Ian Welsh

The horizon is not so far as we can see, but as far as we can imagine

Category: China Page 9 of 11

China Thinks Strategically and We Don’t

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On November 9, 2017

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In the West, we have not lived in rich states for over two generations.

This statement will strike most readers as nonsense, and should, but it’s true.

We think of ourselves as rich because we have a lot of consumer goods. Cars, electronic devices, and so on.

But the states we live in–the governments–have been poor. Their money is tied down and large projects do not get mobilized–things like the moon shots, interstate highways, and so on.

Our states are poor. Their ideology, with a few exceptions (smaller countries, all) is to let the rich get richer and have the rich spend money. So instead of NASA leading a huge space program, we have a variety of private companies like SpaceX building technology which a rich state would have created 20 years ago.

China doesn’t think this way. Chinese citizens may not be as rich as the average westerner (though there are plenty of rich Chinese as every world-class city that allows foreigners to buy its real-estate has found out, much to the sorrow of its ordinary citizens), but the state is rich, and the state and the companies it controls and influences are rich.

Most of our companies are not driven by the bottom line. Rather, they are driven by how much money they can create for those who control them. This is often not the case for Chinese companies.

Case in point: The global shipping industry is in grave trouble. Who is buying up those shipping companies in trouble? China. And they’re also buying up control of ports all over the world. China has majority control over many European ports, but no outsiders have majority control over any Chinese ports.

These are strategic assets. With control of shipping and ports, China is sure to be always able to move products and commodities wherever it wants, and its navy also has places to dock.

This simple strategy was understood for centuries. Countries went far out of their way to create large merchant marines, to protect ports and to retain control of them. Some assets are worth more than their market price in a slump, because everything else relies on them when things go bad. (Imagine Britain and the US without strong merchant marines in WWII.)

This is the way China thinks: They are buying up vast quantities of northern land in preparation for global warming, creating entire new waterways, deciding to build entire green cities.

China’s state is rich. The Chinese companies the state considers important are rich. They can do big things because China recognizes that those big things will matter in ten or twenty or forty years.

Chinese leadership still thinks strategically, and they can afford to do so.

Whether this will continue to be the case is unclear. The next generation of Chinese leadership will draw heavily on the princelings, who have never known real adversity. The economy is still suffering from the mercantalist trap, and widespread corruption and lack of a quality ethic causes huge issues. Aquifers are being drained ferociously, and climate change will hit China hard.

But unlike most of the rest of the world, China is actually trying to tackle problems, to think decades ahead, to plan, and to do big important things.

Some of what China considers important, I don’t like–for example, its expansion of a truly oppressive surveillance citizen which will include a public score for every citizen. However, this doesn’t change the fact that China does big things, good, bad, or flawed, while we watch approaching catastrophes and gently hum to ourselves, then check our phones.

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China’s Economy, Freedom and the Threat of War

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On October 18, 2017

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This article from NPR is useful for context.

The 2008 financial crisis hit Chinese exports. Approximately 20 million people lost their jobs, and had to go back to their villages, so the Communist party did a huge stimulus, but since China is vastly corrupt, that lead to vast corruption.

The Communist party, and Xi in particular, saw that the economy was unstable, and that scared them, so they started suppressing dissent even more fiercely.

For a long time my analysis of China has been simple, the Communist party stays in power as long as they keep the economic growth going.  If they don’t, the members of the party (and remember, it is a family affair, with high officials passing power to their incompetent children), are at risk of death.

The Chinese are very violent. There are riots all the time. Villages confront police and even the army, by which I mean, fight them, regularly. I recall one ethnic riot in a factory, where the workers ripped apart the beds in the dorms to get iron bars to beat each other with.

These people are on the edge, and they are still used to hard manual labor. They are not particularly scared of violence.

This is is also a great danger to everyone else. If China’s economy goes truly south, and the Chinese Communist party leadership is scared, they will use jingoistic nationalism even more than they do already, which is a lot.

And if blaming foreigners and going to war is required to keep Chinese minds from blaming who’s really at fault (their own leadership), well, they’ll do that. Millions of ordinary citizens dying, to the leadership of almost all countries in history beats the leadership dying.

This is exacerbated by two things: that Chinese leadership is about to run out of people who didn’t grow up powerful and comfortable, meaning truly competent people, and that China will be hit massively hard by aquifer depletion and climate change.

