As global markets count down to the Trump presidency, the trillion-dollar question seems to be how the flamboyant realtor and reality TV personality plans to "get tough" with China, as he has so emphatically promised to do so ever since his improbable bid for the presidency began nearly nineteen months ago.
Trump's appointment of anti-China stalwarts Peter Navarro and Robert Lighthizer to key trade posts in his administration signals a break from the past, when such offices were as good as a China lobby on Beijing's behalf in the US - without China having to spend a dime buying influence itself. State media in the communist superpower has predictably responded nastily: China isn't afraid of a trade war, it pouts, because such a conflict will be anything but one-sided and will leave America bruised and battered, too. That begs the question: Is Trump really preparing to exchange salvos with the world's second-biggest economy in such a way that global markets and supply chains are jolted into painful adjustments?
On closer examination, highly improbable. Trump knows that his mandate to govern will be judged by practical positive results. And he also knows that such results could be hard to come by in a scenario of tit-for-tat hostile escalation with the middle kingdom - especially in light of how much more achievable they'll be with Beijing's cooperation.
For starters, China is already such a major market for American companies - with such potential for further growth - that even Trump can't purport to start from scratch in kickstarting US exports to what promises to be the largest single foreign market in the not-so-distant future. As the Asian powerhouse grows wealthier, with an ever expanding middle class, its appetite for US agricultural produce and high-end manufactured products, as well as premium services such as those in finance and law, is primed to explode. Mind-boggling sums of money over many years into the 2030s and beyond are now at play. To take just one example, Boeing expects China to account for nearly a third of global jetliner demand in the coming decade and purchase a whopping nearly 7,000 planes over two, which would make it the first trillion-dollar aviation market. While this smacks of the time-honored Western China lust whose fabled lineage can be traced all the way back to Marco Polo, it gives a sense of the sheer magnitude of the perceived opportunity for US capitalists and investors - and by extension, workers.
To "win" the trade war with China, in other words, doesn't mean making China - no more than America - worse off: quite the contrary. "Victory" will mean the rising Chinese upper and middle classes purchasing massive volumes of American goods and services even as Chinese firms continue to sell prodigious quantities the other way. Both sides stand to become better-off - possibly much better-off.
On this flip side, Trump's biggest wish - that America attracts more productive plant investment from international companies - also happens to correspond with what a growing number of Chinese companies are already pursuing. The combination of rising labor costs at home and cheap energy supplies on the other side of the Pacific is slowly but steadily becoming a structural vacuum sucking Chinese manufacturers onto Yankee shores to be closer to their most lucrative foreign market. Massive retailers like Walmart and Amazon, whose branded and generic products alike are heavily sourced from Chinese-owned factories on the mainland, could in time find themselves purchasing inventories instead from new Chinese assembly lines employing American workers and robots domestically in the US.
Chinese investment in America will get an even bigger boost if the pragmatic Trump administration, eager to capitalize on excess Chinese capacity in real estate, construction and infrastructure-related industries like steel, cement, and glass, reduces the political barriers hindering investment from majority state-owned Chinese players in these sectors. Such a drastic move may be wishful thinking for the foreseeable future, but if anyone would even consider it for the medium to longer term, Trump would be the one. While China trade hawks like Navarro decry Beijing's seemingly untouchable lifeline of subsidies to its favored industrial firms, one wonders what attitude a mercantilist Washington will adopt if this largess is turned to support American reindustrialization and American jobs instead. Having never been a slavish ideologue when it comes to "free markets" and strictly "private" investment, Trump of all American leaders would likely welcome a helping hand from the Chinese state: it's not like subsidies are anything new to strategic sectors of the US economy, to begin with; if introducing Chinese cash into the mix stirs competition in these spaces which otherwise tend to be pockets of inefficiency and waste (as tends to be the case where free public money is doled out), all the better.
The psychological aversion of Americans, especially conservative Americans, to communist Chinese investment is a barrier of the kind that only a character as unconventional and maverick as Trump can overcome: he likes to see the big picture, and as a consequence isn't apt to dwell on details which in and of themselves could feel awkward. What better way to contain China, he'd broach, than to sucker Beijing into pouring so much of its prime industrial capacity into America that America effectively gains a veto over Chinese behavior around the world?
For China's part, far from lamenting the loss of factory installations and jobs that this strategic economic shift comes with, both the communist government and general population would welcome their own arrival as major investors and owners of productive assets in the heart of the developed world.
The "win-win" aspect of US-China relations has in recent years become so cliché as to become a fitting euphemism for everything that America feels has gone off the rails with the globalization project. But even now, a good two weeks before he even takes office, one can see the outlines of how a reinvigorated America under Donald Trump could score so big and so spectacularly - eventually, at least - in reframing the world's central commercial relationship that before we know it, we'll actually get tired of winning.
It's a crazy world when the Apocalypse becomes the Salvation, but that's what 2017 seems to be heralding barely a week in.
Friday, January 6, 2017
Wednesday, January 4, 2017
A year after near collapse, Xi's China on belated path to stability
A year ago, the global financial world held its breath as the Chinese stock market and currency nosedived to open the 2016 trading year's first two weeks, triggering the second round of China-induced multi-trillion dollar liquidations worldwide in less than six months. As George Soros quipped, "I'm not predicting a Chinese hard landing, I'm observing it," a general consensus emerged in the ensuing weeks that Beijing was basically on its last legs fighting off a general financial crisis, which could only end in a massive devaluation of the yuan to bail out a debt deflation-trapped banking sector. Longtime China-bashing "permabears" like Jim Chanos and Gordon Chang gleefully trumpeted their prescience all along that the communist regime had built nothing more than a Potemkin village, confidently predicting that this time - at long last - Beijing simply couldn't stop a complete meltdown no matter what it tried.
It turns out, of course, that they were badly wrong for what could well be the last time: China not only didn't collapse, it managed to bounce back and stabilize in such a way that, by the closing months of 2016, it no longer appeared so particularly vulnerable in a global neoliberal economic system whose very heart - the Anglo-American-dominated West - was undergoing significant convulsions of uncertainty and volatility which were calling to question the integrity of its very foundations.
Against this backdrop, even as Beijing bleeds capital at the rate of $50 to $100 billion a month while watching the yuan slide towards the psychological threshold of 7 per dollar, it appears to be indisputably in charge of China's destiny. This is in no small part because it has comprehensively and holistically confronted the fundamental structural problem it faces: how to carve out a greater global space for its brand of centrally planned economic development, with greater international use of its newly designated reserve currency as the linchpin of such a strategy.
Even before the surprise election of protectionist Donald Trump, it was painfully clear to China that its future prosperity and strength as an independent sovereign power would necessarily wean it off the quarter-century model of export-driven surpluses with the West which it recycled into Western reserve currencies to keep the cycle flowing. Much as this whole scheme had begun to foster greater disenchantment with trade and globalization in Western countries in recent years, it had also begun to badly sputter as a source of income and profits for China itself.
The investment-heavy Chinese economy increasingly needs to shift gears: its producers must climb the value chain from cheap assembly to advanced component fabrication, even as the consumer society must expand healthily along with the service sector. Such a profound transformation amidst declining demographics and sluggish growth both domestically and globally has forced Beijing's hand in the realm of fiat credit long utterly dominated by the West and particularly the US: now more than ever, China must develop and boost confidence in its indigenous financial system, starting with the RMB itself.
