As a new report shows Beijing dethroning New York as the world's billionaire capital, Donald Trump's resounding victory in Nevada says something about America's collective psychological state.
Americans don't want to be Mr. Nice Guy anymore - they just want to kick some butt again. In 1980, when "Let's make America great again" was first coined by Ronald Reagan, that meant intimidating the Soviet Union with a massive arms buildup. In 2016, Mr. Trump has recycled that to mean beating China in global trade.
This is a welcome development - it exposes who we really are and what we're really made of, because it disabuses us of all the stale platitudes, zombie-like sloganeering, increasingly empty and bankrupt ideas and ideals, and too-long-cherished myths that have prevented us from thinking and acting upon a realistic appraisal of ourselves.
The earthquake shaking up the American sociopolitical landscape is, at its root, a great nation clamoring to be great in a firm normal way again, not in some mushy exceptional way.
Whatever he eventually accomplishes, Mr. Trump has already struck at the heart of the ideological stranglehold that has crippled and paralyzed our domestic political culture with the predictable consequence of a yawning gap between our supersized international ambitions and our actual shrinking international profile.
You may be repulsed by his style, his overly flexible attitude towards his own personal integrity, and his quasi-demagogic streak, but you can't deny the obvious: he knows we're sick and tired of armchair intellectual debates and thin-skinned partisan bickering, because we want to see our supposedly wonderful system finally produce some RESULTS - FOR OURSELVES, never mind for the Chinese, the Russians, the Syrians, or the Ukrainians.
For too long our elites have assumed that not only could there be nothing possibly wrong with our own system, but that all of history was inexorably marching towards a universal adoption of our system. This is why they crafted a foreign policy of "invade the world" via our unrivaled military yet also "invite the world" with looser borders. It's why even "conservative" Bush-43 pushed for amnesty for illegal immigrants, whilst even "liberal" Obama pursued a far more aggressive foreign policy than his lackluster results would suggest. The gathering consensus now, of course, is that we've simply overreached abroad even as we've left home field undefended - it is the angry awakening to this reality that has fueled the wave which has carried Mr. Trump to his present heights.
At this point in time, Trump is the accurate representation and personification of where we stand as a nation - and where America stands in the world. This outweighs whatever particular flaws he may otherwise carry. What matters in the end is how well our next president reflects our collective mentality and consciousness.
And not incidentally, this is what the rest of the world also needs from America: an honest, introspective self-reappraisal. If we don't know where we ourselves are heading, how can we lead anyone else?
The so-called "Washington Consensus" may not be dead yet - but it's most certainly up for review and possible major revision. China has a key role to play in any shift that takes place in the coming years, and a Trump presidency, believe it or not, is probably just what Beijing needs to carry out its own much-needed restructuring. There's no better impetus to get your own house in order than a new business partner who won't let you squeeze him - indeed, who probably wants to squeeze you instead.
Wednesday, February 24, 2016
Tuesday, February 23, 2016
Is China just too big to fail?
This weekend's G-20 summit in Shanghai, which kicks off China's yearlong presidency of the world's most important economic grouping, will showcase Beijing's dramatically increased clout on the world stage since the global financial crisis of 2008-2009.
In the run-up, China's notorious industrial overcapacity is gaining prominence, emerging as an increasingly hot-button issue that's straining ties with Europe in particular.
For their part, China's Asian neighbors are adopting a "wait and see" attitude towards Beijing's latest promises to kill its "zombie companies".
China is increasingly seen as being "too big to fail" - if the financial markets are to be believed, it's already the single greatest factor weighing on investor sentiment. And even the Fed is basing its decisions increasingly on what happens there.
The "too big to fail" factor is recognized by some to be the biggest reason the yuan won't collapse; indeed, even China bears increasingly understand that betting against China means betting against the entire global economy (including the US), like this analyst who says the following (my emphasis):
In the run-up, China's notorious industrial overcapacity is gaining prominence, emerging as an increasingly hot-button issue that's straining ties with Europe in particular.
For their part, China's Asian neighbors are adopting a "wait and see" attitude towards Beijing's latest promises to kill its "zombie companies".
China is increasingly seen as being "too big to fail" - if the financial markets are to be believed, it's already the single greatest factor weighing on investor sentiment. And even the Fed is basing its decisions increasingly on what happens there.
The "too big to fail" factor is recognized by some to be the biggest reason the yuan won't collapse; indeed, even China bears increasingly understand that betting against China means betting against the entire global economy (including the US), like this analyst who says the following (my emphasis):
...in case the yuan depreciation argument stands on solid grounds, it may be a better idea simply to short the US markets, and that would be much cheaper than shorting the yuan!So yes, China can crash and fall alright...but the anxiety about this prospect shows just how far along it's come.
Friday, February 19, 2016
Misunderstanding how China thinks about its own transition
According to this article, China's continued use of heavy monetary and fiscal intervention to shore up its economy is the best evidence that its economy has already failed. Other than relying too much on the old argument that Beijing is effectively making up its growth figures, it betrays a fundamental misunderstanding of how China actually thinks about its own transition.
The crux of the argument is as follows:
The transition China is trying to make now is not to undo a past failure, but to move on before the deadweight of staled "success" becomes a true failure indeed.
Secondly, whatever "failure" threatens China is not seen as the fault of the central government per se: rather, it was the inability of the central government to rein in the misallocation of capital and economic resources at the provincial, municipal, and local levels under the previous generation of leadership, which was hampered by a weakness of central party and state authority under Hu Jintao on account of a decade-long power struggle with his predecessor Jiang Zemin. Jiang's "Shanghai clique" had leveraged the massive crisis-response stimulus of 2009 to deliberately devolve economic decision-making to the provinces, localities, and segments of the state-owned enterprise (SOE) system. (It has been suggested, too, that Jiang patronized the princeling Bo Xilai, disgraced ex-party secretary of Chongqing, as Hu's successor in lieu of the favored Xi Jinping.)
