China's critics contradict themselves

Self-contradiction is rife in China analysis, especially by its most vehement critics.

On the one hand, Beijing gets bashed for not pushing through market reforms; on the other, it's blamed for incompetence when it loosens its grip on the economy too much that it triggers global financial volatility.

You have to wonder: What in the world do China bashers really want, other than an implosion of the communist regime that would vindicate their increasingly defunct neo-liberal ideology? Even they know better than to sanguinely assume that the end of CPC rule is the panacea for not just the Chinese but the global economy. Yet they're seemingly so blinded by their hatred of any alternative to the discredited Western notion of "efficient markets" that they'd rather risk a "Chinese spring" turning it into a giant Iraq or Syria than see it somehow muddle through again under communism.

The recent string of revelations on Xi Jinping's economic policy, including a release of notes detailing the central bank's yuan policy reversal in January, should be seen as only bolstering Mr. Xi's administration's credibility with regards to reform. To state the obvious:

At a heavily guarded conclave of senior Communist Party officials in December, Mr. Xi called China’s markets and regulatory system “immature” and said “the majority” of party officials hadn’t done enough to guide the economy toward more sustainable growth, according to people who attended the meeting. 

To the central bank, there was only one possible interpretation: Step on the brakes. 

And so here we are. What would have been a quick and smooth process if the party as a whole were as bold as the minority that's overcome inertia, has now been reduced to a long and drawn-out slog. Things should be better, yes, but they could also be worse.

Needless to say, this is fodder for those who argue that the party itself is the problem - always has been, always will be - and the solution is to tear it down altogether. Good luck with that.

Yes, it's true that China is "hostage" to its lumbering SOE sector, which accounts for the lion's share of what could amount to 8 trillion RMB of bank losses; it's just pointless to argue that the slow and cautious approach to SOE reform and restructuring is somehow worse than doing everything all at once, as if potential dangers later on justify actual dangers today. The real threat of complacency is ignorance: and China's top leaders, at least, are anything but ignorant. They deserve the world's moral and practical support, not constant villainizing or dark intrigue-guessing.

Thankfully, a Donald Trump administration would set the record straight. No, Americans don't want an unbridled "free market" any more than Venezuelans or Zimbabweans want unchecked socialism. We don't want a freely floated yuan anymore than we want loaded Chinese immigrants flooding our shores to make more housing markets like Vancouver.

Next Fed hike depends (again) on China

The US Federal Reserve's apparent impatience to raise interest rates again is an admission that ultra-low rates don't benefit the global economy anymore, and that it's better to risk the short-term financial volatility of "normalization" to get them back up to speed than it is to leave markets and investors hanging longer with too little nominal yield.

That being said, the Fed is again dependent on China for its hike schedule, as it first discovered towards the end of last summer. While other emerging market currencies have already depreciated so much since 2013 (the first rumblings of the current cycle of global dollar tightening), and therefore appear robust enough to sustain their early 2016 recovery even in the face of present Fed hawkishness, the yuan is more of a question mark - and it matters more than the rest of them put together.

Other things being equal, Beijing for its part prefers a weaker RMB - perhaps as low as 7.0 to the greenback - and would have already guided it there had the move in that direction not triggered such massive capital flight in the second half of 2015. If the People's Bank of China (PBOC) can now engineer the kind of gradual slide to the high-6's or even low-7's that it has thus far been unable to, we can expect a steady softening of the yuan for the remainder of the year. It'll draw harsh rebukes from Donald Trump, of course, but also signal the kind of progress to a more market-based exchange rate that will help the yuan enter the IMF's Special Drawing Right (SDR) basket of reserve currencies (alongside the dollar, euro, yen and pound sterling) on a sound footing in October.

More likely, though, the memory of August 2015 and January 2016 is too fresh in investors' and markets' minds: with an "L-shaped" stabilization now officially Chinese policy, the risk is too great that yuan weakness will again be interpreted as worse than officially acknowledged weakness in the real economy, and it's hard to see Beijing tolerating stress tests of its beefed-up capital controls since last winter if it can help it. PBOC recognizes that the yuan has a narrow band of safety before speculation of a larger devaluation unacceptably piles on again; this is probably between 6.6 and 6.65 for the offshore CNH, or little over 100 "pips", i.e. .0100, further down from the most recent lows of almost 6.59. As well, the offshore (Hong Kong) premium over onshore CNY (additional yuan-cents to buy a dollar) must be minimized, as PBOC has clearly done so towards end of this past week - not only to dampen speculative offshore betting of devaluation, but also to subject the mainland to greater global market influence and ease operating conditions for mainland-based firms.

