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

Chinese Stock Market Woes and the Pre-War World


China is bolstering efforts to arrest a selloff that has rippled through risk assets globally, banning major stockholders from selling stakes as more than half the country’s listed companies are suspended from trading.

Expect some ripple effects, given that a LOT of people can’t sell formerly liquid assets—if they need money they will need to sell offshore assets.

As of this writing, the stock market is slightly up–but yeah, that’s with over half the companies frozen and with vast efforts by the government to funnel money into those that aren’t frozen. A ton of investors are still selling what they can.

Let’s talk China for a bit. I’ve long said that China is the place to watch: It is now a larger real economy than America’s, with a larger population, and it is the largest industrial country in the world. Making stuff, real material stuff, still matters. Americans trumpet innovation, but Britain was still producing more patents than America for years after America was the biggest economy in the world; the stuff just wasn’t made in Britain.

Commodity prices have been dropping in virtually every commodity, not just oil. This is driven by, yes, China, and it affects every commodity exporting country in the world.

(Insert ritual cursing out of Canadian Prime Minister Harper for his policy of doubling down on oil and abandoning manufacturing, thus critically damaging a mixed economy policy well over 100 years old.)

China has been vastly overbuilding infrastructure and real-estate for some time. The media is replete with stories of vast tracts of uninhabited high-rises and so on. Much of what has been built is of dubious quality (not necessarily entirely bad, if it has to be rebuilt, from an economic viewpoint, but disastrous from an environmental one). Peasants in China love their lives; workers hate theirs, even though workers have much more money. This is a direct analogue of Western industrialization, by the way, people had to be forced off the land. Early industrialization makes life much worse for most people directly involved.

I can’t speak directly to Chinese leadership, but I’d guess that we’re now reaching the point where the last competent people are near the end of their careers.  Soon the Communist party will be run largely by princelings: entitled, greedy, and short-sighted.

China is a violent nation. Huge industrial protests happen all the time, entire villages fight (and sometimes win) against army units, etc. The violence is often savage—hand-to-hand melee with iron rods and so on.

One wonders why the Communist party keeps cracking down, installing more surveillance, etc, etc. If they lose control, or if they don’t make it to the airport before the mob, they and their entire families will die, and die messily, or worse.

If things go really pear-shaped in China, the Communist party WILL blame foreigners. You can bet every cent you have on it. War is possible. China is making the necessary preparations and pre-war blocs are forming.

Now, this stock market crash isn’t necessarily the precipitating event. I doubt it is, and even if we look back in 20 years, in the midst of the sweet nuclear glow, and conclude it was, we won’t know for some time that it is.

But we are in a world which is a ton more dangerous than most people, many of whom buy into this “the world is getting less violent” stuff, are willing to believe. Yeah, the world is less violent than it was for most of the post-WWII period, but such periods, well, they end, when the conditions which made them possible end.

The Chinese can still print a ton of money. The lesson the elites took from the Financial Crisis has been “just print money if people who matter are hurting.” The Chinese and Westerners put different groups of people into their “who matters” categories, but both are willing to run the virtual printing presses.

What This Means: It’s likely that the situation won’t go really pear-shaped until such time as running the printing presses stops working as a preventative to staving off disaster. Unless until someone gets stupid and doesn’t run the presses when they should because they think the people suffering don’t matter enough to bother with.

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  1. Back to the 17th and a half century! what they still are not getting his that there are three fold uses of money.

  2. It rebounded once the large players were said to take losses… in other words it still not over.

  3. jsn

    Misallocation of real resources is the logical knock on to mal-investment which has been running rampant since the Volker era. Unfortunately that moment, when the investment and distributional framework of the New Deal was actively being dismantled was the one to which the disaster of Mao’s China awoke to the “wonders” of capitalism.

    The Party in China is engaged in full bore “primitive accumulation” and the social consequences have been in evidence for quite a while, its just that Marx’ economics were bad enough their failures have helped to obscured his excellent history and westerners can no longer see what is right before their eyes:

    I grew up with a “conservative” drone in my ear that if the “people” ever discovered the power of fiat money they would just feather their own beds until the entire system collapsed. Yet here we are 40 years latter and these self styled “conservatives” who conserve nothing but the privileges the most environmentally destructive economic system in history shovels at them have featherbedded themselves off from realty: the money tap now, here and in China, preserves a bubble membrane over a vast sphere of failure that at some moment will pop to unleash the pandemonium it’s polished veneer contains.

