^{The path of the righteous man is beset on all sides by the iniquities of the selfish and the tyranny of evil men. Blessed is he who, in the name of charity and good will, shepherds the weak through the valley of the darkness. For he is truly his brother's keeper and the finder of lost children. And I will strike down upon thee with great vengeance and furious anger those who attempt to poison and destroy my brothers. And you will know I am the Lord when I lay my vengeance upon you.}

Three Chinese  institutions were among the world's top four banks at the end of 2007 at a time when the market capitalisation of Western banks was suffering from a global financial crisis, a study showed Wednesday. The number one spot in the rankings, compiled by the Boston Consulting Group, was occupied by the Industrial and Commercial Bank of China, with market capitalisation of nearly 340 billion dollars (218 billion euros). In second place was China Construction Bank, followed by HSBC of Britain, Bank of China, Bank of America and Citigroup of the United States. The study found that banks in North America and Western Europe had suffered a loss of 695 billion dollars in market capitalisation at the end of 2007 while their counterparts in emerging market countries Brazil, Russia, China and India had seen their market capitalisation increase by 753 billion dollars. Major US and European banks have suffered losses and asset writedowns stemming from the near collapse of US subprime -- high risk -- mortgage sector, which undermined the value of billions of dollars' worth of their mortgage-backed securities.

This is another reason why the US government shouldn't be spending borrowed money to finance extra-constitutional spending. The Chinese government has begun a concerted campaign of economic threats against the United States, hinting that it may liquidate its vast holding of US treasuries if Washington imposes trade sanctions to force a yuan revaluation. Two officials at leading Communist Party bodies have given interviews in recent days warning - for the first time - that Beijing may use its $1.33 trillion (£658bn) of foreign reserves as a political weapon to counter pressure from the US Congress. Shifts in Chinese policy are often announced through key think tanks and academies. Described as China's "nuclear option" in the state media, such action could trigger a dollar crash at a time when the US currency is already breaking down through historic support levels. It would also cause a spike in US bond yields, hammering the US housing market and perhaps tipping the economy into recession. It is estimated that China holds over $900bn in a mix of US bonds. When the federal government is asked to do things the Constitution doesn't tell it to do, and when more and more money flows through it, and with that more and more power, it's hard to stop spending. And with that comes borrowing. And with that comes slavery. The same thing could happen even if spending were kept in the context of the Constitution, but once you escape its limits, there is then no limit. The rich rule over the poor, and the borrower is servant to the lender. - Proverbs 22:7 (NIV)

China's oil giant Sinopec Group has signed a US$70 billion oil and natural gas agreement with Iran, which is China's biggest energy deal with the No. 2 OPEC producer. Under a memorandum of understanding signed Thursday, Sinopec Group will buy 250 million tons of liquefied natural gas over 30 years from Iran and develop the giant Yadavaran field. Iran is also committed to export 150,000 barrels per day of crude oil to China for 25 years at market prices after commissioning of the field. Iran's oil Minister Bijan Zanganeh, who is on a two-day visit to Beijing pursuing closer ties, said Iran is China's biggest oil supplier and wants to be its long-term business partner. Official figures show that China imported 226 million tons of oil in2003, about 13 percent of which coming from Iran. Beijing expects to secure foreign energy supplies by the deals for its economy, which has turned China into a major oil importer but suffers severe power shortages.A former KGB officer said to be close to President Vladimir Putin was selected at a shareholders meeting Monday to head Transneft, the state-owned monopoly pipeline operator. Nikolai Tokarev had run state-owned oil exporting firm Zarubezhneft since 2000, the year Putin became president. He previously had served a brief stint at Transneft as vice president. Tokarev will replace Semyon Vainshtok, who was picked to head the state-run corporation overseeing construction of sports facilities and infrastructure in Sochi for the 2012 Winter Games.