Looking back on 2016, it was a watershed year for the communist superpower's domestic credit development. Trillions of yuan of new locally denominated debt were issued to corporations, local governments, and increasingly even consumers to keep the domestic economy - especially the real estate and industrial sectors - afloat with cheap cash at a time of highly pronounced global dollar scarcity and illiquidity. Skeptics will of course lambast Chinese officials and bankers for creating so much new credit out of thin air which in the long term might only further saddle Chinese economic agents with unpayable debts; but thus far, since the massive first-quarter stimulus of last year, Beijing's monetary and fiscal easing has succeeded in reversing the deflationary tide that had Mr. Soros and like-minded speculators so certain the middle kingdom would flatly crash.
This offered a propitious background against which the yuan was finally officially added to the IMF's Special Drawing Right (SDR) basket of elite reserve currencies (alongside the dollar, euro, pound sterling, and yen). Whereas 2016 saw a decline in the offshore RMB's total usage beyond the mainland - mainly as a result of capital controls imposed to stop a run on the currency - this should be understood as a stopgap pullback and not a permanent resealing of the capital account. The yuan simply wasn't ready for anything close to prime time in 2015 and 2016 - not when domestic Chinese firms' and individuals' faith in it hadn't yet been tested vis-à-vis their ironclad trust in King Dollar. Going forward, as local usage of the local tender for bond and debt issuance increases - it has already ballooned dramatically only since 2014 - this gap of credibility and confidence should steadily narrow. (And needless to say, this is a prerequisite for medium to long-term Chinese aspirations for a Sinocentric Eurasian economic architecture, where the yuan is a legitimate trading and reserve currency for developing countries along Beijing's "One Belt One Road" scheme.)
Which of course leads to the underlying and underpinning question at hand: just how stable is the communist regime and system under Xi Jinping? It is on this matter that perhaps the most resounding proofs have emerged in the past year - however open-ended or inconclusive they yet remain.
There's little doubt that the financial and economic travails of 2015 and early 2016 badly bruised the Xi-Li (Keqiang) administration which had taken power with such an ambitious reform agenda in 2012-13; the attendant fallout of this prolonged episode, however, has also exposed the fundamental stability of the one-party state with a single powerful center that none of the subordinate parts can effectively directly challenge, however much they may continue to disobey or defy its edicts - mainly through sheer inertia.
Like their counterparts in the West, China's own elite "ruling class" - in this case the communist party bosses at the heads of local governments and state-owned enterprises (SOEs) - have been demonstrated to be highly reluctant to compromise their long-enjoyed prerogatives at the apex of the socioeconomic food chain within the global neoliberal architecture. Having contributed so much to China's development and prosperity for the preceding quarter-century, they understandably felt a sense of entitlement - again closely mirroring their Western peers - to a disproportionate share of the common goods even as the overall pie stopped growing or even shrank. Though they'd already been admonished by the central government that downsizing their debt-ridden and overcapacity-bloated industries would be nothing short of "slashing one's wrists", they used various shenanigans to put off the day of reckoning, with near-disastrous consequences for the entire country.
This is what became strikingly apparent in the second half of 2015, when the double whammy of the Chinese stock market crash and yuan devaluation coincided with the Fed's first interest rate hike in nearly a decade to create a perfect storm that culminated in the virtual panic at the outset of 2016.
Initially, the economic slowdown in early 2015 - in spite of repeated central bank easing through a series of interest rate and reserve requirement ratio (RRR) cuts - was greatly exacerbated by deliberate intransigence of local officials to adapt to a stricter financing environment, specifically the new prohibition on local government financing vehicles (LGFVs) for the purposes of curbing corruption in line with Xi Jinping's much vaunted and increasingly feared and hated (among officialdom) campaign.
Where they should have responded with circumspection in the form of production and capacity cutbacks - this was just the environment that would have demanded their delayed compliance with central mandates to do so - the ensconced managers of local state firms instead fired up their lines in the hope of decimating lesser (including private) competitors. A mutually destructive race to the bottom ensued, pitting factories and plants both regionally and nationally against each other in pursuit of shrinking profits. The systemic distortions were multiplied by the various forms and channels of illegal "shadow" lending and credit which moved into the funding gaps of less privileged market players to sustain their tooth-and-nail efforts to stay alive.
By the time the central authorities stepped in to loosen the politically tautened local fiscal levers, it was too late to stop or even moderate this free-for-all: the final two quarters of 2015 saw ham-fisted efforts by Beijing to wring out what legitimate stimulus they could from provincial and local administrators without returning to the good old days of LGFV extravagance, coupled with far less restrained industrial expansion by provincial and local firms to meet the only incrementally improving aggregate demand. The result: by December, the producer price index (PPI) had been mired at close to negative 6 percent for the second straight month - which when coupled with the benchmark interest rate of over 4 percent meant a deflationary hell for industry of real borrowing costs in the double digits. Unless drastic action was taken quickly, Beijing would be utterly humiliated by its ill-wishers in the Western China-bashing and China-shorting community.
And so the LGFVs had to be reinstated, at first by degrees and eventually virtually wholesale: there was as yet realistically no other way to pull off the scale of fiscal stimulus that the overall economy now demanded to keep from abruptly depressurizing. As soon as this decision was made, unleashing an over $1 trillion spending package, the Chinese recovery was both swift and broad, almost overnight spiking global commodity prices.
The double-edged word, of course, was that this short-term provisional lifesaver greatly emboldened the party bosses of the local government and SOE worlds: they now felt vindicated in resisting Beijing's downsizing program from the get-go. To them, it was a moral as well as political victory over Xi's party-mandated austerity, which by now they saw as really a naked power grab by the most insatiable personality-cult strongman since Mao himself. When push came to shove, they had managed to extract a massive concession from Li's government to all but veto Xi, which, for a brief moment, seemed to do the impossible: create an actual rift at the very top of the party-state structure in the paramount Politburo Standing Committee.
It was at this juncture - on the occasion of the annual "Two Sessions" of the rubber-stamp Chinese parliament early last March - that the anti-austerity, status-quo faction of the party struck: an anonymous "open letter" purportedly from disenchanted party officials appeared on the internet, first overseas and then republished by the Xinjiang provincial government - headed by one of Xi's known enemies (a crony of anti-corruption-disgraced security czar Zhou Yongkang) - calling for nothing short of the general secretary's resignation.
The Xi administration's response was predictably immediate and furious, but by now more was being exposed: even the Politburo Standing Committee wasn't fully in line with Xi's increasingly personal brand of authoritarian rule by one-man diktat - or at least, not as much as it should have been. In an embarrassing flub, the propaganda ministry headed by standing committee member Liu Yunshan summarily executed the online presence of outspoken liberal party stalwart Ren Zhiqiang, unleashing such a firestorm of negativity towards Master Xi himself that it had to be investigated by the anti-corruption watchdog. Thus were even Xi's purported loyalists unwittingly destabilizing the delicate internal balance of the party - serving their leader with a zealous loyalty that could barely conceal ulterior ambition, they wound up damaging his reputation at just the moment when it was already bruised.
The culmination of the intrigue came in late April and early May, when the palpably widening split between Xi and Li finally came to a visible head. The critical occasion for this was the fizzling out of the initial energizing effects of the trillion-dollar stimulus: redundant steel and coal capacity which had without authorization been brought back online to meet stimulus demand (after being slated for rationalization) now had to be shut down again absent yet another injection of bailout cash. While the public posturing gave Xi's detractors and critics hope - they were thrilled to see state media broadcast Li meeting and greeting his power base at the communist youth league (CYL) - the behind-the-scenes power play was characteristically one-sided: Xi loyalists quietly began executing plans to permanently sideline the CYL as a patronage base for future top leaders, and the recalcitrant party secretary of steel-producing Hebei province right outside Beijing was purged from his post for failing to curb "zombie" plants which had once more come back from the dead.
