The Credit Bluff: Economic Instability Increases Odds for War

All over China there are empty developments waiting to be filled, evidence of a construction boom that drove fast economic growth but has now stalled. __ ValueWalk

China’s housing binge over the last few years has been without parallel in human history. For a while it paid off, as construction drove breakneck economic growth. But far too much was built and in the wrong places. __ BBC

China Bubble Ghost Cities Everywhere The Diplomat

China Bubble Ghost Cities Everywhere
The Diplomat

Esteemed China economist Michael Pettis warned in November 2015 about China’s debt/credit problem:

What matters is the associated growth in credit. If growth next year of 7% were achieved with 18% growth in credit, things would actually be getting worse, not better. On the other hand if China grew next year by 5%, with credit growing at “only” 8%, this would represent a significant improvement in China’s medium- and long-term growth prospects. This is something that a lot of economists seem to have real trouble in understanding. There is no “good” level of economic growth independent of the associated growth in credit. __

In reality, China’s GDP growth is headed lower — despite massive growth in credit:

Total Chinese New Credit (aggregate “social financing”) expanded $525 billion in January. This was more than 50% above estimates. It was also a record for Chinese Credit expansion and, surely, one of the biggest months of Credit growth in the history of mankind. There are important seasonal and special factors at play. Nonetheless, January Credit data supports/confirms the view that China’s financial system has succumbed to a precarious self-destruction phase. Such egregious Credit creation may help meet 2016 growth goals. It will do anything but bolster flagging confidence in policymaking or China’s financial system.

How long can China sustain this massive credit bubble expansion while its underlying economic fundamentals continue to deteriorate?

China’s stock market slide pictured below is just the tip of China’s economic iceberg:

If it’s not a real estate bubble, it’s a stock bubble, a bond bubble, or a manufacturing bubble. China is running a “cargo cult” bubble-style economy as if real-world economics doesn’t really matter. All of that would be a local problem if not for the global reach of China’s economy — and the increasingly global reach of its military.

China has become a big part of virtually every important economy in the world. Donald Trump says, “I like China. China gives me money!” He is not the only opportunist in the house of cards. A lot of global despots and real estate moguls like China for the same reason.

When China’s foreign investment bubble bursts, a smaller secondary bubble of capital flight and the flight of elites (with their wealth) from China will take place. So for those properly positioned there is still money to be made.

But China’s massive military buildup is quite real, and will remain standing after the ghost cities collapse prematurely of their shoddy construction. And when China’s economic slide threatens domestic tranquility, China’s leaders will not hesitate to use its military to maintain national cohesion behind the party.

World War II was easier to predict than World War I, given Hitler’s long buildup to his bloody clumsy krieg. World War III falls between the seemingly “accidental WWI” and the clearly intentional WWII. The relationship between Russia and China in 2016 is strongly reminiscent of the relationship between Germany and the USSR in 1939. Bosom frenemies until the convenient moment of open warfare.

Stumbling economies combined with growing domestic hardship can only lead to trumped up propagandistic nationalism, and rising risk of outright war. Almost all the pieces are in place. Everything waits on that unpredictable trigger.

A problem both China and Russia share is the flight of capital. In China over a trillion dollars has left the country in the last year, most of it illegally. Russia has a GDP one tenth the size of Chinas but has suffered proportionally more capital flight. Worse, the sanctions and corruption have kept foreign investors away just when Russia needed them most. Even Chinese investors are reluctant (without guarantees from the Chinese government) to put capital into Russia.

__ StrategyPage

China’s need for Siberia’s pristine resources is growing at the same time that Russia’s ability to hold onto its eastern colonies is diminishing.

Short background piece on global financial weakness

This entry was posted in China, Economics and tagged . Bookmark the permalink.

1 Response to The Credit Bluff: Economic Instability Increases Odds for War

  1. Pingback: Outside in - Involvements with reality » Blog Archive » Chaos Patch (#102)

Comments are closed.