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China’s Debt Bomb About to Explode: 5 Ominous Signs

Teresa Jones wrote . . . . . . . . .

Debt to GDP ratio of at least 275%, immense hidden debt by corrupted local governments, property developers default one by one… China’s debt bomb is ticking much louder. Can the communist regime postpone the day of debt reckoning?

Overview of China’s debt mountain

As reported by Bloomberg, China’s debt will probably break the record this year due to the central bank’s attempt to boost credit and struggle with the economic downturn. According to a Beijing-backed think tank, China’s total debt as a percentage of gross domestic product is projected to climb by 11.3 percentage points to about 275% this year. Although this figure is not internationally excessive compared to highly indebted countries like France or Japan, there is reason to worry because China’s huge hidden debts is unknown, as provincial and lower-tier officials have concealed obligations they have incurred; and are not included in the statistics.

China’s debt has dramatically increased in the past decade, which is, according to Reuters, mostly due to credit poured into state-owned enterprises following the global financial crisis. From a broader perspective, the debt mountain has long been piled up since the giant economy started to binge on debt to fuel its growth.

Some analysts said China’s indebtedness remains manageable as it incurred relatively little foreign debt, at $2.7 trillion last September. Yet, according to a commentary by famous columnist Gordon Chang in Newsweek, history shows the most severe and long-lasting financial crises happened to countries that owe money to themselves.

Chang explained, “In external-debt crises, foreign parties suffer when debt is compromised. The reduction of debt, of course, is politically popular in debtor countries. In China’s case, every solution involves domestic losers—the borrowers are largely domestic—so the crisis will not end until the Communist Party forces local parties to bear severe consequences.”

According to Minxin Pei, professor at Claremont McKenna College and a nonresident senior fellow of the German Marshall Fund of the United States, although China’s banking system is still standing, many warning signs have appeared, foretelling an imminent debt reckoning.

Sign #1: Bank runs and domino effect

The sudden freeze of cash withdrawals by four banks in Henan on April 18 sparked the cash crisis, which has raised serious concerns over the financial health of the country’s smaller banks.

According to Professor Minxin Pei, small rural banks in Henan were driven into insolvency due to weak supervision, poor risk management, and corruption, which are systemic among nearly 4,000 small and medium-sized banks in China. And there is a high possibility that other similar banks will fail soon.

Coincidentally, when Henan authorities were suppressing the victims of bank failure with abusive tactics instead of helping them. Authorities in Shanghai had secretly put on trial a former billionaire who allegedly manipulated a medium-sized bank in Inner Mongolia to fund various illegal schemes. The 2019 bailout of the failed bank cost several billion dollars.

Financial Times reported a rise in bank runs among China’s 3,902 regional lenders over the past few years. Many experts warned of a chain reaction threatening the financial sector’s stability, wherein their counterparties and lenders, particularly larger banks, could incur huge losses.

Several days ago, Bloomberg disclosed that China’s banks might face mortgage losses of about 350 billion dollars in a worst-case scenario as confidence in the country’s real estate market plunges.

Sign #2: Debt-ridden real estate sector

China’s debt-ridden real estate sector is the most dismal alarm bell of its debt reckoning. Following the default of China Evergrande Group, the most indebted real estate developer worldwide with more than 300 billion dollars in liabilities, a record number of defaults among Chinese developers have shaken the whole economy, whose growth significantly relies on the property market.

Bloomberg cited data from Teneo, saying that some 28 of the top 100 real estate developers have either defaulted or negotiated for debt extensions with creditors over the last year. The ongoing crisis aggravated as hundreds of thousands of homebuyers began a mortgage boycott due to unfinished projects in over 90 cities across China, raising concerns over broader systemic risks.

Last week, CNBC reported that China’s real estate sales would drop 30% this year, according to credit rating agency Standard and Poor’s Global Ratings (S&P). This figure was even worse than the financial global market crisis in 2008, when the fall was around 20%.

To worsen the confidence in the property market, recently, Evergrande has been back on the front pages after three of its top executives were asked by the director board to resign on corruption charges. An internal investigation confirmed that Chief Executive Officer (CEO) Xia Haijun, Chief Financial Officer (CFO) Pan Darong, and executive Ke Peng embezzled approximately 2 billion dollars from third-party loans.

Sign #3: Debt-laden local governments

As land sales accounted for a significant part of local authorities’ revenue, the real estate crisis immediately drove local governments into grim prospects. According to Nikkei Asia, property market deadlock and falling tax receipts are estimated to cause a 900 billion dollar shortfall (equivalent to 6 trillion yuan) in local government revenues this year. It would be difficult for local government financing vehicles (LGFVs) that have significantly borrowed from banks or issued bonds to service their debt.

SCMP reported a rapid rise in the number of LGFVs since 2008, with Guangfa Securities estimating that up to 3,060 LGFVs sold debt in the public bond market. “These platforms, opaque in nature, are often used to raise funds for infrastructure spending that does not immediately generate returns, leading to the accumulation of hidden debt in the regional economy,” stated the news outlet.

China’s National Audit Office 2017 noted that some local government officials had “incorrect views” about their political accomplishments and abused excessive borrowing to boost their performance. According to the audit report, some cadres neglected financing guidelines, ignoring whether they had the means to repay the debt before launching a project.

SCMP highlighted that the central and local governments have never published the scale of off-balance sheet borrowing or which lenders are exposed. According to Lu Ting, chief China economist at Nomura, local government hidden debt, including loans and bonds, might reach 7 trillion dollars or 44% of China’s GDP by the end of 2020.

For example, Guizhou, a populous southwestern province famous for making liquor Mao-tai, had its LGFVs defaulted on at least 68 debt products since 2018. In 2020, the province’s debt to revenue ratio was estimated at 706.56 percent. “The province’s Dushan county admitted “reckless borrowing” after it embarked on a construction spree between 2016-20, which included a number of white elephant projects,” said SCMP.

Acknowledging the situation, in recent years Chinese central authority has accelerated supervision of LGFVs, and has been promoting the market-oriented transformation of LGFVs since 2015. However, according to Guangfa Securities, such a transformation of LGFVs into commercially viable operations necessitates a favorable regional environment. Not all local governments possess profitable businesses suited for developing the platforms.

