China has already won the US election

As a reflection of its growing ascendancy in international affairs, it's obvious right now that China has won regardless of who wins the upcoming US presidential election. Indeed, as far as Beijing's concerned, the difference between Hillary Clinton and Donald Trump is primarily one of style and not substance. Either one will have to attempt the daunting task of uniting a sharply divided country. Either one will have to renegotiate and recalibrate American engagement with a fraying global system it no longer unilaterally dominates. And either one will have the particular challenge of garnering bipartisan support for a cohesive strategy to confront the People's Republic as a virtual peer competitor in various realms of activity and in a growing number of geopolitical regions.

As China sees it, the next US president will immediately be grounded in a new reality that will quickly put to rest the simplistic fallacy - mere campaign rhetoric as it probably was anyway - that the eight-year Obama administration has derelictly forfeited strong American leadership on the world stage for sheer lack of willpower or conviction. Instead, he or she will readily be forced to deal with the facts as they are: that American democracy no longer appears such a singular shining beacon guiding its own participants, let alone the rest of humanity, to practical solutions to their most vexing collective contradictions and schisms.

This polarization of American politics won't be resolved by either candidate's victory or defeat next Tuesday: it may only worsen. Already, the strongmen of Beijing and Moscow have had a field day with their own citizenry mocking (however obliquely) the sheer inability of both the American political system and media apparatus - the great pillars of freedom and prosperity - to do anything but further drive the American public apart from itself. "You want the same here?" is the operative unspoken question they're asking their own disgruntled subjects who may be harboring such subversive thoughts as the notion that they should be as free as their American counterparts to speak out and assemble.

But it would be one thing if the US representative republican system's travails were occurring in a vacuum whilst its rival Chinese bureaucratic-imperial system were not exhibiting surprising resilience and vitality: the opposite appears to be the case.

The very fact that Beijing's internal problems are more immediate, more severe, and more existentially dangerous than Washington's seems to be giving Xi Jinping and his team of central party-state administrators a big boost: knowing full well that their very survival is at stake in what amounts to a civil war within the communist apparatus, they deliberate and calibrate their every word and action with extreme care and diligence as to its potential and likely impact on every conceivable stakeholder, whether within or outside the party. Without recourse to electoral means to gauge their legitimacy even within the ruling caste, let alone the general public, they're ironically compelled to stay constantly and religiously abreast of all opinion and sentiment at every level and in every corner of the country - far more than their Western counterparts, who have the luxury of splitting their devotion between voters during election season and donors before and after.

Thus the very term "crisis" - as JFK deftly noted of the Sinic rendition of it - is the symbiosis of the constituent characters for "threat" and "opportunity", which far from being irreconcilably opposed to one another, need and feed on each other as any other yin-yang cosmic pair. It's not just that the threat gives birth to the opportunity; the opportunity itself can only live in the full apprehension of the threat it seeks to address in the first place.

And so, while China's resolution of its own internal crisis remains anything but assured, neither are its efforts doomed to fail, for these are primarily what Xi and co. finally choose to make of them. The verdict is still out on that one and will be for years yet; but in the meantime, Beijing's intolerance of dissent isn't irrational paranoia, let alone a sadistic exercise of power for power's sake - it's a dispassionate calculation that the only path forward is to buy more time for the existing order so that it can eventually deliver enough general welfare to defuse the ticking bomb of social conflict and upheaval. Even the regime's most scathing critics have a hard time disagreeing with it on at least one point: things surely won't get better in the near term were it to implode and collapse.

And this is where the rise of Donald Trump, irrespective of what happens November 8, has already made the communist Chinese regime such a big winner in this US election cycle. For Beijing knows quite intimately the underlying structural imbalance at the heart of the West's malaise - because it's dealing with the more virulent Chinese version of it itself.

Namely, this is the creation in the past two decades of a permanent administrative-managerial "overclass" of intertwined big government and big business interests, whose stranglehold on the global financial and trade systems in particular has increasingly removed important economic decision-making processes from popular sovereignty even in democratic countries. China has of course benefited most handsomely among the family of nations from this Western-led neoliberal hegemony of the post-Cold War era (circa 1990-2014); it has unsurprisingly also been worst afflicted by its sheer excesses (having taken in, needless to say, the bad along with the good).

Xi Jinping and his party-state leadership clique have already been waging the political struggle that Western populists like Mr. Trump have essentially been promising to launch in their own far richer societies: a redistribution of the modes of wealth production and wealth transfer from the small rentier-official elite that enjoys it to the masses whose toil (and debt) it's actually extracted from. Tellingly, what makes Trump so disconcerting to the American and Western money and power elite is not any particular policy proposal - not only do they know these to be fluid and negotiable, but they're also privately comfortable with one of their own (as Xi is no doubt privately affable with many a corrupt party apparatchik who ingratiate him with secret entreaties or gifts) - but the apparent authenticity of his suggestion that it's time for Main Street to call the shots on the economy again, not Wall Street and K Street.

Trump is thus sending the American ruling class the same message that Xi has been sending the Chinese with gutso and violence as needed: "Look, you've had a really good run, and you can still have a really good run yet, but you'd better start paying more dues to 'the people' now, or else you'll force my hand to act more ruthlessly on their behalf at your visible expense."

Though in Trump's case, the gutter-depths of such disdainful threats seems to be reserved for the "soft power" ambassadors of the ruling elite more so than its "hard power" practitioners: he despises the liberal mainstream media which he sees as peddlers of an unbridled liberal universalism that promotes unchecked immigration (open borders) and the effacement of national (read: ethnic and racial) identity. In this he also mimics Xi - in a far more benign manner, of course: the communist secretary-general has vehemently extirpated Western "universal values" from public discourse as a soft but insidious form of cultural imperialism by China-haters bent on humiliating Han pride and consciousness.

Trump will still probably lose the election, but already he has so radically altered the political landscape of American politics that it's becoming conceivable that the Republican party is only beginning to be transformed in the flamboyant billionaire's image. This will have enormous repercussions for the evolving future role that America plays in the world - especially if the Democrats fail to adapt to the shifting electoral dynamics across much of the country, which is seeing them decisively lose the white working-class vote in their former strongholds of the labor-union era. For China, the ideological coup of Trumpism - with or without Trump himself in the White House - will be enormous: it will be a powerful (if still limited) validation of the regime's longstanding claims that America and the American people are at heart no less narrowly minded and parochial in their sectarian interests as any other nation. And it will accelerate the drift of China's neighbors into Beijing's orbit, not just the already irresistible economic one but increasingly the sociopolitical and ultimately the underlying cultural one as well.

So is Hillary Clinton all that stands in the way of such an unmitigated US setback in the Asia-Pacific? Probably wishful thinking, given how narrow a victory she's now likely to win. Even leaving aside the renewed FBI investigation into her emails and potential federal probe of the family charity foundation, if Mrs. Clinton wants to avoid the fate of the Obama administration at the hands of powerful GOP opposition in Congress and state governments, she may well have to compromise on immigration (i.e. amnesty for undocumented workers) just as she already has on trade (backtracking her support for TPP in the face of Bernie Sanders' powerful anti-globalization challenge from the left during the Democratic primary). Similarly, on foreign policy she'll have to choose between restoring American credibility against hard physical security threats - a course that would require less haggling of strongmen "allies" like Turkey's Erdogan and the Philippines' Duterte over their human rights abuses - and the alternative of finding America increasingly isolated with the Brexit-wrangling British Anglosphere and the sclerotic EU in censuring non-Western countries for their disrespect of progressive values.

In fact, objectively it's easy to see why a nationalist China prefers Hillary to Trump for practical reasons just as it prefers Trump to Hillary for ideological ones. Trump, not Hillary, is the candidate already better in tune (at least publicly) with the new realities of an increasingly Sinocentric Asia-Pacific (where even the west coast of North America is arguably coming within a nascent Chinese economic sphere of influence); as such, he's the one more likely to put America in the driver's seat of the US-China relationship as it's truly evolving, whilst Hillary will default to positions that no longer adequately reflect what's already fundamentally shifted. Where both are in fact likely to arrive at very similar bargains and compromises, Trump will more easily do so in a way that makes it look like America "wins" (because he's basically saying that it's "losing" to start with), but Hillary's likely to do so in a way that betrays an appearance of even further American decline (because she's comparatively arguing that it's still "winning" right now).

Either way, China's the real winner of Tuesday's decision: regardless of who actually gets 270 electoral votes, it will either be a status quo candidate who can no longer contain its rise or a challenger candidate who has acknowledged that its rise is already the only plausible starting point for US policy.

Is the plunging yuan pricing in hidden Trump risk?

