China is now in a very difficult position. Economists at Nomura say the yuan is 6pc overvalued, the result of an relentless rise when it was still coupled to the dollar, and due to the internal effects of rising labour costs and slowing productivity growth.
Yet a fragile world economy cannot cope with a falling yuan. China’s fixed asset investment has been running at $5 trillion a year, as much as in North America and Europe combined. The country is hostage to an investment-led growth model that was not reformed in time, and relies too heavily on exports.
… The closer we move to this tipping point, the more tense it will become, for China and for the world.
It is instructive to consider how China became such a powerful economic force so quickly, once its government opened the door to outside investment in 1979. Massive foreign direct investment and technology transfer from the west to China drove rapid economic expansion — from the outside. The Communist Party of China rapidly appropriated commercial profits to build the massive and overproducing state-owned enterprise sector, the state banking sector, and the shadow banking sector with its hidden assets and transfers.
Recent Chinese government actions and natural economic consequences of rapid growth have driven much foreign direct investment away, and have caused many corporations to relocate factories from China to Mexico, and to other East, South, and Southeast Asian nations well outside of China. In this way, both foreign investment and legitimate technology transfer to China have been curtailed.
China’s economy is rapidly decelerating, and declining trade is not helping. Last year, China’s trade of $3.96 trillion was down 8.0% from 2014. Exports dropped 2.8% while imports plummeted 14.1%. The trend line is holding. In the first five months of this year, exports were off 7.3% from the same period in 2015. Imports were down 10.3%.
China’s real economy has been contracting, while the state-owned enterprise sectors, the government banking and finance sectors, and the shadow financial sectors have been putting on a grand show and facade for international investors who may be impressed by that sort of thing.
“The Chinese corporate bond market is freezing up. Since April 11th the Chinese corporate bond markets had 150 cancellations out of 210 announced deals,” says [Kyle] Bass. And indeed, the Chinese corporate bond market, which has helped keep unsustainable corporate debt afloat and also backs trillions in repackaged loans called Wealth Management Products (WMP), is in trouble in 2016.
… While there are clear parallels to what happened in the United States in 2008 and Europe in 2010, Bass says that China’s problems are a magnitude larger. “They have asset liability mismatches in wealth management products that are more than 10 percent of their system. Our mismatches were 2.5 percent of the system and you know what they did,” he says. __ http://www.theepochtimes.com/n3/2106875-kyle-bass-we-are-seeing-the-chinese-machine-break-down/
If Chinese deleveraging and devaluation continue in lockstep with Chinese government hyper-militarism, the power base for the Chinese governments expansionism is likely to shrink — forcing Xi’s government to rely more on propaganda, bluster, and risky intimidation.
China’s attempt to export its problems though devaluation is a key reason why inflation expectations are crashing to record lows across the developed world.
This in turn is driving bond yields to historic lows almost daily, with 10-year borrowing costs down to -0.58pc in Switzerland, -0.28pc in Japan, -0.16pc in Germany, 0.14pc in France, 0.78pc in Britain, and 1.4pc in the US. __ Telegraph
Russia Has Problems of Its Own
Capital has fled from the Kremlin. Since 2011, Russia has been losing 4-8 percent of GDP annually in capital outflows.
According to the World Bank, real incomes shrank 9.5 percent in 2015, and the number of those living below the poverty level was projected to grow in 2016 at its fastest rate since the 1998 crisis. The World Bank estimates that the number of people living in poverty in Russia will increase to more than 20 million this year, in a country with a population of 140 million. That’s the highest number in nine years.
So far, Russia has been able to rely on reserves built up over almost a decade of high oil prices to minimize the impact on its official budgets. But the Reserve Fund dropped to $44.9 billion this month — its lowest point in four years and down from about $90 billion two years ago. ___ http://www.realclearworld.com/articles/2016/07/09/how_is_russias_economy_a_yeltsin-style_not_good_111941.html
Russia faces similar problems as China. Caught in the middle of imperial intimidation and expansion, its power base is eroding. This may force Putin’s government into granting far more concessions to Xi than is wise, considering Russia’s already compromised future.
Global Financial Bubble Hazard Grows
The inexorable effect of contemporary central banking is serial financial booms and busts. With that comes increasing levels of systemic financial instability and a growing dissipation of real economic resources in misallocations and malinvestment. At length, the world becomes poorer…
It’s … the inherent result of massive QE bond-buying where central banks finance their purchases with credits conjured from thin air. The central banks’ big fat thumb on the bond market’s supply/demand scale results in far lower yields than real savers would accept in an honest free market.
The same is true of the hoary doctrine of “wealth effects” stimulus. After being initiated by Alan Greenspan 15 years ago, it has been embraced ever more eagerly by his successors at the Fed and elsewhere ever since.
Here, the monetary transmission channel is through the top 1% that own 40% of the financial assets and the top 10% that own upwards of 85%. To wit, stock prices are intentionally driven to artificially high levels by means of “financial easing”. The latter is a euphemism for cheap or even free finance for carry trade gamblers and subsidized hedging insurance for fast money speculators.
As the stock averages rise and their Fed-subsidized portfolios attain ever higher “marks”, the wealth effects operators supposedly feel, well, wealthier. They are thereby motivated to spend and investment more than otherwise, and to actually double-down on these paper wealth gains by using them as collateral to obtain even more cheap funding for even more speculations.
The trouble is, financial prices cannot be falsified indefinitely. At length, they become the subject of a pure confidence game and the risk of shocks and black swans that even the central banks are unable to off-set. Then the day of reckoning arrives in traumatic and violent aspect. __ David Stockman
The global financial bubble is likely to have serious consequences for a wide swath of societies across Europe, the Anglosphere, the emerging world, and the parts of the third world that rely desperately on investment and aide from the more developed world.
… ‘Good leverage is decreasing as bad leverage increases,’ said Huang Yiping at Beijing University’s National School of Development… Liu Yonghao, a self-made agribusiness tycoon and co-founder of Minsheng Bank, told the Financial Times that the ‘banking sector isn’t fit for the age we live in’. ‘Our banks and financial institutions serve the state-owned sector and the government,’ Mr Lui said…”
[Meanwhile back in the free world:] Soaring bond prices have sent yields on the perceived safe havens of government debt plumbing fresh lows, even while expectations of looser monetary policy produce a burst of animal spirits in stock markets. The flight to safety has prompted some analysts to question the durability of the rally in equities, where the S&P 500 was up 3.5% last week and the FTSE 100 has erased its post-referendum dip… Still others say that money is pouring into stocks as lower bond yields force investors to search for returns in alternative asset classes.” ___ Doug Noland
As China and Russia sink more deeply into “hollow man militarism and bombast,” governments of Europe and the Anglosphere are sinking slowly into Idiocracy and dysgenic demographic decline. Political correctness in the west is accelerating this decline into cultural decay and eventual collapse and surrender to third world populations, in select nations.
Recent revelations of China’s massive human organ transplant industry lend a horrific colour cast to everything the Chinese government does. China’s ongoing lucrative genocide of dissidents kills two birds with one stone, unlike Hitler’s or Pol Pot’s genocides, which merely sought to dispose of inconvenient and unwanted persons. But any government capable of carrying out such atrocities without being shunned and castigated by all other nations, is a government that is being given carte blanche to do anything at all.