China Banks Increasingly On Unsure Ground

China injects 2.7 Billion Dollars into into the banking system to help out with the liquidity freeze that hit many Chinese banks last month.  Also in recent news lending jump by 27 Billion Dollars in the first week of July, while deposists dropped by 114 Billion Dollars.  Gordon Chang hypothesizes that the reason for the drop is that it is the failout to shady interbank lending and accounting practices. Specifically the practice of using high return short term accounts, called Wealth Management Products, that they use to bolster deposit numbers.  The process is repeated again next month and, as Boomberg noted, is a giant ponzi scheme set to implode.

Somewhere between 1.2 to 2.08 trillion dollars of Chinese savings are possibly floating around in these accounts, much of these funds are from ordinary chinese.  This begs the question, what will happen when the WMPs eventually implode? 

College Graduates In China Facing Similar Future to Those In America

According to a post by Gordon Chang at Forbes, China is seeing record numbers of Chinese graduates, but at the same time a drop of college graduates who have employment contracts prior to graduating. According to the South China Morning Post, the average number of students with signed contracts for  mainland China is 52.4%, however, it is as low as 46% in Guangdong and 33% in Beijing.

Given that it is an open secret that China fudges their official numbers, the employment situation in China for recent graduates is starting to look very similar to those in the United States. For those who rely on China to supplant the United States as the economic hub of the world, this is bad news considering that China hasn't even come close to approaching the economic development standards that the United States has. China cannot be both the creditor, debtor, producer and consumer for the world; that would be the equivalent of the perpetual motion machine.

The cessation of economic growth in China, which I think will happen in the not to distant future, will be a black day for the global economy and unmitigated disaster for the PRC.  For the last two to three generations the Chinese government has stacked their entire legitimacy, and raison d'être, on economic growth. What happens to the Chinese government when that is removed? Only time will tell.

Shanggui and Proscriptions - Extra-Judicial Punishment

One thing I like about blogs are the comments that often follow. Some of the blogs with a lot of followers can generate a fair number of comments, many of them insightful, many of them not so much.  In regards to comments that fall in the latter category the one that elicits the most eye rolls from me is the claim that the United States is the most corrupt country on the earth. The United States has undoubtedly seen a decline in regards to our civil liberties and corruption, but I can think of many governments that are far more corrupt than the US; Venezuela anyone? 

China's Long Term Local Currency Default Rating Downgraded

Fitch has downgraded China's long term local debt outlook from an AA- to A+. While the Foreign Currency Issuer Default rating has been affirmed as looking relatively strong, relatively strong meaning that it deserves it's A+ rating, due in large part to the vast foreign debt instruments it owns; I would disagree. China's long term local debt outlook doesn't look quiet as strong due to these items:

• China's stock of bank credit is 137% the size of of Private Sector GDP; this might be a new sovereign analysis metric to look at and I like how they use Private Sector GDP instead of just official GDP which I think is a better indicator of economic health.
• Shadow banking has shot up by 73 percentage points since 2008.
• China's local government debt, which even back in 2011 severely underestimated actual debt levels, which has increased the rest for local default.
• Decreased fiscal revenue.
• And the opaqueness in regards to debt from corporations that are linked to local governments.

One think I have stressed is that China didn't give up communism for capitalism, not by a long shot. All those 'private' corporations are often just shell companies where the largest investor is the local government. China didn't really dismantle it's state run industries so much as add many additional layers to give it the veneer of a private enterprise. In the end the government, often as a major stockholder of the company, still calls the shots.

What also needs to be remembered is that, while a downgrade from AA- to A+ doesn't seem like a major deal, the ratings agency also only downgraded the United States from AAA to AA+ back in 2011; and how many individuals think that a nation with debts in excess of its GDP is really a AA+ debt risk?  In my mind, knowing how reluctant ratings agencies are to actually list a countries actual debt rating according to sound judgement of the data, any sort of downgrade should be considered as a big deal.

