May 23, 2020

Ladakh sector’s Galwan Valley and its history in Sino-India relations

Archival documents from 1962 reveal tit-for-tat allegations by India and China on soldiers trespassing in Ladakh sector’s Galwan Valley -- where the most recent standoff took place. The Galwan Valley region, which China claims is part of Xinjiang Uyghur Autonomous Region, is part of the 3,488 km long border dispute.

Updated: May 20, 2020 15:27 IST

By Sutirtho Patranobis |Edited by: Anubha Rohatgi, Hindustan Times Beijing

India and China have deployed additional troops   days after scores of Indian and Chinese soldiers were involved in a tense faceoff along the IndiaChina boundary
India and China have deployed additional troops , days after scores of Indian and Chinese soldiers were involved in a tense face-off along the India-China boundary. (HT File Photo )

The Chinese government often says the border dispute with India is a legacy of history. The dispute has influenced bilateral ties between New Delhi and Beijing for nearly 70 years despite dozens of rounds of negotiations over the years.

Archival documents from 1962 reveal tit-for-tat allegations by India and China on soldiers trespassing in Ladakh sector’s Galwan Valley -- where the most recent standoff took place. The Galwan Valley region, which China claims is part of Xinjiang Uyghur Autonomous Region, is part of the 3,488 km long border dispute.

Through the summer of 1962, barely weeks before the two neighbours fought a war, India and China went back-and-forth on their troops trespassing across the border in the Galwan Valley region.

Several letters were exchanged between the foreign ministries through embassies in New Delhi and Beijing.

The rhetoric flew thick-and-fast and within months both countries were fighting the border war of 1962.

The language in those letters exchanged remain almost identical to official exchanges now.

In a letter from the Chinese foreign ministry handed over to the Indian embassy in Beijing on July 23, 1962, Beijing laid out its allegations.

According to frontier guards in Sinkiang, (Xinjiang) China, there occurred recently another two serious cases of Indian troops intruding into Chinese territory and firing provocatively at Chinese frontier guards,” excerpts from the letter said.

It continued: “Several dozens of Indian troops intruded recently into Chinese territory south of the Galwan river had reached a place…where they attempted to entrench themselves permanently. At 17:35 hours on July 19, the said Indian troops unwarrantedly fired provocatively at Chinese patrol nearby. The Chinese patrol took no action against the provocation”.

“If the Chinese guards had not remained cool and exercised self-restrain, the above two new cases of provocation would most probably have led to armed clashes. The Chinese Government hereby lodges a serious protest with the Government of India against the two cases,” the letter said.

The Indian government responded swiftly.

In a letter to the Chinese embassy, August 3, 1962, the ministry of external affairs (MEA) rejected the allegations.

The Government of India has carefully investigated all the three allegations and has found them to be without any basis whatsoever…The GOI notes in this connection that all the three areas referred to by the Chinese government lie well within India territory. It is clear from this that such intrusions as have occurred, have in fact been committed by Chinese forces and not by Indian troops.”

The Indian border defence forces have, despite provocation by Chinese forces throughout shown considerable patience and self-restraint.”

“While rejecting the Chinese note, the Government of India would once again press upon the Chinese Government the urgent necessity of issuing immediate instructions to all Chinese forces to desist from provocative action of any kind and to withdraw from Indian territory”.

The very next day, on August 4, 1962, China shot off another dispatch to India.

“In disregard of the repeated protests of the Chinese government, the Indian side has not only refused to withdraw its troops which have intruded into the Galwan river valley in Sinkiang, China, and menacingly surrounded the Chinese frontier guards there but set up another military strongpoint on Chinese territory south of Galwan river…,” excerpt from the letter said.

India dismissed the allegations on August 8 in a letter to the Chinese embassy. “...There is no truth whatsoever in these allegations. On the contrary whenever an instance of this nature has arisen, it has invariably been due to Chinese forces intruding in Indian territory and shooting at Indian border forces. The Government of India has protested about two such incidents…On both occasions the Indian forces exercises great self-restrain and did not return the Chinese fire,” said part of the letter.

Similar exchanges continued for weeks until the 1962 Sino-Indian war, the legacy of which will continue to shadow ties for a long time to come.

Chinese troops focus on 4 LAC locations, test new areas in Ladakh

Along with Pangong Tso, where Indian and Chinese troops came to blows earlier this month, Trig Heights and Burtse have witnessed two-thirds of the total transgressions across the LAC.
New areas of Chinese forays into Indian territory have come up in 2019 — the Doletango area opposite Dumchele suddenly saw 54 Chinese transgressions in 2019, after having recorded only three transgressions in the past four years.

Although India and China share a boundary that stretches 3,488 km from Ladakh to Arunachal Pradesh, official data show that 80 per cent of Chinese transgressions across the Line of Actual Control (LAC) since 2015 have taken place in four locations, three of them in eastern Ladakh in the western sector.

Along with Pangong Tso, where Indian and Chinese troops came to blows earlier this month, Trig Heights and Burtse have witnessed two-thirds of the total transgressions across the LAC.


New areas of Chinese forays into Indian territory have come up in 2019 — the Doletango area opposite Dumchele suddenly saw 54 Chinese transgressions in 2019, after having recorded only three transgressions in the past four years.

In the eastern sector, the highest number of transgressions by the Chinese — 14.5 per cent of the total – was recorded in Dichu Area/Madan Ridge Area. Transgressions recorded in other areas in the eastern sector were very low, including Naku La in Sikkim which saw two Chinese transgressions each in 2018 and 2019. Earlier this month, Naku La too saw a clash between Indian and Chinese soldiers.


The only location in the central sector to record significant Chinese transgressions is Barahoti in Uttarakhand which recorded 21 transgressions in 2019 and 30 in 2018. Least disputed, it is the only sector where both countries have shared maps, presenting their respective perceptions of the LAC.

While Pangong Tso tops the list, the other site of contention in the Galwan river valley had hardly witnessed Chinese transgressions.

Major sites of Chinese transgressions on the LAC

According to official data, Pangong Tso, the 135-km long lake, one-third of which is controlled by India, recorded 25 per cent of the total number of Chinese transgressions in the last five years across the LAC.

Trig Heights recorded 22 per cent while Burtse/Depsang Bulge accounted for 19 per cent of all transgressions.

At Pangong Tso, Chinese transgressions almost doubled from a five-year low of 72 in 2018 to 142 in 2019. These transgressions occurred both in the waters of the lake, and its northern banks.

There were 112 transgressions in 2017, the year the two armies were locked in a tense 73-day faceoff at Doklam on the Sikkim-Bhutan border. It was 164 and 77 in 2015 and 2016, respectively.

India and China have different perceptions about the exact location of the LAC in the Pangong Tso area, which results in high number of transgressions.

Incidentally, the site at Galwan river, where tensions have escalated between the two armies, saw only six Chinese transgressions during the same period. While there was no transgression in 2019, four were recorded in 2017, and one each in 2018 and 2016.

Explained: What does the increase in Chinese transgressions mean?

Officials suggest that the Galwan river area, a prominent site of action during the 1962 war, is a “settled portion” of the LAC, where both sides agree on its location. So, the current situation in the area is, therefore, a significant departure from the norms of previous disputes on the LAC.