The choice of a former KGB officer to run Transneft, which is 75 percent state owned, comes ahead of parliamentary and presidential elections in Russia and fits a Kremlin pattern of putting trusted people in key government and corporate positions. "This is part of the configuration around the presidential succession," said Vladimir Pribylovsky, a political analyst.Bulgaria and Russia signed a deal Friday to build a natural gas pipeline that would undercut a rival project backed by the U.S. and European Union and strengthen the Kremlin's dominance over EU energy supplies.The agreement came after visiting Russian President Vladimir Putin pushed hard to secure Bulgaria's crucial participation in the projected South Stream pipeline, which would cross from Russia under the Black Sea to Bulgaria and then branch off for delivery deeper in Europe. Putin brushed off concerns about Russia's increasing influence, saying after the signing ceremony that the pipeline agreement and other deals would "seriously increase the energy security of the Balkans, Europe as a whole and, of course, Bulgaria." The deal required last-minute negotiations, amid tough bargaining by Bulgaria and wariness about Russia's clout. The Bulgarian Cabinet approved the agreement at an extraordinary meeting only a few hours before it was signed.Bulgaria's interests are fully protected, because the company which will be set up to construct and run the pipeline on Bulgarian soil will be with 50 percent Bulgarian and 50 percent Russian ownership," Bulgarian Prime Minister Sergei Stanishev said. Russia's state-controlled gas monopoly, OAO Gazprom, had previously been offering a minority stake in the part of the pipeline that would run through Bulgaria.

"Until yesterday, the Russian side insisted on holding a 51-percent stake," Stanishev said. He said Putin himself deserved most of the credit for the progress in the late-night negotiations. But despite the concession, the imminent deal was a victory for Putin and Russia, which is already Europe's dominant gas and oil supplier and is seeking to increase its control over westward routes for its energy supplies from the former Soviet Union. "It's very important that the parties have shown their ability to compromise, and the draft that has been was prepared reflects a balance of interests," Gazprom chairman Dmitry Medvedev, who is likely to succeed Putin after the March 2 presidential election, said after meeting with Stanishev. He said agreements on South Stream "will work for decades and make it possible to ensure stable conditions for future energy deliveries for Bulgaria, Russia and EU nations."

Gazprom has set up a parity joint venture with Italy's ENI SpA to develop a feasibility study for the 900-kilometer (550-mile), $10 billion pipeline. The project is a direct rival to the Nabucco pipeline, sponsored by the United States and the European Union, which would also come through Bulgaria. Taking advantage of the clashing pipeline offers, Bulgaria has bargained with the Kremlin. On Thursday, Bulgarian President Georgi Parvanov underlined his nation's support for the EU's efforts to diversify energy supply routes -- and for Nabucco -- in a speech at a ceremony marking the opening of a Russian cultural festival in Bulgaria. After Parvanov had spoken, a clearly annoyed Putin, standing next to him, said Bulgaria was free to chose its direction but warned it to make sure it "works to its benefit." ENI CEO Paolo Scaroni played down the rivalry between South Stream and Nabucco following meetings with Gazprom CEO Alexei Miller, saying both would be needed because of growing demand. But South Stream would undercut Nabucco and dash the European Union's hopes of reducing its growing reliance on Russia, which now supplies up to 40 percent of Europe's gas and up to a third of the oil imports of some European countries. South Stream would have an estimated annual capacity of 30 billion cubic meters (1.15 trillion cubic feet), roughly equivalent to 60 percent of the natural gas consumed annually in The Netherlands. The Kremlin's plans have upset opposition parties and non-governmental organizations in Bulgaria, who fear the former Soviet satellite's increasing dependence on Russian energy supplies and criticize Moscow's human rights record. With Putin and Parvanov looking on, officials also signed a $5.9 billion contract to build Bulgaria's second nuclear plant near the northern town of Belene.

Also signed was an agreement for a joint company, also including Greece, to build the Burgas-Alexandroupolis oil pipeline, which will channel Russian oil from the Black Sea to the Aegean, bypassing Turkey's busy Bosporus. As part of its energy blitz, Russia has promised to extend South Stream into Serbia and build a huge gas storage facility there -- moves that would turn the Balkan nation into a major hub for Russian energy supplies to Europe. Miller said Gazprom and Serbian officials were close to a final agreement on a deal that would envisage a South Stream branch reaching Serbia, and would also foresee Gazprom taking a controlling stake Serbia's state oil company NIS. Belgrade has turned increasingly away from the West and toward Russia, which has supported Serbia in the debate over independence for Serbia's Kosovo province.

