Ian Welsh

The horizon is not so far as we can see, but as far as we can imagine

Category: China Page 11 of 12

Rumors of the Ukrainian Rebels demise

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On September 9, 2014

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were exaggerated.  Or rather, the information in the Western press was essentially propaganda.

I think it’s worth acknowledging that I swallowed it, only to be corrected by a number of readers.  The Ukrainian rebels were tougher than I expected, Russian support seems to have been more significant and the Ukrainian military was simply not up to the task.  They couldn’t win the street fighting.

This means that Russia still has a strong negotiating position with regards to Ukraine’s future: their preferred option, of course, is federalization and forbidding NATO expansion into the Ukraine.

Meanwhile we must continue to keep an eye on sanctions.  The risk here is real sanctions being imposed on Russia, Russia retaliating with a gas shut off and an economic collapse in Europe.  Note that the key player here is actually China, who can easily keep Russia afloat if they choose to (China is printing far more money than the Fed was at the height of its unconventional monetary policy.)  The West keeps assuming it is the only game, and that it controls the money spigots: shut them off and they can crush anyone.  That is no longer true.  The question will be “what does China want to keep Russia afloat, or alternately, from the West, to cut them off.”

In my opinion, while China and Russia have some differing interests, those pale compared to their need for each as allies against the West.  The American Foreign Affairs and security establishment has been clear that they want to pivot against China, whom they see (correctly) as the largest threat to American hegemony.  For China to allow the West to crush Russia would be a colossal mistake, especially when the cost of keeping them alive is not that significant a world awash with printed money.

As for Europe, they are being fools and they will pay the price for it.  Satraps of a self-interested and cruel hegemonic power are never treated well, and Europe does not need to be a satrap, yet chooses that path against their own self-interest.

So be it.

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The Russia China Axis continues to form

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On May 23, 2014

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So, the Russians and Chinese, after 10 years of haggling, have signed a gas deal worth 400 billion or so.

The timing is not coincidental, of course: Russia needs to diversify who it sell to.  The next major step, which will be years in coming, is arranging how to supply India.

The US has been pivoting against China, reassuring its allies in the Pacific, that US ocean, that it is on their side against a China which is pushing territorial claims aggressively.  China knows that many in the US consider it the real enemy: the real threat, because of its burgeoning economy and its massive industrial base (shipped to it by American capitalists, selling China the rope to hang the American Empire with.)

As I have noted before, the price of the Ukraine is a firm alignment of Russia with China.  Russia needs China’s goods, money and political support; China will also be happy to have a security council ally and buy all those Russian commodities.

Japan is a firm American ally, and likely to remain so. It will increase the size of its military, but Japan’s long stagnation has now turned into actual decline, with regular trade deficits with no end in sight, since it has been shipping much of its industry offshore, and not creating the new generations of the best or cheapest goods.  Demographic decline, likewise, continues, and Japanese xenophobia makes it impossible for them to use immigration as a cure, while the declining economy and tight pressed quarters means there’s no reason to expect the Japanese themselves to start breeding.

Europe has firmly aligned with America, indicating willingness to cut its own throat with trade sanctions against Russia, if necessary.  South America and central America is unlikely to align en-masse with America for obvious historical reasons: America has been the enemy of most states there for over a century, with its willingness to attempt to overthrow any government it doesn’t like.

The Middle East grows less important as solar and alternative sources for oil come on line, and as their own reserves deteriorate.  To be sure, it will matter for decades yet, but it is no longer the most important region on the earth.  Sub-Saharan Africa, sadly, is largely irrelevant: they will sell their resources to whoever pays for them.

This leaves India s the last major country in play.  But for them, the smart play is to stay out of it, keep good relations with both sides, and let China and the US slag each other, coming up the middle to be the next hegemonic power.

To be sure, many will say that China and the US can never seriously fight: they need each other too much.  Such people are fools: American consumers grow weaker, US treasuries are a sunk asset, and China will have to move to a domestic consumer society at some point: raising the income of their own citizens and selling the goods to Chinese.

