Not a hard or soft landing, but a long one

China is going to have neither a hard nor a soft landing, but rather a long one.

The country's rebalancing, it now appears, will have barely even gotten off the ground by the end of Xi Jinping's first term as party chief at next fall's 19th party congress; it will then likely require the entirety of his second term (2017-2022) to truly take off.

In the near term, low-hanging fruit will be picked. Mega-mergers of large and modern national SOEs, like the much-anticipated union of Shanghai Baosteel with Wuhan Steel, should reduce some overcapacity and, more importantly, position a handful of strategic state firms to eventually gobble up or drive out of business the dozens or even hundreds of redundant local SOEs that have been zombified by years of protectionist measures and evergreen lending from local governments and their financing entities. The millions of layoffs that this rationalization of the heavy industrial sector will cause will be cushioned in part by transitioning workers to low-skill but tech-enabled services, as is already happening en masse with former coal and steel workers becoming drivers for China's Uber, Didi Chuxing.

Ongoing financial sector reforms over the next couple of years, including gradual opening of the capital account and capital markets to international investment, will assist in improving the allocation of funds to sectors and companies based on real growth prospects. In this light, restraining dodgy subprime debt - as in the case of a renewed crackdown on wealth management products (WMPs) - will also be crucial to corporate profitability (as well as financial stability).

The central government must be prepared to use its considerable fiscal and monetary firepower - undergirded by a far stronger balance of payments than its local counterparts - to mop up the inevitable wreckage that any number of local SOEs and administrations are likely to become as the latest round of credit stimulus likely wears off in 2017 and 2018 and losses build up again. Bailouts are inevitable to prevent propagation of systemic risk, but Beijing must be as frugal as possible: it must seize these opportunities to further downsize redundant firms and local industries (including by merging into the big national champions), slash bloated local bureaucracies, accelerate any delayed or stalled social reforms (like hukou liberalization), and better integrate local finances with national and international capital markets.

Needless to say, this means Xi Jinping and co. will have their plates full of intraparty political battles, especially with local CPC bosses, over the next few years; there's good reason to believe, though, that they're well prepared for them.

These macro-measures will help provide a stable backdrop for the Chinese economy so that it can tackle its true medium to long-term challenge: increasing total factor productivity (TFP).

Without a significant recovery in TFP, which has flatlined or even contracted in recent years, China may well be doomed to the middle-income trap.

McKinsey optimistically assesses that productivity increases can add $5.6 trillion to China's GDP by 2030. The Chinese government has itself made innovation-based entrepreneurship a key pillar of the country's economic rebalancing; it's also relatively clear that "innovation" in the Chinese context isn't so much inventing entirely new technologies as would be the case in the rich world, but primarily adopting and adapting existing advances which are breakthroughs for what's still a developing country.

Even so, as always the communist authorities have already gotten ahead of themselves: all across the country, local government administrations have poured or earmarked billions into questionable "innovation centers" that are awfully reminiscent of previous waves of construction booms that tended to be massive new "financial centers" or exclusive luxury towns.

In fact, not only are the biggest gains on the innovation and entrepreneurship front likely to have little to do with direct government initiatives to promote them, but it's even arguable that the whole focus is skewed: boosting productivity must come as much from superior personnel and management technique as from upgraded capital investment and technology; these are so much less sexy than "whiz-bang" new equipment and tools, for sure, but they potentially have an even deeper and broader societal and cultural effect.

That being said, China has beaten the odds before, and it stands a pretty decent shot at doing so again. There will be both winners and losers, for sure - and the greatest strides in coming years will probably be the fruit of lessons that can only be learned from failure. So long as Beijing remains committed to the long, hard slog - and persistent in its refusal to take shortcuts (like currency devaluation) - it's probably only a question of just how long the Chinese landing will be, and that in itself makes it a soft one.

Stabilizing industrial profits shows stimulus is working

Industrial profits jumped 5.1 percent year-on-year in June, capping off a first-half year-on-year increase of 6.2 percent for large (presumably primarily state-owned) firms. While even the National Bureau of Statistics (NBS) acknowledges that this doesn't mean China's out of the woods yet, it offers compelling evidence that the massive 1Q stimulus is working to stabilize the real economy.

