Economy The U.S-China Trade War: China said it would impose retaliatory tariffs on $75 billion in U.S. goods

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Chinese leadership is facing a rare backlash for its handling of the US trade dispute

REUTERS | August 9, 2018​
  • Some critics saying that an overly nationalistic Chinese stance may have hardened the US position.
  • President Xi Jinping still has a firm grip on power, but an unusual surge of criticism about economic policy and how the government has handled the trade war has revealed rare cracks in the ruling Communist Party.
  • There have been signs of a shift in China's messaging.
A growing trade war with the United States is causing rifts within China's Communist Party, with some critics saying that an overly nationalistic Chinese stance may have hardened the U.S. position, according to four sources close to the government.

President Xi Jinping still has a firm grip on power, but an unusual surge of criticism about economic policy and how the government has handled the trade war has revealed rare cracks in the ruling Communist Party.

A backlash is being felt at the highest levels of the government, possibly hitting a close aide to Xi, his ideology chief and strategist Wang Huning, according to two sources familiar with discussions in leadership circles.

A prominent and influential academic whose views have found favor in some party quarters has also come under attack for his strident views on Chinese power.

Wang, who was the architect of the "China Dream", Xi's vision for China to become a strong and prosperous nation, has been taken to task by the Chinese leader for crafting an excessively nationalistic image for the country, which has only provoked the United States, the sources said.

"He's in trouble for mishandling the propaganda and hyping up China too much," said one of the sources, who has ties to China's leadership and propaganda system.

The office of the party's spokesman did not respond to a request for comment on Wang and his relationship with Xi, or on whether China had erred in its messaging in the trade war.

There is a growing feeling within the Chinese government that the outlook for China has "become grim", according to a government policy advisor, following the deterioration in relations between China and the United States over trade. The advisor requested anonymity.

Those feelings are also shared by other influential voices.

"Many economists and intellectuals are upset about China's trade war policies," an academic at a Chinese policy think tank told Reuters, speaking on condition of anonymity due to the sensitivity of the issue. "The overarching view is that China's current stance has been too hard-line and the leadership has clearly misjudged the situation."

That view contrasts with the thinking at the beginning of the year of many Chinese academics who had touted China's ability to withstand the trade row in the face of Trump's perceived political weakness at home.

China thought it had reached a deal with Washington in May to avoid a trade war, but was shocked when the Trump administration, in Beijing's eyes, went back on that agreement.

"The evolution from a trade conflict to trade war has made people rethink things," the policy advisor said. "This is seen as being related to the exaggeration of China's strength by some Chinese institutions and scholars that have influenced the U.S. perceptions and even domestic views."

One official who is familiar with China's propaganda efforts said the messaging had gone astray.

"In the trade war, the line of thinking in the propaganda has been that Trump is crazy," said the official. "In fact, what he is scared of is us getting strong."

CONFIDENT CHINA?

Under Xi, officials have become increasingly confident in proclaiming what they see as China's rightful place as a world leader, casting off a long-held maxim of Deng Xiaoping, the former paramount leader who said the country needed to "bide its time and hide its strength."

That confidence has been apparent as the government pushes its Belt and Road initiative to develop trade routes between East and West and takes a hard line on territorial issues such as the South China Sea and Taiwan.

Hu Angang, an economics professor at Tsinghua University and an expert in the field of "Chinese exceptionalism", is one prominent advocate for the view that China has achieved "comprehensive national power."

In recent weeks, Hu has faced a public backlash, with critics blaming him for making the United States wary of China by trumpeting and exaggerating its relative economic, technical and military might.

That view of Hu is also shared by some people in official circles, according to the policy advisor.

Hu declined to comment when contacted by Reuters.

The cracks within the party come as China's stock markets and currency have slumped, and the government has struggled to shore up the economy to cushion the impact of the trade war.

China in recent weeks has encouraged more lending and pledged to use fiscal policy - including tax cuts and more funding for local governments - to combat slowing economic growth and rising uncertainty driven in part by the escalating trade war.

Xi has had other fires to hose too, including public anger over a vaccine fraud case and protests in Beijing this week by investors in failed online lending platforms.

Meanwhile, top leaders are believed to be meeting for secretive annual talks, most likely at the seaside resort of Beidaihe, leaving a policy vacuum as Xi and other officials all but vanish from state media. Based on what has happened in previous years, that could be for up to two weeks.

It is unclear if Wang, the propaganda boss, will face any consequences, and there may be other reasons for the tensions within the party related to him.

A third source with ties to the leadership told Reuters the tension had to do with Wang opposing a cult of personality that has been forming around Xi.

Wang still features in state media and diplomats and leadership sources say he is unlikely to be removed from the Standing Committee, the party body that runs China, in what would be an unprecedented move.

Though official media has in recent days been filled with defiant commentary regarding the United States and the trade war, there have been signs of a shift in China's messaging.

Beijing has begun downplaying Made in China 2025, the state-backed industrial policy that is core to Washington's complaints about the country's technological ambitions.

State television's English-language news channel CGTN, which is aimed at foreigners, has also been focusing on how ordinary Americans will be affected by more expensive prices for cheap made-in-China consumer goods and the damage tariffs will do to the U.S. economy.

But the thinking in Chinese government circles is that the damage has already been done - and that China has learned the hard way that its domestic propaganda is now being scrutinized abroad in a way it never was before.

"It's impossible for China to 'bide its time and hide its strength', but at least we can control the volume of our own propaganda and tell China's story the proper way," the policy insider said.

"When the size of China's economy was small, it got little outside attention but China is now closely watched."

