Commentary on Political Economy

Wednesday 30 January 2019


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Some global investors with an eye on China act as if trade friction between the mainland and the US is the only factor worrying markets. That has especially been the case for investors in China shares. But investors also need to pay attention to the dynamics of corporate credit in China — and not just the last salvo between the two competing powers. The fact is, the country is in the grip of a credit crunch. The year 2018 saw a record number of defaults by number and total value, as Beijing clamped down on lending via both official and unofficial channels in an effort to slow the growth of debt, especially in the corporate sector. The cumulative value of troubled debt may be over $3tn, according to estimates from Hong Kong-based Clearwater Capital. The growing number of defaults and non-performing loans are the product of both financial tightening and the fact that regulators are forcing the banks to cease efforts to conceal problem loans. As a result, China is joining India as a new hotbed for distressed-debt specialists. They include some of the most well-known firms across the Pacific, including Blackstone, Centerbridge and Oaktree, who join longtime investors in the region such as Avenue Capital or PAG. Some have relatively little business elsewhere, given that major central banks are still providing extraordinary levels of support. China’s tightening last year was far more severe than many analysts predicted. The rate of growth of bank credit was well below that of nominal gross domestic product, according to strategist Christopher Wood of the CLSA unit of Citic Securities. And other financing channels such as capital markets did not compensate. The slowdown in so-called “total social financing”, which captures everything from bonds to insurance repayments, was even more dramatic. One company which hit trouble was Gansu Gangtai Group, a privately owned jewellery retailer. It defaulted in the autumn on two separate corporate bonds worth a combined Rmb1bn ($149m), after investors exercised options to sell them back to the company. Events like this create “a vicious cycle in which loss of liquidity leads to defaults which lead to even more loss of liquidity”, said Thomas Gatley, analyst at Gavekal Dragonomics, a research boutique. The credit crunch has hit privately owned enterprises especially hard because they have always relied on the “grey” market — a network of trust companies, fund managers and loosely regulated finance firms — which is slowly being rubbed out by Beijing. That has harmful effects, since today private companies account for far more economic growth and job creation than the state-owned enterprises. Today, the market for troubled debt is becoming more institutionalised By mid-November of last year, 22 private companies had failed to repay Rmb37bn of bonds, compared with nine companies which failed to repay Rmb10bn the previous year, according to data from Mr Gatley. Private firms “experienced six months of negative net issuance as they struggle to refinance maturing bonds”, he noted. By the end of last year, though, there were signs that monetary policy was becoming more generous. “The deleveraging campaign is now no longer as focused on credit tightening and [is] more fixated on addressing problems in the existing stock of debt via [non-performing loan] recognition and disposal,” said Jason Bedford and May Yan, of UBS in Hong Kong, in a recent report. In January the People’s Bank of China made two cuts to the amount of cash that commercial banks have to keep as reserves. The PBoC is also providing Rmb10bnto the China Bond Insurance Corp, a state-owned credit guarantee fund, to support debt sales by private firms. Moreover, bank lending and corporate bond issuance has picked up since the end of the year, with $3.7bn of US dollar bonds issued in the second week of January alone. Meanwhile, spreads on high-yield US dollar bond issues by Chinese companies have narrowed compared with their US counterparts. But will there be worse to come — especially for privately owned enterprises? Recommended beyondbrics China’s slowdown is of its own doing Without solid support from the shrinking shadow banking market where private firms could go for help in refinancing loans and maturing bonds, it is hard to be optimistic. Furthermore, in addition to the Rmb280bn in bonds that will mature this year there are another Rmb283bn that become callable, Mr Gatley calculates. Today, the market for troubled debt is becoming more institutionalised; indeed Shenzhen has just established the first bankruptcy court in China. There are now so many players that it is possible to go on the website of e-commerce giant, Alibaba, and purchase non-performing loans. Competition has driven down prices dramatically. Those price drops “will magnify impairment losses [for lenders] and slow the pace of the process”, Mr Bedford and Ms Yan added. Moreover, the two analysts have found cases where local investment firms which play in the distressed-debt market become distressed themselves, or have shareholders with undisclosed ties to the firms whose debt they purchase. Given these factors, then, expect some messy workouts. Distress in China may prove as stressful for investors as it is for issuers.

Tuesday 29 January 2019


In June 2017 former China correspondent, former Turnbull staffer and then principal international adviser in Prime Minister and Cabinet, John Garnaut, delivered within the department the analysis he had long contemplated — Engineers of the Soul: Ideology in Xi Jinping’s China.
If you have anything to do with China, personal or professional, you need to read it. The brief was transmitted to HR McMaster when he was national security adviser to President Donald Trump and circulated to the US National Security Council team.
Garnaut says that in initially advising the Australian government on China “it was simply too alien and difficult” to include the vital component of ideology, hence his practice was to “normalise” China simply because people were not ready to grasp the ideological DNA of the regime.


