Tag Archives: China

China Suffers “Delusion” like 1980s Japan, Faces Long Stagnation, by Wolf Richter

With everything going on in Illinois, Puerto Rico, Greece, Italy, and Spain, among others, it’s easy to take your off the Chinese ball. China is not in danger of imminent default, but the country is in for a long stretch of Japanese-style stagnation. From Wolf Richter at wolfstreet.com:

Sudden Financial Meltdown is less likely.

The Chinese government has the situation under control and will do whatever it takes to keep it under control — that’s in essence what Premier Li Keqiang said today in a speech at the World Economic Forum in the Chinese city of Dalian.

“We are fully capable of achieving the main economic targets for the full year,” Li said. The mandated growth rate this year is 6.5%.

“Currently, China also faces many difficulties and challenges, but we are fully prepared,” he said, according to Reuters. He said this because everyone from the IMF and the New York Fed on down has been pointing at and fretting about the debt powder keg that China keeps filling with ever more volatile compounds.

“There are indeed some risks in the financial sector, but we are able to uphold the bottom line of no systemic risks,” he said. “We are fully capable of preventing various risks and making sure economic operations will be within a reasonable range.”

So the powder keg isn’t going to blow up. As ever more debt is added, the government is pursuing the shift to a consumer-driven economy, while trying to tamp down on excess and outdated capacity in some select industries such as steel and coal. These cuts, Li said, would continue.

“No development is the biggest risk for China,” he said, so China wants to “sustain medium- to high-speed economic growth over the long term.” But given the size of China’s economy, it “will not be easy.” In other words, come hell or high water, credit creation will continue in order to maintain this mandated growth.

So when will this powder keg blow up?

It might not blow up; China might be able to prevent that kind of event, and it is less likely that China will melt down financially despite its terrific credit expansion, and there are no signs of an immediate crisis. But China, like Japan in the 1980s, is suffering from a “delusion” about how to fix its economic problems.

To continue reading: China Suffers “Delusion” like 1980s Japan, Faces Long Stagnation

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After Laying off Thousands, Boeing CEO Says Offshoring Work to China Won’t “Directly Harm” US Jobs, by Wolf Richter

Is Boeing shooting itself in the foot? From Wolf Richter at wolfstreet.com:

“We know as we’re investing there, we’re also creating a competitor.”

Boeing, the largest US exporter by dollar value, faces a tough environment for commercial jetliners. In 2016, net orders dropped 13% from 2015 and 53% from 2014, to just 668 planes, the lowest level since 2010! Through June 6, 2017, Boeing has just 208 net orders.

The company is under pressure to cut costs. So there has been wave after wave of job cuts through voluntary buyouts and involuntary layoffs last year and this year. Its payroll has shriveled by about 30,000 workers over the past five years. At the end of May it was down to 145,000.

So Boeing is moving some work to China and other locations overseas, CEO Dennis Muilenburg explained to the Wall Street Journal in an interview. He has been calling the business climate in the US “uncompetitive,” according to the Journal. Boeing is building some plants overseas. One of them is near Shanghai that will complete aircraft made in the US. Workers will paint the planes and install the interiors, such as seats and other fittings. That’s the first step.

It has a Chinese partner, which is required in China to do business in China. There will be technology transfers, which is also required. The Chinese partner is state-owned Comac, which is leading China’s efforts to become an aerospace giant to compete with Boeing and Airbus. Comac already supplies Boeing with parts for its aircraft. Comac’s own jetliner, the C919, which is the size of Boeing’s 737, completed its maiden flight a month ago.

Muilenburg, who has no illusions about this, said: “We know as we’re investing there, we’re also creating a competitor.”

This is the same process that high-speed train makers from Japan, France, and Germany went through. China bought some train sets and other equipment from each. There were joint ventures, technology transfers and the like. And now China, having gained what it needed from these companies, is cranking out its own high-speed train sets and other equipment that it is not only using in China but also selling around the world, in direct competition with the Japanese, French, and German companies where much of this technology originated.

To continue reading: After Laying off Thousands, Boeing CEO Says Offshoring Work to China Won’t “Directly Harm” US Jobs

One Belt, One Road, and One Debt Hangover, by Jim Rickards

Debt can wreck the best laid plans of mice and China. From Jim Rickards at dailyreckoning.com:

China is not only one of the world’s largest debtors, it is one of the world’s largest creditors.