 
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My gas and electricity is up. Other than that fuck China. Hoorah.
 
Yep, that's right. Winning.
 
We can double-up, I guess.

Like the sub-prime mortgage crisis... in every economic sector.



:D
 
Last edited:
Zeihan took down the Chinese financial system in his book four years ago. More people should listen to former US State Department geopolitical analysts who went off to do their own thing for $40 G's a pop to talk about this shit. Chickens coming home to roost. US should apply more pressure lolz, cut right to the heart of the legitimacy of the regime.

A mere partial excerpt for those actually interested, and even then it's pretty sizeable.

Peter Zeihan said:
China’s regions have little in common and do not naturally cohere. Getting nationalist, security-minded northerners to cooperate with the business-savvy central Chinese as well as the occupied southerners is not an easy task. And that is before you take into account that the interior is a chunky, seething morass of dissatisfaction or that the primary hub of the south is Hong Kong, until recently part of the free world.

China needs a social binding agent. It needs to be a strong adhesive and applied in huge volumes. Without it China not only spins out into its constituent fragments, but large numbers of its citizens tend to gather into large groups and go on long walks together. None of this is a surprise to the Communist Party. After all, its founders took advantage of China’s many regional and socioeconomic cleavages in their rise to power in the first place. Rather than deny contemporary China’s origin story, they instead have used the opportunities presented by Bretton Woods to forge a solution.

It comes down to money. The Chinese government starkly limits what its citizens can do with their savings. Rather than allowing a wealth of investment options as exists in the capital-rich American or British system, private savings are instead funneled to state goals in a manner somewhat similar to the German system. Specifically, there are very few banks in China, with some three-quarters of all deposits held in four large state-owned institutions: the Agricultural Bank of China, the Bank of China, the Construction Bank of China, and the Industrial and Commercial Bank of China.

Those four banks have very clear mandates. They are to use the citizenry’s deposits to maximize bank lending to the economy as a whole. The goal of the policy is a simple one: maximum possible employment. While this is technically a lending model, it is more accurately thought of as a system of subsidization. Since Chinese citizens have so few investment options, the banks have access to their deposits at rates that are ridiculously low. Consequently, internal interest rates in China are artificially held well below global norms and are certainly far below what they would normally be in an economy at China’s level of development.

Loans are available for everything. Want to launch a new product? Take out a loan to finance the development, to pay the staff, to cover marketing expenses, to build a warehouse to store output that doesn’t sell as planned. Find yourself under the burden of too many loans? Take out another to cover the loan payments. The result is an ever-rising mountain of loans gone bad and ever less efficient firms, held together by nothing more than the system’s bottomless supply of cheap labor and cheap credit.

The distortions this system creates are ones very familiar to all of us living in the contemporary world:

• The Chinese financial system subsidizes prices for finished outputs. This drives down the price of Chinese finished goods and allows their exports to displace most global competition. Normally such price crashes would induce producers to reduce output, but in China profits and even sales are not the driving rationale for business. Employment is. And Bretton Woods, by its very design, gives the Chinese access to a bottomless global market.

• The Chinese financial system subsidizes the consumption for inputs. In effect, the Chinese system doesn’t care whether oil costs $8 a barrel or $180 a barrel. Everything is paid for with borrowed money you don’t have to pay back anyway, so demand builds upon itself. Chinese demand is the primary cause for the drastic price increases of the past fifteen years in everything from oil to copper to tin to concrete. It’s not just happening abroad, but at home as well. The Chinese property boom is ultimately caused by huge volumes of loans chasing a fixed supply of a product, in this case housing.

• When you don’t care about prices or output or debt or quality or safety or reputation, your economic growth is truly impressive. China has achieved over 9 percent economic growth annually now for thirty years, elevating it to its current status as the world’s second largest economy.

• China has expanded so much that in some sectors its demand has swallowed up all that remained of several industrial commodities in the world at large, forcing its state-owned firms to venture out and invest in projects that otherwise wouldn’t have happened—LNG in Australia, copper in Zambia, soy in Brazil. Chinese overseas investments are a who’s who of what is technically possible but economically ridiculous.

• Finally, as cheap and plentiful as Chinese capital is, it isn’t available for everyone. Because the Chinese system is ultimately managed by the Communist Party and because the leaders of localities hold so much power versus the center, there is extreme collusion between bank management and the local Communist Party leaderships. This collusion funnels capital to local state firms affiliated with friends and family of the local governing elite, often depriving smaller—and typically more efficient—firms of the loans that they need to expand. The result is a system skewed toward larger firms that, from an employment point of view, become too large to fail. Any meaningful reform of the Chinese system will not only break the links between national and local authorities, but gut the very firms that are achieving social placidity.

So how big is this problem? Pretty big. In 2007, total Chinese lending topped 3.6 trillion RMB ($600 billion). How much is that really? Well, that’s more than total lending into the U.S. economy when the U.S. subprime bubble was at its maximum inflation, and that in a year when the Chinese economy was less than one-third the size of the U.S. economy. As the 2007–9 global financial crisis bit, the Chinese government discovered that demand for goods was collapsing on a global scale, with Chinese goods being no exception. In other countries, the drop in demand for goods forced companies out of business along with the expected impact upon employment levels. Not in China. Following such a normal business cycle in China would have resulted in unemployment and social unrest (or worse).

Instead of the credit crunch that the rest of the world suffered, Chinese companies were encouraged to borrow ever larger volumes, allowing them to finance their way through the downturn. Overall lending not only increased, it tripled in just two years. Normally, such a credit explosion would generate massive inefficiencies, bubbles, and other distortions that would be damning to an economy—but such problems were already embedded in the Chinese system, so the change didn’t really register.