Construction of a new Indian road in the Galwan area, well inside Indian territory, has elicited strong objections from the Chinese who have moved soldiers, heavy vehicles, and monitoring equipment in large numbers. Sources said 70-80 Chinese tents have been pitched in the area, matched by strong Indian mobilisation on the ground

Govt has been groping in the dark on the migrant issue. This must change

Migrant workers must be able to believe that this is a country for all, without any discrimination. They do not require mercy, they should be allowed to live with dignity.
The irony of fate is that when these very nation builders sought a little assistance from the country in their quest to reach their humble abodes, we failed to provide them food, shelter and conveyance. (File Photo)

The COVID-19 pandemic has introduced words and phrases that have now become deeply familiar to us: Corona, quarantine, thermal screening, tracing, testing, isolation, vaccination and, most prominently, “stranded migrant workers”.

At regular intervals, we have been witnessing heart-rending visuals of weary migrants painfully trudging along roads — people who have been compelled to set out on arduous journeys to reach their native villages, which they had once left for “greener pastures”. These migrant workers have been contributing towards the development of the nation by the sheer sweat of their brow, their labour, so that India could move towards the goal of becoming a trillion dollar economy.


The irony of fate is that when these very nation builders sought a little assistance from the country in their quest to reach their humble abodes, we failed to provide them food, shelter and conveyance.

The media has done no more than merely train the spotlight on their harrowing journeys. These are people who were crushed, mowed down and fated to die of exhaustion — from starvation really. This is a blot on humanity and an ignominy for the country. The glaring distinction between two Indias has palpably come to the fore.


In India, there is no dearth of hype and hyperbole. Swami Vivekananda had once said, “an ounce of practice is worth twenty-thousand tonnes of big talk”. The entire post-lockdown scenario vindicates the fact that the lockdown was a half-baked, knee-jerk exercise that has resulted in an unprecedented human disaster on a scale unseen since Independence. This could have been averted had there been a well-thought out plan in anticipation of the magnitude of this looming corona menace. Can we ignore the fact that if these migrants do not return to their workplaces after the lifting of the lockdown, several critical economic activities will take a hit? The structure of our economic activities has evolved in such a manner that migrants — from within or outside their respective state — have an integral role to play.

The question is whether the government has comprehensive data about the migrant workers of our country. It appears that the government is emerging from a stupor and groping in the dark about the status and significance of the migrants.


On the one hand, these workers have lost their livelihoods abruptly. Their hard-earned money — otherwise remitted to their homes to cater to the needs of their families, and means of survival for themselves — was wiped out instantly. Now, shorn of everything, these migrants have been mobilising the cost of their return journeys home by selling their family valuables. The stringent lockdown is like a double-edged sword for them: Their sources of income have dried up, and the little resources back home are not sufficient to help them withstand the hardship of the situation. It appears to me that the “medicine” to counter coronavirus has, in our case, become more deadly than the virus itself.

The lockdown has forced us to think specifically about migrants, whether they are skilled or unskilled workers, blue-collar workers or white-collar workers. All migrants face difficulties. Appropriate facilities should thus be created at all places to address their problems. There is a need to match demand and supply for their skills, and the employers have to be sensitive enough to create required facilities for them. Hence, a law is needed to deal with any adversities that the migrant workers may confront in future in a holistic manner. Migrant workers must be able to believe that this is a country for all, without any discrimination. They do not require mercy, they should be allowed to live with dignity.

The current crisis also makes us think about the need to have a separate ministry for migrant affairs, dealing with domestic migrants only. The UPA government was innovative enough to create the Ministry of Overseas Indian Affairs to give proper attention to the various issues faced by Indian expatriates. It helped to ameliorate the conditions of Indians working abroad to some extent. Likewise, we must pay attention to domestic migrants. A dedicated ministry for migrants affairs will have the complete database of the migrants — their place of origin, the place they have moved to, skills they possess, etc. This information can be leveraged to plan our cities, towns and train movements better. This can help in generating appropriate employment, besides ensuring traceability and helping to organise their housing, transport and food in times of crisis. This ministry can coordinate with the respective states about the migrants. Across the world, migrants keep moving in search of better economic options. Therefore, we may also study how other countries have fared on this front.

The focus of the UPA has always been the poor and the downtrodden — how to transform their lives and raise their standards of living, thus pulling them out of penury and insecurity. As we have been reading about the plight of the migrants during the lockdown, it has prompted us to think more about them. We have realised that in order to better focus on their affairs, in all situations and all times, it is best to have a separate ministry of migrants affairs.

We should also bear in mind that the lockdown has been promulgated under the disaster management act of 2005, which was conceptualised by the UPA in the aftermath of the 2004 tsunami.

This article first appeared in the print edition on May 22, 2020 under the title ‘A ministry for migrant labour’. The writer is leader of the Congress in Lok Sabha.

TALK: Hindu Revival and fight back in Northeast India

Pragna Bharati is inviting you to a scheduled Zoom meeting.

Topic: Hindu Revival and fight back in Northeast India
Time: May 23, 2020 05:00 PM India

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Tag lines:  How the Tribal Communities are fighting the Christian Falsification in Indias Northeast, is a story not known to most Indians. This story needs to told and retold so that the revival and fight back form part of the grand Bharateeya Narrative.

About the Speaker: Raka Sudhakar is a Journalist for more than 25 years. He worked in Northeast for 12 years as a RSS pracharak. He worked among Tribal community of Northeast and was part of their fight for protecting indigenous faiths.
He teaches in a reputed jouranlism school,his YouTube channel(TELUGU)RAKALOKAM is popular for its research content on nationalistic  topics. He is a writer and speaker.
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2,000 road crashes and 368 deaths from March 25, when the lockdown began, to May 16.

"Worldwide, the defining images of India’s lockdown are the caravans of migrant workers walking hundreds of kilometres to reach their homes. Bereft of substantive support from the government or their employers, they want to escape the city and get back to their villages and families. Several hundreds of them lost their lives in their desperate attempt to reach home during the lockdown. The SaveLife Foundation, a non-profit organisation working to prevent road accidents, has recorded nearly 2,000 road crashes and 368 deaths from March 25, when the lockdown began, to May 16."

Source : The Hindu

US to Exit International Military Surveillance Treaty

Russian Air Force Beriev A-50 early warning aircraft and Sukhoi Su-27 jet fighter fly in Kaliningrad, Russia April 25, 2020…
FILE - A Russian Air Force Beriev A-50 early-warning aircraft and a Sukhoi Su-27 jet fighter fly over Kaliningrad, Russia, April 25, 2020.

President Donald Trump said Thursday that he was pulling the United States out of the 18-year-old international Open Skies Treaty allowing surveillance flights over other countries because Russia has been violating it.

The U.S. began notifying the other signatories to the accord that it was giving the required six months’ notice to leave.

President Donald Trump listens during a meeting with restaurant industry executives about the coronavirus response
FILE - President Donald Trump listens during a meeting in the State Dining Room of the White House, May 18, 2020, in Washington.

Trump accused Moscow of ignoring terms of the treaty. “I think we have a very good relationship with Russia," he told reporters at the White House. "But Russia didn't adhere to the treaty. So, until they adhere, we will pull out.”

The president did note there was a possibility, though, that some new agreement might be reached at a future date.

