800 Israeli Drone Feeds Hacked By British and American Intelligence

Israeli Drone Feeds Hacked By British and American Intelligence

Newsletter published on 3 February 2016

(1) Obama ordered NSA to spy on Israel during Iran negotiations
(2) US has a national interest in stopping the Israel lobby; Obama
approved the wiretaps
(3) NSA tapped Communications between Netanyahu and Congress
(4) Netanyahu was telling American-Jewish groups to get Congress to
sabotage the Iran Deal
(5) Israeli Drone Feeds Hacked By British and American Intelligence
(6) Is America is still an ally of Israel? Is Israel still an ally of
America?

(1) Obama ordered NSA to spy on Israel during Iran negotiations

http://www.wsj.com/articles/u-s-spy-net-on-israel-snares-congress-1451425210

U.S. Spy Net on Israel Snares Congress

NSA’s targeting of Israeli leaders swept up the content of private
conversations with U.S. lawmakers

By Adam Entous and Danny Yadron

The Wall Street Journal

Dec. 29, 2015 4:40 p.m. ET

President Barack Obama announced two years ago he would curtail
eavesdropping on friendly heads of state after the world learned the
reach of long-secret U.S. surveillance programs.

But behind the scenes, the White House decided to keep certain allies
under close watch, current and former U.S. officials said. Topping the
list was Israeli Prime Minister Benjamin Netanyahu.

The U.S., pursuing a nuclear arms agreement with Iran at the time,
captured communications between Mr. Netanyahu and his aides that
inflamed mistrust between the two countries and planted a political
minefield at home when Mr. Netanyahu later took his campaign against the
deal to Capitol Hill.

The National Security Agency’s targeting of Israeli leaders and
officials also swept up the contents of some of their private
conversations with U.S. lawmakers and American-Jewish groups. That
raised fears… that the executive branch would be accused of spying on
Congress.

(2) US has a national interest in stopping the Israel lobby; Obama
approved the wiretaps
http://www.globalresearch.ca/israel-and-its-lobby-lose-the-iran-deal-all-over-again-in-news-of-damning-wiretaps/5498714?print=1

Israel and Its Lobby Lose the Iran Deal All over Again, in News of
Damning Wiretaps

By James North and Philip Weiss

Mondoweiss 1 December 2015
Global Research, January 01, 2016

http://www.globalresearch.ca/israel-and-its-lobby-lose-the-iran-deal-all-over-again-in-news-of-damning-wiretaps/5498714

You’d think that there would be widespread outrage over the story
everyone’s talking about today, the Wall Street Journal scoop that the
Obama administration spied on Israeli Prime Minister Netanyahu during
the Iran Deal negotiations so as to counter his efforts to sink it. The
wiretaps reveal that Israeli officials were up to their necks in the US
political process; they "coordinated talking points with Jewish-American
groups against the deal; and asked undecided lawmakers what it would
take to win their votes, according to current and former officials
familiar with the intercepts."

The president approved the wiretaps.

Privately, Mr. Obama maintained the monitoring of Mr. Netanyahu on the
grounds that it served a "compelling national security purpose,"
according to current and former U.S. officials.

That’s right; there’s a compelling national interest in stopping the
Israel lobby.

Many have said that President Obama lacks spine? Well, it sure looks
like the leak to reporters Adam Entous and Danny Yadron came from the
administration, and it’s hard to believe that a leak of this magnitude
was not approved by the president. Just when the Israel lobby thought
that it was starting to get back to business as usual, the Obama
administration has reminded them that something has fundamentally
changed in the U.S.-Israel relationship. Not only did we beat the lobby
and Israel on the Iran Deal, but: we’re exposing your tactics, and
patriotic Americans are going to be very upset by what they see.

Remember that Obama in his highlight moment of the Iran Deal told
Americans it would be an "abrogation of my constitutional duty" to defer
to Israel’s interests on the Iran Deal. You’d think it would be a
scandal that the Israeli PM was intriguing with Republicans — and surely
some Democrats– in the way the WSJ has documented; but instead the
official reaction is likely to be how outrageous it was for Obama and
the NSA to be listening in on the supposed only democracy in the Middle
East.

Some of the details from the article:

The U.S., pursuing a nuclear arms agreement with Iran at the time,
captured communications between Mr. Netanyahu and his aides that
inflamed mistrust between the two countries and planted a political
minefield at home when Mr. Netanyahu later took his campaign against the
deal to Capitol Hill.

The National Security Agency’s targeting of Israeli leaders and
officials also swept up the contents of some of their private
conversations with U.S. lawmakers and American-Jewish groups. That
raised fears—an "Oh-s— moment," one senior U.S. official said — that the
executive branch would be accused of spying on Congress…

White House officials believed the intercepted information could be
valuable to counter Mr. Netanyahu’s campaign…

Much of the article substantiates the allegations swirling at the time
of the deal, that Netanyahu was getting inside information on the secret
negotiations. The eavesdropping revealed to the White House:

How Mr. Netanyahu and his advisers had leaked details of the U.S.-Iran
negotiations — learned through Israeli spying operations — to undermine
the talks; coordinated talking points with Jewish-American groups
against the deal; and asked undecided lawmakers what it would take to
win their votes, according to current and former officials familiar with
the intercepts.

The notorious Israeli ambassador Ron Dermer was caught on the tapes:

Mr. Dermer was described as coaching unnamed U.S. organizations — which
officials could tell from the context were Jewish-American groups — on
lines of argument to use with lawmakers, and Israeli officials were
reported pressing lawmakers to oppose the deal…

Israel’s pitch to undecided lawmakers often included such questions as:
"How can we get your vote? What’s it going to take?"

Again, no names of US legislators, but this article contains the
explicit threat that Israel could expose individuals down the road. The
practice is sure to anger Americans and drive an even deeper wedge into
the Jewish community over the role of the lobby. Patriotic Jewish
Americans are going to be embarrassed yet again by the extent to which
Israel tries to subvert our government, using American Jewish friends to
do so. And many will walk away from the lobby over this kind of
business. The large wavering middle of pro-Israel forces is going to be
set back. J Street made the right call on the Iran Deal (reluctantly,
I’ve heard) but it will reap a dividend.

Notre Dame professor Michael Desch’s interpretation: "The lobby and
Congress will no doubt try to spin it as more evidence of Obama’s
anti-Israel animus. But the story constitutes powerful evidence of 1)
divergence of US and Israeli interests on important issues like Iran and
2) close coordination of the lobby and Government of Israel in trying to
influence US domestic politics."

Scott Horton refers to the last big eavesdropping scandal, when
then-congresswoman Jane Harman promised a suspected Israeli agent that
she would attempt to stop a federal case against American Israel Public
Affairs Committee (AIPAC) staffers in exchange for that agent’s
political influence in getting her a committee chair. Jeff Stein
reported the story:

Rep. Jane Harman, the California Democrat with a longtime involvement in
intelligence issues, was overheard on an NSA wiretap telling a suspected
Israeli agent that she would lobby the Justice Department to reduce
espionage-related charges against two officials of the American Israeli
Public Affairs Committee, the most powerful pro-Israel organization in
Washington.

Harman was recorded saying she would "waddle into" the AIPAC case "if
you think it’ll make a difference," according to two former senior
national security officials familiar with the NSA transcript.

In exchange for Harman’s help, the sources said, the suspected Israeli
agent pledged to help lobby Nancy Pelosi , D-Calif., then-House minority
leader, to appoint Harman chair of the Intelligence Committee after the
2006 elections, which the Democrats were heavily favored to win.

The suspected Israeli agent was inferred (it was the opinion of Josh
Marshall and Ron Kampeas) to be Haim Saban, the giant contributor to the
Democratic Party. So a "suspected Israeli agent" is also a giant
Democratic funder with influence over the Congress? We’re headed for a
showdown between the lobby and the grassroots, inside the Democratic
Party. And praise to the Obama administration, who we guess is fueling
the controversy out of "compelling national" interest.

(3) NSA tapped Communications between Netanyahu and Congress

http://nationalinterest.org/feature/the-nsa-israel-scandal-who-cares-14771

The NSA-Israel Scandal: Who Cares?

Communications between Benjamin Netanyahu and Congress were fair game
for the NSA.

Daniel R. DePetris

December 31, 2015

Adam Entous and Danny Yadron of the Wall Street Journal had Facebook,
Twitter and every other social media platform abuzz last night when they
published their exclusive December 29 piece, entitled "U.S. Spy Net on
Israel Snares Congress." The account, based on interviews with more than
two dozen former and current administration and intelligence officials,
outlines the length to which the National Security Agency—under explicit
orders from policymakers in the Obama administration—kept tabs on
Israeli Prime Minister Benjamin Netanyahu during the high-stakes nuclear
negotiations with Iran.

As Entous and Yadron report, the Obama administration made the decision
to allow the NSA to continue intercepting Prime Minister Netanyahu’s
communications, in a program that was apparently designed to uncover
precisely what the premier’s thoughts were about the highly sensitive
and delicate Iran-P5+1 diplomatic process. Contacts between Netanyahu
and his senior advisors were fair game for NSA analysts to sweep up,
which is standard business for the men and women who work in the massive
Fort Meade complex. In the context of that work, however, the NSA
realized that some of the conversations they were intercepting were
between senior Israeli officials and members of Congress who were being
lobbied by Netanyahu’s administration to vote against the Iran nuclear
deal when the accord came up for a vote. From the story:

"The U.S., pursuing a nuclear arms agreement with Iran at the time,
captured communications between Mr. Netanyahu and his aides that
inflamed mistrust between the two countries and planted a political
minefield at home when Mr. Netanyahu later took his campaign against the
deal to Capitol Hill.

"The National Security Agency’s targeting of Israeli leaders and
officials also swept up the contents of some of their private
conversations with U.S. lawmakers and American-Jewish groups. That
raised fears… that the executive branch would be accused of spying on
Congress."

No one can blame NSA officials for covering their tracks and worrying
amongst themselves that they would be accused by members of Congress for
spying on the American people’s elected representatives. Indeed, if
Entous and Yadros’ story had gotten out during the height of the Edward
Snowden disclosures, there would be more than a distinct possibility of
the head of the NSA and the Director of National Intelligence being
summoned to Capitol Hill for an angry and tense multi-hour grilling.

And yet, when one takes a step back and looks past the initial hype of
the Wall Street Journal article, there is nothing at all unusual between
what the Obama administration authorized and the program that the NSA
carried out.

Yes, Israel is America’s closest ally in the Middle East and yes, the
Israeli and U.S. intelligence agencies are often in synch on numerous
national security issues. But from where President Obama was sitting,
permitting the NSA to intercept Netanyahu’s communications was both
legal under U.S. law and strategically wise. Just because some U.S.
lawmakers happened to be included in the reports sent back to the
president does not change these three fundamental facts.

1. It was no secret to President Obama that Prime Minister Netanyahu was
deeply unreceptive to Washington’s plan of resolving the Iranian nuclear
issue diplomatically. If Obama viewed Iranian Foreign Minister Mohammad
Javad Zarif and his entourage as rational human beings that would be
willing to strike an agreement if the right mix of pressure and
concessions were offered, Netanyahu considered the entire enterprise a
waste of precious time—time that could otherwise be used to lay the
groundwork for even an even more severe package of international
economic sanctions to or a preemptive military operation to get Tehran
to comply. For Netanyahu, any enrichment capability inside Iran was a
non-starter for his government, and an inspection and verification
regime that would only last ten to fifteen years was an indirect
admission from the international community that Iran would eventually be
able to acquire a nuclear weapon.

Netanyahu wasn’t shy about expressing his reservations and outright
opposition to the diplomacy that the U.S. and the P5+1 were conducting.
In fact, he used every appearance when interviewed on U.S. television to
condemn the concessions that the administration was offering, and
scoffed at the very idea that a settlement should result in a domestic
enrichment program for Iran. Whether it was bashing the interim nuclear
agreement as an "historic mistake" immediately after it was signed or
admitting freely on Meet the Press that he was "trying to kill a bad
deal," Netanyahu’s objective as it concerned Iran’s nuclear program was
completely contrary to U.S. policy. It’s only natural, indeed expected,
for the United States to leverage its intelligence resources to defend
an investment that the country was working to achieve over three years
time. The surest way to defend an investment is to determine what other
players are saying or doing. This is exactly what the administration
chose to do.

