In 1980 not only were there no dams on its course, but much of the river could not be used for sizeable, long-distance navigation because of the great barrier of the Khone Falls, located just above the border between Cambodia and Laos, and the repeated rapids and obstacles that marked its course in Laos and China. Indeed, no exaggeration is involved in noting that the Mekong%26rsquo;s overall physical configuration in 1980 was remarkably little changed from that existing when it was explored by the French Mekong Expedition that travelled painfully up the river from Vietnam%26rsquo;s Mekong Delta to Jinghong in southern Yunnan in 1866 and 1867. This was the first European expedition to explore the Mekong from southern Vietnam into China and to produce an accurate map of its course to that point.

Since 2003, the most substantial changes to the Mekong%26rsquo;s character below China have related to navigation. Following a major program to clear obstacles from the Mekong begun early in the present decade, a regular navigation service now exists between southern Yunnan and the northern Thai river port of Chiang Saen. It is not clear whether the Chinese, who promoted the concept of these clearances and carried out the work involved, still wish to develop navigation further down the river, as was previously their plan. To date, the environmental effects of the navigation clearances have been of a limited character.

The Mekong plays a vital role in the countries of the Lower Mekong Basin (LMB): Laos, Thailand, Cambodia and Vietnam. (Burma is not within the basin). In all four LMB countries the Mekong is a source of irrigation. In Vietnam%26rsquo;s Mekong Delta the annual pattern of flood and retreat insure that this region contributes over 50% of agriculture%26rsquo;s contribution to the country%26rsquo;s GDP. For all four LMB countries the Mekong and its associated systems, particularly Cambodia%26rsquo;s Great Lake (Tonle Sap), are a bountiful source of fish, with the annual value of the catch conservatively valued at US$2 billion. More than 70% of the Cambodian population%26rsquo;s annual animal protein consumption comes from the river%26rsquo;s fish. Eighty per cent of the Mekong%26rsquo;s fish species are migratory, some travelling many hundreds of kilometres between spawning and reaching adulthood. Overall, eight out of 10 persons living in the LMB depend on the river for sustenance, either in terms of wild fish captured in the river or through both large and small-scale agriculture and horticulture.

Since the 1980s, the character of the river has been steadily transformed by China%26rsquo;s dam-building program in Yunnan province. The important changes that had taken place on the course of the river since 1980 and up to 2004 were outlined in the Lowy Institute Paper, River at Risk: The Mekong and the Water Politics of Southeast Asia. In 2010 three hydroelectric dams are already in operation and two more very large dams are under construction and due for completion in 2012 and 2017. Plans exist for at least two further dams, and by 2030 there could be a %26ldquo;cascade%26rdquo; of seven dams in Yunnan. Even before that date and with five dams commissioned, China will be able to regulate the flow of the river, reducing the floods of the wet season and raising the level of the river during the dry. In building its dams, China has acted without consulting its downstream neighbours. Although until now the effects of the dams so far built have been limited, this is set to change within a decade, as discussed below.

For despite the limited environmental costs of the dams China has so far completed, and of the river clearances to aid navigation, this state of affairs will change once China has five dams in operation. And the costs exacted by the Chinese dams will be magnified if the proposed mainstream dams below China are built.

Even if no dams are built on the mainstream below China, the cascade to which it is committed will ultimately have serious effects on the functioning of the Mekong once the dams are used to control the river%26rsquo;s flow. This will be the case because the cascade will:

* Alter the hydrology of the river and so the current %26ldquo;flood pulse%26rdquo;, the regular rise and fall of the river on an annual basis which plays an essential part in the timing of spawning and the migration pattern. This will be particularly important in relation to the Tonle Sap in Cambodia, but will have an effect throughout the river%26rsquo;s course;

* Block the flow of sediment down the river which plays a vital part both in depositing nutrients on the agricultural regions flooded by the river and also as a trigger for fish migration %26mdash; at present well over 50% of the river%26rsquo;s sediment comes from China;

* At least initially cause problems by restricting the amount of flooding that takes place most importantly in Cambodia and Vietnam; and

* Lead to the erosion of river banks.

Proposed dams below China

So China%26rsquo;s dam-building plans are worrying enough, but the proposed new mainstream dams would pose even more serious concerns. In contrast to what has occurred in China, and until very recently, there have been no firm plans for the construction of dams on the mainstream of the Mekong below China. This situation has changed over the past three years. Memoranda of Understanding have been signed for 11 proposed dams: seven in Laos; two between Laos and Thailand; and two in Cambodia. The proposed dams are being backed by foreign private capital or Chinese state-backed firms. Government secrecy in both Cambodia and Laos means that it is difficult to judge which, if any, of these proposed dams will actually come into being. Attention and concern have focused on two sites: Don Sahong at the Khone Falls in southern Laos and Sambor in north-eastern Cambodia. The reason for this attention is that if built these dams would block the fish migrations that are essential to insure the food supplies of Laos and Cambodia.

Those built at sites higher upstream would cause the least damage to fish stocks, but if, as currently seems possible, the most likely dams to be built would be at Don Sahong and Sambor, the costs to fish stocks could be very serious. This is because unanimous expert opinion judges that there are no ways to mitigate the blocking of fish migration that would occur if these dams are constructed. None of the suggested possible forms of mitigation %26mdash; fish ladders, fish lifts, and alternative fish-passages %26mdash; are feasible for the species of fish in the Mekong and the very large biomass that is involved in their migratory pattern. Fish ladders were tried and failed at the Pak Mun dam on one of the Mekong%26rsquo;s tributaries in Thailand in the 1990s.

Why are the governments of Laos and Cambodia contemplating the construction of dams that seem certain to have a devastating effect on their populations%26rsquo; food security? The answers are complex and include some of the following:

* A lack of knowledge at some levels of government;

* A readiness to disregard available information on the basis that it may be inaccurate; and

* A belief or conviction that fishing is %26ldquo;old-fashioned%26rdquo;, whereas the production of hydroelectricity is %26ldquo;modern%26rdquo;.

In Cambodia%26rsquo;s case, and in particular in relation to the proposed dam at Sambor, the fact that a Chinese firm is seeking to construct the dam raises the possibility that prime minister Hun Sen is unready to offend the country that has become Cambodia%26rsquo;s largest aid donor and Cambodia%26rsquo;s %26ldquo;most trusted friend%26rdquo;. In Laos, the proposal for a dam at Don Sahong is very much linked to the interests of the Siphandone family for whom southern Laos is a virtual fief. Of all the proposed dam sites, Don Sahong is the most studied in terms of knowledge of fisheries so that it can be safely said that the planned dam would wreak havoc on a migratory system that involves fish moving through the Hou Sahong channel throughout the year, movement that takes place in both directions, upstream and downstream.

In the face of the threats posed by both the Chinese dams and those proposed for the downstream stretches of the river, there is no existing body able to mandate or control what individual countries choose to do on their sections of the Mekong. The agreement establishing the Mekong River Commission (MRC) in 1995 does not include China or Burma, and though the latter%26rsquo;s absence is not important, the fact that China is not an MRC member underlines the body%26rsquo;s weakness. In any event, the MRC members%26rsquo; commitment to maintaining the Mekong%26rsquo;s sustainability has not overcome their basic commitment to national self-interest. A prime example of this is the manner in which the Lao government has proceeded in relation to the proposed Don Sahong dam. For at least two years while the dam was under consideration there was no consultation with Cambodia. Similarly, so far as can be judged, Cambodia%26rsquo;s consideration of a possible dam at Sambor has taken place without consultation with the governments of either Laos or Vietnam.

At the moment the best hope is that both the Cambodian and Lao governments will abandon their plans for Sambor and Don Sahong. If they do not, the future of the Mekong as a great source of food, both through fish and agriculture, is in serious jeopardy. At the time of writing the intentions of the Lao and Cambodian governments remain uncertain.

