Category Archives: China-U.S.

Trust But Verify

How fast is the fast deal struck between China and the U.S. over the departure of Chen Guangcheng from the U.S. embassy in Beijing? The are few precedents concerning previous visitors to American diplomatic outposts who have ‘left of their own volition’. The most recent one, Wang Lijun, disgraced Bo Xilai’s former police chief in Chongqing, is hardly a happy one. The circumstances surrounding Chen’s case are much different, though. For one, for all Chen’s international fame, he is little known inside China outside activist circles. His human rights activities, notably his exposure of forced abortions in Linyi in Shandong, challenged local rather than national politicians. His imprisonment and subsequent house arrest were prosecuted locally not nationally. He has not made any political demands on Beijing, beyond calling on it to investigate his treatment at the hands of local officials.

Chen’s flight to the U.S. embassy, where he had taken refuge for six days, was nonetheless an embarrassment and inconvenience to central government, especially coming as it did against the backdrop of the Bo affair and the always heightened security concerns of a leadership transition, and immediately ahead of a visit by the U.S. secretaries of state and Treasury, Hilary Clinton and Timothy Geithner. The later made it another and unasked-for test of the China-U.S. relationship. The foreign ministry was tart in its first public comment on the affair, demanding an apology from the Americans for interfering in domestic affairs. That despite the part the ministry would have played in the rapid diplomatic diffusing of the case. The Americans have issued no apology, saying just that they consider Chen’s an exceptional case. A pro-forma response to a perfunctory protest. Both sides save face.

Chen’s wish to stay in China rather than go in to exile made it easier to settle this incident quickly. What remains unclear is how credible are the guarantees the authorities have given to both Chen and the Americans that the activist can live freely with his family and attend law school (he is a self-trained lawyer) away from Shandong. U.S. ambassador Gary Locke publicly accompanied Chen from the embassy to Chaoyang Hospital, where Chen was to be reunited with his family and receive further treatment for a foot injury sustained during his escape from Linyi. It was a clear attempt to attract a domestic spotlight on Chen.

Both sides will keep a watchful eye on him. That is a considerably easier task for Chinese authorities than American diplomats. For as long as Chen keeps his head down and doesn’t become a national figure, there is no reason to believe that he won’t be left as alone as any other Chinese citizen, and will be as free to be as politically active in future as the circumstances at the time allow. But in the words of the old Russian proverb beloved of both Lenin and Ronald Reagan, trust but verify.

Update: The deal appears to be going pear-shaped already. U.S. press reports quote Chen saying he now wants to leave the country. He fears for the safety of his family, and that he only left the refuge of the U.S. embassy in the face of threats that his wife and children would forcibly returned to Shandong and beaten.

Beyond the human tragedy, if this is true, it would be a blow to the U.S.’s standing in China and in particular to that of the Obama administration at home and abroad.

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The Chen Case: A Inconvenient Test Of China-U.S. Relations

The flight of Chen Guangcheng from house arrest in Shandong to the refuge of the American embassy in Beijing comes at a highly inconvenient time for Sino-U.S. relations. U.S. Secretary of State, Hilary Clinton, and her counterpart at the U.S. Treasury, Timothy Geithner, are due in Beijing this week for what were routine bilateral talks. These will now be overshadowed by what is an embarrassment to Chinese authorities and a problem U.S. diplomats could do with out given all the other glowing embers of contention between the two countries. Clinton has advanced the dispatch of some of her sherpas in an effort to defuse the situation before she arrives. Her assistant secretary of state, Kurt Campbell, is already in Beijing, several days ahead of his planned arrival.

Both governments are staying mum on Chen’s case. The Americans haven’t officially acknowledged Chen is sheltering in their embassy. China’s foreign ministry spokesman says they have no information about Chen’s whereabouts. Whatever. With China’s leadership mired in the Bo Xilai affair and Amerca’s in a presidential election, both governments will want a quiet solution, but are unlikely to get it because of the domestic political pressures.