Actual China Economic Growth

According to Gordon Chang at Forbes China's real economic growth isn't near the official 7.8% stated by the Chinese government, he thinks it is around 3.8% based off of other statistics.  Now the US would kill for 3.8% economic growth and it is nothing to sneeze at, even for a developing economy.  The United States averaged 3.7% growth over the course of its history, but an analysis of the rolling 10 year historic average of the United States should illustrate what is wrong with many developing economies today.

Even when America was developing average growth rates rarely exceeded 5% and hovered between 3% to 4% though there were years were growth was particularly high. Compare this to recent Chinese economic growth has averaged, at least officially, around 10%.  And this is what strikes me, though a case could be made about higher growth rates for newly developing countries due to technological advances, I still have a hard time believing that developing countries today could develop, sustainably, at a rate higher than 19th century America.

19th century America had everything going when it comes to being able to sustain high levels of economic growth. The nation was expanding it's borders rapidly, had material wealth in great excess of it's needs, a rapidly growing population, little foreign involvement, technologies, such as railroads, telegraphs, telephones, electricity, and industrial advancements, that were increasing national productivity at mind boggling rates. And even then American economic growth rates were never consistently 10% per year.

Contrast this with many developing nations today. While there are amazing technological developments that would contribute to a higher nominal economic growth rate today the conditions for China today are no where near as favorable as it was for 19th century America.  China has to import materials and goods that it doesn't have, something 19th century Americas did not have to do. It has an extremely large impoverished population, something 19th century America never had.  It has a population whose workforce size has already reached peak, once again this was not the case in 19th America.

And somehow this nation of over a billion people have been able to have consistent economic growth without a single decrease in national GDP since 1987? That is over 20 years of consistent economic growth with out a single recession.  Even 19th century America saw periodic economic contractions during it's developing period. Keynesians will of course state that the contractions in 19th century America were the result of a lack of oversight to smooth out the economy and that the reason why China has been able to grow continuously is precisely because of that oversight.  Never mind that all Keynesian economic policy does is kick successive necessary business corrections down the road until there are too many cans to kick and a massive economic correction occurs.

Or another way to illustrate this issue. China has grown from a 1.19 trillion dollar economy at the turn of the millennium to an economy of over 7.3 trillion dollars 11 years later which means they have increased their economy by 7 fold.  Even Warren Buffet, arguably the greatest investor living to date, would only have increased your wealth by 6 fold assuming a 20% yearly return rate. I am somehow supposed to expect that an entire economy is able to perform as well as Berkshire Hathaway, a company that only fills it's portfolio with the most profit? 

I could be very wrong, but I just don't see how a nation, even a developing one with potential can somehow economically out grow the 19th century United States and have it not be an indicator of how flawed the metrics we are recieving out from China.

Four Reasons Why I Don't Think China Is On The Rise

Outside of Ancient Rome, and American Culture, I write about Geopolitics, specifically China, since the worlds, and most importantly America's focus is shifting away from the Atlantic and to the Pacific. A lot of individuals think China is going to surpass the United States as the worlds premier super power. I disagree, and I have explained why in the past. I have noticed that the blogger sphere that I follow has gradually become more aware that China's rise isn't in stone and that they don't have America by the balls. But some individuals still think that's the case, and it isn't surprising, even with the Internet it takes a while for information to disseminate across the web. I'm putting this post together as compendium of my posts on China. As always, I could be wrong, but here are my arguments.

First and foremost, demographics. Demographics is destiny, it always has, and it always will. China has a population replacement rate far below the replacement, while the United States hovers around replacement levels, and also, unlike the US, China has people migrating from their country. There is of course debate on the cultural affects of migration, however, I am looking at longer term trends. And considering that the world's fetility rate is decreasing, which means that in the future there will be a competition for human capital, China is not positioned for long term economic growth or power projection. For the last 400 years our economic system has been geared around continued population growth and while technology could break that need in the future that point hasn't happened yet.