The offshore yuan has just cracked all-time lows against the dollar in active trading since its introduction in Hong Kong early in the post-crisis period; as it pushes 6.80 to the greenback - Beijing's earlier post-Brexit, informally suggested floor to defend for 2016 - it's worth wondering how much of this is related to fears of a prospective Donald Trump presidency, however unlikely that appears to be with recent polls.

Granted, the euro, pound, and yen are all exhibiting softness of late, but given that the yuan is now part of the IMF's elite SDR reserve currency basket, as well, it's becoming more plausible that the RMB is now influencing these other alternatives to the dollar as opposed to merely shadowing them as it has done so in the wake of the shock Brexit vote four months ago.

Clearly, in the unlikely event that Trump wins, a protectionist backlash against China will loom large over Sino-US relations. In these last 15 days of the campaign, therefore, the yuan could be a key barometer of the global economy's true judgment of the chances that Trump could yet pull off such a historic upset.

Already, the yuan seems to be signaling an unease that Hillary Clinton still hasn't put this contest squarely away. There's a nagging feeling somewhere in this steady slide to 6.80/USD or even beyond that the polls which show 7-12 point leads for Hillary have been deliberately skewed in favor of registered Democrats - how else to explain the virtual tie shown by some conservative-leaning surveys even at this juncture?

So if the mainstream Western media is indeed trying to discourage potential Trump sympathizers from even thinking he can still win, things could already be more precarious than first meets the eye. This is just what Trump needs to squeeze out every last drop of the anti-establishment, anti-elite populist vote: and just the kind of shenanigan that feeds the cynicism of the large independent segment of the electorate whose apathy towards Hillary could in the end do far more harm than their aversion to Trump.

But worst of all, if this unabashed and blatant media cheerleading for Hillary ironically turns her own lukewarm supporters away - i.e. if they're so unenthusiastic about her essentially status-quo platform, given her own deep flaws, that they possibly won't go out to vote at all except if they genuinely think the fiasco of a Trump presidency were still possible - the Western elite and establishment could actually be digging their own grave. If they were really that smart, they'd wise up to the dangers of such an approach - unless perhaps they're unwittingly being manipulated by an even smaller clique among themselves who are even more exclusively "in the know" about things.

We got sort of a warning four months ago with Brexit as to how our society in the developed rich world has apparently moved on from the entire basis of working assumptions that our leaders cling to. Even then, it should have become obvious to the elites that their very tendency to dismiss or downplay the populist threat to their ever shakier consensus may actually have contributed significantly to their own stunning loss of legitimacy. At the last minute, it seems, enough apathetic British voters became so convinced that Brexit would be handily defeated that they didn't even bother showing up at the polling booths to actually play their part defeating it - thereby sealing the doom of the "remain" cause.

It would be quite a spectacle if the elites now make the same blunder - only monumentally bigger and more far reaching.

If you're China, you have little excuse or rationale left to not take any chances.

How low will the yuan go?

As the yuan dips further below six-year lows against the dollar, it's worth asking how low it will go, and what constitutes a reasonable floor.

The fact that even the heavily restricted onshore RMB is already pushing 6.75 (closed 6.7449 today) indicates that Beijing has convinced the world that it has enough control of the currency to prevent a speculative rout. But with so much uncertainty looming over the global economy, especially what with the rise of nationalist populism in the West that's fueling an unprecedented rich-world backlash against trade, it's seemingly at the mercy of forces beyond its control. So even though it's actually helped China that the West is increasingly exposed as actually the weaker link in the global economy, the cover that this gives it to weaken the yuan won't last much longer until concerns over its own health come back to the fore.

Back on July 2, 2015 in Beijing, during my last trip to China, I asked my uncle, a mainland steel trader, what the yuan would go to if it were allowed to free-float. This was the week before the worst of the summer stock market crash, and the yuan was sitting at 6.21 to the dollar - propped up, as I later learned, by heavy selling of forex reserves by PBOC. He told me that it would go down by about 10 percent, putting it at 6.90 to the dollar.

Sure enough, less than six weeks later China stunned the world by devaluing nearly 2 percent one-off on August 11, in the first of several waves of reset that have now seen the yuan shave about 8 percent against the greenback. In other words, we're mostly there: another 2 percent depreciation perhaps, and we'll be at the floor as perceived by someone intimately familiar with Chinese markets and economic conditions.

Beyond this, it's highly tempting for Beijing to devalue even further should weakness persist in Europe and the UK (i.e. Brexit), and even more so if Japan buckles under pressure and starts devaluing the yen at last, while the Fed still dawdles over its determination to normalize interest rates in this unusually prolonged hike cycle. The drawback to further currency softness, though, will be quite obvious: it sends the wrong signal about commitment to transition the Chinese economy from exports to domestic consumption, even as it raises more hackles with trade partners about not cutting them much-needed slack.

So for the time being, as Western uncertainties about trade and globalization more broadly are worked out, China must strive to pull some more weight as is now widely expected and demanded of it. It must draw some line in the sand that it won't cross regardless of how hairy things get with further easing or bailouts especially in Europe and the UK; it must also hold its ground as the Fed likely bargains with the new US administration and Congress to raise rates at an acceptable clip on the condition that the latter enact more aggressive fiscal support and preferably targeted deregulation of the most choked-up or clogged sectors.

Ideally, the yuan shouldn't have to decline to 7.0 or even 6.90, but will decisively stabilize around the 6.80 level from which it subsequently strengthened in the resounding recovery from the financial crisis. Then, as back in the 2011-13 appreciation period, it should claw its way back up beginning in late 2018 or early 2019, as the "L-shaped recovery" is completed, to return to the mid- and eventually low-6's; by the end of Xi Jinping's second term in 2022, it should be stable in the 6.05-6.25 range at which it hovered in 2014-15, before breaking in the August 2015 devaluation.

This won't sit well with certain committed neoliberal ideologues who insist that China fully subject its currency to "market forces", as if the West still actually plays by such "market forces" itself. But such voices are the ones now finally being rejected and discredited despite having brayed the same old spiel for so long. If Beijing continues to exercise discipline against its own corruption and resolve in the face of those with a vested interest in its failure, a China-friendly - even to some degree China-centric - new global financial architecture is likely to emerge early next decade.

Flat is the new up for China

Third quarter GDP came in at 6.7 percent, in line with analyst expectations and keeping a perfectly flat 6.7 percent clip for all quarters of 2016 so far, but some caveats are in order.

After year-on-year monthly GDP of 6.9 and 7.2 percent for July and August, the year-on-year figure for September must have been comparatively very low to drag down the overall Q3 print to 6.7 percent.

The industrial recovery which has powered the economic stabilization since last winter looks fragile. Year-on-year industrial output was back down to 6.1 percent in September, well below the projected 6.4 percent; while this may be a temporary blip, it underscores fears of the unsustainability of growth that's still largely dependent on secondary industry (manufacturing and construction), even as tertiary industry (consumption and services) account for a greater portion of new economic activity. Indeed, as is the case with all economies, secondary industry drives tertiary industry - after all, that's what makes them secondary and tertiary to begin with.

Encouraging signs are still to be found, though: both fixed-asset investment (8.2 percent) and retail sales (10.7 percent) in September beat estimates by 0.1 percentage point; the latter in particular points to good Q4 consumption and services performance that should again compensate for declining industrial and investment growth, at least until Q1 2017, by which time Beijing may need to ramp up more targeted fiscal and policy support for its secondary sectors. By then, however, the hope is that the gloomy global economic and especially trade outlook will have brightened with the political uncertainty in the West having eased or at least plateaued from the current downward trend.

The yuan and Chinese stock market seem to be neutral in the wake of the latest news, and PBOC's earlier floor of 6.8 to the dollar through year-end appears to remain in place. Flat is the new up for China - and more generally for the global economy in the present environment, as well.

China isn't the global economy's weak link: the West is

Last Wednesday and Thursday, consecutive releases of Chinese trade and inflation data painted a mixed picture: the former worse than expected, the latter better. Does this point to a domestically driven Chinese recovery or stabilization? Tuesday's upcoming Q3 GDP figures - to include the breakouts for industrial production, fixed asset investment, and retail sales - will go a long way to determining that. As well, Monday's lending figures - total social financing, outstanding loan growth, and money supply growth - will be indicative of credit intensity and how supportive it is of continued fast growth.

Though it's becoming clear that trade volume is one of those alternate metrics which is no longer as reliable a proxy for Chinese GDP as it used to be, China perma-bears like Gordon Chang still cite it as proof that Beijing is fabricating the latter. Of course, they do so while ignoring other favored proxy data that has recently swung into agreement with solid official growth, like perking up electricity usage.