The game of empire never ends, it only changes.  The Russians are now aligned with the Chinese because of European and American stupidity: Putin and the Russians, for many years, longed to be Europeans and it would have required only a little respect to keep bring them into the Western camp.

Such strategic mistakes often seal the fate of Empires.

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The Prelude to the End of the American Era

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On April 25, 2014

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And so it begins.  Russia is not restraining the separatists, the Kiev government is finally really sending in the troops, Barack Obama and EU leaders claim they will impose real sanctions and Russia and China are set to ink a deal to export Russian Gas to China, the world’s industrial heartland.

If the sanctions are imposed, for whatever reason (Russian invasion or not), they will force the creation of a second economic, non-dollar bloc.  Russia is not Iran, and China is not going to cut off Russia to please the West, rather the contrary.  The creation of a real non dollar bloc which can make almost anything people want, and which has access to essentially all key resources from oil to rare minerals, metals and food is an existential threat to the hegemony of the West and its allies like Japan and Korea.

Be clear, real sanctions will impose real costs on Russia, but they can bear them.  They do not need to borrow money from the West, they cannot be Troika-ized. They have key resources that someone will buy, even if they can’t buy in dollars, because Yuan or rubles can, actually, buy most of what most countries need to buy.

Absent China, Russia cannot be isolated.  Cannot.  China is unlikely to cooperate.  Sure, they could view eastern Russia near their borders as ripe, but Russia as a subordinate state in the Chinese sphere means they get everything they really need from the Russians anyway, plus backing in a military confrontation with the current developed world.

The Chinese are not stupid, they know that if a real war breaks out, it will be between them and America.  They are the rising power, the naturally most powerful and militarily powerful state in the world, recovering from a hiatus of a few centuries where they lost their status.  Russia has a lot to offer them, and the Chinese cannot be coerced by sanctions.  Sanctioning China would backfire so hard that the US was go into a real economic collapse: China makes the goods.  Sanction them, and they WILL break the patents and just make them anyway.  Reestablishing the manufacturing and distributing base back to the US and its allies under such circumstances would be unbelievably difficult, especially as Russia, China and its allies control certain key resources like rare earths (other people could mine them in quantity, but don’t, because Chinese rare earths are cheaper and we are stupid and greedy.)

Russia is already planning how to survive economic sanctions: how to sell its goods in rubles.  People will buy, Russia is too big a producer to ignore.  If Europe doesn’t want the growth which comes from using Russian gas and oil, well, China and others will be  happy to take it.

And once a second bloc is created, it will no longer be possible to pull stunts like breaking Iran with sanctions: the Chinese/Russian bloc will have a veto.

Over Ukraine?  I guarantee that if this is done in 50 years historians will look back on this like we do on WWI—what were they thinking?  The Balkans wasn’t worth WWI.  Ukraine isn’t worth destroying American: Western, hegemony.  Well, not for America.  Others might think this is more of a good thing than bad.

But it is also the potential glide path to war, real war.  WWIII.

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How China Can End American Hegemony

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On March 25, 2014

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For most of history China has been the most powerful nation in the world, with the largest economy, and the most advanced technology.

That is, in the long run, normal.

Today China rises.  Having been humiliated by the West in the 19th and early 20th century, it has systematically increases its manufacturing base until China is the largest manufacturer in the world.

I concentrate on manufacturing because it and resource extraction are the two things which really matter.  All the software in the world, all the “financial services” don’t matter if you can’t make, mine, or grow what you need.

If you were China, and you wanted to destroy US hegemony, how would you do it?

The simple answer is “control the means of production”.

Right now many US companies manufacture in China: Apple may be located in California, but its manufacturing base is largely in China.  As time goes by, those who make goods, learn how to design them.  As companies more and more offshore and outsource their design, this becomes more and more true.

Companies like Apple can build their goods in China because of patent law: the Chinese may know how to make them,  but it’s illegal to do so.