“There’s a very good chance we’ll make a new agreement or do something to put that agreement back together," he said. "But whenever there’s an agreement that another party doesn’t agree to — you know, we have many of those agreements around the world, where it’s a two-party agreement but they don’t adhere to it and we do — when we have things like that, we pull out also.  That’s why, with the arms treaties, if you look at the arms treaties, we’re probably going to make a deal with Russia on an arms treaty.  And China will be, maybe, included in that. We’ll see what happens.

"So I think what’s going to happen is we’re going to pull out, and they’re going to come back and want to make a deal. We’ve had a very good relationship lately with Russia.  And you can see that with respect to oil and what’s happening with oil,” he said.

US assertions

The treaty has allowed 35 countries to conduct surveillance flights over each other’s territory to look at military installations, an effort aimed at international peacekeeping.

But the U.S. contends that Moscow has been violating the treaty by blocking it from conducting flights over the Baltic Sea city of Kaliningrad and Russia’s southern border near Georgia, both of which are permitted by the agreement.

U.S. Defense Secretary Mark Esper told the Senate Armed Services Committee in March that Russia has been “cheating for many years.”

Russia has denied violating the treaty.

The Open Skies withdrawal is Trump’s latest move during his 3½-year presidency to remove the U.S. from international agreements enacted by previous presidents that he considers unfair to American interests.

Last year, Washington withdrew from the Intermediate-Range Nuclear Forces Treaty with Russia, and earlier it abandoned the international Paris climate control accord, a trade treaty with Pacific Rim nations, and a deal with Iran to restrain its development of nuclear weapons.

The concept of the Open Skies treaty was first advanced in the decade after the end of World War II by President Dwight Eisenhower. The Soviet Union balked at the idea at the time, but the U.S. again pushed for a pact in 1989 under President George H.W. Bush. It was finally adopted by the required 20 countries in January 2002.

Pakistan Army forcefully ‘harvesting organs’ from ethnic minorities in Balochistan: Report

Balochistan: A tale of abduction, killings and organ harvesting by Pak army

Representative Image (Photo Courtesy: The Financial Express)

The Pakistan army has allegedly been involved in the abduction, forced disappearances, torture and forced organ harvesting of people living in ethnic areas of Balochistan, report Organiser. The report claims that corpses of such ethnic minorities are wrapped by the army in white cloth and family members are prevented from seeing anything other than the face. Such dead bodies are buried with missing organs.

Reportedly, the army would earlier bury the dead in ‘secluded places’. However, after allegations of forced organ harvesting have come to light, such bodies are now buried in the presence of family members. The report claims that the army covers the bodies such that the stitch marks are not visible to the family. Interestingly, the army also does not allow post-mortem to be conducted on such dead bodies.

Cases of Organ Harvesting in Balochistan

One such case was that of a man named Gurham Baloch. Followed his abduction by the Pakistan army, his corpse was returned after two days to the family for burial. However, the last rites were performed under the watch of the army officials. According to local correspondents who investigated the matter, essential organs were harvested from the body of the deceased. Gurham was arrested along with two others on Feb 22, 2019, from Herronk in Kech district. He worked as a labourer and hailed from a poor family.

When the Pakistani Army raided his house, he had gone to the local market. Following the interrogation of family members, the military officials asked them to call the victim. On reaching home, Gurham was arrested along with his two brothers. They were shifted to a nearby army camp where all of them were tortured.

While the two brothers were released, Gurham’s dead body was carried to their house in army cars. As per the modus operandi, the family members were not allowed to see his body. A local anonymously revealed, “Only his face was disclosed. Army personnel did not allow anyone to see his body. However, during burial, they saw a little. His body was cleaved, and all essential organs were taken out.” The family members were aghast at this organ harvesting but couldn’t do anything owing to fear.

Reportedly, forced disappearances and torture at the hands of army personnel in regions dominated by ethnic minorities in Pakistan is rampant since 2008. As per Organiser, Abdul Rahman, the cousin of Baloch National Movement (BNM) Vice-President Lal Munir, was abducted on February 24, 2013, by the Pakistan army. His corpse with missing essential organs was discovered near the Milar area in Karachi on March 10, 2013.

Ban on Commercial Trade of Organs

Reportedly, illegal organ harvesting has become a flourishing trade in the Islamic Republic of Pakistan. The country had, however, banned the commercial sale of human organs in 2010. As per the law, anyone found involved in organ harvesting and trade of organs can face up to a jail term of 10 years and a maximum fine of PKR 1 million.

Under the current provisions, donors can give their organs to relatives and not to foreigners. As per the report published by the Organiser, people from abroad including Britain, Saudi Arabia, and South Africa travel to Karachi in Pakistan for organ transplantation. Such operations are carried out in discreet private clinics or in concealed basements.

Photo Courtesy: Organsier

The Chinese Link

Human rights activist Naela Quadri Baloch fear that the ethnic minority of Baloch would become exterminated at the hands of the Pakistani army. She compares the treatment (genocide) meted out the people in Balochistan to that of Jews in Germany during Hitler’s time and the Bengalis in East Pakistan. “As per the existing population, every day 10 to 50 people (in Balochistan) are getting disappeared which will result in the elimination of Baloch people,” she was quoted as saying.

She alleged that the Pakistan army is not only behind the resources in Balochistan but also the organ of the ethnic minorities in the area. Naela said, “They are kidnapping our children and women so that they get killed and their organs to be sold. Pakistani and Chinese armies are doing it together. You get the cheapest organ transplant in China. Where do they get all these organs? They have implemented the same in their country and have live blood banks. They are doing the same in Balochistan and Sindh.”

Forced Disappearances

According to Manzoor Pashteen, 1000s of Pashtuns are abducted by the Pakistani army every year and sold by its Generals for money. Estimates say that around 40,000 Baloch and 25,000 Mohajirs are still missing. Tens and thousands of Pashtuns have been forcibly disappeared from Khyber Pakhtunkhwa.

In 2017, the US Treasury Department said that it imposes sanctions on all Human Rights abusers from across the globe. US President Donald Trump had signed an Executive order to impose sanctions on grave human rights abusers from around the world. In this regard, sanctions were imposed on a Pakistani surgeon named Mukhtar Hamid Shah who is believed to be involved in organ trafficking, kidnapping, and wrongful confinement.

Shah was arrested in 2016 for holding 24 impoverished individuals against their will, under the pretext of providing them jobs. Doctors were planning to harvest their kidneys. Reportedly, 400 people were kept in detention at the apartment at various points in time. Activists demand that Donald Trump impose sanctions against high-ranking army officials deployed in Balochistan and are involved in organ trafficking, forced disappearances and murders.

Photo Credits: Organiser

The Silence of International Organisations on Balochistan

The Human Rights activists in Balochistan have been time and again emphasised the need for international organisations such as Red Cross, Human Rights Watch, Amnesty International, European Council, Human Rights without Frontiers, etc. to take cognisance of the humanitarian crisis in Pakistan. Besides requesting them to set up their offices in Balochistan, they have demanded reports on the deaths of civilians at the hands of the Pakistani army.