Then in May, an official "expert" essay on the economy appeared with fanfare which blasted the old means of economic development through massive debt expansion as inherently flawed and potentially very dangerous; virtually simultaneously a previously private statement by Xi to provincial party chiefs was publicized that conveyed how the general secretary was basically losing patience with his underlings for their chronic foot-dragging on painful restructuring. By the time these reiterations of paramount leadership's officially sanctioned stances were disclosed, the internal power struggle they indicated had been decisively concluded: Xi had utterly crushed the ill-conceived and completely uncoordinated revolt against him stillborn.
Through all these developments, the standout fact which emerged was the party central leadership's creeping consolidation of control over the provincial party hierarchies and its steadily encroaching overriding influence over the actual organs of state. Since spring 2016, as the Chinese economy has further stabilized, a sense of normalcy has returned politically as well: Xi has further consolidated his unchallenged position as the "core" of the party's fifth-generation leadership. He has warded off whatever trouble may have arisen from subordinates in the party-state latching onto an alternate lead figure, i.e. Li Keqiang, as a channel for passive dissent or resistance; Li for his part has also demonstrated the political prudence to shy away from rivalry with Xi, even at the price of exposure to risk of a forced early retirement at the coming 19th party congress, for the discretion of doing the best visible job he can executing Xi's economic initiatives.
In this light, the most critical single development in China in the past tumultuous year - and the single greatest comfort that its optimists can take - is the admonition published last April on the official website of the Central Committee for Discipline Inspection (CCDI), the party's self-policing agency in charge of the graft-busting crusade, titled: "A single truth teller is better than a thousand yes-men."
Since it appeared so hot on the heels of the hostile open letter demanding Xi's resignation - the key grievance of which was the party chief's seemingly unabashed self-promotion of a personality cult - this party-approved exposition, which can only have been published with express permission from CCDI head Wang Qishan, was at the time widely seen as indicative that even this stalwart anti-corruption firebrand had finally turned against old friend and ally Xi, the disgraced young red princeling he had first bonded with in the Cultural Revolution some 50 years earlier.
Alas for those wishing communist China ill, the CCDI article was not scrubbed off like any online content clearly not in line with Xi's leadership, and thus turned out to be an unequivocal if oblique expression of support for the current administration. It sent a powerful message that Xi - through trusted confidante Wang - was fully conscious of the risks coming from both ends of the spectrum: he was appropriately wary of the temptation of absolute power even as he rightly wouldn't tolerate malicious dissent within the ranks. In other words, the man charged with leading the party - and thereby an empire of 1.4 billion and a $10 trillion economy, the world's second-largest and still a pivotal engine of globalization - was highly competent because he was at heart a humble servant of the nation and its citizenry.
Obviously, the ultimate success of China's monumental transition is anything but assured at this admittedly incipient stage: it could yet derail in unforeseen ways, and if anything, it's the sense of calm and the lack of trouble or drama which ironically could breed the very complacency that most reliably allows imbalances and distortions to build up until they reach a breaking point. If there's anything Beijing's policymakers and Xi himself should have learned since 2014, it's that they're actually better off in a constant state of concern or even worry - this is precisely what keeps them on their toes, alert to subtle threats to systemic stability which in fatter times could easily slip past unnoticed.
To conclude, a year after apparent near collapse, Xi's China finds itself on a belated road to eventual stability. It doesn't seem anymore like it was ever much more than a fool's know-nothing fantasy that the rising superpower's implosion was already a foregone conclusion.
It turns out, of course, that they were badly wrong for what could well be the last time: China not only didn't collapse, it managed to bounce back and stabilize in such a way that, by the closing months of 2016, it no longer appeared so particularly vulnerable in a global neoliberal economic system whose very heart - the Anglo-American-dominated West - was undergoing significant convulsions of uncertainty and volatility which were calling to question the integrity of its very foundations.
Against this backdrop, even as Beijing bleeds capital at the rate of $50 to $100 billion a month while watching the yuan slide towards the psychological threshold of 7 per dollar, it appears to be indisputably in charge of China's destiny. This is in no small part because it has comprehensively and holistically confronted the fundamental structural problem it faces: how to carve out a greater global space for its brand of centrally planned economic development, with greater international use of its newly designated reserve currency as the linchpin of such a strategy.
Even before the surprise election of protectionist Donald Trump, it was painfully clear to China that its future prosperity and strength as an independent sovereign power would necessarily wean it off the quarter-century model of export-driven surpluses with the West which it recycled into Western reserve currencies to keep the cycle flowing. Much as this whole scheme had begun to foster greater disenchantment with trade and globalization in Western countries in recent years, it had also begun to badly sputter as a source of income and profits for China itself.
The investment-heavy Chinese economy increasingly needs to shift gears: its producers must climb the value chain from cheap assembly to advanced component fabrication, even as the consumer society must expand healthily along with the service sector. Such a profound transformation amidst declining demographics and sluggish growth both domestically and globally has forced Beijing's hand in the realm of fiat credit long utterly dominated by the West and particularly the US: now more than ever, China must develop and boost confidence in its indigenous financial system, starting with the RMB itself.
Looking back on 2016, it was a watershed year for the communist superpower's domestic credit development. Trillions of yuan of new locally denominated debt were issued to corporations, local governments, and increasingly even consumers to keep the domestic economy - especially the real estate and industrial sectors - afloat with cheap cash at a time of highly pronounced global dollar scarcity and illiquidity. Skeptics will of course lambast Chinese officials and bankers for creating so much new credit out of thin air which in the long term might only further saddle Chinese economic agents with unpayable debts; but thus far, since the massive first-quarter stimulus of last year, Beijing's monetary and fiscal easing has succeeded in reversing the deflationary tide that had Mr. Soros and like-minded speculators so certain the middle kingdom would flatly crash.
This offered a propitious background against which the yuan was finally officially added to the IMF's Special Drawing Right (SDR) basket of elite reserve currencies (alongside the dollar, euro, pound sterling, and yen). Whereas 2016 saw a decline in the offshore RMB's total usage beyond the mainland - mainly as a result of capital controls imposed to stop a run on the currency - this should be understood as a stopgap pullback and not a permanent resealing of the capital account. The yuan simply wasn't ready for anything close to prime time in 2015 and 2016 - not when domestic Chinese firms' and individuals' faith in it hadn't yet been tested vis-à-vis their ironclad trust in King Dollar. Going forward, as local usage of the local tender for bond and debt issuance increases - it has already ballooned dramatically only since 2014 - this gap of credibility and confidence should steadily narrow. (And needless to say, this is a prerequisite for medium to long-term Chinese aspirations for a Sinocentric Eurasian economic architecture, where the yuan is a legitimate trading and reserve currency for developing countries along Beijing's "One Belt One Road" scheme.)
Which of course leads to the underlying and underpinning question at hand: just how stable is the communist regime and system under Xi Jinping? It is on this matter that perhaps the most resounding proofs have emerged in the past year - however open-ended or inconclusive they yet remain.
There's little doubt that the financial and economic travails of 2015 and early 2016 badly bruised the Xi-Li (Keqiang) administration which had taken power with such an ambitious reform agenda in 2012-13; the attendant fallout of this prolonged episode, however, has also exposed the fundamental stability of the one-party state with a single powerful center that none of the subordinate parts can effectively directly challenge, however much they may continue to disobey or defy its edicts - mainly through sheer inertia.