The Obama administration was criticized domestically for not granting Wang Lijun, Bo’s police chief in Chongqing, asylum when he went to the U.S. consulate in Chengdu to reveal that Bo’s wife Gu Kailai was implicated in the murder of British businessman Neil Heywood. To deny asylum to Chen, if he asks for it, a person whose case the Americans have repeatedly raised on human rights grounds, would open the Obama administration to charges by his Republican opponents of again being “soft on China”, just as they accuse him of being over trade, currency and other economic issues. The administration, which doesn’t have the luxury of being able to criticize from the campaign trail without having to deal with the fallout from “interfering in China’s domestic affairs”, has been trying to walk a tightrope between promoting human rights without that a getting in the way of working with Beijing on global and regional issues that affect U.S. national interests.

With China’s rise as a regional and economic power, the two countries’ national interests intersect ever more frequently–Syria, Iran, North Korea, South China Sea, Taiwan–to list some current points of tension. All are ones where nationalist voices can be raised strongly at any time, and amplified by domestic politics. Within China, it doesn’t take much for the conservatives in Beijing to resurrect the specter that Washington is exploiting Chinese domestic events to weaken or encircle the country. One reason that the diplomats on both sides want a quiet, face-saving resolution to the Chen affair is that both sets know they have bigger issues to fight over.

Older readers may remember the case of Fang Lizhi, who sheltered in the U.S. embassy in Beijing for more a year in the wake of Tiananmen in 1989. It was caustic to China-U.S. relations.  The relationship has matured but also become more complex since. Yet a diplomatic sweeping under the carpet of an inconvenient affair is not what the diplomats are likely to get.  Chen is going to be a stern test of the bigger relationship.

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China Half-Heartedly Falling In Behind Kim To Head World Bank

Kim Yong Jim, U.S. nominee for President of the World Bank, March 2012One way to look at Jim Yong Kim (left), the U.S.’s surprise nominee to be the next president of the World Bank, is that he represents a transition from the leadership of the multilateral development agency being a Washington sinecure to a merit-based selection from developing countries. That is how it seems to be being seen in Beijing. Kim’s nomination “demonstrated that [U.S. President Barack Obama] has begun to take heed of the demands from the developing world for an expanded role within the global institution,” Xinhua said in a commentary.

Kim, though a U.S. citizen, is Korean-born. Currently president of one of American’s elite Ivy League universities, Dartmouth College, he is a health professional with long experience in the developing world, including running the HIV/AIDS department at the World Health Organization. More importantly, he is neither a Washington nor Wall Street retread.

One reason for the post-World War II gentleman’s agreement between the U.S. and Europe that the former would get to put an American in as head the World Bank and the later a European as managing director of the IMF, was that the Bank needed to secure the confidence of Wall Street, then its primary supplier of capital. That world has changed. Washington’s gift of the Bank’s presidency, along with Europe’s of the IMF’s managing directorship, is a 20th century convenience but a 21st century anachronism.

Kim is one of three candidates. Nigeria’s finance minister, Ngozi Okonjo-Iweala, and Colombia’s former finance minister, Jose Antonio Ocampo, are the other two. Such is the voting structure of the Bank that it would take a broad-based European veto to block Kim. Even in the highly unlikely event of that happening, the U.S. could, in turn, veto either of the other two candidates. A new Bank president needs a supermajority of the Bank’s executive directors, 25 representatives of its member nations with voting power weighted in accordance to the capital they subscribe to the Bank.

Beijing has yet to tip its hand publicly. The decision it has to take is whether to get behind what looks to the winning horse, in the expectation that Kim may introduce further reform in the governance of the Bank from which China would be a beneficiary, perhaps the big winner, or to stand by one of the other two candidates in a show of developing-nation solidarity, though that would force it to make a choice between its friends in Africa and those in Latin America. We expect Beijing to go, along with the Europeans, with the first choice. The biggest hint in that direction came earlier this month from central bank governor Zhou Xiaochuan. He said that it wasn’t worth paying much attention to the selection of a new head of the Bank as the job had always gone to an American. Coverage in state media has been correspondingly light and scarcely more interested.

As others have pointed out, the World Bank matters less to China now than China does to the World Bank. It may also matter less to the world than China. The commentator and academic, Martin Jacques, captures the point succinctly: “in 2009 and 2010 the China Development Bank and the China Exim Bank lent more to the developing world than the World Bank”.

It is telling that Beijing didn’t put a candidate of its own forward, nor was one of its own, save perhaps for Zhou, much talked about even as an outside possibility. The prize Beijing has its eye on is the top job at the IMF.