This likely means more RMB softness in the weeks ahead and into the start of the second half, as even if May data in the US and China delay the Fed from hiking next month (until July or even September), the financial and currency markets still haven't fully priced in the Fed's determination to move as quickly as possible on normalization. Whether in China or elsewhere, market participants still seem to hold a widespread but erroneous view that normalization is bad for risk assets, when in fact central bankers probably recognize more than ever that persistent low rates are worse. Perhaps another 10 percent US stock correction is in the cards to shake investors out of this fallacy, and if so it'll likely be triggered yet again by the Shanghai Composite, which is only a single big day's drop (6.6 percent) away from its 52-week low in late January; but as noted above, Beijing will monitor the yuan's every pip of depreciation against the greenback to keep it in a safe zone, giving global stocks a solid floor.

Central banks are "neither god nor magician", as PBOC chairman Zhou Xiaochuan aptly put it, but until they truly fail beyond repair, they're still the only game in town - and more, not less so, for the West than for China, given that political (hence fiscal) gridlock has been more of an issue in democracies lately. That's bad news - as it has been since even before the financial crisis - for neo-liberal "market" fundamentalism, but hey, if China doesn't need Western economics, the West probably doesn't, either.

Donald Trump, for one, would definitely agree (regardless of what he does to Janet Yellen in 2018).

How can fixed asset investment still be growing so quickly?

Derek Scissors of the neoconservative American Enterprise Institute is puzzled at how China's fixed asset investment (FAI), which accounts for over 40 percent of GDP, can still be growing at a faster clip than consumption, when official Chinese figures show that nearly 85 percent of Q1 growth came from consumption alone.

A quick consultation with Wikipedia helps:

Gross fixed investment is defined as total business spending on fixed assets, such as factories, machinery, equipment, dwellings, and inventories of raw materials, which provide the basis for future production. It is measured gross of the depreciation of the assets, i.e., it includes investment that merely replaces worn-out or scrapped capital.

So to arrive at a rough approximation to validate the official Chinese breakdowns of growth contributions, let's use a Q1 2015 baseline GDP of 100 units, broken down as 51 consumption, 42 investment, and 7 net exports. In Q1 2016 both consumption and investment in fact rose by around 10 percent, meaning an additional 5.1 and 4.2 units of consumption and investment, respectively. However, if investment depreciation was 1.4 units (i.e. a third of new plant, real estate, etc. was simply to replace old capital stock), that means the net addition to investment GDP is only 2.8, bringing the new total to 44.8, while consumption GDP increments by the full 5.1 units to 56.5. Now combining this with net exports falling by 1.6 units (yes, the Chinese trade surplus has shrunk substantially over the past year), that makes total Q1 2016 GDP 56.5 + 44.8 + 5.4 = 106.7 units, or a 6.7 percent growth over Q1 2015 (the official year-on-year increase reported last month).

It follows from this that consumption accounts for 5.1/6.7 or 76.1 percent of GDP growth, investment for 2.8/6.7 or 41.8 percent, and net exports for -1.4/6.7 or -20.9 percent. This isn't terribly far off from the official Chinese stats: 84.7, 35.8, and -20.5 percent, respectively.

What this shows is that the apparent discrepancy noted by Mr. Scissors - between the growth contributions of investment versus consumption as against their individual growth rates - is reflective of the high capital turnover ratio in China. This squares well with anyone who has even a rudimentary intuitive grasp of the Chinese economy: it may be the world's factory floor and builder extraordinaire, but on the whole its capital investment and formation processes are highly wasteful and inefficient - even aside from the fact that much of it is redundant. And it's actually gotten better over time. In the past, when FAI easily outstripped consumption as opposed to being only marginally faster like today, that's because it was even more wasteful and inefficient - at the worst, perhaps nearly a full half of new investment was to swallow up depreciated old assets. And that was when investment's share of GDP was closer to a whopping 50 percent than to 40 percent today.

China's crisis may have finally turned a corner

A week after two consecutive People's Daily articles clearly spelled out the authoritative word on economic reform coming from Xi Jinping in Beijing, the global economy finds itself uncomfortably dependent on a strongman's ability to enforce his edicts. Even so, China's crisis may have finally turned a corner: at the very least, it's clear now who's pushing the badly needed but extremely painful changes (Xi and his central party henchmen), who's actively blocking them (SOE managers and their local government patrons), and who's caught in the middle (Li Keqiang, the State Council, and ancillary central government ministries). And we can be pretty sure who has the upper hand - ultimately - in this power struggle.