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For quite a while China has basically, despite rampant local corruption, been run more or less competently. But as the old leaders aged out, that became less true. It’s soon going to be almost completely true (as it is in the US and most of Western Europe.)

Russia is probably the country which needs to worry most. Yes, they have nukes, but they also have a vast amount of land right north of China which is virtually unpopulated, and when the Chinese think they might start to starve, nukes, exactly because it is mutually assured destruction if they are used, may not be a deterrent.

But other Chinese neighbours should worry as well, especially those that don’t have nukes.

It’s going to be an interesting time.

Note that China will be hitting incompetence about 5 to 10 years before Western demographic and political trends will give the West a chance to replace its incompetent leadership.

Not healthy for China, or for anyone else, really.

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The Trump China Showdown Aligns with Reality

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On December 12, 2016

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Trump received a phone call from the Taiwanese president. That was a violation of the One China policy, where in order to have diplomatic relations with China, one cannot have formal relations with China.

It is quite clear that Trump did this deliberately, it was not a gaffe, but planned.

China stated this was unacceptable, but was willing to pretend it was a gaffe.

Trump doubled down, accusing China of currency manipulation hurting the US (not true right now, but massive in the past), of not helping enough with North Korea, and of unacceptable behaviour in the South China Sea, where it has been building islands in order to seize control of the sea. He said he sees no reason to abide by One China if the US isn’t getting something in return.

China’s official response is that there will be no negotiations over anything without One China first.

A Chinese tabloid which is party associated said that if the US rescinded One China, China should invade Taiwan and arm American enemies.

And here we are.

Some basics. One power maximum; the potential power, of a modern state, is equal to its industrial power. Many nations may not have as much power as their industry allows, but this is the limiter.

China is now the world’s largest manufacturer. It is the world’s potentially most powerful nation. However, China’s policy has been (quite sensibly) to gain the base first, then arm, for classic guns or butter reasons.

China did manipulate its currency to gain their manufacturing base, but the US and other Western elites were entirely complicit. China offered large profits to individuals and corporations, and they took that money. It’s that simple.

China’s ascension did not just hurt the US, it hurt Japan, who is probably America’s most loyal ally (with the possible exception of the UK or Canada).

The manufacturing jobs performed in China would have been, in an alternate universe, done by the people who elected Trump in the Rust Belt.

Trump and his advisors do not believe that China and the US’s interests are aligned; they see China as the rising power, who is rising at the expense of the US.

This is not insane. In fact, it is accurate. It is possible to imagine a world in which that rise led to shared prosperity, but no one is offering such policies and no one ever has.

Now, I want you to turn your attention to Russia. Yes, Russia.

See, the problem with NATO expansion, the overthrow of the Ukrainian government, the color revolutions, and sanctions against Russia, and all that stuff, is that it was forcing Russia into China’s camp.

Russia does not want to be China’s ally. Russians (at least in the past, not so sure any more) would far rather have allied with Europe and the US, but Europe and the US would simply not allow it. Running on crazed fumes from the Cold War, the US and Europe feared Russia, who is no longer a threat to take first sport, rather than China, who is.

Note that Trump has also expressed great skepticism about NATO. He puts it in money terms: “Why should we pay for Europe’s defense?” But the end is the same, a NATO pointed at Russia doesn’t make sense to Trump or his advisors.

And Trump’s plans for the US involve a change in trade, anyway. People are scared of a trade war, and they should be.  Right now, what Trump is saying is at a meta-level which most people are too stupid to get: China is going to have to make a deal which helps American manufacturing, and everything is on the table in order to negotiate that. Everything.

Because Trump owes his election to the Rust Belt. He must deliver for them, in four years, or he will not be re-elected. His people, at least, will understand this. The election was too close. Trump must deliver.

And if China won’t cut a deal? Fine, slap tariffs on them. America is still America; American consumers can still consume, and if it turns into a trade war, manufacturing jobs may well come back to the US.

This is high stakes poker. It could cause a serious war, or it could send the world economy into a serious tailspin.

It is also a realignment moment. The US is pivoting from treating Russia as a big enemy, to treating China as the big threat. This is, whether you like it or not, rational: China is the actual threat to American hegemony.

