Three Short Observations and One Long Observation

Short thoughts today before I fly out to New Orleans tomorrow.

1.) Although not the whole picture, I largely agree with statements given in this FT article about the global savings glut. This imbalance, and particularly Americas forced absorption of the imbalance, is why I believe so strongly in the trade conflict I wrote about in the beginning of December.

FT imbalances

Cross-border lending helped facilitate the credit crisis a decade ago. After the Asian financial crisis of the 1990s, many countries in that region decided that maintaining big foreign currency reserves was a prerequisite for financial stability. They sold bonds to their citizens and invested the proceeds in foreign — primarily US — assets. Another stream of money came from Germany, where post-unification wage reforms and European monetary policies created an exporting powerhouse. Still another came from the oil exporters, awash in petrodollars. These flowed towards America, too. The money washed up in the US housing market, driving up investment and prices.

…Since the crisis, low oil prices have eliminated a big part of the glut. The German and Chinese contributions, which fell after the crisis, are approaching 2007 levels again.

Unless one believes the United States financial system is unable to domestically fund its financial needs, one must believe this foreign money artificially drives up asset prices. Its all about capital supply.

2.) When writing about the trade conflict in early December, I predicted America would be forced to act unilaterally. That belief only grows stronger.

Here are joint statements from America and Germany regarding the abhorrent sentencing of human rights lawyers in China. If Canada, Australia, and the EU can’t work on a joint statement regarding human rights, do you think the world, to include current account surplus producing East Asian allies, will agree to stop domestic distortions that cause current account surpluses?

It is true that there has been some success on addressing obvious flaws in the One Belt One Road initiative, but that project was doomed from the beginning.  The Asian Infrastructure and Investment Bank as well as the One Belt One Road initiative were always laden with symbolic value and nothing else.

I hope I’m wrong, but I remain pessimistic.

3.) I think this blog post from Christoper Balding in which he describes the Chinese economy as fragile is a must read.

4.) For all the talk of reform, have we seen any meaningful economic reform under the Xi administration?

The first large economic reform buzzword to placate Western expectations was supply side reform, but the economy seemed to continue with business as usual. The second large economic reform buzzword to placate Western expectations was strategic deleveraging , but the economy seemed to continue with business as usual. The official statement after the 2017 Central economic Work Conference did not mention deleveraging at all. Deleveraging seems to have been replaced by “risk control” in the official party language.

So what was the tangible economic reform of the Xi administration? There are two: urbanization and new technology investmentFor all the talk of debt in Western media, China has signaled every intent to try and grow out of its debt burden.

Regarding urbanization, the new leadership pins high hopes on the New Urbanisation Programme to transform China into a domestic consumption-driven economy, and to promote the country’s rural and urban integration for social equality.  This has resulted in the creation of more New Areas, the latest being Xiong An. The ambition to create new cities from nothing doesn’t get a lot of Western press, but this couldn’t be bigger news in China, a country whose entire wealth is denominated in real estate inflation.

Map of Xiong An

Here is Chairman Xi looking at a map of Xiong An.

xiong an money

Here are the words 雄安新区 (Xiong An New Area) on top of money.

xiong an triangle 1 Here the positions of Xiong An, Beijing, and Tianjin are cleverly marked with a triangle.

xiong an triangle 2

Increasingly clever triangle.

xiong an triangle 3


Chinese urbanization seems to include mass eviction of poor migrant workers- forcibly removed from their homes with little notice into the freezing northern winter at a time when the local governments have proven inept at providing heat – as well as the idea that new cities will allow these poorer Chinese to buy into the fixed asset price inflation dream that has made all of China rich.  The plan is to raise real estate prices in rural area so those asset holders become rich, eventually being able to cash out and increase household consumption. That is the plan being verbally and visually implemented: evictions and strategic housing price inflation.

The second policy, which is only just being seriously discussed in Western Media is China’s push to be the leading producer of 21st century new technology. Besides the serious AI race, China has openly admitted to targeting robot, smart car, rail, ship building, agriculture, medical devices, and new materials technology. Western media is only just realizing that China is a serious threat that foreign firms might not be able to compete with.

“Ah, but China, like all state planned economies, isn’t innovative. Western firms will be able to be more innovative and competitive!”

History disagrees. China was effective in destroying the American solar panel market and it took years for the United States government to begin a response. There is no way to compete with a system like China in which the state can operate at large losses, price commodities at will, and funnel huge sums of money. Take this quote from the linked NYT article:

American manufacturers say the cheap panels have been unfairly financed by the Chinese government. Chinese manufacturers have benefited from cheap loans from government-run banks. Even some Chinese companies that have struggled with losses and had trouble making loan payments have been able to stay afloat.

Such manufacturers in China “are technically insolvent, but they still get capital.”

As I previously wrote, governments are currently unable to create policy to counteract the extreme depth of subsidies Chinese companies give and receive. This is in a sector the American government supports and encourages. These are jobs and companies America wanted.

The battle for new technology is already underway. Take CRRC for example, a rolling stock manufacturer. This report by SCI is illuminating.


CRRC market share

CRRC market share 2

CRRC is able to dominate the global rolling stock market, currently providing transportation solutions to Boston ($576 million), Chicago ($1.3 billion), and LA ($647 million). Herein lies the rub, large SOEs like CRRC no longer just compete in rolling stock. They now have an acquisitions subsidiary in Beijing focusing on buying new technologies (English starts on page 3).

CRRC is now actively trying to buy out Western environmental systems, new energy, new materials, agriculture, robotics, medical equipment, and recreational engineering companies, companies and technology completely foreign to rolling stock. The desired result is to increase the value of Chinese companies, increasing wages and Chinese household consumption.

China has noted for more than a decade that its economy was unbalanced. They have acknowledged Western concerns, created thrilling, often obfuscating narratives, and begun addressing these problems in a unique take on outgrowing a classic investment driven, debt creating model.

There is reform in China, but its not the news you wanted to hear.


Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s