Plus, given the sheer size of the package, as well as ongoing liquidity injections by PBOC which are more narrowly and prudently tailored (if even still uncomfortably large in absolute terms), when combined with global monetary easing led by a slow-to-hike Fed, there's little reason not to expect further stabilization or "L-shaped" recovery in the remainder of 2016.

That being said, early indications point to a weak July and yet more evidence that China remains at significant risk of runaway credit growth.

Optimistically, these concerns will take two or three quarters to clear up, but clear up they will - there's no reason to pessimistically assume that new credit is predominantly going to the same old zombie firms. A lot probably still is, but then there wouldn't be default cases like Dongbei Special Steel group which are clearly a result of the loss of the traditional liquidity backstops for large SOEs. To point out that SOE reform on the ground has been slow isn't the same as saying no progress is being made at all: it's more a reflection of the stabilizing overall economic situation and yet more verification that SOEs contribute to that stability via employment and policy utilization, not profits.

Indeed, with private investment at lows that weren't touched even in the depths of the financial crisis, who knows how bad the Chinese economy would be if state firms haven't stepped up to the plate. And just because they're doing so doesn't mean they're doomed to be just as wasteful and inefficient as they've been before.

More importantly for both the real economy and by extension the country's debt burden, quiet, unspectacular productivity and efficiency improvements are underway in the industrial and manufacturing sector: to survive and prosper, firms must do more with less, and such a process steadily weeds out losers from winners. This especially appears to be the case with lighter industries downstream from the still-depressed industrial commodity manufacturers: electronics and electrical equipment, for instance, have seen a profit tear of late, contributing disproportionately to overall industrial profit growth.

China also intends to make the most of the robot revolution, which makes perfect sense for it now that its labor force is entering a long, steady decline.

The stimulus is working. Any surprises in the remainder of 2016 are likely to be on the upside, not the downside: Chinese growth has a fairly good shot of bottoming out by year-end, as even though the same problems and headwinds will persist well into 2017, they're increasingly likely to be outweighed by productivity gains in the real economy. Even more guardedly, if one argues that far too many local governments and SOEs still aren't changing their ways (or fast enough), that means growth will still fall in 2017, but doesn't change the overarching theme of macro stabilization in a rough "L" shape (which its purveyor himself acknowledged could take up to two years).

Crisis is deepening, but so is Xi's grip on it

The dark side of China averting a hard landing in 2016? Not surprisingly at all, more ghost towns - in other words, a reflated property bubble that's as dangerously unsustainable as ever.

The sheer scale of the small and medium-sized urban area expansion being put on the cards by local officials truly makes the 2016 stimulus seem like the next iteration of the 2009 stimulus - with potential devastating effects down the line for the real economy. China's deep structural crisis hasn't abated but deepened.

But Xi Jinping isn't unprepared for the trouble ahead. It's precisely this scale of returning to old ways of goosing short-term GDP that he was alarmed enough about back in May to openly voice discord against Li Keqiang's management of the economy - a discord that has apparently resurfaced as of early July in their conflicting signals over SOE reform.

In fact, Xi must know as well as Li that given the circumstances both domestically and internationally, a new massive wave of credit expansion was really the only way to prevent a full-blown loss of confidence in the Chinese economy. But the aforementioned figure - new urban areas for an estimated 3.4 billion people - absolutely blows out of the water any economic or commercial sense and makes his public rebuke seem quite necessary.

It's as if Xi were warning provincial leaders and their favored SOEs: "Yes, we need to give you all this cheap money now to prop up growth, but when the going gets tough again - and before long it will - don't expect the same implicit guarantees of backstops against failure."

Ideally, local governments should already know that "this time is different": they shouldn't need additional reminders that their credit-fueled expansion is merely meant to buy time to transfer wealth and income from the bloated state sector to the household sector.

In reality, of course, for most of them the stimulus has been just the vindication they were looking for that Beijing, yet again, couldn't possibly put them out to dry: instead of crafting better policies to clear through their existing housing gluts and boosting social services support for non-urban residents (thereby urbanizing them), they've instinctively poured hoards of cash into their same old crony sweetheart companies.

But this time truly is different: in a decelerating growth environment, poor investments now take far less time to go sour, and the seize-up of monetary velocity which has already all but stalled private investment is increasingly putting pressure on public investment, as well. Before long, those zombie SOEs which have yet again resisted downsizing will be deeper in the red than they've ever been, and at that point they'll be at the mercy of a stronger central party leadership under Xi Jinping's personal direction.