With the official launch of the Chinese Investment Corp, China's new financial juggernaut will be both a formidable opportunity and challenge for the west. The Chinese Investment Corp. (CIC) has been officially launched, and with an initial endowment of US$200 billion the new state-controlled company is tasked to invest abroad China's huge foreign reserves. In the shopping bag there will be natural resources from developing countries as well as foreign technologies, research and development (R&D) establishments and brand names from developed economies. For the west, China's new financial juggernaut will be a formidable opportunity, and a formidable challenge. After various announcements, on 27 September, the Chinese authorities officially unveiled the CIC. Under the direct supervision of the State Council, the nation's cabinet, the CIC is mandated to invest abroad the huge reserves accumulated by Beijing over the last years. China's forex topped US$1.33 trillion at the end of June and are expected to reach US$1.5 trillion by the end of the year, the largest in the world. Lou Jiwei, a deputy-secretary general of the State Council and former finance minister, will be the director of the new company.

China's investment corporation has been under preparation for some time. At the conclusion of the annual session of the National People's Congress in March, the Chinese government announced that it would set up a State Foreign Exchange Investment Company (SFEIC) aimed at improving the yield of the country's foreign exchange reserves and generating the largest returns possible. In May, the new company, while still in preparation, invested US$3 billion of its reserves in non-voting shares of the Blackstone Group, the New York-based private equity firm that recently went public. With the establishment of the CIC at the end of September, the contours of China's investment strategy have become clearer. The CIC strategy
The CIC is modeled on the Singapore investment company, Temasek Holdings. Temasek is an investment firm incorporated in 1974 and headquartered in Singapore. Its portfolio spans various industries including telecommunications and media, financial services, real estate, transportation and logistics, energy and resources, infrastructure, engineering and technology as well as bioscience and healthcare. The Chinese sovereign wealth fund will also be a private equity vehicle, operating on a flexible investment horizon with the option of taking concentrated risks. Lou Jiwey, the CIC's director, declared that the new company would "invest, manage and add value to the Chinese portfolio" as an owner of its assets and investments. Beijing currently holds its reserves in US treasury bonds and other safe but low-yielding, instruments. According to Chinese sources, the CIC will likely be "equity-heavy." Analysts at Morgan Stanley also expect the Chinese company to hold a substantial share of its assets in equities, not sovereign bonds. "The company's principal purpose is to make profits," Li Yang, director of the finance research institute at the Chinese Academy of Social Sciences (CASS), told ISN Security Watch. The CIC has an initial capital of US$ 200 billion, but presumably the amount will be increased according to the investments that the company will support. In practice, the CIC will issue RMB-denominated bonds and sell these bonds on the market to buy foreign exchange funds from the central bank. It will then use the foreign exchange funds for investment. In June, China's legislature approved a special issuance of RMB 1.55 trillion (US$200 million) in treasury bonds for the new investment company. The CIC will operate in both the domestic and global markets. Internally, the investment channels of the new vehicle will include another Chinese state-owned company founded in 2003, the Central Huijin Investment Corp., which has been merged into the CIC as a wholly owned subsidiary company. Central Huijin holds shares in China's four leading commercial banks and in 2005 injected US$60 billion into three of them. While Central Huijin will be one of the financial vehicles adopted as the central bank's investment arm to improve the balance sheets of Chinese state-owned banks, the CIC will be more of a strategic investment fund focused on industry and private equity. Internationally, the CIC will be Beijing's investment arm in a range of sectors and countries. Its initial endowment and future prospects make it one of the biggest in the world.

According to a report by Chatham House published in September, the CIC soon will be the number two in the world, behind the Adia, the sovereign wealth fund of the United Arab Emirates, but ahead of both the Gic, the Singaporean fund, and the Norwegian Government Pension Fund. The central question is therefore where and in which sectors the CIC will invest its capital. According to sources, China's international investment strategy will take two directions. One the one hand, it will invest in natural resources in developing countries. On the other hand, it will concentrate on the acquisition of foreign technologies, R&D establishments and brand names in advanced economies. According to Li Rongrong, director of the China State Asset Management Commission (the agency that oversees government assets), the CIC may also help major state-owned companies expand overseas.