Thus far, provincial and local governments have rendered Xi's "supply-side" reform agenda little more than theoretical curiosity in most of the real economy throughout the country, keeping numerous "zombie" SOEs alive with additional credit (debt) that should have been used for retiring idle capital and transitioning redundant workers. China's fate - and possibly that of the entire global economy which has come to depend on it - now absolutely needs this pattern of disobedience to stop. The following chart speaks for itself.

The international consequences of this failure to meaningfully reduce crippling industrial overcapacity are growing, even if a financial crisis and contagion remain relatively distant threats: Europe has rejected "market economy" designation for China after months of hand-wringing over cheap Chinese steel imports apparently tipped the scales in Brussels against what would have been a coup for Beijing in its geostrategic competition with Washington.

So now Mr. Xi can point the finger at recalcitrant party bosses - they're not only delaying China's economic modernization, but in the process also delaying the dream of national rejuvenation on the world stage.

Fortunately (or unfortunately?), the most powerful communist leader since at least Deng Xiaoping has won a small round against the vested interests: credit growth slowed dramatically in April, possibly at his direct urging (and definitely with his strong sanction).

And as I've written, Xi hasn't wasted this crisis to further consolidate power, whether it's purging provincial party bosses or fending off a challenge from Li Keqiang, who has unwittingly emerged as defender of the bloated SOE sector if only because, as head of the State Council (i.e. the central government), he's still officially responsible for implementation of the party's economic policy, and the slow pace of reform on the ground is automatically interpreted as enabling of or even collusion with opposition.

Going forward, then, there's good reason to expect a gradual but steady progress in the kind of supply-side restructuring that's been dubbed "Xiconomics" - which is really Xi's appropriation in 2015 of what back in 2013 was originally "Likonomics", but which fell out of relevance once it became clear that the premier didn't have the political heft to implement his program and was conspicuously overshadowed by the new "central leading groups" of the party created and headed by Xi, even in day-to-day economic management.

In fact, the nuance of the current situation easily makes it appear worse and more unstable than it probably is. It's not as if Xi's simply against credit easing and Li's for it: the $1 trillion first-quarter stimulus could only have been possible if both leaders agreed on the need for monetary and fiscal accommodation to prevent growth from collapsing. But what disturbed Xi more than the sheer size of the package was how much of it was more bad debt to roll over existing bad debt in the redundant heavy-industrial sectors; this he could no longer brook, and because Li's reliability and even loyalty were now more in question than ever before, it was time to come down hard from the very top of the party hierarchy.

In any case, Xi has won - or at least it's clear how he'll win. The good portions of the $1 trillion stimulus are likely to power real economic growth all the way until the 19th party congress in late 2017; the bad portions will fizzle out well before then. With his complete control of the military and security services, Xi can now remove the party's vested interests more easily and has already done so where practicable; his personally driven administration is sufficiently secure now such that even a likely increase in resistance in the near future - inevitable as "old China" stalls further where it's still clung on to life - can conceivably be disposed of without much drama. As the futility of continued intransigent defiance of Beijing becomes apparent, more local party bosses will fall in line, as well. In this way, despite a long and drawn-out battle, few zombies are likely to survive the culling of economic waste that promises to incrementally but steadily accelerate in the next 18 to 24 months, to reach its final completion probably early in Xi's second term (2018-19).

It's a war of attrition, no doubt - and Xi intends to outlast his enemies. Having secured the center, he's now consolidating it as well as putting more of his own pieces in place all over the map. That's why, against all appearances, it's likely that China's crisis - and its transition - has finally turned a corner.

How to defeat Mao's enduring legacy

On the 50th anniversary of the Cultural Revolution - a milestone unsurprisingly brushed off by official China - the world at large is a kind of place Mao Zedong would have liked to see.

The father of the People's Republic and mastermind of the cataclysm of 1966-76 would have been taken aback by the rapid changes in China during the 1990s and 2000s, which made a mockery of his socialist ideals, but he would've been proud of the redistributionist populism which has since become the animating principle of Xi Jinping's rule; and he would have been especially glad to see how this brand of "majoritarianism" is again able to gain traction worldwide - notably in established democracies where perceived capitalist excesses have incited a blowback even as actual socialist excesses have continued to cause far more damage elsewhere.

Mao was truly a prophet ahead of his time - whatever you may think of the moral implications of his prescience. Indeed, the Devil is a far better practical theologian - with a far deeper understanding of the hard truths of human nature which play out in real life - than the vast majority of formally trained religious experts of any creed.

This has meant that decades later, Mao's enduring legacy still lacks an effective challenge, whether in China or the West. Liberal democracy and free markets had a unique opportunity in the wake of the great victories of 1989-91 to reshape the world order in a genuinely humanitarian and humane image. Even in authoritarian holdouts as exemplified by China, the wave of sociopolitical retrogression was at best fighting to buy some more time.