Nevertheless, the Chinese government isn’t actively looking for problems, and it dialed back the credit expansion… or at least it tried to. Since the banks operate just like the rest of the country—on throughput rather than profit—they needed to keep forcing money through the system. The result was a proliferation of new methods of lending, ranging from bogus insurance policies to corporate bonds. None of these programs work in China the way that they do elsewhere.

For example, in most countries, firms seeking to raise money issue corporate bonds that are purchased by interested investors. In China, the large banks issue bonds to each other and use the money raised to support their own phalanx of corporate customers. It is simply another means of force-feeding capital through the system to maximize short-term economic activity.

The various means of capital profusion had become so many and so lax that the government actually lost control of its own financial network. The government knew it had to somehow rein in credit, but it wanted to find a way of doing so that wouldn’t actually cause a recession, much less an economic crash and the unemployment that would go along with it. The government dared not risk changing the fundamental method of handing out credit, nor the large-scale absence of quality checks, nor the absence of due diligence. The “solution” was to issue a centrally imposed quota on bank lending every month. In most months, the quota was reached well before month’s end, causing the entire financial sector to seize up when the credit suddenly dried up.

This led to two outcomes. First, the central bank had to (repeatedly) pump in emergency credit the day after the quota was reached, or else face the sort of systemic financial crash that U.S. subprime caused in late 2007. Second, banks, firms, and retail investors, appalled by the idea that the government might actually deny them credit because of something as silly as a lending quota, built their own financial network to run in parallel to the existing system.

This shadow system includes everything from loan-sharking to financial products with even fewer quality controls than official bank lending (after all, they were formed expressly to bypass government authority). By the first quarter of 2013, China’s own central bank estimated that such shadow lending was exceeding all other forms of credit combined.

Just as the United States meted out access to its market to bribe its way into the world’s largest ever alliance, the Chinese used finance to bribe both its often conflicting regions and ever restive populations into quiescence and even cooperation. It is a brilliant strategy, but it has limits.

Japan followed a similar system in the 1950s through the 1980s, eventually reaching a level of overextension that brought the entire system to its knees. In the quarter century since the Japanese crash, the Japanese banking sector has retreated completely from the global system, and the Japanese economy as a whole has not grown. Such stagnation is China’s best-case-scenario future.

Unfortunately, it is also not a very likely one. The Japanese economy is largely domestically held and demand-driven, so while loose credit certainly helps, it is not the hedge against doomsday that it is in China. Additionally, Japan is over 98 percent ethnically Japanese, and over four-fifths of the population lives on the island of Honshu. China is considerably less unified regionally, ethnically, and spatially.

The United States even experimented with this system: the idea that growth and throughput were more important than profitability and a positive rate of return on capital. The result was a mess of graft, abuse, and unwise lending that created the failed company we knew as Enron, and the property bubble we now know as subprime. Both experiments created impressive growth for years. But such investments were geared to maximized throughput, not profits or efficiency. And so they collapsed. In essence, the entire Chinese system is subprime, in every economic sector.
@JonesBones @Madmick @sub_thug

EDIT: quote-boxed to reduce scale of characters on page.
 
Last edited:
Zeihan took down the Chinese financial system in his book four years ago. More people should listen to former US State Department geopolitical analysts who went off to do their own thing for $40 G's a pop to talk about this shit. Chickens coming home to roost. US should apply more pressure lolz, cut right to the heart of the legitimacy of the regime.

A mere partial excerpt for those actually interested, and even then it's pretty sizeable.

China’s regions have little in common and do not naturally cohere. Getting nationalist, security-minded northerners to cooperate with the business-savvy central Chinese as well as the occupied southerners is not an easy task. And that is before you take into account that the interior is a chunky, seething morass of dissatisfaction or that the primary hub of the south is Hong Kong, until recently part of the free world.

China needs a social binding agent. It needs to be a strong adhesive and applied in huge volumes. Without it China not only spins out into its constituent fragments, but large numbers of its citizens tend to gather into large groups and go on long walks together. None of this is a surprise to the Communist Party. After all, its founders took advantage of China’s many regional and socioeconomic cleavages in their rise to power in the first place. Rather than deny contemporary China’s origin story, they instead have used the opportunities presented by Bretton Woods to forge a solution.

It comes down to money. The Chinese government starkly limits what its citizens can do with their savings. Rather than allowing a wealth of investment options as exists in the capital-rich American or British system, private savings are instead funneled to state goals in a manner somewhat similar to the German system. Specifically, there are very few banks in China, with some three-quarters of all deposits held in four large state-owned institutions: the Agricultural Bank of China, the Bank of China, the Construction Bank of China, and the Industrial and Commercial Bank of China.

Those four banks have very clear mandates. They are to use the citizenry’s deposits to maximize bank lending to the economy as a whole. The goal of the policy is a simple one: maximum possible employment. While this is technically a lending model, it is more accurately thought of as a system of subsidization. Since Chinese citizens have so few investment options, the banks have access to their deposits at rates that are ridiculously low. Consequently, internal interest rates in China are artificially held well below global norms and are certainly far below what they would normally be in an economy at China’s level of development.

Loans are available for everything. Want to launch a new product? Take out a loan to finance the development, to pay the staff, to cover marketing expenses, to build a warehouse to store output that doesn’t sell as planned. Find yourself under the burden of too many loans? Take out another to cover the loan payments. The result is an ever-rising mountain of loans gone bad and ever less efficient firms, held together by nothing more than the system’s bottomless supply of cheap labor and cheap credit.