(4) Netanyahu was telling American-Jewish groups to get Congress to
sabotage the Iran Deal
https://theintercept.com/2015/12/30/spying-on-congress-and-israel-nsa-cheerleaders-discover-value-of-privacy-only-when-their-own-is-violated/

Spying on Congress and Israel: NSA Cheerleaders Discover Value of
Privacy Only When Their Own Is Violated

2015-12-30T19:02:52+00:00

Glenn Greenwald

The Wall Street Journal reported yesterday that the NSA under President
Obama targeted Israeli Prime Minister Benjamin Netanyahu and his top
aides for surveillance. In the process, the agency ended up
eavesdropping on "the contents of some of their private conversations
with U.S. lawmakers and American-Jewish groups" about how to sabotage
the Iran Deal. All sorts of people who spent many years cheering for and
defending the NSA and its programs of mass surveillance are suddenly
indignant now that they know the eavesdropping included them and their
American and Israeli friends rather than just ordinary people.

The long-time GOP chairman of the House Intelligence Committee and
unyielding NSA defender Pete Hoekstra last night was truly indignant to
learn of this surveillance:

In January 2014, I debated Rep. Hoekstra about NSA spying and he could
not have been more mocking and dismissive of the privacy concerns I was
invoking. "Spying is a matter of fact," he scoffed. As Andrew Krietz,
the journalist who covered that debate, reported, Hoekstra "laughs at
foreign governments who are shocked they’ve been spied on because they,
too, gather information" — referring to anger from German and Brazilian
leaders. As TechDirt noted, "Hoekstra attacked a bill called the RESTORE
Act, that would have granted a tiny bit more oversight over situations
where (you guessed it) the NSA was collecting information on Americans."

But all that, of course, was before Hoekstra knew that he and his
Israeli friends were swept up in the spying of which he was so fond. Now
that he knows that it is his privacy and those of his comrades that has
been invaded, he is no longer cavalier about it. In fact, he’s so
furious that this long-time NSA cheerleader is actually calling for the
criminal prosecution of the NSA and Obama officials for the crime of
spying on him and his friends.

This pattern — whereby political officials who are vehement supporters
of the Surveillance State transform overnight into crusading privacy
advocates once they learn that they themselves have been spied on — is
one that has repeated itself over and over. It has been seen many times
as part of the Snowden revelations, but also well before that.

In 2005, the New York Times revealed that the Bush administration
ordered the NSA to spy on the telephone calls of Americans without the
warrants required by law, and the paper ultimately won the Pulitzer
Prize for doing so. The politician who did more than anyone to suffocate
that scandal and ensure there were no consequences was
then-Congresswoman Jane Harman, the ranking Democratic member on the
House Intelligence Committee.

In the wake of that NSA scandal, Harman went on every TV show she could
find and categorically defended Bush’s warrantless NSA program as "both
legal and necessary," as well as "essential to U.S. national security."
Worse, she railed against the "despicable" whistleblower (Thomas Tamm)
who disclosed this crime and even suggested that the newspaper that
reported it should have been criminally investigated (but not, of
course, the lawbreaking government officials who ordered the spying).
Because she was the leading House Democrat on the issue of the NSA, her
steadfast support for the Bush/Cheney secret warrantless surveillance
program and the NSA generally created the impression that support for
this program was bipartisan.

But in 2009 — a mere four years later — Jane Harman did a 180-degree
reversal. That’s because it was revealed that her own private
conversations had been eavesdropped on by the NSA. Specifically, CQ’s
Jeff Stein reported that an NSA wiretap caught Harman "telling a
suspected Israeli agent that she would lobby the Justice Department to
reduce espionage charges against two officials of American Israeli
Public Affairs Committee (AIPAC) in exchange for the agent’s agreement
to lobby Nancy Pelosi to name Harman chair of the House Intelligence
Committee." Harman vehemently denied that she sought this quid pro quo,
but she was so furious that she herself(rather than just ordinary
citizens) had been eavesdropped on by the NSA that — just like Pete
Hoekstra did yesterday — she transformed overnight into an aggressive
and eloquent defender of privacy rights, and demanded investigations of
the spying agency that for so long she had defended:

  I call it an abuse of power in the letter I wrote [Attorney General
Eric Holder] this morning. … I’m just very disappointed that my country
— I’m an American citizen just like you are — could have permitted what
I think is a gross abuse of power in recent years. I’m one member of
Congress who may be caught up in it, and I have a bully pulpit and I can
fight back. I’m thinking about others who have no bully pulpit, who may
not be aware, as I was not, that someone is listening in on their
conversations, and they’re innocent Americans.

The stalwart defender of NSA spying learned that her own conversations
had been monitored and she instantly began sounding like an ACLU lawyer,
or Edward Snowden. Isn’t that amazing?

The same thing happened when Dianne Feinstein — one of the few members
of Congress who could compete with Hoekstra and Harman for the title of
Most Subservient Defender of the Intelligence Community ("I can honestly
say I don’t know a bigger booster of the CIA than Senator Feinstein,"
said her colleague Sen. Martin Heinrich) — learned in 2014 that she and
her torture-investigating Senate Committee had been spied on by the CIA.
Feinstein — who, until then, had never met an NSA mass surveillance
program she didn’t adore — was utterly filled with rage over this
discovery, arguing that "the CIA’s search of the staff’s computers might
well have violated … the Fourth Amendment." The Fourth Amendment! She
further pronounced that she had "grave concerns" that the CIA snooping
may also have "violated the separation of powers principles embodied in
the United States Constitution."

During the Snowden reporting, it was common to see foreign governments
react with indifference — until they learned that they themselves,
rather than just their unnotable subjects, were subject to spying. The
first reports we did in both Germany and Brazil were about mass
surveillance aimed at hundreds of millions of innocent people in those
countries’ populations, and both the Merkel and Rousseff governments
reacted with the most cursory, vacant objections: It was obvious they
really couldn’t have cared less. But when both leaders discovered that
they had been personally targeted, that was when real outrage poured
forth, and serious damage to diplomatic relations with the U.S. was
inflicted.

So now, with yesterday’s WSJ report, we witness the tawdry spectacle of
large numbers of people who for years were fine with, responsible for,
and even giddy about NSA mass surveillance suddenly objecting. Now
they’ve learned that they themselves, or the officials of the foreign
country they most love, have been caught up in this surveillance
dragnet, and they can hardly contain their indignation. Overnight,
privacy is of the highest value because now it’s their privacy, rather
than just yours, that is invaded.

What happened to all the dismissive lectures about how if you’ve done
nothing wrong, then you have nothing to hide? Is that still applicable?
Or is it that these members of the U.S. Congress who conspired with
Netanyahu and AIPAC over how to sabotage the U.S. government’s Iran Deal
feel they did do something wrong and are angry about having been
monitored for that reason?

I’ve always argued that on the spectrum of spying stories, revelations
about targeting foreign leaders is the least important, since that is
the most justifiable type of espionage. Whether the U.S. should be
surveilling the private conversations of officials of allied democracies
is certainly worth debating, but, as I argued in my 2014 book, those
"revelations … are less significant than the agency’s warrantless mass
surveillance of whole populations" since "countries have spied on heads
of state for centuries, including allies."

But here, the NSA did not merely listen to the conversations of
Netanyahu and his top aides, but also members of the U.S. Congress as
they spoke with him. And not for the first time: "In one previously
undisclosed episode, the NSA tried to wiretap a member of Congress
without a warrant," the New York Times reported in 2009.

The NSA justifies such warrantless eavesdropping on Americans as
"incidental collection." That is the term used when it spies on the
conversations of American citizens without warrants, but claims those
Americans weren’t "targeted," but rather just so happened to be speaking
to one of the agency’s foreign targets (warrants are needed only to
target U.S. persons, not foreign nationals outside of the U.S.).

This claim of "incidental collection" has always been deceitful,
designed to mask the fact that the NSA does indeed frequently spy on the
conversations of American citizens without warrants of any kind. Indeed,
as I detailed here, the 2008 FISA law enacted by Congress had as one of
its principal, explicit purposes allowing the NSA to eavesdrop on
Americans’ conversations without warrants of any kind. "The principal
purpose of the 2008 law was to make it possible for the government to
collect Americans’ international communications — and to collect those
communications without reference to whether any party to those
communications was doing anything illegal," the ACLU’s Jameel Jaffer
said.  "And a lot of the government’s advocacy is meant to obscure this
fact, but it’s a crucial one: The government doesn’t need to ‘target’
Americans in order to collect huge volumes of their communications."

Whatever one’s views on that might be — i.e., even if you’re someone who
is convinced that there’s nothing wrong with the NSA eavesdropping on
the private communications even of American citizens, even members of
Congress, without warrants — this sudden, self-interested embrace of the
value of privacy should be revolting indeed. Warrantless eavesdropping
on people who have done nothing wrong — the largest system of
suspicionless mass surveillance ever created — is inherently abusive and
unjustified, and one shouldn’t need a report that this was done to the
Benjamin Netanyahus and Pete Hoekstras of the world to realize that.

(5) Israeli Drone Feeds Hacked By British and American Intelligence

https://theintercept.com/2016/01/28/israeli-drone-feeds-hacked-by-british-and-american-intelligence/

Cora Currier, Henrik Moltke

Jan. 29 2016, 1:08 p.m.

AMERICAN AND BRITISH INTELLIGENCE secretly tapped into live video feeds
from Israeli drones and fighter jets, monitoring military operations in
Gaza, watching for a potential strike against Iran, and keeping tabs on
the drone technology Israel exports around the world.

Under a classified program code-named "Anarchist," the U.K.’s Government
Communications Headquarters, or GCHQ, working with the National Security
Agency, systematically targeted Israeli drones from a mountaintop on the
Mediterranean island of Cyprus. GCHQ files provided by former NSA
contractor Edward Snowden include a series of "Anarchist snapshots" —
thumbnail images from videos recorded by drone cameras. The files also
show location data mapping the flight paths of the aircraft. In essence,
U.S. and British agencies stole a bird’s-eye view from the drones.

See hacked images from Israel’s drone fleet.

Several of the snapshots, a subset collected in 2009 and 2010, appear to
show drones carrying missiles. Although they are not clear enough to be
conclusive, the images offer rare visual evidence to support reports
that Israel flies attack drones — an open secret that the Israeli
government won’t acknowledge.

"There’s a good chance that we are looking at the first images of an
armed Israeli drone in the public domain," said Chris Woods, author of
Sudden Justice, a history of drone warfare. "They’ve gone to
extraordinary lengths to suppress information on weaponized drones."

The Intercept is publishing a selection of the drone snapshots in an
accompanying article.

Additionally, in 2012, a GCHQ analyst reported "regular collects of
Heron TP carrying weapons," referring to a giant drone made by the
state-owned Israel Aerospace Industries, known as IAI.

Anarchist operated from a Royal Air Force installation in the Troodos
Mountains, near Mount Olympus, the highest point on Cyprus. The Troodos
site "has long been regarded as a ‘Jewel in the Crown’ by NSA as it
offers unique access to the Levant, North Africa, and Turkey," according
to an article from GCHQ’s internal wiki. Last August, The Intercept
published a portion of a GCHQ document that revealed that NSA and GCHQ
tracked weapons signals from Troodos, and earlier reporting on the
Snowden documents indicated that the NSA targeted Israeli drones and an
Israeli missile system for tracking, but the details of the operations
have not been previously disclosed.

"This access is indispensable for maintaining an understanding of
Israeli military training and operations and thus an insight to possible
future developments in the region," a GCHQ report from 2008 enthused.
"In times of crisis this access is critical and one of the only avenues
to provide up to the minute information and support to U.S. and Allied
operations in the area."

GCHQ documents state that analysts first collected encrypted video
signals at Troodos in 1998, and also describe efforts against drones
used by Syria and by Hezbollah in Lebanon.

A 2009 document notes that "no tip-off exists for Hezbollah UAV
[Unmanned Aerial Vehicle] activity;" apparently the spies had few
signals that they were sure were associated with Hezbollah’s drone
program. Another report recounts that Troodos had captured video from an
Iranian-made drone flying out of a Syrian air force base in March 2012,
resulting in "presidential interest in further samples of the Regime
launching attacks upon the general populous [sic]," presumably referring
to U.S. President Barack Obama, whose administration had first called
for Syrian President Bashar al-Assad to step down the year before, a few
months after his regime began a crackdown on Arab Spring protests.
Indeed, also in March 2012, unnamed U.S. officials told the press that
Assad had been supplied with Iranian drones.

