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The China Factor and the Overstretch of the US Hegemony

3 books that can change your mind in 2005 about the geo-politic and geo-economic dynamics going on

Interviews by Jorge Nascimento Rodrigues, editor of Gurusonline.tv, Jannuary 2005 Transition Report is a quarterly online journal edited by Gurusonline.tv

George Zhibin Gu, the Chinese consultant based in Shenzhen and author of the forthcoming "China's Global Reach" (Haworth Press, US) Chalmers Johnson, president of the Japan Policy Research Institute and author of "The Sorrows of Empire" (Metropolitan Books, US) André Gunder Frank, associate of the Luxembourg Institute for Education and International Studies and author of the forthcoming "ReOrient the Nineteenth Century" (a sequel of his 1998's "ReOrient")

FIRST STORY A view from an insider George Zhibin Gu CHINA IS BECOMING A GLOBAL THEATER "A new power balance will emerge gradually and most likely indirectly"

George Zhibin Gu considers himself a protagonist of the Chinese lucky young generation of the 60's in the last century. He heads a consulting group in Shenzhen that borders with Hong Kong. Born in 1961 in Xian - the most ancient capital of China -, Dr. Gu holds masters degrees in both physics and mathematics and a PhD in mathematics from the University of Michigan, in 1987, in the United States. For 13 years he lived in the US. He joined Wall Street in 1990, first in New York and then in San Francisco. He returned to China to represent Lazard and its clients in 1994. Later, he became independent with his own partnerships. He provides investment consulting, and more increasingly management consulting, for both multinational and Chinese companies. George Gu helps international companies to invest in China and Chinese companies to expand in the international market. Till now, he has done work in venture capital, M&A, joint ventures, business expansions and restructuring. He considers himself "a generalist with a focus on strategies". "My passion is coaching and public lecturing", he told Gurusonline. Dr. Gu is author of China Beyond Deng: Reform in the RPC (Mcfarland & Co Inc, 1991) and of the forthcoming book China's Global Reach: Markets, Multinationals and Globalization, to be published in Fall 2005 by Haworth Press, New York. In both books, that's a rigorous view from an INSIDER.

Dr. Gu can be contacted by email

INTERVIEW

First idea: "Today, most Chinese would prefer to be the one just following the leader. That is a safe play, and a better alternative"

The full engagement of China with the world means Daguo Xintai ( "mentality of global power") or Heping Jueqi ("peaceful rise" as Zheng Bijian introduced in 2003)? Has China a "mission" as a global power as the Portuguese, the Dutch, the British, and the US had in the past 650 years?

Strangely enough, the outside world feels more effects about this fast developing China. Most Chinese are more concerned to improve living standards and get more opportunities. They are little aware about China's future role in the global stage. More than often, the Chinese are shocked when foreign visitors tell them that 21 Century will be Chinese. Having this said, there is a common understanding that a fast developing China will reverse the history in this sense only: the Chinese will be treated as equals in the global community. For some 200 years, Chinese have been treated inferiorly. It is changing for the better, finally. China is not ready to play a more significant role in the global stage at all. Maybe it is because that China has suffered terribly in the past for thinking itself the center. Today, most Chinese would prefer to be the one just following the leader. That is a safe play, and a better alternative. Even the various European nations have learnt their lessons from the recent past. Being a world leader could also invite unwanted troubles. For that, the US has yet to learn.

The Asia Rising - more than the US twin deficits and the new terrorism - can be the main obstacle for the consolidation of the hegemonic role of the US? Do you think that, finally, the 21st century will be the truly "Asian Century"?