Plus, with official manufacturing PMI for September at a healthy 50.4 (the same as the previous month) and the alternate Caixin Markit private sector-focused PMI likewise in mild expansionary territory (50.1), it's strongly suggestive of a tentative industrial stabilization driven by domestic demand in Q3. And because services and consumption tend to lag industry and investment, that also suggests robust growth in the former during Q4 - again domestically driven.

But China still depends heavily on the global economy of which it is a linchpin: as Xi Jinping highlighted at the BRICS summit, that makes it imperative to Beijing that the damaging uncertainty created by the Western populist backlash against globalization isn't allowed to actually shift gears in reverse.

The West needs a good does of both demand-side and supply-side boosts to kickstart moribund economic engines. Keynes and Friedman can no longer continue to exert such rigid policy gridlock: the rich world needs both fiscal stimulus and tax cuts plus deregulation.

In that regard, perhaps China is belatedly emerging as a strong and not weak link in the global economy, after all: it's already done massive injections of Keynes to stop the economy from simply crashing, even as it's trying to use the extra time it's bought to haltingly introduce Friedman - with Chinese characteristics, of course.

So even though we may well see the yuan hit its declared lower tolerable limit for the remainder of 2016 - 6.8 to the dollar as loosely set by PBOC in the wake of Brexit - already the markets are increasingly of the mind that this is a natural reflection of global weakness, especially in Europe and Japan, and not particular Chinese vulnerability.

That European and Japanese weakness, in turn, is largely a consequence of residual US softness: specifically, of a Fed that's only gradually begun to recognize that this round of "rate normalization" simply can't go the way previous ones have, given the long-term ill effects of the 2008 crisis on longer term productivity, labor participation, and investment levels, which have together rendered the economy more vulnerable to relative illiquidity even from modest interest rate hikes than would otherwise have been the case.

QE and extraordinary monetary policy have played their role, but Janet Yellen herself now sees the possible necessity of a "high-pressure economy" nonetheless - read: a more comprehensive combination of policy measures to get the whole economic system with its constituent interconnected parts firing on all cylinders again.

Sort of like what China's already attempting. But even China will reach a limit of what it can achieve without a robust and broad US and Western economic recovery to ride atop once more - and soon.

What Syria's humbling of China says about the importance of struggle

Last week's stunning defeat of the Chinese national soccer team by war-torn Syria in the 2018 World Cup qualifier may have set off a bout of jingoistic "football hooligan" street rage across the middle kingdom at being one-upped by a pathetic little rogue state - to include bloodthirsty demands for the removal of the Chinese team's coach - but in the midst of the jock fervor, it's easy to miss the far more significant symbolism of the 1-0 upset.

It's obvious from the outcome of the match that neither a vastly bigger pool of athletes to draw from nor national stability and prosperity helped a Chinese team that simply wasn't as hungry for victory as its Syrian counterpart. And why should it have? Syria is a society steeled by nearly six years of brutal civil war and violent sectarian extremism, whilst China has enjoyed a steady ascent to greater consumerist prosperity over the same period. It goes without saying which country is primed for grueling struggle of physical and psychological attrition - that is, which national crew was "bourgeois" with complacency and which was "revolutionary" in its zeal.

In a broader sense, Syria holds potentially critical lessons for China's own monumental transition from an industrial to a consumer society, which in a roughly overarching socioeconomic sense is basically a surrogate for the transition from dictatorship to democracy.

The strength of nations is forged through severe challenges and crises, no less than individual character is shaped and refined by personal trials and tribulations. And just as the hardest battle that any one of us individually must fight is that to master what lies within ourselves, so too are internal conflicts far more consequential than external ones in determining an entire people's destiny.

At a time when the free world seems increasingly paralyzed with division and self-doubt, even as so much of the unfree world still yearns for liberty, the common thread that ties all humanity together is the constant necessity of struggle itself. The worst fate for any person or nation is not failure or defeat but apathy and aimlessness which amount to a general moral surrender; suffering and strife with a perceived meaning, however flawed, are incomparably better than peace and plenty without its semblance, however authentic.

That being said, although none of us can be absolutely sure of the complete and ultimate truth of what we fight for and hold dearest for ourselves, let alone presume a position to judge the merits of those ideas and adversaries we find ourselves fighting against, we must cling to the hope that final victory is the reward for those who humble themselves enough to finally arrive at the fullness of understanding of themselves primarily and of others contingently.

As Syria has experienced in the last almost six years, war inevitably brings out the very worst in human nature; but it always has the silver lining of purging many of its participants of the illusions of self-sufficiency and self-reliance so much that a greater opportunity emerges for good to be extracted from evil than would otherwise be possible. To struggle is the essence of what it is to be human.

China's "old economy" still drives its "new economy"

China's economy supposedly deteriorated in Q3 because its "old economy" led the alleged recovery while the "new economy" sputtered. Or not?

Perhaps some analysts are still overdue for a bit of clarification on just how "old China" relates to "new China", i.e. how the former still largely drives the latter:

The undeniable trend has been that so goes Chinese industrial production, so goes Chinese consumption - a fact that no less than some of the most bearish China analysts are especially keen to stress. A two-month lag seems plausible from the above chart: since industrial production struggled back in the May to July stretch (after the initial effects of the Q1 stimulus wore off in late April), it's not surprising that retail sales struggled in the July to September period of Q3; by the same token, however, the pickup in industrial stats in Q3 seems to have been driven by rebounds especially in August and September, so this could well be a harbinger for stronger Q4 retail and consumption figures.

So it's not a bad thing that "old China" seems to be leading the nascent recovery: it very much has to.

Besides, it's not like either industry or retail are expected to improve to anywhere near their previous highs in the chart - the government's goal of an "L-shaped" recovery doesn't call for it, but rather a plateauing that's already exhibited in the chart's right-hand side for both data series (making for an "L" with a sliding diagonal trunk).

On 67th birthday, PRC attains key global economic milestone

On the 67th anniversary of its founding in 1949, the communist People's Republic of China has been awarded inclusion of its yuan into an elite club of reserve currencies overseen by its once-hated capitalist rivals, namely the US and European-dominated IMF.

The Special Drawing Right (SDR), while largely a nominal instrument that weights the dollar, euro, pound sterling, yen, and now the yuan in a kind of composite tender for exchange-rate benchmarking and indexing purposes, still represents a key step for Beijing on its long march to parity with the developed market economies of the West, especially the US. Much like the first steps it took in the early 1980s to reintroduce market competition to the domestic socialist economy, it marks a starting point of genuine opening of the country's financial markets to international capital flows.

The mere fact that the yuan is actually being included at all - almost a year after the go-ahead was given - is a testament to the changing times. For a semi-market currency (at best) to join the ranks of mature market ones as a standard issue is an indication of how much the world at large needs China to eventually go where the SDR now says it should go, even if it's nowhere close to being there at the moment.

While Beijing now has an additional powerful impetus to push through financial reforms and liberalization, the hard realities of its present economic transition mean that the yuan is anything but ready for prime time just yet.

Significant capital outflow pressures remain, and equities in particular seem to be experiencing a lopsided imbalance with mainlanders' overseas investments absolutely swamping overseas investors' mainland investments.

On the other hand, yuan-denominated bond inflows have increased and this is an encouraging initial sign that the government and central bank's efforts to boost foreign purchases of yuan-denominated debt have borne some fruit already.

For good or ill, it seems that state policy and not private market participant demand will continue to dictate the yuan's degree of free and open international use for some time to come; even should capital controls be relaxed, this will probably only be a consequence of PBOC gaining enough confidence that its own surrogates (i.e. the large state banks) have enough "swing" clout on global RMB exchanges to sway the currency as Beijing pleases.

The increased use of RMB in global commodities trade, meanwhile, will be crucial to elevating the yuan's actual practical value as a medium of exchange in global commerce, to eventually challenge the dollar in this domain. The groundwork for such a tectonic long-term shift is being laid with the "Belt and Road" initiative, the AIIB, and other regional and global programs undertaken by Beijing to promote sustainable economic ties and links at a time when the West is confronted with the real prospect of being compelled by its own electoral politics to seal itself off and turn inward.

So the SDR inclusion isn't just a milestone for China, but potentially a truly global economic inflection point.

Even pessimistic bad debt outlook uses better figures

China faces a lost decade, fears Fitch Ratings, giving a high-end estimate of non-performing loans (NPLs) of 15 to 21 percent of, or 10 times the official ratio.

In the first place, this is clearly an upper ceiling: given the slowdown in velocity of money over the past two-plus years, it's only natural that more loans than before are taking longer to get repaid. Many firms are simply taking far longer than before to get compensated for their products and services, so it's natural that they're also taking far longer to meet their liabilities; but in most cases they eventually will.