Concern about dams in China and the LMB is given added importance in the light of worries associated with the likely effects of climate change in the region through which the river flows. Research suggests there will be a series of challenges to the Mekong%26rsquo;s future ecological health. Until recently concerns about the likely impact of climate change tended to focus on the ongoing reduction in the size of the glaciers from which its springs in the Himalayas and which feed it as the result of snow melt. But while there is no doubt that a diminishment in size of the glaciers feeding the Mekong is taking place, recent research has suggested that a more immediate serious threat to the river%26rsquo;s health will come from sea-level changes, particularly as rising levels could begin to inundate large sections of Vietnam%26rsquo;s Mekong Delta. To what extent the threat posed by rising sea levels will be affected by another predicted development linked to climate change %26mdash; greatly increased precipitation leading to more flooding during the wet season %26mdash; is not yet clearly established. But research is pointing to a greatly increased precipitation that is likely to cause major increases in flooding in the future, possibly as early as 2030.

Against the pessimistic views outlined in this article perhaps the best that can be hoped for is that once serious consequences begin to become apparent advice can be offered to mitigate the worst effects of the developments taking place. Where once it was appropriate to write of risks, when assessing the Mekong%26rsquo;s future it is now time to write of fundamental threats to the river%26rsquo;s current and vital role in all of the countries of the Lower Mekong Basin.

Milton Osborne is visiting fellow at the Lowy Institute. He has been associated with the south-east Asian region since being posted to the Australian embassy in Phnom Penh in 1959. Osborne is the author of 10 books on the history and politics of south-east Asia, including The Mekong: turbulent past, uncertain future (2006) and Southeast Asia: an introductory history.

An earlier version of this article was published as %26quot;The Mekong River Under Threat,%26quot; The Asia-Pacific Journal, 2-2-10, January 11, 2010. It is used here with permission.

This article draws on the author%26rsquo;s Lowy Institute Paper 27, 2009. See the complete paper here. To read the complete paper, it is necessary to type in the current year after entering the site.

Homepage image shows the proposed location of the Sambor Dam, Kratie province, Cambodia. Photograph by Carl Middleton, International Rivers.

In 1980 not only were there no dams on its course, but much of the river could not be used for sizeable, long-distance navigation because of the great barrier of the Khone Falls, located just above the border between Cambodia and Laos, and the repeated rapids and obstacles that marked its course in Laos and China. Indeed, no exaggeration is involved in noting that the Mekong%26rsquo;s overall physical configuration in 1980 was remarkably little changed from that existing when it was explored by the French Mekong Expedition that travelled painfully up the river from Vietnam%26rsquo;s Mekong Delta to Jinghong in southern Yunnan in 1866 and 1867. This was the first European expedition to explore the Mekong from southern Vietnam into China and to produce an accurate map of its course to that point.

Since 2003, the most substantial changes to the Mekong%26rsquo;s character below China have related to navigation. Following a major program to clear obstacles from the Mekong begun early in the present decade, a regular navigation service now exists between southern Yunnan and the northern Thai river port of Chiang Saen. It is not clear whether the Chinese, who promoted the concept of these clearances and carried out the work involved, still wish to develop navigation further down the river, as was previously their plan. To date, the environmental effects of the navigation clearances have been of a limited character.

The Mekong plays a vital role in the countries of the Lower Mekong Basin (LMB): Laos, Thailand, Cambodia and Vietnam. (Burma is not within the basin). In all four LMB countries the Mekong is a source of irrigation. In Vietnam%26rsquo;s Mekong Delta the annual pattern of flood and retreat insure that this region contributes over 50% of agriculture%26rsquo;s contribution to the country%26rsquo;s GDP. For all four LMB countries the Mekong and its associated systems, particularly Cambodia%26rsquo;s Great Lake (Tonle Sap), are a bountiful source of fish, with the annual value of the catch conservatively valued at US$2 billion. More than 70% of the Cambodian population%26rsquo;s annual animal protein consumption comes from the river%26rsquo;s fish. Eighty per cent of the Mekong%26rsquo;s fish species are migratory, some travelling many hundreds of kilometres between spawning and reaching adulthood. Overall, eight out of 10 persons living in the LMB depend on the river for sustenance, either in terms of wild fish captured in the river or through both large and small-scale agriculture and horticulture.

Since the 1980s, the character of the river has been steadily transformed by China%26rsquo;s dam-building program in Yunnan province. The important changes that had taken place on the course of the river since 1980 and up to 2004 were outlined in the Lowy Institute Paper, River at Risk: The Mekong and the Water Politics of Southeast Asia. In 2010 three hydroelectric dams are already in operation and two more very large dams are under construction and due for completion in 2012 and 2017. Plans exist for at least two further dams, and by 2030 there could be a %26ldquo;cascade%26rdquo; of seven dams in Yunnan. Even before that date and with five dams commissioned, China will be able to regulate the flow of the river, reducing the floods of the wet season and raising the level of the river during the dry. In building its dams, China has acted without consulting its downstream neighbours. Although until now the effects of the dams so far built have been limited, this is set to change within a decade, as discussed below.

For despite the limited environmental costs of the dams China has so far completed, and of the river clearances to aid navigation, this state of affairs will change once China has five dams in operation. And the costs exacted by the Chinese dams will be magnified if the proposed mainstream dams below China are built.

Even if no dams are built on the mainstream below China, the cascade to which it is committed will ultimately have serious effects on the functioning of the Mekong once the dams are used to control the river%26rsquo;s flow. This will be the case because the cascade will:

* Alter the hydrology of the river and so the current %26ldquo;flood pulse%26rdquo;, the regular rise and fall of the river on an annual basis which plays an essential part in the timing of spawning and the migration pattern. This will be particularly important in relation to the Tonle Sap in Cambodia, but will have an effect throughout the river%26rsquo;s course;

* Block the flow of sediment down the river which plays a vital part both in depositing nutrients on the agricultural regions flooded by the river and also as a trigger for fish migration %26mdash; at present well over 50% of the river%26rsquo;s sediment comes from China;

* At least initially cause problems by restricting the amount of flooding that takes place most importantly in Cambodia and Vietnam; and

* Lead to the erosion of river banks.

Proposed dams below China

So China%26rsquo;s dam-building plans are worrying enough, but the proposed new mainstream dams would pose even more serious concerns. In contrast to what has occurred in China, and until very recently, there have been no firm plans for the construction of dams on the mainstream of the Mekong below China. This situation has changed over the past three years. Memoranda of Understanding have been signed for 11 proposed dams: seven in Laos; two between Laos and Thailand; and two in Cambodia. The proposed dams are being backed by foreign private capital or Chinese state-backed firms. Government secrecy in both Cambodia and Laos means that it is difficult to judge which, if any, of these proposed dams will actually come into being. Attention and concern have focused on two sites: Don Sahong at the Khone Falls in southern Laos and Sambor in north-eastern Cambodia. The reason for this attention is that if built these dams would block the fish migrations that are essential to insure the food supplies of Laos and Cambodia.

Those built at sites higher upstream would cause the least damage to fish stocks, but if, as currently seems possible, the most likely dams to be built would be at Don Sahong and Sambor, the costs to fish stocks could be very serious. This is because unanimous expert opinion judges that there are no ways to mitigate the blocking of fish migration that would occur if these dams are constructed. None of the suggested possible forms of mitigation %26mdash; fish ladders, fish lifts, and alternative fish-passages %26mdash; are feasible for the species of fish in the Mekong and the very large biomass that is involved in their migratory pattern. Fish ladders were tried and failed at the Pak Mun dam on one of the Mekong%26rsquo;s tributaries in Thailand in the 1990s.

Why are the governments of Laos and Cambodia contemplating the construction of dams that seem certain to have a devastating effect on their populations%26rsquo; food security? The answers are complex and include some of the following:

* A lack of knowledge at some levels of government;

* A readiness to disregard available information on the basis that it may be inaccurate; and

* A belief or conviction that fishing is %26ldquo;old-fashioned%26rdquo;, whereas the production of hydroelectricity is %26ldquo;modern%26rdquo;.

