Autonomous Source

Main

October 29, 2007

Modern Diplomacy

In the Star today, former diplomat Harry Sterling has some advice for Stephen Harper on the delicate art of international relations:

Leaders of governments who confuse their own personal viewpoints with those of their countries' national interests can cause unwelcome and even dangerous consequences for their fellow countrymen.
In particular, Sterling feels Harper's stubborn insistence on meeting whomever he wants is very provocative and insensitive to our Chinese friends:
Harper will meet the Dalai Lama openly with the media in attendance. The forthcoming encounter has already been criticized by the Chinese authorities as interference in China's internal affairs.

Beijing's unhappiness with Harper's meeting the Dalai Lama is thus not unexpected. Nor is China's growing displeasure with the pro-Taiwan stance of many prominent members of Harper's Conservative party.

Although Members of Parliament have as much right as anyone else to be favourably disposed towards the Dalai Lama – or Taiwan for that matter – totally ignoring the possible negative trade fallout is another matter, especially since China is now Canada's fourth-largest export market.

As much as some would praise Harper for standing up for his principles in such cases, others see such actions as potentially undermining important national interests, a concern that even the Canadian business community has voiced in the past.

Certainly this is very good advice. Maintaining good relations with our trading partners should be the primary goal of our foreign policy. So what if the Chinese openly support the brutal regimes in Sudan, Myanmar, North Korea, and Zimbabwe? And so what if they're pretty brutal themselves? Requiring our Prime Minister to consult with an oppressive foreign government on what he can say or who he can meet with is a small price to pay to avoid any risk to the supply of merchandise for our dollar stores.

And Sterling has more advice:

The fact Harper has remained remarkably silent about the violation of international law and human rights covenants by the Bush administration – President George W. Bush countenancing practices considered torture – has only reinforced the view of those who regard his support for human rights and religious freedoms as highly selective. As well, Harper seems indifferent to the imprisonment at the notorious U.S. prison at Guantanamo, Cuba, of Canadian teenager Omar Khadr, incarcerated since July 2002 when he was captured at the age of 15 in Afghanistan.
Wait... huh?

August 08, 2007

China talks tough to hide a weak hand

China is apparently threatening to dump their massive holding of US dollars if Congress gets too aggressive with trade tariffs:

Described as China's "nuclear option" in the state media, such action could trigger a dollar crash at a time when the US currency is already breaking down through historic support levels.

It would also cause a spike in US bond yields, hammering the US housing market and perhaps tipping the economy into recession. It is estimated that China holds over $900bn in a mix of US bonds.

The unfortunate thing is that China and the US have a unhealthy codependent relationship. The US is addicted to the cheap money the Chinese have been providing, which allows interest rates to stay low and keep the economy moving. And China is dependent on the US to soak up all the crap they produce so they can keep their people working and avoid social unrest. It's a situation that can't go on forever, and perhaps the cracks are finally beginning to show.

But economic crises are caused not by changing economic conditions, but by the rate of change of those conditions. Markets generally adapt to change very well, but too much too fast will cause enormous disruptions that unpredictable effects. Both the tariffs proposed by the US and the dumping of dollars by the Chinese will rebound to their own countries and cause a lot of economic devastation.

The fact that the two countries are still making threats to each other in public tells me they're still a long way from cooperating in disentangling themselves from this mess they're in. Personally, I think it's far too late to do anything anyway, especially with the debt crisis growing in the US. It's likely the rhetoric will get more heated as the two nations seek to blame each other for the inevitable pain as they break free of their codependency the hard way.

June 21, 2007

Behind China's mask of prosperity

In City Journal, Guy Sorman has written a lengthy and comprehensive summary of the human rights abuses in China and the unstable nature of its current 'prosperity'. China's PR is so effective that most people in the West never hear of the everyday horrors there. This essay is a good place to start to find out the truth: The Empire of Lies.

February 28, 2007

The fuse is lit

China's Shanghai market is rallying today, as should be expected. In such a heavily government-controlled economy, it would be surprising if such a visible metric of economic health would be allowed to continue to show weakness. But as I have said before, China's 'economic miracle' is living on borrowed time. The internal contradictions of the current system are unsustainable.

If anyone has any doubts on this, read this excellent article by James Waterton of Samizdata. He discusses the rotten foundation the whole smoking mess is built on and grimly muses on the consequences of collapse.

January 12, 2007

The second biggest issue of the 21st century

The Chinese state media agency Xinhua has admitted that China gender imbalance is growing deeper:

A report released here Thursday said there will be 30 million more males of marriageable age in China than females by the year 2020, which will make it difficult for men to find wives.

The report, issued by the State Population and Family Planning Commission, said China's sex ratio for newborn babies in 2005 was 118 boys to 100 girls, compared with 110:100 in 2000. In some regions, the sex ratio has reached 130:100.

The Chinese Communist government has decided this is a bad thing, but that their brutal family planning policies had nothing to do with it.
The report predicted that in the year 2020, Chinese men of marriageable age will find it difficult to find wives, especially those with low income or little education. This will create social instability.

Liu said the sex ratio imbalance was not connected to China's family planning policy. "It is more a result of the deep-rooted notion in Chinese culture that men are superior to women," she said.