In this light, it's encouraging that money supply (M2) growth picked up in August after worrying signs of decline in preceding months which some portended to be a looming "liquidity trap"; as money growth continues to rebound, the NPL ratio will naturally start to look healthier.

Beyond this, it's worth noting that even the aggregate debt-to-GDP ratio and credit efficiency metric used by Fitch are actually better than they appeared earlier this year. At 253 percent of GDP, this year's debt-to-GDP is already well below the most alarming estimate of about 350 percent for last year. And the credit efficiency ratio of 0.3 is far above the 0.2 or even less that was cited back in spring, when the Q1 stimulus was only starting to take effect.

Over and above all this, there are tentative yet clear indications that supply-side reforms are starting to pick up, and that this has already begun to ease the pressure for more stimulus, especially monetary but even fiscal as well.

A lost decade isn't quite in the offing, and the pessimists' own revised figures are unwittingly weakening their own case.

It's official: China has bottomed out

China's economy has fundamentally stabilized with robust growth and its currency is no longer unduly burdened by depreciation pressure, says Li Keqiang, who later adds that the 2016 target of 6.5 to 7 percent GDP expansion will be met.

As well, the central bank reports that the vaunted "L-shaped" recovery has been achieved:

Li’s expression of confidence in the nation’s economic outlook follow similar signals from the central bank this week. Better-than-expected lending and money supply data for August show the economy has bottomed in its “L-shaped” recovery, a central bank newspaper said in a front-page commentary on Monday.

Though we'll need at least another month or two of data to genuinely confirm that Chinese growth has bottomed, the confidence of these statements is still notable: Chinese officials at this paramount level are not given to exaggeration or hyperbole.

This comes as more doom-and-gloom is being touted by Western financial outlets concerning Chinese debt levels: this time, it's the so-called "credit-to-GDP gap", measured at an eye-popping 30.1 percent (where anything over 10 percent is a red flag).

Taken in isolation, however, this figure easily exaggerates the gravity of the situation. It would be far more alarming in the absence of evidence that Beijing is succeeding in engineering a soft landing; as more such evidence comes in, initial proof of deleveraging can be expected to start trickling in, as well.

Now that warnings of Chinese financial meltdown have been pervasive for over a year, both experts and the general public in China can more confidently push back against the pessimism with an appreciation of the nuance of their socioeconomic system which makes direct comparison with the West implausible. The high debt figures and debt-to-GDP metrics in themselves mean a lot less than they would in a Western system; the overriding concern in China has never been a broadly cascading seizure of credit but rather a deteriorating ratio of credit growth to GDP growth, which now appears increasingly unlikely.

It has been said on multiple occasions in 2016 that it now takes four yuan of new credit to generate just one yuan of additional GDP, but this ratio appears to have been temporarily inflated by the massive first-quarter stimulus, which blew year-on-year credit growth out of the water. As such, it has since inevitably declined, though still uncomfortably high; there's little reason to doubt, however, that the decline will continue.

Back on February 22, in a draft post for this blog, I had noted:

China is now embarking on a systematic redistribution of wealth from the state to the household sector. To pose it in Xi Jinping's anti-corruption terms, it means a massive expropriation of "gray income" from the corrupt bureaucracy and its cronies to the exploited masses of workers and peasants, to allow this still subsistence-poor majority of the population to join the ranks of the urban middle class.

The big wild card over the remainder of the year is likely to be the yuan's exchange rate. Judging from this now often-quoted interview with PBOC governor Zhou Xiaochuan, China recognizes the importance of stabilizing it.

Some seven months later, these clear imperatives that Beijing had early this year in the face of unprecedented uncertainty over its ability to pull off a difficult economic transition are beginning to be addressed. It's early innings of a long ballgame, but at least the players have all shown up, healthy and in high spirits to notch the win: it was the prospect that the battle was over even before it began which so deeply upset the world last winter.

Strong August vindicates Beijing's heavy-handed intervention - for now

With key economic metrics stabilizing or even perking up in August, Beijing's heavy-handed stabilization efforts are being vindicated in the early running - adding fuel to the fire for those who despise China's constant cheating of the rules of "free markets", but ironically also likely to earn rare but growing praise from smarting competitors.

All three key data series - industrial production, retail sales, and fixed-asset investment (FAI) - beat expectations. The first two have continued their firming up since early 2015, whilst FAI has continued to fall, but this is not at all unexpected, given the sheer base level:

In a sign of near-term China bullishness, Goldman Sachs is moving to short-term overweight on Chinese stocks. Along this same vein, emerging markets in general are becoming more attractive compared to developed ones, given that the populist backlash in the latter is gathering steam as the US election nears, itself sandwiched between Brexit last June and next spring's important legislative races in France and Germany which are already widely expected to sweep right-wing nationalists to unprecedented power.

Of course, there are still basket cases like Venezuela or Zimbabwe which must be avoided like the plague by emerging market investors, but the overall picture has improved markedly since late 2015, and the short-term pickup in Chinese demand for commodities is the central part of this story.

The medium to long-term outlook for China itself remains cloudy. Doom and gloom could return as investment and industry continue to grind down to neutral; per Goldman's analysis, though, this has likely been delayed to start of 2017, giving the central bank and State Council a welcome breather from further stimulus.

A more recent inset of the above chart, dating back to January 2014, shows that FAI and industrial production fell precipitously in 2014 - the year that the white-hot real-estate market began to cool:

In 2015, both were then stabilized with strong policy support, primarily in the form of benchmark interest rate and reserve requirement ratio (RRR) cuts until the late-June stock market crash, and then with stepped-up fiscal and monetary stimulus overall in the second half in response to the unleashed financial volatility. This helped keep retail sales from falling below double digits throughout 2015, buoying what has since become an ever bigger slice of the overall growth pie (70+ percent in H1 2016); indeed, the slight pickup in industrial production since mid-2015 can only have coincided with the noticeable decline in FAI since late 2015 only because more installed plant capacity has shifted to end-user consumer goods, i.e. retail products; the strong growth in car sales since late 2015 is the poster child for this trend, for the obvious cross-industry impact of the auto sector.

Worth particularly special mention is the sheer scale of the central bank's ongoing stimulus - its "backdoor QE", so to speak. Primarily in the form of special short to medium-term lending facilities to the large state-owned commercial banks, but also in the form of bond sales to these surrogate entities, these when combined with the rapid growth of the municipal bond market to refinance local government administrations have given Beijing far and away the world's biggest monetary easing program over the last 12 to 15 months, propelling its total debt load into outer space. In this light, the yuan's plunge of nearly 8 percent since PBOC's unexpected August 2015 devaluation indeed seems artificially suppressed - the actual pressure on a larger devaluation, though not nearly as great as the most extreme bears (read: Kyle Bass) think, has obviously been much more than Beijing has let on.

With the latest stats, it increasingly appears that these China doom-and-gloomers have essentially missed the boat: by the time they piled on their big bets of a Chinese meltdown last January and February, the worst was already over, and with Beijing's heavy-handed measures to stabilize the real economy, the "L-shaped recovery" which Xi Jinping's administration has enshrined as the country's salvation has been tentatively accomplished.

The question now is whether it will be sustained. The key in this regard will be the latest debt figures, to be released starting tomorrow: these will offer clues as to whether the recent credit binge is in fact moderating, after some cooling of lending activity in July. So a future post here will break down the key credit and financing metrics for August, comparing the change in these to that in real economic activity to give a sense of whether Chinese growth is becoming more sustainable (i.e. not significantly worsening the total debt-to-GDP ratio).

Key metric continues to blow "slowdown" out of the water

Economic slowdown? Risk of hard landing? Car sales rose 24.5 percent in August to cap off a 13-percent increase YTD. Gordon Chang, Jim Chanos, Kyle Bass and the like must be shaking their heads in disgust. China should long have completely melted down by now, long bread lines should long ago have formed in its cities, and the communist regime should be on its last legs.

So successful has the tax cut on small passenger vehicles last October been that a strong case is now being made to make them permanent...what squeezes margins at Chinese and foreign automakers alike will continue to provide a boon to Chinese consumers, on whose shoulders the economy's transition increasingly rests.

Along with rapidly growing residential mortgages, the boom in auto financing is likewise a pillar of the government policy to grow the household slice of the total debt pie and whittle back the corporate slice with the concomitant boost to consumer demand and thereby corporate profitability.

The strong growth of the auto sector alone lends credence to the overall increase in industrial profitability in China in 2016 - after real estate and infrastructure, transport is the main pillar of demand across the entire breadth of capacity-brimming industrial segments nationwide.