Now he wanted to describe that ideology. It begins with the recognition communism was grafted on to the classical Chinese dynastic system, and the leaders of the People’s Republic “never really changed the mental wallpaper”.
“Xi Jinping has exercised an unwritten aristocratic claim to power which derives from his father’s proximity to the founder of the red dynasty: Chairman Mao,” Garnaut says. “He is the compromise representative of all the great founding families. This is the starting point for understanding the world view of Xi Jinping and his princeling cohort.
“In the view of China’s princelings, or ‘revolutionary successors’ as they prefer to be known, China is still trapped in the cycle which created and destroyed every dynasty that had gone before. In this tradition, when you lose political power you don’t just lose your job. You lose your wealth, your freedom, probably your life and possibly your entire extended family. You are literally erased from history. Winners take all and losers lose everything.
“In the Chinese formulation it is ‘you die, I live’. I must kill pre-emptively in order to live. Xi and his comrades in the red dynasty believe they will go the same way as the Manchus and the Mings the moment they forget.”
Garnaut says Marxism-Leninism was interpreted to Mao by a critical intermediary: Stalin. Mao found his ideological treasure in Stalin’s History of the Communist Party of the Soviet Union (Bolsheviks): Short Course that, at the time of Stalin’s 1953 death, was the third most printed book in history and “the closest thing in China to a religious text”.
The book, Garnaut says, “is a manual for perpetual struggle against a roll call of imagined dastardly enemies who are collaborating with imagined Western agents to restore bourgeois capitalism and liberalism. You can imagine how this formulation was revelatory to a ruthless Chinese leader like Mao who had mastered the ‘you die, I live’ world and was obsessed with how to prevent the decay which had destroyed every imperial dynasty before.
“What Stalin offered Mao was not only a manual for purging his peers but also an explanation of why it was necessary. Purging his rivals was the only way a vanguard party could ‘purify’ itself, remain true to its revolutionary nature and prevent capitalist restoration.
“Crucially, Mao split with Khrushchev because Khrushchev split with Stalin and everything he stood for. We hear a lot about how Xi and his peers blame Gorbachev for the collapse of the Soviet state but actually their grievances go back much further. They blame Khrushchev for breaking with Stalin. And they vow they will never do to Mao what Khrushchev did to Stalin. Now, 60 years on, we’re seeing Xi making his claim to be the true revolutionary successor of Mao. This is the language the deep red princelings spoke when together and occasionally when I interviewed them and crashed their gatherings in the lead-up to the 18th party congress.”
Garnaut quotes from Xi’s speech: “To dismiss the history of the Soviet Union and the Soviet Communist Party, to dismiss Lenin and Stalin, and to dismiss everything else is to engage in historic nihilism, and it confuses our thoughts and undermines the party’s organisations on all levels.”
This is the logic driving Xi’s “ever-deepening purge of peers”: of challenger Bo Xilai, security chief Zhou Yongkang, two vice-chairs of the PLA Central Military Commission, Xu Caihou and Guo Boxiong, Youth League fixer Ling Jihua, and potential successor, Sun Zhengcai. “None of this is personal,” Garnaut said. “It’s dialectical. And inevitable.’’
“History needs to be pushed along its dialectical course,” said Xi in his speech marking the party’s 95th birthday in 2015. “History always moves forward and it never waits for all those who hesitate.”
Garnaut says: “The essence of Maoism and Stalinism is perpetual struggle. This is the antidote to the calcification and putrefaction that has destroyed every dynasty, dictatorship and empire. This is why Xi and his peers believe Maoism and Stalinism is still highly relevant. Not just relevant, but existential. Xi has set in motion a purification project, a war against the counter-revolution, that has no end point because the notional utopian destination of perfect communism will always be kicked a little further down the road.” It is why extreme politics cannot stop at the 19th party congress.
Garnaut asks: “Who was the world leader who described artists and authors as ‘engineers of the human soul’ and said ‘the production of souls is more important than the production of tanks’?”
The quote comes from Stalin’s speech at the home of writer Maxim Gorky, at the end of the great famine. The message is that art and literature are to be instrumental. Their job is to indoctrinate the masses and advance the revolution. Garnaut quotes Mao extending the Stalin formula: truth, love and art have no purpose but that of politics. “Mao’s talk on literature and art was his way of introducing the Yan’an Rectification Campaign, the first great systematic purge of the Chinese Communist Party,” Garnaut said. It was a project of “orchestrated peer pressure and torture”; by breaking people “physically, socially and psychologically”, the human mind could be conditioned “in the same way Pavlov conditioned dogs”.
When Xi spoke at the Beijing Forum on Literature and Art in 2014, he argued for a return to Stalinist/Maoist principles: “Art and literature is the engineering that moulds the human soul.” In short, the arts must serve politics, meaning, as Garnaut said, “the totalitarian project” of unity language, knowledge and behaviour. “Xi uses the same ideological template to describe the role of ‘media workers’, teachers and university scholars. They are all engineers of ideological conformity.”
Could China have turned out differently? There was a contest internally from Mao’s death to the Tiananmen massacres but, Garnaut argues, “ideology won that contest”. “Everything Xi says as leader, and everything I can piece together from his background, tells me he is deadly serious about the totalising project,” Garnaut said. “The unbroken thread that runs from Lenin through Stalin, Mao and Xi is the party is and always has defined itself as being in perpetual struggle with the ‘hostile’ forces of Western liberalism.
“ Xi did not invent this ideological project but he has highly reinvigorated it. And he is pushing communist ideology at a time when the idea of ‘communism’ is as unattractive as it has been at any time in the past 100 years. In the space of five years, with the assistance of big data and artificial intelligence, he has been bending the internet from an instrument of democratisation into a tool of omniscient control. The challenge for us is that Xi’s project of total control does not stop at China’s borders. It is packaged to travel with Chinese students, tourists, migrants and especially money. It flows through the channels of the Chinese language internet, pushes into all the world’s major media and cultural spaces.”
Garnaut calls his address “the bit we forgot to study”. It was designed to bust the notion of China as a normal country. This is how the Western educated mind is trained to think, and it is false. He says if you’re in the business of dealing with China in intelligence, defence, higher education, trade, economics or whatever, then you need to understand the ideology of Lenin-Stalin-Mao and Xi.