The distortions this system creates are ones very familiar to all of us living in the contemporary world:

• The Chinese financial system subsidizes prices for finished outputs. This drives down the price of Chinese finished goods and allows their exports to displace most global competition. Normally such price crashes would induce producers to reduce output, but in China profits and even sales are not the driving rationale for business. Employment is. And Bretton Woods, by its very design, gives the Chinese access to a bottomless global market.

• The Chinese financial system subsidizes the consumption for inputs. In effect, the Chinese system doesn’t care whether oil costs $8 a barrel or $180 a barrel. Everything is paid for with borrowed money you don’t have to pay back anyway, so demand builds upon itself. Chinese demand is the primary cause for the drastic price increases of the past fifteen years in everything from oil to copper to tin to concrete. It’s not just happening abroad, but at home as well. The Chinese property boom is ultimately caused by huge volumes of loans chasing a fixed supply of a product, in this case housing.

• When you don’t care about prices or output or debt or quality or safety or reputation, your economic growth is truly impressive. China has achieved over 9 percent economic growth annually now for thirty years, elevating it to its current status as the world’s second largest economy.

• China has expanded so much that in some sectors its demand has swallowed up all that remained of several industrial commodities in the world at large, forcing its state-owned firms to venture out and invest in projects that otherwise wouldn’t have happened—LNG in Australia, copper in Zambia, soy in Brazil. Chinese overseas investments are a who’s who of what is technically possible but economically ridiculous.

• Finally, as cheap and plentiful as Chinese capital is, it isn’t available for everyone. Because the Chinese system is ultimately managed by the Communist Party and because the leaders of localities hold so much power versus the center, there is extreme collusion between bank management and the local Communist Party leaderships. This collusion funnels capital to local state firms affiliated with friends and family of the local governing elite, often depriving smaller—and typically more efficient—firms of the loans that they need to expand. The result is a system skewed toward larger firms that, from an employment point of view, become too large to fail. Any meaningful reform of the Chinese system will not only break the links between national and local authorities, but gut the very firms that are achieving social placidity.

So how big is this problem? Pretty big. In 2007, total Chinese lending topped 3.6 trillion RMB ($600 billion). How much is that really? Well, that’s more than total lending into the U.S. economy when the U.S. subprime bubble was at its maximum inflation, and that in a year when the Chinese economy was less than one-third the size of the U.S. economy. As the 2007–9 global financial crisis bit, the Chinese government discovered that demand for goods was collapsing on a global scale, with Chinese goods being no exception. In other countries, the drop in demand for goods forced companies out of business along with the expected impact upon employment levels. Not in China. Following such a normal business cycle in China would have resulted in unemployment and social unrest (or worse).

Instead of the credit crunch that the rest of the world suffered, Chinese companies were encouraged to borrow ever larger volumes, allowing them to finance their way through the downturn. Overall lending not only increased, it tripled in just two years. Normally, such a credit explosion would generate massive inefficiencies, bubbles, and other distortions that would be damning to an economy—but such problems were already embedded in the Chinese system, so the change didn’t really register.

Nevertheless, the Chinese government isn’t actively looking for problems, and it dialed back the credit expansion… or at least it tried to. Since the banks operate just like the rest of the country—on throughput rather than profit—they needed to keep forcing money through the system. The result was a proliferation of new methods of lending, ranging from bogus insurance policies to corporate bonds. None of these programs work in China the way that they do elsewhere.

For example, in most countries, firms seeking to raise money issue corporate bonds that are purchased by interested investors. In China, the large banks issue bonds to each other and use the money raised to support their own phalanx of corporate customers. It is simply another means of force-feeding capital through the system to maximize short-term economic activity.

The various means of capital profusion had become so many and so lax that the government actually lost control of its own financial network. The government knew it had to somehow rein in credit, but it wanted to find a way of doing so that wouldn’t actually cause a recession, much less an economic crash and the unemployment that would go along with it. The government dared not risk changing the fundamental method of handing out credit, nor the large-scale absence of quality checks, nor the absence of due diligence. The “solution” was to issue a centrally imposed quota on bank lending every month. In most months, the quota was reached well before month’s end, causing the entire financial sector to seize up when the credit suddenly dried up.

This led to two outcomes. First, the central bank had to (repeatedly) pump in emergency credit the day after the quota was reached, or else face the sort of systemic financial crash that U.S. subprime caused in late 2007. Second, banks, firms, and retail investors, appalled by the idea that the government might actually deny them credit because of something as silly as a lending quota, built their own financial network to run in parallel to the existing system.

This shadow system includes everything from loan-sharking to financial products with even fewer quality controls than official bank lending (after all, they were formed expressly to bypass government authority). By the first quarter of 2013, China’s own central bank estimated that such shadow lending was exceeding all other forms of credit combined.

Just as the United States meted out access to its market to bribe its way into the world’s largest ever alliance, the Chinese used finance to bribe both its often conflicting regions and ever restive populations into quiescence and even cooperation. It is a brilliant strategy, but it has limits.

Japan followed a similar system in the 1950s through the 1980s, eventually reaching a level of overextension that brought the entire system to its knees. In the quarter century since the Japanese crash, the Japanese banking sector has retreated completely from the global system, and the Japanese economy as a whole has not grown. Such stagnation is China’s best-case-scenario future.