Asia could provide a global leadership in a different way. There are countless good merits in Asia. Asians have strong family ties, love education, and are willing to do hard work. Their best merit is this: they face tough situations with a smile and harder work. These are some of the merits for the rest of the world to learn. As Asians gain more economic progress, the rest of the world will become more willing to learn from Asians. This will reverse the recent historical trends. For this and only for this, 21 century will be Asian. To me, 21 century will belong to the world, not just Asia/China. For this century, sharing and common wealth will become more significant than ever before. As a result, more nations will benefit. This is a trend that can only grow. For the world is already tightly linked by business and economy. A car produced in Detroit has engine made in Europe and wheels made in Asia - with raw materials coming from Latin America and Australia. It takes a shared work and its benefits go beyond any single country. Also, at the next level, China and India's strength lies in the low cost structure. But the developed nations can easily tap into this market. They benefit more than anyone else. Also, for consumers in the developed nations, they can enjoy the cheapest products as well. So, 21 Century belongs to the entire world. It presents a grand platform for the convergence of global civilizations, though only in its very beginning. Even so, it shows a bright direction for the world, despite all the new worries and conflicts

Second idea: "Even if the US is not willing to be more open, it will be more aware of the others' existence. In short, a new power balance will emerge gradually, and most likely indirectly"

Can China emerge as a global challenger for the US hegemony? Or its emergence will be episodic like the Japanese short take-off as a global economic challenger in the 80's of last century?

The reemergence of both China and India today will impact on the global balance for sure. But it may come from a different context. That is, it may come gradually and indirectly. It is because that India and China take 40% of world population. If they double their income in the next ten years, the rest of world will feel it. Their enormous size means a lot already. How about the US hegemony? Well, the US will become more willing for consultations and dialogues with India, China and rest of world. Even if the US is not willing to be more open, it will be more aware of the others' existence. In short, a new power balance will emerge gradually, and most likely indirectly. More significant, it may not repeat the bloody rivalry as in the past. History shows that bloody rivalry may produce no winners. As far as the US is concerned, it is also learning as to how to act like a leader. There are no ready teachers for the leader. It makes more mistakes on its own weight. This weight may become too burdensome for it to handle. It has happened countless times in Man's History. Interestingly, the great powers in the past have all been pulled down more by their own weight than anything else. Should the future be any different?

Third idea: "China is being very careful not to let world politics mess its economic development. This will become a long-term strategy as well as a dominating mentality"

Is China able to grow, even if slowly, a sustainable coalition against the incumbent power, something that the new Russia never gets since the 80's? The strategic agreements with strategic countries all over the world (like those in 2004 - Brazil, Venezuela, South Africa, Iran, Golf Council) can change the world balance?

Economically, the world is more connected. But political rivalry is still intense. The political mentality must be changed to meet the changing realities. Otherwise, this cold war mentality will produce a mess for the world. China's growing economy will create more economic partnerships than anything else. China is being very careful not to let world politics mess its economic development. This will become a long-term strategy as well as a dominating mentality. China is also being very conscious about the international concerns. It now acts as an eager learner willingly. It shows that China has gone beyond the old mentality. That has made China's development a global thing as today.

Do you think China in this first half of the century can surpass the US in pure economic terms, as Goldman Sachs Reports are saying?

It is less meaningful to say that China will surpass US in any given time. However, China's growth is real and sustainable, despite all the imperfections. This conclusion is based more in the massive population size and their desires for a better life than in relation to their economic realities that still are very low. Many regions in China are only beginning to develop. It may be more meaningful to look at it this way - for example, if every five Chinese will use one more Kodak film role a year, China will double the size of US. In the mobile phone business, China is already more than twice the size of the US. But no, China will remain a low-income nation for a long time. A direct comparison may be less meaningful. Even so, China will enjoy a prosperous life if its income per capita reaches 20% of the US. Similar things may also be true for India and many other developing nations. Importantly, we have new lesson for the world: burdensome large population may be turned into a productive force if a fair and rational platform is created. In this context, both India and China are moving forward brilliantly.

China must enter in a G-something world big powers' club? Some think tanks proposed this year that China must enter a G4 with US, European Union, and Japan.

It is highly positive for the outside world to be more open. But let us not expect too much that memberships will get benefits. Even so, gaining access shows the increased international interest in a growing China. Walking out the old world mentality takes efforts for everyone.

Korea and Taiwan are real volatile issues for Chinese strategy, compromising the possibility for a "peaceful rising"?