Capitalism and Poverty

For a long time on these pages we have tried to explain how the claim, peddled by people like Martin Wolf and too many others, that the Chinese Dictatorship “has raised hundreds of people out of poverty” was complete and utter mephitic rubbish for the reasons expounded very clearly and convincingly in the article below written for The Guardian - for which we thank its author, of course.

Last week, as world leaders and business elites arrived in Davos for the World Economic ForumBill Gates tweeted an infographic to his 46 million followers showing that the world has been getting better and better. “This is one of my favourite infographics,” he wrote. “A lot of people underestimate just how much life has improved over the past two centuries.”
Of the six graphs – developed by Max Roser of Our World in Data – the first has attracted the most attention by far. It shows that the proportion of people living in poverty has declined from 94% in 1820 to only 10% today. The claim is simple and compelling. And it’s not just Gates who’s grabbed on to it. These figures have been trotted out in the past year by everyone from Steven Pinker to Nick Kristof and much of the rest of the Davos set to argue that the global extension of free-market capitalism has been great for everyone. Pinker and Gates have gone even further, saying we shouldn’t complain about rising inequality when the very forces that deliver such immense wealth to the richest are also eradicating poverty before our very eyes.
It’s a powerful narrative. And it’s completely wrong.
There are a number of problems with this graph, though. First of all, real data on poverty has only been collected since 1981. Anything before that is extremely sketchy, and to go back as far as 1820 is meaningless. Roser draws on a dataset that was never intended to describe poverty, but rather inequality in the distribution of world GDP – and that for only a limited range of countries. There is no actual research to bolster the claims about long-term poverty. It’s not science; it’s social media.
What Roser’s numbers actually reveal is that the world went from a situation where most of humanity had no need of money at all to one where today most of humanity struggles to survive on extremely small amounts of money. The graph casts this as a decline in poverty, but in reality what was going on was a process of dispossession that bulldozed people into the capitalist labour system, during the enclosure movements in Europe and the colonisation of the global south.
Prior to colonisation, most people lived in subsistence economies where they enjoyed access to abundant commons – land, water, forests, livestock and robust systems of sharing and reciprocity. They had little if any money, but then they didn’t need it in order to live well – so it makes little sense to claim that they were poor. This way of life was violently destroyed by colonisers who forced people off the land and into European-owned mines, factories and plantations, where they were paid paltry wages for work they never wanted to do in the first place.
In other words, Roser’s graph illustrates a story of coerced proletarianisation. It is not at all clear that this represents an improvement in people’s lives, as in most cases we know that the new income people earned from wages didn’t come anywhere close to compensating for their loss of land and resources, which were of course gobbled up by colonisers. Gates’s favourite infographic takes the violence of colonisation and repackages it as a happy story of progress.
But that’s not all that’s wrong here. The trend that the graph depicts is based on a poverty line of $1.90 (£1.44) per day, which is the equivalent of what $1.90 could buy in the US in 2011. It’s obscenely low by any standard, and we now have piles of evidence that people living just above this line have terrible levels of malnutrition and mortality. Earning $2 per day doesn’t mean that you’re somehow suddenly free of extreme poverty. Not by a long shot.
Scholars have been calling for a more reasonable poverty line for many years. Most agree that people need a minimum of about $7.40 per day to achieve basic nutrition and normal human life expectancy, plus a half-decent chance of seeing their kids survive their fifth birthday. And many scholars, including Harvard economist Lant Pritchett, insist that the poverty line should be set even higher, at $10 to $15 per day.
