1) Does the Chinese data you’re analyzing break down by region or even by city? I ask because if there are huge differences in financial troubles between the different local governments (and their LGFVs) then socialism might require the more financially stable regions to bailout the ones in trouble. If so, resentment might build in the cannibalized regions enough to lead to a future political instability and maybe even revolt. On the other hand, if all regions have pretty much the same financial problems, then future revolt would likely have to come about through a different pathway.
2) Xi says deflationary results will not be ‘tolerated’. Does he actually have any mechanisms that would prevent this, without creating a new asset bubble, or draconian political measures?
3) You have previously written that deflationary problems in China would lead to some financial contagion in the USA. Do you still see that, and do you see it now being likely more severe, given the real estate and banking problems we currently have?
1) There is some regional data, but it's harder to come by. China has been getting progressively more opaque recently--which tells me that at least some in the bureaucracy know how bad things are getting (and that they very likely are worse than the publicly available data indicates).
That being said, there are some significant variances between regions. Around Shanghai and Shenzen is relatively wealthy, while the old industrial provinces in the north (China's very own "Rust Belt") are not nearly as prosperous. As you might imagine, the cities (and their LGFVs) in the poorer regions are in the worst financial shape. There has already been some indication of political instability, chiefly last year's "mortgage boycott", which is very likely to come to the fore again with Country Garden now in default. The Chinese system depends above all else on maintaining order. Protests and boycotts are a very disordered undertaking. If they start to take hold Xi will have his hands full suppressing them.
2) Economics happens without regard to what politicians say. Xi can no more order economic activity levels than Canute could command the tides. What he can do is distort the economy even more with stimulus and asset price inflation. With debt levels already at an eye-watering 300% of GDP, Beijing does not have much maneuvering room for debt stimulus, and the size of China's credit impulse has been shrinking every year for at least the past decade. I don't see how China can avoid deflation without blowing another asset bubble, but I'm not certain if China even CAN blow another asset bubble at this point.
3) The major risk I see is that both China's real estate market and the US real estate market are not in great shape. Real estate is always joined at the hip to banking, which means that if real estate in China continues to go south eventually it will turn into a banking crisis. That could spread globally (all the more so depending on how Evergrande and Country Garden wind up things with their offshore investors). Additionally, a crisis of confidence in Chinese real estate could easily aggravate the crisis of confidence in US real estate. So yes, the contagion risk is real. Whether it is worse now than before is hard to say. With everything else going on in the world, it's difficult to assess the magnitude of impact collapsing real estate either here or there will have; it just won't be good, and it won't be small.
The timing has always been the key. In a race to the bottom the presumption would be the country which comes in last wins. Right now that could mean the US has the advantage. At a minimum a collapsing Chinese economy means dollar hegemony will not be seriously challenged for at least a decade, by which time the situations will be completely different.
The greatest risk is that as Chinese industrial capacity gets disrupted, global supply chains have to be redone, and that is going to have both scarcity and demand challenges for the global economy. Which means China may very well end up exporting its deflation as a contagion effect, first in Europe and then in the US.
Of course, the Middle East is scrambling the picture. I'm not sure we have clear trends from which to extrapolate what comes next.
Will it be, as Celente says, when all else fails, they take you to war? Or is the East different? Certainly Celente's dictum applied to Tojo's Japans in the 1930s so maybe this is a universal thing....
I don't see that happening. Not that I don't think Xi Jinping would be unwilling, but I highly doubt the PLA can organize the logistics for an invasion across the Taiwan Strait.
There's no way for Beijing to achieve any sort of surprise in such an attack. To gather the ships and landing craft to mount the actual assault would be a pretty visible undertaking. Their navy doesn't have the capacity to control either the Taiwan Strait or the Malacca Strait, which means China will have 75% of its oil supply embargoed even before the invasion began, while the invasion itself would be at the mercy of US submarines.
Would Xi Jinping like to try to take the island? He would. I just don't think he can muster the actual force to pull it off.