For China, the Taiwan issue is most urgent. It is so complex, because it involves the US interest significantly. But it is more than a political issue. Economically, Taiwan is well connected to Mainland China. One highly feasible way is not to let the water boil too much and wait for the future generations for solutions. The only problem for now is that politicians on both sides are impatient somehow. It is made worse by the troublemakers in Washington. The Korea issue is easier. China is willing to play its part in finding a resolution. Even so, one should not expect a smooth sail for the Korea issue. It still poses a great challenge for the world.

The Chinese Diaspora (the Overseas Chinese) in South Asia (Singapore for instance) and all over the world (including Americas and Europe) is important for China globalization, as it is the Indian Diaspora (the so called "bollystan" by the Indian strategists)?

So far, overseas Chinese as a group are the biggest investor in China. Also, they add more values by playing a bridge role for China and the outside world. However, their power displays best by their vast numbers. They mostly focus on low-end businesses. For example, Hong Kong businessmen are the biggest investment group in China. But they focus on toys, clothes and household products mostly. Individually, the foreign multinationals are more influential in China as a group. They are the leader in IT, pharmaceutical, energy, auto and other capital-intensive businesses. Most Chinese professionals want to work for the multinationals. For now, more than 23 million Chinese work for the overseas employers.

Fourth Idea: "This hub is bound to expand in all directions. It is now being upgraded and moving toward R&D, financial and services. This process is unavoidable. Also, it may take less time than thought"

China will be the World Factory, the world-manufacturing center of the 21 Century? Or it can be more that that, also with a global positioning in off-shoring business processes and other services, including R&D and innovation?

So far, China has been able to build a manufacturing hub for the world. This hub has emerged in a natural, and even accidental, way other than by design. But it is reaching a rational level by now. This hub is bound to expand in all directions. It is now being upgraded and moving toward R&D, financial and services. This process is unavoidable. Also, it may take less time than thought. Things keep getting fed on their own merits. For this, international multinationals play a large role. So far, around 400 new sizable R&D centers are in operation that are all owned by foreign parties or joint ventures. The Chinese companies are also trying hard to move up in the value chain. For example, China's retail chain business is vibrant, though only about 10 years old. A better Chinese economy will have to come from innovation. Also, it is not restricted to technological issues. To me, it is more concerned with leadership, organizations and governance.

What you mean by that management revolution?

There is a huge room for innovation for all these things and beyond. Otherwise, R&D would not make business sense. In general, Chinese businesses are still weak in building professional organizations and effective management. Professional management is new to China. In the West, a CEO may work for five different companies in his career. In China, he can work only for one. It takes time to build modern professional organizations. Also, there is an overcrowd situation in every sector now. For example, China has some 400 air-conditioning makers and some 100 carmakers. They face deadly competition. To move ahead, there must be consolidations. But rational consolidations demand a more professional setup and management. Otherwise, M&A would not work. Now facing a deadly market competition, China is beginning to embrace merger activities. Indeed, if China's electronics and home-appliances makers, now counting about 1,300, are reduced to half dozen, these resulting companies will be the biggest in the world. This may take a couple of decades to materialize. The great thing is that China is fast moving, significantly due to the international involvement. The troublesome issues concern how to turn both the state sector and private sector companies into professional organizations before meaningful mergers can function right. There are no small issues when China is concerned. Turning China from a government-centered economy into a modern economy demands to create the entire package. It must have all the right components.

Can you give an example?

One large example is with the big four state banks. Despite an economic boom, they have been faltering up to now. There is an urgent way to clear up the banking house. But it is hardly a banking or business issue alone. It takes to reform the entire political-economic framework in place. In short, these four banks must be turned into independent professional organizations with a right ownership and governance as well as a professional management. In particular, it will have to serve the market needs other than government. Today, more actions are taken in this new direction. More is urgently needed.

You wrote that China is an "old man with baby clothes". The major obstacle to China growth is the bureaucratic power?

This uncontained bureaucratic power has been the ultimate and lasting problem for China. In my book, I state that this bureaucratic problem is like cancer and it has spread all over the body. To be sure, China's bureaucratic power has been expanding for 2,200 years, from Qin Dynasty to Mao era. This bureaucratic power has been able to contain all the private initiatives effectively and completely. China has always had a vibrant private sector, but it has failed to create a modern market economy and a true private ownership. Since 1978, China's bureaucratic power has been on the decline. It has directly given birth to the sharp rise of private sector. It is this private sector that is most responsible for a booming economy. What a contrast! This contrast is even more meaningful when considering that China has the same soil, land and people. But people are happier, more prosperous and more productive than in Mao era.