Taking the world by investment
Since the mid-1990s, the search for natural resources has continued to gain momentum as a result of China's high economic growth, with increasing emphasis on oil and industrial raw materials. In its 2006 World Investment Report, the United Nations Conference on Trade and Development (UNCTAD) indicated that China's outward foreign direct investment had more than quintupled in the first half of this decade, to reach US$11.3 billion in 2005. South-East Asia, Latin America and Africa have become the prime targets. For instance, in 2002, the China National Offshore Oil Corporation became the largest foreign oil producer in Indonesia after its takeover (for US$585 million) of Repsol Indonesia. In Africa, China's investment strategy has been directed mainly at sourcing natural resources, including oil. Moreover, increasing numbers of Chinese companies have recently established production bases to supply local markets with cheap products highly compatible with local demand and purchasing power. As a result, total trade between China and Africa nearly quadrupled in six years, from US$10.8 billion in 2000 to nearly US$40 billion in 2006. China is today Africa's biggest trading partner and the second most important investor. China's new investment company will further boost these trends. At the same time, China will invest more and more in developed countries, where its presence is often welcomed for the jobs, cash and infrastructure that it brings. In Australia, for example, China has become the biggest foreign investor in the mining sector. The CIC will place more emphasis on the acqui¬sition of advanced technologies, R&D establishments, managerial know-how, distribution networks and brand names. China's investment strategy will likely take the form of profitable participation in private equity funds as well as strategic participation in foreign investment companies running businesses considered of importance for China. While normally in the first case, the CIC would hold a minority stake or give up voting rights for the entitlement of a higher return (as in the Blackstone investment fund), in the event of acquisitions of strategic assets, China's investment company would presumably detain the majority of shares or in any case full control of the company. It is in this scenario that questions of corporate governance, transparency and strategic considerations will be unavoidable.

Eye on Europe: challenge and opportunity
While in the US protectionist tendencies may create difficulties for China investing in key strategic sectors, Europe is emerging as the most attractive place for China's technology-seeking shopping spree. China is eyeing Europe's IT, aerospace and defense sectors as investment opportunities, both in terms of profitable returns on its foreign reserves and in terms of acquisition of advanced technologies needed for China's industrial (and military) modernization. Chinese investments in European companies would be helped by the fact that EU-China relations are characterized by the conspicuous absence of issues that could provoke a confrontation between the two sides - such as the Taiwan question. Unlike the US and Japan, Europeans look at China almost exclusively in terms of business opportunities and not as a possible military competitor. Some EU policy makers - such as the Italian minister for the economy, Tommaso Padoa-Schioppa - have openly invited the CIC to invest in Europe. At the same time, French President Nicolas Sarkozy and German Chancellor Angela Merkel have called for a European "golden share" to protect industrial strategic assets from unwanted takeovers from sovereign wealth funds (SWFs). EU Economy Commissioner Joaquin Almunia added that "the EU might restrict investments by government funds unless they disclose more about what they invest in and why." The CIC will thus be, on the one hand, a great opportunity for some industrial sectors, as it will offer fresh money into tight markets after the sub-prime mortgage crisis. On the other hand, the Chinese investment vehicle could well succeed in gaining control of western assets and advanced technology that could be turned into military might in a situation where there could be future tensions in US-China relations, especially over Taiwan. In sum, for the west, the new Chinese investment corporation will be a great economic opportunity, but also a formidable strategic challenge to watch.

Three Chinese banks in world's top four: study

Three Chinese institutions were among the world's top four banks at the end of 2007 at a time when the market capitalisation of Western banks was suffering from a global financial crisis, a study showed Wednesday. The number one spot in the rankings, compiled by the Boston Consulting Group, was occupied by the Industrial and Commercial Bank of China, with market capitalisation of nearly 340 billion dollars (218 billion euros). In second place was China Construction Bank, followed by HSBC of Britain, Bank of China, Bank of America and Citigroup of the United States. The study found that banks in North America and Western Europe had suffered a loss of 695 billion dollars in market capitalisation at the end of 2007 while their counterparts in emerging market countries Brazil, Russia, China and India had seen their market capitalisation increase by 753 billion dollars. Major US and European banks have suffered losses and asset writedowns stemming from the near collapse of US subprime -- high risk -- mortgage sector, which undermined the value of billions of dollars' worth of their mortgage-backed securities.

An analysis of the world's 25 largest companies by market value provides some telling insights into the tectonic shifts shaping global markets. The United States continues to dominate the ranks of the world's biggest companies, but to a much lesser degree than it did even a decade ago. It now accounts for nine of the Top 25, followed closely by Europe with eight.

