interest reasons--why Chinese companies need to start inventing more of what they manufacture.

Minister of Science and Technology Xu Guanhua (pictured above) told journalists that growing pressure from foreign companies means China must develop its own technology if its businesses want to remain competitive in the world market.

Xu said that lacking core technologies, China, for example, has to pay fees to foreign patent holders for every mobile phone and every piece of digital equipment it sells. He said Chinese companies that are legally producing foreign-designed products are currently paying between 20 and 30 percent for licenses.

Xu also said--and this could be most significant--that the rising cost of labor is leaving China with no choice but to start innovating.

"We have seen a rise in the cost of labor force, that means there is a narrowing comparative advantage of the labor force in China," Xu said. "So, with all these factors taken into consideration, China is facing mounting pressure to become competitive internationally and that is why we say that the only way out is to promote the development of science and technology, to go for innovation and to build an innovation-oriented country."

China's largest bank has hired the world's largest securities firm to underwrite its initial public offering (IPO)--China's largest-ever overseas listing.

The Industrial & Commercial Bank of China (ICBC)--which boasts more than 20,000 branches and total assets of roughly $746 billion--is seeking to raise between $10 billion and $15 billion. Its IPO will be handled by Merrill Lynch, as lead underwriter, with support from Deutsche Bank, Credit Suisse, and China International Capital, a Beijing-headquartered investment bank owned by China Construction Bank, Morgan Stanley, the Singapore government, and other entities.

The IPO, which should take place in the second half of this year--following an approximately $8 billion IPO by the Bank of China that is set for June--is expected to generate a whopping $300 million in fees for the bankers.

Goldman Sachs is underwriting the Bank of China IPO. The New York-based bank's role reportedly created a conflict that knocked it out of the running for the prized ICBC offering.

The Chinese government established ICBC in 1984 to offer deposit and lending services to state-owned companies. The bank says it will earn at least 100 billion yuan ($12.4 billion) in operating profit this year, up from 90.2 billion yuan in 2005. It claims more than 100 million retail customers and 8 million corporate clients.

Excluding Japan, China has been the biggest source of revenue for securities firms in Asia, with the nation's companies set to sell $29 billion of shares over the next year.

In other banking news, China's sixth largest lender, Shanghai China Merchants Bank, said Wednesday that it had received approval to open its first branch abroad, as it seeks to build its brand ahead of a public offering in Hong Kong.

The bank says it has more than 400 outlets in 30 Chinese cities.

China today returned fire in what has become an annual war of words with the United States over the state of human rights in the world's most populous nation.

Responding to criticism of China in the US State Department's yearly human rights report, which was released Wednesday, China's cabinet, known as the State Council, hit back with its own report of alleged US human rights abuses and offenses. Beijing's report accused the US of, among other things, allowing urban violence, racial discrimination, illegal wiretapping of its own citizens, and abuse of detainees in Iraq and Guantanamo Bay, Cuba.

"The US State Department pointed the finger at human rights situations in more than 190 countries and regions including China but kept silent on the violations of human rights in the United States," the Chinese report said.

"For years, the US government has ignored and concealed deliberately serious violations of human rights in its own country for fear of criticism. We urge the US government to look squarely at its own human rights problems, reflect what it has done in the human rights field and take concrete measures to improve its own human rights status."

Among accusations leveled at the US, China said an estimated 100,000 Iraqis, mostly women and children, had died following the US-led invasion of Iraq in 2003.

Foreign ministry spokesman Qin Gang told reporters that the US report "turns a blind eye to basic facts, making irresponsible accusations about China's human rights situation."

"The US State Department's so-called Annual Country Human Rights Report is not based on facts and is without reason to criticize China's human rights situation," Qin said. " We express strong dissatisfaction and resolutely oppose it."

China's counter-report also quoted the Committee to Protect Journalists in detailing the cases of four Iraqi reporters locked away by the United States in Iraq. The report failed to note, however, that the same group named China as the world's leading jailer of journalists for the seventh consecutive year in 2005 with 32 behind bars.

China routinely rejects criticism and defends its record by employing its own definition of human rights, which Beijing defines as people's basic right to material things like food and shelter. Chinese officials say they use what they call the international definition of the term "human rights" in their criticism of the US record, insisting that the basic rights of its 1.3 billion people to food, clothing and housing take precedence over individual civil liberties.