Since the annual "Two Sessions" back in March, provincial and local party bosses have obviously sought Li Keqiang's political cover as a shield against more aggressive streamlining of their economic activities by Xi, especially as Li could plausibly plead for easing on their behalf as necessary for economic and financial stability. But when push eventually comes to shove, that protection won't be enough against the hammer of austerity from the party headquarters of Zhongnanhai.

That's because party chief Xi has complete and ever-tightening control of the military, the security apparatus, and perhaps most significantly, the press. He hasn't forgotten the embarrassing flab of dissent which leaked out around the Two Sessions, and can only be expected to be even less tolerant of any disobedience within the party ranks - likely silencing any of it before it can possibly be expressed to the public - next time it surfaces.

China's unresolved crisis, with its looming outburst of real financial and economic trouble somewhere down the road, is better understood by Xi and his small central party leadership team than anyone else in the country (or the world) - possibly by far.

Where Western and liberal Chinese observers and analysts see contradiction and confusion in his stated intent to rein in credit growth on the one hand, yet strengthen the power and role of SOEs on the other, Xi himself is perfectly clear as to the paradox of the present juncture of China's reform and opening: the "market" is demanding consolidation of many disparate state firms scattered across myriad provinces and regions into just a handful of larger but leaner outfits which would be more responsive to central party and government edicts.

Xi has always known that further pro-market reforms are impossible on a nationwide basis except for a reconsolidation and recentralization of party and state authority back into Beijing's hands; three years of wrangling with the party's vested provincial and local interests have now only emphatically underscored what he always knew to be the case.

He can't stop most of the country - most of the party - from hitting the brick wall of yet another sputtered credit boom. If he had his way, he wouldn't have had to concentrate ever more absolute authority into his own hands. But as he sees it, the die is now cast: the raft is now barreling down to a treacherous turn of the rapids with no chance left of course correction, leaving preparation for shock the only alternative. He's tightening his grip because it's time to brace for impact: few cautions can be too excessive.

China has altered not just the global economy, but economics itself

China's transition is working. Such confidence that Beijing has again averted a hard landing is increasingly easy to declare with gutso: the confirmation will be in the remainder of 2016, as the private sector follows the public sector's lead in ramping up investment.

Sure, the global economy may be stagnant, but thanks largely to China, it's also become more stable than ever. Amidst all the concerns about deflation, debt, and growth collapse, a far more momentous structural shift is being missed by Western market fundamentalists: China has effectively put a cap or ceiling on prices of virtually every industrial commodity and manufactured good. This is huge: it's effectively a permanent bulwark against out-of-control inflation on a wide global scale. It's as if the problem of world hunger has been solved by vast and cheap new food production capacity.

Years and decades from now, this will likely be remembered as China's and the increasingly China-driven global economy's finest hour: for the first time in the modern epoch, the economic balance has tilted to a parity between East and West which has deeply stabilized the entire body of human commercial activity - in the process utterly confounding traditional Western notions and assumptions of standard "boom-bust" business cycles.

Before China came along and crashed worldwide prices for everything from clothing to shipping, downturns were far harder to prevent from spiraling into outright contractions. That's because Western firms simply can't operate with the same tolerance for extended losses as their Chinese counterparts. Price wars translated far more quickly - and sometimes ruthlessly - into capacity and job cuts that in turn ratchet into a wider systemic seizure of credit and liquidity for businesses and consumers.

Since the 2008-09 financial crisis, however, China has fervently captured ever greater market share across the entire gamut of sectors and industries in the global economy to such an extent that even in downturns, gluts have become a bigger problem than shortages. Conventional Western wisdom sees nothing short of calamity in this change - i.e. the self-correcting nature of "efficient" and "free" markets has been usurped by insidious scheming central bankers and other global central planners. The more sanguine view, however - available only to minds that break out of the market fundamentalist box - is that "socialism with Chinese characteristics" has cushioned the blow to investors and consumers alike that would otherwise have been more severe if it also operated according to Western principles.