They have demanded trial against guilty army personnel and high-ranking officers for crimes against humanity. Owing to the atrocities perpetrated on the people of Balochistan, they have demanded freedom from the Punjabi-dominated army. Several people are forced to pick up arms and resist the tyrannical army. Locals say, “This vicious circle of exploitation and Human Rights abuse will end only when they get freedom. Till then their freedom struggle will continue.”

May 22, 2020

Chinese Private Security Contractors: New Trends and Future Prospects

Chinese Private Security Contractors: New Trends and Future Prospects

Publication: China Brief Volume: 20 Issue: 9

Image: Personnel of Hua Wei International Security (华卫安保国际, Hua Wei Anbao Guoji) stand alongside other representatives of international private security companies at a conference in Macao, June 2015. (Source: Hua Wei Security)


In addition to the Chinese People’s Liberation Army Navy (PLAN) Support Base in Djibouti, the People’s Republic of China (PRC) has indicated ambitious plans for future “strategic strong point” naval bases in the Indian Ocean and Africa (China Brief, March 22, 2019), and has pursued this goal with varying degrees of success (China Brief, April 13). One of the key ideas behind these bases is to provide security to Chinese workers and businesses abroad. By late 2016, more than 30,000 Chinese businesses had invested offshore (with a total investment of $1.2 trillion) and nearly one million Chinese citizens were working abroad (China Daily, July 14, 2017). Many of these workers are either employed, or in the near future could be employed, along Belt and Road Initiative (BRI) routes that traverse over some of the world’s most unstable and dangerous areas (China Brief, February 15, 2019; China Brief, April 1).

The PRC has sought multiple means to improve regional security in BRI-affiliated countries, to include promoting a greater role for the Central Asia-based Shanghai Cooperation Organization (China Brief, July 16, 2019). The PRC has also sponsored the “Beijing Xiangshan Forum” (北京香山论坛, Beijing Xiangshan Luntan) which has been promoted as  “the security component” of the BRI, and as a cooperative framework intended to strengthen military-technical cooperation with BRI-associated countries (Belt and Road News October 28, 2019; China Brief, November 19, 2019).

However, traditional means of security assurance do not always correspond to the new realities and the new needs of China’s increasing overseas presence. In this evolving environment, other instruments—to include the growing Chinese private security industry—are attaining a crucial role. Previous work by this author has detailed many aspects of the growing use of Russian private military companies in unstable regions and conflicts throughout the world (Jamestown, multiple dates). This article seeks to provide insights into the growth of China’s private security industry, which to date has not been as closely examined.

Chinese PSCs in Transition: The Milestones

The development of Chinese private security companies (PSC) has been shaped by tragic incidents involving Chinese nationals abroad. First emerging in the 1990s, Chinese PSCs became more prominent after 2004, when 11 Chinese construction workers were killed in Afghanistan by the Taliban (, June 10, 2004). Following a series of subsequent incidents in East Timor, Chad, Lebanon, Solomon Islands, Tonga, Thailand, Haiti, and later Libya and Egypt, the necessity to protect Chinese nationals abroad became a more pressing necessity. These incidents involving Chinese nationals resulted in the rapid rise of the Chinese PSC industry.

In September 2009, the PRC State Council issued the “Regulation on the Administration of Security and Guarding Services” (保安服务管理条例, Baoan Fuwu Guanli Tiaoli). This measure was the PRC’s first attempt to establish a regulatory framework for the private security industry, and gave de facto legalization to PSCs. The regulation recognized two main types of PSCs: “security companies” (保安服务公司, baoan fuwu gongsi), and “security companies engaged in armed escorting services” (从事武装守护押运服务的保安服务公司, congshi wuzhuang shouhu yayun fuwu de baoan fuwu gongsi). The regulation provided a basic legal framework for PSCs operating domestically within China, but made no clear reference to overseas activities (Law Info China, October 13, 2009).

By the time the BRI was formally announced in 2013, 4,000 entities employing more than 4.3 million security personnel were registered in China (Asia Sentinel September 3, 2018). This year was also marked by the beginning of Erik Prince’s involvement in the Chinese PSC industry via the creation of Hong-Kong registered Frontier Services Group (FSG) (先丰服务集团, Xianfeng Fuwu Jituan). [1] Later, Prince explicitly stated that FSG would be oriented towards providing logistical assistance and security training to Chinese businesses and government personnel working on BRI projects (Global Times, March 21, 2017).

Between 2014 and 2016, a series of international incidents in Iraq and South Sudan required the evacuation of Chinese nationals. These incidents directed international attention to two Chinese PSCs in particular: VSS Security (伟之杰安保公司, Weizhijie Anbao Gongsi) and DeWe Security (北京德威保安服务有限公司, Beijing Dewei Baoan Fuwu Youxian Gongsi). This also resulted in a 2016 statement by Chinese Communist Party (CCP) General Secretary Xi Jinping on the necessity to render all necessary protection to Chinese companies working in dangerous regions. By 2016, the overall number of Chinese PSCs working abroad rose to twenty, with 3,200 security professionals deployed overseas (Global Times, June 23, 2016; China Daily April 22, 2016). However, the international market share of Chinese PSCs remained miniscule in comparison with their Western counterparts.

Image: Personnel of the private security firm Bojing Tewei (博警特卫) conduct martial arts and bodyguard training (undated, circa 2016). (Source: CGTN/Youtube)

New Developments in 2019

The year 2019 was marked by several important transformations within the Chinese PSC industry, to include a trend towards increasing professionalism. Early 2019 saw the announcement that Frontier Services Group would create a “training base” in the Xinjiang region, with the company pledged to invest $600,000 in a center capable of training 8,000 people per year (Sputnik News, February 1, 2019). When asked about this, Chinese Foreign Ministry spokesman Geng Shuang declined to give any comments (SCMP, February 1, 2019).

The issue of PSCs also entered into the PRC’s domestic discourse in 2019. Speaking at the annual Chinese People’s Political Consultative Conference in March 2019, CITIC Capital Holdings Ltd. Chairman Zhang Yichen made a number of comments about PSCs, including the following:

  • China needs to drastically increase budgetary spending on the security of its overseas embassies and key infrastructural projects—to include further funding for Chinese private security forces, whose capabilities should be upgraded to the level of their Western counterparts;
  • Coordination between government departments and private security firms should be strengthened;
  • A national fund with a focus on overseas security projects should be established;
  • The Beidou (北斗) satellite navigation system should be relied on, which will “allow Chinese companies to acquire a massive amount of security information in overseas markets without relying on Western technologies” (Belt and Road News, March 10, 2019).
Images: Publicity photos from the Chinese private security contractor Hua Xin Zhong An (华信中安), advertising the capabilities of the company’s shipboard security personnel. (Source: Hua Xin Zhong An)

What are Chinese PSCs, and Whose Interests Do They Serve?

Among Sinologists who have studied the topic, viewpoints on Chinese PSCs—regarding both their levels of professionalism, and the extent of their ties to the state—vary widely. Alessandro Arduino contends that Chinese PSCs are “neither an extension of the PLA nor an armed wing of the Chinese Communist Party,” and views them as underdeveloped, privately-run enterprises (The Diplomat, March 20, 2018). Alexey Maslov, head of the School of Asian Studies at the Higher School of Economics (HSE) in Moscow, has argued that Chinese PSCs “are not very effective and quite unprofessional,” and that “there is no concrete proof that these companies are somehow related to the Chinese state” (Current, February 2, 2019).