In Cambodia%26rsquo;s case, and in particular in relation to the proposed dam at Sambor, the fact that a Chinese firm is seeking to construct the dam raises the possibility that prime minister Hun Sen is unready to offend the country that has become Cambodia%26rsquo;s largest aid donor and Cambodia%26rsquo;s %26ldquo;most trusted friend%26rdquo;. In Laos, the proposal for a dam at Don Sahong is very much linked to the interests of the Siphandone family for whom southern Laos is a virtual fief. Of all the proposed dam sites, Don Sahong is the most studied in terms of knowledge of fisheries so that it can be safely said that the planned dam would wreak havoc on a migratory system that involves fish moving through the Hou Sahong channel throughout the year, movement that takes place in both directions, upstream and downstream.

In the face of the threats posed by both the Chinese dams and those proposed for the downstream stretches of the river, there is no existing body able to mandate or control what individual countries choose to do on their sections of the Mekong. The agreement establishing the Mekong River Commission (MRC) in 1995 does not include China or Burma, and though the latter%26rsquo;s absence is not important, the fact that China is not an MRC member underlines the body%26rsquo;s weakness. In any event, the MRC members%26rsquo; commitment to maintaining the Mekong%26rsquo;s sustainability has not overcome their basic commitment to national self-interest. A prime example of this is the manner in which the Lao government has proceeded in relation to the proposed Don Sahong dam. For at least two years while the dam was under consideration there was no consultation with Cambodia. Similarly, so far as can be judged, Cambodia%26rsquo;s consideration of a possible dam at Sambor has taken place without consultation with the governments of either Laos or Vietnam.

At the moment the best hope is that both the Cambodian and Lao governments will abandon their plans for Sambor and Don Sahong. If they do not, the future of the Mekong as a great source of food, both through fish and agriculture, is in serious jeopardy. At the time of writing the intentions of the Lao and Cambodian governments remain uncertain.

Concern about dams in China and the LMB is given added importance in the light of worries associated with the likely effects of climate change in the region through which the river flows. Research suggests there will be a series of challenges to the Mekong%26rsquo;s future ecological health. Until recently concerns about the likely impact of climate change tended to focus on the ongoing reduction in the size of the glaciers from which its springs in the Himalayas and which feed it as the result of snow melt. But while there is no doubt that a diminishment in size of the glaciers feeding the Mekong is taking place, recent research has suggested that a more immediate serious threat to the river%26rsquo;s health will come from sea-level changes, particularly as rising levels could begin to inundate large sections of Vietnam%26rsquo;s Mekong Delta. To what extent the threat posed by rising sea levels will be affected by another predicted development linked to climate change %26mdash; greatly increased precipitation leading to more flooding during the wet season %26mdash; is not yet clearly established. But research is pointing to a greatly increased precipitation that is likely to cause major increases in flooding in the future, possibly as early as 2030.

Against the pessimistic views outlined in this article perhaps the best that can be hoped for is that once serious consequences begin to become apparent advice can be offered to mitigate the worst effects of the developments taking place. Where once it was appropriate to write of risks, when assessing the Mekong%26rsquo;s future it is now time to write of fundamental threats to the river%26rsquo;s current and vital role in all of the countries of the Lower Mekong Basin.

Milton Osborne is visiting fellow at the Lowy Institute. He has been associated with the south-east Asian region since being posted to the Australian embassy in Phnom Penh in 1959. Osborne is the author of 10 books on the history and politics of south-east Asia, including The Mekong: turbulent past, uncertain future (2006) and Southeast Asia: an introductory history.

An earlier version of this article was published as %26quot;The Mekong River Under Threat,%26quot; The Asia-Pacific Journal, 2-2-10, January 11, 2010. It is used here with permission.

This article draws on the author%26rsquo;s Lowy Institute Paper 27, 2009. See the complete paper here. To read the complete paper, it is necessary to type in the current year after entering the site.

Homepage image shows the proposed location of the Sambor Dam, Kratie province, Cambodia. Photograph by Carl Middleton, International Rivers.

The island of Bangka, home to around 650,000 people, is known for its white beaches. But most of these are now covered by garbage and exhibit the latest %26ldquo;cultural trend%26rdquo;: affluent young people and families bring their cars and scooters to the seafront and drive back and forth on the sand until late in the evening. Silence %26ndash; once the last attraction of the island %26ndash; is gone, replaced by the roar of engines. The beach, decorated by some fantastic rock structures, is now badly polluted.

Just a few miles across the sea from Bangka, a dilapidated hydrofoil (one of which recently sank) enters the magnificent Sungai Musi River, one of the mighty rivers of Sumatra Island. While I admire the surface of the river from the boat, a local student suggests I look between the trees separating the river bank and the interior: %26ldquo;Try to catch the moment %26ndash; the opening. You will see, there is nothing left of the forest.%26rdquo;

One hour later, this black smoke and pop-music belching craft docks at the port of the city of Palembang. With 1.5 million inhabitants, the city is the second largest in Sumatra and one of the most populous in Indonesia. It is one of the most appalling urban centres on the Asian continent, with hardly anything to offer except a handful of Dutch-era buildings and several picturesque traditional houses on stilts inhabited by the very poor. Although located some 80 kilometres from the coast, Palembang is a vast seaport with huge vessels docked at the banks and in the middle of the Musi River. The river and the streams that feed into her are not just polluted, they appear to be positively toxic.

Inflated carcasses of dogs and other animals are floating on the surface of the river, together with industrial waste, debris, bottles and simple household waste. Palembang is home to oil refineries as well as cement and fertiliser plants. It sits in the middle of two major areas of unbridled deforestation on the island of Sumatra. While Indonesia is often referred to as the %26ldquo;ground zero%26rdquo; of climate change, Palembang should be considered one of its most telling monuments.

Isna Wijayani Lexy is professor of journalism at the Faculty of Social and Political Science in Sumatra%26rsquo;s Baturaja University. Hers is one of the few outspoken voices in this part of the world: %26ldquo;Illegal loggers can usually count on backing from the police, military, local government officials and thugs,%26rdquo; she says. %26ldquo;Media only cover raids against the loggers, that is, if there are raids. Even then it is very rare that journalists cover them on their own as they are usually short of funds and can%26rsquo;t just go up or down the river as they please.

%26ldquo;On this, as well as many other topics, there is news hegemony and no diversity in content. The local journalists dare not take risks. Journalists in Palembang only look for easy news and if they have been %26lsquo;serviced%26rsquo; (bribed), bad or critical news will not be published. Money talks here, even when it comes to the news.%26rdquo;

There are plenty of alarming reports by local academics and international observers about the archipelago%26rsquo;s disappearing rainforests and unbearable pollution levels in all major Indonesian cities. But there are few sound analyses that link all the factors that make Indonesia, environmentally, one of the most battered nations on earth: corruption, governmental incompetence, the powerful position of armed forces and unbridled pursuit of profits utilising the easiest and often least-sustainable means.

Restraint was broken on January 29, 2010, when The Jakarta Globe reprinted an Agence France%26ndash;Presse report on an academic study into illegal logging in the forest bordering Malaysia on the island of Borneo, which began: %26ldquo;The Indonesian military is deeply involved in the trade in illegally felled timber that is destroying vast tracts of pristine forest and contributing to global warming, researchers said Friday.%26rdquo; But, given the combination of state controls and the silence of the media, the public remains largely uninformed about the environmental and social disasters that are devastating their country.

Despite pollution, the River Musi is still one of the mightiest waterways of south-east Asia. The misery along this waterway is on a par with some of the poorest parts of Africa. Tiny villages and towns along the shores are lost in time, often cut off from the rest of the country. Upang town is built on stilts. It is an expensive one-hour boat ride from Palembang at breakneck speed and survives by supplying riverboats with fuel and food. Upang sits at the heart of the Musi River%26rsquo;s illegal logging trade.