"The United States has always boasted itself as the model of democracy and hawked its mode of democracy to the rest of the world, but in fact, American 'democracy' is always one for the wealthy and a 'game for the rich'," China said, making no mention, of course, of internal and external criticism of China for its own embrace of capitalist values.

"Some of the rhetoric in the Chinese report should be seen in this context," says one analyst who has followed the the ruling Communist Party's propaganda line for decades.

China has ironically come under increasing criticism from human rights activists and globalization critics for embracing free-market-style capitalism at the expense of the majority of its people, who have yet to benefit from the so-called Chinese economic miracle. The plight of the left-behind rural poor and urban underclass has in fact prompted critics--on the left--inside and out of China--to question if the new capitalist-road-going China is as much an agent of globalized cruelty and exploitation as it is for economic change.

Wading in with its own report on Thursday, a group of Chinese lawyers and rights activists said there were modest expansions of some freedoms in 2005, though many citizens' rights remained narrow, fragile or non-existent.

"Relative to economic development and social progress, the government has not done enough to actively protect and expand civic rights," said the report issued by the Open Constitution Initiative, an independent organization that investigates claims of rights violation and pushes policy change.

The human rights accusations and counter-accusations come at a potentially sensitive time in bilateral relations, with Chinese President Hu Jintao due to visit the United States next month and growing demands by US lawmakers for action on trade and intellectual property theft issues.

US Assistant Secretary of State for East Asian affairs Christopher Hill said on Wednesday that Washington expected to "engage with President Hu on a broad range of human rights and religious freedom topics" during his trip.

Translation: regardless of the war of words, human rights will not be a major item. Given the war in Iraq, the war against Islamist terrorism and extremism, and all the other problems plaguing the Bush administration--including the trade deficit with China and its economic power and leverage relative to the US--the last thing the US needs now is another crisis.

Is China finally beginning to combat large-scale intellectual property (IP) piracy?

As reported by China Law Blog, articles recently published in online and traditional media outlets, including Fortune magazine, suggest a positive turning of the tide on this critically important and politically potent issue.

But an increasingly vocal and assertive American chorus of lawmakers and officials disagree. Seeing no significant progress on the IP front, they are urging the Bush administration to take immediate legal action against Beijing.

Chris Israel, coordinator for international intellectual property enforcement at the United States Commerce Department, says IP piracy costs American businesses some $250 billion each year. At a US Senate Commerce subcommittee hearing Wednesday, he said evidence suggests China is responsible for most of that piracy.

"In 2005, the US Customs reported that China was by far the leading source of counterfeit products that were seized at our borders, accounting for 69 percent of all seizures," Israel said.

Israel allowed that China's leaders have expressed a commitment to crack down on the problem. But he said Beijing needs to back its words with actions. He noted that the Bush administration has threatened to file a case against China at the World Trade Organization (WTO) unless it takes serious steps to reduce IP violations.

Members of the Senate subcommittee expressed frustration that the Bush administration has not already taken action against China, which acceded to the WTO in December 2001.

Senator Gordon Smith, an Oregon Republican, who chairs the panel said: "I think we have got to do something for the sake of our own nation's economic future and the integrity of our own laws and respect of our own industries Not protectionism, but protecting what our nation is frankly best at, and that is new ideas, new products, new commerce that is transforming the world, but if it is stolen, its value is much diminished and our jobs are unfairly compromised."

Senator Byron Dorgan, a North Dakota Democrat, agreed, saying Washington should set a date for when it plans to take action at the WTO if China does not respond.

"We need a time-frame," Dorgan said. "We need a decision. We need to understand that this country needs to stand up for its economic interests."

The Commerce Department's Chris Israel said the administration is serious about cracking down on the problem.

"We are using every trade tool at our disposal in the WTO, and we consider all options to be on the table," he said.

Israel expressed hope that progress could be made in resolving the dispute at an April meeting in Washington between US and Chinese economic officials, just days before a summit between President Bush and Chinese President Hu Jintao at the White House.

In Europe, too, there is a growing outcry against China's large-scale theft of IP.

While China has been in the copycat business for decades, European critics say copyright-infringement abuses are now at staggeringly high levels.

At least 70 percent of all illegal copycat products--an estimated $300 billion market--comes from Asia, with most of the stuff made in China.

A European Union analyst says: "The issue is no longer just a pair of copycat running shoes or a plastic version of a Gucci watch. Now, the Chinese and others have taken to pirating expensive, high-tech knowledge, which allows them to duplicate entire machines and systems."