In fact, given the precipitous slowdown in China's private secondary industrial sector since 2014, one can argue that its SOEs - so widely reviled for their inefficiency and credit drain - have literally held up asset values and goods prices worldwide for over two years. Only because so many of them could still churn out goods and products even as they slid further into loss territory has overall growth - both within China and internationally - not fallen off a cliff. That's because they still paid their workers' wages and pensions, without which the wider consumer economy would've taken a hit, negatively impacting the dynamic private sector, as well. In a real sense, Chinese SOEs have been a shadow force for global stability - a contribution to the global economy that probably won't be recognized in the West for years.

That's not to say SOE reform isn't badly and urgently needed: far from it. But it's to say that Keynesian pump-priming - some would argue on steroids, in China's case - has served an important purpose that's easy to overlook because it's so ideologically despised in the distorted neoliberal orthodoxy of the post-cold war era.

It means that China has altered not just the global economy, but economics itself: both Keynes and Friedman now have a permanent place in the pantheon of macroeconomic theory and practice, with neither able to exclude the other. Indeed, that's how Friedman himself always viewed Keynes, contrary to so many of his most partisan devotees: he never saw supply-side theory as supplanting the famous Oxford sage from the Depression and world war era, but mainly supplementing it.

With China now, the yin-and-yang of Keynes and Friedman seems intriguingly suggestive of a broader yin-and-yang of capitalism and socialism themselves; as with any yin-yang pair, each member's excesses and deficiencies point to the other's equities and strengths. History is the only reliable witness and proof of such primeval realities, and at this pivotal moment of global crisis, it inexorably points to the eventual realization of not a Chinese century, nor a second American century, but indeed a Chimerican century.

China looks remarkably well-governed now

The fallout from Brexit, the failed Turkish coup, the racial and anti-police violence and volatile presidential election in the US, and so on and so forth, all make China appear to be a remarkable island of relative sanity and comparatively good governance.

Long gone is the rumor-mongering about infighting within the communist party ranks that supposedly threatened Xi Jinping's grip on power which flared up in spring; in its place, Xi has had a quiet few months, while premier Li Keqiang has unspectacularly but steadily taken firmer reins of economic policy without appearing to be out of line with his boss.

The attempted coup in Turkey was doubtless concerning to Beijing: it's just the kind of usurpation of centralized authoritarian power that China and Russia automatically associate with Western or Western-sycophant meddling, so its rapid crushing by Ankara and massive wave of reprisals are as reassuring to Moscow and Beijing as it's troubling to Washington and Brussels.

The ongoing crisis also offers yet another vindication of the communist party's view that multi-party democracy simply isn't worth the trouble and risk - definitely not now and not yet. Ironically, the very suggestion that Erdogan staged the coup himself to consolidate power has done more than anything to expose his enemies both domestic and international who in fact do want him eliminated - including by violence if necessary. Indeed, it's difficult to see in the current situation how a country as complex and diverse as Turkey can be held intact except by such a sheer force of personality.

In the decadent West, however, the delicate balance between freedom and security has been taken for granted for decades, and now that it's cracking even a little, it's driving more than a few folks on both ends of the political spectrum nuts. Of course, we have a buffer of general prosperity and plenty that the non-Western world doesn't have, ensuring that our strife remains psychological except in the scattered (if even more frequent) bursts of physical unrest.

That's not to understate the genuine risk of overreach in a conservative regime or society's reactionary retrenchment: it's always contingent upon the leadership of such countries to forcefully lock down the immediate systemic threat only so such coercion can be relaxed - in careful and deliberate stages - as soon as possible.

That's what "crossing the river by feeling the stones" is all about: this brutally simple, common-sense approach that China has taken in nearly four decades of reform and opening will only continue to garner respect and practical interest as the post-post cold war world earnestly seeks a rectified path now that unbridled neoliberalism has reached its logical dead end.

China joins US in flouting international law

In the week since The Hague ruled against China in a long-awaited arbitration case on the territorial dispute with the Philippines in the South China Sea, virtually no facts have changed on the ground. As Beijing has announced another round of military exercises in the area - a day after buzzing a nuclear-capable H-6 bomber past the key islet in the case, Scarborough Shoal (itself after again turning away Filipino fishing boats from adjacent waters) - it looks like business as usual.