Two young girls, Linda and Yanti, are working in a local eatery. %26ldquo;Each household has people who work across the river on %26lsquo;cleared land%26rsquo;,%26rdquo; explains Linda. %26ldquo;People from the entire area are working on %26lsquo;cleared land%26rsquo;, many doing the %26lsquo;clearing%26rsquo; itself. There are no permits necessary and no taxes; nobody checks.%26rdquo;

The girls explain that their monthly income is 20,000 to 30,000 Indonesia rupiahs (US$2 to US$3). %26ldquo;My dream is to become rich,%26rdquo; says Yanti. %26ldquo;If I were rich, I would give alms (zakat) and then travel. I would go to Bandung and to Jakarta. I would visit the National Monument.%26rdquo; Neither girl has ever left Upang %26ndash; not even to visit Palembang, 25 miles up the river.

The girls have no knowledge about deforestation. They know it only as %26ldquo;clearing the land%26rdquo;, something good for planting rice and palm oil. They had no idea what global warming is either. We ask the same question of several people along the Musi River and always receive the same answer %26ndash; incomprehension and bewilderment on their faces. Rural Indonesia is extremely poor and underdeveloped and moral and ethical questions here are simply perceived as odd. Caring for the environment and the world are luxuries most impoverished Indonesians cannot afford while, for the rich rulers of this nation, they are simply not profitable enough.

As we sail across the river and slowly progress towards Palembang, the full horror of the deforestation suddenly emerges: hundreds of square miles of rainforest destroyed and replaced by tremendous bare plains; some areas still burning. There are bags with chemicals and bottles of spray scattered all over the earth. Even for those who are not experts on the environment, this could hardly appear to be anything other than unbridled, gross and brutal rape of nature.

At one of the epicentres of the disaster, Sawah Upang, we spot an old couple sitting in front of their house. They wave and happily explain their presence there: %26ldquo;We are from Palembang. Five years ago we bought the land here from other people from Upang. Now we have our rice fields here.%26rdquo; Deforestation? Global warming? They both smile, not comprehending.

On the way back to Palembang it begins to rain. Huge rusty cargo ships stand in the middle of the river like tremendous ghosts, while the factory chimneys regurgitate colourful smoke skyward, even in this heavy downpour. Streams bring brown and foamy liquid to the river. All around is misery, dirt and hopelessness %26ndash; so common in today%26rsquo;s Indonesia but here, somehow, brought to the extreme.

Indonesia achieved the world%26rsquo;s fastest rate of deforestation between 2000 and 2005, with an area the size of 300 football fields removed every hour, according to Greenpeace. The country has already lost over 70% of its intact ancient forests and half of what is left is threatened by commercial logging, forest fires and clearances for palm-oil plantations. And the greed seems to know no bounds.

No matter how pressing, the environmental issues cannot be separated from the general and continuous decay of the Indonesian state %26ndash; from its endemic corruption, impunity of armed forces, extreme breed of market fundamentalism and tendency to put faith above rational thinking.

Andre Vltchek is a novelist, journalist and filmmaker.

An earlier version of this article was published as: Andre Vltchek and Geoffrey Gunn, %26quot;In the Tropical Forests of Sumatra: Notes from Climate Change %26lsquo;Ground Zero,%26rsquo;%26rdquo; The Asia-Pacific Journal, 7-2-10, February 15, 2010. It is used here with permission.

Homepage image from Greenpeace

The island of Bangka, home to around 650,000 people, is known for its white beaches. But most of these are now covered by garbage and exhibit the latest %26ldquo;cultural trend%26rdquo;: affluent young people and families bring their cars and scooters to the seafront and drive back and forth on the sand until late in the evening. Silence %26ndash; once the last attraction of the island %26ndash; is gone, replaced by the roar of engines. The beach, decorated by some fantastic rock structures, is now badly polluted.

Just a few miles across the sea from Bangka, a dilapidated hydrofoil (one of which recently sank) enters the magnificent Sungai Musi River, one of the mighty rivers of Sumatra Island. While I admire the surface of the river from the boat, a local student suggests I look between the trees separating the river bank and the interior: %26ldquo;Try to catch the moment %26ndash; the opening. You will see, there is nothing left of the forest.%26rdquo;

One hour later, this black smoke and pop-music belching craft docks at the port of the city of Palembang. With 1.5 million inhabitants, the city is the second largest in Sumatra and one of the most populous in Indonesia. It is one of the most appalling urban centres on the Asian continent, with hardly anything to offer except a handful of Dutch-era buildings and several picturesque traditional houses on stilts inhabited by the very poor. Although located some 80 kilometres from the coast, Palembang is a vast seaport with huge vessels docked at the banks and in the middle of the Musi River. The river and the streams that feed into her are not just polluted, they appear to be positively toxic.

Inflated carcasses of dogs and other animals are floating on the surface of the river, together with industrial waste, debris, bottles and simple household waste. Palembang is home to oil refineries as well as cement and fertiliser plants. It sits in the middle of two major areas of unbridled deforestation on the island of Sumatra. While Indonesia is often referred to as the %26ldquo;ground zero%26rdquo; of climate change, Palembang should be considered one of its most telling monuments.

Isna Wijayani Lexy is professor of journalism at the Faculty of Social and Political Science in Sumatra%26rsquo;s Baturaja University. Hers is one of the few outspoken voices in this part of the world: %26ldquo;Illegal loggers can usually count on backing from the police, military, local government officials and thugs,%26rdquo; she says. %26ldquo;Media only cover raids against the loggers, that is, if there are raids. Even then it is very rare that journalists cover them on their own as they are usually short of funds and can%26rsquo;t just go up or down the river as they please.

%26ldquo;On this, as well as many other topics, there is news hegemony and no diversity in content. The local journalists dare not take risks. Journalists in Palembang only look for easy news and if they have been %26lsquo;serviced%26rsquo; (bribed), bad or critical news will not be published. Money talks here, even when it comes to the news.%26rdquo;

There are plenty of alarming reports by local academics and international observers about the archipelago%26rsquo;s disappearing rainforests and unbearable pollution levels in all major Indonesian cities. But there are few sound analyses that link all the factors that make Indonesia, environmentally, one of the most battered nations on earth: corruption, governmental incompetence, the powerful position of armed forces and unbridled pursuit of profits utilising the easiest and often least-sustainable means.

Restraint was broken on January 29, 2010, when The Jakarta Globe reprinted an Agence France%26ndash;Presse report on an academic study into illegal logging in the forest bordering Malaysia on the island of Borneo, which began: %26ldquo;The Indonesian military is deeply involved in the trade in illegally felled timber that is destroying vast tracts of pristine forest and contributing to global warming, researchers said Friday.%26rdquo; But, given the combination of state controls and the silence of the media, the public remains largely uninformed about the environmental and social disasters that are devastating their country.

Despite pollution, the River Musi is still one of the mightiest waterways of south-east Asia. The misery along this waterway is on a par with some of the poorest parts of Africa. Tiny villages and towns along the shores are lost in time, often cut off from the rest of the country. Upang town is built on stilts. It is an expensive one-hour boat ride from Palembang at breakneck speed and survives by supplying riverboats with fuel and food. Upang sits at the heart of the Musi River%26rsquo;s illegal logging trade.

Two young girls, Linda and Yanti, are working in a local eatery. %26ldquo;Each household has people who work across the river on %26lsquo;cleared land%26rsquo;,%26rdquo; explains Linda. %26ldquo;People from the entire area are working on %26lsquo;cleared land%26rsquo;, many doing the %26lsquo;clearing%26rsquo; itself. There are no permits necessary and no taxes; nobody checks.%26rdquo;

The girls explain that their monthly income is 20,000 to 30,000 Indonesia rupiahs (US$2 to US$3). %26ldquo;My dream is to become rich,%26rdquo; says Yanti. %26ldquo;If I were rich, I would give alms (zakat) and then travel. I would go to Bandung and to Jakarta. I would visit the National Monument.%26rdquo; Neither girl has ever left Upang %26ndash; not even to visit Palembang, 25 miles up the river.