Here are the Top 10 companies by market value:

1. Petro China, China, $524 billion *
2. Exxon Mobil, USA, $460 billion
3. General Electric, USA, $339 billion
4. Gazprom, Russia, $310 billion
5. China Mobile, China, $290 billion *
6. Microsoft, USA, $266 billion
7. Ind. & Comm. Bank, China, $264 billion *
8. Petrobas, Brazil, $231 billion
9. Royal Dutch Shell, Netherlands, $221 billion
10. AT&T, USA, $214 billion

While the world was riveted by news from the latest subprime fallout on July 23, few investors noticed that a leap in the share price of Industrial & Commercial Bank of China (ICBC) made it the world's biggest bank by market capitalization. On that day, the Chinese bank exceeded the $251 billion capitalization of Citigroup for the first time. Since then, the gap has only widened.Chinese banks are arguably the single-best example of successful rebranding in recent financial memory. And the transformation has been both swift and impressive. As recently as 2005, the Chinese chairman for Citigroup Global Markets Asia observed at the Wharton China Business Forum, that: "The four major state-owned banks (in China) are technically insolvent... they have weak governance, bureaucratic cultures and staggering levels of non-performing loans." He could not have guessed that within 24 months, the largest of these 'technically insolvent' banks –- ICBC -- would have not only launched the largest IPO in history ($22 billion), but also would have a market capitalization larger than Citibank itself.

Chinese Banks: A Reality Check

Eye-popping market capitalizations and slick rebranding notwithstanding, Chinese state-owned banks are a financial disaster that makes the U.S. current subprime sector look like a rounding error. Estimates of bad loans on the books of China's banks by the leading rating agencies in the world range from 40% to 60% of China's current GDP. That would be the equivalent of about $5.6 to $8.4 trillion of bad loans in the U.S. banking system in a $14 trillion economy. By way of comparison, the U.S. Savings & Loan scandal of the early 1990s cost the U.S government less than 3% of GDP. No wonder that Moody's Global Credit Research rated the average bank financial strength rating of E+ for Chinese banks, one of the lowest on Moody's global scale. Yet the irony of the focus on Chinese banks' exposure to U.S. subprime loans, which Moody's estimates to be a mere $13.5 billion, has eluded the mainstream media.
How did Chinese banks get into this mess? Investors forget that China is a Communist, centrally planned economy -- complete with five-year plans. As in all centrally planned economies, China's state-owned banks' role is to bankroll the government's massive infrastructure projects and to keep otherwise bankrupt, state-owned enterprises afloat. That's why state-owned enterprises account for 25% of gross domestic product, but receive 65% of loans. Credit management problems, a lack of qualified staffers and deep-rooted corruption are more characteristic of China's banks than world-beating financial savvy.

Chinese Banks: Smart Money's Big Bet

Yet despite their more than cosmetic defects, Chinese banks have attracted many eager suitors over the last two years. The Royal Bank of Scotland paid $3 billion for a 10% stake in the Bank of China just last year. Other banks rolling the dice in the China bank craps table include Bank of America, Citigroup, Goldman Sachs, and UBS. The initial public stock offerings (IPOs) of ICBC, Bank of China, China Construction Bank Corp., Bank of Communications Ltd., and China Merchants Bank Co. have raised more than $47 billion from share sales since June 2005. It turns out that many Western banks bought these stakes as an option on Chinese growth, regardless of the underlying asset quality. Operating in the midst of a four-year investment boom that has powered annual economic expansion of 10+% meant that Chinese banks have never had it so good. Breakneck economic growth covers a multitude of sins. Indeed, the growth in profits of Chinese banks is impressive. ICBC's first-half net profit rose 62% from a year earlier to US$5.4 billion, boosted by higher interest income and an expansion of its fee-based businesses. Bank of China's net profit for January-June rose 52% to $3.9 billion. And those who have invested early have seen their original stakes double or even triple in value. It's always hard to argue with a skyrocketing share price.