As of today, however, the center seems to have reversed this decline in its efficacy. In 2015 Xi Jinping's anti-corruption campaign has apparently become a permanent, institutionalized party and state function nationwide; the merger and consolidation of redundant SOEs was accelerated, bolstering a more centralized supervision of the state-run economy; through such methods as new bond issuance by the central bank (PBOC) to local governments and appropriation of local budgets in troubled areas, Beijing began a process of financial and fiscal reconsolidation; to top it off, 2016 began with a long-awaited overhaul of the PLA, dissolving the disjointed, even centrifugal structure of semi-autonomous military regions, replacing this with a more streamlined and centralized top-down command structure.
Rather than simply too much control, regulation, or intervention, Xi and co. believe China suffers from too patchy, too inconsistent or self-contradictory, or even too little of it. And while their long-term goal is clearly stated to be as little regulation as possible - i.e. give "market forces" a decisive role in the economy - they firmly think that China can only get there with more intensive party and state direction in the near term - specifically, more cohesive execution of the center's policies by its constituent parts.
Whether or not they're right is the Great Question of our time - and this blog is devoted to following the course of events that will answer it. But as far as they're concerned, right now, China has most certainly not "failed" - and that's why they feel no need to admit it.
(It's also useful to keep things in perspective. This report, cited by the above article as proof that consumer confidence in China is collapsing, still shows figures that are probably enviable by comparison with the world as a whole. Indeed, it cites that disposable income and consumer spending grew by 7.4 and 11 percent respectively in 2015 - that's not an economy on the verge of recession, and it's actually initial proof that the new government "stimulus" focused on consumption, launched mid-2015, is already working. The effect is particularly pronounced in the auto market: auto sales grew nearly 8 percent in January, an impressive clip for the world's largest vehicle market, and continuing a rebound since October.)
The crux of the argument is as follows:
Instead, it seems as if China is using Keynesian economic tools in an entirely appropriate way: to prop up a failing economy. The only missing element in this equation is an open admission by the Chinese government that its economy really is failing. But if the economy is succeeding, China's current economic policies make no sense.In the first place, the old growth model based on investment and exports has only "failed" in the sense that it grew bigger and ran longer than it should have. From Beijing's point of view (and indeed the whole world's), it was in fact a stupendous success - so much so that this itself reached the brink of becoming a "failure."
The transition China is trying to make now is not to undo a past failure, but to move on before the deadweight of staled "success" becomes a true failure indeed.
Secondly, whatever "failure" threatens China is not seen as the fault of the central government per se: rather, it was the inability of the central government to rein in the misallocation of capital and economic resources at the provincial, municipal, and local levels under the previous generation of leadership, which was hampered by a weakness of central party and state authority under Hu Jintao on account of a decade-long power struggle with his predecessor Jiang Zemin. Jiang's "Shanghai clique" had leveraged the massive crisis-response stimulus of 2009 to deliberately devolve economic decision-making to the provinces, localities, and segments of the state-owned enterprise (SOE) system. (It has been suggested, too, that Jiang patronized the princeling Bo Xilai, disgraced ex-party secretary of Chongqing, as Hu's successor in lieu of the favored Xi Jinping.)
As of today, however, the center seems to have reversed this decline in its efficacy. In 2015 Xi Jinping's anti-corruption campaign has apparently become a permanent, institutionalized party and state function nationwide; the merger and consolidation of redundant SOEs was accelerated, bolstering a more centralized supervision of the state-run economy; through such methods as new bond issuance by the central bank (PBOC) to local governments and appropriation of local budgets in troubled areas, Beijing began a process of financial and fiscal reconsolidation; to top it off, 2016 began with a long-awaited overhaul of the PLA, dissolving the disjointed, even centrifugal structure of semi-autonomous military regions, replacing this with a more streamlined and centralized top-down command structure.
Rather than simply too much control, regulation, or intervention, Xi and co. believe China suffers from too patchy, too inconsistent or self-contradictory, or even too little of it. And while their long-term goal is clearly stated to be as little regulation as possible - i.e. give "market forces" a decisive role in the economy - they firmly think that China can only get there with more intensive party and state direction in the near term - specifically, more cohesive execution of the center's policies by its constituent parts.
Whether or not they're right is the Great Question of our time - and this blog is devoted to following the course of events that will answer it. But as far as they're concerned, right now, China has most certainly not "failed" - and that's why they feel no need to admit it.
(It's also useful to keep things in perspective. This report, cited by the above article as proof that consumer confidence in China is collapsing, still shows figures that are probably enviable by comparison with the world as a whole. Indeed, it cites that disposable income and consumer spending grew by 7.4 and 11 percent respectively in 2015 - that's not an economy on the verge of recession, and it's actually initial proof that the new government "stimulus" focused on consumption, launched mid-2015, is already working. The effect is particularly pronounced in the auto market: auto sales grew nearly 8 percent in January, an impressive clip for the world's largest vehicle market, and continuing a rebound since October.)
Tuesday, February 16, 2016
George Soros may have done China a big favor
With the yuan surprisingly strengthening instead of weakening after Lunar New Year week, it now appears that George Soros and others betting big on a Chinese financial meltdown have given a bigger boost to the reformers in Beijing than even Xi Jinping could have. Whereas before everyone was fearful that China (not so) secretly intended to weaken the RMB to boost exports, it's all but given now that it in fact wants an artificially strong currency as long as possible to facilitate - force, actually - painful structural reforms.
Those vested interests in the lumbering SOE sector which have fiercely resisted restructuring and have doubtless lobbied for a large yuan devaluation so they could dump more excess capacity on global markets have probably lost their reactionary campaign against the Xi-Li reform team for good: before Mr. Soros and other speculators openly declared their intention to rake in billions from China's collapse, their arguments for a weak yuan were hard to counter; now, however, they will be viewed as traitors making common cause with foreign devils who want to steal tons of money from the Chinese people by sowing panic and distrust in their system.