China uses debt not in the customary financial manner, but as a political tool to generate employment and maintain social stability. Likewise China uses loans and investment as a tool to advance its strategic interests. This may be good geopolitics in the short run, but it will be a disaster economically in the long run.

Just as Chinese state owned enterprises (SOEs) can’t repay debts to Chinese banks, China’s foreign partners will not be able to repay debts to China itself. These twin disasters-in-the-making may converge in such a way that China’s assets disappear or become illiquid at exactly the time they are most needed to bail-out its own banking system.

China has launched four major overseas investment initiatives in the past ten years. The oldest is their sovereign wealth fund, China Investment Corporation, or CIC, established in 2007. Sovereign wealth funds are a way for countries to invest their reserves in securities other than safe instruments such as U.S. Treasury notes.

CIC today has assets of over $800 billion, spread among stocks, corporate bonds, hedge funds, private equity, commodities, and commercial real estate. Some of CIC’s investments are directly-owned enterprises, including gold mines in Zimbabwe.

While these assets may outperform Treasury notes over time, they are also illiquid, and would tend to decline in value during a financial panic. This means that about 20%, of China’s reserves are unavailable for critical tasks such as bailing out the banking system or defending the currency.

The second and third initiatives are the New Development Bank, NDB, created by the BRICS in 2014, and the Asia Infrastructure Investment Bank, AIIB, created by China in 2016. These have participation from 35 countries in the Asia/Australia region, and 18 other countries from outside that region, mostly in Europe. The United States refused to join.

Although NDB and AIIB are both multilateral institutions, China was the principal sponsor and a major source of funding. It provided about $10 billion to NDB and $30 billion to AIIB.

These banks will expand their lending capacity by issuing notes and will fund infrastructure projects in competition with the World Bank and its regional development banks — without interference from the U.S. on priorities.

To continue reading: One Belt, One Road, And One Debt Hangover

Reunification Only Way to Defuse Korea Crisis, by John R. Bolton

John R. Bolton may be right, but he’s proabably underestimating Chinese reluctance to have a reunified Korea—an American ally—as its next door neighbor. From Bolton at gatestoneinstitute.org:

Barack Obama’s foreign-policy failures, and those of his predecessors, regarding North Korea, are coming back to bedevil Donald Trump’s new presidency. Trump administration spokesmen have rightly said that Obama’s policy of “strategic patience,” a synonym for doing nothing, is over. But they have not yet articulated a replacement strategy.

Analysts across the political spectrum now believe that North Korea is perilously close to fabricating nuclear devices — at least five of which have already been detonated — small enough to mount on intercontinental ballistic missiles capable of striking targets within the continental United States. Some estimates posit this capability as early as 2018, with targets closer to the Korean Peninsula, including Japan and Hawaii likely at risk earlier.

Time is thus in desperately short supply, one of the fruits of 25 years of wasted efforts negotiating with Pyongyang. The harsh reality is that Kim Jung Un and his predecessors were never going to be chit-chatted out of their nuclear-weapons program, which they have always regarded as essential to regime survival. Neither persuasion nor coercion, nor any mix of the two, has succeeded before, and we have no reason to believe they will start succeeding now.

There are any number of suggestions about how to increase military pressure on North Korea, including scenarios for pre-emptive attacks against its nuclear and ballistic-missile assets. Certainly, no American president should be willing to countenance the risk to innocent U.S. civilians, and those of our vulnerable friends and allies in the region, that Pyongyang’s erratic leadership increasingly poses. Moreover, we must be sure China understands President Trump’s determination — reportedly explained in person to Chinese President Xi Jinping during the recent Mar-a-Lago summit — not to be held hostage by Pyongyang.

Unfortunately, however, years of savage Obama Administration defense budget cuts have rendered U.S. military options far from optimal. Obama underfunded national missile-defense programs, thereby rendering this last line of defense woefully inadequate compared to how President George W. Bush originally conceived it.

Similarly, our ability to neutralize North Korea’s military threats to the South, which have long worried United States and South Korean decision-makers, is severely challenged.

To continue reading: Reunification Only Way to Defuse Korea Crisis

The Greatest Financial Bubble in History, by Jim Rickards

China may not be the greatest financial bubble in history, but it’s certainly one of them. (There have been so many lately, it’s hard to rank them.) From Jim Rickards at dailyreckoning.com:

China is in the greatest financial bubble in history. Yet, calling China a bubble does not do justice to the situation. This story has been touched on periodically over the last year.

