Good evening from Canada…well, it sure has been an interesting week.
The Trumpster, no sooner than backing off from Mexico, decided to up the stakes with Turkey while at the same time downplaying Iran’s apparent attacks on 6 oil tankers in the Straits of Hormuz over the last 2 weeks as, “nothing serious”. Folks, I don’t make this stuff up – no one could have such a vivid and offbeat imagination. How attacking 6 tankers in a transportation choke point “isn’t serious” (sic) even though his military advisors urged action ie. concrete action, not just the visual of sending another 1000 soldiers to where they can be outnumbered….???? And the EU is also considering sanctions against Turkey and not because they bought the Russian missile system that has Trump’s attention for this 5 seconds – apparently Mr. Erdogan had the colossal audacity to start drilling for oil off the coast of Cyprus which he had previously sworn not to do. Imagine – a leader that lies…leave it to Europe to worry not about missiles and not about political freedoms but about something that, in their opinion, matters more than anything else – M*O*N*E*Y!
BBG (Bloomberg) now reports that China and Russia are buying gold – remember, please, that you heard it here first, and months and months ago. Also, Nikkei reported that China does not have enough US dollars to honor its obligations (of course, those ‘obligations’ are, at best, guesstimates as no one really knows what they owe, and that includes the Chinese. From experience, the best guess is:
Only a guess
Under, and probably way under
So that bleating that you heard a few months ago about China selling off US holdings en masse was the ranting of a few loudmouths who either have no clue or else wanted to start a panic for reasons of their own – far be it for me to mention them by name or to speculate as to what those interests were/are. But the Chinese in this respect are very shrewd players and they know what a mass selling would do to the value of their holdings, both to their economy and that of the world at large. And, while one may ascribe all sorts of motives, they are not about to cut their own collective neck.
Cudos to the people of Hong Kong, my favorite place in the whole world, for what they did 2 weeks ago with 1 million people marching to protest the proposed implementation of the Law of Repatriation. This law would have enabled the Chinese Government to arrange for anyone accused of allegedly maligning Chinese politicians or the Government or spreading State Secrets or…or…or whatever – the laws in China are opaque for a reason – to be picked up by the police and immediately ‘repatriated’ to Mainland China without knowing the charge, without access to a lawyer, without access to one’s embassy personnel (if applicable)…and, remember, the key word is, “alleged”. And you thought that billets doux went out of fashion with the French monarchy? And just like those 2 unlucky Canadians languishing in a Chinese prison without fresh air time and without the lights off, repatriation means prison until they decide to have your case heard. So, just a note, don’t bring Winnie the Pooh stuffed bears to your friends.
But then those unbeatable people in HK did something that was just even more amazingly awesome – after the proposed law was off the table, people marched again and 2 million this time– that’s 30% of the entire resident population…young & old, rich & poor, bosses & employees, professionals & truck drivers, teachers & students, administrators & janitors ie. anyone and everyone stood up to be heard, to declare that Hong Kong was separate and unique and demanded that it continue to be treated that way. And the police, who had tried to intimidate people before and during the first march for “spreading dissent” and “actions against the public order” not only had to back off, but the police chief had to retract his statement about rioters and today promised to investigate charges of unwarranted harassment against some officers. Yes! These are not Boxers and not Falun Gong – these are responsible citizens expressing their concern for the future, theirs and that of their children and that of future generations. Now compare that with those lazy jerks in the UK who could not get off their beer-spread asses and get out to vote for or against leaving Europe – just 73% (ref: BBC) of eligible voters turned out because “staying was in the bag”…but the bag had a hole in the bottom and only 46 or so percent voted to remain. In other words, those wanting to leave were passionate and showed up, and those wanting to remain couldn’t be bothered. To date, this Brexit mess has cost US$86 billion plus they now have the possibility of a recession very much to the fore. And let’s not even think about those people who stayed home in the US during the last presidential election.***THANK YOU, HONG KONG*** for showing people everywhere what it means to be a responsible citizen.