Another Russian source, however, maintains that “Chinese PMCs are hardly market players… They are created by former military and police personnel and controlled by state bodies, whereas their clients are large state corporations” (, March 23, 2017). A similar conclusion was made by the Mercator Institute for China Studies, which argued that “Chinese PSCs are entirely under the control of the state, through the Ministry of Public Security (MPS).” [2] It is the author’s own opinion that, based on available references, statements of notable Chinese figures, and PRC political traditions, it is unlikely that Chinese PSCs operate independently of the state.

Table 1: Selected Chinese Private Security Companies

China Security and Protection Group


Shandong Huawei Security Group


China Overseas Security Group


Hua Xin Zhong An


Beijing DeWe Security Services Limited Company


Frontier Services Group


Zhongchengwei Security Service Group Co., Ltd.


Beijing Security Service General Company


Number of employ-ees+30,000+6,000Total unknown+15,000Total unknown, +350 based abroadTotal unknown, 432 in hdqtrs.Unknown+ 77,000
Top leader(s)Liu Wei


Xun Jinqing


Wang Guobao


Yin Weihong


Li Xiaopeng


Chang Zhenming


Not reportedZhang Tao理张涛
Year founded19941993201520042011201420091986
Where they claim to work




Focused on the BRIAfrica  (strategic coop-eration agreement with the Australian MSS Security Group)Argentina, Djibouti, Ethiopia, Iraq, Jordan, Sri Lanka, Laos, Indonesia,Pakistan, Turkey, Malaysia, Cambodia, Mozambique, South Africa and Thailand.Focused on the BRIOverseas operations (up to 50 countries)Focused on East Africa, Northwest, Southwest and Middle East & North Africa.

Hdqtrs.  in Hong Kong and Beijing; offices in Shanghai, Dubai, Nairobi, Boten, Malta,Johannesburg.

Nationwide; focus on the BRIFocused on the Chinese market (33 branches, 1 security training school and 12 security training branches)

(Source: Compiled by the author)

Chinese PSCs: Weaknesses and Challenges

Despite its growth, the Chinese PSC industry continues to face challenges—with three issues standing out in particular. The first is the lack of a legal framework: while Chinese PSCs have a legal status for operations inside China, they lack clear guidelines for international operations. This stems from the “Law of the PRC on Control of Guns” (中华人民共和国枪支管理法, Zhonghua Renmin Gongheguo Qiangzhi Guanli Fa) adopted in 1996, which allows only the PLA, the police, and the militia to possess weapons (, February 14, 2011). Furthermore, according to PRC criminal statutes, those who possess weapons overseas may face imprisonment. As stated by a security guard who worked at an oilfield in Iraq, Chinese PSCs operating abroad are unable to effectively protect themselves and their clients, and are limited to reporting potential threats to local police (Global Times January 23, 2015). Thus, while operating abroad, many Chinese businesses actually prefer to employ Western PSCs.

Second, deficiencies exist in training and qualifications. As noted by Tian Buchou, a veteran of the Chinese special forces who worked in private security in the Middle East and Africa, in terms of training and expertise Chinese PSCs are far behind their Western counterparts, which have a “comprehensive operational system covering logistics, weapons, high-technology and even medical support”, whereas “more than 80 per cent of Chinese security personnel have just a basic education” (SCMP July 15, 2018). He also identified the lack of knowledge of foreign languages among Chinese PSC personnel, and a reluctance to learn new skills. Another serious issue is low pay, and the fact that Chinese PSC members “are paid by the mission without other benefits.” This greatly affects the prestige and desirability of jobs with PSCs (SCMP, July 16, 2018).

The third aspect presents a far more complex issue: the activities of Chinese PSCs abroad, and potential complications surrounding the right to carry lethal weapons, are likely to result in incidents that could aggravate negative perceptions of China in developing countries. Specifically, incidents involving Chinese PSCs in Zambia in 2010 and South Sudan in 2012 caused a huge uproar. Moreover, the example of Pakistan—where the PRC has tried to use its PSCs to protect its economic interests along the China-Pakistan Economic Corridor (CPEC), but saw them pushed out—clearly demonstrated that many countries are reluctant to have Chinese paramilitary personnel on their soil (Reuters, August 19, 2012).

Conclusion: What Happens Next?

Despite challenges associated with its PSC industry, the PRC is bound to take further steps to support this industry for two main reasons. First, the growing global presence of Chinese businesses will require protection—which, given China’s image and ambitions, excludes permanent reliance on foreign PSCs. Secondly, China has a large number of military veterans—57 million as of 2018, with growing discontent among this group (China Daily, March 14, 2018)—and PSCs may provide a means of employment for some of these veterans.

The Chinese are analyzing their foreign experiences and evaluating the different models available on the market. The Western model is premised on full legalization; use of force as an extreme measure; greater transparency and openness to domestic and international scrutiny; and independence from the state. However, this model presumes greater transparency and a larger role for private ownership—elements that are likely unpalatable for the Chinese government. The Russian model, by contrast, is predicated on near complete dependency on the state; illegal status and next to zero accountability for actions; and plausible deniability that could be enjoyed by the state and sponsors of these entities (War by Other Means, March 20, 2019). This pattern, however, carries the risk of negative international publicity, and requires personnel with extensive fighting experience—an element that the Chinese military, unlike its Russian counterpart, does not have.

Most likely, the Chinese model will differ from both patterns. Legalized entities are likely to remain under tight control of the state, which will allow the Chinese government to use its PSCs to promote Beijing’s geopolitical and economic interests in strategically important areas. As the PRC’s economic presence continues to expand overseas, China’s growing private security industry is likely to follow in its stead.

Dr. Sergey Sukhankin is a Fellow at the Jamestown Foundation, and an Advisor at Gulf State Analytics (Washington, D.C.). He received his PhD in Contemporary Political and Social History from the Autonomous University of Barcelona. His areas of interest include Kaliningrad and the Baltic Sea region, Russian information and cyber security, A2/AD and its interpretation in Russia, the Arctic region, and the development of Russian private military companies since the outbreak of the Syrian Civil War. He has consulted or briefed with CSIS (Canada), DIA (USA), and the European Parliament. He is based in Edmonton, Alberta, Canada.


[1] Eric Prince was one of the lead founders of the PMC “Blackwater USA” in 1997. The company has gone through multiple name changes over time, to include “Xe” in 2009, and then “Academi” in 2010. Prince left his formal positions with the company in 2009. Academi continues operations as a component of the Constellis Holdings Group, an umbrella company for multiple PMCs.

[2] This source further notes that “In 2010, China’s Ministry of Commerce issued a follow-up set of rules and regulations for firms operating abroad, creating very strict security requirements for them, and thus indirectly encouraging Chinese PSCs to go international, even though they are not directly mentioned.” See: Guardians of the Belt and Road. The Internationalization of China’s Private Security Companies (Mercator Institute, . 2018) p.9.

The end of Hong Kong as we know it?

Protesters outside the U.S. Consulate in Hong Kong, Nov. 2019. Photo: Vivek Prakash/AFP via Getty Images


It emerged today that China plans to implement a sweeping national security law for Hong Kong that could provoke a fierce backlash from pro-democracy activists there.