China has multiple bubbles, and they’re all getting ready to burst. If you make the right moves now, you could be well positioned even as Chinese credit and currency crash and burn.

The first and most obvious bubble is credit. The combined Chinese government and corporate debt-to-equity ratio is over 300-to-1 after hidden liabilities, such as provincial guarantees and shadow banking system liabilities, are taken into account.

Paying off that debt requires growth, but the growth itself is fueled by more debt. China is now at the point where enormous new debt is required to achieve only modest new growth. This is clearly non-sustainable.

The next bubble is in investment instruments called Wealth Management Products, or WMPs. You may remember hearing about in the Daily Reckoning and also covered in Bloomberg’s article China Is Playing a $9 Trillion Game of Chicken With Savers.

Picture this. You’re a middle-class Chinese saver and you walk into a bank. They offer you two investment options. The first is a bank deposit that pays about 2%. The other is a WMP that pays about 7%. Which do you choose?

In the past ten years, bank customers have chosen almost $12 trillion of WMPs. That might be fine if WMPs were like high-quality corporate or municipal bonds. They’re not. They’re more like the biggest Ponzi scheme in history.

Here’s how they work. Proceeds from sales of WMPs are loaned to speculative real estate developers and unprofitable state owned enterprises (SOEs) at attractive yields in the form of notes.

So, WMPs resemble collateralized debt obligations, CDOs, the same product that sank Lehman Brothers in the panic of 2008.

The problem is that the borrowers behind the WMPs can’t pay their debts. They’re relying on further bubbles in real estate or easy credit from the government to meet their interest obligations.

To continue reading: The Greatest Financial Bubble in History

How America Could End Up in an Unexpected War with China, by Doug Bandow

The Chinese want to be the big dog in their own region. So does the US government, and the flash points could lead to war. From Doug Bandow at nationalinterest.org:

Three decades ago the People’s Republic of China was an economic backwater. Today the PRC sports the world’s second-largest economy. Shanghai most dramatically illustrates the country’s transformation. The city is filled with stylish office buildings, five-star hotels, luxury stores and foreign visitors.

Reflecting their success, the Chinese are increasingly confident as well. If not yet a great power, the PRC seems destined to eventually share global leadership with the United States. And its people know that.

Which means future U.S.-China relations could be rocky.

Ties turned confrontational under the Obama administration, which announced a “pivot” or “rebalance” to Asia. Washington officials unconvincingly claimed that the policy was not directed against Beijing. The Chinese may be many things, but they are not stupid.

Candidate Donald Trump sounded like he intended to pursue an even more truculent course, upgrading relations with Taiwan, launching a trade war, blockading Chinese possessions in the South China Sea and pressuring the PRC to “solve” the North Korea problem. But then came the bilateral summit and the president’s one-way love-fest with Chinese president Xi Jinping. All suddenly became sweet and light in Trumpland.

However, in the long-term the president’s pleasant words backed by an offer of unspecified trade concessions won’t go far in buffering relations between a unipower determined to preserve its dominance and a rising power equally determined to assert itself. First, the Trump administration yielded Pacific economic leadership to the PRC. Beijing is likely to find new commercial opportunities, limiting Washington’s ability to do trade harm.

Second, nationalist passions are not easily cooled. The issue is not just a few obstreperous officials who don’t know their country’s proper place. The real challenge is posed by a population that believes in a much greater China.

To continue reading: How America Could End Up in an Unexpected War with China

Why Bother? by Robert Gore

The best strategy for dealing with crazies is to keep your distance.

You try to ignore the ravings of the paranoid lunatic on a street corner, but if he’s waving a gun, you can’t.  He may kill himself, but he may kill you. Protecting yourself is your first consideration. You want to get as far as possible from him.

As an intellectual exercise, imagine how the Chinese and Russian leadership look at the United States, its government, and those of its allies. It will get you labeled as a “sympathizer” or “agent,” but take the risk and try seeing the world through their eyes:

We hear the Americans raving about the exceptional and indispensable nation, the American imperium, and maintaining world order. What other conclusion can be drawn: like many lunatics, the US suffers from delusions of grandeur. As we know, it’s difficult to maintain order in one country, and the US wants to take on the whole world? They’re having a tough time maintaining order in the US. Half the country hates the other half, and many of their experts warn of civil unrest that could be ignited with the smallest of sparks. Take it from us, spark suppression is a full-time job in big countries with many people and few common interests, even those with powerful, intrusive governments like the US.

