China’s Ponzi Finance Problem & Russia’s Faltering High Wire Act

China Coasts While Bear on Last Legs?

China Coasts While Bear on Last Legs?

Both China and Russia are in Precarious Positions

Chinese borrowers are taking on record amounts of debt to repay interest on their existing obligations, raising the risk of defaults …

… The amount of loans, bonds and shadow finance arranged to cover interest payments will probably rise 5 percent this year to a record 7.6 trillion yuan ($1.2 trillion), according to Beijing-based Hua Chuang Securities Co., whose lead fixed-income analyst was top-ranked by China’s New Fortune magazine in 2012 and 2013. Dubbed “Ponzi finance” by Hyman Minsky, the use of borrowed funds to repay interest was seen by the late U.S. economist as an unsustainable form of credit growth that could precipitate financial crises.

… Defaults will probably keep rising as profits fail to keep up with interest expenses at some Chinese borrowers, according to Zhou Hao, a senior economist at Commerzbank AG in Singapore. Earnings at Chinese industrial firms shrank for a fourth straight month in September, while producer prices fell for the 44th consecutive month in October.

___ China in Ponzi Mode

Needless to say, defaults on debt inside China are rising in all financial sectors, with no end in sight.

China’s banking crisis.

China’s looming debt crisis became predictable in 2009, when China chose to bank its future on massive — but ultimately meaningless — infrastructure / industrial / real estate expansion. The dragon chose the “ghost path” rather than a more rational path to “rebalancing” its economy from its overdependence on exports.

Russia on Borrowed Time

Russia is facing its worst banking crisis in almost 20 years, and falling oil prices are not helping Russia’s near term prospects:

“The world is floating in oil, and commercial stocks on land are at a record high,” said David Hufton, head of oil brokers PVM Group. “The numbers we are facing now are dreadful. Stocks have been building continuously for two years. This is unprecedented.”

… OPEC [and Russia were – ed.] slow to understand the rising threat posed by the US shale industry. It may now have misjudged its resilience. Frackers have been quick to cut costs with multiple pad-drilling, and they can revive production relatively quickly as soon as prices recover. __

Saudi Arabia is battling for market share in Europe against Russia — and the fight shows no sign of waning. Russia is being forced to discount the price of Urals crude, further adding to its fiscal problems. Eventually, Russia will not be able to keep up production, using its current antiquated oil production infrastructure.

In response to the tough financial circumstances that Russia has found itself in, it sees no choice but to squeeze as much oil out of its aging fields as it can… In any case, Russia probably can’t boost output any further. OPEC predicts Russia’s oil production will remain flat through next year.

… In its November report, OPEC reported that the Urals discount to Brent “almost tripled in October amid plentiful supplies, sagging refinery margins and wide availability of alternative grades from the Middle East.” __

For Russia to increase production, it would need to invest in foreign expertise using hard currency reserves or overseas loans in hard currency, neither of which are widely available to Moscow at the current time.

Big drop in Russian retail sales and wages

The longer the crisis goes on, the more difficulty Russia will have just making payments on the hard currency loan obligations it already has.

Given these economic problems, how would one explain the militant belligerency of Russia, for example?

Russia has at most eight years to correct its decline. If it fails, it will not have an economy or a large enough population to maintain its roads and rail system, monitor its frontier or even the capacity to sustain a military.

… Next on Putin’s list … will be the annexation of the Northern European frontier of Estonia, Latvia and Lithuania. This will protect the fate of Russia’s second city, St. Petersburg, and give the country access to deep-water ports, something they need and don’t have. Belarus and Poland are also in danger of falling under Moscow’s influence.

To the south of Russia is Kazakhstan (“stan” means “land”), which is the breadbasket of the region. This will be a target for Putin to keep China from coming in through its back door. Lastly, the Russians will need to secure the Caucases, which include Armenia, Georgia and Azerbaijan located between the Black and Caspian seas and on the border of Turkey. __ The Method to Putin’s Madness

All of that makes sense from the prospect of a “Tsar Putin” who wishes to reconstitute Russia as a great power one last time before he dies. How does Putin’s aggression in Syria tie in?

Perhaps Putin wishes to position himself in a place where he can look at the Saudi leaders “eye to eye.” Obama is a weak US President, and it is not clear what he would do should Putin make overt or covert threats against Saudi Arabia‘s government or its economic system.

Interview with Peter Zeihan on Russia’s aggressive future

Putin would rather make these aggressive moves from a position of economic strength. But Russia’s demographic situation shows signs of collapsing, while outside of Moscow and St. Petersburg, separatist currents are flowing more strongly. Even if Russia’s roads are crumbling, its oil pipelines leaking floods of oil across the taiga, its public health infrastructure collapsing, and its schools failing, Putin feels he must put his military strategy above all else — including Russia’s future after he himself is gone.

The conscript-dependent Russian army, for instance, faces a significant loss of troop strength in coming years as the population ages and shrinks, a trend that will accelerate now that the bump from the raft of perestroika babies is running its course. The inevitable ebbing of its military strength is one reason the Kremlin is so determined to take on its vastly weaker former satellites such as Ukraine now while it’s still capable of calling U.S. and NATO bluffs.

On the plus side, a high mortality rate among people in their 50s and 60s means the Kremlin can continue to redirect hundreds of billions of surplus rubles earmarked for the state pension fund…

__ Russia’s Last Government

Stratfor on the fragmentation of Russia within the decade

More on Stratfor’s Decadal Forecast

China will eventually claim Siberia, and may soon make very bold moves into Central Asia.

Keep your eye on Russia and China. ISIS may seem flashier because of its attacks on civilians, but Muslim terror under any other name would stink the same. If it’s not ISIS it will be some other Muslim terror group. The “youth bulge” of Islam must play itself out. If the western world is smart, it will allow its civilians to “get Dangerous.” Doing so would help finish off that youth bulge so much more quickly.

Russia and China are most dangerous when they have painted themselves into a corner, as they are currently doing. The next 15 years are apt to be very interesting, more suited to quick and resilient learners and actors, rather than to the pathetic crop of fragile “protest youth” that universities tend to regurgitate onto society these days.

Hope for the best. Prepare for the worst. It is never too late to have a Dangerous Childhood.

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1 Response to China’s Ponzi Finance Problem & Russia’s Faltering High Wire Act

  1. Samuel says:

    Well, let’s just be thankful third world war does not erupt this weekend, with all the muslim terrorists, falling jets, black student riots, Europe shootings and socialist/fascist election debates. Let’s just quietly enjoy our turkeys tonight (if we can afford that) before we stomp on each other on black friday sales.

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