Ian Welsh

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

Category: China

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.

Clueless About Oil: It isn’t going to stay fungible

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On April 24, 2010

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China’s been grabbing up resources as fast as they can with all their export earnings:

Since becoming a net oil importer in 1993, China has rapidly overtaken everyone but the US in its thirst for the world’s crude. If one could quantify a country’s eagerness to control this vital resource, though, China would surely be number one. Aggressive investments in Africa’s resource sector have led some to dub its policies there the “Great Chinese Takeout”. Its latest move, a $20bn loans-for-oil deal with Venezuela, coming on top of an existing $8bn commitment, is its largest. This follows last year’s $25bn loans-for-oil deal with Russia and separate agreements for $10bn each with Brazil and Kazakhstan.

On face value, China’s energy grab appears naive. Extending below market rate loans and investing in areas like Venezuela’s Orinoco Belt, recently eschewed by many multinationals, mean that it may earn a low risk-weighted return. Even if these projects are ultimately successful, procuring actual barrels halfway around the globe is inefficient and unnecessary. Oil is a fungible commodity so buying a distant barrel simply frees up a nearer one for someone else. Financially speaking, China is in effect entering massive, long-dated commodities futures contracts.

Ok, oil is only partially fungible even now.  Oil has to be refined, and refineries are built to handle specific types oil.  Asphalt-quality oil from the Canadian tar sands, which powers much of the western US, for example, simply cannot be refined in refineries not set up for it.

More to the point, if there are absolute shortages of oil which can be refined by the current crop of refineries coming up, and there are, and if it takes years to build new refineries, and if cheap oil is or has come to and end (if it hasn’t, which depends on your definition, it is going to, and soon) then oil is not fungible.

Any country which does not have enough domestic supply of oil for its own needs should definitely be locking in oil supplies.  Because there just isn’t going to be enough of it, and soon.

China has done relatively well these past 30 odd years because they tend to think ahead.  Oh, they say, we’re near peak oil, we should lock in supplies.  Oh, they say, we don’t need a big army, we should put that money into the economy so that if or when we do need a big army our economy can afford one.  Oh, we’ve got a population problem, we should cut back on population growth.  Oh, we’re choking on smog, we should invest in green technology in such a way that in 10 to 20 years we’ll probably be the biggest producers.

That’s not to say they’re forward thinking on everything (for example, they aren’t handling water well at all, or desertification) but compared to most other countries, they’re cracker jack.

And folks like the FT’s Lex team are living, not just in the present, but in the past.  Maybe it’s time that the West’s “intellectual” class started staring the future, or even the present, in the eyes?

Communist Dictatorship China Reaffirms It Will Never Do a Nuclear First Strike, Unlike US

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On April 24, 2010

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Who are the bad guys, again?

Retired People’s Liberation Army Major General Xu Guangyu said in the newspaper commentary that China wanted a minimal nuclear deterrent and would avoid any arms race. “China resolutely adheres to a defensive nuclear strategy, and has always adhered to a policy that it will never be the first to use nuclear weapons at any time and under any circumstances,” wrote Xu

Meanwhile, the US…

The Barack Obama administration’s declaration in its Nuclear Posture Review (NPR) that it is reserving the right to use nuclear weapons against Iran represents a new element in a strategy of persuading Tehran that an Israeli attack on Iranian nuclear sites is a serious possibility if Iran does not bow to the demand that it cease uranium enrichment.

Although administration officials have carefully refrained from drawing any direct connection between the new nuclear option and the Israeli threat, the NPR broadens the range of contingencies in which nuclear weapons might play a role so as to include an Iranian military response to an Israeli attack.

A war involving Iran that begins with an Israeli attack is the only plausible scenario that would fit the category of contingencies in the document.

The NPR describes the role of U.S. nuclear weapons in those contingencies as a “deterrent”. A strategy of exploiting the Israeli threat to attack Iran would seek to deter an Iranian response to such an attack and thus make it more plausible.

In other words, if Israel attacks Iran, the US says it might nuke Iran if Iran strikes back after an Israeli attacks.

Say what?  Oh, I see “You’re going to let my friend Israel beat the shit out of you, or I’m going to pull the trigger of this gun I have pointed at your head.  Because you’re a bad country, and Israel and the US are the good guys.”

Gee, the idea of those crazy Iranians getting nukes seems so much scarier than the US having them, doesn’t it?

Meanwhile, in other news, the US locks up more of its own people than China, despite having a population which is one quarter of China’s.

A force for peace, and the home of the free, indeed.

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