How can the US think that it can rule the world when it can’t win wars in Vietnam, Afghanistan, and Iraq? That’s crazy talk! There are smart people in their military. They must recognize that guerrilla warfare, terrorism, knowledge of the people, language, and terrain, and the availability of cheap but effective defensive weapons and munitions give a huge advantage to nationals resisting domination in their own territory. Why hasn’t the US learned anything from their disastrous wars, or the Soviet fiasco in Afghanistan?

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We in Russia are not altogether comfortable with our Syrian involvement and know it poses substantial risks. However, Syria is in the same neighborhood, is a long-time Russian ally, and hosts Russia’s only Mediterranean port. The US has no such compelling interests and is apparently there at the behest of Saudi Arabia, the Gulf States, Turkey, and Israel. (How do these nations get the US to fight its wars? It must be baksheesh.) It pretends to fight Islamic terrorists while aiding them in another idiotic, and so far futile, attempt at regime change. The biggest danger for us in Syria isn’t the rebels, it’s those crazy Yanks.

The US and its allies’ (what curious allies—the US defends them and picks up most of the tab while they fund cradle-to-grave welfare states) interventions have created refugees—some innocent victims, some potential terrorists—who have fled en masse to Europe and trickled into the US. More intervention will create more refugees, yet that is their policy. Russia and China both have problems with native Muslim populations; it’s pure lunacy to import them. Yet, the American and European intelligentsia condemn not the proponents but the detractors of military intervention and refugee creation and admittance.

If those are supposed to be the smart people, it’s no wonder those countries are in such poor shape. A country is only as good as its people. The Americans and Europeans have voted themselves benefits from their governments that can only be paid for with debt. How long can that last? What will beneficiaries do when the well runs dry? The US used to be one of the most industrious countries on the planet. Now most of its people are fat, lazy, and soft, with no idea how to provide for themselves. The so-called smart people worry if transgenders can enter the bathroom of their choice, and cheer a great Olympic decathlon champion who turned himself into an approximation of a woman. These idiots are not useful to anybody.

The only rational policy is to keep our distance from the US, while trying to protect ourselves from its depredations, and concentrate on jointly developing the immense potential of Eurasia. In other words, to continue doing what we’ve been doing. Our primary economic initiatives, One Belt One Road and the Maritime Silk Road, under the auspices of the Eurasian Economic Union, are going well. We will develop extensive commercial and transportation links among nations stretching from China to Europe, an area which encompasses over half the world’s population and natural resources. China will providing much of the infrastructure investment through the Asian Infrastructure Investment Bank. Russia will spearhead security arrangements, particularly against Islamic extremists, through the Shanghai Cooperation Organization, which includes China and central Asian nations that were formerly part of the USSR, and will soon admit India, Pakistan, and Iran.

Financially, self-protection means moving away from fiat dollars and euros and stockpiling real money—gold. China is reducing its vast pile of US treasury securities, and Russia its much smaller pile. We will continue to advocate for replacement of the dollar as the world’s reserve currency, preferably with the International Monetary Fund’s Special Drawing Rights. The Chinese yuan recently became part of that currency basket. We have also taken steps to develop an alternative to the SWIFT system, the US’s monopoly on international bank clearing.

Militarily, some of the bluster coming out of the US is insanity: the possibility of “winning” a nuclear war. No matter what their computer simulations might suggest, there is no way that a US first strike would wipe out our means and will to retaliate, regardless of their anti-ballistic missile systems in Eastern Europe and South Korea. Sometimes it is an advantage to be underestimated by one’s enemy, but in this case, US underestimation could lead to extinction of the human race. Our nuclear weaponry, military strategies, and defense systems must continue to be state of the art, to assure that destruction in the event of a US attack is mutual.

Keeping our distance from the US certainly does not entail getting involved in their elections. Donald Trump didn’t have a positive thing to say about China during his campaign. Although he made noises about reducing America’s foreign interventions, we heard the same from George W. Bush and Barack Obama and look how that turned out. Trump also made noises about rapprochement with Russia, but it was clear that he’d be fighting his own Deep State if he won, which we did not expect. Why would we poison relations with Hillary Clinton, who we and most experts did expect to win, before she even took office? It’s a further sign of rampant delusion, a complete unwillingness to deal with reality, that Clinton’s Democrats are blaming Russia for problems they brought upon themselves.

Why bother manipulating an election when America seems so bent on self-destruction? It would be like trying to leash a rabid dog.

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