China-bashers the world over, but especially neocon imperialists here in the US, are likely to be beside themselves in the coming weeks and months, as the legal ruling recedes into the background and fades into virtual irrelevance. Any bilateral negotiations between Beijing and Manila concerning the actual situation within the latter's exclusive economic zone (EEZ) are likely to be conducted in strict secrecy, even as a continuous parade of PLAN and US Navy exercises and "freedom of navigation" patrols, respectively, rolls on by around the artificial Chinese islets.

In the end, probably the biggest achievement of the Philippines' arbitration case - doubtless inspired (at least in the minds of some) by a belief that Washington would come to its old ally's defense if push came to shove - will be a reaffirmation of an age-old truth: so-called "rule of law" has never not been, in reality, a naked "rule of the gun" (or "rule of the sword").

Laws and regulations are utterly meaningless without the means to enforce them: in the real world we inhabit, "moral" victory just doesn't cut it - no imperfect human individual or society can presume to enjoy any authority whatsoever to enforce the morality of another sovereign human individual or society. It would be one thing if the Philippines - not to mention the US - were perfectly content with the symbolic ruling and dispassionately refrained from expecting it to impact the situation on the ground; at least some elements of the Manila and Washington establishments, however, were most definitely hoping for a good deal more. Well, welcome to the real world.

True, China has effectively left the UN Convention on the Law of the Sea (UNCLOS) with its flagrant disregard of The Hague's ruling. But that puts it in good company with another big, heavily armed power which has never even bothered to sign it in the first place: the US!

Of course, Washington's apologists can protest all they want that the US has always abided by UNCLOS even if it hasn't signed it; just like they can continue to protest that invading Iraq, overthrowing Libya, and sponsoring a whole host of coups of non-compliant client states for more than a century were actually all in accordance with "international law."

Perhaps China's really made it to the bigs now: it can now indulge a bit in the kind of "rules don't apply to me" perks that can only be the exclusive domain of the most dominant empires - read: Uncle Sam.

Beijing still firmly in control

The Chinese economy expanded 6.7 percent year-on-year in 2Q, beating consensus forecasts and offering tentative proof of the desired "L-shaped" stabilization alluded to by an official expert a couple of months ago.

Going forward, the key thing to look for is some sign that the latest bout of stimulus which has buoyed the SOE sector since 1Q doesn't worsen the long-term industrial overcapacity and debt overhang which has pushed the debt-to-GDP ratio to as much as 350 percent. As the negative PPI moderates further (it's fallen from -5.9 percent to -2.3 percent YTD), we should eventually see a moderation of credit growth relative to GDP growth which is so badly needed for a sustainable economic rebalancing, but which still isn't anywhere in sight thanks to the massive 2016 stimulus that's apparently succeeded in averting a hard landing.

For the moment, Beijing's still firmly in control. Industrial profits are showing additional tentative signs of recovery, and perhaps real meaningful capacity cuts are finally on the way at the big SOEs. These are all acknowledged even under a headline such as "China's Economy: Complex and Grim?"

That's bad news for China bashers and global economic doomsayers more broadly, but hardly resounding reassurance for optimists: given how much SOE reforms and restructuring have been delayed for years, the world is rightly skeptical that anything's actually changed on the ground until evidence of it is seen across the board - not just in PPI and corporate profits, but credit and NPL figures as well. If the various data series don't eventually confirm each other, not only does it cast doubt on claims of recovery, but it renews long-running mistrust of official Chinese statistics.

The most credible estimates of China's total NPL pile, including one mentioned in this 2Q GDP commentary by Macquarie Research, are between $1 and $2 trillion, or up to 10-15 percent of the entire corporate debt load. Even with an optimistic recovery and securitization rate of 50 to 75 percent, that leaves up to a full trillion dollars of losses to recapitalize the banking system of - dwarfing the 300 billion euros now being floated for a European banking bailout (150 billion euros suggested for Italy alone). That's an eye-popping figure, for sure, but by no means enough to make a banking crisis a foregone conclusion. Extreme China bears not only tend to overstate the sheer size of the NPL problem but seem to largely dismiss any significant recoup.

The entire global economy has become a game of confidence: confidence and faith that policymakers, if they haven't already gotten their act together, will do so before long. If in the remainder of 2016 Beijing actually does so, it will have a positive global impact commensurate with China's size and heft.