The logical path for China would be to wait till they have the actual production facilities for every key sector, then break the patents and let the factories (which are already Chinese owned subcontractors, as a rule) make the goods themselves.

If you do this in one fell-swoop, because the facilities no longer exist in the US or Europe to make the goods, the US and, indeed, Western governments are faced with two choices: go into an economic tailspin, or buy from China either way.

The conventional reply to this is “but the Chinese need Western consumers!”

Do they?  Will they forever?  Or can they take their huge population and turn that into a consumer base?  Can they turn various developing countries into consumers of their goods?  Africa, in particular, has been looking more and more to China, because China offers development: building roads and factories and ports and airports, which the West no longer does, at least not without insisting on crippling IMF conditions.  China doesn’t do that, it doesn’t care how other countries run their internal affairs: if they want to subsidize food, that’s fine by China.

Russia, of course, will increasingly turn to China as the West isolates it.  Much of Latin America is already looking towards China, and find Chinese influence far less problematic than American influence, since the Chinese don’t actively try to overthrow their governments.

Will this happen?  Perhaps, perhaps not.  But, increasingly, it is a route open to the Chinese.  They control the actual means of production: the West has very kindly engaged in massive technology and capital transfer to China, moving expertise and the actual production.

One might argue that cooperation is better for China.  But will it always be?  Thanks to massive mismanagement of the economy, the environment and both renewable and non-renewable resources, we are increasingly moving into a period of scarcity.  In a negative sum game, cutting America, which consumes far more than its per capita share of resources off at the knees may be exactly what China needs to do to ensure its own prosperity and survival.

Why China Banned Banks from Bitcoin Transactions

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On December 5, 2013

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China has ordered banks not to engage in Bitcoin transactions.  The reason is simple: bitcoin is used to bypass currency restrictions, and China doesn’t want even more money flowing out of China (it’s already contributed massively to the Australian housing bubble and affected New York’s, for that matter).  China is creating about sixteen times more money a year than the US, everyone else’s QE is meaningless in comparison.  That money is meant to boost the Chinese economy, not cause property bubbles outside of China.

Bitcoin is dubious at best.  It intentionally gives a huge first mover advantage (and has made its founders filthy rich). It is intentionally deflationary.  It is the libertarian answer to their screams about the central bank “no, we just wanted to be the central bank”.

What bitcoin is is an way of moving money without monetary authorities knowing about it.  Its first bubble peak was during the Cyprus debt crisis, when it was used to move money out of Cyprus.  Since then it has risen based on bubble psychology and on money movement and laundering.  I don’t necessarily mind, just because a government says you can’t buy something doesn’t mean the government is right, I just think it’s important to be clear what Bitcoin is.

The best way to make money from Bitcoin if you weren’t a founder is to mine Bitcoins: printing money, if you think Bitcoin is money.

Governments since the 70s have massively cracked down on movements of money: the $10,000 declaration when you travel (a lot less than it used to be given inflation), the $10,000 reporting limit at banks, huge lists of suspect individuals and corporations which must be checked during every transaction, requirements to report transactions that look like they are structured to avoid the 10K reporting limit, and so on.

This infrastructure was used, in part, to break old-style organized crime (so we could get the far worse networks we have today.)  It is used to break countries like Iran.  It used during the seizure of assets when the government decides to charge someone with a crime and take away all their money so they can’t defend themselves.  It is used to enforce legal restrictions and monopolies on what you can and can’t spend money on.

Bitcoin threatens that.  It also threatens monetary policy in countries which try to keep their money in their country, like China, which is why China was the first country to forbid it.  In the West, Bitcoin is used to move money by small people, the big guys have other ways to do it.  The Russians needed Bitcoin to get out of Cyprus because the Europeans were trying to screw them, but real Western elites, nah.

All of this might make you think I like Bitcoin: I don’t, it’s the wrong way to do something that needed to be done.  We need a peer to peer payment system, but Bitcoin, intentionally deflationary, and intentionally providing huge first mover advantages and advantages to miners which increase over time, is not it.