China is still an incredibly poor country, with a GDP per capita around $ 8,000, the US has a GDP per capita a little over 6 times that amount. Or to put it in other terms, China ranks around 94th in terms of GDP per capita, and the US could see it's GDP per captia halved and still rank no lower than 40th. This also plays into China's demographic situation, considering that they have elected to continue their demographically suicidal one child policy, as there will be fewer workers to support their elderly. Already it looks like China's workforce has peaked. China is going to get poor before it gets old.

This also brings to light a very serious issue for the Chinese. The Chinese have been acquiring vast reserves in order to sequester enough funds to help them deal with the gradual social instability that an age top heavy society will have. The problem for the Chinese, most of them are in dollars. This is where the concept that China is buying America is exposed for an empty fear.

Even discounting the fact that America has a military that far outstrips China in terms of military ability, the US possess 10 career fleets in active service and two in reserve, the largest nuclear powered submarine contingent, and a web of military bases around the world and the pacific. On the other hand China has only one modern aircraft carrier, only 10 nuclear submarines, and 138 combat vessels compared to the US 260 or so and this doesn't count the 244 Coast Guard cutters responsible for near shore defense.

Why do I mention all this? Because it points that China can't force the US to pay it's debts, or not pay them with depreciated dollars. There is no way China can bring it's army over to our shores and then take what is owed them.

Lastly, while a lot of individuals point out the flaws of a Keynesian influenced, or state directed economy, in the West, they fail to see these same flaws in China. There isn't something magical about the Chinese technocrat that makes their central planning any less likely to end in disaster than when we, the French, or the Russians do it. And like all technocrats they are make short term decisions which will have disastrous long term effects. This has lead to an economy that is severely over reliant on exports, government spending, and real estate. Not only is there some evidence that China has already faltered due to decreased global demand, resulting in them turning away materials imports in some cases. There are reams and reams of documentation and research indicating that China is not as strong as people think, here is a blog called Crisis Maven which hasn't been up to date in a while but lists out a lot of China's underlying economic problems.

So while I could very well be wrong about China not being ascendant but having already peaked, the research I have conducted has convinced me that I am right in my assessment. Ultimately time will tell.

The Hukou

It's not something we westerners are going to be familiar with, and we should count our selves lucky. The idea of having internal migration between cities and regions policed within a nation like they were borders of foreign nations violates one of the basic tenants of Western society. Imagine wanting to leave Los Angeles for Houston or Boise for Seattle, but not being allowed to do so, or if you were allowed, constantly living under the knowledge that the government could uproot you at any moment, not to mention your 2nd class citizen status.

It has existed in China for thousands of years, and it existed because of the very fractured nature of China. Provinces and regions were constantly breaking away and being reassumed to what ever Imperial dynasty came along. It makes sense to see why such a system developed in the turbulent history of China. But in a modern state, the Hukou is a truly evil system.

Is America Waging Economic War on China?

While perusing my list of blogs I happpened onto our Swedish defender of markets, good sense western civalization, otherwise known as Savecapitalism, he posits a question about China and the fact they now have more trade than the US.  While I was responding, I started wondering something, is all that is going on right now with our currency, acquisition of insane amounts of debt and purchasing billions upon billions of cheaply made Chinese goods, some form of economic warefare?

I ask this because the US and China are intertwined in a mutually self destructive relationship. The US has exported jobs, money and debt to another nation to consume more than it produces. This is bad for us because our dollars are going overseas, or rather, more dollars are going overseas than euroes, yen, yuan, or pounds or coming into America. Frankly, a deficit with China wouldn't matter if on a whole we netted out. If our total exports and imports summed to zero then the US would  be treading water. Unfortunately for us, it doesn't sum out. This means our funds are going overseas, and with them, jobs.

China currently sits on trillions of dollars in reserves, ostensibly it looks like a good thing, but then you realize that even though China has decreased the amount of US securities they are buying, 53% of their reserves are still in US denominated securities. This is very bad news for China as this means that over half of their trillions of dollars in reserves are dependent on the promise of the US government to owner their obligations. If the US decides to not owner it's debt to China, or even if they pay back in dollars inflated too worthlessness, then much of China's reserves, in terms of absolute value, disappear. There is some historial precendene to this, as Russia selectively defaulted on some of it's creditors, or delayed payment to others, during the 1998 Financial Crisis.