Like their counterparts in the West, China's own elite "ruling class" - in this case the communist party bosses at the heads of local governments and state-owned enterprises (SOEs) - have been demonstrated to be highly reluctant to compromise their long-enjoyed prerogatives at the apex of the socioeconomic food chain within the global neoliberal architecture. Having contributed so much to China's development and prosperity for the preceding quarter-century, they understandably felt a sense of entitlement - again closely mirroring their Western peers - to a disproportionate share of the common goods even as the overall pie stopped growing or even shrank. Though they'd already been admonished by the central government that downsizing their debt-ridden and overcapacity-bloated industries would be nothing short of "slashing one's wrists", they used various shenanigans to put off the day of reckoning, with near-disastrous consequences for the entire country.
This is what became strikingly apparent in the second half of 2015, when the double whammy of the Chinese stock market crash and yuan devaluation coincided with the Fed's first interest rate hike in nearly a decade to create a perfect storm that culminated in the virtual panic at the outset of 2016.
Initially, the economic slowdown in early 2015 - in spite of repeated central bank easing through a series of interest rate and reserve requirement ratio (RRR) cuts - was greatly exacerbated by deliberate intransigence of local officials to adapt to a stricter financing environment, specifically the new prohibition on local government financing vehicles (LGFVs) for the purposes of curbing corruption in line with Xi Jinping's much vaunted and increasingly feared and hated (among officialdom) campaign.
Where they should have responded with circumspection in the form of production and capacity cutbacks - this was just the environment that would have demanded their delayed compliance with central mandates to do so - the ensconced managers of local state firms instead fired up their lines in the hope of decimating lesser (including private) competitors. A mutually destructive race to the bottom ensued, pitting factories and plants both regionally and nationally against each other in pursuit of shrinking profits. The systemic distortions were multiplied by the various forms and channels of illegal "shadow" lending and credit which moved into the funding gaps of less privileged market players to sustain their tooth-and-nail efforts to stay alive.
By the time the central authorities stepped in to loosen the politically tautened local fiscal levers, it was too late to stop or even moderate this free-for-all: the final two quarters of 2015 saw ham-fisted efforts by Beijing to wring out what legitimate stimulus they could from provincial and local administrators without returning to the good old days of LGFV extravagance, coupled with far less restrained industrial expansion by provincial and local firms to meet the only incrementally improving aggregate demand. The result: by December, the producer price index (PPI) had been mired at close to negative 6 percent for the second straight month - which when coupled with the benchmark interest rate of over 4 percent meant a deflationary hell for industry of real borrowing costs in the double digits. Unless drastic action was taken quickly, Beijing would be utterly humiliated by its ill-wishers in the Western China-bashing and China-shorting community.
And so the LGFVs had to be reinstated, at first by degrees and eventually virtually wholesale: there was as yet realistically no other way to pull off the scale of fiscal stimulus that the overall economy now demanded to keep from abruptly depressurizing. As soon as this decision was made, unleashing an over $1 trillion spending package, the Chinese recovery was both swift and broad, almost overnight spiking global commodity prices.
The double-edged word, of course, was that this short-term provisional lifesaver greatly emboldened the party bosses of the local government and SOE worlds: they now felt vindicated in resisting Beijing's downsizing program from the get-go. To them, it was a moral as well as political victory over Xi's party-mandated austerity, which by now they saw as really a naked power grab by the most insatiable personality-cult strongman since Mao himself. When push came to shove, they had managed to extract a massive concession from Li's government to all but veto Xi, which, for a brief moment, seemed to do the impossible: create an actual rift at the very top of the party-state structure in the paramount Politburo Standing Committee.
It was at this juncture - on the occasion of the annual "Two Sessions" of the rubber-stamp Chinese parliament early last March - that the anti-austerity, status-quo faction of the party struck: an anonymous "open letter" purportedly from disenchanted party officials appeared on the internet, first overseas and then republished by the Xinjiang provincial government - headed by one of Xi's known enemies (a crony of anti-corruption-disgraced security czar Zhou Yongkang) - calling for nothing short of the general secretary's resignation.
The Xi administration's response was predictably immediate and furious, but by now more was being exposed: even the Politburo Standing Committee wasn't fully in line with Xi's increasingly personal brand of authoritarian rule by one-man diktat - or at least, not as much as it should have been. In an embarrassing flub, the propaganda ministry headed by standing committee member Liu Yunshan summarily executed the online presence of outspoken liberal party stalwart Ren Zhiqiang, unleashing such a firestorm of negativity towards Master Xi himself that it had to be investigated by the anti-corruption watchdog. Thus were even Xi's purported loyalists unwittingly destabilizing the delicate internal balance of the party - serving their leader with a zealous loyalty that could barely conceal ulterior ambition, they wound up damaging his reputation at just the moment when it was already bruised.
The culmination of the intrigue came in late April and early May, when the palpably widening split between Xi and Li finally came to a visible head. The critical occasion for this was the fizzling out of the initial energizing effects of the trillion-dollar stimulus: redundant steel and coal capacity which had without authorization been brought back online to meet stimulus demand (after being slated for rationalization) now had to be shut down again absent yet another injection of bailout cash. While the public posturing gave Xi's detractors and critics hope - they were thrilled to see state media broadcast Li meeting and greeting his power base at the communist youth league (CYL) - the behind-the-scenes power play was characteristically one-sided: Xi loyalists quietly began executing plans to permanently sideline the CYL as a patronage base for future top leaders, and the recalcitrant party secretary of steel-producing Hebei province right outside Beijing was purged from his post for failing to curb "zombie" plants which had once more come back from the dead.
Then in May, an official "expert" essay on the economy appeared with fanfare which blasted the old means of economic development through massive debt expansion as inherently flawed and potentially very dangerous; virtually simultaneously a previously private statement by Xi to provincial party chiefs was publicized that conveyed how the general secretary was basically losing patience with his underlings for their chronic foot-dragging on painful restructuring. By the time these reiterations of paramount leadership's officially sanctioned stances were disclosed, the internal power struggle they indicated had been decisively concluded: Xi had utterly crushed the ill-conceived and completely uncoordinated revolt against him stillborn.
Through all these developments, the standout fact which emerged was the party central leadership's creeping consolidation of control over the provincial party hierarchies and its steadily encroaching overriding influence over the actual organs of state. Since spring 2016, as the Chinese economy has further stabilized, a sense of normalcy has returned politically as well: Xi has further consolidated his unchallenged position as the "core" of the party's fifth-generation leadership. He has warded off whatever trouble may have arisen from subordinates in the party-state latching onto an alternate lead figure, i.e. Li Keqiang, as a channel for passive dissent or resistance; Li for his part has also demonstrated the political prudence to shy away from rivalry with Xi, even at the price of exposure to risk of a forced early retirement at the coming 19th party congress, for the discretion of doing the best visible job he can executing Xi's economic initiatives.
In this light, the most critical single development in China in the past tumultuous year - and the single greatest comfort that its optimists can take - is the admonition published last April on the official website of the Central Committee for Discipline Inspection (CCDI), the party's self-policing agency in charge of the graft-busting crusade, titled: "A single truth teller is better than a thousand yes-men."
Since it appeared so hot on the heels of the hostile open letter demanding Xi's resignation - the key grievance of which was the party chief's seemingly unabashed self-promotion of a personality cult - this party-approved exposition, which can only have been published with express permission from CCDI head Wang Qishan, was at the time widely seen as indicative that even this stalwart anti-corruption firebrand had finally turned against old friend and ally Xi, the disgraced young red princeling he had first bonded with in the Cultural Revolution some 50 years earlier.