So what happens if we measure global poverty at the low end of this more realistic spectrum – $7.40 per day, to be extra conservative? Well, we see that the number of people living under this line has increased dramatically since measurements began in 1981, reaching some 4.2 billion people today. Suddenly the happy Davos narrative melts away.
Moreover, the few gains that have been made have virtually all happened in one place: China. It is disingenuous, then, for the likes of Gates and Pinker to claim these gains as victories for Washington-consensus neoliberalism. Take China out of the equation, and the numbers look even worse. Over the four decades since 1981, not only has the number of people in poverty gone up, the proportion of people in poverty has remained stagnant at about 60%. It would be difficult to overstate the suffering that these numbers represent.
This is a ringing indictment of our global economic system, which is failing the vast majority of humanity. Our world is richer than ever before, but virtually all of it is being captured by a small elite. Only 5% of all new incomefrom global growth trickles down to the poorest 60% – and yet they are the people who produce most of the food and goods that the world consumes, toiling away in those factories, plantations and mines to which they were condemned 200 years ago. It is madness – and no amount of mansplaining from billionaires will be adequate to justify it.
 Dr Jason Hickel is an academic at the University of London and a fellow of the Royal Society of Arts. His most recent book is The Divide: A Brief Guide to Global Inequality and its Solutions.

Monday 28 January 2019


The post below is a welcome, if belated, clarion call on the part of George Soros to the West to rise up against the Chinese Dictatorship and annihilate it once and for all. There is only one respect in which we strongly disagree with Soros. Whilst we agree that, for political strategic reasons, it is vital to combat this virulent Dictatorship by setting as many of its own subjects as is possible against it, the sad fact remains, and the history of all totalitarian regimes teaches without hint of a doubt, that expansionist and imperialist regimes have the overwhelming support of their subjects who are conniving and complicit beneficiaries of the bestiality of their leaders. The heinous Chinese Dictatorship could never have got this far without the implicit and slavish support of the vile Han Chinese people. These are beasts whom we must subdue and destroy well before they have any opportunity to endanger us and imperil our free societies. Whilst it is hard to fault Soros’s noble humanitarian effort to spare Han Chinese people from the atrocious bestiality of their Dictatorship, the fact is and will remain that these vile worms will gladly go along with the truculent savagery of the Beijing Rats so long as it helps invade other countries, destroy other cultures and exterminate other peoples for their own sordid material advantage. Never has the world known a race as vile and proliferative and invasive as the Chinese Han. To stop them, we must reduce them to misery and political and military impotence. Above all, we must demolish and dismember the Chinese Empire! Our will to Power, not the pathetic implorations of humanitarian weaklings, is what will preserve and secure the future of the great humanistic, democratic and progressive values of Western culture and society. Cheers.

The rapidly improving instruments of control that machine learning and artificial intelligence can produce are giving repressive regimes an inherent advantage. For them, the improving instruments of control are a help; for open societies they constitute a mortal danger.
I'll focus on China, where President Xi Jinping wants a one-party state to reign supreme. Xi is trying to consolidate all the available information about a person into a centralised database to create a "social credit system". Based on these data, people will be evaluated by algorithms that will determine whether they pose a threat to the one-party state. People will then be treated accordingly.
Xi Jinping is trying to consolidate all the available information about a person into a centralised database to create a "social credit system". THOMAS PETER
The social credit system is not yet fully operational, but it's clear where it's heading. It will subordinate the fate of the individual to the interests of the one-party state in unprecedented ways.
I find the social credit system frightening and abhorrent. Unfortunately, some Chinese find it rather attractive, because it provides information and services that are not currently available, and can also protect law-abiding citizens against enemies of the state.

