China: One Yellow Brick Road Falling Behind Schedule

Once Referred to as the “One Belt One Road” (OBOR) Plan; Now More Properly Called the One Yellow Brick Road (OYBR) Plan

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From the Emerald City to the Hinterlands

One Yellow Brick Road (OYBR) Lost in the Poppyfields

More than three years after Xi’s unveiling of the policy, [OYBR] remains ill-defined and underfunded, and faces an uphill battle against many constraints like geography, Eurasian instability and current trade patterns.

__ Geopolitical Futures

Beijing’s bold new fantasy trade route is expected to cost more than $6 trillion over the next ten to fifteen years. As if China’s debt conundrum were not hopeless enough, along comes the One Yellow Brick Road to catapult China debt futures into the surreal. And initial expenditures are just the beginning. Costs for this project will likely come to resemble a bottomless pit before long.

The latest rail link between Beijing and London joins 38 lines already connecting about 30 cities in China and Europe…

… The dozens of existing rail links are not actually inter-connected at the moment. The rail systems in Kazakhstan, Russia, and Belarus use a wide gauge of 1.52 meters, a Soviet legacy, while the Chinese and European systems use a standard gauge of 1.435 m. That means that rail cargo has to be transferred between trains whenever crossing between the two regions of gauges, which occurs at least twice during the journey. Transferring cargo increases travel time and encourages the use of freight in standard containers, rather than bulky cargo such as crops.

… Unlike the high seas, rail lines are located in foreign sovereign terrains beyond Beijing’s jurisdiction, and the risk of disruption is also considerable. If any political turmoil occurs in a country along the rail routes (a not-improbable scenario in Central Asia), or even if a country simply sees souring relations with China, the rail links could be affected or cut. __ The Diplomat

China’s attempts to create an economic utopia in the middle of an impoverished dead zone is admirable, although not particularly realistic.

One Yellow Brick Road A Mirage of Gold and Emeralds

Eurasia is not the pivot of the world as it was when the ancient Silk Road was a vibrant and flourishing trade route. Today, most global trade happens by sea, which is the U.S.’ domain, and [OYBR] will not change that. [OYBR] as currently imagined, funded and directed by China is theoretically seductive, but when you examine the boring yet crucial facts of where the money will come from, who will oversee the overall scope of the project, who will buy Chinese steel shipped overland and why [OYBR] would make countries want to spend more to ship goods across unstable areas, it becomes clear that [OYBR] is more mirage at this point than game-changer.
__ https://geopoliticalfutures.com/one-belt-one-road-no-dice/

China Out On a Long, Thin, Limb

A Stronger US Dollar and Economy Becoming a Threat to Imperial China

At the end of 2016, the US dollar started rising, the yuan started weakening, and people started to quickly take money out of the country to keep their savings from losing value.

Now “we are in uncharted territory,” Charlene Chu, a famed China analyst at Autonomous Research, wrote in a recent note titled “The war on outflows.”

We are now seeing that as the US gradually ends its postcrisis monetary easing program, China will be forced, in some measure, to do so as well. In many ways, though, the country is not ready.
__ Strong Dollar Rocks China Back

China is not ready? That is putting it mildly. In truth,  China’s economic position is precarious. If the US industrial and manufacturing economy does rebound under new US President Trump, China’s economy will be under multiple threats — and not only to its currency.

If, for example, China continues to insist on maintaining its current unbalanced trade policies and tariffs toward US products, China will be the ultimate loser as the US chooses to import less from China and more from Latin America and other parts of Asia. The Trump administration is more likely to maintain a “tit for tat” policy on China trade, than previous presidents were willing to do.

Most of China’s Recent “Growth” Has Been Built On Bad Debt

When a growing proportion of new loans goes toward paying the interest on old loans, you know that an economic system is in trouble. This is the picture we are seeing in China, as the struggle to prop up failing State Owned Enterprises (SOEs) takes the Chinese economy closer to the tipping point. Lacking the economic checks and balances provided by a market economy, the state-dominated economic system of China has been a master of misallocation, overproduction, corrupt graft, and fantasy economic statistics.