Sign #4: Large banks and non-performing loans

Large banks in China are also confronting a debt puzzle. They are trapped in the ambitious Belt and Road Initiative (BRI) with tens of billions of U.S. dollars in loans to developing countries, with a large fraction likely to become non-performing as the debtors fail to service the debt due to economic recession.

Nikkei Asia noted that the recent economic breakdown and the collapse of the Sri Lankan government will likely force Beijing to write off a large share of the loans. The troublesome situation abroad will hinder Chinese banks from helping bail out insolvent small or medium-sized domestic banks.

According to the Financial Times, besides the pandemic, the sharp deterioration of the BRI’s loan portfolio in the last two years was also attributed to the flaws in the program’s design, including an overall lack of transparency, poor risk management on projects, and the participation of many of the world’s riskiest debtor nations.

Why was the Chinese Communist Party ready to lend money to these impoverished countries governed by corrupt authorities? Why are environmental and social impact studies almost always absent from BRI infrastructure projects? According to various international analyses, the real incentives for the Chinese regime behind BRI investments are gaining military advantage, grabbing host countries’ natural resources, and expanding geopolitical influence.

Sign #5: Economic slowdown

Given the four above-mentioned warning lights, a systemic collapse is more likely to happen today than before as China can no longer maintain a high growth rate.

Debt and economic slowdown create a vicious circle: Severe economic downturn, partly due to Beijing’s zero-tolerance Covid policy, has made the debt burden difficult to be managed or even concealed. Vice versa, rising debt and falling income induce households to cut spending, likely worsening the economic downturn.

In late July, SCMP cited the IMF’s “World Economic Outlook,” saying that China’s economy will grow by merely 3.3%, down from the 4.4% forecast in April.

Conclusion and Prospect

To conclude, China’s debt bomb is ticking much louder, and the communist regime will probably face a debt reckoning soon. Bank runs, real estate defaults, debt-ridden local governments, non-performing loans overseas, and economic recession are ominous hints of a real crisis, which might be just the tip of the iceberg.

According to Chinese traditional culture, “debt” could be considered a kind of “karma.” Debt must be repaid one day, just as the law of karma retribution. Ancient sages believed that for karma to be alleviated faster, the debtor should cultivate their virtue and do good deeds. In other words, they should sincerely acknowledge their past misdeeds, be truthful and gracious to their creditor, and sustain a patient attitude while paying back debts. However, the communist regime in China appears to lack these things.

The Chinese communist authority has answered back with abusive tactics to conceal its wrongdoings. They include violent attacks and harassment to silence protesting depositors in Henan recently, how they brutally suppressed students calling for democracy in Tiananmen Square or persecuted Falun Gong practitioners petitioning for their freedom of belief. The CCP has accumulated not only huge monetary debt but also non-refundable moral debt.

Although it is hardly possible for a particular individual to change the whole system, each person must choose a righteous attitude while facing hardship. When the day of debt reckoning comes, the good people could still be saved.


Source : The BL

Who Won the Taiwan War Games?

Patrick J. Buchanan wrote . . . . . . . . .

When House Speaker Nancy Pelosi defied White House signals that she not stop in Taiwan on her valedictory tour of Asian capitals, she ignited the worst diplomatic U.S.-China row in decades.

And how did last week’s collision turn out for the United States?

Writes The New York Times:

Speaker Pelosi’s trip to Taiwan began with her “plane departing from Kuala Lumpur and heading southeast toward the Indonesian part of Borneo, then turning north to fly along the eastern part of the Philippines. A more direct — and shorter — route would have been to fly northeast in a direct route over the South China Sea to Taiwan.”

Pelosi’s avoidance of the South China Sea might have something to do with China’s claim to 90% of it and China’s control of islets in that sea that Beijing has converted into air, missile and naval bases.

After 19 hours in Taiwan, the speaker flew to South Korea, where her reception was described as “cool.” President Yoon Suk Yeol, though at home in Seoul when Pelosi arrived, did not meet with her, but instead held a 40-minute phone conversation.

South Korea, like its neighbors, is anxious not to offend China.

Consider this anomaly here:

South Korea, Japan, Taiwan, Australia and New Zealand all rely on the United States as their No. 1 ally in defending them against China, but all boast of China as their No. 1 trading partner.

How did Beijing react to Pelosi’s 19 hours in Taiwan?

With warplanes, warships and ballistic missiles, China conducted live-fire exercises from Thursday noon to Sunday noon, at six sites surrounding Taiwan. One Chinese missile flew over Taiwan. Five landed in the exclusive economic zone of Japan.

The effect of these live firings at and around Taiwan was that of a naval quarantine or blockade. Ships and planes of other nations avoided air corridors and waters being targeted by Chinese forces.

China also announced diplomatic and economic sanctions against the U.S. and Taiwan, canceling talks with Washington on climate change and military relations.

Pelosi’s visit to Taiwan was the triggering event that ignited the Chinese war games against Taiwan. But these air, naval and missile exercises were not planned in a day. They appear to have been prepared as a dress rehearsal for how China intends to go about bringing Taiwan home to the motherland, when President Xi Jinping decides the time is right.

Pelosi spent the rest of her trip insisting that her visit represented no change in U.S. policy on Taiwan.

Speaking to reporters in Tokyo, Pelosi reiterated, “Our representation here is not about changing the status quo,” adding that Beijing is “probably using our visit as an excuse.”

As the live firing went on for 72 hours, the White House echoed Pelosi that the U.S. recognizes Beijing’s claim that Taiwan is a “part of China” and does not contest that claim. Nor have we any intention of shifting U.S. policy on Taiwan as it has been pursued since Jimmy Carter broke U.S. diplomatic relations with Taiwan in 1979.

Where was the U.S. aircraft carrier Ronald Reagan, then on Asian assignment during all this? Cruising in the Philippine Sea, not the South China Sea or Taiwan Strait or East China Sea, all claimed by Beijing.

What was the message sent and the message received from the war games with which China responded to Pelosi’s visit to Taiwan?

From Beijing, the message sent to the U.S. was clear.

China regards Taiwan as its detached province. It will confront any power, including the United States, that is perceived to be challenging that political reality. It will respond to any Taiwanese move to establish its independence of Beijing as a casus belli, a justification for war.

The White House did not move any planes, ships or missiles to counter the Chinese live-fire exercises and, indeed, reassured Beijing repeatedly that Pelosi’s visit did not represent any change in U.S. policy.