Instead, the intervening generation has demonstrated - perhaps conclusively - that when humanity exercises free choices, it simply doesn't have a natural inclination to do what is right for the whole, but only for its disjointed profit-seeking parts. No, enlightened self-interest simply doesn't equate with the greater good: the latter is ever the product of detached, even otherworldly self-sacrifice and what can only be recognized as a supernatural sensitivity to the long-term consequences of every action and decision for everyone else, not just one's own in-group.

And this means that to defeat this destructive heritage, we as seekers and purveyors of truth must first look within ourselves: we must stop being fooled about ourselves, to think that we're somehow "better" than those who promote night as day, evil as good. Because the reality is, we're not: until we perceive as well as they do the rot within our own belief and value systems - or more accurately, the dead stench of hypocrisy that pervades the gap between what we profess and what we practice - we have already handed ourselves over to the enemy before he has even lifted a finger.

To defeat the legacy of totalitarianism, we must root out this secret totalitarianism of self-preservation that corrupts our inner beings long before our outer shells are rendered useless from the consequences of such an insidious treachery.

US-China Bilateral Currency Treaty (BCT)

A Bilateral Currency Treaty (BCT) should be the priority of US-China trade relations. It would be the hallmark of a Trump administration, taking precedence over both the 12-nation Trans-Pacific Partnership (TPP) that excludes China and the Bilateral Investment Treaty (BIT) with it. Indeed, neither TPP nor BIT are even realistic without BCT being ratified and observed first.

Such a pact's significance would be appropriately matched by its simplicity. Here's a possible rough outline:

US-China Bilateral Currency Treaty (BCT)

Goal: To ensure fundamental stability between the US dollar and Chinese yuan (RMB) as the foundation for equitable trade relations, and engineer a gradual appreciation of the yuan to a range of 5.0-5.5.

Key provisions: Initially establish a ceiling for USD/CNY exchange rate, suggested 6.7, with USD/CNH ceiling of 1.5 percent premium over USD/CNY; after initial stabilization period of 1-2 years, aim for a 2 to 5 percent annual appreciation of CNY against USD until target range of 5.0-5.5 USD/CNY is reached; eliminate CNY/CNH spread over the course of this appreciation period.

Operating mechanisms: Dollar/yuan swap lines between major US and Chinese banks; initiation of major purchase program by US commercial banks of Chinese domestic yuan-denominated interbank bonds; gradual unwinding of 15 percent of Chinese holdings of US Treasury debt; monthly bilateral exchange and coordination of reserve and currency derivative positions (swaps, forwards, etc.) between Fed and PBOC and their respective main constituent banks.

Program oversight and control: Quarterly bank representatives' meetings; annual G-2 financial meeting headed by Fed and PBOC chairpersons in conjunction with US Treasury Secretary and Chinese Minister of Finance; annual program overview and progress reports to relevant senior leaderships of both countries - presidency and Congress in US, communist party central committee and State Council in China.

...

With BCT as the basis, the BIT and even TPP can then be renegotiated within a fair and sound framework to ensure that 21st-century trade from now on is more balanced, sustainable, and equitable for the general populations of all countries.

Xi Jinping gets serious about reform

China will accelerate supply-side structural reforms, as two consecutive People's Daily articles this week have made crystal clear.

Monday, an interview with an "authoritative source" widely believed to be Xi Jinping's top economic adviser Liu He enshrined an "L-shaped" trajectory for the Chinese economy and lambasted the notion that debt-fueled stimulus can continue as before.

Then on Tuesday, a speech by Xi Jinping to leading provincial officials from January was published, in which supply-side structural reform was emphasized.

Taken together, these are powerful affirmations that the trillion-dollar stimulus of Q1 should be understood as provisional demand support for much-needed supply-side restructuring - not a return to China's old ways of propping up GDP.

Given that Xi has further consolidated central party control of the provincial party hierarchies and ultimately determines how much credit flows through the economy via the central bank (headed by ally Zhou Xiaochuan), this should mean the end of monetary stimulus and only limited fiscal stimulus for the remainder of 2016.

As the first article indicates, the provinces have unveiled their supply-side structural reform blueprints, meaning they're now on the hook to deliver on reducing overcapacity and rein in debt. Further:

Officials in Hebei Province, a major steel production base with China's worst air pollution, will face immediate removal from their posts if new steel mills are built or closed factories reopen.

It remains to be seen whether this new enforcement will truly have teeth, but the purge of Hebei provincial party officials last month (including the party secretary) has doubtless removed a major obstacle. And the tailing off of the industrial recovery in late April, including in the steel sector, may be an early fruit of a sustained downsizing effort - even as it's touted by Gordon Chang as evidence that China's finally going to crash.