I had predicted in January that the Chinese RMB would hit 7:1 re: the greenback by the end of June…on June 11th/19, Bocom, a Chinese SOE financial firm, predicted that level “within 3 months”. That was obviously a shot across the bows aimed at Donald but, regardless, the Chinese Government is running out of wiggle room, the more so since it is running out of liquidity for a lot of different reasons – so, bottom line, they haven’t got the funds to defend the RMB past a modest amount…and that doesn’t count whether they really want to anyway. The more the RMB falls, the more expensive imports are and the less people will be able to afford them, go on foreign travel, etc. – and the more inexpensive Chinese products will be when paid for with 1st grade currencies – greenbacks, euros etc.. Oops, sorry la (Hong Kong Cantonese Chinglish) – there is a problem….inflation in China, which is already killer, will get beyond imagining. People will be unable to afford to buy food and more companies will close and more people will be out of work …and the real estate market will collapse as people try to sell their holdings and get cash in order to live. I remember in 2010/11 when slightly used new cars were selling for about 35% of their purchase prices of just a few months before…with few takers. The Government was able to massage the economy then – but it was a lot smaller then, with far less debt and far less inherent and apparent weaknesses and the Government was far more liquid with far more arrows in its quiver. Today, the exchange rate 6.90251:1 (XE Currency Converter). Just saying!
With the compelled takeover by the Government of a (relatively) small bank in Inner Mongolia, the entire banking system in China is now rife with rumors and fears. A major reason for those fears and rumors is the deliberate effort by the Government to not release the news of this takeover to its people until some days later, by which time the news had been disseminated (whether accurately or not) throughout China by outside sources. This kind of treatment of the population does not exactly inspire confidence or loyalty, especially as there have been concerns about many banks’ quality (sic) of assets for over 20 years. One of the main problems is that banks for decades did not write off bad debts – if they took over a property that was financially under water, they carried the debt at full value and did so until they could sell at the book price or had no choice but to divest. And the carrying costs and the maintenance costs, you may ask? – taken out of operating expenses (sic). No way to run a bank, you will say – yeah, considering that many of the SOE banks in Henan province alone (which is where I learned of this practice 25 years ago) are now ‘estimated’ to have 40% non-performing loans! And that’s just one province! So now there is a liquidity crunch with solvent financial institutions (understandably) refusing to lend money on an intraday basis to ‘the others’ – and seeing as the others is a majority (to understate the obvious issue in true approved Mainland official fashion) of them, there is now a huge credit crunch which the Government does not apparently completely understand or have the funds to offset. In a move that makes everyone question the ability of those overseeing the ship’s maintenance and direction both, the government today directed brokerages to lend money to these institutions and to companies that are being cut off of funds by affected banks. How brokerages are supposed to effect this, how they are supposed to determine credit-worthiness and the 101 other risk factors that make up a loan portfolio (especially when the banks (whose job it is) themselves did such a poor job of doing so) and how these brokerages are supposed to get and be able to collect on collateral (as the laws in China are not what one would expect as, leaving government influence aside, the laws have not kept pace with the modernization of the economy) – none of the preceding was defined by the officials pontificating these pronouncements. Leaving aside whether or not they thought that far ahead (or if they thought at all), such blatantly puerile instructions only exacerbated an already volatile lack of confidence in the financial system and those managing it.
The reader will recall, if old enough, that Reagan destroyed the USSR system by recognizing that the latter was financially weaker than the world perceived and proceeded to outspend and outbluff the USSR until it collapsed. The activists of MMT in the USA need not look farther than China to see what happens when this hole-riddled theory gets embraced in reality…China is the land of ghost buildings. When ghost buildings couldn’t keep it going, they expanded to ghost developments and, when those didn’t keep gas in the tank, to ghost cities – and unneeded airports, and bridges to nowhere, and highways for tiny byways. And the construction was poor – a bridge collapsed late last week in southern China; in Qingdao a few weeks ago, the tunnel for a subway under construction collapsed. China has bluster aplenty and can pick on a brilliant broker from UBS who had the temerity to compare the economy to a Chinese pig with African swine flu (ie. dead) but, when it comes down to putting up the funds at the table, it doesn’t have a great hand and it doesn’t have a lot to put down. The owner of Huawei admitted last week that he estimates a 30% drop in sales over the next 2 years – and that’s what he is admitting to now!!! If ZTE and Huawei are cut off from US-made and related supplies, they are dead in the water – remember that ZTE closed within a week when Trump declared an embargo less than 2 years ago for the same reasons that Huawei is accused of now (and it also appears that ZTE continued after it was let off the hook). ZTE was shut so tight against US-made product that they couldn’t even get a urinal repaired in their head office because the plumbing fixture was US-made. Can you imagine the disaster caused by 250,000 people out of work without notice – can you imagine the tsunami of problems caused by the multiplier effect on suppliers, on truckers, on housing etc.?