China is not the only authoritarian regime in the world, but it is undoubtedly the wealthiest, strongest, and most developed in machine learning and artificial intelligence. This makes Xi the most dangerous opponent of those who believe in the concept of open society. But Xi is not alone. Authoritarian regimes are proliferating all over the world, and if they succeed, they will become totalitarian.
I wasn't surprised when Xi ran into serious opposition at home; but I was surprised by the form it took. At last year's leadership convocation at the seaside resort of Beidaihe, Xi was apparently taken down a peg or two. Although there was no official communiqué, the rumour was that the convocation disapproved of the abolition of term limits and the cult of personality that Xi had built around himself.
The committed defenders of open society in China, who are around my age, have mostly retired, and younger people, who are dependent on Xi for promotion, have taken their place. In fact, it was retired leaders like Zhu Rongji who reportedly floated the criticisms of Xi at the Beidaihe meeting.
It's important to realise that such criticisms were only a warning to Xi about his excesses, but did not reverse the abolition of the two-term limit. Moreover, "Xi Jinping Thought", which he promoted as his distillation of Communist theory, was elevated to the same level as "Mao Zedong Thought". So Xi remains the supreme leader, possibly for his lifetime. The ultimate outcome of the current political infighting remains unresolved.


China using artificial intelligence to repress citizens, George Soros warns

China using artificial intelligence to repress citizens, George Soros warns

By Saijel Kishan, Katherine Burton and Melissa Karsh
I have been concentrating on China, but open societies have many more enemies, Putin's Russia foremost among them. And the most dangerous scenario is one in which these enemies conspire with, and learn from, one another in order to oppress their people more effectively.
What can we do to stop them?
The first step is to recognise the danger. That is why I am speaking out. But now comes the difficult part. Those of us who want to preserve the open society must work together and form an effective alliance. We have a task that can't be left to governments. History has shown that even governments that want to protect individual freedom have many other interests, and they also give precedence to their own citizens' freedom over the freedom of the individual as an abstract concept.
Therefore, I want to focus on what I consider the most important question for open societies: what will happen in China?

Hostility to open society

Only the Chinese people can answer the question. All we can do is to draw a sharp distinction between them and Xi. Since Xi has declared his hostility to open society, the Chinese people become the main source of hope.
And there are, in fact, grounds for hope. As some China specialists have explained to me, there's a Confucian tradition according to which the emperor's advisers are expected to speak out when they strongly disagree with one of his actions or decrees, knowing full well that it may result in exile or even execution. This came as a great relief to me when I was on the verge of despair. It means that a new political elite has emerged that is willing to uphold the Confucian tradition, and that Xi will continue to have opponents in China.
Xi presents China as a role model for other countries to emulate, but he's facing criticism abroad as well. His Belt and Road Initiative (BRI) has been in operation long enough to reveal its deficiencies. For one thing, it was designed to promote the interests of China, not the interests of the recipient countries. Moreover, its ambitious infrastructure projects were financed mainly by loans, not by grants, and foreign officials were often bribed to accept them. And many of these projects have proven to be economically unsound.
The iconic case is in Sri Lanka. China loaned the Sri Lankans the money to pay China to build a port that serves China's strategic interests. But the port failed to attract sufficient commercial traffic to enable the Sri Lankans to service the debt, enabling China to take possession of the port. There are several similar cases elsewhere, and they are causing resentment.


Debt bumps on China's Belt and Road

Debt bumps on China's Belt and Road

By Michael Smith
Malaysia is leading the pushback. The previous government, headed by Najib Razak, sold out to China. But in May 2018, Najib was voted out of office by a coalition led by Mahathir Mohamed. Mahathir's government immediately stopped several big infrastructure projects being carried out by Chinese companies and is currently negotiating how much Malaysia will still have to pay China.

Fully beholden to China

The situation is not as clear in Pakistan, which has been the largest recipient of Chinese investments. The Pakistani army is fully beholden to China, but the position of Imran Khan, who became Prime Minister last August, is more ambivalent. At the beginning of 2018, China and Pakistan announced grandiose plans for military cooperation. By the end of the year, Pakistan was in a deep financial crisis. But one thing became evident: China intends to use the BRI for military purposes as well.
All of these setbacks have forced Xi to modify his attitude toward the BRI. In September, he announced that "vanity projects" will be shunned in favour of more carefully conceived initiatives, and in October, the People's Daily warned that projects should serve the interests of the recipient countries.
Customers are now forewarned, and several of them, ranging from Sierra Leone to Ecuador, are questioning or renegotiating projects. Xi has also stopped talking about "Made in China 2025", which had been the centrepiece of his self-promotion a year earlier.