It's hard to imagine what China will be like when there are four men to every three women. I'm very pro-woman myself; I believe that those of the female gender contribute much more to the 'glue' that binds civilization together. Single men are capable of all kinds of trouble -- especially in groups -- but when matched with women they become contributing members of society. Without women, these unmatched Chinese men will be attracted to gangs or aggressive political movements.

I'm also of the opinion that the booming Chinese economy is due to throw a piston in the next five years. Too much of the business of the country is driven by state-managed industry and financing, and not enough by real demand. It will run into trouble for the same reasons that Japan's government-managed economy fell flat fifteen years ago. Will Hutton summarizes it like this:

China's economic growth is based on the state channelling vast under-priced savings into huge investment projects driven by cheap labour. Some 200m of China's 760m workforce are migrant peasants employed in factories, construction sites and offices in its new towns and cities—the biggest migration in history. The Communist party has permitted free movement of prices, encourages profit-seeking and has sharply lowered tariffs on imports and obstacles to inward investment. Its success in creating annual growth of some 9.5 per cent for a generation, lifting 400m people out of poverty, is widely acknowledged. But the party keeps firm control of ownership, wages and company strategies—and of the state. In other words, China occupies an uneasy halfway house between socialism and capitalism; its private sector, although growing, is still puny. It is a system of Leninist corporatism—and it is this that is breaking down.

The breaches in the model are all around. How much longer can China's state-owned banks carry on directing billions of dollars of savings into investments that produce tiny or even negative returns and on which interest is irregularly paid? Poor peasants' ability to create the savings needed to fuel growth is reaching its limits. And in any case, for how long can a $2 trillion economy save at more than 40 per cent of GDP? It is reaching the limit of its capacity to increase exports (which in 2007 will surpass $1 trillion) by 25 per cent a year; at this rate of growth they will reach $5 trillion by 2020 or sooner, representing more than half of today's world trade. Is that likely? Are there sufficient ships and ports to move such volumes—and will western markets stay open without real reciprocity on trade? Every year China acquires $200bn of foreign exchange reserves, mainly dollars, as it rigs its currency to keep its exports competitive. It is absurd for a poor country like China to be lending to a rich one like the US; in fact, it is unsustainable, and the financial markets seem to agree.

China would like to lower the current feverish growth rates, but the tools available in the west—raising taxes, cutting spending and lifting interest rates—are not available to China. The party dare not trigger protests by raising taxes; officials in state enterprises and provincial governments ignore orders to lower spending because their careers depend on generating growth and jobs. And raising interest rates could create a credit crunch as loans go sour.

Chinese history is remarkably consistent. China is always united under one dynasty, which grows corrupt and weak. Sparks erupt in the backwaters -- minor revolts against local rulers -- but most are snuffed out. But eventually one catches fire and starts to claim more territory until a new dynasty is founded. In this way the Ming were replaced by the Qing, who were replaced by the Kuomintang, who were replaced by the Communists. In each of those transitions, there was a huge loss of life.

With the growing gender imbalance and the teetering economy, the groundwork is definitely in place for a dynastic change. And it's not going to be pretty.

August 01, 2006

China Syndrome

Far from the wonder economy some people represent it as, China's economy is a over-heated, smoking mess. So far it's managed to keep chugging along, but problems are building that will eventually cause it to fall apart.

China's leaders are finding that the world's largest command economy no longer responds to their commands.

Growth is hurtling along at the fastest pace in a decade, defying official efforts to curb investment in unneeded factories and real-estate projects. The government's immediate concerns are that overheated growth will saddle China with excess capacity, create more asset bubbles and increase friction with the United States and other trading partners.

"China's unbalanced growth model has now gone to excess and seems in danger of veering out of control," said Stephen Roach, the chief global economist at Morgan Stanley in New York. "The longer China's economic boom runs, the tougher it will be to avoid a more treacherous endgame."

That might include defaults on bank loans, and eventually deflation and a collapse of asset values. Such a hard landing would risk breeding social unrest within China while drying up export markets for neighbors like South Korea and Taiwan.
The problem is that the financial system that has funded China's boom does not make its decisions based on economic analysis, but on what the Communist Party tells it. This can create a lot of activity quickly, but has problems in delivering a return on investment.
In the banking system, measures taken so far to curb lending "are like taking a spoonful of water from an overflowing swimming pool," said Dong Tao, chief Asia economist at Credit Suisse Group in Hong Kong.

Outstanding yuan-denominated loans on June 30 stood at 21.5 trillion yuan, or $2.7 trillion, 15.2 percent higher than a year earlier. New yuan lending in the first half totaled 2.18 trillion yuan, approaching the central bank's full-year target of 2.5 trillion yuan.

China's banks carry more than 1.3 trillion yuan of nonperforming loans, which exceeds the 8 percent carried on their books, according to Moody's Investors Service.

Chinese banks are "backward in terms of their risk management and pricing of loans," said May Yan, vice president at Moody's in Hong Kong. "It's going to take years for these banks to learn how to price risk, and they're going to get burned along the way."
China already has a lot of popular unrest bubbling just under the surface. A serious reversal in their miracle economy would throw millions out of work and destroy the savings of millions more. What happens after that is impossible to predict.