The danger now is that growth will tail off more sharply than expected in coming months: Beijing may well have to choose between missing its GDP target range of 6.5-7 percent and staying faithful to supply-side reforms, as weaker provinces' growth contributions remain abysmal or worsen further. Those still hopeful of China's prospects should cross their fingers that Xi will have the guts to tell the world, if it comes to it, that low-6 percent or even high-5 percent year-on-year growth is tolerable for a few quarters.

In fact, with annualized Q1 growth having clocked at barely 4.5 percent (vs. year-on-year 6.7 percent), it could be as simple as acknowledging what's already happened. Such honesty and humility would serve Beijing far more than cosmetic target-hitting - doubly so as the world realizes China's much better off with just 5-6 percent growth that's high quality than with nearly 7 percent growth that's more traditionally driven.

Xi Jinping has already neutralized Li Keqiang

Xi Jinping has effectively put the final touches of victory on a brief, virtually one-sided power skirmish with premier Li Keqiang.

A People's Daily article (link in Chinese) cites an "authoritative insider" as saying that the economy will endure an "L-shaped" stabilization, not a resounding U- or V-shaped resurgence, as it slowly retools and restructures.

Notably, it says that the "fantasy" of monetary stimulus to prop up short-term growth must be dropped altogether, and the economy should increasingly reflect the risks of the "original sin" of too much debt.

Given Xi Jinping's stranglehold on Chinese media, this "authoritative insider" commentary is effectively the party strongman's reiteration of his commitment to supply-side structural reforms alongside deleveraging.

It's also Xi reminding everyone that he, not premier Li Keqiang, is the mastermind of the country's economic transition, read: a confirmation that he's still fully in charge at the helm.

Ever since Li visibly upstaged Xi at the National People's Congress in early March, the latter's party opponents have apparently pinned their hopes on the former as a replacement as party chief at the 19th CPC congress in late 2017.

Unfortunately for the otherwise highly cerebral and technocratic Li, he seems to have been suckered into this opportunistic scheming against his boss, and has now paid a price. Naturally, he was delighted at the NPC to finally take the limelight on economic policy back from Xi - to the roaring approval of the government ministers whose collective rapport with Xi had hit a low ebb. While this was only natural, the premier subsequently demonstrated a rather surprising lack of political acumen that has left him in an even more subservient position than before.

Where he should have kept a low profile and quietly carried out his job - thereby securing his own standing with Xi - he instead stuck his neck out by staging a public appearance with his power base at the communist youth league (CYL) last month. The main political effect of this was to paint a big target sign on his own forehead: within just two weeks, Xi had further consolidated control of the military, by visiting the Central Military Commission's new joint headquarters in a much-publicized promotional tour, and had also given the go-ahead for an anti-corruption investigation against the CYL which threatens to render it impotent in the Chinese political landscape.

These events have only ensured even more direct micromanaging of day-to-day economic affairs by Xi's party "central leading groups", particularly the group for "comprehensive deepening reforms" and that for finance and economics. In the coming months, we can expect to see his henchmen in these parallel power committees exercise even greater authority at the expense of the State Council headed by Li.

One can't help but feel sorry for Li, but on closer inspection, his miscalculation deserves little sympathy. His insubordination to Xi would only have made sense if Xi were indeed reinstating a kind of neo-Maoist, anti-market command system to roll back 37 years of reform and opening, but this was patently not the case. Instead, he unwittingly made common cause with the very special and vested interests in local governments and the SOEs who were deliberately foot-dragging the next, difficult stage of such reform and marketization. They were clearly hoping that once it came down to it, sheer inertia would prevent the premier from interfering with their schemes to keep zombie firms alive with more "evergreen" financing - just as they'd thwarted such downsizing attempts by Beijing for years.

It helped their cause that Beijing did in fact unleash another massive stimulus to the tune of $1 trillion in new "social financing" in the first quarter; this was taken as affirmation that the central government couldn't do without a continued accommodative stance towards the SOEs and local governments. While largely correct, provincial and local officials misjudged Xi's seriousness to finally start reining in overcapacity and unplugging zombie life-support. As a torrid industrial, real estate and infrastructure investment recovery in March and April fizzled out by May, it became clear that this wasn't "business as usual" anymore to revive the old growth model.