EU Industry Commissioner Gunther Verheugen plans to make the issue of patent theft and industrial piracy a focal point of his agenda this year. And if his efforts are unsuccessful, the EU Commission will address these problems at this year's WTO meeting.

The United States said Wednesday that the human rights situation in China remains poor as the government continues to commit numerous and serious abuses.

In its annual human rights report, the US State Department found a trend towards increased harassment, detention and imprisonment of those perceived as a threat to authority in China.

The report says the Chinese government has also adopted measures to more tightly control print, broadcast and electronic media.

The report notes efforts to make legal reforms in the past year stalled. However, China did adopt new protections for religious groups.

The State Department's annual report is usually swiftly rejected by China, which directs state media to publish lists of problems in the US.

Also in East Asia, the State Department reports North Korea remains an absolute dictatorship where the government's human rights record is extremely poor.

The report says the human rights record of Burma's military government also worsened over the year.

Reports from eastern China say a nine-year-old girl has died of bird flu, fueling fears of a spreading deadly virus that could eventually lead to a global influenza pandemic. She was the country's 10th human victim of the disease.

China's health ministry was quoted Wednesday as saying the girl died Monday night at a hospital in Zhejiang province, about a month after her infection was discovered.

A 32-year-old man died from H5N1 virus in the southern Chinese province of Guangdong, which borders Hong Kong, less than a week ago--the first bird flu death in an urban center in China. He was believed to have contracted the virus at a poultry market.

Also on Wednesday, Belgian officials said a man who had recently visited China had been admitted to a Brussels hospital with symptoms of the bird flu.

And, in related news, Albania confirmed its first case of the virus in poultry. Albania's agriculture minister said tests on a sick chicken from a coastal area, in the Sarande district near the border with Greece, confirmed the presence of the H5N1 strain. Greek officials say they have stepped up precautionary measures.

Japan said no today, rejecting a Chinese proposal to jointly develop oil and gas fields near a disputed island group in the East China Sea.

Japan's chief cabinet secretary, Shinzo Abe, whose photo appears here, announced that Tokyo would not go along with the idea, describing it as unacceptable.

China made the proposal--for joint exploration of two East China Sea areas--on Tuesday, at the end of two days of talks with Japan that again sought to resolve the long-running issue.

One of the two areas proposed by Beijing for exploration is close to a disputed, uninhabited island group claimed by Japan, China and Taiwan.

The islands, called the Senkakus by the Japanese and Diaoyu Islands by the Chinese, are located in the East China Sea between the east coast of China, the southern Japanese islands, and Taiwan. They are believed to lie near oil and gas deposits. Both China and Japan claim them.

China and Japan have agreed to hold their next meeting on the East China Sea dispute, the fifth of its kind, in Tokyo. A date has not been set.

The purpose of the negotiations is to resolve a disagreement over where in the East China Sea the border between the Chinese and Japanese economic zones lies. The disputed islands are somewhere near the dividing line.

Tokyo is concerned about several ongoing gas projects on the Chinese side of the median line. The Japanese believe that drilling could tap into resources buried under Japanese-claimed waters. The Japanese government has meanwhile given a Japanese company drilling rights in the disputed area.

An influential member of the United States Senate has warned Taiwanese officials that the US might not come to their aid in a conflict with China if they precipitate a crisis through unnecessary and provocative political rhetoric.

US Senator John Warner, a Republican from Virginia, made the comment at a meeting of the Senate Armed Services Committee, which he chairs, with the US Pacific Commander attending.

Warner (pictured above) made the comment at the end of a long hearing on Tuesday, which included discussion of a recent decision by Taiwan's president to disband a committee devoted to issues of reunification with China--a move that angered Chinese officials.

"I think if that conflict were precipitated by just inappropriate and wrongful politics generated by the Taiwanese elected officials, I'm not entirely sure that this nation would come full force to their rescue if they created that problem," the Senator said.

The US is obligated by treaty to defend Taiwan--a major deterrent to any Chinese military move to reunite with the island. But Warner, a senior member of President Bush's Republican Party, urged Taiwanese officials not to make what he called 'injudicious' statements or judgments that could precipitate a crisis.

"I've been supportive to build up their military capacity," Warner said. "At the same time they build that up, they ought to build down their heated politics."