Weaker yuan might strengthen China

While the world is fixated today on the ruling against China's claims to the South China Sea at The Hague, the true focus should be on the yuan.

Having weakened nearly 2 percent, to about 6.70 to the dollar, in the two-and-a-half weeks since Brexit, it has thus far noticeably failed to slip out of PBOC's control, in stark contrast to its last slide in January. In fact, today is the half-anniversary (January 12) of the central bank's aggressive intervention in the Hong Kong money markets to stem a full-scale run on the offshore RMB (which had plunged to 6.7618, still its 52-week low as of today), vaulting the benchmark overnight lending rate to over 66 percent.

Tellingly, Chinese stocks are sending a contrarian signal about this latest yuan depreciation: the Shanghai Composite is up nearly 7 percent since the immediate Brexit selloff on Friday, June 24.
This seems to indicate that the weaker yuan is being interpreted not as worsening Chinese economic conditions but as a boost for its beleaguered exporters. More generally, around the world, markets seem to be pricing in the virtual impossibility of a Fed rate hike for the remainder of 2016.

Though the Chinese economy remains fragile and even more so in light of global uncertainty (particularly political uncertainty in the West), there's a growing sense that Beijing is doing its utmost to dictate the pace of devaluation, enabling it to keep an aura of control that confounds China skeptics.

These skeptics tend to underestimate PBOC's determination and ability to manage the RMB's exchange rate tightly enough that it can keep speculators on the margins. Since January, it has inserted itself (via its surrogate state banks) as the single biggest player even in the supposedly open offshore yuan market, and has thereby stemmed nearly $200 billion of outflows through continuous CNH purchasing operations to keep the supply of CNH tight (i.e. short-selling expensive) and any rise in the dollar muted (via constant provision of sell-side liquidity).

This, in turn, has clearly been made possible by massive use of yuan/dollar swaps and forwards to the tune of hundreds of billions of dollars since last summer's turmoil. These contracts, with typical 3-6 month maturities, enable PBOC to pledge ample dollar liquidity in the near future for its constituent banks and thus free them to do its yuan-support bidding in the offshore money markets by offering greenbacks for CNH. At the end of the contract term, the yuan may well have weakened moderately (2-3 percent) and thus compels PBOC to dip into its dollar reserves to offset the shortfall in the rollover of its constituents' derivatives, but the hope is that this will be cushioned somewhat by an improved balance of payments (BOP).

The BOP was clearly strained enormously by the heavy outflows of August 2015-January 2016, but thanks in part to a crackdown on import overinvoicing and bank overpayments for imports since then, the most egregious illegal outflow channels have been significantly constrained. The ongoing anti-corruption crackdown promises to exact a heavier, longer-term toll, too, on particularly large sums leaving the country (whether from wayward officials or haven-seeking private firms and individuals).

Taken together, this means that a moderately weaker (and still gradually weakening) yuan - likely bottoming out at about 7.10 to the dollar in mid-2017 - is a net positive for the Chinese economy. Any decline in dollar reserves caused by this depreciation is likely to be largely offset by a larger current account surplus from boosted exports.

That being said, China can't expect its fellow Asian exporters to stand idly by: they'll also devalue moderately, but in similarly controlled fashion to trace the yuan as a quasi-benchmark. After all, they're all effectively in the same boat of combating overcapacity and deflation, and the last thing everyone needs is competitive, as opposed to collaborative, currency easing.

The US economy, of course, will once more have to provide the anchor of what one hopes will eventually be a rejiggered growth cycle. Rate hikes before the November election are virtually out of the question - not only because of global uncertainty, but also because a Democrat- and establishment-heavy Fed wants as good an economy as possible for Hillary.

Come January, whoever enters the Oval Office will have to unveil an economic blueprint that finally incorporates more comprehensive fiscal stimulus in the form of infrastructure spending: such a boon to Asian exports (and of course, investment in the US) will be the salvation of the global economy in the late 2010s, if only politics would allow it.

"Free-market capitalism" increasingly a fantasy

The S&P 500 has today breached new all-time highs, as the turmoil triggered by Brexit has been met with what are effectively promises of a new bailout effort by the global central banking establishment.

Shinzo Abe's landslide reelection as Japanese prime minister seems to put to rest any notion that Tokyo's stimulus policies have lost credibility, as the Japanese public has now decisively signaled that it would rather the economy fail on account of one more stimulus that gets botched down the line than on account of one less stimulus that crashes asset valuations right away.