It is hard to see how Asia’s free and democratic nations and U.S. allies Japan, South Korea and Australia could not have taken away the conclusion that bristling Chinese aggressiveness had just been met by American passivity. Hawkish members of the Senate like Lindsey Graham appear to believe that.

Consider the path Beijing has lately pursued:

It has attacked and captured border lands in the Himalayas from India, claimed virtually the entire South China Sea, fortified half a dozen isles in that sea, claimed the Taiwan Strait as territorial waters, the transit of which by U.S. and allied warships requires China’s permission, claimed Taiwan as part of China, as well as the nearby Senkaku Islands held by Japan.

Now it has sent military aircraft and warships across the Taiwan Strait into and over the waters surrounding Taiwan and test-fired missiles and rockets to reenforce its claim to the island.

When 21st-century China stakes a claim to something in Asia, it backs up its claim with action. The trend is unmistakable and points to a future confrontation over Taiwan.


Source : Patrick J. Buchanan

‘Living with COVID’: Where the Pandemic Could Go Next

Jennifer Rigby and Julie Steenhuysen wrote . . . . . . . . .

As the third winter of the coronavirus pandemic looms in the northern hemisphere, scientists are warning weary governments and populations alike to brace for more waves of COVID-19.

In the United States alone, there could be up to a million infections a day this winter, Chris Murray, head of the Institute of Health Metrics and Evaluation (IHME), an independent modeling group at the University of Washington that has been tracking the pandemic, told Reuters. That would be around double the current daily tally.

Across the United Kingdom and Europe, scientists predict a series of COVID waves, as people spend more time indoors during the colder months, this time with nearly no masking or social distancing restrictions in place.

However, while cases may surge again in the coming months, deaths and hospitalizations are unlikely to rise with the same intensity, the experts said, helped by vaccination and booster drives, previous infection, milder variants and the availability of highly effective COVID treatments.

“The people who are at greatest risk are those who have never seen the virus, and there’s almost nobody left,” said Murray.

These forecasts raise new questions about when countries will move out of the COVID emergency phase and into a state of endemic disease, where communities with high vaccination rates see smaller outbreaks, possibly on a seasonal basis.

Many experts had predicted that transition would begin in early 2022, but the arrival of the highly mutated Omicron variant of coronavirus disrupted those expectations.

“We need to set aside the idea of ‘is the pandemic over?'” said Adam Kucharski, an epidemiologist at the London School of Hygiene and Tropical Medicine. He and others see COVID morphing into an endemic threat that still causes a high burden of disease.

“Someone once told me the definition of endemicity is that life just gets a bit worse,” he added.

The potential wild card remains whether a new variant will emerge that out-competes currently dominant Omicron subvariants.

If that variant also causes more severe disease and is better able to evade prior immunity, that would be the “worst-case scenario,” according to a recent World Health Organization (WHO) Europe report.

“All scenarios (with new variants) indicate the potential for a large future wave at a level that is as bad or worse than the 2020/2021 epidemic waves,” said the report, based on a model from Imperial College of London.

CONFOUNDING FACTORS

Many of the disease experts interviewed by Reuters said that making forecasts for COVID has become much harder, as many people rely on rapid at-home tests that are not reported to government health officials, obscuring infection rates.

BA.5, the Omicron subvariant that is currently causing infections to peak in many regions, is extremely transmissible, meaning that many patients hospitalized for other illnesses may test positive for it and be counted among severe cases, even if COVID-19 is not the source of their distress.

Scientists said other unknowns complicating their forecasts include whether a combination of vaccination and COVID infection – so-called hybrid immunity – is providing greater protection for people, as well as how effective booster campaigns may be.

“Anyone who says they can predict the future of this pandemic is either overconfident or lying,” said David Dowdy, an infectious disease epidemiologist at Johns Hopkins Bloomberg School of Public Health.

Experts also are closely watching developments in Australia, where a resurgent flu season combined with COVID is overwhelming hospitals. They say it is possible that Western nations could see a similar pattern after several quiet flu seasons.

“If it happens there, it can happen here. Let’s prepare for a proper flu season,” said John McCauley, director of the Worldwide Influenza Centre at the Francis Crick Institute in London.

The WHO has said each country still needs to approach new waves with all the tools in the pandemic armory – from vaccinations to interventions, such as testing and social distancing or masking.

Israel’s government recently halted routine COVID testing of travelers at its international airport, but is ready to resume the practice “within days” if faced with a major surge, said Sharon Alroy-Preis, head of the country’s public health service.

“When there is a wave of infections, we need to put masks on, we need to test ourselves,” she said. “That’s living with COVID.”


Source : Reuters

China Sanctioning Taiwan Like Moving a Stone, Dropping it on Your Own Foot

Ralph Jennings, Ji Siqi and Luna Sun wrote . . . . . . . . .

Mainland China could target hundreds of billions of dollars worth of Taiwanese investments and two-way trade if tensions with the self-ruled island worsen after a sharp slide this week due to US House Speaker Nancy Pelosi’s visit to Taipei, analysts said.

But they are targeting the ruling pro-independence Democratic Progressive Party and probably saving any moves against high-value exports or direct investments as a final move, the analysts added, as measures against Taiwan could ripple back to the mainland.

“[Taiwanese] companies are such an integral part of the Chinese value chain that it becomes difficult to put too much pressure on those trade routes,” said Zennon Kapron, the Singapore-based director of financial industry research firm Kapronasia.

The People’s Liberation Army kick-started large-scale military drills following Pelosi’s arrival on Tuesday night, while Beijing has already rolled out various economic sanctions.

Chinese customs suspended imports of Taiwanese citrus fruits, chilled white scallops and frozen mackerel from Wednesday, extending the list of banned items to more than 1,000 products as cross-Strait relations have deteriorated in recent years.

The Ministry of Commerce also suspended exports of natural sand, a raw material needed for the construction of transport infrastructure and water projects.

“China’s constant opinion has been that any unilateral economic sanctions are double-edged. However, Pelosi’s visit might well push China into restricting certain imports from Taiwan and the US, but I do think that such restrictions will be very limited,” said Tao Jingzhou, an international arbitrator who has practised in Beijing, Hong Kong and London.