Ironically, Li's very act of challenging Xi - however feeble and ill-conceived - has now left him no choice but to serve the dictator more loyally than ever. He will continue a relatively high profile from now until the 19th party congress, not to demonstrate independence or an alternative, but to retain relevance to a reform program which he has never opposed in principle (and indeed helped to initially draft), but has very nearly attempted to botch in practice. What's doubly troubling about this whole mishap is that it has actually betrayed what can only be his own personal ambition over and above his concern for the Chinese nation: there's simply no other explanation as to why the staunchly populist CYL faction (tuanpai) could have found itself on the wrong side of the elitist/populist divide of the contemporary PRC.

If anything, it's Li and not Xi who will get the boot in 18 months.

How Trump can help change China

Republican presidential nominee Donald Trump's drastic proposal of a 45 percent punitive tariff on Chinese imports belies the likelihood that he has a far more realistic and sophisticated strategy to "beat" China on trade than he feels fit to reveal so far.

It's all a matter of US export growth to China outstripping US import growth from it. Logically, it follows that Trump would lobby Beijing for better mainland market access for US exporters and use the carrot of increased investment opportunities within America for Chinese firms as his big bargaining chip; for the latter would simultaneously reduce the trade deficit by turning Chinese exports into Chinese-owned American production lines (for local American markets and consumers).

Of course, Beijing will push back on Trump as much as possible by continuing to demand that US firms invest in China if they want to sell to it; Trump will hold the line by offering even more incentives for Chinese companies (especially publicly traded ones) to set up shop in America, knowing that every single domestic exporter he shields from having to make concessions to earn China business is a victory worth paying the price of additional Chinese investment in the US (since such investment both reduces China's exports to the US and increases American leverage over China).

In other words, Trump wants to turn China's own strategy of trade and investment on its head and beat Beijing at its own game - that is, to "out-China" China.

His calculation is that with infrastructure and property investment saturated in much of China yet badly needed in much of the US, there's a huge impetus for Chinese industrial, construction, and real estate firms to pour large sums into US projects. The problem is that China and the US are strategic competitors as much as they are partners, and nothing can be more sensitive than billions of Chinese investment flowing into core sectors of the American economy.

But as someone who's dealt with Chinese firms and investors for years, Trump knows firsthand that not only is it beneficial to pull one's suspected adversaries closer to oneself than trusted friends, but it's absolutely necessary. Being a student of Sun Tzu - The Art of the Deal is effectively a corollary to The Art of War - Trump is arguably more familiar with Oriental master strategy than anyone who's ever occupied the White House. The more he can coax China to voluntarily enter into arrangements that tie its fortunes up with domestic American politics, the less room Beijing will have to maneuver all across the board against US interests anywhere in the world.

Of course, Trump will make concessions to China too, most likely in the latter's immediate neighborhood like the much contested South China Sea, where the symbolism of the US-China relationship has grossly outstripped the substance. And where past presidents have tended to at least pay lip service to Chinese democratization (irrespective of actual collusion with Beijing), Trump won't even bother to put his mouth somewhere other than where his money is. As far as he's concerned, China knows we stand for rule of law and political and civil liberties, and the best way to evangelize these values is to talk about them less and practice them better.

As such, Trump will be uniquely capable of nudging China to accelerate its own modernization - with its inevitable long-term political implications. By more deeply respecting not only American rules, but America itself as rulemaker, China will help its own cause immensely too.

Newly empowered Chinese investors will clamor for the same quality of market transparency and regulatory fairness on their home turf as they get on the other side of the Pacific - yet neither will they feel compelled to hedge heavily against local risk, because a strong yuan (The Donald will personally see to that one) will make it more attractive to invest primarily, as they should, in their own society. The Chinese private sector will thus get an enormous boost, even as local governments find they can drastically reduce their administrative and regulatory overhead; these in turn will streamline the central government's own coordinating operations across the vast domain of the empire.

This won't put China on a path to genuine representative democracy per se, but it does greatly increase the chance that successors of Xi Jinping and Li Keqiang will feel secure enough at some point to bring piecemeal political liberalization back on the party's agenda. Such changes will then merely be an extension of governance reforms which have already been proven and institutionalized. The party-state will be able to cruise further and more safely along the path of a massively scaled-up "Singapore model" of political modernization, thereby making Xi Jinping's "China dream" a reality by mid-century.

In the end, Donald Trump may not only "out-China" China: he could also lay additional solid groundwork for achieving the great American dream of changing it. His nomination as the GOP candidate has already been an affirmation of a truth that freedom-loving Americans have been compelled to rediscover: that the whole point of freedom is effective and benevolent authority, which harnesses individual potentials to attain a more perfect collective society. And should he actually run China policy in the White House come January, he could guide China itself on the path to finally attain the enlightenment that the whole point of effective and benevolent authority is freedom, which liberates the members of a collective society to attain the fullness of their individual potentials.