And if you’re not Chinese, you don’t want more Chinese money getting out.  Well, maybe you do, if you own prime real estate and want to sell in a few years.  Otherwise, no, that money isn’t going into useful production, it’s going into asset inflation.  That’s not good for you.

We’re going to have to clean up money creation and find a new measure of value to peg creation to. Bitcoin, however, is not it.

The minds of China’s elites tend to get concentrated by such events…

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On September 26, 2011

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… as this:

The demonstration turned violent after villagers were turned away and told to raise the issue with their local Communist party cadre, but were unable to locate any party officials. “Village officials didn’t show up to give us an explanation . . . so we went to their office and smashed it up,” said one man. The enraged villagers also attacked structures in the industrial park…

…

On Thursday afternoon scores of policemen retaliated. Video footage obtained by the Financial Times showed police getting out of armoured cars and other vehicles and chasing anyone who happened to be on the streets. A 15-year-old boy returning from school was beaten and kicked by two policemen.

Villagers said that two children had been taken to hospital bleeding profusely and that a 13-year-old girl had gone missing. A frail woman in her eighties said she too was attacked by police. In response, infuriated residents of Wukan attacked the police station and overturned police cars.

This sort of thing is pretty routine in China.

China’s entire military budget about equal to US spy spending

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On October 28, 2010

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China’s 2010 military budget? About 78 billion.

US’s 2010 spy budget?  About 80 billion.

Both China and the US are on unsustainable trajectories, but the Chinese are betting the US hits the wall first.  I’m betting they’re right.

The Most Important Economic Question in the World Today

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On April 27, 2010

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Chinese and American flags flying together

Chinese and American flags flying together

Is when will the Chinese property bubble burst.

As RGE pointed out:

Urban property prices increased a record 11.7% y/y in March 2010, up from 10.7% y/y February 2010, according to the National Bureau of Statistics’ property price index. Prices rose y/y in all 70 cities in the index, with prices in some cities like Haikou on Hainan Island up more than 50% y/y. In m/m terms, prices accelerated as well, according to the index, rising 1.1% in March, up from 0.9% in February. Real-estate investment saw a 35% y/y jump in Q1 2010, partially due to base effects and potentially also due to developers pulling their projects forward to avoid regulatory restrictions.

The bubble has been going on for years.  Many cities have had 20% housing inflation since the 2000’s.  The bubble has been fueled by very easy credit, and a great deal of fraud.  Sound familiar?

Bubbles end when the last sucker buys.  At that point housing prices implode, and banks have tons of loans go bad on them.  They either write them off and probably go bankrupt, or they are allowed to keep them on the books as non-performing loans, which means they become zombie banks, unable to loan effectively.  Meanwhile local governments, highly reliant on the bubble, are forced to start cutting back services and employment.

The government at that point may choose to print a great deal of money (the Chinese are much less reluctant to do that than many Western governments), in which case they risk either inflation (if it gets into the real economy) or the Japanese disease, in which case China gets substandard growth.  Since growth is what the Communist party offers Chinese in exchange for staying in charge, low growth risks the Chinese communist party being overthrown. And by overthrown, I mean killed.  The Chinese are really big into mass violence, riots and so on.

The majority of the world’s growth, at this point, is coming from China, with Asia ex-Japan providing most of the rest of it. If China goes under, it takes the world with it.

And, from a longer perspective, if you’re worrying about a Great Depression and using the last one as your model, China is what you want to watch. Though not dominant in gross terms in the way the US was in the 1920’s, it is the major surplus nation in the world, just as the US was then.

I don’t know how this is going to play out, but there’s no question that China has a huge property bubble.  All bubbles pop eventually.  The question is when, and how that popping is handled.

China needs to tamp this down, keep building its internal economy, and get off the mercantalist treadmill.  The rest of the world is not going to buy enough Chinese goods to allow them to fully industrialize through mercantalist policies—they are going to have to switch to an internal consumer society.  A Japanese style status quo is not feasible for China, both for political reasons and for the simple reason that their population is just too large.

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