But much of Anarchist’s focus was on Israel. The drone-watching
documented in the GCHQ files covered periods of Israeli military
offensives in Palestine, and also indicates that the intelligence
agencies monitored drones for a potential strike against Iran.

The documents highlight the conflicted relationship between the United
States and Israel and U.S. concerns about Israel’s potentially
destabilizing actions in the region. The two nations are close
counterterrorism partners, and have a memorandum of understanding,
dating back to 2009, that allows Israel access to raw communications
data collected by the NSA. Yet they are nonetheless constantly engaged
in a game of spy versus spy. Last month, the Wall Street Journal
reported that, although President Obama had pledged to stop spying on
friendly heads of state, the White House carved out an exception for
Israeli Prime Minister Benjamin Netanyahu and other top Israeli
officials. Michael Hayden, former head of the CIA and NSA, told the
Journal that the intelligence relationship with Israel was "the most
combustible mixture of intimacy and caution that we have."

GCHQ and the Israel Defense Forces declined to comment. The NSA
acknowledged receipt of an inquiry but did not respond to questions by
the time of publication.

On January 3, 2008, as Israel launched airstrikes against Palestinian
militants in Gaza, U.S. and British spies had a virtual seat in the cockpit.

Satellite surveillance operators at Menwith Hill, an important NSA site
in England, had been tasked with looking at drones as the Israeli
military stepped up attacks in Gaza in response to rockets fired by
Palestinian militants, according to a 2008 year-end summary from GCHQ.
In all, Menwith Hill gathered over 20 separate drone videos by
intercepting signals traveling between Israeli drones and orbiting
satellites. The NSA’s internal newsletter, SIDToday, enthusiastically
reported the effort, noting that on January 3, analysts had also
"collected video for the first time from the cockpit of an Israeli Air
Force F-16 fighter jet," which "showed a target on the ground being
tracked." Menwith Hill had worked "closely with a GCHQ site in Cyprus
for tip-offs."

In July 2008, GCHQ ordered Anarchist technicians to look for drones
flying over a number of "areas of interest," including the Golan Heights
(a region of southwest Syria seized by Israel in the 1967 Six-Day War),
the occupied Palestinian territories of the West Bank and Gaza Strip,
and Israel’s borders with Lebanon and Syria.

"Due to the political situation of the region there is a requirement for
Israeli UAV operations in certain areas to be intercepted and exploited
so that assessments can be made on what possible actions maybe [sic]
taking place," read the request, dated July 29, 2008. The memo asked for
analysts to record and send video to GCHQ, along with ground plots
showing where the drones had flown, and information about the signal.

Anarchist operators were able to snag the feeds of several different
types of Israeli drones, according to an Intercept analysis of the
snapshots and presentations from GCHQ summarizing Troodos achievements.
The 20 snapshots identified by The Intercept in GCHQ files include
several video stills clearly taken from Israeli drones, dating between
February 2009 and June 2010.

According to one GCHQ presentation, technicians first collected signals
from a Heron TP in February 2009. Intercepted images indicate that they
also picked up video from other models and configurations of the Heron,
and from the IAI Searcher drone. Another GCHQ presentation shows that by
2009, technicians had tapped into data from Hermes drones, manufactured
by the Israeli company Elbit systems. In January 2010, Troodos reported
that in the previous six months they had collected data from the
Aerostar tactical drone and the Orbiter mini-drone, both made by the
Israeli company Aeronautics.

In several snapshots of the Heron TP, there are objects under the wings
that appear to be mounts for missiles or for other equipment such as
sensors. In one image, from January 2010, a missile-shaped object is
clearly visible on the left wing, while the mount on the right appears
to be missing its load.

The Heron TP, which the Jerusalem Post described as "the drone that can
reach Iran," has an 85-foot wingspan — larger than that of the Reaper,
the largest armed drone flown by the United States Air Force — and can
carry a 1-ton payload. Israel recently reached an agreement to sell
armed versions of the TP to India.

Pieter Wezeman, a senior researcher on arms transfers with the Stockholm
International Peace Research Institute, told The Intercept that the
items visible under the wings in the snapshots "appear to have the kind
of fins such missiles have," but noted that "there could be other
payloads that could be fitted in the same position." Chris Woods, the
drone history author, said that they could be sensor pods for
intelligence gathering.

It has been widely reported that Israel launches attacks from the
smaller Hermes 450s, although the GCHQ documents do not specify whether
the Hermes drones recorded at Troodos were armed.

Reports surfaced of Israel launching missiles from drones in Gaza as far
back as 2004, and more than a decade later, drones have become a fact of
life for residents. Chris Cobb-Smith, a former British army officer who
has investigated drone strikes in Gaza for human rights groups, said
that "during periods of tension, you can seldom go outside without the
buzz of drones overhead." A Gaza City bar owner complained to the
Washington Post in 2011 that drone patrols often interfered with his
satellite TV signals. In 2014, the London Telegraph reported that 65
percent of Israel’s air combat operations were conducted by drones.
Yotam Feldman, an Israeli filmmaker who made a documentary about
Israel’s drone industry for Al Jazeera last year, said that he has been
told the figure is even higher.

During Operation Cast Lead, a three-week Israeli offensive that began in
December 2008, Human Rights Watch reported dozens of Palestinian
civilian deaths from drone strikes. In diplomatic cables released by
WikiLeaks, an Israeli commander told a U.S. State Department official
that a "UAV fired two missiles" against militant operatives outside a
mosque, and that shrapnel from the strike hit civilians.

Yet the Israeli government still maintains an official stance of secrecy
(a tactic akin to the United States’ refusal to formally acknowledge its
drone program until 2013, despite years of reporting and commentary on
it). In sanctioned interviews, Israeli military personnel are careful to
describe the drones they fly as being used for surveillance and marking
targets for manned warplanes to strike. Aviation and defense bloggers
are left speculating about blurred photos and industry rumors about how
drones might be equipped with missiles. The Israeli media is subject to
a strict censorship regime, and the military does not allow mention of
armed Israeli drones, unless quoting foreign sources.

"Releasing full details about which munitions were used and how they
were used can raise many other questions about these attacks — about the
targets, about what the army calls collateral damage, about the command
chain," said Feldman, the Israeli filmmaker. "I think it is really the
Israeli military throwing sand in the eyes of outside observers on
Israeli strikes."

The Anarchist images don’t show any drone strikes in action. It is not
always clear from the images precisely where the drones were located,
and it is thus impossible to tie the intercepts to specific attacks. A
note on January 12, 2009, in the midst of Cast Lead, directs technicians
"with the current situation … to keep a watch and report on where the
majority of UAV flights are being conducted." But the snapshots
identified by The Intercept date from after Israel withdrew from Gaza in
January 2009.

In several cases, the images were taken on the same day or just before
reported Israeli airstrikes on Gaza, which continued after the
ceasefire. For instance, on August 25, 2009, after months of relative
quiet in the border area between Gaza and Egypt, Israel bombed a tunnel
on the border, killing three Palestinians and wounding seven. That same
day, Anarchist technicians at Troodos captured an Israeli drone signal.

Decoding the Drone

Drones communicate with their controllers on the ground via satellite;
the transmission to the home station is known as the "downlink." The
antennas at Troodos grabbed that downlink by finding the right frequency
for each drone.

Drone feeds are vulnerable to interception not just from the NSA — even
cheap, commercially available equipment can be used to get the downlink.
In a 2009 article in Wired, a U.S. military official likened such
interception to "criminals using radio scanners to pick up police
communications."

Indeed, in 2009, U.S. forces in Iraq discovered laptops with video from
Predator drones in the hands of insurgents. It couldn’t have come as a
total surprise — military officials had noted the vulnerability as far
back as 1999, and a 2005 CIA report stated that one of Saddam Hussein’s
technicians had likely "located and downloaded … unencrypted satellite
feed from U.S. military UAVs."

In 1997, Hezbollah killed 12 Israeli commandos in an ambush in Lebanon.
It emerged years later that Hezbollah had plotted the ambush after
intercepting unencrypted drone video. The revelation caused a scandal,
and led the Israeli military and drone industry to invest "significant
efforts to encrypt the transmission of UAVs to their ground bases," said
Ronen Bergman, an investigative journalist with the paper Yedioth
Ahronoth, who is currently writing a book on Israel’s intelligence
service, Mossad.

"The broadcast was supposed to be completely secure," said Bergman. "If
the NSA and GCHQ were able to crack that, it would come as a big
surprise, and might well lead to the launch of an inquiry."

Israel appears to have since expanded encryption across its drone fleet,
and many of the feeds grabbed by the Troodos analysts were encrypted or
scrambled, showing up like the black-and-white snow on a TV screen.

According to GCHQ Anarchist training manuals from 2008, analysts took
snapshots of live signals and would process them for "poor quality
signals, or for scrambled video."

The manuals stated that video feeds were scrambled using a method
similar to that used to protect the signals of subscriber-only TV
channels. Analysts decoded the images using open-source code "freely
available on the internet" — a program known as AntiSky. The attack
reconstructed the image by brute force, allowing intelligence agents to
crack the encryption without knowing the algorithm that had been used to
scramble the video.

Even when fully decoded, the images are of varying quality, often
grainy, and often showing nothing but the sky or sun or the drone’s own
landing gear nearing the runway.

The aim of the snapshots seemed to be simply to identify which signals
belonged with which aircraft, weapon, or radar, and to demonstrate that
the intelligence agencies had the capability to grab such snapshots if
needed. "The computing power needed to descramble the images in near
real time is considerable," the Anarchist manual notes, but "it is still
possible to descramble individual frames to determine the image content
without too much effort."

The GCHQ documents describe the mission against Israeli drones in broad
terms. An "outbreak of hostilities between Israel and Hamas" occasioned
the intelligence agency’s interest, and so did tension with Tehran. In
reporting on flights of an armed Heron TP, a Troodos employee noted that
"our ability to collect and track and report this activity is important
for the initial detection and tip-off for any potential pre-emptive or
retaliatory strike against Iran."

A 2008 Anarchist memo also notes that "interest by the weapons community
in Israeli UAV’s [sic] remains high," because Israel "provide[s] many
countries with their UAV’s" and is "developing large UAV’s capable of
being deployed for a variety of purposes." Another, also from 2008,
describes the hunt to confirm whether a specific type of radar "has been
mounted on any UAV platforms." A GCHQ presentation listing "successes in
2009" at Troodos includes "UAV development Israel/India."

Israel leads the world in drone exports, and capabilities Israel
developed would soon be passed to other countries. Its companies
aggressively market the potential attack capabilities of their aircraft.
In September, India made arrangements to buy 10 armed Heron TPs. This
month, Germany’s defense minister, Ursula von der Leyen, announced that
the country would lease several TPs, citing the aircraft’s attack
capabilities.

"This will be the standard in the future," von der Leyen said.

By most accounts, Israel, the United States, the United Kingdom, and
Pakistan are the only countries known to have used drones for deadly
attacks. But dozens of countries are believed to be developing armed
drones, so that club likely won’t stay small for long.

Israeli Drone Feeds Hacked By British and American Intelligence

(6) Is America is still an ally of Israel? Is Israel still an ally of
America?

http://www.al-monitor.com/pulse/originals/2016/02/israel-us-uk-spy-hack-encryption-system-drones-idf-missiles.html

Is the US a threat to Israel?

US efforts to crack the Israeli drone encryption system have caused some
to question whether or not America is still an ally of Israel.

Author Ben Caspit

Posted February 1, 2016

Translator Sandy Bloom

The Intercept published Jan. 29 information about Operation Anarchist,
an extensive spying initiative of the United States and the United
Kingdom against Israel’s covert aerial activities. The article generated
an enormous storm in Israel’s security circles and also in its highest
political echelons. According to the report that was drawn from Edward
Snowden’s documents, the national wiretapping services of both the
United States and the United Kingdom — the National Security Agency and
Government Communications Headquarters, respectively — set up secret
spying facilities atop Cyprus’ Troodos Mountains. For 18 years, they
have been tracking Israeli activities of fighter jets, unmanned aerial
vehicles (UCAVs or combat drones) and Israel’s entire aerial deployment.
According to the documents, the Americans succeeded in breaking the code
encryption of Israel’s drone alignment including the Israeli Heron. The
leaked documents claim that this is an unmanned aircraft capable of
attacking deep in enemy territory. According to the published
information, even the operating code of the Arrow project's Black
Sparrow target missile was breached by the superpowers. The Black
Sparrow is a missile launched by Israeli fighter planes from a very high
altitude; it resembles the Iranian Shahab missile that the Arrow is
supposed to intercept and damage at high altitude.