“As retaliation, the US might increase export control measures for technology and also increase scrutiny of activities of Chinese companies in the US. This visit will further deteriorate the US-China relations across the board.”

Mainland China will probably strike at farming and small manufacturers in parts of southern Taiwan where President Tsai Ing-wen’s Democratic Progressive Party has its main strongholds, said Chen Yi-fan, an assistant professor of diplomacy and international relations at Tamkang University in Taiwan.

Beijing hopes to influence Taiwan’s local elections in November, Chen said, with the party that wins most seats often shaping the outcome of the presidential race two years later.

Tsai’s ruling party takes a guarded view toward China, while its main opposition prefers a more conciliatory stance.

Beijing is expected to release sanctions “bit by bit” to gauge responses in Taiwan, said Yu Xiang, an adjunct fellow at the Centre for International Security and Strategy at Tsinghua University.

Export bans can be cancelled as quickly as they are announced and some have called the existing suspensions largely symbolic because farming and fishery exports make up just a fraction of Taiwan’s US$765 billion economy.

China had already banned imports of Taiwanese confectionery, biscuits, bread and aquatic products in the lead up to Pelosi’s visit.

“Processed food is not even in the top 10 items that Taiwan exports to China, so China’s move is currently only symbolic,” said Darson Chiu, a fellow with the Taiwan Institute of Economic Research’s international affairs department in Taipei.

Taiwan’s export economy runs on shipments of semiconductors and consumer electronics, followed by machinery and petrochemicals.

But to penalise key goods would hurt numerous Taiwanese people, stoking anti-Chinese sentiment, and strike at the mainland’s own economy, some analysts said.

“Taiwanese businesses are a major component of China investors, and Taiwan is part of China,” said Hong Hao, an author and independent China economist.

“Therefore, to sanction Taiwan is just like moving a stone and dropping it on your own foot, plus it deepens divisions between the two sides.”

The US-China trade war, which has been ongoing since 2018, has shown that sanctions aimed at one country hurt both sides, said Wang Huiyao, founder of Beijing-based think tank, the Centre for China and Globalisation.

“In the end, the US consumer and companies are paying the price for that. I don’t think that the economic sanctions are going to work,” Wang said.

“In the long run, we really have to find a way not to dissolve the status quo and really keep the peace and prosperity in the region.”

Any ban on imports of Taiwanese petrochemicals, machinery, transport goods and textiles would also violate the Economic Cooperation Framework Agreement trade deal signed by the two sides in 2010 when political relations had reached a peak, Chiu added.

Taiwanese investors have put money into mainland Chinese since the 1980s, and their 4,200 enterprises employ numerous staff, while they also help to drive economies near Shanghai and in the Pearl River Delta.

Taiwan-based Foxconn Technology and Pegatron make equipment for US multinational technology company Apple at mega factories in mainland China.

Lu Xiang, a researcher on US studies with the Chinese Academy of Social Sciences, said sanction will not be used as a major tool and that Beijing will refrain from escalating to a full-scale economic war.

“The mainland still aims for economic integration with the island over the long run. Companies which support pro-independence and some industries will be sanctioned or hit, but the impact will be limited. Mainland China is one of the only few trading partners that Taiwan has maintained a trade surplus with,” said Lu.

Chinese smartphone makers particularly depend on Taiwanese semiconductors, which the Boston Consulting Group said makes up 92 per cent of world’s capacity.

“I think the challenge for mainland China is the fact that it is so heavily reliant on the high-end chips and technology that’s coming out of Taiwan,” Kapron added.

Beijing views Taiwan as a breakaway part of its territory and has vowed to take back control of the island, by force if necessary, while it also resents US influence in Taiwan’s military or political space.

But Taiwanese leaders will make no policy changes in response to sanctions, according to Chen from Tamkang University, as neither side wants to look weak.

Tsai opposes China’s goal of unification with Taiwan and has courted foreign support for her cause since taking office in 2016.

“Now there is a deep distrust across the strait, so nothing Tsai does will bring comfort to the other side,” Chen said.

The Taipei government made no immediate comment in response to Wednesday’s trade bans, but Lo Ping-cheng, minister without portfolio and spokesman, said the cabinet would help business operators “respond appropriately” to any fallout from Pelosi’s visit.


Source : Yahoo!

Hong Kong: When Is a Colony Not a Colony?

John Burns wrote . . . . . . . . .

The Education Bureau, responding to a Legislative Council (LegCo) discussion, has offered an official view – the bureau’s “stance” – on whether or not Hong Kong was a colony. Views had been expressed in the LegCo, the bureau pointed out, that “Hong Kong was not a colony.”

“We must base our interpretation of history on historical facts and refer to different perspectives,” the bureau wrote. Indeed. The bureau’s stance is an official interpretation, nothing more or less. It is not in some sense “correct,” but simply an official interpretation.

The bureau’s interpretation is nothing new. The Communist Party of China and the central government have propagated this stance for many years without much traction, and now the bureau is passing it on to the people of Hong Kong as the government’s “official” position. The bureau is thus aligning itself with the central government. We should recognise this move for what it is.

There is much in the statement with which any fair-minded person could agree. The British occupied Hong Kong by force and coerced the Qing court to sign various treaties that produced colonial Hong Kong.

The bureau quite rightly points out that in 1972 Chinese authorities demanded that Hong Kong and Macau be removed from a United Nations list of “colonial territories” that should be granted independence. Removing Hong Kong and Macau from this list did not mean that they ceased to be colonies, but that they ceased to be colonies that should be granted independence.

The bureau claims that to “use the word colony to describe the status of Hong Kong is inappropriate (不恰当, bu qiadang),” shying away from saying that it is incorrect. The bureau goes on to demand that students and the people of Hong Kong must have a “correct (正确, zhengque, proper) understanding of the historical facts.”

This implies that there is only one legitimate interpretation and gives the lie to the bureau’s appeal to “different perspectives.” Perhaps the bureau meant that students and the people of Hong Kong should be aware of the official interpretation. I agree.

What to make of the official view that Hong Kong was not a colony? This interpretation is grounded in a partial understanding of Hong Kong’s legal status before 1997. We need to understand that authorities make law to protect the interests of those in power. The law has a clear political dimension, which the bureau conveniently ignores.