Of course, few doubt that the yuan will continue to slide throughout 2016: as of this moment, both onshore and offshore rates are falling quickly against the dollar from the strong fix that PBOC set at the beginning of this week following New Year's; but Beijing has already sent a clear signal that any talk of rapid uncontrollable currency collapse will meet determined opposition, as PBOC chief Zhou Xiaochuan has finally broken his months-long silence to reiterate his intention to keep the RMB strong, with special emphasis this time on warding off speculators.
In another sign that things may be looking up for China, Inc., the Shanghai stock market has rebounded over 3 percent today despite more worse-than-expected trade data yesterday of 11 percent decline in exports and 18 percent decline in imports. Should the index rally above 3,000 points in the coming days it could herald a turn of sentiment, in that bad news is now being regarded as good news.
Whatever happens going forward, there's little doubt that Zhou, Li Keqiang, and Xi Jinping himself will try to not waste this crisis caused by foreign speculators, and use it as yet another justification to get their ambitious programs off the ground, with a stable currency as a requisite backdrop.
A plausible refutation of the "super-bear" argument that Chinese banks are on the verge of collapse has been provided here, which essentially stresses the same basic point I made about China being a dictatorship, and hence its financial system simply doesn't work the same way as a Western one.
Thursday, February 11, 2016
The real reason China won't have a financial crash: dictatorship
The recent bloodbath in financial stocks, especially of major European banks, has led to a renewed concern over China's own stressed banking sector.
Hedge fund manager Kyle Bass, who has become perhaps the most famous yuan bear since George Soros' now-celebrated broadside against the Chinese economy last month, bases his bet of a massive RMB devaluation on the staggering costs that Beijing will incur to rescue its banks from bad loans, to the tune of at least US$3.5 trillion, if not far more.
Other recent mind-boggling estimates have been in the range of $5 to $8 trillion for a comprehensive recapitalization of the Chinese banking system.
Other recent mind-boggling estimates have been in the range of $5 to $8 trillion for a comprehensive recapitalization of the Chinese banking system.
How plausible are these Apocalyptic figures?
The $3.5 trillion is based on a non-performing loan (NPL) ratio of 10 percent of China's total banking assets of $34.5 trillion (though according to this official report, it's actually $29.7 trillion as of end-2015). According to Mr. Bass, this is a conservative estimate considering past NPL cycles in Chinese history - he is referring to the late-1990s cycle in the run-up to China's accession to the WTO, in which the NPL ratio was widely believed to be 25 to 40 percent. China grew out of that funk - the hope in Beijing today is that it will grow out of the present one, as well.
Only a small minority believes the official statistic that merely 1.6 percent of outstanding Chinese loans are currently non-performing; Chinese banks themselves, especially smaller or private banks without implicit guarantees against failure enjoyed by their large state-backed counterparts, do in fact price in a ratio of about 10 percent in their risk assessments for lending. But other unofficial estimates range anywhere from 6 to over 21 percent - a stunningly wide range for what's arguably one of the most critical metrics as far as the stability of the global financial system is concerned.
Only a small minority believes the official statistic that merely 1.6 percent of outstanding Chinese loans are currently non-performing; Chinese banks themselves, especially smaller or private banks without implicit guarantees against failure enjoyed by their large state-backed counterparts, do in fact price in a ratio of about 10 percent in their risk assessments for lending. But other unofficial estimates range anywhere from 6 to over 21 percent - a stunningly wide range for what's arguably one of the most critical metrics as far as the stability of the global financial system is concerned.
No doubt this uncertainty about the actual health of Chinese banks is becoming one of the great big questions hanging over markets on every continent and in practically every country - as Fed chair Janet Yellen has again singled out China as the main international concern for US monetary policy in her latest testimony to Congress.
But like so many other Western experts, Mr. Bass clearly misunderstands China: it's an Asian autocracy, not a Western democracy. Those who consider him a prophet for forecasting the US subprime mortgage crisis in 2007 are quickly countered by those who point out how badly his prediction that Japanese bonds would meltdown in 2010 turned out. There's good reason to believe that on China, his Asian misinterpretation will be repeated, rather than his Western prescience. If Japan is an Oriental command-and-control system that defies the logic of Western markets, China is far more so.
Per a late-2014 report by Chinese government-linked researchers, the country wasted $6.9 trillion of investment from 2009 thru 2013 - that's right, US$6.9 TRILLION?!
That translates to a non-performing loan ratio approaching 50 percent for the stimulus-steroid-boosted years 2009-2013.
In a Western system, such staggering losses would have triggered a complete financial catastrophe by now. Not so in China - the money was, for the most part, simply pocketed by corrupt officials and their crony entrepreneurs, and showed up dramatically in the rest of the economy, but most obviously in the astronomical real estate bubble that has made housing unaffordable for ordinary Chinese.
Mr. Xi Jinping and co. are now attempting to massively redistribute these ill-gotten gains from the ruling elite to the masses - before it all flies out of the country. This means more dictatorship, not less - more state intervention, not less.
China's a basket case alright - even more so than the stubbornest bears would have it. For this very reason, they're likely to be frustrated.
Per a late-2014 report by Chinese government-linked researchers, the country wasted $6.9 trillion of investment from 2009 thru 2013 - that's right, US$6.9 TRILLION?!
That translates to a non-performing loan ratio approaching 50 percent for the stimulus-steroid-boosted years 2009-2013.
In a Western system, such staggering losses would have triggered a complete financial catastrophe by now. Not so in China - the money was, for the most part, simply pocketed by corrupt officials and their crony entrepreneurs, and showed up dramatically in the rest of the economy, but most obviously in the astronomical real estate bubble that has made housing unaffordable for ordinary Chinese.