Alas for those wishing communist China ill, the CCDI article was not scrubbed off like any online content clearly not in line with Xi's leadership, and thus turned out to be an unequivocal if oblique expression of support for the current administration. It sent a powerful message that Xi - through trusted confidante Wang - was fully conscious of the risks coming from both ends of the spectrum: he was appropriately wary of the temptation of absolute power even as he rightly wouldn't tolerate malicious dissent within the ranks. In other words, the man charged with leading the party - and thereby an empire of 1.4 billion and a $10 trillion economy, the world's second-largest and still a pivotal engine of globalization - was highly competent because he was at heart a humble servant of the nation and its citizenry.
Obviously, the ultimate success of China's monumental transition is anything but assured at this admittedly incipient stage: it could yet derail in unforeseen ways, and if anything, it's the sense of calm and the lack of trouble or drama which ironically could breed the very complacency that most reliably allows imbalances and distortions to build up until they reach a breaking point. If there's anything Beijing's policymakers and Xi himself should have learned since 2014, it's that they're actually better off in a constant state of concern or even worry - this is precisely what keeps them on their toes, alert to subtle threats to systemic stability which in fatter times could easily slip past unnoticed.
To conclude, a year after apparent near collapse, Xi's China finds itself on a belated road to eventual stability. It doesn't seem anymore like it was ever much more than a fool's know-nothing fantasy that the rising superpower's implosion was already a foregone conclusion.
Thursday, November 3, 2016
China has already won the US election
As a reflection of its growing ascendancy in international affairs, it's obvious right now that China has won regardless of who wins the upcoming US presidential election. Indeed, as far as Beijing's concerned, the difference between Hillary Clinton and Donald Trump is primarily one of style and not substance. Either one will have to attempt the daunting task of uniting a sharply divided country. Either one will have to renegotiate and recalibrate American engagement with a fraying global system it no longer unilaterally dominates. And either one will have the particular challenge of garnering bipartisan support for a cohesive strategy to confront the People's Republic as a virtual peer competitor in various realms of activity and in a growing number of geopolitical regions.
As China sees it, the next US president will immediately be grounded in a new reality that will quickly put to rest the simplistic fallacy - mere campaign rhetoric as it probably was anyway - that the eight-year Obama administration has derelictly forfeited strong American leadership on the world stage for sheer lack of willpower or conviction. Instead, he or she will readily be forced to deal with the facts as they are: that American democracy no longer appears such a singular shining beacon guiding its own participants, let alone the rest of humanity, to practical solutions to their most vexing collective contradictions and schisms.
This polarization of American politics won't be resolved by either candidate's victory or defeat next Tuesday: it may only worsen. Already, the strongmen of Beijing and Moscow have had a field day with their own citizenry mocking (however obliquely) the sheer inability of both the American political system and media apparatus - the great pillars of freedom and prosperity - to do anything but further drive the American public apart from itself. "You want the same here?" is the operative unspoken question they're asking their own disgruntled subjects who may be harboring such subversive thoughts as the notion that they should be as free as their American counterparts to speak out and assemble.
But it would be one thing if the US representative republican system's travails were occurring in a vacuum whilst its rival Chinese bureaucratic-imperial system were not exhibiting surprising resilience and vitality: the opposite appears to be the case.
The very fact that Beijing's internal problems are more immediate, more severe, and more existentially dangerous than Washington's seems to be giving Xi Jinping and his team of central party-state administrators a big boost: knowing full well that their very survival is at stake in what amounts to a civil war within the communist apparatus, they deliberate and calibrate their every word and action with extreme care and diligence as to its potential and likely impact on every conceivable stakeholder, whether within or outside the party. Without recourse to electoral means to gauge their legitimacy even within the ruling caste, let alone the general public, they're ironically compelled to stay constantly and religiously abreast of all opinion and sentiment at every level and in every corner of the country - far more than their Western counterparts, who have the luxury of splitting their devotion between voters during election season and donors before and after.
Thus the very term "crisis" - as JFK deftly noted of the Sinic rendition of it - is the symbiosis of the constituent characters for "threat" and "opportunity", which far from being irreconcilably opposed to one another, need and feed on each other as any other yin-yang cosmic pair. It's not just that the threat gives birth to the opportunity; the opportunity itself can only live in the full apprehension of the threat it seeks to address in the first place.
And so, while China's resolution of its own internal crisis remains anything but assured, neither are its efforts doomed to fail, for these are primarily what Xi and co. finally choose to make of them. The verdict is still out on that one and will be for years yet; but in the meantime, Beijing's intolerance of dissent isn't irrational paranoia, let alone a sadistic exercise of power for power's sake - it's a dispassionate calculation that the only path forward is to buy more time for the existing order so that it can eventually deliver enough general welfare to defuse the ticking bomb of social conflict and upheaval. Even the regime's most scathing critics have a hard time disagreeing with it on at least one point: things surely won't get better in the near term were it to implode and collapse.
And this is where the rise of Donald Trump, irrespective of what happens November 8, has already made the communist Chinese regime such a big winner in this US election cycle. For Beijing knows quite intimately the underlying structural imbalance at the heart of the West's malaise - because it's dealing with the more virulent Chinese version of it itself.
Namely, this is the creation in the past two decades of a permanent administrative-managerial "overclass" of intertwined big government and big business interests, whose stranglehold on the global financial and trade systems in particular has increasingly removed important economic decision-making processes from popular sovereignty even in democratic countries. China has of course benefited most handsomely among the family of nations from this Western-led neoliberal hegemony of the post-Cold War era (circa 1990-2014); it has unsurprisingly also been worst afflicted by its sheer excesses (having taken in, needless to say, the bad along with the good).
Xi Jinping and his party-state leadership clique have already been waging the political struggle that Western populists like Mr. Trump have essentially been promising to launch in their own far richer societies: a redistribution of the modes of wealth production and wealth transfer from the small rentier-official elite that enjoys it to the masses whose toil (and debt) it's actually extracted from. Tellingly, what makes Trump so disconcerting to the American and Western money and power elite is not any particular policy proposal - not only do they know these to be fluid and negotiable, but they're also privately comfortable with one of their own (as Xi is no doubt privately affable with many a corrupt party apparatchik who ingratiate him with secret entreaties or gifts) - but the apparent authenticity of his suggestion that it's time for Main Street to call the shots on the economy again, not Wall Street and K Street.
Trump is thus sending the American ruling class the same message that Xi has been sending the Chinese with gutso and violence as needed: "Look, you've had a really good run, and you can still have a really good run yet, but you'd better start paying more dues to 'the people' now, or else you'll force my hand to act more ruthlessly on their behalf at your visible expense."
Though in Trump's case, the gutter-depths of such disdainful threats seems to be reserved for the "soft power" ambassadors of the ruling elite more so than its "hard power" practitioners: he despises the liberal mainstream media which he sees as peddlers of an unbridled liberal universalism that promotes unchecked immigration (open borders) and the effacement of national (read: ethnic and racial) identity. In this he also mimics Xi - in a far more benign manner, of course: the communist secretary-general has vehemently extirpated Western "universal values" from public discourse as a soft but insidious form of cultural imperialism by China-haters bent on humiliating Han pride and consciousness.
Trump will still probably lose the election, but already he has so radically altered the political landscape of American politics that it's becoming conceivable that the Republican party is only beginning to be transformed in the flamboyant billionaire's image. This will have enormous repercussions for the evolving future role that America plays in the world - especially if the Democrats fail to adapt to the shifting electoral dynamics across much of the country, which is seeing them decisively lose the white working-class vote in their former strongholds of the labor-union era. For China, the ideological coup of Trumpism - with or without Trump himself in the White House - will be enormous: it will be a powerful (if still limited) validation of the regime's longstanding claims that America and the American people are at heart no less narrowly minded and parochial in their sectarian interests as any other nation. And it will accelerate the drift of China's neighbors into Beijing's orbit, not just the already irresistible economic one but increasingly the sociopolitical and ultimately the underlying cultural one as well.