I assume Trump thinks there is a deal to be made–perhaps he even thinks there is a way to make the deal into a win/win. We will see.

But do not think this is pure insanity, or that it is not well thought out. This is based on a world model in better accord with actual world conditions–more so than the world model under which Obama was operating.

If the status quo continues, the US will be superseded by China. At that point, if China and Russia are allies, options for the US are extremely limited. China is the rising power, Russia is a great power, but won’t a threat at the “super power” level again in the immediate future.

I will remind readers, once again, to stop assuming that Trump and his team are idiots just because they are doing things in new ways. I do not know if this pivot will work, and it could blow up spectacularly, but it is not prima facie stupid.

In fact, politicians who actually put the US’s real interests first would have never allowed China into the WTO, and certainly would have gone out of their way to make sure that China’s ascendence was a win/win, rather than a win/lose OR (if they were ruthless and slightly less smart) they would have done everything they could to prevent it. (I would not have favored that, to be clear).

Certainly, the US should have pivoted East years ago. This is a move which is made much more dangerous and problematic than it could have been by the fact that it wasn’t done when it should have been, enabled by an absolutely deranged policy towards Russia, which schizophrenically treated Russia as if it were both powerless and a huge threat.*

The world is getting a lot more dangerous, fast. But it was going to anyway. This may not be the best China policy possible, but it at least acknowledges reality.

(*I understand the impulse to prevent Russia from turning back into a huge threat, but that could have been managed with far less difficulty and in ways that wouldn’t have estranged Russia.)

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What Chinese Market Turmoil Tells Us About 2016

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On January 13, 2016

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Since the last financial crisis, I have repeatedly said that the most important economy in the world was now China. China is the world’s largest manufacturing nation. It is probably the world’s largest economy. It is the largest market for commodities, which many of the world’s nations rely on as their primary exports. Because we have gone to a world system which encourages manufacturing overseas for First World nations, this is unsurprising.

China has been creating, publicly and privately, more money than the US, Japan, and Europe combined. Multitudes of it.

Even when it hasn’t been the strongest growing economy, it has driven the growth of many other nations; direct trade with China might not dominate trade for some nations (for example, Brazil), but China determines the price of key commodities which many nations sell.

Some economists will argue that because trade is a small percentage of a particular country’s economy, it does not matter. This is like saying that since the food I eat is a small percentage of my body weight, eating less and worse food doesn’t matter.

Activities at the margins determine prices, economic growth, and employment/unemployment. China is the lynchpin economy which determines these things for much of the world.

So, we’ve had an ongoing commodities price crash, ongoing for some time, with most of the attention on the price of oil (now down to 2003, Pre-Iraq war prices). But commodities overall have crashed, and even countries which have maintained GDP growth (like Australia) have taken huge hits in their labor markets.

With prices down, growth stagnant or down, there is simply much less demand. This is your standard vicious cycle: The Chinese can sell less manufactured goods to the rest of the world, therefore need less commodities, etc.

The Yuan is becoming a reserve currency, and that means it is being unpegged from the dollar, regardless of whether most people can admit this or not. So the decreased exports are putting pressure on the Yuan, everyone’s money is running to the currency of last resort (the US dollar), and people are trying to get out of volatile Yuan denominated assets.

All of that is a long way of saying: This is the year the shit hits the fan.

We never left the depression after the financial crisis. We did, however, still have a business cycle. There was a recovery, expansion, and so on. Now we’re (and by “we,” I mean the entire world, with some exceptions) heading into recession.

That’s a recession within a depression, wherein many First World nations’ median income actually fell, and where employment in core nations never recovered in terms of population percentage.

This is going to hurt.

This is going to really, really hurt.

I’ll discuss specific consequences later, and what you can do. Do not assume this won’t come home to the US. A lot of the pain is being concealed in the US by the flight to the dollar and the oil price collapse, but it’s still going to hit and the pain is still going to hurt.

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As the Dow Jones Drops

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On August 24, 2015

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Down about 1,000 as of this writing. (Since mostly recovered.)

Let’s review: First, various “emerging economy” exchanges lost value, then China, then Wall Street.