Increasingly, economists think China will look like a poorer Japan, declining into drudgery in unexpected ways to ease its transition into a painfully slow-growing economy. __ BI

Some observers believe that China is barreling toward an economic crisis. Should that be the case, it is not unrealistic to expect China to adopt an increasingly war-like footing — up to the point where it may become impossible to prevent regional war, if not something much worse.

China’s Exports Already Falling; Trump Could Make Things Much Worse

China’s leadership has been acting “the tough guy” over the China Seas, Taiwan, and several other international issues. But China’s economic foundations — income from exports to Europe and North America and technology transfer from North America and Europe — are being threatened by China’s own belligerence and thieving ways. China behaves as if it has control of its own destiny, but that is far from being the case in reality.

In a trade war, China has much more to lose than does the US. Global markets belong to buyers, and the US is a buyer — China is predominately a seller. If the US and North America choose “retrenchment” under the Trump policy, China will be unable to find replacement markets for its products.

US Suddenly in the Market for New Suppliers to Replace China?

US Suddenly in the Market for New Suppliers to Replace China?

The US can find new suppliers far easier than China can find new buyers, in today’s markets. Mexico is becoming an excellent replacement location for manufacturers who wish to leave China, for example.

At this point the Chinese dependence on the United States is substantially greater than the reverse. In addition, the United States has a strategic advantage over China, demonstrated by Trump’s willingness to disregard the One China concept. The United States currently has the economic and strategic advantage to negotiate a new relationship with China, and to compel that negotiation. __ George Friedman

The issue is far more complex than presented here, with strong overtones of shadow banking, bad debts, a bubble/pyramid economic scheme, a deadly toxic environment, shrinking exports, growing economic crisis in Europe — an important export market for China, a covert but costly effort to encircle and control Russia, and much more. If the US chooses to pull back from China economically even more quickly than has been done, all of China’s pre-existing problems will be magnified. On top of all that, China’s rapid shrinkage in the size of its work force and youth cohort casts a shadow over all proposed grandiose plans for expansion.

Seen in this context, China’s loud proclamations about its “One Yellow Brick Road” plan can be seen as more than a little fantastical, much like the fictional series of books that made the Emerald City famous a hundred years ago.

A Note to President-Elect Trump

The US economy will benefit far more from incentive boosts to business startups and entrepreneurship than by attempting to recreate the “rust belt economy of old.”

According to the pioneering work of Nobel Prize winner Robert Solow, technological innovation is the ultimate source of productivity and growth. It’s the only proven way for economies to consistently get ahead — especially innovation born by startup companies. Recent Census Bureau data show that most of the net employment gains in the United States between 1980 and 2005 came from firms younger than five years old. Without startups, the average annual net employment growth rate would actually have been negative.

Economist Carl Schramm, president of the Kauffman Foundation, which analyzes entrepreneurial economics, told us that “for the United States to survive and continue its economic leadership in the world, we must see entrepreneurship as our central comparative advantage. Nothing else can give us the necessary leverage.

__ Start-Up Nation from Introduction

It has long been known that job creation is best accomplished via disruptive innovation and creative destruction that comes from smart economic policies, such as tax policies that favour investment in startups and small business, as well as policies that reduce taxes and expenses for industries that locate within a certain jurisdiction.

Threatening to apply 35% tariffs to foreign manufacturers who build products in Mexico is a tactic, which may be effective in the short term. It is certainly the case that large European and East Asian manufacturers are perplexed over what they can expect from the Trump trade team once it is in place. But “crying Wolf!” too many times can accentuate a pre-existing clownish aspect, which may not help one’s negotiating positions down the road.

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

Before 2008, China’s rapid economic rise was based upon cheap labour, technology transfer, and massive export income from trade with Europe and North America. But that was then. This is now.

Since 2008, China has increasingly built its economy upon bubbles built on bubbles. The Ponzi pyramid scheme that is today’s China economy can only lead to war. Try to insulate yourself from that likely event as best you can.

