What is Going On With China!?

February 24, 2014

By: Kelly Diamond, Publisher

Chinese economy timelineSince my last entry on December 9, 2013, “China’s Recent Monetary Moves”, China has placed a few more pieces on the Go board that indicate they have a unique strategy that eludes the west.

In that installment, I pointed out that China is taking advantage of the United States’ vulnerability.  They have, for a long time, propped up the US dollar, compensating for the weight we’ve been putting on it with our “Quantitative Easing”.  By propping up our dollar, they’ve benefited by making their products look cheaper.  That has put China at the forefront of international trade.

However, China might be listening to the rally cries against their currency manipulations.  If you understand what’s entailed in currency manipulations, then you can anticipate the initial fall-out and prepare.  I can’t give that kind of credit to the Keynesian idiots at the helm of the American economy.  It’s all fine and dandy to decry China’s manipulative tactics, but to do so without preparations for the initial hit the dollar will take is unwise. 

The focus shouldn’t just be on what will China do when their products no longer look “cheap”, but what will the US do when their dollar no longer looks steady or strong?  And what will China do once the dollar is weakened?  I honestly can’t even hazard a guess.

China recently unloaded a large sum of American debt.  Not just large, but the second largest since 2011.  Zerohedge makes an interesting observation about this:

That this happened at a time when Chinese FX reserves soared to all-time highs, and when China had gobs of spare cash lying around and not investing in US paper should be quite troubling to anyone who follows the nuanced game theory between the US and its largest external creditor, and the signals China sends to the world when it comes to its confidence in the US.”

How did the US survive such a blow?  The tiny country of Belgium, to the tune of $78 Billion, bought itself some US debt.  And what is Belgium to us?  Belgium IS the European Union.  I don’t know how many favors were called in, but I can’t see such favors having a long sustainable shelf-life. 

So, China is reducing their debt holdings, increasing their precious metals holdings, and weakening the dollar and the confidence therein.  Too many eggs in China’s basket?  I’ve always thought so, but only time will tell if we can transfer the eggs in time to mitigate the next blow from China’s refusal to buy or HOLD US debt.

The New York Times released a really half-assed analysis of China’s trajectory a few days ago.  They itemized China’s priorities as:

  1. “Chinese economy must be restructured away from overdependence on infrastructure investment and exports, toward private businesses that increase the quantity and quality of consumer goods and services.”
  2. “Ensure that restructuring occurs in an orderly manner, without risking a severe slowdown that might threaten the Communist Party’s monopoly of power.”
  3. “Overhaul the finance sector and restraining excessive credit growth.”

The first and third objectives are good ones to have.  The second is, at the very least, predictable and understandable, given this is China we are talking about.

So the NYT contributor speculates what will happen when these three things inevitably conflict with one another, and this is how they put it:

What if restraining credit growth causes a severe economic slowdown, or if clamping down on shadow banking starves private enterprises of capital for growth, or if aggressive industrial restructuring becomes incompatible with financial stability?

This presumes a LOT about China, and gives them absolutely NO credit whatsoever.  If I were China reading this article, I would be insulted.  China isn’t as short sighted as the West.  The West is only as long sighted as the term limits of the people in charge.  China isn’t about the politician du jour.  China is about China, and if that means the long game is 50 years, then so be it.

When we talk about the US, we usually talk about its policies in terms of administration and term limits and election cycles.  We are short sighted in that regard.  When we talk about China, however, it’s always about China, not about a particular administration.  And China is a capitalistic player in the world, while maintaining a communist regime at home.  The dual personalities of China should be telling any and all of its critics and analysts one immutable thing: they are, above all, pragmatic.

China dominates in exports, has total control over cross-border capital flows, and $3.5 trillion in foreign exchange reserves.  They’ve been buying up crude like a fiend.  They bought up metals ranging from copper to gold.  They have the US by the unmentionables.  And more countries are beginning to trade in Yuan, among them is Australia and Russia.  They have strategically been placing their pieces on the board, capturing several stones on the Go table.  (Seriously, if you want to know what China is doing, and understand their long game, research the game Go.  This is economic Go being played, and to think otherwise is both naïve and dangerous.)

Restraining credit growth and clamping down on shadow banking won’t adversely affect economic growth.  It will temper it and keep the economic activity realistic.  It will essentially mitigate unnecessary bubbles and bursts.  I don’t count burstable bubbles as “economic growth” unless I’m a Westerner looking at economic cycles through the paradigm of term limits.  That’s why Clinton is praised for the dot-com boom… and Bush is blamed for the burst. 

The NYT reporter hails the central banking system of China as being “cast iron”.  But it’s not because it has a state run bank that China will weather the short-term storms.  It’s because it has the capital to back up the banks.  The author suggests that this capital can bail out the Bank of China if people default on their loans and lines of credit en masse.  

The reality is, while lending is high and rising in China, the Bank of China will not make the same mistakes as the US, that’s for sure.  It is a communist country, with a global desire to dominate.  It watched the US fail, and plays with the US while it struggles to stay afloat like a stray cat plays with its prey before it finally kills it.

All this restructuring and bank regulating can however clash with China’s Communist agenda.  How they will balance that, is a different story.   The question is will it suffocate its markets with too much regulation, or will it loosen the noose?  If it takes the pragmatic route of less regulation, it will have to spin it as remaining true to its communist heritage.  Keep an eye out… watch China, but from a distance. 

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