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China Cuts Its Holdings Of U.S. Treasuries–Or Not So Much

China cut its net holdings of U.S. Treasuries by 12% in the second half of last year, more than twice as much as previously reported, according to the preliminary annual revision of the U.S.’s monthly Treasury International Capital (TIC) report. And it probably doesn’t mean anything much beyond what we already know.

The new TIC report on major foreign holders of U.S. Treasury securities shows that China’s holdings fell from $1.31 trillion last July to $1.15 trillion in December, with a sharp net sell-off coming in that last month. The TIC monthly numbers had shown a fall from$1.17 trillion to $1.1 trillion over the same period. The annual revisions are considered more accurate than the monthly numbers. They take into account the true origin of buying done through third countries. A new series of monthly numbers introduced in January this year will narrow the accuracy gap, though not close it. (U.S. Treasury note on all this here.)

China buys a lot of U.S. Treasuries through London, and, to a lesser extent other popular custodial centers such as Luxembourg, Belgium, Switzerland and the Caribbean. Once this is taken into consideration, the preliminary June baseline number for its holdings increased to $1.31 trillion from $1.17 trillion. Hence the doubling of the percentage net sell-off in the second half of last year.

A year-on-year comparison paints a different picture: China’s holdings at $1.15 in December 2011 were down less than 1% from $1.16 trillion a year earlier, and might have been higher had there not been a heavy sell off in December last year from November’s holdings of $1.25 trillion. China typically reduces its Treasuries holdings towards the end of a year.

The numbers for the second half of last year were always likely to be closely watched. The political kerfuffle in Washington over the debt ceiling during the autumn put the U.S.’s AAA-credit rating at risk. Also, overseas investors generally were buying higher-yielding U.S. mortgage securities ahead of what was expected to be a further round of quantitative easing by the U.S. Federal Reserve.

There are other factors consistent with a long-term fall in China’s Treasuries holdings, among them a shrinking trade surplus and the gradual rise in the yuan against the dollar. This time round, Beijing has also likely been buying euro-denominated sovereign debt, both to diversify it holdings further (which it has been doing for some time) at fire-sale prices, and to provide some political backstopping for Europe during the euro-debt crisis. The State Administration of Foreign Exchange (SAFE), which manages the country’s foreign exchange reserves, is also pursuing equity investment and a little buying of gold and more of other commodities. When you are sitting on $3.2 trillion in reserves, you have to chase a little yield. The Wall Street Journal calculates that the share of China’s reserves in U.S. securities has fallen to a decade-low 54%.

While SAFE  hasn’t been putting all the extra foreign-exchange reserves that China has been taking in into U.S. dollar denominated assets for a while, more recently, the U.S. Federal Reserve has been buying long-term Treasury bonds as part of its easing program, Operation Twist, as the putative QE3 became. Americans who bleated about their country being in hock to the Chinese, can now bleat about being in hock to their own Federal Reserve–for some an even greater evil. For the rest, China still owns more than $1 trillion of American sovereign debt to get het up about. Nor does China have too many other places to put it.

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Lights. Camera. But How Much More Action For Hollywood In China?

There may be less than meets the eye, and certainly less than the hype, to the trade concessions the U.S. has won for Hollywood from Beijing. The deal raises to 34 from 20 the number of non-Chinese films than can be distributed in China each year, by the device of adding 14 3-D or IMAX films to the base quota. As China has only 2,500 3-D movie screens and 48 IMAX theaters the significant concession is that those 14 will also be allowed in in their 2-D formats, which will be able to be seen on China’s 10,500 conventional cinema screens. The U.S. has 40,000 screens. The U.S. also releases 8,000-9,000 new films a year.

Most of the 20 foreign films a year that have been allowed into China for the past 20 years are American. The three top grossing foreign films in China last year were Transformers 3, Kung Fu Panda 2 and Pirates of the Caribbean: On Stranger Tides. They took $170 million, $98 million and $76 million at the box office respectively. Even more pleasing for Hollywood, under the new deal, its cut on box-office takings will rise to 25% from 13%. Hollywood typically expects a 30% fee on foreign distribution, but with 13% and all the other restrictions having been the rule for China for two decades, this feels like the “very big deal” it is being proclaimed to be in Hollywood, at least for the blessed 34 films.