Unfortunately, it is also not a very likely one. The Japanese economy is largely domestically held and demand-driven, so while loose credit certainly helps, it is not the hedge against doomsday that it is in China. Additionally, Japan is over 98 percent ethnically Japanese, and over four-fifths of the population lives on the island of Honshu. China is considerably less unified regionally, ethnically, and spatially.

The United States even experimented with this system: the idea that growth and throughput were more important than profitability and a positive rate of return on capital. The result was a mess of graft, abuse, and unwise lending that created the failed company we knew as Enron, and the property bubble we now know as subprime. Both experiments created impressive growth for years. But such investments were geared to maximized throughput, not profits or efficiency. And so they collapsed. In essence, the entire Chinese system is subprime, in every economic sector.


@JonesBones @Madmick @sub_thug
 
Zeihan took down the Chinese financial system in his book four years ago. More people should listen to former US State Department geopolitical analysts who went off to do their own thing for $40 G's a pop to talk about this shit. Chickens coming home to roost. US should apply more pressure lolz, cut right to the heart of the legitimacy of the regime.

A mere partial excerpt for those actually interested, and even then it's pretty sizeable.

China’s regions have little in common and do not naturally cohere. Getting nationalist, security-minded northerners to cooperate with the business-savvy central Chinese as well as the occupied southerners is not an easy task. And that is before you take into account that the interior is a chunky, seething morass of dissatisfaction or that the primary hub of the south is Hong Kong, until recently part of the free world.

China needs a social binding agent. It needs to be a strong adhesive and applied in huge volumes. Without it China not only spins out into its constituent fragments, but large numbers of its citizens tend to gather into large groups and go on long walks together. None of this is a surprise to the Communist Party. After all, its founders took advantage of China’s many regional and socioeconomic cleavages in their rise to power in the first place. Rather than deny contemporary China’s origin story, they instead have used the opportunities presented by Bretton Woods to forge a solution.

It comes down to money. The Chinese government starkly limits what its citizens can do with their savings. Rather than allowing a wealth of investment options as exists in the capital-rich American or British system, private savings are instead funneled to state goals in a manner somewhat similar to the German system. Specifically, there are very few banks in China, with some three-quarters of all deposits held in four large state-owned institutions: the Agricultural Bank of China, the Bank of China, the Construction Bank of China, and the Industrial and Commercial Bank of China.

Those four banks have very clear mandates. They are to use the citizenry’s deposits to maximize bank lending to the economy as a whole. The goal of the policy is a simple one: maximum possible employment. While this is technically a lending model, it is more accurately thought of as a system of subsidization. Since Chinese citizens have so few investment options, the banks have access to their deposits at rates that are ridiculously low. Consequently, internal interest rates in China are artificially held well below global norms and are certainly far below what they would normally be in an economy at China’s level of development.

Loans are available for everything. Want to launch a new product? Take out a loan to finance the development, to pay the staff, to cover marketing expenses, to build a warehouse to store output that doesn’t sell as planned. Find yourself under the burden of too many loans? Take out another to cover the loan payments. The result is an ever-rising mountain of loans gone bad and ever less efficient firms, held together by nothing more than the system’s bottomless supply of cheap labor and cheap credit.

The distortions this system creates are ones very familiar to all of us living in the contemporary world:

• The Chinese financial system subsidizes prices for finished outputs. This drives down the price of Chinese finished goods and allows their exports to displace most global competition. Normally such price crashes would induce producers to reduce output, but in China profits and even sales are not the driving rationale for business. Employment is. And Bretton Woods, by its very design, gives the Chinese access to a bottomless global market.

• The Chinese financial system subsidizes the consumption for inputs. In effect, the Chinese system doesn’t care whether oil costs $8 a barrel or $180 a barrel. Everything is paid for with borrowed money you don’t have to pay back anyway, so demand builds upon itself. Chinese demand is the primary cause for the drastic price increases of the past fifteen years in everything from oil to copper to tin to concrete. It’s not just happening abroad, but at home as well. The Chinese property boom is ultimately caused by huge volumes of loans chasing a fixed supply of a product, in this case housing.

• When you don’t care about prices or output or debt or quality or safety or reputation, your economic growth is truly impressive. China has achieved over 9 percent economic growth annually now for thirty years, elevating it to its current status as the world’s second largest economy.

• China has expanded so much that in some sectors its demand has swallowed up all that remained of several industrial commodities in the world at large, forcing its state-owned firms to venture out and invest in projects that otherwise wouldn’t have happened—LNG in Australia, copper in Zambia, soy in Brazil. Chinese overseas investments are a who’s who of what is technically possible but economically ridiculous.

• Finally, as cheap and plentiful as Chinese capital is, it isn’t available for everyone. Because the Chinese system is ultimately managed by the Communist Party and because the leaders of localities hold so much power versus the center, there is extreme collusion between bank management and the local Communist Party leaderships. This collusion funnels capital to local state firms affiliated with friends and family of the local governing elite, often depriving smaller—and typically more efficient—firms of the loans that they need to expand. The result is a system skewed toward larger firms that, from an employment point of view, become too large to fail. Any meaningful reform of the Chinese system will not only break the links between national and local authorities, but gut the very firms that are achieving social placidity.

So how big is this problem? Pretty big. In 2007, total Chinese lending topped 3.6 trillion RMB ($600 billion). How much is that really? Well, that’s more than total lending into the U.S. economy when the U.S. subprime bubble was at its maximum inflation, and that in a year when the Chinese economy was less than one-third the size of the U.S. economy. As the 2007–9 global financial crisis bit, the Chinese government discovered that demand for goods was collapsing on a global scale, with Chinese goods being no exception. In other countries, the drop in demand for goods forced companies out of business along with the expected impact upon employment levels. Not in China. Following such a normal business cycle in China would have resulted in unemployment and social unrest (or worse).