And, while Xi and Modi tell each other and the world that they are, “not a threat to each other” (SCMP, June 14th/19), let’s not forget that less than a year ago they were almost at war in the Himalayas and the underlying cause of that (ie. access to water) has not only not gone away, but is of even greater concern now with ongoing climate change (yes, Donald, it exists – you don’t have to ask people in India or China or South Africa, just ask your citizens in California, Florida, New York, Texas …. that doesn’t end the list.
The threat of China to curtail rare earths as counter to the threat to cut Huawei off from US-controlled materials is moot – the world will gear up to supply the rare earths which are found in numerous places…but US tech is exactly that, US. On June 12th/19, BBG reported that Romania was re-opening 3 mines. I snuck this paragraph in just to show the kind of cards that China is holding in this poker game.
DT is a shit-disturber and a narcissist and a self-absorbed and unconscionable liar and cheat …and, in case it isn’t clear, I even loathe the oxygen he breathes. But that doesn’t mean that he is always wrong and that also doesn’t mean that he won’t ‘win’ sometimes even if he is wrong. Those of us who know and love China recognize the signs of the irrational subconscious inferiority complex coming to the fore – worrying about Winnie the Pooh would have just been amusingly sad, if it weren’t a symptom of the underlying and deep-rooted malaise. “Fight until the end” for what – the right to steal technological secrets? The right to block food imports so that citizens have to pay more for no valid reason other than “trumped up” (sorry, the pun was too good to resist) charges (sic)? The right to promise to pay and then walk away when it doesn’t suit? The right to kidnap people and hold them incommunicado on spurious charges that even aren’t even detailed in the tame press (much less their courts)? The people in China of the 1950’s are the same people but they are not the same illiterate peasants – they have computer skills; they have knowledge of the outside world. They are not going to be tamely led into a scenario where the entire country is ruined because a number of bloated bureaucrats in the middle between the bottom and the top selectively implemented Beijing’s dictates when it suited them and only in ways in which it suited them in their power tripping.
A government minister in Singapore today stated that the biggest problem is the underlying lack of trust that will not go away any time soon (between China and the USA). He is right as far as he went – but, in my opinion, he did not go far enough. Due to Donald’s antics and Xi’s responses, supply chains are changing, and rapidly. Foxconn already stated that they could assemble Apple products elsewhere – how many 100’s of thousands will be turfed out of their jobs? But it isn’t just US companies – Chinese companies want to keep the business so they are moving as well – Viet Nam, Thailand, Philippines, Africa, Mexico. Just like when Koreans moved their factories from Korea to China and caused a complete change in the Korean economy (from which it has yet to recover), those factories never moved back. And now China must contend with this along with the greying of the population and the increasing incidence of health-related issues caused by the polluted air, water, and soil.
Donald Trump is a proven venal, self-absorbed, malicious, corrupt, and mendacious individual. Contrast that with Xi Jinping who I do believe is essentially a decent and brilliant man that truly has the good of China in his heart – but the road to Hell is paved with good intentions and he’s got a bad hand that is getting worse by the day. And he’s surrounded by individuals who, in the time-honored tradition of the emperors beginning with the Song Dynasties, are giving advice and facts (sic) that are empty of sense and totally ill-conceived (such as this exhortation to brokerages to act as banks). We can only hope that they both blink at the same time because emphatic victory for either one will be pyrrhic for all. Just saying!
benlittle@facetedproducts.com
ABOUT THE AUTHOR