That's pretty much been the story of the global economy since the 2008 meltdown.

And now this post-Brexit stabilization, should it be sustained, heralds a permanent shift to central planning and a death knell to the Western, especially the neoliberal, conception of "free markets" and, quite possibly by extension, "capitalism" itself. The freezing of liquidations in the UK's largest commercial property fund has put investors on notice that nowhere can they expect their money to be freely redeemable in the event of a liquidity scramble that threatens to turn into a stampede and thereby pull the floor from under risk assets.

To save Britain and Europe, its monetary authorities may be irrevocably "Sinicizing" its rigged and manipulated financial system. It may take a while, but the potential shift is profound: Western investors may eventually find Chinese markets more attractive as Beijing gradually opens its capital account, even as Chinese investors eventually realize that their assets in the West aren't as secure as once assumed, especially if electoral instability continues to expose commerce to the vicissitudes of politics.

This isn't necessarily bad news in the long run: it could be just the crisis that Western capitalism needs to save itself. Much like Chinese communism had no choice but to make groundbreaking concessions to deregulated markets to save itself from its own excesses, perhaps Western capitalism must likewise be purged of its self-imposed distortions and perversions to recover both vitality and credibility.

But that means acknowledging the sad state of current affairs: "free market capitalism" risks becoming little more than a fantasy of armchair "experts" out of touch with the real world. And these folks include many stalwart conservatives of the Reaganite/Thatcherite heritage who are effectively in denial of their own culpability in the failure of their ideas. For years, they could blame pesky progressives and filthy socialists; now they themselves are exposed as fundamentally corrupted, as well. That the system has been deliberately rigged for so long to primarily benefit the capitalist class doesn't make it more "free" or less "planned", when it really comes down to it, than a system rigged to purportedly benefit the common masses.

More to the point, just because the capitalist elites have so clearly betrayed their own principles with quasi-socialist practices doesn't mean that capitalism itself can be cleanly exempted by blaming all its woes on socialism. This lie is the main target of the populist rebellion on both sides of the Atlantic: as of 2016, no longer will the conservative base of Western countries be bamboozled by the propaganda of "capitalism" to in fact nurture a most insidious form of socialism.

China delays the Fed again - under cover of Brexit

Today's positive US jobs surprise comes on the heels of yesterday's likewise surprising increase in China's FX reserves. Though these encouraging signs two weeks after Brexit are unlikely to dispel the consequent uncertainty which abounds in Europe and Japan - including more talk of such extraordinary measures as negative interest rates or even "helicopter money" for consumers and firms - they suggest that Chimerica's twin pillars are standing relatively firm at the moment. The S&P 500 is sitting pretty at just a wisp below its all-time high.

Nonetheless, it's hard to see a more hawkish Fed emerge for at least a few months. That's in no small part because the yuan has shed 1.8 percent against the greenback in the wake of Brexit - translating to as much as a 20-basis point jump in real US interest rates, with more probably on the way. That all but takes September off the table for the next 25-basis point fed funds increase and puts December into even more doubt (it was already about 50-50 before Brexit).

To those horrified of deflation, this amounts to Chinese currency warfare under the cover of British and European turmoil - to say nothing of the convenient fresh attack line it gives Mr. Trump. But in fact the yuan's recent fall is just as much a concession to the mythic "free market" that Western experts still can't fall out of love with: with the pound and euro having shed as much as 10+ and 3.5 percent from Brexit shock starting June 23, the yuan's 1.8 percent decline (from about 6.58 to 6.70 per USD) is just about right; notwithstanding the suffering that an 8 to 9 percent appreciation of the yen on the yuan in this same period is clearly causing Tokyo. Further, the yuan's continued decline against the rest of its trade-weighted currency exchange basket is reflective of Beijing's understandable attempt to tame its domestic industrial deflation by boosting commodity import prices - if it didn't do this, its disinflating exports to the rich economies would be even more of a drag on them.