The girls have no knowledge about deforestation. They know it only as %26ldquo;clearing the land%26rdquo;, something good for planting rice and palm oil. They had no idea what global warming is either. We ask the same question of several people along the Musi River and always receive the same answer %26ndash; incomprehension and bewilderment on their faces. Rural Indonesia is extremely poor and underdeveloped and moral and ethical questions here are simply perceived as odd. Caring for the environment and the world are luxuries most impoverished Indonesians cannot afford while, for the rich rulers of this nation, they are simply not profitable enough.

As we sail across the river and slowly progress towards Palembang, the full horror of the deforestation suddenly emerges: hundreds of square miles of rainforest destroyed and replaced by tremendous bare plains; some areas still burning. There are bags with chemicals and bottles of spray scattered all over the earth. Even for those who are not experts on the environment, this could hardly appear to be anything other than unbridled, gross and brutal rape of nature.

At one of the epicentres of the disaster, Sawah Upang, we spot an old couple sitting in front of their house. They wave and happily explain their presence there: %26ldquo;We are from Palembang. Five years ago we bought the land here from other people from Upang. Now we have our rice fields here.%26rdquo; Deforestation? Global warming? They both smile, not comprehending.

On the way back to Palembang it begins to rain. Huge rusty cargo ships stand in the middle of the river like tremendous ghosts, while the factory chimneys regurgitate colourful smoke skyward, even in this heavy downpour. Streams bring brown and foamy liquid to the river. All around is misery, dirt and hopelessness %26ndash; so common in today%26rsquo;s Indonesia but here, somehow, brought to the extreme.

Indonesia achieved the world%26rsquo;s fastest rate of deforestation between 2000 and 2005, with an area the size of 300 football fields removed every hour, according to Greenpeace. The country has already lost over 70% of its intact ancient forests and half of what is left is threatened by commercial logging, forest fires and clearances for palm-oil plantations. And the greed seems to know no bounds.

No matter how pressing, the environmental issues cannot be separated from the general and continuous decay of the Indonesian state %26ndash; from its endemic corruption, impunity of armed forces, extreme breed of market fundamentalism and tendency to put faith above rational thinking.

Andre Vltchek is a novelist, journalist and filmmaker.

An earlier version of this article was published as: Andre Vltchek and Geoffrey Gunn, %26quot;In the Tropical Forests of Sumatra: Notes from Climate Change %26lsquo;Ground Zero,%26rsquo;%26rdquo; The Asia-Pacific Journal, 7-2-10, February 15, 2010. It is used here with permission.

Homepage image from Greenpeace

Article 1 These Measures are formulated for the purposes of banning illegal financial institutions and illegal financial business operations, maintaining financial order and protecting public interest of society.

Article 2 All illegal financial institutions and illegal financial business operations must be banned.

Article 3 The illegal financial institutions referred to in these Measures mean those institutions established on their own without the approval of the People’s Bank of China for engaging in or mainly engaging in such financial business operations as attraction of deposits, granting of loans, handling of settlements, note discount, call loans, trust investment, financial leasing, financing guaranty and foreign exchange buying and selling.

The preparatory organization of an illegal financial institution shall be construed as an illegal financial institution.

Article 4 The illegal financial business operations referred to in these Measures mean the engagement on their own without the approval of the People’s Bank of China in the following operations:

(1)illegal attraction of public deposits or attraction in disguised forms of public deposits;

(2)illegal fund-raising from non-specified objects of society in any name without approval in accordance with law;

(3)illegal granting of loans, handling of settlements, note discount, fund calling, trust investment, financial leasing, fund accomodation guaranty and foreign exchange buying and selling; and

(4)other illegal financial business operations determined by the People’s Bank of China.

Illegal attraction of public deposits referred to in the preceding paragraph means operations without the approval of the People’s Bank of China of attraction of funds from non-specified objects of society, issuance of vouchers and commitment to pay the principal and interest within a specified time period; attraction of public deposits in disguised forms referred to means operations without the approval of the People’s Bank of China of attraction of funds from non-specified objects of society not in the name of attraction of public deposits however with the commitment to the fulfilment of obligations identical in nature to those of attraction of public deposits.

Article 5 No unit or individual shall, without the approval of the People’s Bank of China in accordance with law, establish on its/his/her own a financial institution or engage on its/his/her own in financial business operations.

Organs of industry and commerce administration shall not process the registration of illegal financial institutions and illegal financial business operations.

Financial institutions shall not open accounts, handle settlements and provide loans for illegal financial institutions and illegal financial business operations.

Article 6 Illegal financial institutions and illegal financial business operations shall be banned by the People’s Bank of China.

Local people’s governments of the localities wherein the illegal financial institutions have been established or wherein illegal financial business operations have taken place shall be responsible for the work related to organization, coordination, supervision and banning.

Article 7 No unit or individual shall interfere with, reject and obstruct the banning by the People’s Bank of China in accordance with law of illegal financial institutions and illegal financial business operations.

Article 8 Functionaries of the People’s Bank of China should, in the fulfilment of duties and responsibilities in banning illegal financial institutions and illegal financial business operations, keep secrets in accordance with law.

Chapter II Procedures for the Imposition of Ban

Article 9 The People’s Bank of China should, upon uncovering, investigate and verify forthwith an illegal financial institution, illegal attraction of public deposits or attraction of public deposits in disguised forms as well as illegal fund-raising; and should, upon preliminary determination, ask the public security organ in time to establish a case for detection and investigation in accordance with law.

Article 10 The People’s Bank of China and public security organ should cooperate with each other in the process of investigation and detection of illegal financial institutions and illegal financial business operations.

Article 11 The public security organ shall take compulsory measures against the criminal suspect(s), funds and assets involved in the case of the illegal financial institution and illegal financial business operations to guard against the escape of criminal suspect(s) and transfer of funds and assets.

Article 12 The People’s Bank of China shall, upon determination through investigation, take a decision on the banning of the illegal financial institution and illegal financial business operations and declare the said financial institution and financial business operations illegal, order it to stop all business operations, and make a public announcement.

Article 13 The People’s Bank of China should, upon uncovering of a financial institution opening an account, handling settlements and providing loans for an illegal financial institution or illegal financial business operations, order the said financial institution to stop forthwith the business operations concerned. No unit or individual shall take down the funds concerned on its/his/her own.

The organ of industry and commerce administration should, upon uncovering, nullify the registration or effect a change in the registration forthwith of the registration of the organ of industry and commerce administration for the establishment of the illegal financial institution or engagement in illegal financial business operations obtained through deceit.

Article 14 During the investigation conducted by the People’s Bank of China on an illegal financial institution and illegal financial business operations, the unit or individual under investigation must accept the investigation conducted by the People’s Bank of China in accordance with law, report on the situation truthfully and provide relevant materials, and must not refuse or conceal.

Article 15 The People’s Bank of China may, during investigation on an illegal financial institution and illegal financial business operations, employ such means as taking notes, copying and tape recording of the information and materials related to the case to obtain evidences.

The People’s Bank of China may, under circumstances that the evidences may be destroyed or lost or difficult to obtain later, enter into registration and put it(them) in safekeeping beforehand, the interested party and persons concerned shall not destroy or transfer the evidence(s).

Chapter III Consolidation and Settlement of Financial Claims and Debts

Article 16 The institution engaging in illegal financial business operations shall be responsible for the consolidation and settlement of the financial clam is and debts formed as a result of illegal financial business operations.

Article 17 For an illegal financial institution that has the approval department, competent unit or founding unit, once declared banned by the People’s Bank of China, the approval department, competent unit or founding unit shall be responsible for the organization of consolidation and settlement of financial claims and debts; for an institution that has no approval department, competent unit or founding unit, the local people’s government of the locality wherein it is located shall be responsible for the organization of consolidation and settlement of financial claims and debts.