So is Hillary Clinton all that stands in the way of such an unmitigated US setback in the Asia-Pacific? Probably wishful thinking, given how narrow a victory she's now likely to win. Even leaving aside the renewed FBI investigation into her emails and potential federal probe of the family charity foundation, if Mrs. Clinton wants to avoid the fate of the Obama administration at the hands of powerful GOP opposition in Congress and state governments, she may well have to compromise on immigration (i.e. amnesty for undocumented workers) just as she already has on trade (backtracking her support for TPP in the face of Bernie Sanders' powerful anti-globalization challenge from the left during the Democratic primary). Similarly, on foreign policy she'll have to choose between restoring American credibility against hard physical security threats - a course that would require less haggling of strongmen "allies" like Turkey's Erdogan and the Philippines' Duterte over their human rights abuses - and the alternative of finding America increasingly isolated with the Brexit-wrangling British Anglosphere and the sclerotic EU in censuring non-Western countries for their disrespect of progressive values.
In fact, objectively it's easy to see why a nationalist China prefers Hillary to Trump for practical reasons just as it prefers Trump to Hillary for ideological ones. Trump, not Hillary, is the candidate already better in tune (at least publicly) with the new realities of an increasingly Sinocentric Asia-Pacific (where even the west coast of North America is arguably coming within a nascent Chinese economic sphere of influence); as such, he's the one more likely to put America in the driver's seat of the US-China relationship as it's truly evolving, whilst Hillary will default to positions that no longer adequately reflect what's already fundamentally shifted. Where both are in fact likely to arrive at very similar bargains and compromises, Trump will more easily do so in a way that makes it look like America "wins" (because he's basically saying that it's "losing" to start with), but Hillary's likely to do so in a way that betrays an appearance of even further American decline (because she's comparatively arguing that it's still "winning" right now).
Either way, China's the real winner of Tuesday's decision: regardless of who actually gets 270 electoral votes, it will either be a status quo candidate who can no longer contain its rise or a challenger candidate who has acknowledged that its rise is already the only plausible starting point for US policy.
Monday, October 24, 2016
Is the plunging yuan pricing in hidden Trump risk?
The offshore yuan has just cracked all-time lows against the dollar in active trading since its introduction in Hong Kong early in the post-crisis period; as it pushes 6.80 to the greenback - Beijing's earlier post-Brexit, informally suggested floor to defend for 2016 - it's worth wondering how much of this is related to fears of a prospective Donald Trump presidency, however unlikely that appears to be with recent polls.
Granted, the euro, pound, and yen are all exhibiting softness of late, but given that the yuan is now part of the IMF's elite SDR reserve currency basket, as well, it's becoming more plausible that the RMB is now influencing these other alternatives to the dollar as opposed to merely shadowing them as it has done so in the wake of the shock Brexit vote four months ago.
Clearly, in the unlikely event that Trump wins, a protectionist backlash against China will loom large over Sino-US relations. In these last 15 days of the campaign, therefore, the yuan could be a key barometer of the global economy's true judgment of the chances that Trump could yet pull off such a historic upset.
Already, the yuan seems to be signaling an unease that Hillary Clinton still hasn't put this contest squarely away. There's a nagging feeling somewhere in this steady slide to 6.80/USD or even beyond that the polls which show 7-12 point leads for Hillary have been deliberately skewed in favor of registered Democrats - how else to explain the virtual tie shown by some conservative-leaning surveys even at this juncture?
So if the mainstream Western media is indeed trying to discourage potential Trump sympathizers from even thinking he can still win, things could already be more precarious than first meets the eye. This is just what Trump needs to squeeze out every last drop of the anti-establishment, anti-elite populist vote: and just the kind of shenanigan that feeds the cynicism of the large independent segment of the electorate whose apathy towards Hillary could in the end do far more harm than their aversion to Trump.
But worst of all, if this unabashed and blatant media cheerleading for Hillary ironically turns her own lukewarm supporters away - i.e. if they're so unenthusiastic about her essentially status-quo platform, given her own deep flaws, that they possibly won't go out to vote at all except if they genuinely think the fiasco of a Trump presidency were still possible - the Western elite and establishment could actually be digging their own grave. If they were really that smart, they'd wise up to the dangers of such an approach - unless perhaps they're unwittingly being manipulated by an even smaller clique among themselves who are even more exclusively "in the know" about things.
We got sort of a warning four months ago with Brexit as to how our society in the developed rich world has apparently moved on from the entire basis of working assumptions that our leaders cling to. Even then, it should have become obvious to the elites that their very tendency to dismiss or downplay the populist threat to their ever shakier consensus may actually have contributed significantly to their own stunning loss of legitimacy. At the last minute, it seems, enough apathetic British voters became so convinced that Brexit would be handily defeated that they didn't even bother showing up at the polling booths to actually play their part defeating it - thereby sealing the doom of the "remain" cause.
It would be quite a spectacle if the elites now make the same blunder - only monumentally bigger and more far reaching.
If you're China, you have little excuse or rationale left to not take any chances.
Granted, the euro, pound, and yen are all exhibiting softness of late, but given that the yuan is now part of the IMF's elite SDR reserve currency basket, as well, it's becoming more plausible that the RMB is now influencing these other alternatives to the dollar as opposed to merely shadowing them as it has done so in the wake of the shock Brexit vote four months ago.
Clearly, in the unlikely event that Trump wins, a protectionist backlash against China will loom large over Sino-US relations. In these last 15 days of the campaign, therefore, the yuan could be a key barometer of the global economy's true judgment of the chances that Trump could yet pull off such a historic upset.
Already, the yuan seems to be signaling an unease that Hillary Clinton still hasn't put this contest squarely away. There's a nagging feeling somewhere in this steady slide to 6.80/USD or even beyond that the polls which show 7-12 point leads for Hillary have been deliberately skewed in favor of registered Democrats - how else to explain the virtual tie shown by some conservative-leaning surveys even at this juncture?
So if the mainstream Western media is indeed trying to discourage potential Trump sympathizers from even thinking he can still win, things could already be more precarious than first meets the eye. This is just what Trump needs to squeeze out every last drop of the anti-establishment, anti-elite populist vote: and just the kind of shenanigan that feeds the cynicism of the large independent segment of the electorate whose apathy towards Hillary could in the end do far more harm than their aversion to Trump.
But worst of all, if this unabashed and blatant media cheerleading for Hillary ironically turns her own lukewarm supporters away - i.e. if they're so unenthusiastic about her essentially status-quo platform, given her own deep flaws, that they possibly won't go out to vote at all except if they genuinely think the fiasco of a Trump presidency were still possible - the Western elite and establishment could actually be digging their own grave. If they were really that smart, they'd wise up to the dangers of such an approach - unless perhaps they're unwittingly being manipulated by an even smaller clique among themselves who are even more exclusively "in the know" about things.
We got sort of a warning four months ago with Brexit as to how our society in the developed rich world has apparently moved on from the entire basis of working assumptions that our leaders cling to. Even then, it should have become obvious to the elites that their very tendency to dismiss or downplay the populist threat to their ever shakier consensus may actually have contributed significantly to their own stunning loss of legitimacy. At the last minute, it seems, enough apathetic British voters became so convinced that Brexit would be handily defeated that they didn't even bother showing up at the polling booths to actually play their part defeating it - thereby sealing the doom of the "remain" cause.
It would be quite a spectacle if the elites now make the same blunder - only monumentally bigger and more far reaching.
If you're China, you have little excuse or rationale left to not take any chances.