Mr. Xi Jinping and co. are now attempting to massively redistribute these ill-gotten gains from the ruling elite to the masses - before it all flies out of the country. This means more dictatorship, not less - more state intervention, not less.
China's a basket case alright - even more so than the stubbornest bears would have it. For this very reason, they're likely to be frustrated.
Friday, February 5, 2016
Taiwan's real problem: it needs China more than China needs it
A new era has clearly dawned in cross-strait relations, and both sides will adjust accordingly in the coming years.
Beyond the short-term euphoria of the overwhelming mandate for the pro-independence DPP in both the presidency and parliament, some hard realities will, before long, settle in on the island.
As with the rest of Asia, Taiwan is grappling with how to handle a rising China. That it has rejected the accommodationist stance of the KMT is an obvious indication of its unease with the prospect of economic dependence on a massive neighbor whose political system it has no desire to be absorbed into. Yet it is hard to see just how this economic dependence can be substantially reduced by any government, however determined its pursuit of lasting autonomy from the mainland. Whether it likes China or not, its relationship with China will continue to be the defining one for Taiwan.
While from the 1990s Taiwanese businesses could not fathom being denied access to the mainland's lucrative supply of cheap labor, today they increasingly can't fathom being denied access to the mainland's massive market. China's recent financial and economic difficulties have only more sharply highlighted the island's awkward intertwinement with it, rather than offering a way out of Beijing's orbit.
One is tempted to argue that Taiwan has none but itself to blame. It has fallen behind South Korea as a high-end producer and exporter, much like Hong Kong has been squeezed by Shanghai to the north and Singapore to the south as a leading financial hub. Arguably the very fact that Taiwan and Hong Kong have been the main conduits for China's opening to the world has rendered their comparative advantages less and less salient than those of the other "little dragons" of a generation ago. In reality, there is little that either could have done to avert their present crises with respect to the mainland.
The outgoing KMT may have been too naively hopeful of its capacity to tune a cross-strait integration in Taiwan's favor, but it recognized the fundamental inevitability of such an integration in one form or another. If the DPP in its triumphalism thinks otherwise, it will relearn the hard way that dependence on the mainland isn't simply the fault of a greedy industrial and commercial elite; it reflects plain economic common sense.
Taiwan needs China more than China needs it; it has little left that Beijing can't get from other trade partners, notably South Korea. On the other hand, nothing can replace the combination of size and proximity of the mainland market for Taiwan - and nothing ever will.
Taiwan must reverse this imbalance so that it enjoys leverage over the communist dictatorship instead of the other way around. It will most certainly not accomplish this by trying to steer away from Beijing - that will only hasten its descent into servitude. As Ukraine must do with respect to Russia, Taiwan must acquire and exercise the finest of all skills: confronting a far stronger adversary on his own terms. America will not come to the rescue - no more than western Europe will rush to Ukraine's. Freedom can only triumph by converting the unfree from within - the free world is today paying the price for the American effort to impose it from without.
Such is the magnitude of Taiwan's mission and mandate in the global family of nations.
Beyond the short-term euphoria of the overwhelming mandate for the pro-independence DPP in both the presidency and parliament, some hard realities will, before long, settle in on the island.
As with the rest of Asia, Taiwan is grappling with how to handle a rising China. That it has rejected the accommodationist stance of the KMT is an obvious indication of its unease with the prospect of economic dependence on a massive neighbor whose political system it has no desire to be absorbed into. Yet it is hard to see just how this economic dependence can be substantially reduced by any government, however determined its pursuit of lasting autonomy from the mainland. Whether it likes China or not, its relationship with China will continue to be the defining one for Taiwan.
While from the 1990s Taiwanese businesses could not fathom being denied access to the mainland's lucrative supply of cheap labor, today they increasingly can't fathom being denied access to the mainland's massive market. China's recent financial and economic difficulties have only more sharply highlighted the island's awkward intertwinement with it, rather than offering a way out of Beijing's orbit.
One is tempted to argue that Taiwan has none but itself to blame. It has fallen behind South Korea as a high-end producer and exporter, much like Hong Kong has been squeezed by Shanghai to the north and Singapore to the south as a leading financial hub. Arguably the very fact that Taiwan and Hong Kong have been the main conduits for China's opening to the world has rendered their comparative advantages less and less salient than those of the other "little dragons" of a generation ago. In reality, there is little that either could have done to avert their present crises with respect to the mainland.
The outgoing KMT may have been too naively hopeful of its capacity to tune a cross-strait integration in Taiwan's favor, but it recognized the fundamental inevitability of such an integration in one form or another. If the DPP in its triumphalism thinks otherwise, it will relearn the hard way that dependence on the mainland isn't simply the fault of a greedy industrial and commercial elite; it reflects plain economic common sense.
Taiwan needs China more than China needs it; it has little left that Beijing can't get from other trade partners, notably South Korea. On the other hand, nothing can replace the combination of size and proximity of the mainland market for Taiwan - and nothing ever will.
Taiwan must reverse this imbalance so that it enjoys leverage over the communist dictatorship instead of the other way around. It will most certainly not accomplish this by trying to steer away from Beijing - that will only hasten its descent into servitude. As Ukraine must do with respect to Russia, Taiwan must acquire and exercise the finest of all skills: confronting a far stronger adversary on his own terms. America will not come to the rescue - no more than western Europe will rush to Ukraine's. Freedom can only triumph by converting the unfree from within - the free world is today paying the price for the American effort to impose it from without.
Such is the magnitude of Taiwan's mission and mandate in the global family of nations.
Thursday, February 4, 2016
2016 will make or break Xi Jinping's term as paramount leader
Reports that Xi Jinping is now being referred to as the "core" leader of China appear to coincide with the middle kingdom's latest financial troubles, and could be an indication that we have reached a make-or-break juncture in Mr. Xi's expected decade-long term as paramount leader.