Investors may be ignoring the risks on China

Investors may be ignoring the risks on China

By Jonathan Shapiro
Most important, the US government has now identified China as a "strategic rival". President Donald Trump is notoriously unpredictable, but this decision was the result of a carefully prepared strategic plan. Since then, Trump's idiosyncratic behaviour has been largely superseded by a China policy adopted by the agencies of the administration and overseen by the National Security Council Asian affairs adviser, Matthew Pottinger, and others. The policy was outlined in a seminal speech by Vice President Mike Pence on October 4, 2018.
Even so, declaring China a strategic rival is too simplistic. China is an important global actor. An effective policy toward China cannot be summed up in a generalisation. It needs to be far more sophisticated, detailed, and practical; and it must include a US economic response to the BRI. The Pottinger plan doesn't spell out whether its ultimate goal is to level the playing field or to disengage from China.

Fully understood the threat

Xi fully understood the threat that the new US policy posed for his leadership. He gambled on a personal meeting with Trump at the G20 meeting in Buenos Aires on December 1. In the meantime, the danger of a global trade war escalated, and a sharp sell-off in the stock market began, creating problems for the Trump administration, which had focused all of its energy and attention on the midterm elections the previous month. When Trump and Xi met, both sides were eager for a deal. So they reached one, though what they agreed – a 90-day truce – is very inconclusive.
But there are clear indications that a broad-based economic decline is in the making in China, which is affecting the rest of the world. A global slowdown is the last thing the market wants to see.
The unspoken social contract in China is built on steadily rising living standards. If the decline in the Chinese economy and stock market is severe enough, this social contract may be undermined, and even the business community may end up opposing Xi. Such a downturn could also sound the BRI's death knell, because Xi may run out of resources to continue financing so many loss-making investments.
On the broader question of global Internet governance, there is an undeclared struggle between China and the West. China wants to dictate the rules and procedures that govern the digital economy by dominating the developing world with its new platforms and technologies. This is a threat to the freedom of the Internet and open society itself.
Last year, I still believed that China ought to be more deeply embedded in the institutions of global governance, but Xi's behaviour since then has changed my opinion. My view now is that instead of waging a trade war with practically the whole world, the US should focus on China; instead of letting ZTE and Huawei off lightly, it needs to crack down on them harshly. If these companies came to dominate the 5G market, they would present an unacceptable security risk for the rest of the world.
Regrettably, President Trump seems to be following a different course: make concessions to China and declare victory while renewing his attacks on US allies. This is liable to undermine the US policy objective of curbing China's abuses and excesses.
Mahathir's government immediately stopped several big infrastructure projects being carried out by Chinese companies. Yam G-Jun

Dangerous enemy

Because Xi is the most dangerous enemy of open societies, we must pin our hopes on the Chinese people, and especially on the political elite, which is inspired by the Confucian tradition.
This does not mean that those of us who believe in the open society should remain passive. The reality is that we are in a Cold War that threatens to turn into a hot one. On the other hand, if Xi and Trump were no longer in power, an opportunity would present itself to develop greater cooperation between the two cyber-superpowers.
It's possible to dream of something similar to the United Nations Treaty at the end of World War II. This would be the appropriate ending to the current cycle of conflict between the US and China. It would reestablish international cooperation and allow open societies to flourish.
George Soros is Chairman of Soros Fund Management and of the Open Society Foundations. This is an edited version of his speech at the World Economic Forum in Davos.

Friday 25 January 2019

ANNIHILATE CHINA! A new password for all freedom fighters.

A paramilitary police officer stands guard outside the Beijing Railway Station in Beijing. Picture: AFP.
A paramilitary police officer stands guard outside the Beijing Railway Station in Beijing. Picture: AFP.
In its quarterly economic outlook this week, the IMF observed that these days, as in 2015-16, concerns about the health of China’s economy can trigger abrupt, wide-reaching sell-offs in financial and commodity markets.
How true. In fact an energy market analyst was moved to comment: “What we’re seeing in the market, call it for the last month or so, is that every day is almost a referendum on what China growth is going to look like in 2019.” He was talking about oil, but he might just as easily have been talking about other markets.
It is generally agreed that the health of China’s economy is pretty important to the world these days, and none more than Australia, which makes the fact that it’s almost entirely fictitious either worrying or reassuring, and I’m really not sure which.


