Monday, March 05, 2012

Trains in Vain: California’s HSR and the Hukuang Railway

I have a piece up at Asia Times concerning California’s efforts to entice China’s sovereign wealth fund into an investment in its troubled high speed rail project.

Not gonna happen, is my feeling.  The project’s economics don’t smell very sweet, and CIC has already taken huge heat within China for its disastrous investments in Morgan Stanley and Blackstone.  CIC doesn’t need another high-profile failure.

PRC President-in-waiting Xi Jinping, who was lobbied on the project during his visit to LA, might possibly have considered throwing a few billion at CHSR as a promotional expense, in order to display the benign face of rising China to the US.  

But post-Wenzhou-crash and in the atmosphere of strong partisanship that permeates opposition to the project from Republicans and Tea Partyites (if you want a strong feeling that America is circling the drain, politically, Google “Agenda 21”),  a package of Chinese trains and investment is a PR nightmare, not a PR dream, IMHO.

Too busy or too lazy to Google?  Here’s the relevant excerpt from my Asia Times piece:

In the mainstream, Agenda 21 is a toothless United Nations environmental initiative for sustainable development. For the Tea Party fringe, it is a conspiracy staple: a UN-created, George Soros-funded plan for leftists in the government to destroy freedom and private property by setting up a chain of gulags along passenger rail lines full of bike paths and clean air but no cars or liberty.

Enamored of the energy of the Tea Party, the Republican leadership, especially Newt Gingrich, and Fox News have flirted with legitimizing Agenda 21. Agenda 21 Cassandras figured prominently in the public outcry that doomed the only high-speed rail project in the US other than California's: the Florida HSR.

Attitudes like this should dissuade Xi Jinping that the PRC will be welcomed as the savior of California's high-speed rail system:

Oooh baby ... High-speed rail owned and operated by the Chinese throughout the US. ... Roads, sewer systems, and water systems will be owned by the Chinese. ... I can see it now. We lose our rural roads - pulverized to gravel. Our private vehicle usage is limited, restricted, and taxed. Our bus service will be declared insolvent and not cost effective. High-speed rail will be the only way to travel.

Fully owned and operated by the Chinese. In our country. Airport-style searches. Restricted use tickets. Overcrowding. Limited line service. Why? Because we can't maintain our own infrastructure? Can we maintain our sovereignty? Just wondering.

California’s lethal combination of rail and political and economic peril put me in mind of another gigantic north-south rail project, biggest of its kind, which scrambled for foreign investment, ignited a political firestorm, and brought a great state to its knees—even before it defaulted on its bonds, and almost 30 years before the line got built: the Hukuang railway, which began its tortuous path to completion in the latter days of the Qing dynasty.

“Hukuang” means “Hubei/Guangdong”.  The purpose of the railway was to connect central and south China via a thousand-plus mile rail line between Canton and Hankow across some very nasty, mountainous, and expensive terrain.  Local and national funding wasn’t up to scratch, so it was deemed necessary to tap the power of private capital.

In the old days, of course, railroad investment ran the other way, from West to East.  In the early 20th century, it was China that needed capital and it was America that sought power and profit through investment in the Chinese railway network.

As an article by Michael Mahler details, Hukuang was the big infrastructure play in China at the time.  It also represented the Qing dynasty’s rather desperate attempt to get its financial and geopolitical house in order with the help of international capital and the foreign powers after the disaster of the Boxer Rebellion.

Originally, the credit would have been issued in 1909 by a consortium of British, German, and French banks.  However, America’s vaunting ambition induced complexity, rancor, and fatal delay that played a significant role in sinking the Qing dynasty.

Getting an American share of the £ 6,000,000 bond issue to finance construction of the Hukuang line was a cornerstone of President William Taft’s “dollar diplomacy”: the use of the good offices of the American government to extend the reach of American investment and trade, thereby projecting US power.  