On the one hand, it will be reassuring to those that welcome China's rise to hear that Xi is increasingly frustrated with bureaucratic inertia within the communist party ranks - they've been saying all along that this is the main obstacle to much-needed economic reform and restructuring, and that Xi's own personal determination to transition the Chinese economy from investment and trade towards services and domestic consumption has never been in much doubt.
On the other hand, it is downright scary to those fearful of China's autocratic retrenchment that so much now depends not merely on the ruling party, but on just one man's authority over that party - these liberals are left to wonder how on earth China will finally get on the path to Western-style democratization someday, assuming that it's even still desirable for Beijing if it manages to become an even wealthier and stronger dictatorship than it already is.
Because China has essentially run out of time to start fixing its deep underlying socioeconomic imbalances, 2016 will almost certainly go down as the year in which Xi Jinping's ambitious scheme for taking modernization to the next stage either finally lifted off or sputtered out unceremoniously on the runway.
One can easily sense Xi's growing impatience with the vested interests within the party - the local officials and state enterprise bosses he hasn't yet brought to heel - now that the entire world is fixated on the possibility of a hard landing of the Chinese economy in the form of a massive, unintended and uncontrolled devaluation of the yuan. He knows that no matter what the facts on the ground, that such a disaster will be squarely blamed on him and him alone.
Ironically, it is world opinion that ultimately has Xi's back in his struggle to whip his party into line: we may not like him, but we're woefully unprepared to deal with the consequences of his failure to do so. At a time of upheaval in the Middle East and stagnation in Europe and America that have fueled both the extreme right and the extreme left to a fever pitch unseen in four decades, a Chinese collapse is likely to truly unleash the worldwide floodgates of bigotry and xenophobia in the form of trade and currency wars emanating outward from Asia, and possibly even reverse the seemingly unstoppable march of globalization since the end of the Cold War.
Yet that's why, in the final analysis, Mr. Xi has a pretty good shot - to bet against him is to bet against the status quo of not just China, but the entire edifice of the post-Bretton Woods global financial and economic system dominated by central banks, their subsidiary large international financial institutions, and the massive transnational corporations.
That's a much more formidable lineup than a communist dictatorship, even China's.
On the one hand, it will be reassuring to those that welcome China's rise to hear that Xi is increasingly frustrated with bureaucratic inertia within the communist party ranks - they've been saying all along that this is the main obstacle to much-needed economic reform and restructuring, and that Xi's own personal determination to transition the Chinese economy from investment and trade towards services and domestic consumption has never been in much doubt.
On the other hand, it is downright scary to those fearful of China's autocratic retrenchment that so much now depends not merely on the ruling party, but on just one man's authority over that party - these liberals are left to wonder how on earth China will finally get on the path to Western-style democratization someday, assuming that it's even still desirable for Beijing if it manages to become an even wealthier and stronger dictatorship than it already is.
Because China has essentially run out of time to start fixing its deep underlying socioeconomic imbalances, 2016 will almost certainly go down as the year in which Xi Jinping's ambitious scheme for taking modernization to the next stage either finally lifted off or sputtered out unceremoniously on the runway.
One can easily sense Xi's growing impatience with the vested interests within the party - the local officials and state enterprise bosses he hasn't yet brought to heel - now that the entire world is fixated on the possibility of a hard landing of the Chinese economy in the form of a massive, unintended and uncontrolled devaluation of the yuan. He knows that no matter what the facts on the ground, that such a disaster will be squarely blamed on him and him alone.
Ironically, it is world opinion that ultimately has Xi's back in his struggle to whip his party into line: we may not like him, but we're woefully unprepared to deal with the consequences of his failure to do so. At a time of upheaval in the Middle East and stagnation in Europe and America that have fueled both the extreme right and the extreme left to a fever pitch unseen in four decades, a Chinese collapse is likely to truly unleash the worldwide floodgates of bigotry and xenophobia in the form of trade and currency wars emanating outward from Asia, and possibly even reverse the seemingly unstoppable march of globalization since the end of the Cold War.
Yet that's why, in the final analysis, Mr. Xi has a pretty good shot - to bet against him is to bet against the status quo of not just China, but the entire edifice of the post-Bretton Woods global financial and economic system dominated by central banks, their subsidiary large international financial institutions, and the massive transnational corporations.
That's a much more formidable lineup than a communist dictatorship, even China's.
Wednesday, February 3, 2016
Pope Francis blesses Xi's China: what does it mean?
In what's sure to go down as another one of his controversial interviews, Pope Francis has effectively officially blessed Xi Jinping and the People's Republic of China at just the moment when it appears that the entire capitalist world has become dependent on the last great communist state.
His message that the world should not fear China's rise is sure to endear him to the authorities in Beijing, who have precious few Western leaders they can count on to be so unreservedly welcoming and positive towards their unelected autocratic rule - or rather, so apparently naive in equating the Chinese state with the Chinese people.
But as with all things with this maverick pontiff, there are some deep insights which are unpleasant to those of opposing viewpoints precisely because there's such a large degree of truth to them. Here are what I take to be the three big ones.
1. China - even communist China - is yet another non-Christian entity that Christians are called on today to stop judging and start loving as it is.
In case anyone forgets, the great Pope St. John Paul II brought about the fall of communism in the eastern bloc precisely because he was trusted by the communists themselves; he understood the peculiar aspirations and fears of his native Poland's atheist masters so well that they couldn't bring it upon themselves to stop surrendering more and more of their dictatorial authority - until they found themselves in open power-sharing negotiations with the opposition (Solidarity) by 1988.
To this day, it's a great scandal for Polish ultra-conservatives and ultra-nationalists that the communist regime wasn't violently overthrown with bombs, bullets, and prison or exile for its officials and enablers - that on the contrary, many minor communist bureaucrats remained in their posts into the 1990s.