British law, which applied to Hong Kong, recognised Hong Kong as a crown colony. The basis of Hong Kong’s status as a colony may be found in the Letters Patent and the Royal Instructions. The bureau is saying, “Well, your (British) law is not our law.” Okay.

Still from 1841 until 1997 Chinese official entities in Hong Kong recognised and obeyed British law in Hong Kong. That is Chinese state actors in Hong Kong recognised that they were bound by this law. They settled disputes in Hong Kong based on this law.

Thus, while the Chinese government may claim that the Sino-British treaties establishing Hong Kong as a colony had “no legal effect under international law,” Chinese and foreign actors in Hong Kong behaved as if these laws had legal effect. To deny this is to fail to recognise historical fact. Hong Kong was a colony and was recognized as such by Chinese and foreign state actors.

Moreover, colonial Hong Kong was the lived experience of the people of Hong Kong before 1997. The colonial laws of Hong Kong bound them, just as they bound Chinese state actors in Hong Kong. To say that Hong Kong was not a colony is to deny this experience. Such a denial does a great disservice to those of us trying to understand the behaviour of people living in Hong Kong.

Finally, remember that the “through train” brought most of Hong Kong’s colonial political, economic, and legal institutions into the city. They are with us today. Repeating the official narrative that Hong Kong was not a colony undermines the very real need, recognised by the Communist Party, to decolonise Hong Kong, including our civil service, education system, and system of public finance. Starting from the position that the people of Hong Kong were delusional, as the bureau’s stance seems to suggest, gets us nowhere.

The legacy of colonialism in Hong Kong – a system built on racism and coercion – must be confronted and not denied. The Education Bureau fails in its mission to educate when it implies that there is only one correct interpretation of Hong Kong’s colonial history, that is, the official version.

At its most basic, by relying the 1972 UN decision to remove Hong Kong from a list of colonies that should be granted independence, and taking that action out of context, the Education Bureau teaches us that historical facts do not matter, and toeing the line is the best way forward. This is very disappointing from educators.

So, to the Education Bureau: remember your mission is to educate. This means producing citizens capable of independent and critical appraisal of various perspectives, which the bureau claims to value, including its own official stance.


Source : Hong Kong Free Press

The Economy Needs a Volcker Moment

Connor Mortell wrote . . . . . . . . .

Readers of the Mises Wire are most likely familiar with the Volcker moment. This was when former Fed chair Paul Volcker, in the face of steep price inflation, skyrocketed rates to nearly 20 percent. While critics of the Volcker moment complain that such a move also skyrocketed unemployment to almost 11 percent, it cannot be ignored that the price inflation was finally reined in. Not only did we see the benefit in reduced inflation, but Austrians have an answer regarding the unemployment.

Austrian business cycle theory very simply explains this. While ceteris paribus, this unemployment number looks absolutely devastating, the reality is that it was inevitable. These jobs evaporate with inflation not because there is some mathematically divine connection between inflation and unemployment, but rather because the demand for these jobs was artificially created by the inflation misleading entrepreneurs to misread price signals.

While we should still mourn for those who lose their jobs—because it is undisputedly painful—we must also recognize that to see this as a widespread economic loss is to fall into the broken window fallacy, as French economist, Frédéric Bastiat has explained, when a window is broken:

The reader must take care to remember that there are not two persons only, but three…. It is this third person who is always kept in the shade, and who, personating that which is not seen, is a necessary element of the problem. It is he who shows us how absurd it is to think we see a profit in an act of destruction. It is he who will soon teach us that it is not less absurd to see a profit in a restriction, which is, after all, nothing else than a partial destruction. Therefore if you will only go to the root of all arguments which are adduced in its favor, all you will find will be the paraphrase of this vulgar saying—what would become of the glaziers, if nobody ever broke windows.

Bastiat explained that if nobody ever broke windows, then unemployment among glaziers would skyrocket. But this is no reason to keep breaking windows, because the people paying the glaziers would have been purchasing other more valued things—in Bastiat’s example, shoes—and now these other purchases never occur and become part of what Bastiat calls the unseen.

The same is true of employment from inflation. If we were to stop inflating, then the jobs created by inflation would disappear. But this is not reason to continue inflating. We are not profiting from inflation because these jobs exist. Rather these jobs are channeling resources from more valued means that we cannot possibly see in the face of this brutal inflation.

Seeing now that Volcker did control inflation by hiking rates and that the unemployment response does not carry the weight one may expect, we now can look at the 9.1 percent Consumer Price Index (CPI) inflation and understand that this is a terrifying number and that even if June’s 75 basis point rate hike is the highest we’ve seen since 1994, it is not nearly enough: it is time for a Volcker moment. ZeroHedge has previously reported that to have a Volcker moment, we would need to raise rates above the CPI rate, as Volcker in fact did.

That would mean that we need much higher increase than a measly 0.75 percent, we’d need a rate over 9.00 percent! In fact, if we were to look at the CPI as it was calculated back in Volcker’s time, we’d need a rate over 20.00 percent. This year we have seen record-breaking rate hikes compared to recent history, but they are not nearly enough.

A genuine Volcker moment would bring about serious economic hardship, which makes it hard to advocate. However, before long, the absence of such a moment will cause even more serious and much more prolonged economic hardship. It is time.


Source : Mises Institute

The Fed vs. the Economy in the U.S.

James Rickards wrote . . . . . . . . .

Right now, it’s basically a case of the Fed versus the economy. You might say, “Wait a second. Isn’t the Fed supposed to help the economy?”

Well, not exactly. They may want to help the economy, but helping the economy actually isn’t job one. Job one is helping the banks. The Fed was essentially created to prop up the banking system and prevent bank runs.

Everything else it tries to accomplish, such as price stability and maximum employment, comes second.

So it’s not clear that the Fed’s always aligned with the best interests of the economy. People don’t realize that, but it’s important to keep in mind.

Everyone knows the Fed’s raising interest rates right now. But which rates? The rate that the Fed actually raises is called the fed funds target rate. And what is that?

That’s the rate at which banks lend to each other to meet their reserve requirements on an overnight basis. Fed funds are amounts that banks lend to each other to meet overnight reserve requirements.

It’s an extremely short-term rate. The Fed targets that rate as a way to control the money supply and perhaps tweak inflation or achieve other economic goals.