The American movie industry has long complained about its treatment in the world’s fastest growing movie market. The WTO ruled in 2009 that China’s limits on movie distribution fees was a violation of international trade rules. Beijing has not rushed to come into compliance, and promoting China’s own cultural heritage has become a national priority. Yet even as China tightened restrictions on foreign TV imports, Xi Jinping’s visit to the U.S. allowed the logjam in negotiations over movies to be broken. It was something that China would have have to have done at some point anyway, and is far less expensive than settling the outstanding issues with the U.S. over intellectual property. It would be a brave man, though, to this Bystander’s mind, who would bet that the showing of 14 more Hollywood movies in China each year will dampen the demand for pirated DVDs, a main prop of Hollywood’s argument for increasing the distribution fees.

China is expected to double the number of movie screens it has to 16,000 by 2015. The ones it had took in $2.1 billion at the box office last year. The key question is how much of that will the U.S. movie industry actually get its hands on. Hollywood distributors may soon understand why the old saw, there’s many a slip twixt cup and lip, applies so readily to doing business as a foreign firm in China. We’ve heard of one distributor who gets the house photographed each screening to settle arguments of how many tickets have actually been bought. The right for foreign film distributors to audit box-office sales might turn out to be the most important provisions of the new agreement.

The position is even worse for foreign co-producers operating in China. Some 40 independently produced foreign movies are distributed in China each year outside of the quota system. These independent films don’t get a cut of the box office, but a licence fee based on the film’s budget. It is about a third of the standard international fee. Under the new rules, filmmakers and distributors will be able to negotiate license fees closer to international norms. But the fee is just the beginning of what seems regularly to turn into a nightmare. The China Law Blog has had a series of excellent posts on this subject last year that don’t make pretty reading if you are a would-be film producer.

Why is it so hard for foreign co-producers to get paid? There are three main reasons:

1. There are no trusted intermediaries for film in China. Collection agents, escrow account holders, trustees and the like simply do not exist here in China. The foundations of international film finance are not in place. In itself, that makes you wonder how completion guarantors can underwrite Sino-foreign co-productions.

2. You need to rely on your Chinese co-producer to collect the box office and pay your share to you outside of China. Good luck with that.

3. Even if you are lucky and your Chinese co-producer has some vague intention of paying you, they cannot pay you unless they can show the Chinese tax authorities that income tax has been paid on the gross receipts and that the withholding tax on their payment to you will be deducted. Even then, they will still need State Administration of Foreign Exchange (SAFE) approval before being able to send money overseas. The vast majority of Chinese businesses will not want to do business this way.

We hope that DreamWorks Animation, which has just signed a $300 million joint venture to make movies in China, is a reader.

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Mr Xi Visits America Again

Xi Jinping, the Chinese vice-president the rest of the world is taking to be China’s next president, visits the U.S. this week. It is a land he knows better than apparently the U.S. knows him. Xi is seen above (center, with plastic cup) at a picnic in Muscatine, Iowa 27  years ago with a visiting Hebei provincial agricultural delegation. He will be returning there with great PR fanfare during his latest trip. This Bystander thought it timely to republish a piece we first published last July  looking at Xi and China’s most important leadership transition in the three decades since Deng Xioaping set the party and country on the road of economic reform.

China’s next top leaders will, for the first time, be men born after the Party seized power in 1949. With their ascendancy, modern China will cross a political and demographic Rubicon. Their generation is the great, great grandchild of Mao’s first generation of leaders. Their youth occurred during the Cultural Revolution, when many of their families were purged, but they embraced the Party nevertheless, and many advanced through its ranks by being “redder than red”. They are more worldly than their predecessors, mostly educated at top Chinese universities, more likely than their predecessors to have social science rather than engineering degrees, and be more likely to send their own children to top U.S. and European universities. Their working political life has only known China transforming itself as a rising political and economic power, yet they are as pragmatically committed as their predecessors to the Party’s monopoly on power, if divided over whether the basis for that should be ideological or economic.

The distinction matters. China is at a critical stage of its economic development. It has, self-evidently, developed at great pace through the initial phases of industrialization and urbanization over the past 30 years. Now it must kick on and leap the great wall that has stopped other developing nations completing the transformation to a developed economy.