Why it matters: Beijing's encroachment on Hong Kong's independent legal system prompted massive protests last year that have resumed on a smaller scale as social-distancing measures lift.

  • The current proposal appears to be even more far-reaching, banning sedition, treason and secession, which Beijing tends to define very broadly.
  • The proposal would amend the Basic Law, which has governed relations with the mainland since Hong Kong was handed back to China from the U.K. in 1997.

By addressing this law in Beijing, China's leaders are bypassing Hong Kong's legislature and chief executive, Axios' Bethany Allen-Ebrahimian notes.

  • The law could mean the end of the relative political freedoms that Hong Kong's people have enjoyed under the Basic Law — and thus the effective end of the "one country, two systems" framework.

What they're saying: "This move affirms that Hong Kong as we knew it is gone and rule of law is now rule by law, with the CCP determining what the laws are and how they will be enforced," writes Bill Bishop in his Sinocism newsletter.

What to watch: Secretary of State Mike Pompeo recently said that if Hong Kong's political freedoms are not upheld, the U.S. will consider revoking the special status that allows the city to thrive as an international financial hub.

Beginning of the end for Hong Kong


The big news on Hong Kong came on Thursday night.
National People’s Congress (NPC) spokesperson Zhang Yesui announced that the NPC will deliberate a “Draft decision on establishing and improving the legal system and implementation mechanism for the safeguarding of national security in Hong Kong.”
What that means:

  • The draft decision is NOT the much-talked about National Security Law.
  • Instead, the draft decision, once passed, will authorize the NPC Standing Committee to start drafting such legislation.

The upshot: The mainland will be able to enforce national security provisions in Hong Kong without the need for the Hong Kong Legislative Council to pass such a law.
Get smart: This is the beginning of the end for Hong Kong. The new law will give Beijing wide latitude to punish behaviors that “threaten national security.” That means tighter control over media, education, and free speech.
Our take: Xi Jinping is fed up with Hong Kong and is ready to take a tougher line – no matter the consequences.

What to watch: The NPC Standing Committee will meet in June and could pass the legislation then.

read more

Xinhua: 十三届全国人大三次会议将审议《全国人民代表大会关于建立健全香港特别行政区维护国家安全的法律制度和执行机制的决定(草案)
NPC: 王晨作关于《全国人民代表大会关于建立健全香港特别行政区维护国家安全的法律制度和执行机制的决定(草案)》的说明

China abandons GDP growth target


All it took was a once-in-a-century global pandemic and economic crisis.

  • The Chinese government finally dropped its annual GDP growth target, long the foundation for economic policy.

Premier Li Keqiang announced the change in his Government Work Report delivered this morning:

  • “I would like to point out that we have not set a specific target for economic growth this year.”
  •  “This is because our country will face some factors that are difficult to predict in its development due to the great uncertainty regarding the covid-19 [sic] pandemic and the world economic and trade environment.”
This does not mean that the government will not pursue economic growth:
  • “We must be clear that efforts to stabilize employment, ensure living standards, eliminate poverty, and prevent and defuse risks must be underpinned by economic growth; so ensuring stable economic performance is of crucial significance.”

Get smart: Reformers have advocated for dropping the GDP growth target for years, but have always been rebuffed – until now.

Why it matters: The obsession with growth led to misallocated capital and unproductive investment as officials throughout the system sought to juice GDP above all else. Jettisoning the growth target allows for more sustainable economic growth.

The bottom line: Growth this year will be weaker than many expected.

read more  政府工作报告(文字实录)

Middle Powers Must Intervene as Giants Confront to Dominate Global Order

The two technical giants, US and China, have intensified their unfettered confrontation for global domination.  Either of them coming out victorious is no solace as both want to subjugate the international community to their control.  Their next major clash is coming up in November ITU meet in New Delhi. Middle powers need to pool their resources to guide the US-China competition to a more benign world order. European Union, Russia and India may well lead.


by Prasad Nallapati

The US is vertically divided on Russia, but it presents a united front to confront and stop Chinese march to global domination. This paper attempts to review the cyber confrontation between the US and its two adversaries and how a potential damage could be averted for better world order.

“RussiaGate” Collapse 

The Democratic Party’s crusade to discredit President Trump’s election and his alleged collusion with Russia during the 2016 polls, derisively called “RussiaGate,” has finally been collapsed with the latest revelations that the cybersecurity firm, CrowdSrike, had no evidence of Russia exfiltrating data from the servers of the Democratic National Convention (DNC) and that the FBI set a perjury trap for Gen. Michael Flynn.

Now, it is the turn of the Trump administration to launch a counter-investigation into what he calls, “ObamaGate”.  Attorney General William Barr has commissioned John Durham, US Attorney to Connecticut, to get to the bottom of the origins of the “Russia collusion” probe initiated by the previous Obama administration against the then President-elect. Barr may have ruled out criminal investigation into Obama or Joe Biden, former Vice President, but their senior officials, former Deputy Attorney General Sally Yates, former FBI Director James Comey, then-CIA Director John Brennan and former Director of National Intelligence James Clapper may have to worry.

The chickens have come home to roost after Democratic Chairman of House Intelligence Committee, Adam Schiff, was forced to release documents relating to its 2017 “closed-door” investigation into alleged collusion between Trump’s campaign and Russia.  These testimonies are quite revealing.  Shawn Henry of the CrowdStrike, who was the only one allowed by DNC to examine its servers following alleged hacking, testified on December 5, 2017 that there was no proof of Russian hackers actually exfiltrating emails and it was only circumstantial evidence.

James Clapper disclosed to the Committee in July 2017 that he never saw any direct empirical evidence that the Trump campaign or someone in it was plotting/conspiring with the Russians to meddle with the election. Attorney General Loretta Lynch, National Security Adviser Susan Rice, UN Ambassador Samantha Power, and other Obama officials have also admitted that they did not have any evidence or were never briefed about any collusion. Much of the “evidence” or suspicion of collusion was based on a much maligned Steele Dossier, which was developed by a former British intelligence official and paid for by the campaign of then-presidential candidate Hillary Clinton. FBI Deputy Director Andrew McCabe confirmed to the House Committee that they were not able to prove the accuracy of all the information in the dossier.

Notwithstanding such unproven allegations, the Democrat legislators got the Department of Justice to launch an investigation by Special Counsel Robert Mueller. He could not find any collusion but all the same the Democrat-controlled House launched impeachment process to remove Trump from Presidency, knowing well that it would not succeed.

Reams of papers were produced, and hundreds of hearings were held in the Congress in the last four years on Russian manipulation of not just the 2016 election, but mid-term and provincial elections as well. They concluded that the Russians are continuing unabated, and their hackers are at it to influence this year’s election too.  Europeans have also blamed Russian hacker operations of manipulating the EU elections, Brexit vote and various other national polls.

Holes in European Suspicions on Russia 

An investigation report released on May 13 by German intelligence authorities found that Russia’s Military Intelligence, GRU, was responsible for the cyberattack in November 2015 on Bundestag (German Parliament) including personal email account of Chancellor Angela Merkel. It was long suspected to be the work of Russian operatives who reportedly obtained sensitive data that was later used in an attempt to destabilize the political system in the run-up to federal elections in 2017.  It took five years to gather evidence of the involvement of the hacker group, APT 28, known as Fancy Bear, which is believed to be working for the GRU.