Thursday, October 20, 2016
How low will the yuan go?
As the yuan dips further below six-year lows against the dollar, it's worth asking how low it will go, and what constitutes a reasonable floor.
The fact that even the heavily restricted onshore RMB is already pushing 6.75 (closed 6.7449 today) indicates that Beijing has convinced the world that it has enough control of the currency to prevent a speculative rout. But with so much uncertainty looming over the global economy, especially what with the rise of nationalist populism in the West that's fueling an unprecedented rich-world backlash against trade, it's seemingly at the mercy of forces beyond its control. So even though it's actually helped China that the West is increasingly exposed as actually the weaker link in the global economy, the cover that this gives it to weaken the yuan won't last much longer until concerns over its own health come back to the fore.
Back on July 2, 2015 in Beijing, during my last trip to China, I asked my uncle, a mainland steel trader, what the yuan would go to if it were allowed to free-float. This was the week before the worst of the summer stock market crash, and the yuan was sitting at 6.21 to the dollar - propped up, as I later learned, by heavy selling of forex reserves by PBOC. He told me that it would go down by about 10 percent, putting it at 6.90 to the dollar.
Sure enough, less than six weeks later China stunned the world by devaluing nearly 2 percent one-off on August 11, in the first of several waves of reset that have now seen the yuan shave about 8 percent against the greenback. In other words, we're mostly there: another 2 percent depreciation perhaps, and we'll be at the floor as perceived by someone intimately familiar with Chinese markets and economic conditions.
Beyond this, it's highly tempting for Beijing to devalue even further should weakness persist in Europe and the UK (i.e. Brexit), and even more so if Japan buckles under pressure and starts devaluing the yen at last, while the Fed still dawdles over its determination to normalize interest rates in this unusually prolonged hike cycle. The drawback to further currency softness, though, will be quite obvious: it sends the wrong signal about commitment to transition the Chinese economy from exports to domestic consumption, even as it raises more hackles with trade partners about not cutting them much-needed slack.
So for the time being, as Western uncertainties about trade and globalization more broadly are worked out, China must strive to pull some more weight as is now widely expected and demanded of it. It must draw some line in the sand that it won't cross regardless of how hairy things get with further easing or bailouts especially in Europe and the UK; it must also hold its ground as the Fed likely bargains with the new US administration and Congress to raise rates at an acceptable clip on the condition that the latter enact more aggressive fiscal support and preferably targeted deregulation of the most choked-up or clogged sectors.
Ideally, the yuan shouldn't have to decline to 7.0 or even 6.90, but will decisively stabilize around the 6.80 level from which it subsequently strengthened in the resounding recovery from the financial crisis. Then, as back in the 2011-13 appreciation period, it should claw its way back up beginning in late 2018 or early 2019, as the "L-shaped recovery" is completed, to return to the mid- and eventually low-6's; by the end of Xi Jinping's second term in 2022, it should be stable in the 6.05-6.25 range at which it hovered in 2014-15, before breaking in the August 2015 devaluation.
This won't sit well with certain committed neoliberal ideologues who insist that China fully subject its currency to "market forces", as if the West still actually plays by such "market forces" itself. But such voices are the ones now finally being rejected and discredited despite having brayed the same old spiel for so long. If Beijing continues to exercise discipline against its own corruption and resolve in the face of those with a vested interest in its failure, a China-friendly - even to some degree China-centric - new global financial architecture is likely to emerge early next decade.
The fact that even the heavily restricted onshore RMB is already pushing 6.75 (closed 6.7449 today) indicates that Beijing has convinced the world that it has enough control of the currency to prevent a speculative rout. But with so much uncertainty looming over the global economy, especially what with the rise of nationalist populism in the West that's fueling an unprecedented rich-world backlash against trade, it's seemingly at the mercy of forces beyond its control. So even though it's actually helped China that the West is increasingly exposed as actually the weaker link in the global economy, the cover that this gives it to weaken the yuan won't last much longer until concerns over its own health come back to the fore.
Back on July 2, 2015 in Beijing, during my last trip to China, I asked my uncle, a mainland steel trader, what the yuan would go to if it were allowed to free-float. This was the week before the worst of the summer stock market crash, and the yuan was sitting at 6.21 to the dollar - propped up, as I later learned, by heavy selling of forex reserves by PBOC. He told me that it would go down by about 10 percent, putting it at 6.90 to the dollar.
Sure enough, less than six weeks later China stunned the world by devaluing nearly 2 percent one-off on August 11, in the first of several waves of reset that have now seen the yuan shave about 8 percent against the greenback. In other words, we're mostly there: another 2 percent depreciation perhaps, and we'll be at the floor as perceived by someone intimately familiar with Chinese markets and economic conditions.
Beyond this, it's highly tempting for Beijing to devalue even further should weakness persist in Europe and the UK (i.e. Brexit), and even more so if Japan buckles under pressure and starts devaluing the yen at last, while the Fed still dawdles over its determination to normalize interest rates in this unusually prolonged hike cycle. The drawback to further currency softness, though, will be quite obvious: it sends the wrong signal about commitment to transition the Chinese economy from exports to domestic consumption, even as it raises more hackles with trade partners about not cutting them much-needed slack.
So for the time being, as Western uncertainties about trade and globalization more broadly are worked out, China must strive to pull some more weight as is now widely expected and demanded of it. It must draw some line in the sand that it won't cross regardless of how hairy things get with further easing or bailouts especially in Europe and the UK; it must also hold its ground as the Fed likely bargains with the new US administration and Congress to raise rates at an acceptable clip on the condition that the latter enact more aggressive fiscal support and preferably targeted deregulation of the most choked-up or clogged sectors.
Ideally, the yuan shouldn't have to decline to 7.0 or even 6.90, but will decisively stabilize around the 6.80 level from which it subsequently strengthened in the resounding recovery from the financial crisis. Then, as back in the 2011-13 appreciation period, it should claw its way back up beginning in late 2018 or early 2019, as the "L-shaped recovery" is completed, to return to the mid- and eventually low-6's; by the end of Xi Jinping's second term in 2022, it should be stable in the 6.05-6.25 range at which it hovered in 2014-15, before breaking in the August 2015 devaluation.
This won't sit well with certain committed neoliberal ideologues who insist that China fully subject its currency to "market forces", as if the West still actually plays by such "market forces" itself. But such voices are the ones now finally being rejected and discredited despite having brayed the same old spiel for so long. If Beijing continues to exercise discipline against its own corruption and resolve in the face of those with a vested interest in its failure, a China-friendly - even to some degree China-centric - new global financial architecture is likely to emerge early next decade.
Wednesday, October 19, 2016
Flat is the new up for China
Third quarter GDP came in at 6.7 percent, in line with analyst expectations and keeping a perfectly flat 6.7 percent clip for all quarters of 2016 so far, but some caveats are in order.
After year-on-year monthly GDP of 6.9 and 7.2 percent for July and August, the year-on-year figure for September must have been comparatively very low to drag down the overall Q3 print to 6.7 percent.
The industrial recovery which has powered the economic stabilization since last winter looks fragile. Year-on-year industrial output was back down to 6.1 percent in September, well below the projected 6.4 percent; while this may be a temporary blip, it underscores fears of the unsustainability of growth that's still largely dependent on secondary industry (manufacturing and construction), even as tertiary industry (consumption and services) account for a greater portion of new economic activity. Indeed, as is the case with all economies, secondary industry drives tertiary industry - after all, that's what makes them secondary and tertiary to begin with.