When per capita income reaches $10,000-12,000 a year (in 2007 dollars), developing economies tend to stop developing without institutional change. China’s annual per capital income is $4,000. At current growth rates that gives it less than a decade–the watch of the new leadership–before it hits the wall. It will need to make deep structural reforms, both economic and political, if it is going to be able to vault it. Regardless of the fact that even if it does clear the wall, China will still be a middle-income country–absolute size of the economy is irrelevant in this respect, even if China passes the U.S. to become the world’s largest economy–no country has yet managed to be both developed and a single-party state.

That sets up a dilemma. If the Party’s legitimacy to monopolistic rule depends on continuing to deliver the economic growth that keeps its citizens getting richer and the country stronger and if China’s rapid economic growth cannot continue beyond a certain point without institutional reform, then managing the role of government in the economy and overcoming state-owned vested interests–in other words reforming itself–becomes the new leadership’s most important concern.

If, on the other hand, the Party’s legitimacy to monopolistic rule rests on an ideology of the mandate of Mao, it will still need to forge a statist economy that can deliver the economic development to ensure social stability and regional clout, and be unable to escape the fact that economic growth cannot continue beyond a certain point without institutional reform to support its move up the arc of development and prevent the ossifying of incumbent interests. So, again, managing the role of government in the economy and arbitrating between state-owned vested interests becomes the new leadership’s most important concern.

China is not only self-evidently non-Western, but it has a self-consciously distinct history, culture and political system, so it could develop a distinct economic system. Chinese exceptionalism is not anymore unreasonable than American exceptionalism. But in that event, the Party will still have to operate and against a back-drop of a globally connected economy in a world that is already wary of China’s perceived mercantilism and rising power and status. Though unlikely, that could make China turn inward and neo-isolationist, relying on its growing internal market and a demographic bias to becoming a deficit country over the next decade, to drive the next stage in its economic development.

For now, there is every indication that China will continue on its present course. Indeed, there is a plan for that. The new leadership will come into position midway though the current five-year plan. Yet what looks from the outside to be a seamless transfer of power from one generation of leadership to the next belies the factional infighting that occurs out of public view.

So far, it is the princelings, the descendants of Mao’s original revolutionary leaders, an elite collective dynasty of some 400 families who hold extensive sway over the Party, army and the economy, that are coming out on top. One of their own, Xi Jinping, born 1953, is emerging as Hu Jintao’s successor as paramount leader, successively taking over from Hu the positions of Party general secretary in 2012, president in 2013 and chairman of the Central Military Commission in 2014. By then the top Party, state and military jobs will again be united in one man, if Xi successfully consolidates over the course of the two-year transition his position as the first ranked in the Politburo’s standing committee, the small group of men, currently nine, that constitute the inner sanctum of the Party’s–and China’s–power.

Xi has outflanked Li Keqiang, the only other post-49er to make it to the Politburo’s standing committee, where he ranks seventh out of nine, one place below Xi, and who was Hu’s protege until Hu bowed to political realities and switched his support to Xi. Li, like Hu rose through the Party’s other leading faction, the Communist Youth League (YCL) whose power base is the party’s grassroots. Princelings dismissively refer to the leaders who come up through the YCL as “sons of shopkeepers.”

Xi rise from provincial official to national leader has been rapid. Cunning, calculating and ambitious Xi plays politics like a chameleon playing poker. He has worked in the countryside and in cities, north and south, in villages and in big cities, giving him a broad network of connections. He is a student of Marxism but not known to be ideological. Though never in the army, he has strong links with the armed forces. His father, General Xi Zhongxun, was a founding father of Mao’s revolution and his wife, Peng Liyuan, is both a celebrity folk singer and a major general in the PLA. He has a reputation for being pro-business (his father was purged by Mao for promoting economic opening and became one of Deng Xiaoping’s key mentors and lieutenants in instituting economic reform, particularly the early experiments in Guangdong and Shenzhen) but he is also famous for being ‘clean’, having cleared up corruption in Fujian in the 1990s and Shanghai in the 2000s, and is disdainful of China’s nouveau riche. He is calm and cautious, and above all seen as a team player–while all the while skillfully climbing a ladder of political patrons.