Article 18 The participant(s) shall bear by himself/herself(themselves)the loss suffered as a result of participating in illegal financial business operations.

Article 19 The debts and risks formed by illegal financial business operations shall not be passed onto state-owned banks and other financial institutions as well as any other units that have not participated in illegal financial business operations.

Article 20 Any remaining illegal property(properties) after the consolidation and settlement of financial claims and debts shall be confiscated and delivered to the central treasury on the spot.

Article 21 Dispute(s) arising from consolidation and settlement shall be resolved by the parties interested through consultation; in the event of failure of consultation, resolution shall be sought through judicial procedures.

Chapter IV Penalty Provisions

Article 22 Criminal liability shall be investigated in accordance with law for the establishment of an illegal financial institution or engagement in illegal financial business operations constituting a crime; where a crime has not been constituted, the People’s Bank of China shall confisticate its illegal gains and concurrently impose a fine of more than 100% less than five times of the amount of illegal gains; where there are no illegal gains, a fine of more than RMB 100000 Yuan less than RMB 500000 Yuan shall be imposed.

Article 23 For the approval without authorization of the establishment of an illegal financial institution or the approval without authorization of engagement in illegal financial business operations, the person-in-charge held directly responsible and other personnel directly responsible shall be imposed administrative sanctions in accordance with law; where a crime has been constituted, criminal liability shall be investigated.

Article 24 Any financial institution that opens an account, handles settlements and provides loans for illegal financial institutions or illegal financial business operations in contravention of provisions, shall be ordered by the People’s Bank of China to make a rectification, confisticated of the illegal gains, and concurrently imposed a fine of more than 100% less than five times of the amount of the illegal gains; where there are no illegal gains, a fine of more than RMB 100000 Yuan less than RMB 500000 Yuan shall be imposed; disciplinary sanctions shall be imposed on the person-in-charge held directly responsible and other personnel directly responsible; where a crime has been constituted, criminal liability shall be investigated in accordance with law.

Article 25 Whoever refuses or obstructs the People’s Bank of China in the implementation of its functions constituting a crime shall be investigated of criminal liability in accordance with law; where a crime has not been constituted, penalty for public security administration shall be imposed by the public security organ in accordance with law.

Article 26 Any functionary of the People’s Bank of China who divulges secrets in fulfilling responsibilities of banning the illegal financial institution and illegal financial business operations shall be imposed administrative sanctions in accordance with law; where a crime has been constituted, criminal liability shall be investigated in accordance with law.

Article 27 Functionaries of the People’s Bank of China, public security organs and organs of industry and commerce administration whose neglect of duty, abuse of power and malpractises for selfish gains constitute a crime shall be investigated of criminal liability in accordance with law; where a crime has not been constituted, administrative sanctions shall be imposed in accordance with law.

Any functionary of the People’s Bank of China who should have transferred the case of the illegal financial institution and illegal financial business operations to the public security organ but has failed to do so constituting a crime shall be investigated of criminal liability in accordance with law; where a crime has not been constituted, administrative sanctions shall be imposed in accordance with law.

Chapter V Supplementary Provisions

Article 28 Reference shall be made to these Measures in banning illegal securities agencies and illegal securities business operations. China Securities Supervision and Control Commission shall be responsible for the implementation thereof and may formulate specific measures for implementation in accordance with the principles of these Measures.

Reference shall be made to these Measures in banning illegal commercial insurance agencies and illegal commercial insurance business operations. The department of commercial insurance supervision and control under the State Council shall be responsible for the implementation thereof and may formulate specific measures for implementation in accordance with the principles of these Measures.

Article 29 All kinds of foundations, mutual aid societies, savings societies, capital service departments, share service departments, settlement centers and investment corporations that engage in illegal financial business operations exceeding the scope of the state policy prior to the coming into effect of these Measures should be sorted out and consolidated within the specified time period pursuant to the provisions of the State Council. Any institution that continues to engage in illegal financial business operations beyond the specified time period shall be banned pursuant to these Measures; where the circumstances are serious and a crime has been constituted, criminal liability shall be investigated in accordance with law.

Article 30 These Measures shall come into force as of the date of promulgation.

Market will now shift focus to Washington as Barack Obama will be sworn in as the 44th President of the US on January 20. Will a new President save the US economy and restore banking stability? Although many plans are in the pipeline and will be launched as soon as Obama takes office, including a new round of fiscal stimulus, in the form of tax cuts and government spending, and financial stimulus, perhaps in the form of a bad bank to take over bad assets of banks, it will take time for these measures to take effect. In the mean time, bank and corporate earnings will continue to disappoint and economic conditions will deteriorate. Despite government efforts, the US unemployment rate could surge past 9%, from 7.2% at present. All these will bode badly for riskier assets and provide more room for the US dollar to score further gains against other majors in the first quarter of this year.

Interest Rates

The race to zero rates is still on. After the Fed cut rates to a range of zero to 0.25% and the Bank of Japan to 0.1%, other central banks are not far behind. The Bank of England and the European Central Bank reduced rates by 50bps in the past two weeks as their economies fell into deeper recession. Rates in the UK stand at 1.5% and that in the euro zone at 2%. Both central banks signaled that more rate cuts could be expected if the downturn accelerates. The decline in inflation as a result of falling oil and commodity prices also give monetary authorities more leeway for further policy easing.

With US rates near zero, the Fed is resorting to unconventional monetary policy to revive lending. It is using its balance sheet to purchase commercial paper and mortgage backed securities. Starting in February, the Fed will provide three-year term loans to investors against consumer and small business loans. If credit conditions do not improve, the Fed might consider purchasing longer term securities as a means to push down longer term interest rates.

As a matter of fact, the Fed’s action has already helped ease stress in money markets, as evidenced by a narrowing spread, from over 450 bps in October 2008 to around 100 bps in mid-January 2009, between interbank interest rates and Treasury Bill rates. Mortgage rates have also come down after its announced plan of purchasing mortgage backed securities in government sponsored enterprises. The average rate on a 30-year fixed mortgage dropped below 5% in mid-January 2009, from about 6.5% in the last week of October, 2008.

The Fed is determined to revive growth and there is no limit to how far it Fed could expand its balance sheet. But the Fed’s action will of course has long term consequences, including escalating money supply growth and inflation, if not handled carefully and promptly.

China Industrial and Commercial Bank hereby extends its deep respect to you and thanks you for your persistent confidence and support to Peony Card.

To adapt to the development trend of global bank card business, provide you with more quality service and ensure your lawful rights and interests, ICBC has revised the ICBC Peony International Debit Card Regulation and the revised regulation (hereinafter referred to as the new Regulation) has been approved by China Banking Regulatory Commission and was published on Financial Times and took effect on December 18, 2003. ICBC hereby makes the following statements about matters after the new Regulation takes effect.

1. After the new Regulation is published and takes effect, ICBC will no longer issue relief printed peony international debit card (hereinafter referred to as relief printed international debit card). Where your relief printed international debit card needs to be renewed upon maturity date, ICBC will renew the card with lithographic peony international debit card (both in RMB/USD, same as hereinafter). If your relief printed international debit card needs to be replaced due to loss reporting or damage of card during the card’s term, ICBC will renew the card with lithographic peony international debit card; if you still wants to replace relief printed international debit card, ICBC will renew card for you, and the term of the renewed card is consistent with that of the original card.

2. To improve service level, ICBC will, by combining implementation of the new Regulation after systemic reconstruction and preparation is completed, collectively add RMB account to the original relief printed international debit card on April 20, 2004 and update it into the bank card that can be used both in China and abroad.