The actual economic contagion started with resource prices. That was driven by reduced demand, primarily from China. Oil prices (only one commodity), already under pressure from moderately increased supply (it was less than boosters make out), were crashed by Saudi Arabia’s decision to increase production rather than cutting it back. There’s plenty of speculation why, the practical result was to trash multiple exchange rates and economies and to encourage everyone to overproduce, breaking OPEC solidarity. I don’t think Saudi Arabia is going to win this bet, whether it was to crush specific countries (Russia, Iran) or to crush American high cost oil production.

During this period we had repeated currency devaluations in an attempt to increase the competitiveness of exports. These devaluations had marginal effect at best, didn’t work at least.

China’s growth had been slowing (thus the reduction in their demand for commodities), they encouraged a stock market bubble as consumers were proving reluctant to continue piling into real-estate. They printed vast amounts of money, at least twenty times as much as Europe, Japan, and the US combined, but exports were no longer leading growth. Regular Chinese and private firms have massive amounts of debt.

To put it simply, China had reached the point where export-led mercantilism was no longer working. They needed to shift to domestic consumer demand.  They chose to try and inflate bubbles instead.

Virtually every country in the world was either rolling off a cliff, or struggling to keep their head above water. Most of the South of Europe had never really recovered (Ireland is a partial exception). Latin America was diving, Turkey’s real-estate driven, neo-liberal growth was stalling, India’s “miracle” was always more of a paper tiger than most made out, being concentrated to a minority even as the average number of calories consumed in the country dived.

But this started in China, which is important.

We are now in a situation analogous to the late 19th and early 20th century. America is the global hegemon (as Britain was then), and China is the world’s most important economy (America was then.) China is the global manufacturer. It buys the most resources, which is what most of the world sells, since most countries have given up manufacturing most goods for themselves. It prints the most money, dwarfing America and Europe. Its rich people are driving up real-estate prices all over the globe.

Yes, yes, by some measures the US economy is still “bigger,” but those measures are even more inflated than inflated and bogus Chinese ones. China is the key maker of goods. There are a few other countries that also make goods as the most important (not largest, most important) part of their economy. Everyone else is a commodity producer, a financier, or trying to sell intangibles (intellectual property, whether inventions or fiction or branding).

So what and how China does now matters most, economically. The contagion started in China, spread to emerging economies, money fled to the US and a few other safe havens, China’s economy continued to stall, its stock market fell despite radical attempts to keep it inflated, and that has now come home to New York.

Some are worried this is 1929, but in China. I have been stating for years that the big one would start in China. Whether this is it, we won’t know for a while (just as they did not know in 1929 that it was 1929).

Welcome to the new world. The US and Europe put a LOT of effort into moving as much industrial production as possible to China. China just promised that a very few people would get very rich doing it, and those people made sure it happened. (Look up the profit margins on iPhones.)

I will note that there are still bubbles. Real-estate bubbles (Canada, Britain, a few important US cities, Australia, etc.) and a vast amount of highly leveraged derivatives have been pumped back out since the 2008 crash, since no one actually bothered to regulate or forbid them. And banks and financial companies are now larger and fewer, making the economy and financial markets both more subject to contagion.

The elites learned from 2008 that the important thing to do in a financial crisis is to just print enough money and relax enough accounting rules–extend and pretend. That will be the play again this time if this contagion turns truly serious. I would guess that it will work, sort of: More zombies will be created, they will need higher profits, the real economy will be even more stagnant. And people like Corbyn, Trump, Sanders, and so on will reap the rewards electorally.

Printing money is a viable strategy only as long as the elites control the regulatory apparatus (including prosecutors, finance departments/treasuries, and central banks), legislators, and executives. The reason people are screaming so loudly about Corbyn is not because he can’t win in England, it’s because if he did, and he’s serious about his policies, he will inevitably have to confront them. And an English PM with a majority he controls is pretty much a dictator.

A lot is at stake here. Our elites are losing control over the electoral apparatus and the common narrative. In both cases, the signs aren’t terrible yet, but they are there; the rise of the old right and the old left is visible.

So, there is more pain to come, but there always was. The decision was made in 2008 and 2009 to not allow an actual recovery and to protect the rich at all costs. There was a cost, it has been paid for the last six years, and this is yet and simply another one of those costs. China, as an exporting power, cannot carry the world economy when the people to whom it exports insist on various levels of austerity (be clear, the US is in austerity too, just not as bad an austerity as Europe).

The way the Chinese are fumbling this crisis also convinces me that they are now past the point where enough competent people who remember poverty and fear remain in power.