Chinese Banks: Looking Below the Hood

China bulls will argue that -- thanks to a combination of capital injections and improved operations -- a bank like ICBC has cut its non-performing loan ratio to about 4% from a high of 34%. Yet the ability of the Chinese banks to change their stripes so quickly and emerge as global powerhouses virtually overnight is doubtful. Moody's notes that many former non-performing loans have been simply re-classified as "special mention" and often represent a huge part of Chinese banks' borrowing activity. Record profits are fueled by record loan growth. New loans totaling 3.08 trillion yuan (409.6 billion U.S. dollars) were approved in the first eight months of this year, a figure that already almost matches 2006's total level of 3.18 trillion yuan (422.9 billion U.S. dollars). Of course, making bad loans only increases the level of bad debt. And the bailout money pumped into banks to dress them up for IPOs is a classic moral hazard. Jawboning from the Chinese authorities aside, there is little incentive for Chinese banks to avoid lending to state-owned businesses that show scant regard for risk or return.

Chinese Banks: Danger Ahead

The reality is that once the Chinese locomotive slows, the risk of bad loans skyrockets. The rating agency Fitch estimates that even in a moderate economic slowdown, 10% of loans could turn bad. A severe slowdown -- say, if China's GDP growth slumps to 3-4% a year -- would send the entire banking sector into a tailspin. And the repercussions are likely to be much worse -- and the bailout much more expensive than after the last bust. Loans to the Chinese private sector and non-financial government enterprises now are clocking nearly 160% of gross domestic product versus about 120% in 2000. A back-of-the envelope calculation shows that much of China's $1.3 trillion in reserves could be eaten up by banking bailouts.
As one analyst put it, "China's leaders make loud and frequent noises about how they are pushing ahead with the reform of the country's government-controlled banking system. But many Western bankers say that it could take as long as 15 to 20 years before the banks develop a Western-style credit culture and efficient operations." Here's the problem. This analysis was published in the International Herald Tribune on April 22, 1995 and it's now close to 15 years later. The world's #1 subprime problem won't disappear overnight.

The Chinese vessels "shadowed and aggressively maneuvered in dangerously close proximity" to the USNS Impeccable, an unarmed ocean surveillance vessel, with one ship coming within 25 feet, a U.S. Defense Department statement said. Tropical Hainan, less than 100 km (60 miles) south of the mainland, hosts a Chinese naval base that houses ballistic missile submarines, according to independent analysts. An unnamed spokesman for the Chinese embassy in Washington earlier denied the Chinese ships had violated maritime rules and said U.S. ships had been conducting illegal surveying, the website of Hong Kong-based Phoenix Television (news.ifeng.com) reported. It said the incident happened 120 km (70 miles) south of the island. Ma said there were laws about scientific research in Chinese waters. The U.S. ship "violated the relevant international laws and Chinese laws and regulations," he said, urging the United States to halt such action. U.S. defense officials said the incident followed days of increasingly aggressive Chinese conduct in the area, including fly-bys by Chinese maritime surveillance planes. It comes just weeks after the two sides resumed military talks, postponed in November after a U.S. announcement of arms sales to Taiwan, a self-ruled island China claims as its own. And it echoes a stand-off in 2001 between U.S. and Chinese military forces after a U.S. spy plane made an emergency landing on Hainan after a collision with a Chinese fighter jet.

China released 24 crew after a U.S. expression of regret. China's national parliament, now in annual session, is set to approve a military budget increase of 14.9 percent more than spending in 2008, bringing announced People's Liberation Army funds to 480.7 billion yuan ($70 billion). Many foreign experts believe its real budget is much higher. Some of that extra money may go to developing China's first aircraft carrier -- the trophy ship of an ambitious sea power -- senior naval officers have recently suggested. "Go and ask the Americans, ask their embassy," Vice Admiral Jin Mao, former Navy vice commander in chief, told Reuters on the sidelines of parliament when asked about the incident. "Ask their officials what their ship was doing in Chinese waters." The Impeccable is one of five ocean surveillance ships that serve with the U.S. 7th Fleet, based in Yokosuka, Japan. The ships use low-frequency sound to search for undersea threats including submarines, a U.S. military official said. A U.S. Defense Department spokesman said the Chinese vessels had surrounded the Impeccable, waving Chinese flags and telling the U.S. ship to leave. The Pentagon also described accounts of half a dozen other incidents dating back to March 4. Oil prices rose on news of the jostling on Monday and stayed high on Tuesday, although analysts said it was hard to see how the tension could threaten oil supplies or inflate prices. "I can see the geopolitical risk between two producing countries. But the U.S. and China are two major consumers. I don't know why oil prices would rise on that," said Tony Nunan, risk management manager at Tokyo-based Mitsubishi Corp. The confrontation coincides with two sensitive anniversaries in Tibet, making China especially sensitive to outside scrutiny. Analyst Shi said the seas off Hainan were important to China's projection of its influence with a modern naval fleet. "The change is in China's attitude. This reflects the hardening line in Chinese foreign policy and the importance we attach to the strategic value of the South China Sea."