The sad fact is, too many devout Christians easily come off as judgmental bigots when it comes to their attitudes towards non-Christian value systems, which whether secular or religious all share the common goal of collective human happiness. And Francis yet again exposes the root cause of such intolerance: a fear of what's different and unfamiliar, ultimately resulting from one's own lack of faith.
With China, this isn't just about Chinese communism, but China itself, as both a people and a culture. Which leads to the next point:
2. Just because it's not elected in the Western manner doesn't mean the Chinese state isn't representative of Chinese people, culture, and history.
Since China abandoned its pretenses of being a revolutionary socialist society in the 1980s, it has inevitably returned to a more benign autocracy based on its ancient Confucian and Legalist social and political philosophies, respectively: value systems that stress authority and hierarchy as unquestioned and unalienable realities in themselves, not subject to their subjects. Like all astute observers of China, Francis recognizes that this fundamental conservatism underlying Chinese culture and politics is deeply rooted, presenting a far greater challenge to Western-style democratization than any residual communist ideology could be.
Thankfully in this regard, even the democratic West is now confronting the limits of the usefulness of its freedoms. The right-wing backlash from the US to Poland indicates that conservative populists increasingly despise what they regard as the degradation of their societies into the chaos of hyper-consumerism, hyper-multiculturalism, and hyper-sexualization; this in turn only further fuels the enmity of the secular and liberal elite and its culture-war allies among racial, economic, and sexual progressives. What passes for "free press" these days is actually an extreme polarization of media into what are essentially rival propaganda mills that distort, omit, or outright fabricate the truth no less effectively than state-controlled media in unfree societies.
It is people who ultimately determine their political system and whose will is ultimately reflected in it: not only in its relative abundance or lack of freedom, but more critically in the constructive or destructive use of what freedom it does have. Only time will tell if this is an area in which, as Francis says, China actually has something to teach the West, just as it has something to learn from it.
That being said, while remaining on the topic of human freedom, here's the final, most important takeaway:
3. China's long-term change and reform in the right path depends on the free choice of its own people to come to terms with their history, not on any imposed revision of that history which purports to "set the record straight" by settling old scores.
What China - indeed, the whole world - desperately needs is a new culture characterized by the forgiving love of one's bitter enemies. In other words, a culture of Mercy (capital "M"), where "Mercy" essentially means "goodwill towards one who deserves ill-will."
This radical transformation will be catalyzed by those who, in Francis' words, take it upon themselves to come to terms with their own history. It is only through this thorough introspection of one's own past that one is informed by one's own conscience that he or she has no right to pass judgment on a fellow man or woman - that there is a God who, in being absolutely forgiving of one's own sins and faults, ordains that our true contentment is found in being absolutely forgiving of the sins and faults of others.
This is true freedom: the intimate knowledge and experience of forgiveness that liberates the soul from the debts it holds against its oppressors - beginning with itself.
Until we experience this kind of Divine Mercy, we can never be free: we condemn ourselves to the slavery of our past history, of our present circumstances, and of all those who we perceive to owe us a debt on account of offense, loss, or injury.
Under this most cruel and insidious interior bondage, we are not agents of peace and reconciliation, but instead wield the sword of Vengeance, which destroys not sin but the sinner - ourselves no less than our enemies.
But free of it, we are worthy to carry the sword of Mercy, which saves the sinner by destroying sin - and converts our enemies into our friends and allies.
The ultimate reason that dictatorships survive - just as democracies fail - is that outward freedom in the hands of an inwardly unfree people leads to chaos and destruction, not stability and prosperity. And ultimately, the only hope for the lasting triumph of democracy - of the outward freedoms protected by laws - is the undergirding victory of Mercy that liberates the inner human spirit.
This crucial distinction is the real matter at hand for China - and the whole world - in this third millennium.
His message that the world should not fear China's rise is sure to endear him to the authorities in Beijing, who have precious few Western leaders they can count on to be so unreservedly welcoming and positive towards their unelected autocratic rule - or rather, so apparently naive in equating the Chinese state with the Chinese people.
But as with all things with this maverick pontiff, there are some deep insights which are unpleasant to those of opposing viewpoints precisely because there's such a large degree of truth to them. Here are what I take to be the three big ones.
1. China - even communist China - is yet another non-Christian entity that Christians are called on today to stop judging and start loving as it is.
In case anyone forgets, the great Pope St. John Paul II brought about the fall of communism in the eastern bloc precisely because he was trusted by the communists themselves; he understood the peculiar aspirations and fears of his native Poland's atheist masters so well that they couldn't bring it upon themselves to stop surrendering more and more of their dictatorial authority - until they found themselves in open power-sharing negotiations with the opposition (Solidarity) by 1988.
To this day, it's a great scandal for Polish ultra-conservatives and ultra-nationalists that the communist regime wasn't violently overthrown with bombs, bullets, and prison or exile for its officials and enablers - that on the contrary, many minor communist bureaucrats remained in their posts into the 1990s.
The sad fact is, too many devout Christians easily come off as judgmental bigots when it comes to their attitudes towards non-Christian value systems, which whether secular or religious all share the common goal of collective human happiness. And Francis yet again exposes the root cause of such intolerance: a fear of what's different and unfamiliar, ultimately resulting from one's own lack of faith.
With China, this isn't just about Chinese communism, but China itself, as both a people and a culture. Which leads to the next point:
2. Just because it's not elected in the Western manner doesn't mean the Chinese state isn't representative of Chinese people, culture, and history.
Since China abandoned its pretenses of being a revolutionary socialist society in the 1980s, it has inevitably returned to a more benign autocracy based on its ancient Confucian and Legalist social and political philosophies, respectively: value systems that stress authority and hierarchy as unquestioned and unalienable realities in themselves, not subject to their subjects. Like all astute observers of China, Francis recognizes that this fundamental conservatism underlying Chinese culture and politics is deeply rooted, presenting a far greater challenge to Western-style democratization than any residual communist ideology could be.