Placing his faith in greenbacks rather than battleships, Taft mobilized J.P. Morgan, Kuhn Loeb, First National Bank, and National City Bank to promote US diplomatic and financial interests in Asia.
Specifically, Taft (and later Woodrow Wilson) hoped that a “China Consortium”, composed of British, French, German, and US banks working in harmony under the direction of their governments on "Open Door"principles, would serve as the exclusive conduit for massive Western public investment in China, thereby swamping Russian and Japanese efforts to carve China, starting with Manchuria, into exclusive national spheres of influence and/or colonies.

In response to the insistent lobbying by Taft’s Secretary of State, Philander Knox (including a threat that the US would cancel its remission of the Boxer indemnity), the US group was granted a quarter share of the Hukuang consortium (even though the Americans at that time did not possess the financial heft to dispose of their share in the US and needed European channels—and the bemused forbearance of their partners--to lay off their holdings).

The Hukuang loan was the largest commercial debt undertaking ever assumed by the Qing dynasty, dwarfed only by the gigantic Boxer and Sino-Japanese war reparations.  Since the revenues of the Maritime Customs (the loan guarantee of first resort for a risk-averse foreign power) were maxed out, the loan was secured by salt, rice, and likin (local transit) taxes.

Unfortunately, the two years of bickering provoked by the US muscling in on the consortium meant that the Qing dynasty was in extremis when it was finally time to issue the loan, and ill equipped to handle the political blowback it provoked.

In order to lock up foreign funding, the Qing dynasty was obliged to effectively nationalize all railway operations in China.  This meant cancelling concessions to local Chinese companies with competing projects, whose stock offerings had been enthusiastically underwritten by patriotic and nationalistic gentry and overseas Chinese determined to create an alternative to foreign control of the critical sector.

The announcement of the Hukuang loan on May 20, 1911, less than three weeks after the cancellation of the domestic concessions, including one to a floundering local outfit unable to make a convincing go of the Hukuang line, infuriated gentry investors in the now-defunct railways. They made common cause with disgruntled students and ardent revolutionaries in a “Protect the Railways” movement.  

It was as if the Tea Party, the Occupy movement, and the Chamber of Commerce had all banded together to stick it to the government.

Disgust with the Manchu regime over the railway issue quickly fed into widespread alienation, unrest, demonstrations, and rioting that ate away at the legitimacy of the dynasty.  In October 1911, while two of its regiments were dispatched to deal with railway protection movement unrest, the garrison at Wuchang revolted; within two months the Qing dynasty had, for all effects and purposes, collapsed.

Ironically, the Chinese government had foreseen the political perils and tried to back out of the loan, only to be forced to conclude it by foreign pressure:

The U.S. minister to China, William J. Calhoun, was greatly embarrassed by instructions that he demand that the Chinese conclude the loan negotiations. He argued that it was undignified, "unworthy of civilized powers," to force a loan on an unwilling government. But Calhoun's protests were brushed aside, and the U.S. government joined in the pressures to which the Chinese succumbed in May 1911. As the Peking government anticipated, conclusion of the £6 million loan led to increased violence in the provinces and ultimately to revolution.

So the oblivious mandarins of the Qing empire had a better handle on the problems and the consequences of the loan than the masters of the steam-powered universe.  Imagine that.

Hukuang, therefore, is frequently invoked as the precipitating factor in the fall of the 3000 year-old Chinese empire.  

Needless to say, the China consortium did not have an easy time selling Hukuang bonds. 

According to a history of Morgan by Vincent and Rose Carosso, JP Morgan sold off its roughly 9% share (north of half a million pounds) with the help of its London and Paris offices, and netted a less than princely $50,000 for the New York partners.  This was in the day when JP Morgan was run strictly by and for the partners, and they were not at all happy that two years of time, effort, and aggravation on behalf of President Taft’s “dollar diplomacy” had yielded so paltry a return.  

On the other hand, perhaps the partners were consoled and even heartened by the observation that they had been able to get the bonds off their book-- and book a profit!--while the Qing was in virtual free fall.

Though post-Qing China declared bankruptcy in 1921, Chiang Kai-shek’s Republic of China government did not repudiate the debt and struggled, sometimes unsuccessfully, to pay interest on the bonds out of salt revenues (since the railway had not yet been completed).  Chiang Kai-shek’s government renegotiated the debt in 1936-7 but eventually defaulted on the bonds in 1938, shortly after the line was completed, when the travails of the Sino-Japanese War made further payments impossible.  The Communist government subsequently repudiated the debt as “odious.”