Encouraging signs are still to be found, though: both fixed-asset investment (8.2 percent) and retail sales (10.7 percent) in September beat estimates by 0.1 percentage point; the latter in particular points to good Q4 consumption and services performance that should again compensate for declining industrial and investment growth, at least until Q1 2017, by which time Beijing may need to ramp up more targeted fiscal and policy support for its secondary sectors. By then, however, the hope is that the gloomy global economic and especially trade outlook will have brightened with the political uncertainty in the West having eased or at least plateaued from the current downward trend.
The yuan and Chinese stock market seem to be neutral in the wake of the latest news, and PBOC's earlier floor of 6.8 to the dollar through year-end appears to remain in place. Flat is the new up for China - and more generally for the global economy in the present environment, as well.
After year-on-year monthly GDP of 6.9 and 7.2 percent for July and August, the year-on-year figure for September must have been comparatively very low to drag down the overall Q3 print to 6.7 percent.
The industrial recovery which has powered the economic stabilization since last winter looks fragile. Year-on-year industrial output was back down to 6.1 percent in September, well below the projected 6.4 percent; while this may be a temporary blip, it underscores fears of the unsustainability of growth that's still largely dependent on secondary industry (manufacturing and construction), even as tertiary industry (consumption and services) account for a greater portion of new economic activity. Indeed, as is the case with all economies, secondary industry drives tertiary industry - after all, that's what makes them secondary and tertiary to begin with.
Encouraging signs are still to be found, though: both fixed-asset investment (8.2 percent) and retail sales (10.7 percent) in September beat estimates by 0.1 percentage point; the latter in particular points to good Q4 consumption and services performance that should again compensate for declining industrial and investment growth, at least until Q1 2017, by which time Beijing may need to ramp up more targeted fiscal and policy support for its secondary sectors. By then, however, the hope is that the gloomy global economic and especially trade outlook will have brightened with the political uncertainty in the West having eased or at least plateaued from the current downward trend.
The yuan and Chinese stock market seem to be neutral in the wake of the latest news, and PBOC's earlier floor of 6.8 to the dollar through year-end appears to remain in place. Flat is the new up for China - and more generally for the global economy in the present environment, as well.
Sunday, October 16, 2016
China isn't the global economy's weak link: the West is
Last Wednesday and Thursday, consecutive releases of Chinese trade and inflation data painted a mixed picture: the former worse than expected, the latter better. Does this point to a domestically driven Chinese recovery or stabilization? Tuesday's upcoming Q3 GDP figures - to include the breakouts for industrial production, fixed asset investment, and retail sales - will go a long way to determining that. As well, Monday's lending figures - total social financing, outstanding loan growth, and money supply growth - will be indicative of credit intensity and how supportive it is of continued fast growth.
Though it's becoming clear that trade volume is one of those alternate metrics which is no longer as reliable a proxy for Chinese GDP as it used to be, China perma-bears like Gordon Chang still cite it as proof that Beijing is fabricating the latter. Of course, they do so while ignoring other favored proxy data that has recently swung into agreement with solid official growth, like perking up electricity usage.
Plus, with official manufacturing PMI for September at a healthy 50.4 (the same as the previous month) and the alternate Caixin Markit private sector-focused PMI likewise in mild expansionary territory (50.1), it's strongly suggestive of a tentative industrial stabilization driven by domestic demand in Q3. And because services and consumption tend to lag industry and investment, that also suggests robust growth in the former during Q4 - again domestically driven.
But China still depends heavily on the global economy of which it is a linchpin: as Xi Jinping highlighted at the BRICS summit, that makes it imperative to Beijing that the damaging uncertainty created by the Western populist backlash against globalization isn't allowed to actually shift gears in reverse.
The West needs a good does of both demand-side and supply-side boosts to kickstart moribund economic engines. Keynes and Friedman can no longer continue to exert such rigid policy gridlock: the rich world needs both fiscal stimulus and tax cuts plus deregulation.
In that regard, perhaps China is belatedly emerging as a strong and not weak link in the global economy, after all: it's already done massive injections of Keynes to stop the economy from simply crashing, even as it's trying to use the extra time it's bought to haltingly introduce Friedman - with Chinese characteristics, of course.
So even though we may well see the yuan hit its declared lower tolerable limit for the remainder of 2016 - 6.8 to the dollar as loosely set by PBOC in the wake of Brexit - already the markets are increasingly of the mind that this is a natural reflection of global weakness, especially in Europe and Japan, and not particular Chinese vulnerability.
That European and Japanese weakness, in turn, is largely a consequence of residual US softness: specifically, of a Fed that's only gradually begun to recognize that this round of "rate normalization" simply can't go the way previous ones have, given the long-term ill effects of the 2008 crisis on longer term productivity, labor participation, and investment levels, which have together rendered the economy more vulnerable to relative illiquidity even from modest interest rate hikes than would otherwise have been the case.
QE and extraordinary monetary policy have played their role, but Janet Yellen herself now sees the possible necessity of a "high-pressure economy" nonetheless - read: a more comprehensive combination of policy measures to get the whole economic system with its constituent interconnected parts firing on all cylinders again.
Sort of like what China's already attempting. But even China will reach a limit of what it can achieve without a robust and broad US and Western economic recovery to ride atop once more - and soon.
Though it's becoming clear that trade volume is one of those alternate metrics which is no longer as reliable a proxy for Chinese GDP as it used to be, China perma-bears like Gordon Chang still cite it as proof that Beijing is fabricating the latter. Of course, they do so while ignoring other favored proxy data that has recently swung into agreement with solid official growth, like perking up electricity usage.
Plus, with official manufacturing PMI for September at a healthy 50.4 (the same as the previous month) and the alternate Caixin Markit private sector-focused PMI likewise in mild expansionary territory (50.1), it's strongly suggestive of a tentative industrial stabilization driven by domestic demand in Q3. And because services and consumption tend to lag industry and investment, that also suggests robust growth in the former during Q4 - again domestically driven.
But China still depends heavily on the global economy of which it is a linchpin: as Xi Jinping highlighted at the BRICS summit, that makes it imperative to Beijing that the damaging uncertainty created by the Western populist backlash against globalization isn't allowed to actually shift gears in reverse.
The West needs a good does of both demand-side and supply-side boosts to kickstart moribund economic engines. Keynes and Friedman can no longer continue to exert such rigid policy gridlock: the rich world needs both fiscal stimulus and tax cuts plus deregulation.
In that regard, perhaps China is belatedly emerging as a strong and not weak link in the global economy, after all: it's already done massive injections of Keynes to stop the economy from simply crashing, even as it's trying to use the extra time it's bought to haltingly introduce Friedman - with Chinese characteristics, of course.
So even though we may well see the yuan hit its declared lower tolerable limit for the remainder of 2016 - 6.8 to the dollar as loosely set by PBOC in the wake of Brexit - already the markets are increasingly of the mind that this is a natural reflection of global weakness, especially in Europe and Japan, and not particular Chinese vulnerability.
That European and Japanese weakness, in turn, is largely a consequence of residual US softness: specifically, of a Fed that's only gradually begun to recognize that this round of "rate normalization" simply can't go the way previous ones have, given the long-term ill effects of the 2008 crisis on longer term productivity, labor participation, and investment levels, which have together rendered the economy more vulnerable to relative illiquidity even from modest interest rate hikes than would otherwise have been the case.
QE and extraordinary monetary policy have played their role, but Janet Yellen herself now sees the possible necessity of a "high-pressure economy" nonetheless - read: a more comprehensive combination of policy measures to get the whole economic system with its constituent interconnected parts firing on all cylinders again.
Sort of like what China's already attempting. But even China will reach a limit of what it can achieve without a robust and broad US and Western economic recovery to ride atop once more - and soon.
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