Instead of the credit crunch that the rest of the world suffered, Chinese companies were encouraged to borrow ever larger volumes, allowing them to finance their way through the downturn. Overall lending not only increased, it tripled in just two years. Normally, such a credit explosion would generate massive inefficiencies, bubbles, and other distortions that would be damning to an economy—but such problems were already embedded in the Chinese system, so the change didn’t really register.

Nevertheless, the Chinese government isn’t actively looking for problems, and it dialed back the credit expansion… or at least it tried to. Since the banks operate just like the rest of the country—on throughput rather than profit—they needed to keep forcing money through the system. The result was a proliferation of new methods of lending, ranging from bogus insurance policies to corporate bonds. None of these programs work in China the way that they do elsewhere.

For example, in most countries, firms seeking to raise money issue corporate bonds that are purchased by interested investors. In China, the large banks issue bonds to each other and use the money raised to support their own phalanx of corporate customers. It is simply another means of force-feeding capital through the system to maximize short-term economic activity.

The various means of capital profusion had become so many and so lax that the government actually lost control of its own financial network. The government knew it had to somehow rein in credit, but it wanted to find a way of doing so that wouldn’t actually cause a recession, much less an economic crash and the unemployment that would go along with it. The government dared not risk changing the fundamental method of handing out credit, nor the large-scale absence of quality checks, nor the absence of due diligence. The “solution” was to issue a centrally imposed quota on bank lending every month. In most months, the quota was reached well before month’s end, causing the entire financial sector to seize up when the credit suddenly dried up.

This led to two outcomes. First, the central bank had to (repeatedly) pump in emergency credit the day after the quota was reached, or else face the sort of systemic financial crash that U.S. subprime caused in late 2007. Second, banks, firms, and retail investors, appalled by the idea that the government might actually deny them credit because of something as silly as a lending quota, built their own financial network to run in parallel to the existing system.

This shadow system includes everything from loan-sharking to financial products with even fewer quality controls than official bank lending (after all, they were formed expressly to bypass government authority). By the first quarter of 2013, China’s own central bank estimated that such shadow lending was exceeding all other forms of credit combined.

Just as the United States meted out access to its market to bribe its way into the world’s largest ever alliance, the Chinese used finance to bribe both its often conflicting regions and ever restive populations into quiescence and even cooperation. It is a brilliant strategy, but it has limits.

Japan followed a similar system in the 1950s through the 1980s, eventually reaching a level of overextension that brought the entire system to its knees. In the quarter century since the Japanese crash, the Japanese banking sector has retreated completely from the global system, and the Japanese economy as a whole has not grown. Such stagnation is China’s best-case-scenario future.

Unfortunately, it is also not a very likely one. The Japanese economy is largely domestically held and demand-driven, so while loose credit certainly helps, it is not the hedge against doomsday that it is in China. Additionally, Japan is over 98 percent ethnically Japanese, and over four-fifths of the population lives on the island of Honshu. China is considerably less unified regionally, ethnically, and spatially.

The United States even experimented with this system: the idea that growth and throughput were more important than profitability and a positive rate of return on capital. The result was a mess of graft, abuse, and unwise lending that created the failed company we knew as Enron, and the property bubble we now know as subprime. Both experiments created impressive growth for years. But such investments were geared to maximized throughput, not profits or efficiency. And so they collapsed. In essence, the entire Chinese system is subprime, in every economic sector.


@JonesBones @Madmick @sub_thug

Good read, and a reminder that focusing too much on that magical growth % can be pretty hazardous. It's easy to close in on double-digits if you're willing to take a lot of risks and destabilize your future economy. Give me a nice steady 3.5% any day.
 
Good read, and a reminder that focusing too much on that magical growth % can be pretty hazardous. It's easy to close in on double-digits if you're willing to take a lot of risks and destabilize your future economy. Give me a nice steady 3.5% any day.

But I mean hey, they've come along way through writ large currency manipulation, overbuilding, subsidization, product dumping, lack of reciprocity, forced technology transfers and the state-directed industrialized effort for the outright theft of intellectual property, trade secrets and sensitive US military data that both violate WTO agreements and/or work to severely undermine American spawned industries critical to its present and future economic growth, national security and capacity for innovation.
 
I have a feeling that powerful people in the communist party will use this as an excuse to remove Xi because he just made hinself king.
 
I have a feeling that powerful people in the communist party will use this as an excuse to remove Xi because he just made hinself king.

It's viable given the article, but I tend to believe the CCP had just as much to do with putting him in that position because the reforms China requires are inevitably going to bring a lot of economic slow down and tangible squeeze on the country. It's going to require strongarm leadership over an extended period of time and removing him at this juncture would really only throw things into disarray.

The National People's Congress approved scraping term limits by a vote of 2,958 to 2. Yes, two; three others abstained. He's also purged a great number of political adversaries under the guise of a massive, ruthless anti-corruption campaign since taking over in 2013. President is really only the third most powerful title in the country, he already holds the other two as General Secretary of the CCP and Chairman of the Central Military Commission.

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'Leave Immediately!': China Sent 6 Warnings To A US Navy Plane, But The US Didn't Back Down

Chinese forces deployed to the hotly contested South China Sea ordered a US Navy reconnaissance aircraft to "leave immediately" six times Friday, but the pilot stayed the course, refusing to back down.