The Hukuang bonds themselves lived on, and became a significant impediment to normalization of PRC-American relations in the 1980s.  Speculative investors who had purchased the bonds as relations thawed in 1976 filed a claim in US court against the PRC.  When the PRC didn’t appear in court, the judge awarded a summary judgment of $41 million to the claimants, threatening the PRC with attachment of its then meager assets in the United States.  Deng Xiaoping communicated his exasperation to the US government and Jerome Cohen, the doyen of China legal scholars, jumped in. 

It still took three years and the intercession of George Schultz’s State Department for the case to go away.

Today Hukuang bonds are a valued only as a scripophily collectible.  But a £ 100 Hukuang bond sells for $695—more than its face value.

We’ll have to see if California high speed rail bonds will match that performance.

Image of Hukuang bond from

Saturday, March 03, 2012

In Syria, al Jazeera’s credibility implodes before the Bashar regime does

Over the last couple days the Syrian army has moved into the Baba Amr district of Homs.

The action is Syria’s Tiananmen.

The Western shorthand for Tiananmen is “authoritarian regime reveals its true monstrous face to the world and its own citizens by trampling on helpless pro-democracy demonstrators.”

Maybe so, but in the Chinese official political lexicon Tianenmen was “a demonstration of state power against a dissident group meant to illustrate the absolute authority of the state and the utter marginalization of the protesters.”

On February 25, I wrote this about the Homs endgame in Asia Times:

Then there is Homs or, more accurately, the Baba Amro district of Homs, which has turned into a symbol of resistance, armed and otherwise, to Assad's rule.

Assad's Western and domestic opponents have put the onus on Russia and China for enabling the Homs assault by their veto of the UN Security Council resolution, a toothless text that would have called for Assad to step down.

However, the significance of the veto was not that it allowed Assad to give free rein to his insatiable blood lust for slaughtering his own citizens, as the West would have it.

The true significance of the veto was the message that Russia and China had endorsed Assad as a viable political actor, primarily within Syria, and his domestic opponents, including those holding out in Baba Amro, should think twice before basing their political strategy on the idea that he would be out of the picture shortly thanks to foreign pressure.

It is difficult to determine exactly what the government's objectives are for Baba Amro. Hopefully, they are not simply wholesale massacre through indiscriminate shelling.

Recent reports indicate that the government, after a prolonged and brutal softening-up, has decided to encircle the district, send in the tanks, and demonstrate to the fragmented opposition that "resistance is futile", at least the armed resistance that seems to depend on the expectation of some combination of foreign support and intervention to stymie Assad and advance its interest.

Whatever the plan is, the Chinese government is probably wishing that the Assad regime would get on with it and remove the humanitarian relief of Homs from the "Friends of Syria" diplomatic agenda.

The message that Syria and China hope the domestic opposition will extract from Homs in the next few weeks is that, in the absence of meaningful foreign support, armed resistance has reached a dead end; it is time for moderates to abandon hope in the local militia or the gunmen of the FSA and turn to a political settlement.

To Syria's foreign detractors, the message will be that the genie of armed resistance has been stuffed back into the bottle thanks to "Hama Lite"; and the nations that live in Syria's neighborhood might reconsider their implacable opposition to Assad's continued survival. 

I think this interpretation of events is pretty spot on.  But enough self-congratulatory tummy rubbing.  

And I wish somebody would address the issue of who were the 4000 who stayed to the end in Baba Amr, “a working class district of 100,000”: Was it the core of the resistance? People who couldn’t or wouldn’t leave when the Syrian army tightened the noose?  Any second thoughts on that botched exfiltration of that Sunday Times reporter that got him out a couple days before the Syrian army moved in (and moved the journos out) but apparently got 13 people killed?

Was Homs a) a carnival of slaughter unleashed by a madman against his own citizens? b) a bloody exercise in Fallujah-style collective punishment meant to terrify Syria’s Sunni majority into submission? c) a brutal and effective coordinated military/security/political/diplomatic campaign meant to isolate and marginalize the rebels and convince Syrians that the insurrection has no hope of foreign succor or domestic success?