At the same hearing, the commander of US forces in the Pacific, Admiral William Fallon, expressed some satisfaction with China's response to the Taiwanese move. He noted that a year ago, tension was much higher between China and Taiwan, and there were Chinese military moves and public demonstrations apparently encouraged by the government. This time, he said, that did not happen.

"If it's just rhetoric and it's reasonably moderate in tone, I think that's unfortunate but probably not particularly damaging," Fallon said. "If other steps are taken, some military actions or other indications that people are being agitated or stirred up to take other actions, then I think this would be a real concern."

China is not likely to make a military move against Taiwan before the Beijing Olympics in 2008. Knowing this, Taiwanese officials may be tempted to exploit a window of opportunity for provocative political action and rhetoric.

Downplaying the China risk factor, Fallon said he was not overly concerned with China's recent announcement of a 15 percent increase in its military budget, following a 13 percent increase last year. He noted that the growth in defense spending is larger than China's overall economic growth. But the admiral said his meetings with senior Chinese military officers indicate that they want to modernize their antiquated forces. He said while some of their equipment purchases are noteworthy, any technological improvements come on what was a very low base.

"The types of equipment are troubling because the capabilities are new and modern," he said. "The numbers are not yet anywhere near the kinds of numbers that I believe truly threaten this country."

The Pacific commander also said he does not see conflict between the US and China as inevitable. He said he is working to expand military contacts with Chinese forces, following Defense Secretary Donald Rumsfeld's visit to China last year. The contacts, Fallon said, would be an important part of US efforts to encourage China to use its growing military, economic and political power constructively.

China today called on Iran to cooperate with the International Atomic Energy Agency (IAEA), saying there was still time for diplomacy to resolve the dispute over the country's nuclear ambitions.

Chinese Foreign Minister Li Zhaoxing said that Iran has the right to peaceful nuclear power. But Iran must also fulfill its commitments under the nuclear Non-Proliferation Treaty, Li said.

Li called on Tehran to cooperate with the IAEA, which is meeting in Vienna this week to consider referring the dispute to the United Nations Security Council for possible sanctions against Iran.

"We hope Iran can fully cooperate with the IAEA and adopt more measures that can help boost trust," Li said.

Iran contends it is enriching uranium for a peacetime energy program. The European Union and the United States claim it is seeking to build a nuclear weapon.

Western nations have been pushing for Iran to be referred to the Security Council. But China--one of five permanent Security Council members with veto power over UN actions--has opposed the move.

The foreign minister, speaking to reporters during the annual meeting of China's National People's Congress, also rejected criticism of Beijing's double-digit increase in defense spending. He said the US spends much more on its military.

"China's national defense policy is transparent, it is completely defensive in nature," he said.

Most analysts agree, however, that Beijing's military spending is much higher than government figures show. The military build-up has raised concerns in Washington, Tokyo and Taipei.

Li pledged to work towards reducing the large trade surplus between the US and China, although he called the situation "complicated." He also said the US. should ease restrictions on high-technology exports. Washington does not allow the export of technology to China that could be used for military purposes.

Li's comments came ahead of Chinese President Hu Jintao's visit to Washington next month, where such items as technology exports and the trade deficit are expected to be on the agenda.

The latest round of talks between China and Japan over disputed territory in the East China Sea has ended with no sign of progress.

Japan was hoping for a positive response from China on its proposal in the last round of talks for joint exploration of rich energy resources in the disputed territory.

A Japanese official in Beijing said the Chinese put forward a counter-proposal, which Japan would have to study. Neither side offered details about the counter-proposal.

This was the fourth round of talks between the two countries on the East China Sea, which lies between Shanghai and the southern Japanese island of Kyushu.

After the two days of talks ended Tuesday, the chief Japanese delegate, Kenichiro Sasae, expressed delicately phrased reservations about Chinese intentions.

"Through the meeting, I felt the Chinese side had an incentive to move this issue forward through concerted effort," the delegate said. "However, I think that it is a different matter whether this attitude is incorporated in the content. We need to measure that on merit."

The boundary disagreement, which has been going on for years, heated up when China unilaterally began undersea drilling for gas near the disputed area in 2003.

The two energy hungry countries say they want to work together to extract oil and gas from the seabed, but disagree over where the boundary between the two lies, and how much territory should be jointly exploited.

They have agreed to meet for another round of negotiations in Tokyo, but have not yet picked a date.