A US Navy P-8A Poseidon reconnaissance plane flew past China's garrisons in the Spratly Islands, giving CNN reporters aboard the aircraft a view of Chinese militarization in the region.

Flying over Chinese strongholds on Mischief Reef, Johnson Reef, Fiery Cross Reef, and Subi Reef, CNN spotted "large radar installations, power plants, and runways sturdy enough to carry large military aircraft." At one outpost, onboard sensors detected 86 vessels, including Chinese Coast Guard ships, which China has been known to use to strong-arm countries with competing claims in the South China Sea.

Lt. Lauren Callen, who led the US Navy crew, said it was "surprising to see airports in the middle of the ocean."

The Chinese stationed in the area were not exactly kind hosts to the uninvited guests.

Warning the aircraft that it was in Chinese territory — an argument an international arbitration tribunal ruled against two years ago — the Chinese military ordered the US Navy plane to "leave immediately and keep out to avoid any misunderstanding."

Six warnings were issued, according to CNN, and the US Navy responded the same every time.


@ShinkanPo
 
Trump cucking China hard.

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It still boggles the mind he felt the need to personally leap into the fray to save ZTE after his own damn Administration was about to put them out of business. That was some unprecedented shit, and particularly given he otherwise actually has been harsh on China.

He probably doesn't even know what the fuck is going on. Whatever, it doesn't matter. A lot of these problems were inevitable for China but the trade war is likely hurting them more than people want to admit. The stock market just lost it's place as world's second largest, there's reports of tension within the CCP (this isn't the first) and the state media is acting very, very strangely. I want to enact the next round on $200 billion worth to see what happens.

I actually have a fair degree of trust in Trump's USTR Robert Lighthizer - not Mattis level trust mind - and (but?) there's also an absolute radical anti-Chinese economic advisor Peter Navarro in there (yes, he's an economist thankfully). A trade war with China is almost desirable for all the shit they pull IF we aren't simultaneously flinging shit at the European Union, Canada and Mexico.
 
Zeihan took down the Chinese foinancial system in his book four years ago. More people should listen to former US State Department geopolitical analysts who went off to do their own thing for $40 G's a pop to talk about this shit. Chickens coming home to roost. US should apply more pressure lolz, cut right to the heart of the legitimacy of the regime.

A mere partial excerpt for those actually interested, and even then it's pretty sizeable.


@JonesBones @Madmick @sub_thug

EDIT: quote-boxed to reduce scale of characters on page.

Good excerpt from Zeihan there. This passage in particular resonated with me...

"Those four banks have very clear mandates. They are to use the citizenry’s deposits to maximize bank lending to the economy as a whole. The goal of the policy is a simple one: maximum possible employment. While this is technically a lending model, it is more accurately thought of as a system of subsidization. Since Chinese citizens have so few investment options, the banks have access to their deposits at rates that are ridiculously low. Consequently, internal interest rates in China are artificially held well below global norms and are certainly far below what they would normally be in an economy at China’s level of development.

Loans are available for everything. Want to launch a new product? Take out a loan to finance the development, to pay the staff, to cover marketing expenses, to build a warehouse to store output that doesn’t sell as planned. Find yourself under the burden of too many loans? Take out another to cover the loan payments. The result is an ever-rising mountain of loans gone bad and ever less efficient firms, held together by nothing more than the system’s bottomless supply of cheap labor and cheap credit.

The distortions this system creates are ones very familiar to all of us living in the contemporary world:

• The Chinese financial system subsidizes prices for finished outputs. This drives down the price of Chinese finished goods and allows their exports to displace most global competition. Normally such price crashes would induce producers to reduce output, but in China profits and even sales are not the driving rationale for business. Employment is. And Bretton Woods, by its very design, gives the Chinese access to a bottomless global market.

I've previously described the kind of dumping we see in the furniture industry including a certain kind of particularity absurd scenario. You see, furniture is a fashion industry where tastes in terms of fabrics, wood types, finishes, etc. go in and out of style all the time. China can manage the fabric side of this equation fairly easily but wood type trends are a harder wave to ride. Not only does China not have good domestic forests of their own, the trends can be so specific that they require trees of a given region like grapes for wine. One such trend is furniture made of American Black Walnut lumber. Of course, Walnut trees grow around the world but none are as desirable for their color and characteristics as those grown in the United States. If China wants a piece of this trend they have no choice but to buy US logs on the open, globally priced market, ship them across the world to China, process them (which involves three or four intermediary steps), turn them into furniture and ship them back across the globe where they can be sold to the US market. You would think that after such an absurd chain of possession that the labor advantage would be essentially neutralized and that the Chinese price would be on par with our own but that is never the case. Time and time again, I see Chinese (it actually happens all across Asia) merchandise made of American grown lumber selling for less than the cost of the raw materials themselves.

Of course, China never admits that they're subsidizing their exports as that would be a clear WTO violation, drawing corrective measures. That in mind I've always assumed that these manufacturers are getting something like low/no interest loans that may, for all intents and purposes, never have to be repaid provided the manufacturer is bringing requisite levels of employment to their districts along with the implied and induced economy that that employment represents (factors we in the west have long undervalued.) Now this is an extremely goofy scenario that makes no sense on it's own. Buying US materials, turning them into finished merchandise and selling back to the US at less than cost does not help China in any way. But it can be understood as something like the tiny percentage of shrinkage in a scheme that is so vast and comprehensive that the several hundred manufacturers using their subsidies in this manner are overlooked by the central economic planners who have much bigger fish to fry. I've seen that broader agenda manifest in dozens of other Chinese enterprises I've interacted with, stories I'll have to save for future posts...
 