With August factory-gate deflation down to just 0.8 percent (from 1.7 percent in July), even as August consumer price inflation has moderated to 1.3 percent, signs are unmistakable that the economy is approaching a healthy pricing equilibrium that strikes the right balance between corporate profitability and consumer affordability, which will be essential to capping and reducing the country's debt-to-GDP ratio.

The PPI figure is particularly startling: it stood at -5.9 percent, i.e. nearly 6 percent deflation, at year-end 2015: in just eight months, it's more than five-sixths of the way back to neutral, belying all the repeated claims that Beijing's policies are still backsliding and the country's economic prospects are still deteriorating.

If anything, before long things might be stable enough at a level satisfactory enough that a real danger of complacency could return to threaten the communist authorities: that would be quite the irony, given what China's gone through in just the last 15 months.

Thankfully, things remain dire in much of the economy and much of the country. As it is, many foot-dragging party officials apparently still need a good kick in the butt in terms of implementing reforms to boost private investment, the stall-out of which remains the biggest threat to recovery.

But the vehicle sales, especially if double-digit or high single-digit expansions persist with extended incentives for consumers, are already a resounding refutation to everyone who's staked either reputation or hard-earned money (or both) on a Chinese crash. It even has another silver lining: the ferocity of competition between Chinese and foreign carmakers alike is likely to put sustained pressure on retail prices, as the big players in an increasingly cutthroat market are forced to compensate for squeezed dealer margins (as little as $10 per premium car now, per above Bloomberg piece) with more sheer volume. That won't just be great news for Chinese consumers: it's a shot in the arm for everyone.

Explaining discrepancy between H1 listed profits and total profits

Listed Chinese companies' profits fell 5.5 percent in H1 2016, according to the China Securities Journal, a better-than-expected performance in light of the rocky and depressing start to the year. This also compares favorably with the S&P 500, which is on pace for a nearly 9 percent year-on-year decline for the same period (nearly 90 percent of companies having reported Q2 earnings).

However, this contrasts sharply with the National Bureau of Statistics' (NBS) reported 6.9 percent increase in total industrial profits year-on-year for January-July 2016 - including 6.2 percent increase for H1 2016 (January-June). How to account for the nearly 12-percentage point gap between the two metrics, both by official agencies? Probably a combination of the following factors.

1. The NBS figure is a more generous figure of profits before interest and/or taxes.
2. The NBS figure allows for more aggressive revenue recognition, given that listed companies' income statements must be complemented by cash flow statements which make it harder to fudge marginal sales.
3. The listed companies' figures are generally more conservative and less prone to artificial inflation, given that these firms are under more scrutiny, including in many cases by international investors and analysts.
4. The less than 3,000 listed companies are still a small slice of the economy and don't include many highly profitable medium-size private firms; if anything, the role of the stock market in Chinese business finance has stagnated since last year's crash, with only selective high-tech IPOs somewhat picking up since Q1; since smaller and medium-size tech firms (or those claiming to be high-tech) are a significant portion of privately owned companies that have listed since 2013-14, and many of these are still loss-making and dependent on future prospects, that's been a drag on listed firms' profit growth over the past year.

Like other apparent inconsistencies between sets of Chinese economic data, these earnings spreads between listed and all firms is troubling but shouldn't be dismissed out of hand as evidence of statistical fabrication; over time they will necessarily reconcile.

Reform set to accelerate as vested resistance is further purged

China should accelerate its reforms, says Xi Jinping. This statement comes as more evidence emerges of the party chief's purge of vested interests, especially provincial officials linked to former paramount leader Jiang Zemin's top henchmen, i.e. the disgraced ex-security czar Zhou Yongkang.

The removal of Xinjiang party boss Zhang Chunxian in particular is a powerful confirmation that whatever nascent political opposition to Xi within the CPC may have flared up last spring has been crushed. Zhang famously defied Xi at the National People's Congress (NPC) in March, refusing to endorse the latter as the "core" of the new communist leadership - just days after underlings within his Xinjiang administration ill-advisedly reposted an "open letter" from disgruntled party members urging Xi's resignation which first appeared on a dissident website in America.

With Xi's own loyalists increasingly staffing both the central and provincial party posts, it's just a matter of time until residual resistance to his reforms in the day-to-day execution of policy is eliminated. Though that would still take a while, Xi has skillfully outmaneuvered his enemies in what's probably their last-ditch effort to block him. From here on out, it's likely to be a simple matter of taking out the trash.

As a reflection of his increased confidence and security in his unassailable position, we're likely to hear more bold pronouncements from Xi urging reforms to hurry up over the coming year-plus until the 19th Party Congress (November 2017). This will bolster global confidence in China's transition, especially as Xi is likely to emphasize microeconomic market-oriented liberalizations, i.e. rural land rights and intellectual property protection as mentioned in the above statement. And ironically, the more successful Xi is in applying his hard political capital to these measures, the more it strengthens the credibility of his only remaining potential rival, reformist premier Li Keqiang. In this way, the Xi-Li duo may reach a much-needed symbiotic equilibrium over its still probable second term (2018-2023).

All in all, the last year of Xi's first term at the party's helm isn't shaping up to be too shabby. And at a time when even a slowing China is increasingly recognized as the main anchor of global growth, the world will be thankful for it.

Why the Fed is right to give China no wiggle room

By reaffirming its commitment to normalizing US interest rates, the Fed has sent a clear message to China on the eve of its first ever G20 summit: get your act together now, because we're not giving you more wiggle room for cheesy monetary stimulus, especially (but not limited to) devaluation.

This attempts to kill two birds with one stone: appeasing American populist political sentiment in an election year and forcing accelerated economic restructuring in China. Just as PBOC has become the standard bearer for China's continued opening to the global economy, so the Fed has become PBOC's crucial external enforcer of sorts. In such a way, Chimerica maximizes its chances of leading the global economy out of its low-growth funk.

To see why the Fed is helping China and not hurting it by adopting a hawkish tone, consider that the dollar has already gained nearly 3 percent against the yuan in 2016 - on top of 4.6 percent last year, when PBOC's surprise August devaluation sent global markets into a tailspin. This has taken enough air out of the yuan to prevent a hard landing, but with the onshore RMB barely 1,200 pips (12 yuan-cents) from its post-crisis low of 6.8 to the dollar in 2009-10, PBOC is right to draw a line in the sand: 6.8 is a reasonable floor to defend, as it's informally declared in the wake of Brexit. Any dip lower than that would represent an unmistakable regression for China back to export-driven growth aback a weak currency, which simply no longer suits its middle-income status and high-income, i.e. high-consumption, aspirations.

The Fed is thus preempting China by compelling Beijing to confront additional depreciation pressure on the yuan now rather than later. Now, not later, is the time to ram through capacity cuts and organizational and managerial restructuring of the bloated SOEs; now, not later, is the time to comprehensively begin to tackle the corporate debt overhang associated with these inefficiencies with the help of more efficient capital markets. If progress isn't being made or made fast enough, it'd better not be for complacency or inertia - it should instead be a natural reflection both of vested-interest resistance and of prudent caution in avoiding systemic socioeconomic instability.

Or to return to Fed-speak: we remain committed to normalizing rates as soon as feasible and are confident that the economy is robust enough to withstand it, even if we have to move far slower than the original timetable to give the markets and the emerging economies the windows of grace they need to adjust to the monetary normalization.

As China is very much a barometer for global risk sentiment and market confidence as a whole - a painful lesson for many market participants and observers last August and this January - the Fed's go-slow-but-firm strategy with regards to East Chimerica can also be taken as an overall go-slow-but-firm strategy with regards to the global economy as a whole.

Why China's August data will be critical

China's August economic data, to be released starting this week, will be especially critical for the prospects and perceptions of the country's transition.

Beneath the yuan's stability of late, worries about the Chinese economy are rising, and central to the concern seems to be the crash in private fixed-asset investment (FAI) since late 2015: two consecutive year-on-year contractions in June and July have capped off a sharp plunge from about 10 percent growth to below zero since December.

The data are probably skewed, however: the government's heavy-handed intervention in the stock market since the mid-2015 crash - overall it has spent anywhere from $150 to $300 billion buying shares to prop up their prices - has caused many firms to be reclassified from "private" to "public" since H2 2015. And considering the market and currency woes which began 2016, heavy state ownership of stocks has persisted and isn't likely to substantially recede: indeed Chinese equities, especially the traditional industrials of the Shanghai Composite, for all practical purposes appear to be stuck on state support.

So the apparent crash in private investment isn't all it's cracked out to be: it's not as unequivocally indicative of a general loss of business confidence as first meets the eye. And considering that the distortion caused by the aforementioned redesignation of firms only started in July last year, we can expect to see some rebound in private FAI going forward. But if the August FAI figures are likewise moribund, it would raise serious questions about Beijing's hopes of withholding further stimulus until the Q1 2016 one works its way through the real economy.