The Fed Is Targeting a Rate That No Longer Exists

I don’t want to get into the mechanics of the banking system, but here’s the essential point I want to make:

There hasn’t been a real fed funds market for about 12 or 13 years, ever since the Fed began flooding the system with money during the Great Financial Crisis. Today, reserves are close to an all-time high.

In other words, the banks have excess reserves. Their actual reserves are multiple trillions of dollars in excess of the requirement. So there is no shortage of reserves.

There’s no overnight lending for reserve requirements, because all the banks have excess reserves.

So the Fed is targeting a rate that doesn’t exist anymore. Why are they doing it?

Banks aren’t lending to each other, but they are lending to the Fed in the form of excess reserves. Those are deposits at the Fed, which the Fed pays interest on. So in a sense, the interest on excess reserves is a modern substitute for the old fed funds rate.

But this money is basically sterilized. It stays within the banking system without making its way into the real economy. That’s why all the QE the Fed engaged in after 2008 never led to consumer price inflation.

The inflation we’re seeing today has nothing to do with QE (more on that in a minute). Now people say the Fed’s raising interest rates. But it’s not that simple.

The Fed Has Limited Influence Over Long-Term Rates

The Fed really only controls that overnight rate. It doesn’t have that type of control over longer-term interest rates like those on the 10-year Treasury note, for example.

The Fed can target 10-year note rates to some extent with quantitative easing or quantitative tightening, through buying and selling them in the market. They can move the rate around a little bit, but that influence is limited.

The market for 10-year Treasuries is much, much larger than the Fed. It’s the deepest and most liquid market in the world.

So the Fed’s really targeting one minor rate, the overnight rate. It’s a really narrow target.

They don’t control long-term interest rates directly, nor do they have the capacity to do so.

So how does raising the fed funds rate reduce inflation?

The Supply Side

There are two major sources of inflation. There’s the supply side and there’s the demand side. Either one of them can drive inflation, but they’re very, very different in terms of how they work.

The supply side, as the name implies, comes from input. The supply just isn’t there. Farm prices are going up because fertilizer prices are going up, partly because of the war in Ukraine. Oil prices are going up because there’s a global shortage, and there’s disruption in supply chains.

Actually, I need to refine my comments about oil shortages. Rising gasoline prices don’t have all that much to do with the oil supply. There’s not a shortage of oil, but in the United States, there’s a shortage of refining capacity.

You don’t put crude oil in your gas tank, you put gasoline in your gas tank, or diesel, or jet fuel, which is basically kerosene. All of it has to be refined, and that’s where the bottleneck is.

Raising Rates Won’t Plant Crops or Increase Oil Production

So there are increasing shortages in some of the refined products, and that also accounts for today’s extremely high prices. And transportation costs go into the prices of everything.

So what can the Fed do about that? Nothing. Does the Fed drill for oil? Does the Fed run a farm? Does the Fed drive a truck? Does the Fed pilot a cargo vessel across the Pacific or load freight at the Port of Los Angeles?

No, they don’t do any of those things, and so they can’t fix that part of the problem. Raising interest rates has no impact on the supply side shortages we’re seeing. And that’s where the inflation’s coming from.

Since the Fed has misdiagnosed the disease, they are applying the wrong medicine. Tight money won’t solve a supply shock. Until the supply shortages are fixed, higher prices will continue. But tight money will hurt consumers, increase the savings rate and raise mortgage interest rates, which hurts housing.

The Demand Side

Then there’s demand-side inflation, called demand-pull inflation. That’s when people build inflation into their day-to-day behavior, when they think inflation’s here to stay.

They say, “Well, I was thinking of buying a new refrigerator. Better go get it today because the price is going up.”

The same logic applies to buying a new car, a new house, etc. The motivation to buy now accelerates demand because consumers think the price will only go up. These expectations can take on a life of their own and feed on themselves as people rush to the stores.

Supply can’t keep up, which is a recipe for higher prices. We’re not there yet. We’re not at the demand-pull side, but we’re dangerously close.

Are you running right out today to go buy a new refrigerator because you fear the price is going up? Probably not. You’re certainly aware of price increases; you see them at the pump and at the grocery store. But at least so far, that part of the behavior has not changed very much.

The Cure May Be Worse Than the Disease

Here’s the point: The Fed can’t create supply but it can destroy demand. If they raise interest rates enough, mortgage rates will rise and monthly payments with them. People will stop buying houses and credit card balances will rise because they’re paying higher interest. Financing starts to dry up, which spreads throughout the economy.

So the Fed can destroy demand, but only at the cost of the economy. It’s one thing if the inflation is coming from the demand side, but it’s not. It’s coming from the supply side, and the Fed can’t do anything about that.

They can destroy enough demand to maybe bring inflation down, but only by destroying the economy. And that’s the point. The idea that the Fed can squash inflation without squashing the economy is false.

I’m afraid we’re going to find that out the hard way.


Source : Daily Reckoning

China’s Economic Engine Is About to Start Shrinking

Justin Fox wrote . . . . . . . . .

For a few decades now, China has been converging with the US economically. Depending how you measure it, its gross domestic product has either already passed that of its great global rival or is getting ever closer. Average incomes are still much lower in China, but by another key metric of living standards, life expectancy, China matched the US in the pandemic year of 2020.

As this century progresses, though, it appears that China will be experiencing economic convergence with the US of another, less positive kind. The country’s working-age population of nearly a billion (defined here as those ages 15 through 64) has been essential to its economic rise, enabling it to become the workshop of the world and a vast consumer market. But according to population projections released last week by the United Nations, this cohort will start declining rapidly in the 2030s, and shrink by almost two-thirds by the end of the century. With the US working-age population projected to be about the same size in 2100 as it is now, China’s will go from more than four times larger to less than twice as big. Throw in Canada and Mexico, which aren’t exactly part of the same labor market as the US but do share a free-trade zone, and China’s working-age population is projected to be only 1.2 times bigger.

These projections, from the “medium scenario” of UN forecasters, are arguably over-optimistic about population trends in China. They assume that the country’s fertility rate will rebound from its sharp decline of the past few years and edge closer to that of the US as the century progresses.

The projections may be too optimistic about fertility trends in the US as well, but this country can at least rely on another source of population growth that China hasn’t embraced and probably won’t in the future: large-scale immigration.

