During the past month many Western news sources have carried stories about increasing the use of the word “comrade” in China.  However much mainstream media attention has been abstruse and often times virulent in painting current caricatures of Chinese life.

For example, here is China daily on the subject:

…in March this year, the Shanghai government published a notice to all officials encouraging them to set an example to the people and start calling each other “comrade” (tongzhi,) once more. According to the brief, comrade was deemed preferable to the more hierarchical term “boss” that has been adopted in China’s halls of power. Comrade, the notice stated, should be adopted both for spoken and written forms of address.

If you compare the China Daily piece to this New York Times piece, you will find similarities. Perhaps most strikingly is their differences, most notably time. The China Daily piece was published in 2003. The New York Times piece was published on November 16th, 2016.

This ‘comrade’ article has been circulating in some form for more than a decade by various news sources, and it shows an absence of basic world knowledge.  The annual publication of appall at the encouragement of comrade besmirches Western media and provides evidence of an inability for media to think outside its borders. Let me explain further.

Using the term comrade has been law for party members since 1965, when the party declared hierarchical titles “a decadent practice of the old society.” Using ‘comrade’ is not a fashion statement.  It is law. It has been law for years. It’s a communist country, and this is the law.

Where does the confusion come from?

So why is some variation of this news story reported so often? There are two reasons. First, comrade (tongzhi 同志) is a common word to describe a homosexual in China. Here, in 2012, is CNN describing how official dictionaries only list the “traditional” meaning of tongzhi and not its homosexual slang:

“It’s unacceptable that the ‘gay’ meaning of ‘tongzhi’ was excluded from the dictionary, a reference book written for all, simply because of the compilers’ own preferences and values,” Nan Feng, a gay rights activist told the state-run news agency Xinhua.

“Tongzhi” serves as a substitute for “tongxinglian,” which is the formal Chinese term for homosexuality. The 2005 edition of the Contemporary Chinese Dictionary defines “tongxinglian” both as same-sex love and as a psychosexual disorder, according to Xinhua.

Homosexuality’s classification as a mental disorder was removed in China in 2001, despite the dictionary’s definition.

A local government in Central China’s Henan Province has asked all of its civil servants to address each other only as “comrade,” in a bid to strengthen political life within the Communist Party of China (CPC), the Henan Business Daily reported on Tuesday.

…A subdistrict of Jiujiang district, under the city of Wuhu, Central China’s Anhui Province launched a series of activities to promote the use of comrade among CPC members, with the aim to “purify the Party.”

General Secretary of CPC Central Committee Xi Jinping advocated simple and clean interpersonal relationships within the Party at a group study session of the Political Bureau of the CPC Central Committee in June, reports people.cn.

The report added that addressing each other as comrade will help promote equality and mutual trust among CPC members; and it will also help strengthen political life within the Party and set an example for purifying social conduct.

Notice how the onus here is directed to conduct within the party and maintaining ethical standards, and notice how the party’s needs supersede that of homosexual identity.

The second source of confusion is speculation regarding future usage. Let’s return to the first China Daily article posted above. The end is purely speculative and somewhat frightening:

Does this mean people will soon be stopping for a Starbucks latte served by Comrade Barista, before hopping into a cab driven by Comrade Driver and apologizing to Comrade Boss for being late for their meeting?

Whether this is a trend that will catch on anywhere other than the halls of power, however, remains to be seen, and given the current trend for opening “communes” for the ultra chic in urban centers around China, you never know – it may well just catch on once more.

Many articles make this same muddled speculation. We have the luxury of hindsight to see that, indeed no, people didn’t start calling their barista ‘comrade,’ because the political system and economic system have natural conflicts. The state must encourage self-righteousness as a source of legitimacy, but everyone else is to compete for material wealth. As previously stated, the use of comrade is intended for party members, not the general public.  To clarify this point, it is useful to examine two pictures from my second home – the Beijing subway.

I’m on the subway for a minimum of two hours every weekday. This has been the most striking advertisement I have seen due to its incredible simplicity and complete nonsense.

花更少， 飞更远，选的多      。 买个机票，8元钱，高高兴兴做公主。

Spend less, fly further, enjoy many choices. Buy one ticket for RMB8, happily become a princess. 

Changing a young woman’s ideal image from princess to comrade must be the hardest task in the world, and most importantly, it is not something the CPC is trying to accomplish.  Drop any notion you may have of descriptive titles and their effects, and solely consider the effort it would take to transplant wealth ideas in a capitalist country. Baristas don’t want to be comrades. They want more money.

Lastly, consider this young woman on the subway. In her lap is her sleeping young son. They are taking two seats. Notice how the elderly woman, a complete stranger, moves to the edge of her seat to provide the most possible room for the sleeping child. Everyone in the subway car did what was necessary to ensure the child’s comfort. Do you think the mother dreams of a time when her son can grow up to   “curb paternalism and sectarianism that have spread within the Party during the last three decades since the reform and opening-up,”as Su Wei, a professor at the CPC Chongqing Municipal Committee Party School, recently told the Global Times?

The party may encourage its members to use the word comrade. Average people are encouraged to be princesses.