The report claims that the same group, led by the GRU agent Dimitri Badin, was also behind the attack on the DNC servers in the US. As the assertions of Russian involvement in the DNC case have not been proven, it may now be difficult to hard sell the GRU complicity in German cyberattack.

Critics have highlighted several other instances of false anti-Russia campaigns by American liberal segments.  The New York Times on May 14 blamed Russian hackers for the November 2016 cyberattack in which nearly one million customers of the German Deutsche Telekom were knocked offline after their home routers were corrupted, using computer worm, Mirai. The attack was in fact carried out by a British hacker, not Russian intelligence. Daniel Kaye was arrested at Luton airport by British National Crime Agency and extradited to Germany, where he was sentenced to 18-year imprisonment. The Times story was later corrected.

US Consensus to stop Chinese Ambitions 

But when it comes to China, the divide between the Republicans and the Democrats disappear and there is bipartisan consensus in the US Congress to frustrate Beijing’s global ambitions. While the US-China competition and confrontation is quite widespread encompassing all spheres of relations, it is more pronounced in the cybersecurity domain.

The two nations are slated to face their major cyber clash in India, where the next meeting of the International Telecommunication Union (ITU) is scheduled to be held in November this year. Beijing has proposed a radical change to the way the internet functions. It envisages a different standard for core network technology called “New IP” (Internet Protocol) that it claims would make the internet more efficient and better structured for the digital age.  The ITU oversees standardization of global telecom technologies, services and operations. The Chinese model seeks to replace the current Western-designed open, unified worldwide web with a more fragmented patchwork of national internets that Beijing calls “cyber sovereignty,” writes Alan Dupont, chief executive of the Cognoscenti Group, a risk consultancy.

“Critics contend that the New IP would bake authoritarianism into the architecture underpinning the web and give state-run internet service providers granular control over customers’ use. An investigation by the Financial Times found that the new protocol would require the network to have tracking features and a “shut-up command” that could enable governments to arbitrarily deny users access, a departure from the present internet system, which acts as an agnostic postman that moves data around.” According to Harvard social scientist Shoshana Zuboff, “What China wants is a technological infrastructure that gives them the absolute control which they have achieved politically, a design that matches the totalitarian impulse. So that is frightening to me and should be fright­ening to every single person.”

Acceptance of the proposal by the UN governing body would allow countries to choose the existing architecture or move to China’s version.  Such an outcome is not acceptable to the US as internet power is now mostly held by four large American corporations: Apple, Google, Amazon and Facebook.  New IP would end this virtual oligopoly and usurp global leadership in technology. If there is no consensus, which is most likely, the world could split into separate information channels, one led by the US and the other by China.

Meanwhile, the Trump administration is further tightening screws on crippling the Chinese tech giant, Huawei Technologies. The Commerce Department imposed new restrictions on May 15 requiring foreign semiconductor makers to obtain a license from US officials before they can supply Huawei-designed semiconductors to the Chinese company that were produced using American technology. The restrictions are designed to narrow loopholes in the last year’s ban on export of US technology to Huawei, which allowed the company to be able to purchase semiconductors made outside the US with US software and equipment. The key element is in blocking the sale of chips made according to Huawei designs.  The new rule, however, does not stop US semiconductor manufacturers from selling chips to Huawei that are made outside the US according to American designs.

US Security agencies have urged the Federal Communication Commission (FCC) to revokeChina Telecom’s license to provide links between the US and foreign countries. CSO Online reports that a US investigation of China Telecom’s operations found “substantial and unacceptable national security and law enforcement risks,” the US Justice Department said in April. China Telecom is a US subsidiary of China’s state-owned telecommunications company. The agencies expressed particular concern about the nature of China Telecom’s US operations, which they argue could give China Telecom the ability to engage in economic espionage and sabotage, mainly by re-routing US internet traffic through Chinese servers, using something called “BJP (border gateway protocol) hijacking,” CSO Online notes.

Chinese power equipment suppliers would also feel the heat with President Trump signing on May 1 an executive order that declares foreign cybersecurity threats to the US electricity system a national emergency. The order bans the “acquisition, importation, transfer or installation,” of bulk-power system electricity equipment from companies under foreign adversary control.  The order did not name any specific foreign adversaries, but it is apparently directed against China, which is the main adversary source of supply of bulk-power system equipment.

The FBI is investigating more than 1000 cases of Chinese theft of American technology.  US security agencies held a China Initiative Conference in February this year to alert private companies and academic institutions about the threats of intellectual property thefts from Chinese entities. The main focus of concern was China’s “Thousand Talents Program” which enticed many American academics into non-transparent financial exchanges. A Chinese American neuroscientist, Li Xiaojing, was sentenced on May 13 while earlier in January, Harvard professor, Charles Lieber, and two of his Chinese researchers were charged with assisting the Chinese government.

Intrusion Truth, an online group of anonymous cyber-security analysts, have found real identities of Chinese hackers and their affiliation with certain provincial departments of the Chinese Ministry of State Security (MSS).  According to them, APT3 is linked to MSS Guangdong, APT 10 to MSS Tianjin, APT 17 to MSS Jinan and APT 40 to MSS Hainan. The Department of Justice has since filed criminal cases against APT 3 and APT 10, charging individual hackers, employees of security firms and intelligence officers.

US law enforcement agencies have also warned users about the security and privacy issues relating to popular video-teleconferencing app Zoom and chat app, WeChat, etc.  NASA and SpaceX have banned their employees using the Zoom.  The app’s management admitted to problems relating to end-to-end encryption and data moving through Chinese servers, which they claim to have been rectified now.

China Launch Counter-Investigations into US Hacking Campaigns

China has aggressively countered many of these US allegations with its own investigation report holding the CIA responsible for a series of cyberattacks on targets in the Peoples’ Republic. Qihoo 360, a Chinese cybersecurity firm published a comprehensive report outlining an eleven-year cyber campaign by the CIA hacking group, called “APT-C-39”, targeting a wide range of industries, including aviation, oil and gas, scientific research institutions and tech companies, besides several government agencies. Central to the report was the hacking tool “Vault-7 which was extensively used in these attacks. Qihoo linked the tool to the CIA hacking materials which were leaked to the Wikileaks in 2017 by its own developer, Joshua Adam Schulte, a former employee of the agency.  The attacks, from September 2008 to June 2019, targeted systems in Beijing, Guangdong and Zhejiang provinces.


The two technical giants thus have intensified their unfettered confrontation for global domination. The world is getting trampled under their feet.  Either of them coming out victorious is no solace as both want to subjugate the international community to their control.  The middle powers therefore need to pool their resources to guide the US-China competition to a more benign world order. European Union, Russia and India may well lead.

The US may like to review its internal fissures, based on factual assessments rather than emotional ideological underpinnings, so as to be able to put up a united front. Or else, alas, it may get weakened by internecine quarrels and worthless foreign wars preventing its ability to stop Chinese destructive campaign. It is proven time and again that Russia is not a monster, that it was made out to be, trying to undermine the US. As the US is heading to elections in November to elect next President, Russia remains the most divisive issue.  Trump sees Putin a strongman with whom he could make deals, while the Democratic Party candidate Biden holds contempt for the Russian leader as a dictator out to destroy American interests. If Trump gets reelected, US may find a partner in Russia and that will checkmate Chinese global ambitions. Otherwise, Moscow remains eternal enemy that will partner with Beijing to weaken the US status.