The UN also offers a “low-fertility scenario” in which birth rates stabilize at lower levels in both China and the US. In it, China sees its working-age population drop by more than 80%, and North America’s surpasses it in 2097.

The year 2097 is a long time from now, of course, and none of this — beyond the 2030s drop in China’s working-age population that’s already been baked in by the recent decline in births — is fated. The UN has been making long-term population projections since the 1950s, and while these have been quite good at capturing the overall trajectory of global population growth, they’ve often been much less accurate in the particulars. The disappearance of two-thirds or more of the working-age population envisioned for China is unprecedented in the modern world, and the threat of it may bring policy and societal changes that slow or even halt the trend. Lots of other things could happen in the next 75 years to supersede these forecasts: climate catastrophes, world wars, alien invasions, the singularity, you name it.

Also, the UN population forecasts contain other information about future labor supply that may end up being much more important than how China and the US stack up. Africa is projected to be the big gainer, with a working-age population expected to nearly equal Asia’s by the end of the century. (For its continental/regional groupings, the UN puts Mexico in Latin America and defines “Northern America” as the US, Canada, Bermuda, Greenland and St. Pierre and Miquelon.)

Still, with the working-age population decline that faces China in a few years already underway elsewhere in East Asia — Japan’s 15-64 population has fallen 17% since 1994, while South Korea’s and Taiwan’s appear to have peaked in 2017 and 2016, respectively — the region’s shift from growth to shrinkage is going to be hard to ignore. Here’s another striking comparison, which I’ve run all the way back to 1950 to get the full effect.

The rise of East Asia has been perhaps the single most important global economic trend of the past half century. What does that imply about its decline?

By “decline” I don’t necessarily mean something akin to the fall of Rome. Japan remains an affluent, advanced economy despite its quarter century (so far) of working-age population decline. But its share of nominal global GDP has fallen to 5.1% in 2021 from 17.9% in 1994. All wealthy nations have ceded GDP share to make room for China and other emerging markets, but the US declined just to 23.9% from 26.1%, and the European Union share declined to 17.8% from 25.7%.

In 2021, China’s share of global GDP was 18.5% and its share of global working-age population was 19.2%. The latter percentage is projected to fall to 6.1% by century’s end. One way for Chinese leaders to prevent an equivalent decline in GDP would be to make reforms and investments that keep per-capita incomes rising faster than the global norm. But as my fellow Bloomberg Opinion columnist Hal Brands and Tufts University China scholar Michael Beckley argued in Foreign Policy last year, fear of reduced economic clout in the future could also elicit a less-productive, more externally aggressive response: “The most dangerous trajectory in world politics is a long rise followed by the prospect of a sharp decline.”

The US faces no such prospect, at least not for demographic reasons. One can even envision it returning to population growth through a renewed embrace of immigration, a more supportive environment for parents or both. At a time of great pessimism among Americans, that’s an interesting prospect to contemplate.


Source : The Washington Post

China’s Lockdowns Are Fueling Record Growth — in Inequality

Luo Meihan wrote . . . . . . . . .

As Shanghai emerged from lockdown in late May, many of the city’s wealthiest residents headed straight for the same store: the Hermès outlet at the exclusive Plaza 66 mall. Long lines formed outside the entrance, as people indulged in their first shopping spree in two months.

Mary Men’s experience was nothing like that.

The 34-year-old spent her first post-lockdown trip in a local supermarket — making some painful choices. For the first time in her life, she found herself studying the price tag of every item before adding it to her basket. She ended up spending just 15 yuan ($2.25) on a box of blueberries, whereas she used to like buying a whole selection of different fruits.

Like much of Shanghai’s middle class, Men struggled financially during the citywide lockdown in April and May. A marketing executive at an import-export firm, her 6,000 yuan after-tax monthly salary already barely covered her mortgage payments and other bills. Then, the shutdown sent food prices skyrocketing — and pushed her into the red.

The experience has forced Men to cut back. She no longer uses her credit card to shop online. Instead, she’s laser-focused on building up her savings, in case the city’s virus controls ramp up again.

“During crunch times, having money in your hands is the most important thing,” says Men. “You had to directly use money from your savings to buy pricey food (during the lockdown).”

Men is far from alone. As China tries to move on from a wave of spring lockdowns, there were hopes that consumers would kick-start the economy by indulging in the kind of “revenge spending” seen at Shanghai’s Hermès store. In reality, the opposite has happened.

Many consumers have emerged from lockdown in a pessimistic mood. Anxious about their personal finances, the precarious state of the economy, and the prospect of further lockdowns, they’re following Men’s example: making deep cuts to their household budgets and saving as much as they can.

That’s because — as has happened elsewhere — China’s lockdowns haven’t affected everyone equally. While wealthy Chinese have ridden out the pandemic with relative ease, a large number of working- and middle-class families have faced job losses and steep drops in income.

A recent survey offers a stark picture of rising inequality. China’s poorest households have seen their wealth decline every quarter since the pandemic began, according to the April report by the Southwestern University of Finance and Economics and Ant Group Research. The country’s wealthiest households, meanwhile, have gotten richer and richer during the crisis.

China’s consumption data reflects this trend. Sales of luxury goods have grown at double-digit levels year-over-year since 2020, according to consultants Bain & Company, putting China on track to become the world’s largest luxury market by 2025.

“The high-income group go for luxury goods partly with the aim of preserving and increasing their assets,” says Ye Min, an executive partner at consultancy PwC in China. “Their consumption is often for the purpose of investment.”

But from a wider perspective, things look very different. During the first five months of 2022, consumers spent more on daily necessities like food and beverages compared with last year, according to official data. But they cut back spending in many other areas, including cosmetics, jewelry, clothing, furniture, cars, and dining out. Total retail sales were down 1.5%.

Consumers’ reluctance to spend is a major headache for Chinese policymakers, threatening to drag down economic growth and fuel unemployment. But it’s also a tough problem to fix — especially as cases of the highly-infectious Omicron subvariant BA.5.2 have emerged in some Chinese cities, bringing the risk of more lockdowns.

Pinching pennies

Mu Cong, a Shanghai-based piano tutor, is one of many middle-class Chinese who have radically altered their spending habits this year.

After he was locked down at home in late March, Mu’s monthly income fell by 70%. Online piano classes were a tough sell, and he barely earned any class fees to supplement his 4,000 yuan basic salary.