The bullish case for China

A bullish case for China is given by one Western fund manager who can claim something most of his counterparts can't: having actually lived there for a long time. His key takeaways:

- China may be overloaded with debt, but it seems to be making progress shifting more of it to securities markets, where their risks can be priced more accurately than traditional bank loans thanks to exposure to the investing public
- Beijing will continue to prioritize a stable currency and can fend off the downward pressure for a large devaluation of the yuan
- Cooperation with its trading partners, especially the US (even under a Trump presidency), ensures a favorable external environment for the transition and rebalancing

In a nutshell, despite all the naysayers, China's at least trying to get the reform ball really rolling along.

A fertilizer maker in north China has become the latest company to default on its bonds, as confidence in Beijing's implicit guarantees of bailing out debt securities, even of SOEs, appears to be flailing as never before. With some $571 billion of local corporate notes maturing by year-end 2016, companies are under ever greater pressure to streamline their operations.

Of course, Chinese bond markets are nowhere close to Western standards in terms of credit stringency. But some context is important here. In the past, many of them didn't even have access to reasonable local bond financing at all - these less favored, typically private firms had to get repayment-heavy bank loans or, if they were good enough, could actually raise capital more easily in dollars, i.e. in the Eurobond market. Now things have swung around: local RMB-denominated bond issuance has gotten much cheaper even as foreign debt costs - especially Eurodollar (i.e. offshore dollar) wholesale financing - have soared.

This means that for the first time, Beijing wants public investors to be the driver of debt pricing discovery. True, it's an opportunistic move to clean up the horrid balance sheets of its state banks, but it also makes those cushy government outfits less dominant and privileged in the long run. It may be a while yet until Chinese corporate debt is priced correctly, but the first baby steps have been taken. We have to cross our fingers now that the bond market will gradually require higher and higher yields for risky debt, so it doesn't seize up quickly and violently from (il)liquidity events.

It helps China that all the world over, debt holders are already (grudgingly) entering something of a "Jubilee" mode of liability forgiveness, i.e. "haircuts" on what they're owed. A general recognition is gradually dawning on investors that they've simply dumped too much money into already crowded investments and assets. Donald Trump is openly gloating about how he'll reduce the national debt if elected president by writing some of it down.

Investors are also slowly acquiring more appreciation of the nuance of China's transition. They're coming to learn, for instance, that the latest burst of stimulus-induced fixed asset investment (FAI) is more driven by infrastructure not property, and this more so in the underdeveloped hinterland and periphery than the wealthy coastal provinces. It's too simplistic to say, as here, that China's economy is still essentially one giant property bubble - even allowing for legitimate concern that it's building more roads and bridges to nowhere.

That last link cites an IMF metric that 14 percent of publicly listed Chinese companies can't meet their interest payments with their earnings - and another 14 percent that can meet them at best twice over. In any Western country, far lower thresholds would have sparked a financial crisis by now. The scale of the mess is undeniable. But the way out is just as clear: struggling firms should be given haircuts and grace periods to get their acts together, else be allowed to fail so long as regulators determine the fallout will be containable. 2016 should be the year that the world finally sees a China in which financial market discipline starts to take root - else it can only be the year that signals an outright retrogression which nobody wants to contemplate.

Trump has finally exposed the laughingstock of US superpower

Donald Trump's stunning ascension to the Republican presidential nomination - which now appears to be a mere formality after the knockout blows against Ted Cruz and John Kasich in Indiana last night - has finally exposed the laughingstock of US superpower status, namely our habit of brandishing bazookas on other people's front yards even as burglars empty out our own living room.

This whole comic charade has become such a well-established fact of international life over the course of the 21st century so far that its purveyors here in the Washington elite have grown totally blind to the scale of the absurdity.

On the bright side, China, the burglar-in-chief in this setup, has already moved on: it's already preparing for a Trump presidency. The Global Times, a nationalist tabloid linked to the communist party, pretty much lays out the choice between The Donald and Hillary that's all but a given now, notwithstanding yet another Bernie Sanders upset of Clinton in the Democrats' own Indiana primary last night (and yet another confirmation of how FUBAR Americans think the trade status quo is).

Meanwhile, the chickens are still running around with their heads cut off inside the Beltway here: none other than president Obama himself has penned an editorial, "Don't let China steal the lead on trade", in a rather blatant attempt to pry the national discourse on globalization away from the increasingly protectionist bent of the insurgent Trump and Sanders campaigns.

Given that China is Donald Trump's single biggest foreign policy obsession, it's worth noting that he has already begun to refocus the American discourse on the most critical bilateral relationship.