If a country’s economic statistics are made up, as China’s are, then as long as everyone is in on the joke and agrees to takes them seriously, well — there’s a sort of perverse security in that … until there’s not, of course.
This week China’s GDP was reported to be 6.4 per cent for the fourth quarter of 2018 and 6.6 per cent for the year. The target in the Communist Party government’s latest five-year plan is, as it happens, 6.5 per cent, smack in the middle of those two numbers. Neat! More importantly, everyone took it as true: China is growing at target. Relax.
The release came just three weeks after the end of the quarter, which was a bit slower than usual, but faster than any other country. Australia’s ABS checks, rechecks and checks again for two months before letting the GDP out of its sight; US statisticians take about a month, and then revise, revise and revise some more.
China’s number-crunchers are the fastest in the world for two reasons: first, the statistics are routinely falsified, and second, GDP in China is not a measure of output, as it is everywhere else, it’s an input. The reported figure is, within a very small tolerance, either at or above Beijing’s annual growth target, and that is known well ahead of time. No need to waste time measuring and counting.
As Michael Pettis, professor of finance at Peking University’s Guanghua School of Management, wrote two weeks ago: “Reported GDP in China is no longer a measure of economic growth, but rather a measure of political intention.” He goes on: “When analysts discuss what reported GDP indicates about the health of the Chinese economy, such thinking involves a very basic mistake in systems theory — a systems input can only offer insights about the goals of the operators, never about the performance of the system itself.”
The government’s target is met through the use of debt. Local governments are expected to generate enough economic activity to reach the decreed number, and can borrow as much money as they need to do it.
So at the end of December, as the trade war with the US was weighing on exports, the State Council in Beijing announced that local governments would be allowed to start borrowing earlier in 2019 — from January, instead of March as usual.
The 2019 quota for local government bond issuance is 1.39 trillion yuan, or $280 billion — that is new debt that may be raised in 2019 to prop up the economy. That adds to existing debt of more than $40 trillion, or 255 per cent of GDP, greater even than Australia’s household debt to GDP ratio, which is saying something.
The Xi government had started 2018 with the best intentions of controlling China’s exploding debt and started to do so, but in the second half, as activity waned, that idea was abandoned.
President Xi’s priority quietly shifted from reforming the economy and further opening it up, to imposing greater Communist Party control, mainly his own, which basically means propping the economy up, not starting a credit squeeze. It has also involved the creation of a huge mass surveillance operation, including the amazing (and horrifying) “citizen score”, which is built from vast amounts of personal data using artificial intelligence, and determines what benefits each person gets. Also, there are video cameras everywhere using facial recognition, so everyone’s movements are constantly monitored. Not to mention the vast “re-education” camps for Muslims.
And now they are even locking up citizens of other countries for views expressed outside China, without even telling the person’s home country (Australian citizen Yang Hengjun).
Is continued economic growth of any sort, let alone 6+ per cent, compatible with a colossal pile of debt and a suffocating police state? I guess we’re about to find out.
The trade war with the US is shorthand for something much bigger than that. It has been clear since October that America is understandably trying to rein in China’s largely illegal efforts to dominate global technology, which was reinforced this week by a joint report from the US Chamber of Commerce and the American Chamber of Commerce in China detailing how China is implementing its “Made in China 2025” to achieve tech dominance.
Markets were shaken on Thursday by a report in the Financial Times that the US had turned down an offer by China to hold preparatory talks for another round of negotiations, later denied by White House economic adviser Larry Kudlow. Expect more of that sort of thing, but the real problem with China’s economy is not the rivalry with the US, but its own failings: mendacity, tyranny and, perhaps above all, demography.
China’s labour force is now declining and the dependency ratio has gone from 10 per cent to 16 per cent since 2001. What’s more, the birthrate has continued to decline after the abolition of the one-child policy in 2015, which is perhaps the greatest negative of all.
Alan Kohler is Editor in Chief of InvestSMART

Tuesday 22 January 2019


Just as we were about to address the meaning and significance of Hyman Minsky’s financial instability hypothesis, Professor Rogoff has resuscitated the phrase “Minsky moment” for us at Davos. Hyman Minsky was a Keynesian economist (cf. his homonymous book on Keynes) whom I championed at Cambridge University in the late 1990s to highlight the elephantine stupidity of the members of the Faculty of Economics there who were entirely oblivious of the impending doom of capitalist society. That doom or demise, of course, were only delayed by the providential intervention of the Chinese Dictatorship, which allowed Western capitalists to double the global working class over the next 30 years in what Ben Bernanke styled as “the Great Moderation”. But all good things come to an end - and the great moderation is growing more immoderate by the hour! We shall explain why in the next intervention. Meanwhile, enjoy reading this report from Davos by Mr. Evans-Pritchard at The Daily Telegraph. Cheers.

