Ian Welsh

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

Category: China Page 9 of 10

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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Why We Should Want the Return of a Two World System

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On February 16, 2015

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Before the collapse of the Soviet Union, there was a two-world system. If you didn’t like the deal that US was offering you, you could go the USSR.  If you didn’t like the deal Russia was offering you could go to the US.

While the US probably offered a better deal, especially in later years, you could have a pretty decent life as a client state to the Soviets.  Cuba under Castro had a higher standard of living in practically every way than it did pre-Castro, when it was an American client state.

Equally, you could play the two off against each other, looking for the best deal.  This made it harder for them to screw you over.

As the USSR weakened, the deals became worse.  The USSR of the 80s could not offer what the USSR of 50s could.  Still, the ability to tell the superpower of your choice, who feared and hated the other superpower, that they had to treat you at least slightly right had benefits.

I certainly don’t want to romanticize the cold-war period.  There were ugly coups, torture regimes and wars.  There was famine.  But while we have less of that today, we don’t have less of it because of the end of the cold war.  Indeed, we have more failed states than we did during the cold war, because it is in no one’s particular interest to pick them up.

So one of the events that I have been tracking since the early 2000’s (as has Stirling) is when a viable second bloc would emerge.

To be viable, a bloc must be able to:

  • Provide relatively high technology;
  • Provide development: power, roads, railways, etc;
  • Provide the consumer goods people want;
  • Provide credit;
  • Feed countries which need food;
  • Provide energy (which still means oil and other hydrocarbons, though that’s changing);
  • Provide some sort of credible military aid or umbrella.

Yesterday I wrote about Russia creating its own bank payments system to compete with the West’s SWIFT. This is important, because since the fall of the USSR, the West (or more accurately, America) has increasingly used this to punish those nations it does not like.  Piss off Washington and they will shut down your ability engage with global credit markets, and even the ability of your citizens to use credit cards.  Pretty soon you can’t buy what you want, even if you have the money, or you pay a huge premium.

So the creation of a Russian SWIFT, while woefully inadequate by itself, was a first step towards meeting one of the needs of a new bloc with rivals the West.

The linchpin nation in any new bloc would be China.  China can credibly provide development, credit and consumer goods (they make much of them anyway.)  But China will also need countries which can supply oil and raw materials: Russia, Venezuela, Iran,  Argentina, and so on.  Much of South America would rather sell food and raw materials to China (or Russia, or whoever) than to the US, because they remember, well, not being treated very well by America during and after the Cold War.

Russia’s military technology, while not as good as America’s, is good enough for most purposes, and China, as is usually the case, has vast amounts of shipbuilding capacity for those who want a navy.  America’s space program is charging forward (mostly privately) but Russia still has plenty of lift capacity for satellites, and China is working hard on its space program.

The BRICS have created their own development bank, as well, so combined with an expansion of the new SWIFT, credit which can be used to buy almost anything you want, or need, will be available.

This, my friends, is the configuration in which the unipolar moment (which has lasted two and a half decades so far) ends.

It was always going to end, for all things do, the question was how soon.  American actions have accelerated what should have taken a couple decades more, significantly, by marginalizing too many countries.  Marginalizing or destroying the occasional country was acceptable, but the number marginalized is just too high, and they have too many resources.  Combined with a great manufacturing nation, they have essentially everything they need: they don’t need the West.

And they may be wondering why they are paying intellectual property taxes (that’s what they are) and interest fees to the West, when the West clearly isn’t acting in their interest.  Why have America and Britain gain all this, when they can reap the money themselves.

Oh, there are still some areas where the West is clearly ahead, from turbines to aerospace.  But they tighten by the year, and they aren’t anything necessary any more. Virtually everything you want, save a few luxury items, you can get without America or Europe being involved.

The question now, then, is the timing and the exact events.  But the broad outline is visible and will accelerate, because it is in too many countries self-interest.

The Great Game, the Great Game never ends.

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How Ebola Aerosolized in Pigs Could Kill Millions

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On October 17, 2014

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Up until today I’ve been moderately sanguine about Ebola outside of some poverty struck African countries with compromised health care systems (and places like Greece.)  The main danger is incompetence and austerity, as with the CDC and Texas fumbling their Ebola cases.

No more.

Ebola is aerosolized in pigs.  This may not seem like a big deal, but in many countries, like China, pigs live in very close proximity to humans.  If Ebola gets into South China and the Chinese do get right on it, it really could kill millions.  In any country where large numbers of people live cheek and jowl with their pigs,  this is potentially explosive.

And if it does explode that way, well, some of those people will wind up traveling to your first world country while asymptomatic (or while with a light fever).

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Rumors of the Ukrainian Rebels demise

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On September 9, 2014

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were exaggerated.  Or rather, the information in the Western press was essentially propaganda.

I think it’s worth acknowledging that I swallowed it, only to be corrected by a number of readers.  The Ukrainian rebels were tougher than I expected, Russian support seems to have been more significant and the Ukrainian military was simply not up to the task.  They couldn’t win the street fighting.

This means that Russia still has a strong negotiating position with regards to Ukraine’s future: their preferred option, of course, is federalization and forbidding NATO expansion into the Ukraine.

Meanwhile we must continue to keep an eye on sanctions.  The risk here is real sanctions being imposed on Russia, Russia retaliating with a gas shut off and an economic collapse in Europe.  Note that the key player here is actually China, who can easily keep Russia afloat if they choose to (China is printing far more money than the Fed was at the height of its unconventional monetary policy.)  The West keeps assuming it is the only game, and that it controls the money spigots: shut them off and they can crush anyone.  That is no longer true.  The question will be “what does China want to keep Russia afloat, or alternately, from the West, to cut them off.”