If FAI doesn't recover or even continues to decline, that would put tremendous pressure on other data points, especially consumption and services growth and PPI. The former can only be expected to decline, too, but hopefully not as precipitously because the Chinese economy will be even more dependent on it; the latter must be seen to further normalize towards zero (having already improved from deep negative territory, -5.9 to -1.7 percent YTD) as an indication that less FAI eases the overcapacity situation. With both investment and consumption growth slowing further, however, that also reshines the spotlight on net exports: they've been lousy since H2 2014 but this has been compensated by a persistently strong internal investment and consumption backdrop (if even also decelerating). Now that things are slowing domestically, China needs more of a boost (and more persistently) from trade. It has helped that although exports have been flat or declining, imports have suffered even more: that's helped the net export contribution to GDP, but it's unlikely to be boosted enough to counter the looming domestic investment and consumption shortfalls.

That means PBOC and Xi Jinping may have to make the difficult choice between more stimulus and missing the GDP target for H2 2016. Doubtless Xi will also seek to accelerate stalled reforms in the most troubled regions, especially pertaining to touchy social issues like migrant workers' urban residency rights, which are hampering real economic activity; but this will be a function of the state of party politics and Xi's confidence that he can ram through tough changes that steamroller vested interests.

The ironic thing about China's present juncture is that both greater control and greater freedom are needed simultaneously - and both increasingly urgently, especially if the August data undershoots as the July data did. The central government needs to be able to turn off the credit taps to unproductive state firms and regional administrations as quickly and efficiently as possible, and the central party leadership needs to assert control of provincial and local parties as efficaciously as possible to force streamlining and restructuring of their local economies on a macro, top-down basis. The net effect of such reform, paradoxically, will be to free up individual economic agents and actors on a micro, bottom-up basis, be it migrant workers finally gaining access to urban education and healthcare, or farmers finally gaining commercial sale rights over their land, or more broadly private consumers and businesses everywhere experiencing everyday tax and regulatory relief along with easier credit (within reasonable bounds).

In any event, with the G-20 in Hangzhou coming at virtually the same time (September 4-5) as the August economic data, the stakes couldn't be higher for China either to deliver on performance expectations or better communicate the nuance of its reported metrics. Most likely a combination of both.

Why China could dominate next-generation manufacturing, too

Size and scale don't really matter anymore when it comes to next-generation manufacturing with highly automated and roboticized production lines. Or so claims one expert who dismissively writes China off as doomed to be an also-ran to a resurgent US manufacturing sector in the coming decades.

It's true that a shrinking, more expensive workforce has eroded China's longstanding labor cost advantage in low-to-medium end manufacturing which has propelled it to economic superpowerdom in 30 years, even as a shortage of high-skilled technical talent and managerial expertise calls to question its ability to broadly and comprehensively climb the value chain. To contemptuously brand Beijing's "Made in China 2025" initiative as little more than a communist Potemkin village, however - as if the US can simply count on its vaunted "free market", without highly deliberate and targeted government support, to keep or regain its productive edge in the 21st-century global economy - reeks of the very kind of elitist arrogance and ignorance that has millions of middle and working-class Americans up in arms this election year.

With the right policies, openness to global investment and competition, and willingness to learn from mistakes, China could well end up dominating next-generation manufacturing, too.

Size and scale will always matter in manufacturing, whatever the degree of automation or use of robotics. And China has every intention and ability to retain its advantages in this regard.

Its market, for one, is simply unrivaled: it already consumes around a quarter of the world's industrial robots, and yet its robot density is an order of magnitude below that of Japan or South Korea. This gap will close as thousands upon thousands of Chinese factories replace human workers with robots in the coming decade to trim labor expenditure; one can foresee one-third or even up to a full half of robots worldwide being consumed in China by the mid-2020s, and an increasing proportion of these will roll off local robot-making assembly lines, even if they're owned and operated by foreign companies.

The resultant economy of scale - especially if supported by longstanding government initiatives like land grants and other subsidies - will be tough for any competitor nation, including the US, to match. That's doubly so because industrial materials sourcing across the entire periodic table of the elements is utterly dominated by China, which thereby effectively sets global prices for inputs into anything and everything that's assembled or fabricated. That's not even taking into account that factories themselves have to be built, supplied, and maintained: unbeatable Chinese prices for steel, cement, copper, and the like guarantee that both the plants and their supporting transport and power infrastructure will continue to enjoy immensely superior turnover cycles over alternative production locales, nullifying the premium from export shipping over much of their lifespan.

And it sure won't help America's cause that confiscatory tax rates and a crushing regulatory burden by an entire host of federal and state agencies are likely to be complemented in coming years by import tariffs borne of a neo-protectionism that both political parties are finding necessary to appease. If Washington prioritizes its steel industry's preservation of local market share in the face of cutthroat Chinese competition, to take just one example, that absolutely doesn't serve the US auto industry's efforts to keep local car production costs down.

The present Chinese manufacturing crisis is already largely being misinterpreted. It's already removing with little mercy the inefficiency and waste in lower-end, more labor-intensive industrial and manufacturing sectors, even as it's compelled the most competitive state and privately owned firms alike to streamline or upgrade their operations, consolidating or expanding market share while also investing more effectively in productivity-enhancing modernizing equipment and processes. A select minority of firms are already foraying into higher-end, higher value-added manufacturing, including of components which have traditionally been imported for final assembly in China.

That's not to say "Made in China 2025" or more generally the country's whole transition up the production chain are sure bets - they most definitely are not. But to write off the potential of the monumental shift plainly out of hand - as if present problems and deficiencies are static in their permanence - is just downright silly.

Already, Chinese appliance giant Midea's high-profile bid to acquire German industrial robot maker Kuka is just one of a host of upgrades by mainland firms via partnership with rich-world innovation leaders. This of course will trigger accusations that China simply can't innovate on its own, but that's missing the point.

China's dominance in next-generation manufacturing will be in essence the same as its dominance in traditional manufacturing: its unique ability and capacity to create massive economies of scale and thereby crash prices worldwide. Just as the iPhone wasn't invented in China but only became a global consumer commodity through vast Chinese assembly lines and hordes of cheap Chinese labor, so tomorrow's disruptive products up and down the global economy will likely become commodities available to the general population through a vast array of automated, smart, and connected Chinese factories and supply-chain networks.

Size and scale not only still matter - they arguably will matter more than ever in the industry, manufacturing, and construction of the future. Beijing seems to envision the sheer magnitude of what it's eventually shooting for. Someday, entire cities will be 3D printed just like 3D printing of earthquake-proof mansions is being pioneered in China today. This isn't a country content to be an also-ran, but rather one that knows full well the untold billions or even trillions that must be invested to establish a 21st-century industrial base and economic infrastructure. One might even wonder these days whether the same can be said of a politically dysfunctional US.

The real reason China's growing at just 4 percent

Earlier this year, legendary bond king Bill Gross remarked that the world will soon realize that China isn't growing at 6+ percent. In one sense, he's dead on: taking into account the sliding yuan, China's GDP is rising at only 3.9 percent year-on-year in US dollar terms, far below the reported 6.7 percent in local currency terms.

Worse, should the yuan slide to just 6.75 per dollar by year-end, that brings dollar GDP growth down to barely 2.6 percent for 2016; should it hit Beijing's stated floor of 6.8 for the rest of the year, it'd be a paltry 1.9 percent. Unfortunately for American investors, such a subpar figure is likely for 2017 and part of 2018 as well, as the yuan is likely to continue a gentle depreciation into the low 7's to support Beijing's desired "L-shaped" recovery. Things can't look much better for European investors, either: the Chinese central bank clearly wants to devalue against the euro, pound, and other western European currencies as well, inasmuch as it can get away with it in the uncertain post-Brexit environment.

So 3 to 4 percent growth is presently more accurate for China, or just half the headline-reported 6 to 7 percent. And that's assuming a relatively firm yuan going forward. It's no wonder that the impressive official GDP figure coming from Beijing doesn't square with Western investor sentiment. And it also explains why the contrast now is so great from 2011-13, when the yuan appreciated 12 percent against the greenback: in those years, China's high-single-digit GDP growth was amplified to as much as 13-14 percent in dollar terms.

On the bright side, by the dollar-converted GDP metric, it's probable that China's already hit rock-bottom last year: 2015 year-on-year GDP in dollar terms was a catastrophic 1.6 percent. Considering that the 2014 figure was about 4.7 percent whereas 2013 was still double digits, we see that the Chinese economy unmistakably slammed the ground over 2013-15, as far as international investors (and thus commentators) are concerned.