The official Israeli response to these publications was "expressions of
disappointment." Official Israeli speakers tried not to inflate the
crisis. Israel’s working assumption is that the United States listens to
every word uttered by the state’s leaders. Prime Minister Benjamin
Netanyahu is convinced that he is under surveillance even in his office
and his private home in Caesarea. He has asked the Shin Bet — more than
once — to try to install wiretap disrupters in his private home. When
Netanyahu is in the United States, he does not talk about classified
matters while at Blair House, the official guesthouse. Instead,
Netanyahu confines all his private talks to the embassy in Washington.
When Prime Minister Yitzhak Rabin used to travel to the United States,
his entourage always picked a last-minute, random apartment in
Washington as the place for transmitting important security updates. The
premise was that the Americans would not have time to install
wiretapping equipment in an apartment at such short notice.

Behind the scenes, however, the drama is far greater than Israel’s
laconic "disappointment" response outlined here. Ephraim Sneh, former
deputy defense minister and brigadier general in the reserves who is
still well connected to the country’s top brass, bitterly castigated the
American-British espionage setup this week. "Israel and the US have the
same enemies," he told Al-Monitor. "Instead of working together
positively, it turns out the Americans are investing tremendous energy
in an attempt to breach Israel’s codes. Operationally that means that
whoever knows where you are today can also know where you plan to be
tomorrow. And technologically what we see is a conscious decision to
invest much energy and resources in breaching Israel’s encryption
system. They use America’s cutting-edge technology against Israel’s.
That should worry us."

Sneh’s words reveal only the tip of the iceberg of the new suspicions
that threaten the already-fragile intimate security relations between
Israel and the United States in the Obama era. "The Americans are our
partners in the development of the Arrow," said another Israeli source,
on condition of anonymity, who is still active in the security system.
"Why are they investing all this effort to breaking the code
[encryption] of the 'target missile'? All they have to do is ask nicely
and we will involve them; Israel passes on to the US everything it
reveals and decodes. I personally participated in meetings in which
Israeli security sources met with the US national adviser. Our side
would spread out satellite photographs and classified material regarding
covert activities of Iran, Hezbollah or other dangerous operatives in
the region. The fact that they invest so many resources in the attempt
to breach the operations of the unmanned squadron is simply disappointing."

Behind closed Israeli doors, there are others who raise additional
worrisome thoughts: If the Americans succeeded in cracking the codes of
the combat drones, then perhaps they are also breaching the codes of
most undercover units such as the General Staff reconnaissance platoon,
and keeping tabs even on the activities of this elite unit. If that is
indeed true, then the situation is far worse than we thought. Another
Israeli military contact told Al-Monitor on condition of anonymity, "All
this time, we were convinced that America is our ally, and they never
appeared on our list of threats. Now it is not clear at all that we were
correct."

More calming voices oppose this approach. "Israel is a world power in
the cyberfield, codes and their operation, and electronic warfare," said
an Israel Defense Forces source, who asked that his name not be
published. "It is hard to believe that the Americans succeeded in
breaching the codes of these sophisticated drones."

Until about 10 years ago, Israeli drone codes were not encrypted at all.
The policy change was prompted by the Naval Commando Disaster in
September 1997 in which 12 Israeli naval commandos were killed in
Ansariya, Lebanon. According to one of the accounts, Hezbollah succeeded
in cracking the code of an Israeli combat drone that carried out a
number of spying missions over the territory in which the commandos were
going to operate. This foreknowledge caused Hezbollah to place ambushes
on the site and inflict much harm on the Israeli forces.

Israel’s Signal and Electronics Corps is responsible for the code
encryption of combat drones, which is graduated or phased: The level of
encryption rises with the level of stealth and combat danger faced by
the UCAV. An Israeli security expert also speaking on condition of
anonymity told Al-Monitor, "With regard to these code encryptions, even
if an external source cracks the code, these codes change all the time
and are replaced very frequently." But this statement does not mollify
the Israelis. "It is absolutely possible that a world power like the US
with its tremendous super computers, unlimited manpower and resources
has attained impressive code-breaking abilities that supersede Israel’s
code encryption abilities. And if that is the way things look, then we
need to worry," he added.

The assessment is that the spying project under discussion reached its
climax from 2009 to 2013, when talk about an Israeli assault on Iran was
at its peak. In those tense years, the Americans demanded that Israel
"not surprise us" with anything connected to an attack on Iran, but the
Americans came up empty-handed from this request. American tracking of
aerial activity of Israel’s combat UCAVs could have given President
Barack Obama a ''safety margin'' of several hours'  warning before an
Israeli attack. That would have allowed Obama to make a quick phone call
to Netanyahu to try to block the whole process.

In 2010, Israel carried out a large-scale aerial maneuver over the
Mediterranean Sea, involving more than 100 fighter jets. Even before all
the planes returned to their bases, then-US Chairman of the Joint Chiefs
of Staff Adm. Michael Mullen called his Israeli counterpart, Gabi
Ashkenazi, to find out what was going on. "It’s no secret that the
Americans know when anything from this area goes into the air," said a
former high-ranking Israeli air force officer this week. "Now we
understand that in addition to being able to detect aerial activity,
they also can figure out the targets and trajectories in advance. We
need to learn how to live with this."

799 China warns Soros against Shorting the Yuan. BoJ says China should impose Capital Controls

China warns Soros against Shorting the Yuan. BoJ says China should
impose Capital Controls

Newsletter published on 29 January 2016

(1) China warns Soros against Shorting the Yuan and HK Dollar
(2) Hedge Fund tells Chinese: Sell your shares now
(3) Chinese companies borrow in $; external borrowing surged from $200
billion in 2009 to $1.1 trillion in 2014
(4) Bank of Japan Governor says China should impose Capital Controls to
defend the Yuan
(5) China Outflows Could Reach $500 Billion in 2016, JPMorgan Says
(6) Steve Keen: China’s Stock Market Is an ‘Unbelievable Bubble’, about
to burst
(7) China in trouble because it followed World Bank advice - John Ross
(8) Fundamental errors of the World Bank report on China - John Ross (2012)
(9) Yuan joins IMF's SDR basket; the price is "finance sector reform",
ie Deregulation
(10) Yuan joins SDR, but PBoC advised to reduce intervention, allowing
market forces
(11) IMF SDR represents a claim to foreign currencies for which it may
be exchanged
(12) IMF SDRs to replace $ as one-world currency
(13) China Rebalancing means Chinese consume more, export less;
industries move to India, Mexico, Vietnam
(14) PBoC Currency Intervention to stop rise of Yuan, then fall of Yuan
(15) China's slowdown is hurting countries that export to it
(16) Luxury exports from West to China plummet

(1) China warns Soros against Shorting the Yuan and HK Dollar

http://www.newsmax.com/Finance/Markets/george-soros-china-yuan-hong-kong-dollar/2016/01/26/id/710882/

China's State Media Warns Soros on Betting Against Yuan, HK Dollar

Tuesday, 26 Jan 2016 08:24 AM

China's state media has warned billionaire investor George Soros against
betting on falls in the value of the Chinese yuan and Hong Kong dollar,
amid widespread worries over the health of world's second-largest economy.

China's fourth-quarter economic growth slowed to the weakest since the
global financial crisis, increasing pressure on a government struggling
to regain investors' confidence after perceived policy missteps jolted
global markets.

"Soros' challenge against the renminbi (yuan) and Hong Kong dollar is
unlikely to succeed, there is no doubt about that," the People's Daily
overseas edition said in a front-page opinion piece on Tuesday.

China's economic fundamentals remain sound, despite slower growth,
volatility in its stock market and the yuan's depreciation against the
U.S. dollar, said the opinion piece, written by a researcher at the
commerce ministry.

Soros told Bloomberg TV on Thursday he sees a hard landing for China's
economy contributing to global deflation.

In his comments to Bloomberg, Soros said he had been betting against the
S&P 500, commodity-producing countries and Asian currencies, while
buying U.S. government bonds. He did not specifically mention the yuan
and Hong Kong dollar.

China's economic growth slowed to 6.8 percent in the fourth quarter,
bringing the full-year growth to 6.9 percent in 2015 - the poorest
showing in 25 years.

The Xinhua news agency also warned against speculation on China's stocks
and currency, saying that smart, far-sighted investors should seize the
opportunities from China's economic restructuring.

"Some people believe that the Chinese capital market is experiencing a
major crisis, of which they try to take advantage with speculative
actions and even vicious shorting activities," Xinhua said in a
commentary published on Saturday.

China has been constantly improving its market regulatory system and
legal system, it said.

"As a result, reckless speculation and vicious shorting will face higher
trading costs and possibly severe legal consequences."

China's central bank has pledged to keep the yuan basically stable
against a basket of currencies while Hong Kong's central bank has said
it had no plans to change the Hong Kong dollar's peg to the U.S. dollar,
despite recent market volatility.

(2) Hedge Fund tells Chinese: Sell your shares now

http://www.newsmax.com/Finance/InvestingAnalysis/China-trader-short-sale/2016/01/25/id/710817/

Trader Who Made 6,200 Percent on China Futures Says Go Short or Get Out

Monday, 25 Jan 2016 07:26 PM

Huang Weimin, the hedge fund manager whose Chinese stock-index futures
wagers returned more than 6,200 percent last year, has some advice for
investors in 2016: Sell your shares now, before it’s too late.

The 45-year-old former worker at a state-owned company, a virtual
unknown until last year, has become a star of the Chinese futures market
after a slew of timely bets on the direction of share prices propelled
his Yourong Fund to the top of the country’s performance rankings. He’s
carried the winning streak into 2016, returning 35 percent through Jan.
22 after selling stock-index futures just days before the market’s
worst- ever start to a year.

Huang, who opened the Yourong Fund in 2014, says China’s benchmark
Shanghai Composite Index could drop another 15 percent in the first half
as slowing economic growth and a weaker yuan fuel capital outflows.
While he’s sticking with bearish futures bets to take advantage of
further losses, he says the average Chinese stock investor would be
better off shifting into cash.

"I’m not optimistic about this year," said Huang, a self- taught trader
who manages more than 100 million yuan ($15.2 million) in the Yourong
Fund and separate client accounts that use similar strategies. "My
advice is to hold cash, wait and watch."

Many of China’s 99 million investors appear to be doing just that.
Volumes in the nation’s $5.6 trillion cash equities market slumped to
the lowest level in three months last week, while trading of stock-index
futures has dropped about 99 percent since June. A bungled government
attempt to introduce market circuit breakers in the first week of 2016
deepened investor pessimism after the mechanisms sparked panic instead
of restoring calm.

Huang’s ability to profit from the turbulence has made him a standout in
China’s hedge-fund industry, which has struggled to cope with price
swings that reached the most extreme levels since 1997 last year. More
than 700 funds were forced to liquidate prematurely in 2015, and this
year’s 18 percent slump in the Shanghai Composite has left many more on
the brink of shutting down.

The Yourong Fund was the best performer last year among 310 private
Chinese futures funds tracked by Shenzhen Rongzhi Investment Consultant
Co. Huang’s closest rival was up just over 1000 percent, while more than
a fifth of his peers posted losses, according to Shenzhen Rongzhi, which
collects performance figures directly from the financial institutions
where funds hold their trading accounts to ensure the data’s authenticity.

To make money last year, Huang had to be nimble. He was bullish for much
of the first half, building long positions in stocks and equity-index
futures as the Shanghai Composite surged to seven-year highs. After
trimming his equity exposure in May, he bet against the market in the
second half of June as shares tumbled.

One-Day Profit

When volatility increased at the end of that month, Huang turned to
short-term wagers. A short-term bet on Everbright Securities Co. that he
sold the following day, for example, produced an 11 percent return on
June 30 as the market posted a brief rally, he said in an interview with
Bloomberg News last week from China’s southern Fujian province.

Huang moved in and out of the market over the next two months, making
one of his most profitable bets in late August after positioning for
losses in stock-index futures before a rout that sent the Shanghai
Composite down as much as 25 percent in just two weeks.

"It’s like surfing," said Huang, who became a full-time investor in 2006
after quitting his job at a state-owned company. "You have to dance on
top of the waves."