In my opinion, while China and Russia have some differing interests, those pale compared to their need for each as allies against the West.  The American Foreign Affairs and security establishment has been clear that they want to pivot against China, whom they see (correctly) as the largest threat to American hegemony.  For China to allow the West to crush Russia would be a colossal mistake, especially when the cost of keeping them alive is not that significant a world awash with printed money.

As for Europe, they are being fools and they will pay the price for it.  Satraps of a self-interested and cruel hegemonic power are never treated well, and Europe does not need to be a satrap, yet chooses that path against their own self-interest.

So be it.

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The Russia China Axis continues to form

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On May 23, 2014

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So, the Russians and Chinese, after 10 years of haggling, have signed a gas deal worth 400 billion or so.

The timing is not coincidental, of course: Russia needs to diversify who it sell to.  The next major step, which will be years in coming, is arranging how to supply India.

The US has been pivoting against China, reassuring its allies in the Pacific, that US ocean, that it is on their side against a China which is pushing territorial claims aggressively.  China knows that many in the US consider it the real enemy: the real threat, because of its burgeoning economy and its massive industrial base (shipped to it by American capitalists, selling China the rope to hang the American Empire with.)

As I have noted before, the price of the Ukraine is a firm alignment of Russia with China.  Russia needs China’s goods, money and political support; China will also be happy to have a security council ally and buy all those Russian commodities.

Japan is a firm American ally, and likely to remain so. It will increase the size of its military, but Japan’s long stagnation has now turned into actual decline, with regular trade deficits with no end in sight, since it has been shipping much of its industry offshore, and not creating the new generations of the best or cheapest goods.  Demographic decline, likewise, continues, and Japanese xenophobia makes it impossible for them to use immigration as a cure, while the declining economy and tight pressed quarters means there’s no reason to expect the Japanese themselves to start breeding.

Europe has firmly aligned with America, indicating willingness to cut its own throat with trade sanctions against Russia, if necessary.  South America and central America is unlikely to align en-masse with America for obvious historical reasons: America has been the enemy of most states there for over a century, with its willingness to attempt to overthrow any government it doesn’t like.

The Middle East grows less important as solar and alternative sources for oil come on line, and as their own reserves deteriorate.  To be sure, it will matter for decades yet, but it is no longer the most important region on the earth.  Sub-Saharan Africa, sadly, is largely irrelevant: they will sell their resources to whoever pays for them.

This leaves India s the last major country in play.  But for them, the smart play is to stay out of it, keep good relations with both sides, and let China and the US slag each other, coming up the middle to be the next hegemonic power.

To be sure, many will say that China and the US can never seriously fight: they need each other too much.  Such people are fools: American consumers grow weaker, US treasuries are a sunk asset, and China will have to move to a domestic consumer society at some point: raising the income of their own citizens and selling the goods to Chinese.

The game of empire never ends, it only changes.  The Russians are now aligned with the Chinese because of European and American stupidity: Putin and the Russians, for many years, longed to be Europeans and it would have required only a little respect to keep bring them into the Western camp.

Such strategic mistakes often seal the fate of Empires.

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The Prelude to the End of the American Era

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On April 25, 2014

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And so it begins.  Russia is not restraining the separatists, the Kiev government is finally really sending in the troops, Barack Obama and EU leaders claim they will impose real sanctions and Russia and China are set to ink a deal to export Russian Gas to China, the world’s industrial heartland.

If the sanctions are imposed, for whatever reason (Russian invasion or not), they will force the creation of a second economic, non-dollar bloc.  Russia is not Iran, and China is not going to cut off Russia to please the West, rather the contrary.  The creation of a real non dollar bloc which can make almost anything people want, and which has access to essentially all key resources from oil to rare minerals, metals and food is an existential threat to the hegemony of the West and its allies like Japan and Korea.

Be clear, real sanctions will impose real costs on Russia, but they can bear them.  They do not need to borrow money from the West, they cannot be Troika-ized. They have key resources that someone will buy, even if they can’t buy in dollars, because Yuan or rubles can, actually, buy most of what most countries need to buy.

Absent China, Russia cannot be isolated.  Cannot.  China is unlikely to cooperate.  Sure, they could view eastern Russia near their borders as ripe, but Russia as a subordinate state in the Chinese sphere means they get everything they really need from the Russians anyway, plus backing in a military confrontation with the current developed world.

The Chinese are not stupid, they know that if a real war breaks out, it will be between them and America.  They are the rising power, the naturally most powerful and militarily powerful state in the world, recovering from a hiatus of a few centuries where they lost their status.  Russia has a lot to offer them, and the Chinese cannot be coerced by sanctions.  Sanctioning China would backfire so hard that the US was go into a real economic collapse: China makes the goods.  Sanction them, and they WILL break the patents and just make them anyway.  Reestablishing the manufacturing and distributing base back to the US and its allies under such circumstances would be unbelievably difficult, especially as Russia, China and its allies control certain key resources like rare earths (other people could mine them in quantity, but don’t, because Chinese rare earths are cheaper and we are stupid and greedy.)

Russia is already planning how to survive economic sanctions: how to sell its goods in rubles.  People will buy, Russia is too big a producer to ignore.  If Europe doesn’t want the growth which comes from using Russian gas and oil, well, China and others will be  happy to take it.

And once a second bloc is created, it will no longer be possible to pull stunts like breaking Iran with sanctions: the Chinese/Russian bloc will have a veto.

Over Ukraine?  I guarantee that if this is done in 50 years historians will look back on this like we do on WWI—what were they thinking?  The Balkans wasn’t worth WWI.  Ukraine isn’t worth destroying American: Western, hegemony.  Well, not for America.  Others might think this is more of a good thing than bad.

But it is also the potential glide path to war, real war.  WWIII.

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