The politics of China and economics of China have natural conflicts, however it does not excuse Western ignorance. Balking at priority between homosexual identity and state legitimacy in a country with China’s history is embarrassingly small minded. Mistaking actions meant for party members which follows a law from 1965 for rules of the general public is inexcusable.

Thus ends my polemic. Let’s hope to see a more insightful media next year.

The sky isn’t grey today.

What a time to be alive. Donald Trump is POTUS, and although policy specifics aren’t set in stone, the world is abuzz considering his first 100 days in office. Commentary regarding his initial policy push centers around Mr. Trump’s “Contract with the American Voter.” This contract has rightfully drawn much attention, however some simple foreign policy objectives have been overlooked.  Here is the contract (emphasis mine):

To “protect American workers,” Trump would renegotiate or withdraw from NAFTA, pull out of the Trans-Pacific Partnership, label China as a “currency manipulator,” direct the executive branch to “identify all foreign trading abuses,” lift restrictions on fossil fuels, allow the Keystone Pipeline, and remove the U.S. from climate change agreements.

There is real possibility for Chinese and American conflict over trade and currency values in the near future.

The history of the conflict

The situation that we currently find ourselves is not new. Due to financial repression and hidden taxes on savers and consumers in the Chinese economy, China has an extremely low consumption share of GDP. To offset this historic low share of consumption, Chinese households must save an ever increasing share of their inadequate income. Consumption and demand in China is weak, so China is forced to export it’s goods. So although China had extremely high investment rates, they have an even higher savings rate.

The following graph shows the growth of the Asian savings glut. Note the trend grew in 2002 following a peg to the United States dollar. Note how it increased year on year as the Chinese economy became more and more imbalanced. Note that it briefly declined during 2008 financial crisis. Note that is now rising again to previous highs.

How does this effect the United States?

There are two ways. First, China would use United States Government bonds to help sterilize Chinese banks. Second, the increased capital flows from China inflated American banks.  It is no coincidence that the American real estate bubble coincided with increased capital movement from China to America. Chinese money fueled speculative asset inflation.

The following graph shows a rise in the Asian current account surplus matching an american deficit.

What benefit does America receive?

China uses the open American system in order to transfer money from savers to producers.  The Chinese economic system needs someone to absorb their surplus. The Chinese economic system needs someone to sterilize their banks. So what does America receive?  American corporations are allowed to operate in China. That’s it. Market access.

If something can’t go on forever, it must end.

There are two constraints to the Chinese growth model: debt growth from high investment rates and unwillingness to absorb trade surpluses.

Both of these things are happening now.

Even if we ignore Trump’s calls, an increasing number of influential economist are calling for an end to this model. It is a mathematic fact that it is bad for America. Here is Brad Setser (emphasis mine):

The combined savings of China, Japan, Korea, Taiwan, and the two city-states of Hong Kong and Singapore is about 40 percent of their collective GDP, a thirty-five-year high. No other region of the world currently contributes more to the global glut in savings that has brought interest rates around the world down to record lows…Without a policy push to bring down savings, East Asia’s excess savings will continue to give rise to new economic and financial risks, both inside the region and globally…The traditional U.S. economic agenda in East Asia—aimed at liberalizing trade, investment, and exchange rates—needs to be complemented with a push for the policies needed to bring East Asia’s savings down to a level that the region can more easily absorb internally. The adjustment should be centered on China, where exceptionally high levels of savings no longer serve the same purpose as during the country’s catch-up phase of economic development.

I told you so. On July 28th I wrote in opposition to George Magnus. I wrote the following:

George Magnus gave a prediction of the RMB devaluing to 7:1 by the end of the year. My prediction is a little different. I believe that Chinese investment levels will drop by the end of the year, and Chinese savings rates will not change. Thusly, China’s current account surplus will rise.

I believe that this time next year, China will run an increasingly large trade surplus with the world. I believe this trade surplus will grab international attention and be received poorly. The current account surplus will put upward pressure on the RMB.

Step one of my prediction is a rise in China’s current account surplus. Look for it to rise over 3%. Step two involves international backlash. The main party would be the United States. Look for the United States to start mentioning key phrases such as “currency manipulator” during and after the election.

The RMB has been devaluing since 2014 ,and this devaluation is due to capital flight. Because there is more supply of RMB than demand, the markets are pressuring the RMB to a lower value. This pressure is huge. Although a bit outdated, this article from Zero Hedge  accurately shows Beijing’s dilemma. On one hand, Beijing is facing the impossible trinity. On the other hand,  the United States is showing an unwillingness, as they should, to absorb China’s domestic imbalances.  This cannot happen forever. In fact, it could, at best, only last another year before China runs the risk of losing all foreign exchange reserves. The value of the RMB is going to be a political struggle, and I am keeping with my initial bet.

Future Implications

The Chinese growth model is ending. Domestic imbalances are causing an unstable increase in debt, and foreign nations are increasingly unwilling to absorb these imbalances.  What are the odds that the United States refusal to accept Chinese domestic imbalances are used to explain to the domestic Chinese population why the growth model has failed. With the current administration completely failing to reform by any serious metric, what are the odds that “foreign black hands” are used as a tool redirect domestic discontent?

The value of the RMB and geopolitics of an East Asian economic rebalancing looks to be the defining foreign policy test of the Trump administration.