Amplifying Returns

Aside from good timing, Huang’s outsized returns were made possible by
the built-in leverage of futures. The purchase or sale of a futures
contract typically requires an initial deposit, known as margin, that’s
just a fraction of the value of the underlying assets. That means even
small price changes can lead to big profits -- or losses -- for holders
of the derivatives.

Huang sees China’s stock market coming under pressure this year from
both the economic slowdown and a potential surge in the supply of new
shares.

Gross domestic product growth fell to 6.9 percent in 2015, the weakest
pace since 1990, as an estimated $1 trillion of capital flowed out of
the country last year and the yuan posted its biggest annual drop in two
decades. Despite six interest rate cuts by China’s central bank, the
latest economic indicators for December showed growth is still slowing.

"When you add a lot of cold water into the pot, the firewood we have is
for sure not enough,’’ Huang said.

Recovery Signals

With 660 Chinese companies waiting to sell shares via initial public
offerings, Huang said the additional supply could divert funds from
existing shares. The impact could be even bigger if policy makers follow
through on plans for a registration system, which would reduce the
government’s ability to control the pace of offerings.

There are signs that Chinese shares are poised for a rally. The Shanghai
Composite’s relative strength index was 33 on Friday, near the threshold
of 30 that some traders use as a signal of recovery. Li Yuanchao,
China’s vice president, said in an interview in Davos last week that the
government is willing to keep intervening in the stock market to make
sure a few speculators don’t benefit at the expense of regular investors.

The government’s intervention has made life more difficult for Huang. He
had to pare back his positions last year, particularly in bearish
contracts, after authorities cracked down on what they saw as excessive
speculation in the stock- index futures market and vowed to go after
"malicious" short sellers.

Grateful Investors

Still, none of that seems to have hurt Huang’s knack for calling the
markets. Cai Zhongyu, a retired electronics institute worker in Shanghai
who’s been following the trade recommendations dispensed by Huang in
online chat groups since 2009, said she made a 300 percent return last
year "all thanks to him."

"He always got it right on the market direction," Cai, 55, said by
phone. "You have to admit that."

Cai was among more than 90 admirers of Huang who traveled to the coastal
city of Xiamen to hear him give trading tips and his market forecasts in
December. After an extraordinary 2015, his outlook for this year was
decidedly more modest.

"I’ll just be following the market and do a few trades as it falls, like
ants biting on a bone," Huang said. "If I get 5 to 6 percent each time
and end the year with 50 percent to 60 percent, I’d be happy."

(3) Chinese companies borrow in $; external borrowing surged from $200
billion in 2009 to $1.1 trillion in 2014

http://www.theepochtimes.com/n3/1947856-new-data-shows-how-chinas-massive-carry-trade-is-unwinding/

New Data Shows How China’s Massive Carry Trade Is Unwinding

By Valentin Schmid, Epoch Times | January 22, 2016 Last Updated: January
24, 2016 2:36 am

China’s currency and the capital outflows behind it have dominated
headlines and market analysis in the last half year.

One of the causes for the outflows ($676 billion in 2015) is the
repayment of foreign currency debt or the unwind of the carry trade. In
the windup of the carry trade, investors borrowed in a country with a
low interest rate (the United States) and invested in a country with a
high interest rate (China).

The Bank of International Settlements (BIS) tracks this data and just
released its findings for the third quarter of 2015, the period before,
during, and after China’s shock devaluation of last August.

This BIS finds China’s total cross boarder foreign currency liabilities
decreased $130 billion to $877 billion from the second quarter to the
third quarter of 2015.

"This represents the sharpest single quarter drawdown since data were
made available in the first quarter of 1978 and a 20.9 percent fall from
its peak of $1109 billion in the third quarter of 2014," the investment
bank Nomura writes in a note to clients.

Chinese banks owe most of the foreign currency debt ($530 billion) with
other corporations owing the balance, although banks mostly facilitate
these transactions for corporations. (Nomura)

After the financial crisis of 2008, Chinese corporations found it more
lucrative to borrow in dollars for a very low single digit rate and
invest it in China for a low double digit rate. Because the Chinese
central bank guaranteed the Chinese currency to go up, they would make
money through the exchange rate as well. As a result, Chinese external
borrowing surged from less than $200 billion in 2009 to $1.1 trillion in
2014.

Why would Chinese corporations engage in financial speculation? Some say
because there were fewer opportunities on the ground, others say Chinese
companies just like to take any opportunity to make easy money, like
investing in property even if it has nothing to do with the core business.

"Companies in the chemical, steel, textile, and shoe industries have
started up property divisions too: The chance of a quick return is much
higher than in their primary business," Bloomberg Business reporter
Dexter Roberts wrote in 2009 when the property boom was in full swing.

When property started to cool down in 2013, the carry trade was the next
best alternative.

This is not the case anymore. Because the Chinese central bank stopped
supporting a strong yuan policy and the U.S. central bank has started
raising rates, Chinese banks and corporates reversed the trade in the
third quarter of 2014 and accelerated it in the third quarter of 2015.

This helped the better connected companies and individuals get out even
before the shock devaluation of August 2015.

"China’s private sector was better prepared for the renminbi weakness,
given the fall in foreign-currency liabilities and foreign exchange
hedging since 11 August 2015. In our view, this is an important factor
why Chinese authorities have allowed for a more market-determined
renminbi from early December to early January," writes Nomura.

(4) Bank of Japan Governor says China should impose Capital Controls to
defend the Yuan

http://www.bloomberg.com/news/articles/2016-01-23/kuroda-advises-china-to-impose-capital-controls-to-defend-yuan

Kuroda Advises China to Impose Capital Controls to Defend Yuan

Simon Kennedy and Jeff Black

January 23, 2016 — 10:34 PM AEST

Bank of Japan Governor Haruhiko Kuroda said China should impose capital
controls to defend the yuan rather than keep burning through currency
reserves.

As he and other international policy makers expressed confidence that
the world’s second largest economy will avoid a hard landing, Kuroda
made his proposal on the final day of the World Economic Forum’s annual
meeting in Davos, Switzerland.

China is struggling to hold up the yuan as a slowing economy forces it
to loosen monetary policy and prompts capital to flee. It now faces
questions from investors over just how long it can keep deploying
reserves to calm the yuan’s volatility.

"This is my personal view, and it may not be shared by the Chinese
authorities, but in this kind of somewhat contradictory situation
capital controls could be useful to manage the exchange rate as regards
domestic monetary policy in a consistent and appropriate way," Kuroda
said on Saturday. Deploying Reserves

China is burning through its reserves as it tries to prop up the
currency. China’s stockpile plunged $513 billion last year to $3.33
trillion, the first annual decline since 1992 and the holdings will drop
to $3 trillion or less by the end of this year, according to the median
of 12 forecasts in a Bloomberg News survey this month. They were
projected to tumble further, to $2.66 trillion by the end of next year.

"The massive use of reserves would not be a particularly good idea,"
said International Monetary Fund Managing Director Christine Lagarde,
who suggested China better clarify how it manages the yuan.

China has already tightened some capital controls, requiring lenders in
offshore yuan-trading centers to lock away more funds in their latest
efforts to combat capital outflows.

It also suspended some foreign lenders from conducting some cross-border
yuan operations and cracked down on illegal money transfers.

Market Jitters

China’s economic slowdown -- and the subsequent financial turmoil it
helped to spark --- were among the most-discussed topics in Davos this
week. For all the market jitters, most delegates bet that the economy
will soon stabilize as officials pivot from debt-fueled investment and
exports toward consumption and services.

"We’re not seeing a hard landing," said Lagarde. "We’re seeing an
evolution, a big transition which is going to be bumpy, which will offer
some turbulence."

U.K. Chancellor of the Exchequer George Osborne said that even at the
current growth rate, China would add the equivalent of Germany to global
output by the end of this decade.

"We actually believe that China will have a soft landing," said Credit
Suisse Group AG Chief Executive Officer Tidjane Thiam.

More broadly, Thiam said global banks are in a much stronger position
now and praised the work of regulators in forcing them to strengthen
their balance sheets. He also said it’s high time that the U.S. Federal
Reserve raised rates even though it means that global monetary policy is
now going out of sync.

"A normalization is necessary because I don’t like periods where the
price of risk is distorted for a long period of time," said Thiam.

(5) China Outflows Could Reach $500 Billion in 2016, JPMorgan Says

http://www.newsmax.com/Finance/StreetTalk/China-currency-reserves-outflow/2016/01/26/id/710924/

Tuesday, 26 Jan 2016 11:33 AM

China could see capital outflows of $500 billion this year, posing a
challenge to policy makers trying to defend the yuan in the midst of an
economic slowdown and a plunge in equities, according to JPMorgan &
Chase Co.’s chief Asia strategist.

While the People’s Bank of China would like to control the yuan’s
decline, those holding assets denominated in the currency could sell to
avoid losses, Adrian Mowat said in an interview in Manila on Tuesday.
The nation is estimated to have seen withdrawals of $650 billion last
year, he said.

"You are going to have this tension around the renminbi and it will
continue to drive volatility," said Mowat, referring to the yuan by its
official name. "Another area where you have tension is that the markets
aren’t allowed to find their levels in the A-share market."

China’s stockpile of foreign-currency reserves plunged $513 billion last
year to $3.33 trillion, the first annual drop since 1992, as the nation
propped up the yuan. The Shanghai Composite is the worst performer in
January among 93 primary equity gauges tracked by Bloomberg, while the
economy grew last year at the slowest pace in a quarter century.

Mowat’s forecast for last year’s capital outflows from China compares
with a figure of $1 trillion estimated by Bloomberg Intelligence. While
outflows surged in December after the central bank unnerved markets by
saying it would refocus the yuan’s moves against a wider basket of
currencies, rather than the dollar alone, exporters are holding funds in
dollars instead of the yuan, according to Tom Orlik, Bloomberg’s chief
Asia economist in Beijing. Special: The Best Credit Cards of 2016

The MSCI China Index, a gauge of mainland companies listed in Hong Kong
and other overseas markets, would still be able to erase losses recorded
so far this month and end 2016 with a gain, Mowat said. The gauge, whose
members include U.S.-listed Internet services companies Alibaba Group
Holding Ltd. and Baidu Inc., is expected to report earnings growth of 15
percent this year, he said.

(6) Steve Keen: China’s Stock Market Is an ‘Unbelievable Bubble’, about
to burst

http://www.theepochtimes.com/n3/1942610-steve-keen-chinas-stock-market-is-an-unbelievable-bubble/

Steve Keen: China’s Stock Market Is an ‘Unbelievable Bubble’

The most famous unconventional economist talks about debt in China and
why it's a problem

By Valentin Schmid, Epoch Times | January 17, 2016

Last Updated: January 19, 2016 4:55 am

     Steve Keen, a professor at London's Kingston University, thinks
China's stock market is a big bubble and is about to burst. (Samira
Bouaou/Epoch Times)

It’s the debt, stupid. This is what professor Steve Keen of London’s
Kingston University has been saying all along: Private debt is
responsible for financial crises. He’s also been saying that
conventional economists are wrong, and even wrote a book about it:
"Debunking Economics."

Apart from his razor-sharp logic and witty style, Keen was one of the
few analysts who predicted the financial crisis in the West in 2008. Now
he sees another crisis looming in the East.

The Epoch Times spoke to Steve Keen about why private debt is again
responsible for China’s economic problems and why the debt fueling
China’s stock market is the most ridiculous thing ever. A private person
can’t direct the central bank to pay that debt.

Epoch Times: How did China avoid the financial crisis of 2008?

Steve Keen: The crisis in 2008 destroyed their export policies. There
was a 45 percent fall in Chinese exports in one year.

The response at that time was to dramatically boost private lending,
trying to cause a boom domestically, to take the place of exports which
they have relied on. So you had an enormous increase in private debt in
China. Professor Steve Keen, an unconventional economist, in every way.
(Steve Keen)

Professor Steve Keen, an unconventional economist. (Steve Keen)

Epoch Times: Some people say that doesn’t matter because in China the
debtors are mostly related to the government.

Mr. Keen: It’s state-owned banks and state-directed banks that lent to
private institutions. The liabilities are private. State-owned banks
have loaned to private companies. Almost all of the increase in debt is
to private organizations, and almost all of that has gone to Chinese
property developments.