The United States and Japan will begin five days of talks in Honolulu Tuesday to finalize a sweeping agreement on realigning and downsizing US forces in Japan. The two countries appear to disagree over what has already been agreed upon, and what they hope the talks will accomplish.

But one thing is certain: China will be watching.

Beijing is not happy about Washington's efforts to draw Tokyo into a China containment strategy. In fact, China's popular anti-Japanese campaign--which is obviously manipulated and influenced by the government to varying degrees--is in large measure aimed at Japan's superpower ally.

The Taiwan reunifiction issue serves the same purpose, to some extent, as China's rulers find ways of calling attention to their capacity to cause trouble and heat matters up should the need arise.

Back to Japan. Washington thought it had a deal last October, when it jointly announced an agreement with Tokyo on realignment of US military forces in Japan--part of a global reorganization of the US military. The agreement included an end-of-March deadline for agreeing on final details.

But parts of the agreement were rejected by local governments on Okinawa, where the bulk of the 50,000 US military personnel in Japan are stationed. That prompted Japanese officials to start referring to the October announcement as an "interim report," with the actual agreement to be formalized by the end of March.

Lt. Col. Richardo Stewart, deputy assistant chief of staff for US Marine Corps Bases in Japan, said Monday that the Marines consider the October announcement final, and not a preliminary draft.

"It's an agreement, and what comes out in March is really, how do we implement that agreement?" he asked.

Japanese Foreign Ministry spokesman Tomohiko Taniguchi downplays expectations that this week's talks in Hawaii are crucial to a resolution by the end of the month.

"This is not supposed to be a meeting to come up with any concrete proposal, any concrete decision," Taniguchi says. "This is just to review the situation, and this is just to share the information among the participants, and that is all."

The announced agreement includes relocating a new US Army command to a base near Yokohama, transferring Japan's air defense command to a US base in western Tokyo, and moving up to eight thousand Marines from Okinawa to Guam.

It also envisions a nuclear-powered US aircraft carrier having its home base at Yokosuka, on the main island of Honshu. And it provides for a Marine air station to be relocated from densely populated central Okinawa to an offshore reef.

But Okinawans have long complained about the US military presence here, citing crimes committed by American personnel, aircraft noise, and potential danger from military flights over populated areas. Many Okinawan officials want the US military moved from the island completely.

The dispute has led to speculation that a final deal might not be reached by the end of this month.

Which China would regard as good news--a chance, perhaps, to score propaganda points by reminding the world that for all the US and Japanese talk about China's expanding military, the issue can cut two ways. US Secretary of Defense Donald Rumsfeld has repeatedly questioned China's need for a larger and more modern military, wondering aloud: "Who threatens China?"

Citing the formidable US military presence in Japan (and notwithstanding the North Korean missile threat to Tokyo), China in the coming weeks and months is likely to ask: "Who threatens Japan? With the Cold War long over, isn't it time to seriously scale down or even shut the US bases in Japan?"

We live in interesting times.

China used the opening session of the National People's Congress to escalate its war of words with Taiwan.

Premier Wen Jiabao drew applause from many of the 3,000 delegates when he said Beijing will boost its efforts to reunite Taiwan with the mainland.

He said anyone who tries to reverse this major trend will most certainly fail.

China says it wants peaceful reunification with the break-away island, while stressing that military force remains an option.

On Saturday, Beijing announced a nearly 15 percent increase in military spending for this year.

The National People's Congress' power is largely limited to approving what the upper leadership of the Communist Party has already decided. However, the Congress' two-week session serves as a venue for the Chinese government to make public its strategy for dealing with the year's problems.

Security is usually tight during the session, but this year access to the Great Hall of the People appears more restricted than before, with 15,000 security agents, some with dogs, keeping people away.

As they do every year in the days preceding the Congress, authorities rounded up and arrested petitioners who had come to the capital to present their grievances.

The annual session of China's rubber stamp parliament started Sunday, and a new reform plan for the troubled countryside was at the top of the agenda.

The plan, which aims to create "a socialist countryside," is the centerpiece of China's next five-year plan, which the so-called parliament--officially known as the National People's Congress--is certain to approve.

The new policy aims to raise rural incomes through a combination of subsidies, tax cuts, debt relief for local governments and infrastructure spending.

Promising help for farmers, Premier Wen Jiabao told the gathering that China must strive to narrow the economic gap between its depressed rural and booming urban areas

Will the government deliver on its promises? Most analysts are skeptical at best.