Davos, Switzerland | China is in the grip of a dangerous downturn and may be forced to rescue large parts of its financial and economic system, the world's leading expert on debt crises has warned.
Harvard professor Kenneth Rogoff said the key policy instruments of the Communist Party are losing traction and the country has exhausted its credit-driven growth model. This is rapidly becoming the greatest single threat to the global financial system.
"People have this stupefying belief that China is different from everywhere else and can grow to the moon," said Prof Rogoff, a former chief economist at the International Monetary Fund.
"China can't just keep creating credit," Professor Rogoff said, speaking before the World Economic Forum in Davos. Bloomberg
"China can't just keep creating credit. They are in a serious growth recession and the trade war is kicking them on the way down," he said, speaking before the World Economic Forum in Davos.
"There will have to be a de facto nationalisation of large parts of the economy. I fear this really could be 'it' at last and they are going to have their own kind of Minsky moment," he said.

This refers to the financial instability hypothesis of Hyman Minsky. It is when a seemingly unstoppable debt bubble collapses under its own weight in a cascade of falling asset and property prices. The authorities can cushion the crash, but they cannot escape the brutal mechanics of reversion.
Prof Rogoff is co-author of a magisterial history of debt delusions, This Time is Different: Eight Centuries of Financial Folly, written with former IMF firefighter Carmen Reinhart.
He said it is an error to think that China's current slowdown is entirely deliberate and calibrated. While the People's Bank undoubtedly wishes to curb the credit boom, it is also riding a tiger that it cannot fully control.

Europe already feeling the pain

"I fear this will be the third leg of the global debt supercycle, after subprime in the US and the eurozone debt crisis. Nobody knows how this is going to play out but it could be on the scale of 2008 and will be very bad for Asia, and there will be spillovers in Europe," he said.
The eurozone is already suffering the fallout from the Asian downturn. Most of the region is in industrial recession. Germany and Italy buckled in the second half of 2018, and confidence has slumped to crisis-level lows in France.
"I am very sceptical that the eurozone system can handle another big shock. It is a house half-built, and if there is something like 2008, it is all going to blow up. Some countries will have to be ring-fenced with capital controls," he said.
The eurozone has little policy powder left to fight deflation. Interest rates are already minus 0.4 per cent and the ECB's €2.6 trillion ($4.13 trillion) blitz of bond purchases has pushed the institution's balance sheet to 43 per cent of GDP. The political bar to renewing quantitative easing is very high.
Europe's leaders have yet to build a crisis machinery fit for purpose. There is still no proper banking union with shared deposit insurance, let alone a fiscal union. The rigid rules of the stability pact inhibit use of budget stimulus a l'outrance in a recession.
Prof Rogoff said there is a danger that China and Asian tigers could be forced to pull in some of their trillions of offshore global funds to cover urgent needs at home, drying up or even reversing the Asian "savings glut".
This would have the unpleasant effect of driving up "real" interest rates across the world, which would be awkward for the US at a time when President Donald Trump's trillion-dollar deficits risk crowding out bond markets. Higher real rates would be trial by fire for parts of Europe.
"This is the Achilles' heel for Italy. Real borrowing costs could rise by 2-3 percentage points," he said. Italy's debt dynamics could not withstand a regime shift of this sort. Markets would see the trouble coming and precipitate events.

Managing losses

Prof Rogoff says China still has room for manoeuvre but it cannot escape the forces of economic gravity. Debt ratios have doubled to 270 per cent of GDP in barely more than a decade. Surges of this kind in a developing economy invariably lead to imbalances that prove malign when the cycle turns.
The one thing the Chinese have in their favour is state control over the banking system. Mark Schiefelbein
The one thing the Chinese have in their favour is state control over the banking system. "They will be able to socialise the losses in a much fairer way than we did in the US and Europe, where it was just intractable," he said.
The country has begun to pay a price for abandoning market reform and reverting to the iron control of the Maoist state under Xi Jinping. The tariff will rise with time.
Official GDP figures Monday clocked in at 6.6 per cent last year, the slowest since 1990. While in line with analyst expectations, it was slower than the 6.8 per cent posted the year prior.
The economy faltered most at the end of the year, recording 6.4 per cent growth for the fourth quarter. But true growth has already slipped to near 4 per cent in this downturn based on proxy measures. Capital Economics thinks the rate will slow ineluctably to nearer 2 per cent by the early 2020s. There lies the middle-income trap.
China's corporate debt levels would be manageable if the torrid catch-up rates of growth of the past were still plausible. It is a harsher story in a future of structural stagnation.