It’s not like the debt in the West where private banks lend to private
organizations. What matters is, who owes the money. It’s still owed by
private individuals and companies. If they can’t pay, they are bankrupt
and they want to run away and get out of their liabilities. This is
going to cause the usual downturn in the economy, even though the debt
is owned by state-owned banks.

It comes down to who the liabilities are owed by. If the federal
government has a debt, it can direct the central bank to pay that debt.
A private person can’t direct the central bank to pay that debt. Total
demand will fall, and that’s the situation we find in China now.

Epoch Times: Give us some numbers please.

Mr. Keen: Seven years ago private debt was about 120 percent of GDP,
according to the Bank of International Settlements (BIS). Now it’s 201
percent. The American level peaked at 170 percent before the financial
crisis.

The level of demand coming into the economy is relying on continually
increasing that debt ratio. But once you reach a peak level of debt,
people will not be borrowing beyond that point. The change in debt goes
from 20 percent growth to zero. As a result, 20 percent of GDP
disappears. (Macquarie)

Epoch Times: Please explain how that works.

Mr. Keen: Total demand in the economy is demand generated from existing
money plus the change in debt. Let’s say GDP is running at a trillion
and debt increases 20 percent, then total demand is $1.2 trillion in
year one.

So GDP is growing at let’s say 10 percent. So next year’s GDP is $1.1
trillion, but if the change in debt goes to zero, total demand will fall
from $1.2 trillion to $1.1 trillion. So even if GDP keeps growing at the
same rate—which won’t happen—total demand will fall, and that’s the
situation we find in China now. That affects all asset markets. This is
an unbelievable bubble.

Epoch Times: What about debt and the Chinese stock market?

Mr. Keen: I have never seen anything quite as ridiculous as margin debt
in China. The level of leverage per asset market is crazy. The Shanghai
Composite Index had a bubble and a crash in 2008, but there was no
margin debt after that crash.

It continued down until June 2014, then it took off and hit a peak of
about 5,100. What had happened in the meantime, they had deregulated and
allowed margin debt to be brought in 2010.

The level of margin debt began in March 2010 at 0.00014 percent of
China’s GDP. You fast-forward to 2014, it was 0.3 percent of GDP. In
July of 2014, it was 0.5 percent of GDP, by 2015 it was 1 percent of
GDP, by July 2015 it was 2.16 percent of GDP. It has since fallen to
0.84 percent of GDP. This is an unbelievable bubble.

It’s the most volatile level of margin debt anywhere in the world—ever.
So you have got this insane level of debt finance and speculation at the
same time.

Epoch Times: What can the Chinese do?

Mr. Keen: The property market was the original way to boost demand in
the Chinese economy. That has come to an end; the share market has come
to an end. So you have this enormous hole in demand.

The 20 percent in debt growth per year was all financing the building
boom; suddenly that’s over. All those workers are losing their jobs, and
they are going back to the countryside.

There is not going to be demand for new housing in China for 10 years.
For example: China is still a major buyer of Australian concrete. A huge
part they are buying they can’t use it anymore. So it has been used by
China as foreign aid in Africa.

A big part of the political shifts we are seeing are reactions to the
slowdown and they are desperately trying to soften the slowdown, and
that’s where all the crazy policy choices are coming from out of the
Politburo.

Most of the infrastructure projects, they can’t keep on doing. The only
thing that’s needed is to replace coal with solar. They have huge excess
capacity, there is no new export market to go into anymore, and they
can’t boost domestically.

(7) China in trouble because it followed World Bank advice - John Ross

http://ablog.typepad.com/keytrendsinglobalisation/2016/01/how-the-influence-of-world-bank-policies-damaged-chinas-economy.html

How the influence of World Bank policies damaged China's economy

John Ross

08 January 2016

Present negative trends in China's financial system and economy were
accurately predicted by me three years ago as occurring if there was any
influence of policies of the World Bank Report on China.

While China has made major steps forward in areas such as the Asian
Infrastructure Investment Bank and New Silk Road ('One Belt One Road')
unfortunately in some areas World Bank policies did acquire influence.
As predicted they led to present negative trends.

There should also be clarity. China has the world's strongest
macroeconomic structure so these trends will not lead to a China 'hard
landing'. But they are a confirmation that no country, including China,
can escape the laws of economics. As long as there is any influence of
World Bank type policies, which are also advocated by Western writers
such as George Magnus and Patrick Chovanec, there will be problems in
China's financial system and economy.

The article I wrote in September 2012 which was published under the
original title 'Fundamental errors of the World Bank report on China' is
republished without alteration.

(8) Fundamental errors of the World Bank report on China - John Ross (2012)
http://ablog.typepad.com/keytrendsinglobalisation/2012/09/fundamental-errors-of-the-world-bank-report-on-china.html

18 September 2012

Fundamental errors of the World Bank report on China

The World Bank's report China 2030 has, unsurprisingly, provoked major
criticism and protest. I have read World Bank reports on China for more
than 20 years and this is undoubtedly the worst. So glaring are its
factual errors, and economic non-sequiturs, that it is difficult to
believe it was intended as an objective analysis of China's economy. It
appears to be driven by the political objective of supporting current US
policies, embodied in proposals such as the Trans-Pacific Partnership.

Listing merely the factual errors in the report, of both commission and
omission, as well as the elementary economic howlers, would take up more
column inches than are available to me. So what follows is just a small
selection, leaving space to consider the possible purpose of such a
strange report.

The report has no serious factual analysis of the present stage of
China's economic development. On the one hand it is behind the times and
"pessimistic", saying China may become "the world's largest economy
before 2030". This is extremely peculiar as, by the most elementary
economic calculations, (the Economist magazine now even provides a ready
reckoner!) China will become the world's largest economy before 2020.

On the other hand, the report greatly exaggerates the rate at which
China will enter the highest form of value added production. As such,
the report calls for various changes in China, and bases its calls on
the rationale of "when a developing country reaches the technology
frontier'. But China's economy, unfortunately, is not yet approaching
the international technology frontier, except in specialized
defence-related areas. Even when China's GDP equals that of the US,
China's per capita GDP, a good measure of technology's spread across its
economy, will be less than one quarter of the US's. Even making
optimistic assumptions, China's per capita GDP will not equal the US's
until around 2040, by which time China's economy would be more than four
times the size of the US's! Put another way, China will not reach the
technology frontier, in a generalized way, for around three decades, so
this rationale can't be used to justify changes now.

The report appears to envisage China's development path differing from
that of every other country on the planet. It claims that in China "the
continued accumulation of capital… will inevitably contribute less to
growth". But one of the most established trends of economic development,
first outlined by Adam Smith and econometrically confirmed to the
present day, is that capital's contribution to growth increases with
development. Deng Xiaoping certainly argued that economic policy must
have "Chinese characteristics", i.e. be adapted to China's specific
conditions. However, he never argued that China was exempt from economic
laws, which is what this report appears to envisage!

The report makes elementary economic mistakes, such as confusing the
consequences of high export shares with trade surpluses. It argues: "If
China's current export growth persists, its projected global market
share could rise to 20 percent by 2030, which is almost double the peak
of Japan's global market share in the mid-1980s when it faced fierce
protectionist sentiments… China's current trajectory… could cause
unmanageable trade frictions." But if China increases its import share
at the same rate as exports, this would not create major trade
frictions. Japan's problem was trade surpluses, not export share.

It is almost impossible to believe, given such elementary mistakes, that
this report was intended as a serious objective analysis of China's
economy. What, then, is its goal? , The report spells out its goal
clearly enough in calling for China to abandon the policies launched by
Deng Xiaoping which brought such success. It says: "Reforms that
launched China on its current growth trajectory were inspired by Deng
Xiaoping… China has reached another turning point in its development
path when a second strategic, and no less fundamental, shift is called for."

What is this new "non-Dengite" economic policy? Deng Xiaoping's most
famous economic statement was "it doesn't matter whether a cat is black
or white provided it catches mice". Effectively, this means, in economic
terms, that a company should not be judged by whether it is private or
state owned but by how it performs. The proposed new economic policy
overturns Deng's dictum by saying: "Reintroduce judging cats by colour,
promote the private sector cat."

The consequences of this are clearly seen in the report's financial
proposals. During the international financial crisis, China was
protected by its state-owned banking system. The US and European
privately-owned banks simultaneously created the financial crisis and
were flattened by it, throwing their economies into crisis. China,
however, suffered no significant setback.

The reasons for the US and European banking crisis are well understood.
Modern banks are necessarily very large, both in order to undertake
international operations and because of the inherent risk of large
investment projects. They are literally "too large to fail", as the
failure of any large bank creates an unacceptable economic crisis. This
theoretical point was rammed home by the devastating consequences of
Lehman's collapse, following which no government will allow a large bank
to fail.

But a situation in which the state is blocking the bankruptcy of a large
bank, whose profits are being privately retained, creates disastrous
risk. If large private banks are state guaranteed against crippling
losses, but retain profits, they are incentivized to undertake
potentially profitable but highly risky operations. The disastrous
results of this scenario were seen during the financial crisis.

Extraordinarily, this report proposes that China abandon the financial
system which brought it successfully through the financial crisis and
instead adopt the one which led the US and Europe to disaster. This is
the real significance of "privatization would be the best way to make
SFIs [State Financial Institutions] more commercially oriented".

This ties in with US TransPacific Partnership pressure for the
elimination of China's state-owned companies, which are seen as giving
China a completive advantage over the US. The US, of course, does not
possess such companies. If the US is worried about the competitive
disadvantage created by not having state-owned companies, it should
create some, not call for China to abandon its own.

The last World Bank report of this type was published in February 1991
and its Study of the Soviet Economy provided the basis for Russia's
economic policies of the 1990s.

The result was that Russia suffered the greatest peacetime economic
disaster to befall any country. GDP declined by more than half. Russian
male life expectancy fell by four years and we saw the beginning of a
population decline, which continues to this day. The USSR subsequently
disintegrated, in what Vladimir Putin called the greatest geopolitical
catastrophe of the 20th century. Russia has not recovered.

This type of economic program is therefore not simply a "theoretical"
model. It has been thoroughly and demonstrably discredited on account of
the catastrophes it has produced. Russia was ill advised enough to adopt
this type of economic program. It is to be hoped, then, that China does
not follow the same course *   *   *

This article originally appeared on China.org.cn.

(9) Yuan joins IMF's SDR basket; the price is "finance sector reform",
ie Deregulation

http://atimes.com/2015/11/chinas-slippery-sdr-sanctification/

China’s slippery SDR sanctification

By Gary Kleiman on November 19, 2015 in

Chinese financial markets continued their comeback as the IMF staff set
the stage for yuan inclusion in the Special Drawing Rights artificial
basket.

The inclusion comes with a technical "freely usable" finding for
international currency and trade transactions, despite capital controls
due to last through end-decade under the latest 5-year economic plan.
Managing Director Lagarde endorsed the report, and IMF board acceptance
at end-month will be a formality with US support triggering an entry
timetable for late 2016.

The Treasury Department decision came in the face of its semi-annual
assessment that the RMB was "below appropriate medium-term valuation,"
as it acknowledged incremental flexibility and cross-border opening and
moved to repair strained relations from Congress’ failure to pass IMF
governance reform.

The preliminary SDR weighting should be ahead of the Japanese yen at
around 15%, but foreign central bank reserve and investor capital market
allocation will remain paltry for years without access and trading
breakthroughs as in all other emerging economies that have historically
been outside the synthetic "global currency."

China’s central bank launched the admission campaign in the wake of the
2008-09 crisis to diversify dollar reliance, but with persistent GDP
slowdown and foreign exchange outflows it is no longer in such a strong
implementation position. The logic has shifted to financial sector
reform impetus for overcoming current trade, investment and debt
squeezes, and laying a foundation for modern banking and securities
markets as in the rest of the region.

According to the SWIFT payments network, the yuan is only used for 2.5%
of international commerce, and the BIS puts it behind the Mexican peso
and other units as fractional components in foreign exchange dealing.
The local stock and bond markets are valued at multiple trillions of
dollars, but foreign investor participation is limited by quotas and
operational and regulatory hurdles.

Index provider MSCI just raised China’s portion with Hong Kong of the
core developing market benchmark to 26% from the previous 23% with the
addition of overseas-listed firms like internet giant Alibaba.  However,
the mainland exchange has experienced widespread suspensions and
official intervention the past three months to further deter
international players. The debt market in contrast has been partially
liberalized for non-resident institutions, but their share is stuck
under 2% as state-owned banks and enterprises dominate both buying and
issuance with minimal secondary trading.