Though scarcely charismatic, Xi will be a more imposing figure on the world stage than his predecessors (though Hu set a low bar). Physically, he is tall and stocky so photo shoots with other world leaders will play well at home. With a sister in Canada, a brother in Taiwan and a daughter at Harvard in the U.S., to which he has been a visitor since the 1970s, he knows more about the world than the world knows about this plain- if rarely outspoken man who plays his political cards close to his chest–or about what he and his fellow new leaders want to do once they reach the apex of power they have scrabbled so hard to ascend.

As already noted, they will take over half way through the current five-year plan, so their initial path is set. But the next Politburo’s composition (all of its nine members save for Xi and Li are expected to retire in 2012) will also reflect the balance of power between those who believe that maintaining economic growth is necessary to legitimize the Party’s right to monopoly rule, in short the economic reformers, and those who think that legitimacy should be based on ideology, a group for whom the current Maoist nostalgia stands proxy. Many other currents–political, nationalistic, regional and demographic–cut across that divide. Even the princelings are not a monolithic bloc. Factional alliances exist among those who want to develop a more harmonious form of capitalism with a strong safety net, a narrowing of the wealth gap and more environmental protections; those harderliner economic reformers who want to diminish the power of the public sector and open up political reforms to embrace a new propertied class; and the so-called neo-comms, who want to asset China’s global power through cultural diplomacy, military strength and taking a greater role in international institutions.

Who gets promoted from the Politburo to its standing committee, and how they rank, will reveal to some extent how those divides lie and thus how China develops over the next decisive decade. But all are united in preserving the Party’s grip on power.

Footnote: State media have published the transcript of written answers Xi gave to questions from the Washington Post on the eve of his visit to the U.S. His comments on Sino-American relations were mostly pro-forma, including a note of warning sounded to the U.S. over its military stance in the Pacific.

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Iran, Oil and U.S. Sanctions: Beijing’s Complex Response

Beijing may be huffing and puffing about the sanctions Washington imposed last week on state-run Zhuhai Zhenrong Corp. for selling refined petroleum products to Iran, but it can scarcely be surprised.

“Imposing sanctions on a Chinese company based on a domestic (US) law is totally unreasonable and does not conform to the spirit or content of the UN Security Council resolutions about the Iran nuclear issue,” foreign ministry spokesman Liu Weimin says.

But it is what Washington does. Zhuhai Zhenron is one of three firms to be sanctioned in this case. The other two were Singapore’s Kuo Oil and the United Arab Emirates’ FAL Oil. Even though the sanctions on Zhuhai Zhenrong are largely symbolic as it does not do much business in the U.S. they could be considered a warning to some larger Chinese energy firms that do.

The sanctions followed Beijing’s rejection earlier last week of visiting U.S. Treasury Secretary Tim Geithner’s request that China use its economic clout as Iran’s largest oil export market to press Tehran to rein in its nuclear ambitions. Recent tightening of U.S. and EU sanctions won’t mean much if Tehran can still ship lots of oil eastwards. Tehran depends on crude oil exports for 60% of revenues and 80% of its hard currency.

Beijing’s argument was that China depended on Iranian oil for its economic development. Up to a point, but meanwhile, Prime Minister Wen Jiabao is in Saudi Arabia for the signing of an agreement between Sinopec and the Saudi energy giant Aramco to build an oil refinery Yanbu on the Red Sea with the capacity to refine 400,000 barrels of oil a day. Along with Angola, Saudi Arabia is already one of China’s top two suppliers of oil, ahead of Iran, which the number three. Wen would like to be assured China can get more oil from Saudi Arabia if necessary. Qatar and the United Arab Emirates are also on Wen’s itinerary.

Tensions are likely to remain high in the Strait of Hormuz for the foreseeable future. Iran is dependent on a break-even price for oil of $90 a barrel, so tension, if not hostilities, may suit it. Even if China and India follow Japan in reducing their purchases of Iranian oil, and even if that cut was by as much as 25%, Iran will get by. Meanwhile, China will continue to seek alternative sources of oil, and not be too sorry if Washington is diverted from its new geo-political pivot towards the Asia-Pacific region by a reminder of its interests in the MidEast.

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