Thankfully in this regard, even the democratic West is now confronting the limits of the usefulness of its freedoms. The right-wing backlash from the US to Poland indicates that conservative populists increasingly despise what they regard as the degradation of their societies into the chaos of hyper-consumerism, hyper-multiculturalism, and hyper-sexualization; this in turn only further fuels the enmity of the secular and liberal elite and its culture-war allies among racial, economic, and sexual progressives. What passes for "free press" these days is actually an extreme polarization of media into what are essentially rival propaganda mills that distort, omit, or outright fabricate the truth no less effectively than state-controlled media in unfree societies.
It is people who ultimately determine their political system and whose will is ultimately reflected in it: not only in its relative abundance or lack of freedom, but more critically in the constructive or destructive use of what freedom it does have. Only time will tell if this is an area in which, as Francis says, China actually has something to teach the West, just as it has something to learn from it.
That being said, while remaining on the topic of human freedom, here's the final, most important takeaway:
3. China's long-term change and reform in the right path depends on the free choice of its own people to come to terms with their history, not on any imposed revision of that history which purports to "set the record straight" by settling old scores.
What China - indeed, the whole world - desperately needs is a new culture characterized by the forgiving love of one's bitter enemies. In other words, a culture of Mercy (capital "M"), where "Mercy" essentially means "goodwill towards one who deserves ill-will."
This radical transformation will be catalyzed by those who, in Francis' words, take it upon themselves to come to terms with their own history. It is only through this thorough introspection of one's own past that one is informed by one's own conscience that he or she has no right to pass judgment on a fellow man or woman - that there is a God who, in being absolutely forgiving of one's own sins and faults, ordains that our true contentment is found in being absolutely forgiving of the sins and faults of others.
This is true freedom: the intimate knowledge and experience of forgiveness that liberates the soul from the debts it holds against its oppressors - beginning with itself.
Until we experience this kind of Divine Mercy, we can never be free: we condemn ourselves to the slavery of our past history, of our present circumstances, and of all those who we perceive to owe us a debt on account of offense, loss, or injury.
Under this most cruel and insidious interior bondage, we are not agents of peace and reconciliation, but instead wield the sword of Vengeance, which destroys not sin but the sinner - ourselves no less than our enemies.
But free of it, we are worthy to carry the sword of Mercy, which saves the sinner by destroying sin - and converts our enemies into our friends and allies.
The ultimate reason that dictatorships survive - just as democracies fail - is that outward freedom in the hands of an inwardly unfree people leads to chaos and destruction, not stability and prosperity. And ultimately, the only hope for the lasting triumph of democracy - of the outward freedoms protected by laws - is the undergirding victory of Mercy that liberates the inner human spirit.
This crucial distinction is the real matter at hand for China - and the whole world - in this third millennium.
Monday, February 1, 2016
Yes, China's about to crash - in US dollar terms
George Soros drew the ire of Beijing last month when he basically said that China's already in a hard landing. He could have qualified it by adding, "in US dollar terms" - that would have made it even more starkly clear that he was singularly focused on a yuan collapse, and made his "China's already crashing" thesis much more credible.
Some basic figures I've crunched are illuminating. In 2014, China's GDP was RMB 63.614 trillion, which translates to USD $10.251 trillion at the 12/31/2014 closing exchange rate of $0.16115 per yuan; in 2015, China's GDP of roughly RMB 67.67 trillion translated to USD $10.422 trillion at the 12/31/2015 closing rate of $0.15401 per yuan.
This means that despite nominal and real GDP growth of 6.4 and 6.9 percent, respectively, in FY 2015, the Chinese economy grew by less than 1.7 percent in nominal US dollar terms last year.
This was actually a stellar performance compared to other emerging markets besides India: these predominantly commodity-producing and exporting economies averaged 4 to 5 percent growth in their own currencies but contracted substantially in dollar terms as their local tenders crashed in the region of 15 to 30 percent against the greenback. Russia and Venezuela, among others worst-hit by the oil slump coupled with their own mismanagement and/or sanctions, have in fact hit the ground with a thud even in their native currencies (i.e. registered contractions in local GDP) and a much louder boom (catastrophic GDP contraction over 20 percent) in dollar terms.
As of yesterday, however, the yuan dipped to a new low of $0.15126 since its descent began last year and, more to the point, since its new year 2016 travails have shocked the world in the first two weeks of January.
At this exchange rate, China's 2015 GDP in US dollar terms has dipped below its 2014 GDP in dollar terms at end-2014, or only $10.236 trillion as against $10.251 trillion.
In other words, China has already stalled in US dollar terms, in what looks like the start of a dollar-denominated crash that it can only hope to keep slow and orderly - if it proves impossible to stop it.
Even if Beijing engineers a gradual yuan depreciation thru the rest of 2016, this alone strains its ability to generate even a single extra US dollar of GDP - a far cry from 2014, when its US dollar growth by itself was bigger than Turkey's entire economy.
A yuan of 7.0 to the dollar at year-end 2016 means that China must register nominal GDP growth - in local yuan terms - of 7.8 percent simply to match its 2015 US dollar GDP. At 7.3 to the dollar, this required nominal local growth rises to a whopping 12.4 percent.
Given that China is set to struggle all year with industrial deflation and overcapacity, its nominal GDP growth in yuan is unlikely to top 6.0-6.5 percent, even if the targeted real growth of 6.5-7.0 percent is met.
So unless Beijing aggressively tackles and manages its transition as never before with the much-touted "supply-side reforms", it's all but assured that China's economy is set to contract in USD terms this year for the first time in over two decades - and the only question is by how much.
