Sep-2012-International

INTERNATIONAL AFFAIRS

Afghanistan, China sign security deal
On September 23, 2012, China signed security and economic agreements with Afghanistan during a rare trip to Kabul by Mr Zhou Yongkang, China’s domestic security chief and a member of the ruling Communist Party’s central Politburo. The deal is seen aimed at bolstering Beijing’s influence ahead of a NATO withdrawal of most combat forces by 2014.

Zhou’s visit was the first to Afghanistan by a senior Chinese leader since 1966 and followed a visit by Karzai to Beijing in June 2012, when both countries agreed to cooperate on combating extremism in the region.

Resource-hungry China, which has a small border with Afghanistan in the country’s mountainous north-eastern corridor, is keen to invest in Afghan resource deposits worth as much as $1 trillion, based on US Pentagon estimates.

US Fed announces QE-3
On September 13, 2012, the US Central Bank said it will launch a fresh round of bond-buying to stimulate the economy, purchasing $40 billion of mortgage debt each month until the outlook for jobs improves substantially.

WHAT IS QUANTITATIVE EASING? A central bank buys large amounts of assets—in this case, bonds backed by housing mortgages—in an effort to bring down interest rates and boost the economy. The Federal Reserve has tried quantitative easing twice before, thus earning this round the designation QE3.

To buy bonds, the Fed essentially creates money from nothing, paying for its purchases by crediting the accounts of banks from which it buys the bonds. That’s a clue as to how it works—as money piles up in their Fed accounts, earning the paltry quarter-of-a-percentage point in interest that the Fed pays, banks may be keener to lend to companies and people. If companies use that money to buy equipment, and households use it to buy homes and cars, the economy gets a jump.

Fed bond-buying also helps the economy by pushing down borrowing costs. Massive buying of any asset tends to push up the prices, and because of the way the bond market works, rising prices forces yields down. Because the Fed is buying mortgage-backed bonds, the purchases act to directly lower the cost of borrowing to buy a home. In addition, some investors, put off by the rising price of the bonds that the Fed is buying, turn to other assets, like corporate bonds—which, in turn, pushes up corporate bond prices and lowers those yields, making it cheaper for companies to borrow—and spend.

By lowering borrowing costs and spurring banks to lend more, the Fed hopes to induce more spending and eventually set the stage for more hiring. This time around, the Fed tied its bond-purchase program explicitly to jobs, saying it will keep buying bonds until it sees a substantial improvement in the labour market.

Most studies show that quantitative easing does reduce borrowing costs, as measured by the yield on 10-year Treasuries. Studies are less clear on how much those lower borrowing costs translate into real economic improvement, such as the creation of more jobs. One model developed by Federal Reserve Bank of San Francisco chief John Williams in 2011 suggested the Fed’s second round of bond-buying –$600 billion worth—generated 700,000 additional jobs.

Buying bonds expands the Fed’s balance sheet. While the central bank says it will be able to shrink its giant balance sheet—$2.85 trillion before its latest round of buying bonds—without sparking inflation, it has never done anything like it before. Critics also say bond-buying enables Congress and the President to avoid dealing with looming fiscal problems by giving them a handy buyer for the nation’s ever-increasing debt. Politicians in other countries have complained that US quantitative easing cheapens the dollar and hurts their exports, and floods their economies with capital that is hard to absorb. The unprecedented stimulus could also draw accusations that the Fed is overstepping, ultimately threatening the Fed’s independence should lawmakers move to curb its powers in response.

First Tri-lateral meet between India, Afghanistan and USA
Against the back-drop of the US drawing down most of its forces by the end of 2014, Beijing, New Delhi and Islamabad are jockeying for position in Afghanistan.  In this regard, the first-ever triangular meeting between the US, India and Afghanistan on September 25, 2012, in New York, sent yet another signal that the US is looking to replace Pakistan with India in its stabilization plans.

Washington wants India to fill up a post-US vacuum in Afghanistan and to take a more active role in training Afghan security forces

There is growing international disappointment with Pakistan’s negative role in Afghanistan. After the long, hard decade-old war on terrorism, Washington is coming to terms with the fact that the contradiction between its interests in Afghanistan and those of the Pakistan army might be irreconcilable.

India is not comfortable with the idea of the Taliban coming back. It fears that under a Taliban-led government, Afghanistan could turn into a sanctuary for anti-India militants and Kashmir terrorists.

China would also like to contain Uighur extremists in Afghanistan who are currently working with the Taliban and against China.

India became the first country to sign a strategic partnership agreement with Afghanistan a year ago. Beijing is the second non-Western power to develop such a partnership with Kabul.

APEC Summit
At the end of the two-day APEC Summit, which concluded on September 9, 2012, at an island off Russian port city of Vladivostok, Asia-Pacific nations, including China, the United States and Japan, promised measures to boost growth. However, they rejected limits on food exports to try to revive the flagging global economy.

The 21 members of the Asian-Pacific Economic Cooperation (APEC) group agreed to slash import duties on “green technology”, take steps to bolster growth, and liberalise trade to counter problems heightened by Europe’s debt crisis.

APEC, which also groups Malaysia, Indonesia, Canada and South Korea, makes decisions by consensus and its moves are not binding. But its influence is growing as Europe’s declines.

It accounts for 40 per cent of the world’s population, 54 per cent of its economic output and 44 per cent of its trade. In the United States, China and Japan, it has the world’s three largest economies.

Despite concern about Europe’s debt problems, APEC welcomed European leaders’ attempts to resolve the crisis.

They also endorsed a list of 54 environmental goods on which import duties will be reduced to no more than 5 per cent by 2015, including equipment for renewable energy, waste treatment and environmental monitoring.

Hosting the summit on an island linked to the mainland by a spectacular new $1-billion bridge, a symbol of Moscow’s decision to look east, President Putin advertised his vast country as a gateway for Asia to European markets.

Chinese President Hu Jintao promised that his country, Asia’s dominant economic force, would rebalance its economy to secure stable and robust growth after a slowdown that has hit the entire region.

Cooperation in APEC is hindered by territorial and other disputes among some members. Hu and Japanese Prime Minister Yoshihiko Noda met briefly on the sidelines of the summit but details of the talks were not made available.