Jonathan Unger, director of the contemporary China center at Australia's National University, says: "The question is whether this is just pretty language or whether the government is willing to follow through in terms of providing the budget support that will be needed. In the past, the government has announced programs that sound very good, but do not provide the money for it."

The statistics are staggering. Two-thirds of China's 800 million people live in the countryside. While rapid economic growth has created wealth in the cities, millions of people in rural areas can't afford to send their children to school or pay for basic health care. The average annual income of rural residents is just $400--less than a third of what the average urban resident makes.

Unemployment in the rural areas has now reached an alarming state. The government estimate is that the number of unemployed and underemployed rural laborers stands at around 100 to 120 million.

Rural poverty and stagnation are creating one of the largest migrations in human history. Three-hundred million Chinese are expected to migrate from the rural areas into the cities before 2020.

Meanwhile, conditions in rural areas are bound to result in the loss of already-limited agricultural land to development as well as further diminished income because of excessive taxation.

Making matters worse, the state of the environment is deteriorating and increasingly affecting people's health and livelihoods. Protests and rioting triggered by injustice and environmental problems are now an almost daily occurrence in the countryside.

Globalization--which has made it possible for China to lift some 300 million people out of poverty--is hurting, rather than helping, rural residents. A 2005 World Bank study notes that China's farmers were already suffering declining incomes before China entered the World Trade Organization in December 2001. Linking China's fortunes to foreign markets has further aggravated this trend, particularly as China removes tariffs that once protected local farmers from imports.

This, too, fuels the tide of rural unrest, as violence is often sparked when local officials confiscate farmland and sell it to developers without offering farmers adequate compensation.

All farmland in China is now collectively held by villages--meaning the state--and leased to individual families for 30 years. Only the government can sell land to developers. Farmers clearly need a more secure land tenure system to allow them to diversify and invest for the long term.

Right now, as the farmers well know, the system simply facilitates the corruption of local officials, who typically take the lion's share of profits from the sale of land seized illegally from farmers.

The deadly H5N1 bird flu virus has again made news in Asia, apparently claiming two more human lives.

Hong Kong health officials said Saturday that a 32-year-old man who frequently visited markets where chickens were slaughtered died Thursday in Guangzhou, on mainland China, after showing symptoms of bird flu.

Also on Saturday, health officials in Indonesia reported that a three-year-old boy has died of the deadly H5N1 virus in Central Java province.

Officials in both countries have sent samples to a World Health Organization-sanctioned laboratory in Hong Kong to confirm that the victims had bird flu.

China has already had eight known deaths from the disease. Twenty people have died from H5N1 in Indonesia.

More than 90 people have died from the disease worldwide.

It has become an annual ritual.

China announced a double-digit military spending increase Saturday, as it has nearly every year since the early 1990s. And, in keeping with the pattern, the official figure is widely assumed to be much lower than the real one.

Jiang Enzhu, a spokesman for China's rubber stamp parliament, the National People's Congress, announced the increase on the eve of its annual session. This year, Jiang said, China will spend 283.8 billion yuan ($35.3 billion, or euro 28.6 billion) on its 2.5 million-member military--a 14.7 percent increase over last year's budget.

But analysts who specialize in studying the Chinese military say much of China's defense spending is concealed in secret accounts, sometimes in the national budget and sometimes through other means. They say Beijing could be hiding as much as two-thirds of the People's Liberation Army budget.

The official budget also excludes foreign military aid, domestically produced weaponry, some military research, its military reserves and the People's Armed Police, which resembles a national guard.

Also not officially reported are local government contributions to military facility maintenance and, more importantly, funds allocated to military factories.

Is the United States trying to use India to contain China?

Some Chinese analysts see China's ascent--and potential threat to the US--as the driving force behind President George Bush's historic India visit.

The Chinese suspect Washington is cynically seeking to drive a wedge between the world's two most populous nations, who have in the past clashed militarily but are now competing economically for markets and resources.

Not for nothing, say the Chinese, was their country the unmentionable issue--publicly, at least--throughout the Bush trip.

But if the US has division on its mind, it could be in for a surprise, because while India, like Japan, is a natural counterweight to rising China, relations between New Delhi and Beijing are on the upswing. India and China recently signed five agreements on energy cooperation, for example, which included information sharing. They agreed to tell each other how much they are paying on bids for oil and gas.