Before adding RMB account, relevant provisions about RMB account in the new Regulation do not apply to relief printed international debit card with single currency for the time being. During this period, provisions that loss reporting by telephone takes effect instantly and account query and request for correction shall be replied within 30 days in the new Regulation apply equally to your relief printed international debit card.

3. After RMB account is added into your relief printed international debit card, deposit, withdrawal, account transfer in RMB can be conducted at ICBC business offices in China; cash withdrawal in RMB can be made at ATMs with ICBC mark or Union Pay mark; consumption by charging to card can be made at appointed stores with ICBC mark or Union Pay mark; account query can be made via ICBC internet banking (www.icbc.com.cn); if you lose the card in China, you also can enjoy emergency cash withdrawal service provided by ICBC. For deposit in RMB account, ICBC shall compute interest for you according to demand deposit interest rate stipulated by the People’s Bank of China and shall deduct interest tax for you according to law.

In order to prevent operative risks and ensure the safety of your capital, after RMB account is added, the relief printed international debit card no longer has functions of on-line shopping, pre-authorization and petty amount transaction. Other functions of relief printed international debit card held by you remain unchanged.

4. After RMB account is added, if you make consumption in appointed organization with peony international debit card in China, draw cash in RMB at appointed business offices or ATMs (including ATMs of other commercial banks) or conduct account transfer with your other RMB accounts, RMB account shall be used for settlement for all these transactions. If you make consumption or draw cash at international credit card organization outside China, draw cash in foreign currency at appointed business office in China or conduct account transfer with your other foreign currency accounts, foreign currency account shall be used for all these transactions. RMB account and foreign currency account shall not be mixed.

5. Notification period of the new Regulation is from December 18, 2003 to February 15, 2004. During notification period, if you do not want to use the peony international debit card any more due to modification of regulation, you can handle account cancellation procedure at card issuing institution and ICBC will refund annual fee pro rata according to the annual fee receipt provided by you. If you apply for account cancellation after expiration of the notification period, ICBC will not refund annual fee any more.

To ensure your normal use of the peony international debit card, if you have any question, don’t hesitate to call ICBC 24hour customer service telephone (010-95588).

ICBC Peony Card Center
December 18, 2003

ICBC Peony International Debit Card Regulation

Article I
Peony international debit card is issued by the Industrial and Commercial Bank of China (hereafter referred to as the “ICBC”), generally accepted in China Mainland and foreign countries, settled in both RMB and a certain designated foreign currency, and has such functions as consumption, account transfer and settlement, cash deposit and withdrawal etc.

Article II
Any of ICBC business offices handling Peony international debit card business, appointed units, and holders of Peony international debit card should abide by this regulation.

Article III
Peony international debit card is classified into Peony Visa Card and Peony MasterCard by brand.

Article IV
Peony international debit card can be used at any of appointed units, designated business offices, local registration authorities (LRA) of domestic and foreign credit card organizations.

Article V
Any person with complete civil capacity and steady income can apply to the card issuing institution for a Peony international debit card by his/her own valid identity certificate and related data.

Article VI
Any transaction by use of password will be deemed the cardholder’s own conduct by the card issuing institution, and any of electronic information records produced by various settlement transactions by use of such electronic information as password etc. will be valid evidence for these transactions. The receipt for any transaction without the use of password will be valid evidence for this transaction if recording the signature of the cardholder. The card issuing institution has right to record income and expenses incurred by the use of Peony international debit card into the cardholder’s account.

Article VII
Any cardholder can deposit his/her cash or wages, or transfer personal legal labor income, investment yields, and other income into the RMB account of Peony international debit card.
Any cardholder can deposit his/her foreign cash, or transfer funds from his/her foreign exchange account (foreign currency account inclusive) into the foreign currency account of Peony international debit card, but should abide by the Management

Measures on Personal Foreign Exchange of the State Administration of Exchange Control in any way, and follow the personal foreign management system of the P.R. of China when withdrawing foreign cash no matter in China Mainland or foreign countries.

The deposit in the account of Peony international debit card accrues interest at the rate of RMB or foreign currency demand deposit provided by the People’s Bank of China (hereafter referred to as the “PBC”), and the card issuing institution will withhold and remit the interest tax according to the laws.

Article VIII
Any cardholder can use his/her RMB account to settle his/her consumption at domestic appointed units, RMB cash withdrawal at designated business offices or ATMs (those of other commercial banks inclusive), fund transfer to/from any other of his/her own RMB accounts.

Any cardholder can use foreign currency account to settle his/her consumption or cash withdrawal at any LRA of domestic or foreign international credit card organizations, foreign cash withdrawal at any of domestic designated business offices, or fund transfer to/from any other of his/her own foreign currency accounts.

The use of RMB account and foreign currency account should be separated.

Article IX
Any cardholder can use his/her Peony international debit card in foreign countries only for the payment under the service trade account, but not for the investment and trade payment under the capital account, or the illegal transactions and acts prohibited by the international laws.

Article X
Any cardholder can but withdraw RMB cash for five times and accumulatively RMB 5,000 at most every day at any of domestic designated ATMs by card and password.

Any cardholder can but use his/her Peony international debit card in foreign countries to withdraw cash accumulatively no more than USD 1,000 or equivalent foreign currency every day, and accumulatively no more than USD 5,000 or equivalent foreign currency every month.

Article XI
Peony international debit card can not be overdrawn. If there is any overdraft incurred by the acceptance of foreign banks or appointed units, or the commissions, the card issuing institution has the right of resource to the cardholder for the amount of overdraft, and also has right to freeze the use of card. The card will return to normal use only after the cardholder pays off the amount of overdraft.

Article XII
The useful life of Peony international debit card is eight years, the card issuing institution will charge the annual fee for the first year from the cardholder’s account after the cardholder deposits money for the first time, and initiatively debit and collect the annual fee for the years to come when sufficient balance is available based on the collecting date in the first year. If wanting to continue the use of card after maturity, the cardholder should replace it with a new card.

Article XIII
The card issuing institution should provide the cardholder with such services as consulting, inquiry, loss-reporting, processing complaints, and issuing bank statements for the cards involving transactions (except otherwise agreed with the cardholder) etc., and give a reply to the requirements of the cardholder for inquiring and correcting transactions and accounts within 30 days after the date of acceptance.

Article XIV
The cardholder of Peony international debit card can only use the card him/herself, but not lease or lend it out, and should not refuse paying the amount due to the card issuing institution by the reason of any dispute with any of the appointed units.

Article XV
Any cardholder should advise the card issuing institution about any change of his/her correspondence address, telephone number, dwelling place etc. in written or other forms agreed by both parties in due course so that the change procedures can be handled. Otherwise, the card issuing institution assumes no responsibility for any consequence accrued hereof.

Article XVI
Any cardholder should cancel his/her account and apply for a new card if his/her card gets damaged.

Article XVII
Any cardholder should go to the nearest ICBC business office and handle written loss-reporting or telephone loss-reporting immediately getting his/her Peony international debit card lost. The cardholder assumes no responsibility for any transaction arisen after completing the loss-reporting procedures. If wanting to replace with a new card after loss-reporting, the cardholder can conduct the replacement procedures by the written loss-reporting application and his/her own valid identity certificate.

Article XVIII
The card issuing institution has right to cancel the qualification of any cardholder disobeying this regulation, and authorize a competent authority to take back his/her Peony international debit card.

Article XIX
Any amendment to this regulation or adjustment on the interest rate of Peony international debit card will be announced on the newspaper within 30 days after getting approved by the China Banking Regulatory Committee, and any cardholder can choose whether to continue the use of Peony international debit card within 60 days after the date of announcement; if not, the card issuing institution will refund the collected annual fee proportionally, and handle the cancellation procedures.

Article XX
This regulation is subject to the constitution and construction of the ICBC, and shall come into effect after the approval of the China Banking Regulatory Committee.