(Prasad Nallapati is President of Hyderabad-based think-tank, Centre for Asia-Africa Policy Research, and former Additional Secretary to Govt of India)

Massive Inflation May Be Coming, Because the US Government Has Cornered Itself into a Fiscal End Game

Years of deficit spending has made monetary policy a slave to fiscal policy.

The federal government is moving into the final stages of its fiscal life. Deficits have gotten so enormous that the Federal Reserve simply prints the money the government needs. Why? Because that’s the only option left on the table.

For years, we have warned that continued deficit spending would paint the Federal Reserve into a corner wherein monetary policy would become a slave to fiscal policy. To avoid government default, confiscatory taxes, government shutdown, or a combination of all three, the Federal Reserve has reached a point wherein it has little choice but to monetize federal deficits. Sooner or later, we will all pay the price in the form of massive inflation.

Total reserves in the US banking system reveal what the Federal Reserve has done. Total reserves include all the cash in banks’ vaults, plus banks’ deposits at the Federal Reserve. The Fed is to banks what banks are to people, and so “banks’ deposits at the Fed” are, roughly, how much money banks have in their checking accounts at the Fed.

From 1985 until August 2008, total reserves averaged about $50 billion. Through three rounds of quantitative easing following the 2008 housing crash, the Federal Reserve increased banks’ total reserves to $2.8 trillion. That’s a 5,500 percent increase!

Data source: Federal Reserve Bank of St. Louis

But reserves aren’t the money supply. Reserves are what the banking system uses to construct the money supply. The money supply increases, not when reserves increase, but when banks loan out the additional reserves to customers.

Prior to 2008, banks would typically loan out almost all of their reserves, holding back around 3 percent as what’s called “excess reserves.” Excess reserves are to a bank as an inventory is to a manufacturer—a buffer meant to absorb fluctuations in consumer demand. But after 2008, things changed. Banks started holding more excess reserves—a lot more. Since 2008, banks have been holding more than 90 percent of their reserves as excess. This is because, starting in 2008, it became much less costly for banks to maintain excess reserves. This is due to two, possibly three, things.

First, historically low interest rates made it less profitable for banks to lend. Second, the Financial Services Regulatory Relief Act of 2006 authorized the Federal Reserve to begin paying interest on money that banks deposited in their Fed accounts (something the Fed had not done before). Third, economic uncertainty following the 2008 crash and the long road to recovery made lending less attractive. These things gave banks an incentive to keep more of their reserves in their accounts at the Fed rather than loaning them out to borrowers. Thus, banks’ excess reserves increased.

Massively increasing banking reserves was like loading the inflation gun. But, pulling the trigger would require banks to loan out those reserves. Because of the increased incentive for banks to hold excess reserves, banks haven’t yet pulled the trigger. That explains why we haven’t seen multi-thousand percent inflation following the multi-thousand percent increase in bank reserves. At least for now, banks are preventing the increase in reserves from translating into an increase in the money supply, and that is holding back inflation.

Inflation occurs when the money supply grows faster than the economy. From the mid 1980s all the way to August of 2008, the money supply grew at an average annual rate of around 5 percent. By comparison, the economy (as measured by real GDP) grew at an average annualized rate of around 3 percent. Other things equal, the difference in these two numbers should give us the inflation rate for the economy as a whole. Indeed, overall inflation (as measured by the implicit price deflator) averaged around 2 percent over this period.

Data source: Federal Reserve Bank of St. Louis

But then came 2008. In an attempt to stimulate the economy following the 2008 housing crash, the federal government ran several trillion-dollar deficits, and the Federal Reserve increased bank reserves to help fund that massive borrowing. From the end of 2008 through February of 2020, the money supply grew at an average annualized rate of around 10 percent—about double the rate at which it grew prior to 2008. Meanwhile, the economy slowed to an average 2 percent annual growth rate. Other things equal, this should have given us an annual inflation rate of around 8 percent. But, overall inflation actually declined somewhat to an average of less than 2 percent per year.

It turns out that other things weren’t equal. What changed was the velocity of money—the rate at which the average dollar changes hands in the purchase of domestically-produced goods and services.

The velocity of money declined by almost as much as the money supply increased. Inflation is like the probability of being in a highway accident, wherein money velocity is the speed at which cars are traveling, and the money supply is the number of cars on the road. Increasing the number of cars on the road increases the likelihood of an accident only if the cars maintain the same speed. If you double the number of cars while simultaneously cutting their speeds in half, the likelihood of an accident remains about the same.

So too here. Starting in 2008, the money supply grew faster, but people and businesses responded by decreasing the velocity of money. Consequently, inflation didn’t change much.

Data source: Federal Reserve Bank of St. Louis

But why did the velocity of money fall? One possible explanation is that, as the money supply increased, the increase went largely into exchanges of financial assets rather than exchanges of goods and services. If this is what happened, then we should see an increase in the prices of financial assets rather than an increase in the prices of goods and services. Because prices of financial assets are not included in inflation calculations, we would not observe an increase in the official inflation numbers.

Indeed, market watchers have been wondering how it can be that stock prices fell with the advent of COVID lockdowns, but then recovered almost half of that decline within three short weeks. The longer the lockdown drags on, the greater the number of bankruptcies there will be.

Given that it’s unclear how long the lockdown will last, and that the economic ramifications become more dire with each passing week, one would expect stock prices to continue to fall so long as the lockdown remains.

A possible explanation for why stock prices partially recovered, and have since remained relatively stable, is that the increase in the money supply made its way into financial markets—putting upward pressure on stock prices—rather than markets for goods and services, leaving prices for goods and services unchanged or falling.

What does this mean for the future? Eventually, the money that has made its way into the stock market will make its way back into the markets for goods and services. This will start to happen as things begin to return to normal and people start spending more freely. Under normal circumstances, the Fed would be on the lookout for this, and would begin to contract reserves so as to prevent inflation. Indeed, this is what the Fed had been doing from 2014 until early this year.

But there is a new factor at play now. The federal government ran its first trillion-dollar deficits in response to the housing crisis. Politicians defended the massive spending because all manner of things were “too big to fail.” But, after the crisis passed, the government didn’t reduce its spending back to pre-2008 levels.

The increased spending had become the new normal. In response to the lockdown, the government will produce its first multi-trillion deficit this year. But, if recent history is any guide, multi-trillion-dollar deficits will also become the new normal. And the funding required to support that level of borrowing will require the Federal Reserve to monetize the deficit, at least partially, by increasing the money supply.

The new normal will have the Federal Reserve printing money to pay for Washington’s runaway spending. And, sooner or later, that will give us sustained and significant inflation. The time to fix this problem passed a decade ago. We’re about to enter the final stages of our government’s fiscal life.

Since the invention of money, this has happened to all of the world’s super economies, and many of the minor ones: Rome, Spain, Germany, the United Kingdom, and next, the US. In every case, the outcome was the same—the country’s currency became less attractive as a reserve currency, and the country’s economic prominence faded. In every case, the fault traces to a single source—the inability of politicians to constrain government.