More agreements could be in the pipeline. As Michael Vatikiotis writes in China, India and the Land Between, cooperation rather than competition--let alone containment--could characterize the China-India relationship for years to come. His highly informative article is our pick for weekend reading.

Amnesty International condemned southern China's Guangdong province on Thursday, after a high court ruled that those convicted of purse snatching and other robberies using violence could be executed.

Amnesty's Hong Kong-based researcher Mark Allison said the court's decision goes against a recent trend in China to limit the use of the death penalty, which Amnesty believes is too readily handed out.

"Part of the problem in China is the death penalty is applicable to such a wide range of crimes," Allison said. "There is something like 68 crimes on the statute book in China, for which you can potentially get the death penalty and these include nonviolent crimes, like tax fraud and bribery."

In terms of reform, China's national supreme court has announced it will start hearing death penalty cases publicly for greater transparency. The government is also considering making the supreme court the place of final appeal for death sentences. Appeals now now rest with provincial high courts.

Amnesty International says China's criminal justice system puts more people to death than any nation on Earth, but the exact numbers are not clear. China's Communist Party authorities consider the number of executions to be a state secret. Independent estimates vary widely.

Liu Renwen, a legal scholar at the Chinese Academy of Social Sciences in Beijing, puts the number at 8,000 annually, based on data gleaned from reports by judges and courts.

A vocal opponent of the death penalty, Liu criticizes the government's refusal to disclose death penalty figures, saying the rule is hampering efforts to track whether executions have been an effective deterrent.

"This, [in] my own opinion, is very stupid because if we do not know the exact number, how can you give useful suggestions for legal reform? So, we are trying to persuade the government to open these statistics in the near future," he says.

China Confidential has learned that the Chinese government has started supplying Nigeria with defense equipment--including dozens of patrol boats--to quell the uprising in the oil-rich Niger Delta.

Earlier in the week, Nigerian officials said they had begun "looking to China" and other nations for arms because security talks with the United States were moving too slowly. The US provides training, but has so far sold Nigeria only four boats for deployment in the restive region--source of most of Nigeria's crude--where the local population is demanding a greater share of oil revenues.

In contrast with Washington, Beijing is moving quickly to take advantage of the crisis, which has already reduced Nigerian oil exports by some 20 percent. In addition to the boats, Chinese officials are assuring their Nigerian counterparts that they can count on Beijing for active assistance in combating attacks on oil facilities.

The Chinese response reflects a policy of providing arms to most regimes, including those that rely on military might to stay in power.

In Nigeria, as in other countries, the policy is paying off by strengthening the hand of Chinese companies competing for strategically significant and potentially lucrative deals.

Last year, Nigeria signed an $800 million deal with state-owned PetroChina to supply 30,000 barrels of oil a day.

In January of this year, China National Offshore Oil Corporation, after failing to acquire American-owned Unocal, purchased a 45 per cent stake in a Nigerian offshore oil and gas field for $2.27 billion and promised to invest an additional $2.25 billion in field development.

China-Africa trade is booming. It reached $37 billion last year, and is expected to exceed $100 billion in five years.

On the export side, China exported $18.68 billion to Africa last year, the Ministry of Commerce reported today, maintaining a successive growth of more than 35 percent for three years.

Electronic exports have accounted for 39 to 44 percent of the total since 2003; textile exports, for 16 to 19 percent; and high-tech exports accounted for 10 percent.

South Africa, Sudan, Nigeria, Congo (Brazzaville) and Angola are the main markets To these countries, China mostly exports electronics, textiles, clothes, high-tech products and steel.

Our Beijing correspondent reports that China is increasingly interested in Congo-Brazzaville, because of the country's formidable natural resources, including oil, and notable political stability. Congo President Dennis Sasssou Nguesso (pictured above with Chinese President Hu Jintao), paid a state visit to China in September, 2005, during which several trade agreements were signed.

The Congolese president is also president of the African Union, an organization Beijing is interested in for both political and economic reasons. Among other things, support for the AU demonstrates Rising China's commitment to international diplomacy as well as international business.

In terms of investment, the government intends to encourage more Chinese companies to invest in Africa; and China's direct investment in Africa is expected to double in five years.

China's overall foreign trade volume surged 23.2 percent to $1.42 trillion last year, yielding a trade surplus of $101.9 billion.