Needless to say, it's cold comfort for any of China's trading partners individually that Beijing's trying to distribute its deflationary damage as evenly as possible across all of them. But there are as yet few indications that PBOC's recently leaked bottom line of an even lower 6.8 per dollar for the rest of 2016 is a deliberate policy target as opposed to its intended defensive floor; even should we see this level in the coming weeks, traders and speculators should be on notice that "Mommy" (PBOC's nickname in the Chinese finance industry) will at that point be prepping some pretty heavy artillery to fire.

If one considers Chimerica - indeed, the global economy as a whole - as an integrated (however imperfectly) system, it's easy to see why everyone's a Keynesian now: it's not because Keynes has been of much help reigniting the flames of global growth lately, but simply because the alternative is even less palatable.

In fact, we may be entering a new phase of global monetary history: the era of unadulterated zero, near-zero, or outright negative interest rates as the norm, not the anomaly. This isn't to question Ms. Yellen's or the Fed's commitment to normalizing rates within a reasonable timetable; it's simply to observe that this is beginning to seem pretty impossible when just about everyone else is gearing for monetary loosening as opposed to tightening - if not via rate cuts then certainly via currency depreciation.

A mere 2 percent further fall in yuan/dollar pushes the next Fed hike to mid-2017 or later - and there's a good chance it'll happen in this Q3. Even worse is the potential effect this could have on global sentiment should Beijing botch its delivery even partially to set a USDCNY ceiling at 6.8; in concert with chronic uncertainty and weakness surrounding the European financial system, the UK's future prospects, and yet another Japanese recession, that would be sufficient to bring a Fed cut back to zero on the table.

China skeptics also get their figures wrong

As the yuan plunges below 5 1/2-year lows in the wake of Brexit, rumblings of a possible large devaluation on the order of 15 to 30 percent have returned. One particularly bearish hedge fund assessment reiterates the belief that a Chinese banking and currency crisis is already a foregone conclusion. As is often the case, such analyses seem to rely on erroneous figures, in this case the revised balance of payments (BOP) by China's State Administration of Foreign Exchange (SAFE):

The same accumulated BoP number today, revised by SAFE several times since, is now a deficit of about $2.8 trillion. Essentially, with its revisions, the SAFE has acknowledged even more capital outflows over the last 16 years than we had initially identified.

On the capital account side, there was a downward revision of $10.1 trillion – from a $4.2 trillion surplus to a $5.9 trillion deficit. On the current account side, the revisions show that Chinese exports have not been as strong as initially reported over the last decade and a half. China’s current account surplus has been reduced by $2.1 trillion– going from $5.1 trillion to $2.9 trillion over the last 16 years.

In fact, a quick look at the latest BOP spreadsheet (as of June 30) from SAFE's own website yields a far lower capital account deficit from 2000 thru 2015 of only $2.43 trillion, which combined with a current account surplus of $2.91 trillion and net errors and omissions of $483.67 billion over the same period yields a miniscule $87,136,500.00 accumulated BOP deficit for the last 16 full years (2000-2015, excluding 2016 Q1). That's a far cry from the hedge fund's dire calculus of a nearly $3 trillion deficit for what was indisputably the unprecedented global expansionist phase of China's reform and opening.

In fact, there's no question that the yuan has been overvalued for some time, that this has mainly been driven by chronic capital outflows dating back much longer than the Fed's monetary tightening cycle which began in 2013, and that only in the past year (the stock market crash was exactly a year ago this week, and led to the currency devaluation five weeks later) has the scale of this problem become widely known. But the aforementioned capital outflow figures are an example of how easy it is for the bearish arguments to go as far off the mark as the bullish ones. Either they're using entirely different figures or their arithmetic is way off.

Back in the real world, PBOC is now fairly confident that it can guide the RMB down 4.5 percent in 2016, to 6.8 per dollar, without triggering much international turmoil should such easing prove necessary to boost the economy and exports particularly. The key is to maintain control of this depreciation at all times. It has already been covering up capital outflows to the tune of $170 billion since October through derivatives and offshore forex interventions via its affiliated state banks, allowing the yuan to maintain an artificially strong peg to the dollar far longer than if its offshore market weren't so heavily manipulated, especially since the near-total run on it in January forced PBOC's hand in the Hong Kong money markets.

The verdict is still out on whether Beijing can engineer its vaunted soft landing as it transitions the economy to a more balanced growth model, but as usual, the extreme bears who have written it off already aren't terribly convincing, upon closer inspection.