For starters, The Donald is unabashed in stating the obvious: since the start of the century, China has utterly devastated the American industrial worker. While the Washington policy elite is fixated on the comparatively minor distraction of a bunch of rocks and reefs in Beijing's front yard, the traditional backbone of prosperity in our very heartland has been gutted hollow in a long-term process by the unfettered wage and finance arbitrage of the past 15-plus years - of which China has been the linchpin.

This begs the question: How can we possibly lead the world when we've done such a great job dispossessing our own economic base?

Granted, there have been benefits from trade with China, but these have been glaringly clustered into two specific, symbiotically linked phenomena: cheaper goods and inflated asset values. As corporate bottom lines boomed thanks to the former, so did easy money and credit (including recycled Chinese and other foreign surpluses coming into the US) which have continuously fueled the latter.

That's created a massive imbalance: even as the economy has become seemingly permanently dependent on consumption and services as against industry and manufacturing, the typical American worker has become seemingly permanently dependent on debt beyond his or her wages to finance that very consumerist lifestyle.

No wonder the average American considered China to be the world's leading economic power as far back as 2010-11, when US GDP was still nearly three times as big as China's (in nominal dollar terms).

Today, even as China and the US are both (by their respective standards) sputtering, it remains clear that the long-term shift of economic power continues apace. Yet the Washington wonk and policy establishment remains in hapless reaction mode: it knows something's amiss with the status quo, but like Obama in the above New York Post editorial, it's at a loss to offer anything substantially new in our approach to the China trade challenge. The cold hard fact is, it hardly matters just how well the Trans-Pacific Partnership (TPP) is advertised or even actually written: American workers have heard the same exact arguments about "free trade" for a whole generation now and have little reason to expect this time the yawning gap between promises and delivery will turn out to be any less infuriating.

So along comes The Donald, quite a blast of fresh air in an otherwise putrid policy context and intellectual milieu. We won't be a laughingstock much longer, God willing: now that the joke's finally been turned on its perpetrators, we can at last move forward with some inkling of objectivity and rationality.

The crux of China's big challenge, revisited

I had earlier posited the crux of China's big challenge as one of bringing debt levels down relative to GDP (both the growth gap and, over time, the absolute ratio).  Another article highlighting the urgency of the problem - showing the debt-to-GDP ratio at close to 350 percent as of April 2016 - lays out China's only way out: capital input growth (i.e. debt-fueled investment) must decelerate while productivity (effectively output per worker per unit of capital) must pick up the slack. Indeed, the flip side to any debt crisis is exactly that: a productivity crisis.

Total factor productivity (TFP) has been declining in China over a number of years, but apparently especially since the post-crisis stimulus, which isn't surprising: Beijing basically invested itself out of the global funk and created today's debt overhang. The overall "depth" of capital exploded relative to the actual utilization of it by the workforce from 2009 to 2015. With untold tens of thousands of factories operating at barely 60-70 percent capacity, China has without doubt suffered a dramatic flatlining (at best) of productivity in recent years.

On the bright side, as argued here, this makes the solution to its woes very simple in principle: it simply has to quit making so many unneeded investments and instead focus on getting the most out of legitimate ones. There's no rocket science to it at all.

In practice, of course, it isn't nearly so easy, primarily because Beijing still can't will its edicts into effect at the local government level. Even as the flow of cheap money to unproductive sectors is whittled down, funding could still be wasted on commercially unviable projects, the only saving grace being that the incentives for more aggressive ventures are naturally reduced by a tighter economic and fiscal environment. So long as the central government (especially the central bank) doesn't itself succumb to the temptation to ease and stimulate out of the growth conundrum, there's hope.

Critics, of course, are already jumping all over the latest credit boom engineered by the central bank as proof that Beijing's back to its old ways. Even if that's true, that doesn't necessarily mean the same old loss-making sectors are being supported just the same as before. In the coming months, China analysts must become increasingly specific about just where the new debt and output growth are actually happening: it's tempting for anyone to say that since debt is growing 15 percent overall, that Beijing's still spending money like a drunken sailor; but what if this aggregate figure includes 30 percent growth for robotics and automation equipment vice barely 5 percent for smokestack commodity steel?

As a final note, the biggest reason to be optimistic is that China's simply too big to fail: the entire global economy needs the difficult restructuring efforts being attempted by the Xi Jinping administration to succeed, and everyone must contribute to the financial and currency stability that would facilitate this transition. Of course, the risk is always there that if the going gets really rough, Xi and co. will truly retrench on reform; but that's quite different from clamoring that he's already failed, which, for some at least, is really a way of saying that he's an evil commie SOB and that red China should just go to hell already.