The main near-term post-SDR yuan inflow may come from central banks and
sovereign wealth funds realigning holdings, with estimates in the $100
billion range annually. Yet this amount is negligible against the over
$10 trillion in global reserves and China’s own $3.5 trillion stash.
Managers also consider liquidity, safety and economic policy and
performance factors outside the Fund’s basket formula for placement.

The Japanese yen has an 8% weighting but draws only half that allocation
in the IMF’s regular survey of central bank preference, while the Swiss
Franc is a major choice outside the SDR. Domestic banking system health
is paramount and October figures showed a sharp credit drop as the
understated non-performing loan ratio drifted toward 2%, despite
interest rate and reserve requirement cuts. Under supply and demand
constraints money supply expansion may be only single digits in 2016, as
the GDP growth forecast was already pared to 6.5% in 2016. Debt defaults
at both private and state firms in the energy, steel and cement
industries reflect lingering overcapacity and deflation worries that cap
the manufacturing PMI under 50, as the services sector is pressed to
absorb the slack.

Exchange rate direction can now go both ways and basic stability cannot
be assumed despite the SDR move. The RMB has recovered ground against
the dollar but may slip again with a Fed rate nudge in December, and
onshore and offshore rates continue to diverge. The authorities have
begun to disclose limited reserve data but not interventions reportedly
concentrated on the murky forward market. They are also studying the old
standby of a Tobin tax to discourage "speculative" trading, when the
emphasis should be on new convincing steps toward routine commercial
dealing within established emerging market practice if the Fund’s
conceptual maneuver is to inspire actual mainland makeover.

Gary N. Kleiman is an emerging markets specialist who runs Kleiman
International in Washington, D.C.

(10) Yuan joins SDR, but PBoC advised to reduce intervention, allowing
market forces

http://www.reuters.com/article/2015/11/14/us-imf-china-yuan-idUSKCN0T22OC20151114

China's yuan takes leap toward joining IMF currency basket

WASHINGTON | BY KRISTA HUGHES

China's yuan moved closer to joining other top global currencies in the
International Monetary Fund's benchmark foreign exchange basket on
Friday after Fund staff and IMF chief Christine Lagarde gave the move
the thumbs up.

The recommendation paves the way for the Fund's executive board, which
has the final say, to place the yuan CNY=CFXS CNY= on a par with the
U.S. dollar .DXY, Japanese yen JPY=, British pound GBP= and euro EUR= at
a meeting scheduled for Nov. 30.

Joining the Special Drawing Rights (SDR) basket would be a victory for
Beijing, which has campaigned hard for the move, and could increase
demand for the yuan among reserve managers as well as marking a symbolic
coming of age for the world's second-largest economy.

Staff had found the yuan, also known as the renminbi (RMB), met the
criteria of being "freely usable," or widely used for international
transactions and widely traded in major foreign exchange markets,
Lagarde said.

"I support the staff’s findings," she said in a statement immediately
welcomed by China's central bank, which said it hoped the international
community would also back the yuan's inclusion.

Staff also gave the green light to Beijing's efforts to address
operational issues identified in a report in July, Lagarde said.

The executive board, which represents the Fund's 188 members, is seen as
unlikely to go against a staff recommendation and countries including
France and Britain have already pledged their support for the change.
This would take effect in October 2016, during China's leadership of the
Group of 20 bloc of advanced and emerging economies.

China has rolled out a flurry of reforms recently to liberalize its
markets and also help the yuan meet the IMF's checklist, including
scrapping a ceiling on deposit rates, issuing three-month Treasury bills
weekly and improving the transparency of Chinese data.

Economists said with the yuan's inclusion in the IMF basket as a reserve
currency now looking like a formality, China should step up efforts to
build trust between global investors and its policy makers.

China's heavy-handed intervention to stem a stock market rout over the
summer, and an unexpected devaluation of the yuan in August, had raised
some doubts about Beijing's commitment to reforms.

Singapore-based Commerzbank economist Zhou Hao said China needs to
further accelerate domestic reforms and improve policy transparency.

"The PBOC should reduce the frequency of market intervention, allowing
market forces to really play a critical role."

The United States, the Fund's biggest shareholder, has said it would
back the yuan's inclusion if it met the IMF's criteria, a U.S. Treasury
spokesperson said, adding: "We will review the IMF’s paper in that light."

If the yuan's addition wins 70 percent or more of IMF board votes, it
will be the first time the number of currencies in the SDR basket -
which determines the composition of loans made to countries such as
Greece - has been expanded.

"I would say that the likelihood of China's yuan joining the IMF
currency basket this year is very high," said Hong Kong-based Shen
Jianguang, chief economist at Mizuho Securities Asia.

"The only thing that could deter this is if the U.S. led a group
rejecting the yuan's inclusion, which could complicate things. But the
United States' current official stance doesn't reflect such an
attitude," he said.

Some currency analysts say making the yuan the fifth currency in the
basket could eventually lead to global demand for the currency worth
more than $500 billion.

But China's extensive capital controls mean it would take a while before
the yuan rivals the dollar's dominant role in international trade and
finance, analysts say.

Its closed capital account still limits foreigners from buying
yuan-denominated assets and places caps on how much cash residents can
take out of the country. These restrictions, along with concerns that
the yuan is set to come under steady depreciation pressure, may cause
corporates to back off from holding yuan.

Nonetheless, the People's Bank of China said the IMF statement was an
acknowledgment of the progress China had made in reforms and opening up
its economy.

"The inclusion of the RMB in the SDR basket would increase the
representativeness and attractiveness of the SDR, and help improve the
current international monetary system, which would benefit both China
and the rest of the world," the PBOC said in a statement.

China would respect the board's decision and continue to deepen economic
reforms, the PBOC said.

(Additional reporting by Timothy Ahmann in Washington, Jason Subler in
Beijing and Brenda Goh in Shanghai; Editing by James Dalgleish & Shri
Navaratnam)

(11) IMF SDR represents a claim to foreign currencies for which it may
be exchanged
http://news.xinhuanet.com/english/2015-04/19/c_134162891.htm

China's Zhou says IMF members frustrated with quota reform delay

19 Apr 2015

WASHINGTON, April 18 (Xinhua) -- China's central bank governor Zhou
Xiaochuan has said that members of the International Monetary Fund (IMF)
are frustrated with the long-delayed 2010 quota reform of the fund and
called for early passage of the reform.

"The 2010 quota reform has been delayed for so long. IMF members are not
simply disappointed but frustrated," Zhou told Xinhua on the sidelines
of the World Bank-IMF Spring Meetings on Friday.

To reflect the growing and underrepresented influence of emerging
economies, the IMF called for a 6 percent shift in quota share to the
emerging economies in 2010. However, the reform has been delayed for
five years due to blocking by U.S. Congress as the United States retains
a de facto veto.

The IMF members are discussing an interim solution which does not need
the U.S. congressional approval.

"The interim plan should not be an alternative to the original reform
program. We are pushing for fully implementing the 2010 quota reform,"
he said.

Commenting on the IMF's review of including the Chinese currency, the
yuan, into the basket of the Special Drawing Rights (SDRs), Zhou said
that the evaluation process of the RMB's inclusion is proceeding in
order, and China would speed up relevant reforms to promote the process.

Christine Lagarde, managing director of the IMF, said on Thursday that
China knew quite well what is desirable, what needs to be changed and
improved in the monetary policy and in the financial sector in China.

"I believe what the Chinese authorities have actually indicated...will
naturally be conducive to an assessment of whether or nor the RMB is
freely usable, which is as you know one of the key criteria," she said
at a press briefing on the sidelines of the Spring Meetings.

SDRs are international foreign exchange reserve assets. Allocated to
nations by the IMF, an SDR represents a claim to foreign currencies for
which it may be exchanged in times of need.

Although denominated in the U.S. dollar, the nominal value of an SDR is
derived from a basket of currencies, with a fixed amount of Japanese
yen, U.S. dollars, British pounds and euros.

According to the IMF, the selections of currencies for the SDR basket
are based on two criteria -- the size of the country's exports and
whether its currency is freely useable.

In the IMF's last review in 2010, the RMB met the export criteria, but
was assessed to not meet the freely useable criteria.

WASHINGTON, April 18 (Xinhua) -- China will take a series of reforms to
further increase the capital account convertibility of Renminbi (RMB),
and make RMB, or yuan, a more freely usable currency, governor of the
People's Bank of China (PBOC) Zhou Xiaochuan said on Saturday.

In a statement at the 31st meeting of the International Monetary and
Financial Committee meeting held in Washington, Zhou said that China
will further expand cross-border investment channels for individual
investors, such as via pilot program of Qualified Domestic Individual
Investor.

(12) IMF SDRs to replace $ as one-world currency

http://www.wnd.com/2015/11/global-currency-plan-gets-boost-from-imf/

Global-currency plan gets boost from IMF

U.N. backs effort to replace U.S. dollar as choice of trade

Jerome R. Corsi

November 16, 2015

NEW YORK – A decision last week by the International Monetary Fund to
accept reserve-currency status for China’s yuan advances a developing
plan backed by the United Nations to replace the dollar as the world’s
reserve currency.

Last Friday, IMF Managing Director Christine Lagarde endorsed a staff
recommendation to include China’s yuan in the basket of four currencies
that currently make up the IMF Special Drawing Rights, or SDRs: the U.S.
dollar, the euro, the British pound and the Japanese yen. The SDRs play
the role of an alternative to the use of the U.S. dollar to settle
transactions in international trade.

In a reversal of policy from policy of previous presidents, President
Obama has indicated the United States plans to drop opposition to the
inclusion of the Chinese yuan in the IMF basket of currencies, giving a
green light to anticipated IMF approval of the plan at a meeting of the
IMF board Nov. 30.

In 2013, the Society for Worldwide Interbank Financial
Telecommunication, a provider of international payments services,
announced the Chinese yuan had advanced to overtake the euro to become
the second-most used currency in global trade finance after the dollar.

A meeting between U.S. Treasury Secretary Jack Lew with Chinese Vice
Premier Wang Yang and Finance Minister Lou Jiwei at the G-20 leaders
summit in Antalya, Turkey, provided an opportunity for the Obama
administration to make clear to China that the U.S. intends to support
the inclusion of the yuan in the SDRs, provided the currency meets the
IMF’s existing criteria.

Reuters noted the irony of the IMF decision following the unexpected
devaluation of the yuan in August. The move by the Chinese government
triggered a global stock market selloff amid objections by World Trade
Organization free-trade advocates that it created an unfair price
advantage for China’s exports while raising questions about Beijing’s
commitments to financial reforms.

Advantages of a reserve currency

William T. Wilson, Ph.D., a senior research fellow at the Heritage
Foundation, in a research report published Aug. 17 titled "Washington,
China, and the Rise of the Renmimbi: Are the Dollar’s Days as the Global
Reserve Currency Numbered?" argues the fall of the dollar has been
accelerated by the relatively slow growth of the U.S. economy since 2009
and the accumulation of a sovereign debt set to double in the eight
years Obama is in office.

Among the advantages of being a reserve currency, Wilson notes "the
reserve-currency countries have the ability to run up fiscal debts
denominated in their own currency at relatively low interest rates."

Wilson lists as additional advantages the convenience for the exporters
and importers of dealing in the country’s own currency rather than in
foreign currencies, reducing the transaction costs as well as the
foreign exchange reserves.

Bob McTeer, a former president of the Dallas Federal Reserve Bank, noted
in a 2013 article published by Forbes that being the world’s reserve
currency of choice for the past 70 years has boosted the U.S. standard
of living "by others’ willingness to hold our currency without ‘cashing
it in’ for goods and services, or, before 1971, gold."

(13) China Rebalancing means Chinese consume more, export less;
industries move to India, Mexico, Vietnam

http://www.taipeitimes.com/News/editorials/archives/2015/01/04/2003608411

Sun, Jan 04, 2015

China's economic rebalancing act

By Zhang Monan

After more than 30 years of extraordinary growth, the Chinese economy is
shifting onto a more conventional development path — and a difficult
rebalancing is under way, affecting nearly every aspect of the economy.

China's current-account surplus has shrunk from its 2007 peak of 10
percent of GDP to just over 2 percent last year — its lowest level in
nine years.

In the third quarter of last year, China's external surplus stood at
US$81.5 billion and its capital and financial account deficits amounted
to US$81.6 billion, reflecting a more stable balance of payments.