 

More on China’s problems financing the One Yellow Brick Road

Measured in US dollars, the gap between America and China’s gross domestic product must have widened significantly in 2016 given a nearly 7 per cent fall in the value of the yuan against the greenback. In addition to currency weakness, funds have been fleeing China due to the country’s slowing growth, elevated debt loads, property bubbles and choking air pollution…

China’s economic success in the past few decades was based upon “integrating itself into the global system and cooperating with the US”, said Scott Kennedy, director of the Project on Chinese Business and Political Economy at the Centre for Strategic and International Studies, a Washington-based think tank.

“Trump’s threats and the possibility of de-linking from the international system … could bring a lot of worries for [Beijing],” Kennedy said. __ South China Morning Post

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4 Responses to China: One Yellow Brick Road Falling Behind Schedule

  1. bob sykes says:

    If there is a trade war with China (unlikely), then it is the US that will suffer. China will be left with the factories, the skilled workers, and a mountain of US T-bills. The US will be left with the money printing presses. China will have to find other markets, and the obvious choice is China itself. A very large number of very large American companies will find themselves without products to sell–think Apple and Walmart–and will go bankrupt. If China cashes out its T-bills, the US will have to default, and the dollar will crash. Welcome to the US of Venezuela.

    As to the New Silk Road, that is a backup in case a war with the US closes off the South China Sea. Clinton has a long sordid record of war mongering, and her election would have guaranteed war with both Russia and China. Trump’s election sets that possibility aside, so the development of the New Silk Road can proceed at a more leisurely pace.

    • alfin2101 says:

      Your comment well expresses a point of view that is prominent in some circles. Thanks for bringing some of these viewpoints into the open where others may discuss them if they wish.

      Your assertion that “If China cashes out its T-bills, the US will have to default …” is a common belief, although not necessarily shared by most economically informed people who have thought the issue through. For example here is respected anaylyst and commentator Michael Shedlock (“Mish”):

      The idea, widely promoted at times is China holds some sort of nuclear option threat of dumping its treasuries.

      It’s a theory stressed by hyperinflationists, and it’s nonsense. I discussed the nuclear notion at length on July 30, 2010 in Should China Dump Dollars for Commodities? What about the “Nuclear Option” of Dumping Treasuries? Can Global Trade Collapse? __ https://mishtalk.com/2016/12/07/china-capital-flight-intensifies-us-treasury-reserves-plunge-capital-controls-increase/

      Mish makes liberal use of quotes by esteemed China economist Michael Pettis, who probably understands China’s economy as well or better than anyone. Pettis has been urging the Chinese government to move away from wasteful and massively indebted overbuilds in infrastructure building, and to move toward internal services and domestic consumer products — as you suggest. Unfortunately, the Chinese government has moved in the opposite direction, and the obscene jacking up of debt to finance previous debt is unsettling to anyone who understands what happens beneath the facade.

      Your sanguine outlook on China’s bubble economy may come as some comfort to President Xi. He certainly needs some comfort in these times of quaking foundations.

    • Abelard Lindsey says:

      That Hillary is the war monger and not Trump is 100% correct, and a reality that is utterly lost on these idiot protesters we have in Portland, Washington D.C. and other places. What makes these protesters even more idiotic is that neither Trump nor Sessions has any desire to attempt to overturn Row vs, Wade in abortion. Thus, these protesters are literally protesting over nothing.

      • alfin2101 says:

        Well, the protestors are being paid to burn cars, break windows, and punch people in the face. They go into the fray already lawyered up, courtesy of wealthy rabble rousers who try to stay in the background.

        People such as Madonna, Ashley Judd, and other celebrities who appear to promote violence and mayhem are on record for what they are saying and for what they seem to be encouraging. Feminism is giving itself a black eye in the opinion of most consumers of mass media in the US. For most of these celebrity protestors, the less they are seen on the streets, the better for their careers.

        It is also clear that universities are promoting ideologies of idiocy which lead to a null future. The more these cottonbrains protest and speak up, the tighter the scrutiny that university staff and faculty will receive.

        As for the news media, fuggiduhbowdit! Print media has lost subscribers and advertisers as if they had the plague. Broadcast media is slowly being replaced by alternatives which are far more real and honest than the mainstream media which has truly earned the label “fake news.”

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