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We moved them from 36th, to first or 2nd.. they don't want the gravy train to end. Americans all wanted it to end, until the media went nuts; now we have to stop playing smart because Donald Trump is the one who FINALLY started things going in the right direction.
 
I've previously described the kind of dumping we see in the furniture industry including a certainly kind of particularity absurd scenario. You see, furniture is a fashion industry where tastes in terms of fabrics, wood types, finishes, etc. go in and out of style all the time. China can manage the fabric side of this equation fairly easily but wood type trends are a harder wave to ride. Not only does China not have good domestic forests of their own, the trends can be so specific that they require trees of a given region like grapes for wine. One such trend is furniture made of American Black Walnut lumber. Of course, Walnut trees grow around the world but none are as desirable for their color and characteristics as those grown in the United States. If China wants a piece of this trend they have no choice but to buy US logs on the open, globally priced market, ship them across the world to China, process them (which involves three or four intermediary steps), turn them into furniture and ship them back across the globe where they can be sold to the US market. You would think that after such an absurd chain of possession that the labor advantage would be essentially neutralized and that the Chinese price would be on par with our own but that is never the case. Time and time again, I see Chinese (it actually happens all across Asia) merchandise made of American grown lumber selling for less than the cost of the raw materials themselves.

Of course, China never admits that they're subsidizing their exports as that would be a clear WTO violation, drawing corrective measures. That in mind I've always assumed that these manufacturers are getting something like low/no interest loans that may, for all intents and purposes, never have to be repaid provided the manufacturer is bringing requisite levels of employment to their districts along with the implied and induced economy that that employment represents (factors we in the west have long undervalued.) Now this is an extremely goofy scenario that makes no sense on it's own. Buying US materials, turning them into finished merchandise and selling back to the US at less than cost does not help China in any way. But it can be understood as something like the tiny percentage of shrinkage in a scheme that is so vast and comprehensive that the several hundred manufacturers using their subsidies in this manner are overlooked by the central economic planners who have much bigger fish to fry. I've seen that broader agenda manifest in dozens of other Chinese enterprises I've interacted with, stories I'll have to save for future posts...

That's top notch, awesome post.

Good excerpt from Zeihan there.

We moved them from 36th, to first or 2nd.. they don't want the gravy train to end. Americans all wanted it to end, until the media went nuts; now we have to stop playing smart because Donald Trump is the one who FINALLY started things going in the right direction.

 
'Leave Immediately!': China Sent 6 Warnings To A US Navy Plane, But The US Didn't Back Down

Chinese forces deployed to the hotly contested South China Sea ordered a US Navy reconnaissance aircraft to "leave immediately" six times Friday, but the pilot stayed the course, refusing to back down.

A US Navy P-8A Poseidon reconnaissance plane flew past China's garrisons in the Spratly Islands, giving CNN reporters aboard the aircraft a view of Chinese militarization in the region.

Flying over Chinese strongholds on Mischief Reef, Johnson Reef, Fiery Cross Reef, and Subi Reef, CNN spotted "large radar installations, power plants, and runways sturdy enough to carry large military aircraft." At one outpost, onboard sensors detected 86 vessels, including Chinese Coast Guard ships, which China has been known to use to strong-arm countries with competing claims in the South China Sea.

Lt. Lauren Callen, who led the US Navy crew, said it was "surprising to see airports in the middle of the ocean."

The Chinese stationed in the area were not exactly kind hosts to the uninvited guests.

Warning the aircraft that it was in Chinese territory — an argument an international arbitration tribunal ruled against two years ago — the Chinese military ordered the US Navy plane to "leave immediately and keep out to avoid any misunderstanding."

Six warnings were issued, according to CNN, and the US Navy responded the same every time.


@ShinkanPo


No wonder there is backla againts Mr.Xi and Wang Challenging a Super Power militarily is not good for business, infact its stupid.

Its the Chinese's fault that the South China sea is militarized and it is bringing the entire region into conflict with other western powers.


The Philippines signed a deal with the USA in 2016 the Enhance deffense agreement in response to Chinese expansion package in the SCS the agreement will allow more US war equipment and personel to use existing Philippine military bases and expand other bases to accomodate larger warships to stay on a semi permanent basis this is short of opening another US offshore base in the region.

There are rumors that Vietnam,Indonesia and even Taiwan wants to enter a similar agreement amidst Chinese hostilities


Had the Chinese had shut up about those Islands I dont think the USA and other countries would not have been motivated in increasing their presence in the region.
 
Zeihan took down the Chinese financial system in his book four years ago. More people should listen to former US State Department geopolitical analysts who went off to do their own thing for $40 G's a pop to talk about this shit. Chickens coming home to roost. US should apply more pressure lolz, cut right to the heart of the legitimacy of the regime.

A mere partial excerpt for those actually interested, and even then it's pretty sizeable.


@JonesBones @Madmick @sub_thug

EDIT: quote-boxed to reduce scale of characters on page.

Did not get to read whole article, but I want to touch on the first point about China's own divisiveness. It is no worse than what Murka has. Murka is too pretty fragmented. Its much more diverse, and now even more diverse with the antifa, SJW, Liberal, LGBTQ movement. China does not even have an antifa, SJW, Liberal, LGBTQ issue. Politics in Murka is much more cliquish.

Edit, just read rest of it.

So China subsidizes its economy. Well its communism. That is basically what communism is. USA though also subsidizes much of economy. We subsidize agriculture. I think you can consider the bailouts to be a subsidy. We subsidize illegal immigrants (if you broaden your definition), etc, etc.
 
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