The other issue we need to consider in regards to China is that China needs to grow, and their consumption levels cannot support their production levels. Only 50% of their GDP is consumed by their own people, which is down from 56% in 2002. Exports accounts for 30% of their GDP. In 2011 China exported 400 billion dollars to the United States, and while that seems like a small percentage of GDP, that is almost as much as the entire GDP of South Africa. The simple fact are that there are few markets large enough to purchase 400 billion dollars of goods, and China's consumers would have to grow by 11% to meet that demand. Not an insurmountable task, China is attempting to raise domestic consumption now, but here is the problem they face. Production precedes consumption, or in other words, production determines the wages the workers earn which then determines consumption. The fact that after decades of growth and that they still have consumption levels so low indicates that they are not there yet.

Which returns us back to the United States. The reason why I wonder if the US is waging economic war on China is because we have received trillions of dollars in loans from the Chinese to subsidize government spending. We have used those borrowed yuan to purchase real tangible goods, for example, tanks, aircraft, carriers, and submarines. If we suddenly say to China, no we aren't going to pay, then we essentially got those items for free. A gross simplification I know, but the fact is that China can't make the US pay.

The United States has the largest navy in the world, it controls the seas, the very seas that China depends on for international trade. There is no way the Chinese could force us to pay if we said no. This doesn't mean the US wouldn't suffer for it's actions, it would, but given the east Asians nations unease with China as of late, who would they side with when the chips fell? Also, is it so totally out of the question to think that America may be intentionally running the international system in the ground to prevent a potential challenger?

You then have to consider that America's material wealth, timber, grain, gold, and oil are far greater than China's, in relative terms. We have more than enough resources for domestic use if we choose to do so, China doesn't. And in the end, it is who has the most stuff that is the wealthiest right?It seems that it is a question of who is the biggest sucker, America for exporting it's jobs, or China for trading it's hard earned money for promises of repayment, or who is the savviest, China for using the American consumer to allow for excess production, or America for taking China's loaned money and buying real tangible goods like nukes.  You decide for yourself, but if you look at our own financial crisis, who was hurt the most, the person/company who made the shitty loans, or the person who was foolish enough to believe their AAA promises?

Boyfriend Renting

According to the Telegraph, boyfriend renting, is becoming more common in China. It's intriguing because this is happening despite the fact that China's ill-conceived one child policy has led to there being a glut of men, and a shortage of women, shouldn't it be the other way around?

But the writer theorizes that the boyfriend rental trend is indicative of Chinese women choosing an urban lifestyle. Why then would they need to rent boyfriends if they can just 'sex and the city' it up? Well we need to also remember that China is not like the west, their elders are still anchored towards traditional views of marriage, so when they meet a family, that mid-20s something needs to bring some sort of man home. You can also say that unlike the slothful west, which already has wealth, the Chinese work themselves to death, meaning there just might not be all that much time for a young women to meet a young man.

But here is what I am wondering. When will we see this phenomena in the west? We have already seen the rise of the old maid, how long until we see young girls renting boyfriends?

MBA's And The Chinese

I hope they don't buy that kind of schlock like we did in the states. I once considered an MBA program, and then while studying for it, I realized that it would have been a colossal waste of time. How exactly do you teach management and leadership skills in a program? The answer is you really can't. The best way to learn is on the field from someone you think is a good leader, it's far cheaper than a degree, and far more effective.

China Chooses Population Bust

Many individuals have talked about how the next century was China's century, and that they would overtake the United States as the sole super power of the world, however, this required numerous assumptions. First, it required the assumption that Chinese growth rates were continue as it had been for the last 20 years, and that is assuming that their growth rates were not tampered with show growth rates higher than what actually existed. Second, the assumption that technocrats call actually steer an economy or a nation, and history has shown us repeatedly the fallacy of thinking that way. Thirdly, it required turning a blind eye to the massive malinvestment driving Chinese growth numbers. Fourth, it requires us to ignore that even though the US imports energy, it produces more than twice the energy that China does.  Lastly, there is the fact that China faces demographic decline.