With all that being said, considering the dramatic tightening of global dollar liquidity which began in 2013-14 with the Fed's winding down of quantitative easing (QE), no other outcome was possible for China, and in fact the nation's fared far better than other emerging markets, especially commodity exporters, who have over the course of the last three-plus years seen large dollar-denominated GDP contractions, in some cases two or even three such waves.

Low-key yuan devaluation proceeding apace

The canary in the coalmine for the apparently stabilized yuan is that offshore RMB deposits have significantly shrunk in 2016 YTD, indicating a low confidence that the currency has bottomed.

Though the yuan's share of international usage according to SWIFT has recently rebounded, at less than 2 percent it remains well below the high of about 3 percent it reached before last year's devaluation.

Recently, the yuan has firmed up somewhat against the dollar, but only by weakening to all-time lows against the alternate 13-currency basket used by CFETS since December. This convenient duality of quasi-pegs has allowed PBOC to avoid tightening monetary conditions in times of RMB strength against the greenback, even as it's also given an effective global cover for further weakness against it. The result has been a substantial roughly 7 percent depreciation against both the dollar and the broader basket - dominated by the other crucial tenders of euro, yen, and sterling - without driving global markets over a cliff, as appeared to be imminent last August and January. Few who understand this mechanism are failing to be gradually impressed by its efficacy and cleverness.

PBOC is thus apparently achieving its goal: engineering a gradual, low-key devaluation of the yuan without triggering undue domestic and international uncertainty over the Chinese financial system and real economy. This has bought time and altitude for the communist authorities in Beijing to attempt the gradual surgical restructuring of the latter, as if a plunging plane with sputtering engines has gotten just enough of a jolt from firing them again, steadying it to a level descent, with sufficient airspeed, that enables it to stay airborne long enough to reach a suitable runway.

PBOC Governor Zhou Xiaochuan is the unsung star of the global economy, and will be much sought after at the coming G-20 in Hangzhou: his prominence in Chinese policy not only reassures the world of Xi Jinping's commitment to reform, but more broadly bolsters global confidence in central banks and bankers as a whole.

One year later, China-induced crash increasingly farfetched

A year ago today, the Dow Jones crashed over 1,000 points to kick off the trading session, as fears of a large and uncontrolled devaluation of the Chinese yuan which had built up since PBOC's surprise reset of the currency on August 11, 2015 finally came to a head in US markets; beginning August 24, when the Dow eventually ended down nearly 600 points, some $5 trillion of equity was liquidated from US bourses over the course of a mere three weeks.

The same horror show of a China-induced global correction was replayed in January and February. The overwhelming effect of these two episodes within just five months of each other was to create a popular narrative in much of the world that it was just a matter of time until the entire global economy would reset on back of a China debt crisis-induced crash that would trigger a universal deflationary shock via a large one-off yuan devaluation.

Now, however, as China prepares to host its first ever G-20 summit in Hangzhou on September 4-5, the dark clouds over the global economy are undeniably still present, but don't seem particularly China-centered anymore.

The problem with most bearish analysis of China is that it tends to focus on eye-catching headline figures - especially pertaining to its high debt levels - which gives the impression that radical and immediate reform is needed from Beijing or else everything by default just goes to hell. This makes it easy to overlook low-key, unspectacular changes in the Chinese economy, like trimming of corrupt SOE executive salaries and nascent bank recapitalizations, that have already prevented the worst-case scenario from materializing thus far.

So one year later, a China-induced global crash looks increasingly farfetched. It can happen, for sure, but even the pessimists now tend to push its timetable further out, if they haven't settled for a prolonged Japan-style stagnation as China's more likely fate.

3 key reasons the gloomy outlook on China is overdone

The gloomy outlook on China's economy is overdone, if one considers what solutions to the country's intractable economic and financial problems are already being achieved in more than a few isolated cases of bad debt cleanup.

Granted, it will take time for these turnarounds to become the overall tone of the economy, and the overall problem of bad debt could still outpace the resolution, but those who have written off a broad crisis or hard landing as inevitable and have staked their reputations or boatloads of money on this inevitability are likely to be frustrated, as some doubtless already have been.

There are several fundamental erroneous assessments that China bears, especially the gloomiest permabears, are making in arriving at their prognosis; in each case, the accusations are crudely overgeneralized and don't stand up to even a little extra scrutiny.

1. Beijing has backtracked on reform.

This view has become popular given the slow pace of SOE downsizing and restructuring, which has resulted in far less overcapacity reduction than the communist central planners have promised. In reality, this only reflects an age-old Chinese reality that even a leader as powerful as Xi Jinping can only gradually alter: the emperor lives in his palace and the mountains are high and far away. Beijing is fully aware of the lagging timetable of capacity cuts; the miracle, relatively speaking, is that they're even proceeding to some appreciable degree at all. Indeed, should the country stay on the current pace and hit 65 and 80 percent of its 2016 coal and steel reduction target, respectively, by year-end, that would be a stunning achievement considering that both sectors were first mandated by the central government to cut capacity a full decade ago (when they were only a fraction of their eventual peak); this indication of increased efficacy of the central government is an unsung testament to the sheer strength of Xi's party leadership - more is bound to come, and that's a very encouraging sign.

Additionally, it's a standard complaint that just because Xi has repeatedly stressed that SOEs should become bigger and stronger and play an even more central role in the economy, that this means he actually wants to double down on the inefficiency and malinvestment that's plagued China for the past few years. Yet that's reducing Mr. Xi to a Maoist bumpkin: quite the contrary, Xi knows that bigger and stronger SOEs also means fewer SOEs in total, and leaner ones at that. If anything, this will be a decisive reversal of China's age-old tendency of economic sectarianism which Mao himself also promoted when he saw fit; perhaps for the first time in its long history, China is about to develop a truly national economy with well-integrated regions, whereby each individual province or even county or municipality will no longer need to subsidize its own pet steel mills and coal plants, or peddle its own urbanization vanity projects with little regard for broader regional synthesis.

2. It would be a sheer disaster for GDP growth to dip below target.

Not anymore, says at least one reputable Western expert: China can manage fine with just 3-4 percent growth. Some would say it's already only growing at that clip - and the strains, while substantial and increasing, are by no means unmanageable yet. As both foreign and domestic observers and stakeholders pay closer attention to the quality as opposed to quantity of Chinese growth, undershooting the raw targets shouldn't have as detrimental an impact on confidence as they would have earlier.

That's not least because the employment situation is well under control as the labor force itself is shrinking: the same pressure to rapidly create so many new jobs has significantly eased, leaving an increasing number of companies with the opposite problem of too few workers to fill their posts (and spurring importation of immigrant workers in some cases). Even less than 5 percent GDP growth can easily absorb the labor pool now, giving a cushy margin to miss the planned 6.5.

That leads to the final fallacy of the China "doom and gloom" crowd: a coarse assumption that growth is vastly overstated.

3. The country's statistics are highly untrustworthy, if not still essentially fabricated, and paint an overly rosy picture.

This longstanding accusation always rears its ugly head in times of uncertainty and shakiness in the Chinese economy. It would be far more credible, though, if its proponents themselves were better at basic arithmetic. The smell of confirmation bias is no less present with China bears as with China bulls: it leads to such egregious errors as double-counting Chinese bonds in aggregating debt figures, even by reputable experts.

Apart from misinterpreting divergent data sets or habitual errors, inconsistencies, or holes in their own statistical reconciliations, China skeptics also mistakenly assume that Beijing blithely downplays bad or troubling data and as a rule covers it up or embellishes it. In fact, while this may often be the case in the short term, over the long term it simply can't work. For years Beijing has been aware of its provinces' and localities' tendency to overstate GDP growth; to suggest that it hasn't been making its own adjustments as needed, or at least smoothing out the effects of bad data over time to provide a generally accurate picture, is to suggest that the country's economy is smaller on the order of trillions of dollars. Just maybe this could be true - though more likely, if anything Chinese GDP remains significantly undercounted.

Yes, the scale of Chinese financial and economic problems is officially understated; but you'd expect for instance much more debt (especially "shadow" debt) than formally reckoned if there's indeed much more economic activity than formally reckoned as well.

Indeed, as the above CNBC article from last year notes, China is grappling with whether to update its accounting methodology to better capture true services and higher value-added activity like R&D. Beijing thus has a trump card: should it be forced to abandon its 6.5 percent GDP target, it will most likely be in the context of increasing base GDP according to the newest UN methodology. In fact, early this year China had already switched to an upgraded system of periodic economic data collection by the IMF, and it's likely this is helping it smooth out to the upside otherwise lower actual GDP growth (i.e. from an already higher base).