This shift can partly be explained by the fact that, over the past two
years, developed nations have been pursuing reindustrialization to boost
their trade competitiveness. For example, in the US manufacturing grew
at an annual rate of 4.3 percent, on average, in 2011 and 2012, and
growth in durable-goods manufacturing reached 8 percent — having risen
from 4.1 percent in 2002 and 5.7 percent in 2007. Indeed, the US'
manufacturing industry has helped to drive its macroeconomic recovery.

Meanwhile, as China's wage costs rise, its labor-intensive manufacturing
industries are facing increasingly intense competition, with the likes
of India, Mexico, Vietnam and some Eastern European economies acting as
new, more cost-effective bases for industrial transfer from developed
nations. As a result, the recovery in advanced economies is not
returning Chinese export demand to pre-crisis levels.

These trends — together with the continued appreciation of the yuan —
have contributed to the decline of Chinese goods' market share in
developed nations. Indeed, Chinese exports have lost about 2.3 percent
of market share in the developed world since 2013, and about 2 percent
in the US since 2011.

Incipient trade agreements, such as the Trans-Pacific Partnership, the
Transatlantic Trade and Investment Partnership, and the Plurilateral
Services Agreement, are set to accelerate this process further, as they
eliminate tariffs among certain nations and implement labor and
environmental criteria. Add to that furtive protectionism, in the form
of state assistance and government procurement, and Chinese exports are
facing serious challenges.

China is also undergoing an internal rebalancing of investment and
consumption. As it stands, declining growth in fixed-asset investment —
from 33 percent in 2009 to 16 percent this year — is placing significant
downward pressure on output growth. Investment's contribution to GDP
growth fell from 8.1 percent in 2009 to 4.2 percent last year.

One reason for the decline is that China has yet to absorb the
production capacity created by large-scale investment in 2010 and 2011.
Aside from traditional industries, inlcuding steel, non-ferrous metals,
construction materials, chemical engineering and shipbuilding, excess
capacity is now affecting emerging industries, such as wind power,
photovoltaics and carbon fiber, with many using less than 75 percent of
their production capacity.

However, the decline in investment is also directly correlated with that
of capital formation. From 1996 to 2012, China's average incremental
capital-output ratio — the marginal capital investment needed to
increase overall output by one unit — was a relatively high 3.9, meaning
that capital investment in China was less efficient than in developing
nations experiencing similar levels of growth.

Moreover, the cyclical increase in financing rates and factor costs has
brought a gradual restoration of the price scissors of industrial and
agricultural goods. As a result, industrial firms' profits are likely to
continue to fall, making it difficult to sustain high investment.

Meanwhile, the expansion of China's middle class is having a major
impact on consumption. Last year, China surpassed Japan to become the
second-largest consumer market in the world, after the US.

Chinese imports remain focused on intermediate goods, with imports of
raw materials like iron ore having surged over the past decade. However,
in the past few years, the share of imported consumption goods and
mixed-use (consumption and investment) finished products, such as
automobiles and computers, has increased considerably. This trend is set
to contribute to a more balanced global environment.

The final piece of China's rebalancing puzzle is technology. As it
stands, a lag in technological adoption and innovation is contributing
to the growing divide between China and the Western developed nations,
stifling economic transformation and upgrading, and hampering China's
ability to move up global value chains.

However, as China's per capita income increases, its consumer market
matures, and its industrial structure is transformed, demand for capital
equipment and commercial services is likely to increase considerably.
Indeed, over the next decade, China's high-tech market is expected to
reach annual growth rates of 20 to 40 percent.

If the US loosens restrictions on exports to China and maintains its
18.3 percent share of China's total imports, US exports of high-tech
products to China stand to reach more than US$60 billion over this
period. This would accelerate industrial upgrading and innovation in
China, while improving global technological transmission and expanding
related investment in developed nations.

China's economy might be decelerating, but its prospects remain strong.
Its GDP might have reached US$10 trillion last year. Once it weathers
the current rebalancing, it could well be stronger than ever.

Zhang Monan is a fellow of the China Information Center and the China
Foundation for International Studies, and a researcher at the China
Macroeconomic Research Platform.

(14) PBoC Currency Intervention to stop rise of Yuan, then fall of Yuan

http://qz.com/386421/why-chinas-economy-is-slowing-and-what-it-means-for-everything/

Why China's economy is slowing and what it means for everything

Matt Phillips

April 19, 2015

It's really happening.

China, an increasingly important engine of global economic growth, is
slowing fast. [É] Does the fact that it's losing steam mean we're doomed
to another global slump? Well, no. Thankfully, developed market
economies such as the US seem to be in decent shape and set to pick up a
bit of slack. The world economy grew by 3.4% in 2014, according to the
IMF. And it's projected to expand by 3.5% and 3.8% in 2015 and 2016. [É]

In the aftermath of the Great Recession, when some of China's most
important export markets, such as the US were mired in the deepest
recession since the Great Depression, China embarked on a massive
investment binge. But that, too, is now slowing. Investment growth
declined to 13.5% in the first quarter, the slowest in since 2000.

In an ideal world, Chinese consumers would pick up some of the slack.
But retail sales growth also continues to slump, it fell to 10.2% in
March, worse than expected. In other words, its unclear what will fuel
China's economic engine.

Capital outflow

So, it's far from clear that China will be able to easily pull off such
a transition. And there are indications that the foreign investors that
have pumped billions into the Chinese economy in recent years aren't
waiting around to find out.

How do we know? Well, we can look at Chinese foreign exchange reserves.
As part of its policy of keeping its currency cheap to boost exports,
China has amassed nearly $4 trillion dollars in reserves in recent years.

Here's how it worked. Essentially, when China's currency, the yuan or
RMB, would strengthen against the dollar, the government printed fresh
yuan and used them to buy dollars. That increased the supply of Chinese
currency floating around in the market, and shrunk the supply of
dollars—because the Chinese government bought them and pulled them out
of circulation. Increased yuan supply and smaller dollar supply weakened
the Chinese currency.

But it recent months, the opposite seems to be happening. The
governments pile of dollars is shrinking a bit, suggesting it has been
selling dollars to try to keep the yuan from weakening too much. The
yuan isn't strengthening the way it has been in recent years, which
suggests investors aren't as eager to invest in the country.

And since China's pile of dollars has stopped growing, the country
hasn't needed to buy as many US government bonds. (Treasuries are
traditionally a key place where China would stash its cash.) Lo and
behold, China this week lost the crown of the largest foreign creditor
to the US, as Japan overtook it.

Trade winds

So, China's slowdown doesn't doom the world to recession. But its path
forward is far from clear. And investors seem to be a bit jittery. The
biggest economic impact tied to the China slowdown could well be outside
of China, particularly among the suppliers of the raw materials China
has used to fuel its industrial and investment binge in recent years.

For example, China consumes roughly 47% of the world's base metals, up
from 13% in 2000, according to the IMF. So it shouldn't be a surprise
that metal prices are now roughly 44% below their 2011 peak.

China's slowdown has weighed on copper prices, for instance. And that's
weighed on copper exporters, such as Peru.

Likewise, iron ore prices have hammered Australia's revenue from exports
of the raw material to Chinese steel mills.

The fact that Brazil is being battered by a similar trend only adds to
the dour outlook for the South American giant. The IMF projects the
Brazilian economy will fall into recession in 2015 and contract by about 1%.

What is to be done?

That's the trillion-dollar question. Will China be able to pull off a
transition to a different economic model without a hiccup? Probably not.
That doesn't mean the economic miracle in the People's Republic is over.
But it does open the door for a bit of volatility over the next few
years. Can the government pull it off? [É]

(15) China's slowdown is hurting countries that export to it

http://www.businessinsider.com.au/us-industrial-impact-chinese-slowdown-2015-6

China's slowdown is bad news for the world's big industrial exporters

Bob Bryan Jul 4, 2015, 4:09 AM

China's slowing economy is a serious concern for the economies of the
nearly 50 nations that count China as their top export destination.

According to economists at UBS, not only will it impact the countries
where the goods are coming from, but individual industries will also be
hit harder than others.

China's flow of imports increased by only 0.7% in 2014. This represents
the lowest growth rate in five years for the country. In terms of growth
for particular global industries, four out of nine tracked by UBS
exported less to China than in 2013.

Imports of minerals and fuels, electronics, textiles, and instruments
all decreased. Two other industries, chemicals and plastics, increased
imports by less than 1%.

US manufacturers were hit similarly hard. Census Bureau data shows that
China is the third-largest export destination for US goods, after the
NAFTA partners of Canada and Mexico, with $US122 billion heading across
the Pacific in 2014. Trade with China grew 1.9% last year according to
the UBS report. This is above the global average, but drastically below
average 9.9% year-over-year growth for the three years preceding based
analysis of Census Bureau data.

Textiles and minerals and fuels decreases in exports of over 10%, while
only agriculture had double-digit growth. UBS notes that while
commodities took the biggest hits, the slowdowns are starting to reach
processed items as well.

"With China's property construction deceleration set to deepen this year
in a multi-year slowdown, we may see a longer-term decline in China's
appetite for foreign industrial imports," said the report.

This is especially troubling to vehicle and machinery producers, as
around 30% of all exports from the US in those industries go to China.
Globally, Germany and the EU send nearly 50% of their goods in these
industries to China.

Over the first four months of 2015, exports have decreased by 6.3% from
the same period last year, though labour disputes at the West Coast
ports contributed to the problems.

China's slowdown has already started to reach American manufacturers.

(16) Luxury exports from West to China plummet

http://qz.com/429127/western-companies-are-reporting-plummeting-sales-in-china/

Western companies are being forced to figure China out all over again

Richard Macauley Heather Timmons

June 22, 2015

Foreign companies have long known that China's economic slowdown—now
upon us—could hit their earnings hard. They just didn't expect they'd be
hit by changing consumer buying habits and a rise in Chinese competitors
at the same time. Suddenly, foreign brands are finding it a lot harder
to convince consumers in the world's most populous country to part with
their cash.

The net result has been a string of miserable earnings reports, company
reorganizations, and cost-cutting announcements in recent weeks,
particularly for the world's biggest luxury and auto brands.

Italian luxury goods maker Prada reported a 44% drop in net profit to
Û59 million ($67 million) for the three months through April, well below
expectations of Û85 million. Executives pointed to weakness in mainland
China and a drop in the number of shoppers heading to Hong Kong and
Macau as a major driver for Prada's poor performance, and warned that it
is a trend showing Òno signs of abating.Ó

Luxury companies have long charged mainland Chinese shoppers a premium
of between 25% and 40% (paywall) compared to other markets, for the
simple fact that consumers were willing to pay inflated prices for
status symbols. Some of those companies are now slashing prices to keep
consumers interested.

Auto makers are suffering too. Last week, BMW reported its first monthly
year-on-year drop in sales in China, its largest market, in a decade.
Earlier this year executives said they were surprised by the speed of
China's slowdown. Jaguar Land Rover's profit fell 33% in the first
quarter and this was also, it said, thanks to a China slowdown. The
steepest drop in two years pushed the company to appoint a new China
sales boss from Porsche to turn things around.

It has been no secret that the Chinese economy has been slowing in
recent years, and a corruption crackdown has squeezed high-end spenders
in particular. But an economy still growing at around 7% shouldn't
create the kinds of sales drop-offs reported by some Western brands, and
the fact that many of these earnings drops were surprises for analysts
and investors shows just how difficult some Western companies are
finding the Chinese market to navigate.

Better domestic competition is part of the issue. The quality of Chinese
brands is improving, as are their marketing chops (paywall) and domestic
brands often predict Chinese consumers' changing desires better than
foreign brands can. In fact, some of the fastest-growing luxury brands
in the world are now Chinese companies like jewelers Lao Feng Xiang and
Chow Sang Sang.

Chinese consumer habits are another. Unilever, which owns brands from
Dove soap to Magnum ice creams, saw sales in China fall 20% in the
fourth quarter last year. Nestl_ has been burning the coffee it couldn't
sell in China, according to the Wall Street Journal (paywall).

Unilever's chief financial officer Jean-Marc Hu‘t told the newspaper
that it had failed to anticipate how quickly and thoroughly Chinese
consumers would make the switch to buying online. Putting it bluntly, he
said Western consumer goods companies were just Òtoo slow to react to
the changes in the marketplace.