  4. S Brennan

    Agree jsn;

    “Misallocation of real resources…has been running rampant since the Volker era. Unfortunately, when the investment and distributional framework of the New Deal was actively being dismantled was the one to which the disaster of Mao’s China awoke to the “wonders” of capitalism.”

    1978 was the year, not 1980…it matters, because that’s when the elite of the Democratic left the New Deal behind, the birth year if you will of the “new Democrats”, 14 years later Bill was in, destroying the New Deal ways that Reagan never dreamed were possible…or even desirable.

  5. Lisa

    The thing every western commentator gets wrong about China is not understanding what they really have done. Even so called ‘left leaning’ or ‘progressive’ people don’t realise how much they have internalised the neo-liberal economic viewpoint.

    In the space of about 20 years they have built a first world infrastructure from nothing, far better than most so called ‘first’ world countries in fact.

    Comparable western historical experience was a century to a 150 years to do the same.

    In doing so they consumed massive amounts of resources and created the infamous resource boom. They also created the internal financial systems that lubricated it all with money.

    Now this all alien to modern western financial people, who live in countries that have long ended public infrastructure development, with our crumbling roads and bridges, ancient trains, rooted education systems and all the rest, we are in the process of disinvestment now. Hence the endless meme of ‘malinvestment’…really? ‘Mote’ and ‘beam’ I say to them and have look at the ever growing pothole on the road over there and yes those rail tracks across from my hosue really are 50 years old…..

    Naturally this massive investment and rapid progress has caused all sort of nonsense along the way, yes there has been some malinvestment, corruption and all the rest.

    A quick comparison of (say) the US doing the same things over 100 years shows that the Chinese by US standards have done things pretty well actually.
    If you look at all the booms/busts, corruption, wasted money, etc when the US built its infrastructure then by those standards China has been a model of efficiency.

    But the issue always was, how do the Chinese deal the end of that infrastructure boom?

    They have lots of advantages, the debt is all internal, the country has massive foreign currency reserves and so on. Fixing it and changing the mode of the economy should be a fairly easy process technically.
    For example: build a top notch health system, which incidentally also employs huge numbers of people, sucking up some of those becoming unemployed due to the end of the infrastructure boom.
    Raise wages considerably, you’d want to at least triple them over the next 20 years.
    Write off infrastructure based debt all over the place. Stroke of a pen thing to get rid of most of it. But of course ban any new debt from happening.
    Make small business (great employer) creation far easier, grants (no debt though), tax deals and all the rest.
    Invest in the infrastructure of other countries to a huge extent.
    And many, many other things.

    Basically look at what the west (especially the US) has done and do the exact opposite…

    But human nature comes in, all those people who have made (legally or illegally) vast amounts of personal money from this infrastructure boom don’t want the gravy train to stop.

    And the Chinese Govt made some real mistakes along the way.
    It let finance get too big and being the blood sucking parasite that all financial systems are, they want the same things to keep on going until there is infinite debt, all guaranteed of course. ‘Banker’ is spelt ‘rentier’ these days
    It allowed far too many people to become very wealthy. And as we all know never get between a billionaire and a homeless widow’s gold fillings and while they are ripping them out of her mouth they will give hey kydneys a quick prod to see of they are sellable…
    We also all know the first thing the wealthy do is corrupt politicians to give them rentier status and guarantee their money.
    Being the sociopaths they are, and having made their billions mostly by corruption, they want the system to keep going on the same way so they can add to those billions and all live in London.
    Foreign owned corporations that moved their manufacturing there will fight tooth and nail to stop any wage increases. Heaven forbid that an iPhone becomes $5 more expensive, less money for all those stock buy ups and CEO bonuses.

    So the Chinese Govt has some challenges to dealing with what should, in technical terms, be a fairly straightforward process of economic change. Realistically they need something like another ‘cultural revolution’ and jail lots of people to clean everything up.

    So China is at a turning point, will it, after all its successes, become just another useless, oligarch dominated crumbling western country with ever declining living standards for ordinary people? With empty, but ever capital gaining, homes while vast numbers of ordinary people are on the street and many people dying of easily treatable medical conditions?

    Or will it build on that, with a rising standard and quality of life for everyone there?

    We shall see.

    Oh and the stock market is totally irrelevant to all that…as it is everywhere except to unregulated financial systems, oligarchs and speculators.
    As Keynes commentated you could shut the whole thing down tomorrow and it would have no effect on the real economy. His argument to keep stock markets was that it gave sociopaths something to do rather than plot taking over the Govt….. (yes that is a paraphrase of what he said).

    In fact a total collapse of the Chinese stock market would be a really good thing in the end.

  6. CMike


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