That being said, China still has a ways to go. Its stockmarkets remain primitive and far too many publicly traded companies remain far more opaque in their corporate governance and financial reporting than even their emerging-market counterparts that are heavily dependent on Chinese growth. This capital market reform - of equities in particular, as some appreciable progress has already been achieved in liberalizing and opening the bond markets - will without doubt be a central reform item for 2017. If successful (even haltingly so), it would be an indication that far from backsliding into Maoism, Xi's administration is determined to reform after all - and that would vindicate his consolidation of power which increasingly has Western observers up in arms, so much so that they've come up with a "repression index" to yet again tie China's prospects with immediate Western-style liberalization.

Well, that's disinformation and propaganda, pure and simple: Xi's repression has a very specific deliberate method to its madness, and the West is blindsiding itself to assume otherwise, as its elites are so clearly blindsiding themselves on the populist backlash in their own midst which has wrested the initiative for globalization from their hands into China's. It's truly up to China now to not squander the opportunity.

Excellent Goldman Sachs analysis debunks China bears

Goldman Sachs debunks the bearish notion that China's transition depends on significantly reducing the investment to GDP ratio (i.e. boosting consumption to GDP). At barely $8,000 per capita, China's income level is far too low for this to happen.

Instead, China must move up the global value chain by refocusing its exports away from commodity industrial products and mass assembly of cheap consumer goods, and towards higher-end, larger and more complex end-products; as well as making inroads into sophisticated parts and components production. In the coming decade, the country should become a leading exporter of everything from cars to planes to robots and semiconductors. Its vast domestic market should make this shift relatively easy to pull off with large new investments by rich countries.

As noted before on this blog, China's long, hard slog is to raise total factor productivity (TFP) by getting more value-added output from less labor and capital input. Already there are encouraging signs that this is starting to happen.

Goldman also puts to well-deserved rest the fallacy - still peddled by the likes of Jim Chanos and Gordon Chang - that the "Li Keqiang index" (concocted way back in 2007) of rail freight, electricity consumption, and bank loans is a more reliable gauge of economic activity than supposedly fabricated GDP statistics:

"Railway passenger traffic has been outpacing railway freight volume, electricity consumed by tertiary industries and households have been rising faster than electricity consumed by primary and secondary industries, and equity and bond markets have become increasingly important in providing credit flows relative to bank lending."

In fact, throughout the past year of tumult and uncertainty for the Chinese economy, these nuances have been noted by bullish analysis and commentary (including on this blog); as Chinese growth stabilizes and the much-anticipated hard landing fails to materialize, this knowledge will finally seep more into the mainstream and eventually drown the cacophony of doomsayers who have thrived on selective interpretation and mass mental laziness.

China, no less than the US, is undergoing huge structural economic shifts of the sort that play out over years, even decades: it's not merely that Western rules don't apply to China - they don't really apply to the West anymore, either.

Supply-side reform beginning to take hold, but Beijing faces tradeoff

The steady decline of industrial deflation in China is bound to have major consequences for the global economy, mostly positive. The continued uptick of the still-negative producer price index (PPI), now at -1.7 percent after bottoming out at -5.9 percent in the final two months of 2015, is the most reliable indicator that coal, steel, and other industrial and mining overcapacity is easing thanks to supply-side structural reform or "Xiconomics." Should PPI hit zero by year-end, it could mark 2016 as a major turnaround for the Chinese economy and herald the beginning of its most monumental transition since reform and opening itself began in the late seventies.

Tellingly, conventional Western analysis has been slow to draw the connection between recovering inflation and weakening growth - or more specifically, how the former is both a direct consequence of and a cushion to the latter. Even where it does, like here, it tends to overlook the positive sign even as it acknowledges that the slowdown has been deliberate:

A lot of China watchers knew this would happen eventually. In April, Chinese state media quoted an "authoritative figure" who warned that the government would not use unfettered credit growth to try to inflate the economy out of a slowdown. The economic reforms that China has been promising for years now, they assured readers, are still coming.

Rather than applaud tentative initial evidence that some supply-side shift is finally underway, the bearish focus is now on the declining growth: it's as if the sky's falling that fixed-asset investment is growing at just 8.1 percent instead of 8.8 percent, while consumer spending is up barely 10.2 percent instead of the projected 10.5 percent. These are quite stellar figures, to be sure, but what's more significant given China's specific set of problems is that unexpected dips in investment growth shouldn't be taken so negatively anymore, anyway: with private investment still in the doldrums (if even showing tentative signs of bottoming), one can just as easily spin the more consequential decline in public investment as an indication that local governments aren't simply building more roads and bridges to nowhere.

Of course, it may well be that growth is heading lower than the official minimum target of 6.5 percent in the second half, and this would present Beijing with a difficult decision: either it unleash another flood of cheap credit or it must manage drastically reduced (by its standards) growth expectations. The latter choice would be far more palatable to both domestic and international investors should it be accompanied by more evidence of supply-side restructuring, including especially the further recovery of factory-gate industrial prices. A stable yuan and balance of payments would also be big mitigators: the country will gain credibility as it resists devaluation pressure to firmly put to rest the notion that it can export its way to better growth, whilst a continued favorable balance of trade will serve as an indication that it's moving up the global value chain as befits a middle-income nation aspiring to join the ranks of the rich.

More to the point from a practical perspective, slower growth in the low-6's would send a signal that the threat of mass unemployment and social unrest is small, i.e. that there's enough new jobs to be done in the services sector to absorb (if even with lower pay and benefits) the millions of redundant industrial workers until such time as the overall economy is more robust and healthily mixed between primary, secondary, and tertiary sectors. This would boost domestic and international confidence alike in China's stability and resilience as a medium to long-term investment, thereby fueling another virtuous cycle of global intercourse and integration for it.

Optimistically, Xi Jinping is both willing and politically strong enough to sacrifice some GDP for some supply-side reform driven by industrial downsizing and restructuring; more realistically, he'll proceed cautiously and incrementally, in keeping faithful to the priority of verifying the integrity of each stone in the river crossing with extra care before committing to transfer one's full weight onto it. However things go from here on out, Beijing faces a fundamental tradeoff of quantity versus quality of growth which can only become harder to avoid.

Show trials of lawyers marks de-politicization of post-Tiananmen civil society

You wouldn't expect praise for Xi Jinping to come from someone being jailed by the communist regime, but at the announcing of his seven-year verdict for subversion, that's what controversial civil rights lawyer Zhou Shifeng supposedly did:

The court said he thanked late paramount Chinese leader Deng Xiaoping for reforms that made his "development" possible.

"The second person I would like to extend my gratitude to is Chairman Xi Jinping," it cited him as saying. "His national strategy to implement the rule of law has made China stronger."

Of course, these statements should be taken with a heavy grain of salt: even if true, they can't be considered purely voluntary. The motives to sweet-talk Xi's administration are quite obvious for anyone in such a situation.

But they do reveal an undeniable reality: with Xi's anti-corruption campaign close to being permanently institutionalized, there's less and less left for independent lawyers to actually do in terms of policing the party and the state which the party and the state won't do on itself - eventually at least.

Though rarely acknowledged in Western media, in key ways the graft-busting crusade has been a remarkable success exceeding mainstream expectations. Its punitive measures have been so widespread and severe, even at the magisterial and ministerial levels, that the outwardly visible culture of corruption has been fundamentally altered. Officials have grown noticeably more cautious and frugal - often to a fault. The corruption remains, for sure, but it's become like the Italian mob in New York City under prosecutor Dewey, or even the Russian oligarchs under Putin: it's been forced to go low-key, at least for the time being. For any society, that's really about the best you can hope for.

That leaves China's post-Tiananmen civil society - more specifically, its most politicized segments - at a loss for relevance. Their whole raison d'être has been that they must police the state because the state (and party) can't police itself; but now that the party-state's internal watchdogs are actually exercising their teeth, they come off as more nuisance than help, even with those in the government who may have formerly seen their role as legitimate.

Post-Tiananmen civil society has thus effectively been de-politicized. Civil society still exists, but now only as an adjunct to absolute communist party authority. One could argue that it never really wanted to be political anyway, in that it never had any intention of challenging communist rule; this misses the point, which is that it always operated under the assumption that private citizens had legitimate constitutional rights to bring charges against officials and the state. It's this fundamental assumption which Xi Jinping's party has overruled: since the party and state can still discipline themselves to be more responsive to the people, that precludes the people acting autonomously in contravention of the political monopoly.

In other words, the party still knows what's best for China, and until such time as the country's socioeconomic transition really comes off the rails, its citizens had better accept it.