To compare an optimistic scenario of small devaluation to 7.0 with nominal local growth of between 5.5 to 6.0 - let's say 5.8 percent - against a pessimistic scenario of big devaluation to 8.3 - the mid-1990s to mid-2000s dollar peg - with juiced-up nominal local growth of 6.5 percent, the following are the potential dollar-denominated 2016 GDP and year-on-year dollar GDP change from 2015:
Optimistic: $10.228 trillion, minus -1.9 percent
Pessimistic: $8.683 trillion, minus -16.7 percent
Quite telling, eh? Anywhere from a 2 to 17 percent contraction in US dollar terms is reasonably in the cards for the Chinese economy this year - per normal international commercial rationale (exclusive of political manipulation and interventionism).
Given Beijing's ambitions to challenge Washington's global hegemony, the size of its economy is most appropriately measured in dollars - and by this measure, it's already looking at a small crash or a big one. By this point, it had better be thinking long and hard about what yuan-boosting bazookas it may have to pull out to prevent what could amount to a catastrophic loss of face, prestige, and credibility.
If recent hints from the communist regime are any indication, the base case now is to delay as long as possible even a mild further slide towards 7.0 per dollar, at least until the RMB is actually officially added to the SDR basket in October - at which time some desperately needed support and appreciation pressure will come from large international banks; quite possibly the ideal outcome is now considered to be an appreciative stabilization in the 6.3 to 6.5 range late this year.
Just about everything will have to go very, very right for Beijing from here on out. Conversely, at PBOC's urging there could be an unprecedented new round of currency cooperation between major central banks - in collusion with their largest commercial and investment vassals and the big transnational corporates - to keep the yuan stable, even at the expense of what are probably the last remaining shreds of the myth of a "free market" in a blatantly rigged and manipulated global credit system.
Some basic figures I've crunched are illuminating. In 2014, China's GDP was RMB 63.614 trillion, which translates to USD $10.251 trillion at the 12/31/2014 closing exchange rate of $0.16115 per yuan; in 2015, China's GDP of roughly RMB 67.67 trillion translated to USD $10.422 trillion at the 12/31/2015 closing rate of $0.15401 per yuan.
This means that despite nominal and real GDP growth of 6.4 and 6.9 percent, respectively, in FY 2015, the Chinese economy grew by less than 1.7 percent in nominal US dollar terms last year.
This was actually a stellar performance compared to other emerging markets besides India: these predominantly commodity-producing and exporting economies averaged 4 to 5 percent growth in their own currencies but contracted substantially in dollar terms as their local tenders crashed in the region of 15 to 30 percent against the greenback. Russia and Venezuela, among others worst-hit by the oil slump coupled with their own mismanagement and/or sanctions, have in fact hit the ground with a thud even in their native currencies (i.e. registered contractions in local GDP) and a much louder boom (catastrophic GDP contraction over 20 percent) in dollar terms.
As of yesterday, however, the yuan dipped to a new low of $0.15126 since its descent began last year and, more to the point, since its new year 2016 travails have shocked the world in the first two weeks of January.
At this exchange rate, China's 2015 GDP in US dollar terms has dipped below its 2014 GDP in dollar terms at end-2014, or only $10.236 trillion as against $10.251 trillion.
In other words, China has already stalled in US dollar terms, in what looks like the start of a dollar-denominated crash that it can only hope to keep slow and orderly - if it proves impossible to stop it.
Even if Beijing engineers a gradual yuan depreciation thru the rest of 2016, this alone strains its ability to generate even a single extra US dollar of GDP - a far cry from 2014, when its US dollar growth by itself was bigger than Turkey's entire economy.
A yuan of 7.0 to the dollar at year-end 2016 means that China must register nominal GDP growth - in local yuan terms - of 7.8 percent simply to match its 2015 US dollar GDP. At 7.3 to the dollar, this required nominal local growth rises to a whopping 12.4 percent.
Given that China is set to struggle all year with industrial deflation and overcapacity, its nominal GDP growth in yuan is unlikely to top 6.0-6.5 percent, even if the targeted real growth of 6.5-7.0 percent is met.
So unless Beijing aggressively tackles and manages its transition as never before with the much-touted "supply-side reforms", it's all but assured that China's economy is set to contract in USD terms this year for the first time in over two decades - and the only question is by how much.
To compare an optimistic scenario of small devaluation to 7.0 with nominal local growth of between 5.5 to 6.0 - let's say 5.8 percent - against a pessimistic scenario of big devaluation to 8.3 - the mid-1990s to mid-2000s dollar peg - with juiced-up nominal local growth of 6.5 percent, the following are the potential dollar-denominated 2016 GDP and year-on-year dollar GDP change from 2015:
Optimistic: $10.228 trillion, minus -1.9 percent
Pessimistic: $8.683 trillion, minus -16.7 percent
Quite telling, eh? Anywhere from a 2 to 17 percent contraction in US dollar terms is reasonably in the cards for the Chinese economy this year - per normal international commercial rationale (exclusive of political manipulation and interventionism).
Given Beijing's ambitions to challenge Washington's global hegemony, the size of its economy is most appropriately measured in dollars - and by this measure, it's already looking at a small crash or a big one. By this point, it had better be thinking long and hard about what yuan-boosting bazookas it may have to pull out to prevent what could amount to a catastrophic loss of face, prestige, and credibility.
If recent hints from the communist regime are any indication, the base case now is to delay as long as possible even a mild further slide towards 7.0 per dollar, at least until the RMB is actually officially added to the SDR basket in October - at which time some desperately needed support and appreciation pressure will come from large international banks; quite possibly the ideal outcome is now considered to be an appreciative stabilization in the 6.3 to 6.5 range late this year.
Just about everything will have to go very, very right for Beijing from here on out. Conversely, at PBOC's urging there could be an unprecedented new round of currency cooperation between major central banks - in collusion with their largest commercial and investment vassals and the big transnational corporates - to keep the yuan stable, even at the expense of what are probably the last remaining shreds of the myth of a "free market" in a blatantly rigged and manipulated global credit system.
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