 

Even one of these factors could severely hamper China's global super power ambitions. A combination of them would made it almost impossible. And the last one, demographic decline, renders it a near impossibility. No nation with a declining population was a superpower, demographic decline is a harbinger of societal decline.  Demographic decline was an almost certainty for China yet it looks like their leadership has officially come out and said that they will do nothing about it.  It is strange that perhaps one of the most momentous pieces of news, considering its geopolitical implications for decades to come, was nothing more than a footnote on MSN.com, were I found the article.

This is a big deal for China because, up to this point in human history, no economy has ever grown when it's population has declined.  Yes, the case of Japan illustrates that individual wealth growth can continue for a short time as economic decline lags behind demographic decline. But history has shown us that this is a near certainty.  Computers, technology, robotics, this could be the means to break that cycle, however, these it will most likely be relatively wealthy nations that will be the first one's to develop these capacities.  And China, with over 100 million living in poverty, and not the American version of poverty, doesn't have a lot of funds to spare.

You then also have the problem which faces Japan, America, and Europe, an elderly population dependent on a social safety net whose needs outstrip the youths ability to provide. China is going to get old before it gets rich. China has the double trouble of dealing with a large population that can barely scrap buy and an old population demanding that it be taken care of. It's like being tied to the train tracks with two trains coming at you head on.

Now some Malthusians would argue that this policy is a good idea, though my points before should start to illuminate the fact that assumption number two is absurd, given the fact that China is a net importer of food.  They would argue that a declining population could help ameliorate the situation illustrated below:

 China's Population Density

China's Farming Land Output

 

 

 

As you can see China has to deal with their people competing for the very same land that is used to generate their foodstuffs. As seen below the United States does not have this problem.

 

 

America's Population Density 

 

America's Farming Productivity

 

 

 

 

 

The United States does population isn't vying for the same land where we grow most of our food. Moreover, much of China's eastern interior is incapable of any sort of real agricultural production. in America, outside of the southwestern deserts, the bayous, and the mega population centers, we do not have this issue.  Though it should also be noted that California benefits from a very advanced system of agriculture that allows us to extract yields that would not be possible otherwise.

 

 

Where China has to import massive amounts of food, America is the largest exporter in the world. The US has the most arable land in the world and the most cultivated land. Even though, in my opinion, America is facing a terrible economic collapse, as is the rest of the world, America has the capability to at least feed her people and then some. China does not.  And while China could develop the agricultural infrastructure to meet its needs just like America did. America was able to do so because it had an abundance of wealth, China will not have that wealth, not in time any ways.

 

There is a lesson to be learned here, and it is a simple one. Technocratic rulers are no more smarter, principled or farsighted than the average man.  The leaders of China are not blind to the problems they face, however, they chose to keep their current course even though it spells demographic disaster.  They did so simply because the have decided that they will better be able to keep power by doing so.  For the technocrat, the state is of first importance, a countries economic well being is a secondary consideration. They might not even be cognizant of that fact, but that is exactly why they have elected to keep the one child policy.

 

 

 

 

China's Recovery Is As Strong As The Mist

Meaning that it is very ephemeral. As Gordon Chang writes, China has indeed experienced recovery, however, China has loosened the money spigot even more than the United States. China's M2 is double their GDP while in America it is around 75% of ours.  In absolute terms America has unleashed a fantastic amount of money, yet in relative terms China's might be more dangerous. Gordon Chang says, from one of his sources, that the good news should last through November, and then there will be no more good news.

Stratfor: Evolving Relationship Between Communist Party And the Army

Too busy at work to do a post yesterday, or this morning, hoping to have some time tonight. Here is a short video on the evolving political enviroment of China and its military.  Unlike the US were our army is beholden, at least in idea, to the nation or the government.  The army in China is expressly the property and tool of the party.  However, this may be beginning to change.