We continue to live in interesting times.

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Chinese Stock Market Woes and the Pre-War World

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On July 9, 2015

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Bloomberg:

China is bolstering efforts to arrest a selloff that has rippled through risk assets globally, banning major stockholders from selling stakes as more than half the country’s listed companies are suspended from trading.

Expect some ripple effects, given that a LOT of people can’t sell formerly liquid assets—if they need money they will need to sell offshore assets.

As of this writing, the stock market is slightly up–but yeah, that’s with over half the companies frozen and with vast efforts by the government to funnel money into those that aren’t frozen. A ton of investors are still selling what they can.

Let’s talk China for a bit. I’ve long said that China is the place to watch: It is now a larger real economy than America’s, with a larger population, and it is the largest industrial country in the world. Making stuff, real material stuff, still matters. Americans trumpet innovation, but Britain was still producing more patents than America for years after America was the biggest economy in the world; the stuff just wasn’t made in Britain.

Commodity prices have been dropping in virtually every commodity, not just oil. This is driven by, yes, China, and it affects every commodity exporting country in the world.

(Insert ritual cursing out of Canadian Prime Minister Harper for his policy of doubling down on oil and abandoning manufacturing, thus critically damaging a mixed economy policy well over 100 years old.)

China has been vastly overbuilding infrastructure and real-estate for some time. The media is replete with stories of vast tracts of uninhabited high-rises and so on. Much of what has been built is of dubious quality (not necessarily entirely bad, if it has to be rebuilt, from an economic viewpoint, but disastrous from an environmental one). Peasants in China love their lives; workers hate theirs, even though workers have much more money. This is a direct analogue of Western industrialization, by the way, people had to be forced off the land. Early industrialization makes life much worse for most people directly involved.

I can’t speak directly to Chinese leadership, but I’d guess that we’re now reaching the point where the last competent people are near the end of their careers.  Soon the Communist party will be run largely by princelings: entitled, greedy, and short-sighted.

China is a violent nation. Huge industrial protests happen all the time, entire villages fight (and sometimes win) against army units, etc. The violence is often savage—hand-to-hand melee with iron rods and so on.

One wonders why the Communist party keeps cracking down, installing more surveillance, etc, etc. If they lose control, or if they don’t make it to the airport before the mob, they and their entire families will die, and die messily, or worse.

If things go really pear-shaped in China, the Communist party WILL blame foreigners. You can bet every cent you have on it. War is possible. China is making the necessary preparations and pre-war blocs are forming.

Now, this stock market crash isn’t necessarily the precipitating event. I doubt it is, and even if we look back in 20 years, in the midst of the sweet nuclear glow, and conclude it was, we won’t know for some time that it is.

But we are in a world which is a ton more dangerous than most people, many of whom buy into this “the world is getting less violent” stuff, are willing to believe. Yeah, the world is less violent than it was for most of the post-WWII period, but such periods, well, they end, when the conditions which made them possible end.

The Chinese can still print a ton of money. The lesson the elites took from the Financial Crisis has been “just print money if people who matter are hurting.” The Chinese and Westerners put different groups of people into their “who matters” categories, but both are willing to run the virtual printing presses.

What This Means: It’s likely that the situation won’t go really pear-shaped until such time as running the printing presses stops working as a preventative to staving off disaster. Unless until someone gets stupid and doesn’t run the presses when they should because they think the people suffering don’t matter enough to bother with.

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Meanwhile, in China, There’s a Huge Stock Market Crash

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On July 6, 2015

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It has dropped about 30 percent in the past three weeks, and today:

BREAKING: CHINA’S NATIONAL SOCIAL SECURITY FUND (PENSION FUND) ORDERS ALL ITS ASSET MANAGERS “NOT TO SELL A SINGLE STOCK” – CAIJING MAGAZINE

Yeah.

And this:

In an extraordinary weekend of policy moves, brokerages and fund managers vowed to buy massive amounts of stocks, helped by China’s state-backed margin finance company which in turn would be aided by a direct line of liquidity from the central bank.

China has also orchestrated a halt to new share issues, with dozens of firms scrapping their IPO plans in separate but similarly worded statements over the weekend, in a tactic authorities have used before to support markets.