Chinese ships surrounded and harassed a Navy mapping ship in international waters off China, at one point coming within 25 feet of the American boat and strewing debris in its path, the Defense Department said Monday. The Obama administration said it would continue naval operations in the South China Sea, most of which China considers its territory, and protested to China about what it called reckless behavior that endangered lives. At one point during the incident Sunday the unarmed USNS Impeccable turned fire hoses on an approaching Chinese ship in self defense, the Pentagon said. At another point a Chinese ship played chicken with the Americans, stopping dead in front of the Impeccable as it tried to sail away, forcing the civilian mariners to slam on the brakes. "We view these as unprofessional maneuvers" and a violation of international law, Pentagon spokesman Bryan Whitman said. The incident had overtones of spycraft, but the U.S. ship is not, strictly speaking, a spy ship. It maps the ocean floor with sonar, compiling information the Navy can use to steer its own submarines or track those of other nations. The Impeccable was specifically designed to augment the Navy's anti-submarine capability, although military spokesmen would not be specific about the ship's duties when it was surrounded. A Pentagon accounting of the confrontation documents the actions of the startled and cornered American crew as a Chinese vessel closed to within 25 feet. Pictures released by the Navy give a sense of the surreal scene: The Chinese mariners had stripped to their underwear following the blast by the Impeccable's fire hoses.

Whitman called that "immature," and said the confrontation was the most aggressive of a series of incidents recently in the same area. Impeccable's crew radioed to tell the Chinese ships that it was leaving the area and requested a safe path to navigate, the Pentagon said. But two of the Chinese ships stopped directly ahead of the Impeccable, forcing it to an emergency stop, the U.S. account said. The Chinese also dropped pieces of wood in the water in Impeccable's path. The incident came just a week after China and the U.S. resumed military-to-military consultations following a five-month suspension over U.S. arms sales to Taiwan. And it came as Chinese Foreign Minister Yang Jiechi was due in Washington to meet with U.S. officials. "We're going to continue to operate in those international waters, and we expect the Chinese to observe international law around that," White House press secretary Robert Gibbs said. A protest was lodged with the Chinese government by the U.S. Embassy in Beijing over the weekend and was repeated to a Chinese defense attache at a Pentagon meeting Monday. In Beijing, Chinese officials did not immediately respond to voicemail messages and e-mail regarding the U.S. allegations. Pentagon officials said the incident followed "increasingly aggressive" acts by Chinese ships against the Impeccable on Wednesday and Saturday and against the USNS Victorious surveillance ship on Thursday while it operated in the Yellow Sea.

The Chinese ships included a Chinese Navy intelligence collection ship, a Bureau of Maritime Fisheries Patrol Vessel, a State Oceanographic Administration patrol vessel and two small Chinese-flagged trawlers, officials said. China views almost the entirety of the South China Sea as its territory. China's claims to small islets in the region have put it at odds with five governments - the Philippines, Vietnam, Malaysia, Brunei and Taiwan. Pentagon officials said the close encounter followed these other incidents last week: _On Wednesday, a Chinese Bureau of Fisheries Patrol vessel used a high-intensity spotlight to illuminate the Victorious, an ocean surveillance ship, as it operated in the Yellow Sea, about 125 nautical miles from China's coast, the Pentagon said. The next day, a Chinese Y-12 maritime surveillance aircraft conducted 12 fly-bys of Victorious at an altitude of about 400 feet and a range of 500 yards. _On Thursday, a Chinese frigate approached USNS Impeccable without warning and crossed its bow at a range of approximately 100 yards, the Pentagon said. This was followed less than two hours later by a Chinese Y-12 aircraft conducting 11 fly-bys of Impeccable at an altitude of 600 feet and a range from 100-300 feet. _On Saturday, a Chinese intelligence collection ship challenged Impeccable over bridge-to-bridge radio, calling her operations illegal and directing Impeccable to leave the area or "suffer the consequences." Sunday's incident near Hainan Island is reminiscent of a much more dramatic foreign policy crisis with China that played out in the same area.