Inquiring minds want to know.

It looks like they won’t find out from al Jazeera.

The main event, or what should be the main event, for Western observers of Syria is the messy implosion of Al Jazeera’s credibility.  Somebody disgruntled with the diktat of channel management that the Syrian revolution (at least the SNC version of it) “must be televised” leaked some raw footage of Homs coverage and interviews staged for maximum anti-regime effect.

As’ad AbuKhalil, proprietor of the Angry Arab newsblog, hails from the atheist/Marxist/feminist/anarchist quadrant and is no friend of the Bashar regime.  He had this to say about recent trends in programming on Syrian state TV:

It seems that Syrian regime had agents among the rebels; or it seems that the Syrian regime obtained a trove of video footage from Baba Amru.  They have been airing them non-stop.  They are quite damning.  They show the correspondent or witness (for CNN or from Aljazeera) before he is on the air: and the demeanor is drastically different from the demeanor on the air and they even show contrived sounds of explosions timed for broadcast time…

PS This is really scandalous. It shows the footage prior to Aljazeera reports: they show fake bandages applied on a child and then a person is ordered to carry a camera in his hand to make it look like a mobile footage.  It shows a child being fed what to say on Aljazeera.

This is rather explosive.  You know how low Aljazeera has sunk when Syrian regime TV stations have a field day with the shoddy journalism and fabrication procedures of Aljazeera.  It seems that people inside Aljazeera have leaked raw footage and pre-air reports to someone in Syrian regime TV.  I am not surprised of the leak at all: I am in contact from people inside Aljazeera who are disgusted by the propaganda work of the network in the last few months.  …  I know how those things work and they know that I know.  The footage that are being shown show staging of events of calling a civilian an "officer" in the Syrian army, of faking injuries and feeding statements to people before airtime, etc. Aljazeera seems to be writing its own professional obituary.  I don't know how it can really resurrect itself again.  It is mortally wounded. I know that there are people in the network who are pained about what is happening but royal orders are royal orders in the network and no one dare to disobey.  I am told that orders came down to the effect that no half-position would be tolerated and that categorical adoption of the Qatari foreign policy on Syria is a job requirement.
Actually, information about Al Jazeera’s Syria biases had already reached the English language media on February 24 (and Syria watchers when Josh Landis posted it on his Syria Comment blog), when an article in al Akhbar reported on some e-mails hacked off al Jazeera’s servers by the Syrian regime’s “electronic army”:

The major find to be made public was an email exchange between anchorwoman Rula Ibrahim and Beirut-based reporter Ali Hashem. The emails seemed to indicate widespread disaffection within the channel, especially over its coverage of the crisis in Syria.

Ibrahim … protested that she had “been utterly humiliated. They wiped the floor with me because I embarrassed Zuheir Salem, spokesperson for Syria’s Muslim Brothers. As a result, I was prevented from doing any Syrian interviews, and threatened with [a] transfer to the night shift on the pretext that I was making the channel imbalanced.” 

Ibrahim also spoke of how Syrian activists invited onto Al Jazeera use terms of sectarian incitement on air, “which Syrians understand very well.”

They also confirmed an allegation Ibrahim had reportedly made in one of her emails: That Ahmad Ibrahim, who is in charge of the channel’s Syria coverage, is the brother of Anas al-Abdeh, a leading member of the opposition Syrian National Council. He allegedly stopped using his family name to avoid drawing attention to the connection.

Yes, emphasis added.  The guy who runs al Jazeera’s Syrian coverage is the brother of a SNC bigwig.

The requisite ironic coda (and what should be the obituary for al Jazeera as a serious news outfit, at least as far as its current Syrian coverage is concerned) is contained in this observation:

However, the scoop did not attract the attention that had been hoped for. Like other official Syrian media, the channel is not widely watched and has suffered a loss of viewer confidence.
Thus the report was barely noticed, and Al Jazeera itself completely disregarded it.

Yes, news you can report just by walking into your newsroom; that’s too far for al Jazeera (and, probably CNN).