Do I need to explain that this is really, really stupid? The Chinext had higher price-to-earnings ratios than Nasdaq when it crashed. These valuations are insane; they do not make sense. This is stock market as ponzi scheme.

Stock markets are socially useful for only three things:

1) IPOs—so that companies can get money unencumbered by debt to undertake large projects. (These days, usually so the founders can cash out, which is at best a limited social good.)

2) Secondary stock offerings; same thing.

3) As Keynes pointed out, to give sociopaths something to do.

There are better ways to deal with these and all of the other supposed advantages of stock markets. (For example, if you want people to be able to share in the success of companies, just tax them and distribute. We would be hard-pressed for a more uneven method than the one we’re using today.)

Stock markets are largely useless to the real economy at this point. But when they go wrong, they can do immense damage to the real economy IF regulators and politicians and central bankers treat them as anything but a game in which money is moved from one set of hands (investors), to another set of hands (brokers, bankers, and since the introduction of stock options as the main way of paying executives, high ranking corporate wankers). Stock markets are snake pits of fraud and conflict of interest and everyone professionally involved in them must be treated as “a criminal the second they can get away with it.”

It’s time to change stock markets entirely so that they are useful again for raising funds for new companies or major new projects without debt and are not so dangerous to the rest of the economy. I suspect the best way to do this is to shut the entire current racket down, mandate dividends and controlled buybacks for all remaining stock companies (public stock companies in the US have dropped by half in the last 20 years anyway), and move to a new model, whatever that will be.

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Fourteen Points on the World Economy as the US GDP Drops .7 Percent

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On May 29, 2015

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So, while it generally takes two quarters for a recession to be so-called, it may be that the recession is here.

Let us recap the non-recessionary period:

  • The percentage of people employed in the US never recovered;
  • More than the total amount of growth went to the top four percent or so, with most of that going to the top one percent and most of that going to the top .1 percent;
  • The stock market had a huge bull market, even though the economy wasn’t working for anyone but the top few;
  • Outside America, the “south” of Europe never recovered in any meaningful way, and most European nations generally did badly for most of their citizens;
  • Various resource nations did well for a time, but their success was based on demand from developed nations or, more commonly, from China;
  • Chinese demand collapsed some time ago;
  • China has been printing more money than either Japan or the US; much more;
  • Japan’s “unconventional monetary policy” has been a roaring failure–if its intention was to get the Japanese economy going again;
  • The collapse in oil prices last year helped the US briefly, but because the rest of the world has rolled off a cliff and because those gains couldn’t go widespread, it was only briefly (this is as I predicted at the time);
  • Canada’s economy was hurt badly by the oil price crash, and because the mixed economy has been critically injured, there is very little else to hold up the economy;
  • Both Britain (or London…almost the same thing) and Canada have huge housing bubbles, and those bubbles, with the addition of financial games, are all that holds those economies together at this point;
  • Britain never actually recovered either, for the majority of its citizens–just a large enough minority to elect Cameron;
  • Australia has tied itself massively to resource extraction on the back of Chinese demand. There is no meaningful Australian economy whose fate is not tied to China.
  • India’s development is hollow neo-liberalism, and has seen an actual decrease in per capita calories. It is consumptive and limited to a few key areas.

Let me put this another way: The developed world is in depression. It has been in depression since 2007. It never left depression. Within that depression, there is still a business cycle: There are expansions, and recessions, and so on. Better times and worse times.

While cheap solar is a big deal, it is not yet deployed sufficiently to break the “widespread demand will crash the economy through oil price increases” problem, and this is exacerbated the by the deadlock rich elites have on most of the world’s politics and economic policies, since it is not in their interest to solve problems, but only to become more rich.  Not that solving problems is something they mind, if it makes them richer and keeps everyone else poor.

The world still has very few problems we couldn’t solve if we acted on them in a productive way (though some, like climate change and the great die-off, are beyond the point of no return for catastrophic damage), but that’s largely irrelevant while public policy remains in the hands of oligarchs. There is some reason for hope, as left-wing parties rise in Europe, but those green shoots are still nothing but green shoots.

I suggest that my readers who are able to make money do so now, you may soon find that you can’t. This is especially important if your employment is precarious.  Take care of yourselves, and take care of each other, unless you are lucky enough to live in the few rich, social democratic states left, you cannot expect much aid from your governments.

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