The pragmatic approach of the old Sun YatSen in the 1910's and of the late Deng XiaoPing in the 1970's is not sufficient for a path of political and social change?

Throughout the long search for a better nation in the past 200 years, China has not really had the opportunity to resolve the basic issues of this untamed bureaucratic power from the root-causes. Instead, there have been full of shortcuts. Socialism is nothing but a shortcut in China in the past half century (though many outsiders argue that China has not had a true socialism). Through this socialist slogan, the government power has been expanded into the lowest grassroots levels. The society and people have been deeply trapped for long. China's economy went dead. But the government bureaucrats have benefited greatly. Their power has expanded in all possible ways, and eventually reached the household level. No citizens were left independent, not even monks. This never happened before in China's entire history. In particular, each old dynastic government had a small official body. One hundred years ago, the government had only some 20,000 officials administrating over this vast nation of 400 million at the time. But since 1949, this bureaucratic body has grown to mount to several millions. Yet, in Mao era, China encountered the biggest manmade tragedies with the people's commune, Great Leap Forward, and Cultural Revolution. Even today, it is still the highest, as well as most formidable, goal for China to contain the bureaucratic power.

Fifth idea: "Chinese businesses have tiny profits made at home. Instead, they must seek active partnerships with the outside world. China is to become the dumping ground for low value added business. This new type of strategic alliances will become more popular"

The IBM-Lenovo agreement is a signal of a new Era for Chinese multinationals? Is this a different path from the Japanese strategy of the 1980's that you reported so clearly in the interesting "theatre" dialogue in some chapters of your book?

Chinese companies have gained enormous progress, especially in manufacturing. But they have gained limited progress with brands, intellectual property and distribution network, especially in the outside world. Moreover, their profits are tiny due to intense competitions and low value added manufacturing business. As a result, there is no way for the Chinese to follow the Japanese model for the international expansion. Japanese businesses made healthy profits at home before they went out. But the Chinese businesses have tiny profits made at home. Instead, they must seek active partnerships with the outside world. This is a realistic way for the Chinese. Good progress is also visible in this context. For example, TCL has joint ventures with Thomson and Alcatel on TV, DVD and mobile phones. Now there is the high-profile deal for IBM-Lenovo. Why did IBM do it? It not only dumps a low profit business, but also gains a growing partner that is beginning to tap into the outside world. Also, through partnership, IBM hopes to cross sell more products to China. For Lenovo, it is a dream coming true. Upon it, it is a global player. This could become a trend. That is, China is to become the dumping ground for low value business. This new type of strategic alliances will become more popular. In this way, the best resources from both worlds can be better utilized.

What are the main economic clusters that are changing the international specialization profile of China?

China is on everyone's map. An effective channel is built and being expanded. More international companies will add programs to get more from China, both as a factory and market. There is a need for China to move beyond a mere manufacturing hub. The urgent needs include a better banking, more effective financial system and services, and a higher intellectual work. For a long time, China is known as a cheap labor hub. Now international businesses realize that there is a vast pool of intellectual talents in China. Oracle and HP only need to pay $800 monthly to get a top Chinese engineer. For this, India is far ahead of China. Indian IT companies are also leading global players.

What's your main advice for foreign investors, particularly from Europe?

There are great success stories of European companies in China. They include names like Glaxo, Zeneca, Nestlé, Nokia, Siemens, Unilever, Philips, BP, Fiat, Carrefour, H&Q, Makro, HSBC and Volkswagen, among many others. Siemens has 30,000 Chinese employees and 45 factories in China now. For Volkswagen, China contributes 20% sales already. It is adding 8 billion euros now and hopes to make China half of its global business. Carrefour can make more profits in China than in any other place. Now, it has 60 mega stores and is adding more. Its only problem, seemingly, is that American Wal-Mart is following its tails. For Unilever, China is already its heaven for profits. But it must compete with American P&G and many other brands.