Three questions:
1) Does the Chinese data you’re analyzing break down by region or even by city? I ask because if there are huge differences in financial troubles between the different local governments (and their LGFVs) then socialism might require the more financially stable regions to bailout the ones in trouble. If so, resentment might build in the cannibalized regions enough to lead to a future political instability and maybe even revolt. On the other hand, if all regions have pretty much the same financial problems, then future revolt would likely have to come about through a different pathway.
2) Xi says deflationary results will not be ‘tolerated’. Does he actually have any mechanisms that would prevent this, without creating a new asset bubble, or draconian political measures?
3) You have previously written that deflationary problems in China would lead to some financial contagion in the USA. Do you still see that, and do you see it now being likely more severe, given the real estate and banking problems we currently have?
Thanks, Mr. Kust!
Three questions, three attempts at answers:
1) There is some regional data, but it's harder to come by. China has been getting progressively more opaque recently--which tells me that at least some in the bureaucracy know how bad things are getting (and that they very likely are worse than the publicly available data indicates).
That being said, there are some significant variances between regions. Around Shanghai and Shenzen is relatively wealthy, while the old industrial provinces in the north (China's very own "Rust Belt") are not nearly as prosperous. As you might imagine, the cities (and their LGFVs) in the poorer regions are in the worst financial shape. There has already been some indication of political instability, chiefly last year's "mortgage boycott", which is very likely to come to the fore again with Country Garden now in default. The Chinese system depends above all else on maintaining order. Protests and boycotts are a very disordered undertaking. If they start to take hold Xi will have his hands full suppressing them.
2) Economics happens without regard to what politicians say. Xi can no more order economic activity levels than Canute could command the tides. What he can do is distort the economy even more with stimulus and asset price inflation. With debt levels already at an eye-watering 300% of GDP, Beijing does not have much maneuvering room for debt stimulus, and the size of China's credit impulse has been shrinking every year for at least the past decade. I don't see how China can avoid deflation without blowing another asset bubble, but I'm not certain if China even CAN blow another asset bubble at this point.
3) The major risk I see is that both China's real estate market and the US real estate market are not in great shape. Real estate is always joined at the hip to banking, which means that if real estate in China continues to go south eventually it will turn into a banking crisis. That could spread globally (all the more so depending on how Evergrande and Country Garden wind up things with their offshore investors). Additionally, a crisis of confidence in Chinese real estate could easily aggravate the crisis of confidence in US real estate. So yes, the contagion risk is real. Whether it is worse now than before is hard to say. With everything else going on in the world, it's difficult to assess the magnitude of impact collapsing real estate either here or there will have; it just won't be good, and it won't be small.
The timing has always been the key. In a race to the bottom the presumption would be the country which comes in last wins. Right now that could mean the US has the advantage. At a minimum a collapsing Chinese economy means dollar hegemony will not be seriously challenged for at least a decade, by which time the situations will be completely different.
The greatest risk is that as Chinese industrial capacity gets disrupted, global supply chains have to be redone, and that is going to have both scarcity and demand challenges for the global economy. Which means China may very well end up exporting its deflation as a contagion effect, first in Europe and then in the US.
Of course, the Middle East is scrambling the picture. I'm not sure we have clear trends from which to extrapolate what comes next.
Excellent, informative answers. Thank you!
Will it be, as Celente says, when all else fails, they take you to war? Or is the East different? Certainly Celente's dictum applied to Tojo's Japans in the 1930s so maybe this is a universal thing....
I don't see that happening. Not that I don't think Xi Jinping would be unwilling, but I highly doubt the PLA can organize the logistics for an invasion across the Taiwan Strait.
There's no way for Beijing to achieve any sort of surprise in such an attack. To gather the ships and landing craft to mount the actual assault would be a pretty visible undertaking. Their navy doesn't have the capacity to control either the Taiwan Strait or the Malacca Strait, which means China will have 75% of its oil supply embargoed even before the invasion began, while the invasion itself would be at the mercy of US submarines.
Would Xi Jinping like to try to take the island? He would. I just don't think he can muster the actual force to pull it off.
That is so heartening and reassuring!