   Following the correction in February, the market will likely trade sideways until there is better clarity on government policy regarding possible measures to control property prices and excessive market speculation. Policy risk remains high over the short term. However, China’s strong economic fundamentals remain intact. The corporate income tax unification could translate into substantial tax reductions for many listed companies which in turn would boost corporate earnings growth. Further Renminbi appreciation, the expansion of the QDII scheme, corporate M&A and the implementation of management incentive plans are positive factors that would lead the market higher over the longer term.

        The Hang Seng Index (HSI) dropped 2.3% for the month, with a sharp plunge around the end of February. The fall was triggered by the sell-off in the China A-share market, the reversal of Yen carry trade as well as a rebound in the emerging markets credit spread. Finance was the worst performing sector as its performance was dragged down by the bell-weather HSBC which issued a profit warning regarding the increased provisions on its US mortgage books. The property sector also underperformed due to profit-taking whilst utilities and commerce and industrial sectors fared relatively better.
    Concerns over fund outflow and high market velocity will see the market entering into a consolidation period over the short term. As the underlying economic fundamentals continue to improve and stock valuations remain reasonable, any major correction would be a good buying opportunity. Positive management guidance in the forthcoming corporate reporting season will be the near-term catalyst for the market to resume its uptrend. We prefer property developers, retailers, hotels, selective industrials and China related stocks, while cautious on utilities, property investors and selective large cap banks.

The year 2008 is an eventful year in the world financial history. The US subprime crisis has evolved into a global financial storm, which, in turn, has caused a downturn in the real economy that has reinforced the strains in the financial system. So far, the negative impact is universal and China is not immune to it. One year ago, when there was a huge debate on whether China could decouple from the world, I said it was only a myth. Now, the Caijing Magazine is offering us a valuable opportunity to look from the hindsight and lay a solid foundation for the future.

Today, I would like to address four topics.
First, the financial turmoil and economic woes are likely to continue.
In short term, restoring confidence in the market remains an arduous task. Liquidity is squeezed and the volatility is high because the accurate figure of losses in financial institutions cannot be calculated due to the challenge in valuing their positions in derivatives. In this context, buying shares alone is not enough. The recapitalization and buying toxic assets should undergo simultaneously, otherwise, more losses will be revealed. My rough estimation is that the aggregate loss in this crisis could amount to USD 3 trillion, which indicates that we are still far from the bottom.
In long term, the de-leveraging process will be very painful. One of the key lessons we have learned is that financial institutions should not be over-leveraged. The appropriate leverage ratio should be no more than 20. However, Lehman Brothers was 30 times leveraged on its book and 20 times leveraged off its balance sheet on the eve of its bankruptcy. Therefore, as banks are de-leveraging, shrinking their balance sheet, and changing their business approaches, we predict that the economic recovery will be a U-shape at the best in stead of a V-shape.

The financial turmoil hit real economy very hard, which will further amplify the credit risk and liquidity risk in the financial sector. We have seen the global shipping business is in a deep recession, which strongly indicates the gloomy outlook of major economies across the world. In the meantime, the emerging markets are more vulnerable in front of external shocks. A number of countries are turning for help from the World Bank. What is worse is that some emerging markets are in stagflation as the economy is slowing down while the inflation stays high.

Second, China’s banking sector is facing serious challenges as the economic growth is dwindling.

1. The deflation is looming large. Both CPI and PPI are dropping very fast from around 8.7% and 9.1% to 2.4% and 2.0% respectively. The industrial added value is seeing a year-on-year decline to 8.2%. The real estate development investment has a year-on-year growth of 24.6%, down 6.8 percentage points. The foreign trade volume is shrinking and the power demand is clearly reducing.
2. The correction in domestic assets market is likely to trigger capital outflow. The housing price has seen a consecutive monthly decline for several months. The stock market plunged over 62% and its function of providing funds for companies is seriously undermined.

Third, we should continue our reform to strengthen the banking sector.

Western countries have identified numerous reasons for the financial crisis, i.e. over trust in rating agencies, over reliance on quantitative models, defects in liquidity management, pro-cyclicality in accounting standards and capital standards and so on. But I would like to highlight five problems that should be addressed; otherwise, the mistakes that have been made this time will be repeated in the future.

1. The firewall between the banking market and capital market has been torn apart by “financial innovation”, which facilitated risk contagion across the board.
2. The western regulatory authorities are too obsessed with innovation and market force and have neglected the role of prudential regulation. Without sober judgment and counter-cyclical moves by the regulators, market failures will be frequent.
3. Excessive use of leverage leads to speculation. We always stress three fundamental rules for banking business. 1) each financial firm should ensure they have reliable and stable funding source. Pure reliance on inter-bank borrowing is strictly prohibited. 2) each financial firm should ensure they have strong risk management expertise, prudent business model and careful due diligence procedure. 3) each financial firm should have a qualified board and senior executive team with duty of care and fiduciary duty.
4. It is necessary to oversee the incentive schemes in financial instituitions. Regulators should not go out to set the compensation package for each senior executive, but we should ensure that the incentive scheme in each financial firm is rational and sustainable. This is important because the incentive is linked to performance. Distorted incentive package will encourage people to take excessive risks and sacrifice the long-term benefits for short-term gains.
5. There are serious defects in the rescue plan. The US bailout plan was originally for big embattled financial institutions. But many people argued that it should be used to boost the sluggish economy. Now similar debate arises in the auto industry. Therefore, to address the crisis, we must first have a broad vision, then a building block a approach, and also a sequenced arrangement.
Fourth, China should avoid the mistakes made in the Western world and highlight the role of regulators.

1. Improving corporate governance. It is an appropriate time to encourage banks to improve corporate governance. The boards in Chinese banks should start to review their institutional arrangement and improve their management procedures.

2. Maintaining boundaries between businesses. The bank-based market and capital-based market should be separate. In this regard, we should maintain the current status and prevent risk contagion from capital market to commercial banks.

3. Regulating financial innovation. While financial innovation is important to manage and distribute risks, banks and regulators should have more in-depth understanding of the innovative instruments in the market. From the CBRC’s perspective, we encourage banks to conduct business innovation. But we also require them to put in place sound risk control structure to ensure that they can understand and manage the risks in these new businesses.
4. Using conventional measures to supervise banks. No matter what the risk is, we should always highlight the traditional measures in managing it, namely, corporate governance, capital adequacy, large exposure, NPL ratio, provision coverage ratio and transparency.

5. Building a strong talent pool. At this critical juncture, it seems more important that we should have a strong professional team that is able to handle the sophistication amid the crisis. In the meantime, we should be more involved in the global supervisory cooperation and create a favorable external environment for Chinese banks.
To conclude, the crisis has brought us both challenges as well as opportunities. I wish all of us could work hand in hand to weather this financial storm and I believe that after this storm, Chinese banking sector will enjoy a brighter future.

Currently, banks and trust companies both have their own advantages in serving their clients. In this context, the cooperation between the two sides could deliver synergies by expanding the customer base, increase the fee-based revenue, as well as building stronger expertise in wealth management business. As there are many approaches for cooperation, the CBRC introduces the new rules to guide their cooperation.
The Guidelines consists of four chapters, i.e. general principles, wealth management cooperation, other business cooperation, risk management and controls. There are three key points in the Guidelines. First, there should be clearly defined role for each party in risk controls, business models as well as responsibilities. Second, each party should set up its risk management policy and procedure to provide capable service to suitable customers. Third, banks are prohibited to provide any guarantee to trusted assets and when banks are selling assets or commercial notes to trust companies, it should be clean and true sale and should not have repo clause. If there is any connected transaction, the information should be disclosed appropriately.
In addition, the Guidelines stipulate that the risk in wealth management should be fully disclosed and every customer should undertake risk appetite test. The terms like “expected return”, “maximum return” are not allowed in marketing the products. Also, the Guidelines make it clear that the trusted assets could be invested in buying shares in financial institutions.
The CBRC will require banks and trust companies to follow the Guidelines, to enhance their risk management capacity and thereby promote sound and healthy cooperation between the two sides.