How did they succeed?

Well, all happy players are the same, while the unhappy ones each has its own stories. The successful ones have done all the right things in China. These things include long-term commitment, well-organized and flexible organizations, realistic strategies, and most significantly, leadership. Also, a localized management is significant. No shortcuts. The bottom line is this: grow with China. My book offers more than a dozen case studies, both successes and failures © Gurusonline.tv, December 2004

A TALE OF A NEW AFFLUENT CHINA "China will be turned into a nation called Global China. This makes a strong contrast to what is inside Japan where things are still a Japanese play at large. But China's theater will have countless international actors."

What are the main growth "engines" today in China?

Consumer products. One example, by the end of 2004, China had 330 million mobile phone users. So far, international suppliers have made more profits by selling their chips, components, equipment and raw materials to the growing Chinese manufacturers. But the badly needed things are services, especially financial, education, logistics and retail. In short, China needs everything and anything can be profitable if done right.

Can we consider that a middle class is booming in the Chinese society?

Urban centers are the hubs of great wealth. So, 50 top Chinese cities possibly take 50% or more of wealth in China. Most urban residents in the big cities are already middle class one way or another. Of which, businessmen, teachers, civil servants and professionals are the core. The rural income growth is less impressive. But 150 million rural migrant workers effectively narrow the gap. Many of them make profits in cities. They then open their own shops at home. It is said that they run millions of small retail outlets and beauty shops now. This is a very significant factor in promoting an overall development.

Probably in less than a decade China will have more cybernauts and customers (for a market economy) than the US. What will be the major consequences?

It will produce more international flavors. It will be more open, diverse and mature, but more competitions as well. In a way, China will be turned into a nation called Global China. This makes a strong contrast to what is inside Japan where things are still a Japanese play at large. But China's theater will have countless international actors. In many sectors, such as auto, films, beauty products, retail, and IT, the foreign businesses are also the leading players. In short, China is becoming a global theater. This makes China's development more positive and interesting. A grand lesson from China is this: no nation can truly develop without making itself open to the world.

A PERSONAL STORY THE LUCKY GENERATION

What impressed you more - as a young urban Chinese - in the shift period after the fall of the "Gang of Four" (the leftist heirs of Mao)?

It was an age of wonder and hope. The most impressive thing in 1978 was that colleges were reopen. Some of us, say 4% of youth, could go to college (Today, this number is much bigger). Before then, for some 12 years, urban high school graduates were sent to work in rural regions. All in the sudden, we could get a college education. Immediately, schoolteachers became important. Also, kids took books seriously. Some incidents happened where kids who failed to enter college committed suicide. It was also an age of eye opening and rationalizing. In the late 1970s, a traditional government centered society suddenly became restless, having gone through all the bitter events. All Chinese became interested in things outside China, anything and everything. We were eager to know what is in the outside world. We developed a mentality that everything in the West was great and everything at home bad. That was the beginning point to open China to the outside world. By the high intensity, we vaguely felt that bigger things would emerge. Yet, we did not quite know what.

In your book you consider yourself and the generation born in the 1960's as a lucky generation. Why?

This generation is a lucky group indeed. They directly entered the era of reform at the right age. They have more opportunities than their elders. They have been young enough to get what they want. The society has changed so that they can focus on things they are interested. Many high-profile businessmen today are in this age group. They are more open and eager to accept international things.

Do you think this lucky generation is today the anchor for the changes needed?

This lucky generation has done a right job. They have performed a leadership role in changing things for the last two decades. They have created a new competitive economy at large. But the future belongs to the younger generations. They are more open, their tastes are more international, their desires boundless. They are more egoistic, entrepreneurial and better educated. They will lead China into the next stage for sure. Also, changes are so dramatic that an 8-year difference may make a new generation - a reality in China today.

STORY NUMBER TWO A critical view from the center of the Global Power Chalmers Johnson CHINA REPLACED THE UNITED STATES AS THE TOP EXPORTER TO JAPAN "The US is treading the same path followed by the former USSR"

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