“When I had a stable income, I preferred to enjoy myself,” says Mu, who spoke with Sixth Tone using a pseudonym for privacy reasons. “But as I spent more than I earned during the lockdown … I started to feel nervous, and felt the urgency to save more.”

The 22-year-old is now cutting down on non-essentials like coffee, home decorations, and new clothes. When he wants to buy something online, he first adds it to his shopping cart for a while — to allow himself to think twice before hitting buy.

“If you are thinking about whether you need it or not, it’s not essential,” says Mu. “For example, you wouldn’t hesitate to buy toilet paper. I’m giving up things I don’t actually need. It gives me a feeling of control over my life.”

Men, the marketing manager, has embraced a similar austerity drive. In late May, she took a higher-paying job and told herself she should save at least 30% of her salary each month.

“I didn’t worry much about money before,” says Men. “But now that I’m spending the money I have saved, every penny spent is a penny less.”

Adjusting to a new lifestyle hasn’t been easy, Men says. She has halved her living expenses to less than 1,000 yuan per month. She now rarely eats out or orders takeout, buys very little online, and commutes by subway instead of driving to the office.

“When I’m greedy for takeout, I scroll through several online food delivery platforms and look at different options many times, but don’t order anything,” says Men. “It is a bit painful at first to control yourself, and not spend the money you have.”

China’s migrant workers — who represent around one-third of the country’s workforce — have been hit even harder, as many of them fall outside the country’s welfare system.

A survey of migrant worker households by the nonprofit Beijing Social Work Development Center for Facilitators in April found that 73% had experienced salary cuts due to the recent outbreaks. Around 45% said their work had been affected even more than during China’s initial COVID-19 outbreak in 2020.

Li Tao, the founder of the Beijing-based nonprofit that published the survey, says many migrant worker households are having to cut back even on essentials, such as by adding fewer vegetables to their meals.

“They’ve largely run out of savings after the repeated outbreaks of the past two years,” says Li. “Plus, while the majority of respondents were optimistic about the COVID-19 situation in early 2020, now over 70% are anxious that the pandemic will continue to impact their household income.”

An uncertain future

Many middle-class Chinese share these concerns. The widespread expectation of more COVID-19 outbreaks — and lockdown restrictions — in the future is casting a longer shadow over consumer confidence than two years ago.

Mo Na, a self-employed headhunter, says that Shanghai’s monthslong lockdown has taken a heavy toll on her business — and her mental health. She used to spend thousands of yuan a year on cosmetics, but now she has stopped buying them completely.

“Being confined at home for months traumatized me psychologically and made me lose interest in cosmetic products,” says Mo, who also used a pseudonym for privacy reasons. “It’s meaningless consumption. It makes more sense to save money and invest it.”

Fearful of another lockdown, Mo also plans to shut down her business and apply for an in-house human resources job at a larger company. Although the salary would be far lower than what she earned as a headhunter, she feels she needs some stability.

“Since the outbreak, I’ve lacked a sense of security,” she says. “I don’t know if something worse will happen in the future. I don’t have the confidence to spend money — who knows if you’ll be locked up again for a few months?”

Mo is far from alone. Chinese financial authorities are witnessing record surges in household savings, as consumers adopt a defensive crouch.

A June survey of urban Chinese bank depositors by China’s central bank found that people’s confidence in their future earning potential was at its lowest level since early 2020. And a record number of respondents — 58.3% — said they intended to increase their savings, rather than their spending or investments.

The central bank’s financial data shows the same trend. During the first half of the year, China’s household savings rose by 10.3 trillion yuan — also a record — while new household loans fell to a seven-year low.

Gu Yue, a Shanghai-based new media editor, was planning to buy an apartment last year. But she has now ditched the plan, after the lockdown made her fear tying up her money in a mortgage.

“It could easily cost over 1,000 yuan to buy just a few things (during the lockdown) … It was like having your money flushed away every day,” Gu says. “Buying a house is not necessary. Having money in your hands is.”

Fixing the problem

For Chinese policymakers, stimulating sluggish consumer spending is an urgent priority. However, it’s also proving challenging as the country continues to implement tough virus-control measures.

So far, China’s stimulus policies have been relatively restrained. Unlike some major economies, it has avoided giving cash directly to consumers. Instead, it has focused on supporting embattled businesses and boosting the economy through massive investment in infrastructure projects, and hoping this trickles down to the consumption sector.

Some local governments, including the capital Beijing, have issued “consumption vouchers” to residents to fuel spending. But experts say handing out cash subsidies to ordinary consumers — especially those in low-income groups — will have a greater effect.

Economists, however, stress that much will also depend on the government’s COVID-19 policies. Dan Wang, chief economist at Hang Seng Bank (China), says consumption in Shanghai is likely to rebound to similar levels seen in 2021 by the end of the year — as long as the city can avoid further lockdowns.

“The key to ensuring income sources for low-income people is to find a targeted and long-term mechanism to cope with COVID-19 outbreaks,” says Wang. “A citywide lockdown must not happen again.”

“The recovery of the consumption sector depends on how the epidemic evolves … and when residents’ future expectations for job security, income, and the ease of travel improve,” says Tommy Xie, head of Greater China research at OCBC Bank.

Men, the marketing professional, agrees. For now, she feels she has no choice but to save as aggressively as she can. Her employer is already showing signs of financial strain. And she has a mortgage, health care costs, and aging parents to think about.

“I need to give myself some security,” she says. “No one knows what will happen tomorrow. Things can change at any time.”


Source : Sixth Tone

How Long and Deep Is Inflation, and How Close Is China to a Banking Crisis?

Bill Blain wrote wrote . . . . . . . . .

“ All that glitters is not gold…”

This morning: The immediate threat is inflation – how could a strong CPI print destablise markets, but inflation is also a question of what shocks are still to come, and investing accordingly. What if a big No-see-Em shock is still to come – a Chinese financial crisis?

Markets are all about risk – What do we know, and what do we not? That’s easy – we know what we care to learn about the past, what we think we know about today, but about tomorrow we are just making informed guesses.

Today the big front and centre issue is inflation. Does it get worse or better, and for how long?

Take a look at any inflation chart and it will typically shows a series of sharp, short-lived spikes – which makes sense: something triggers inflation, it is addressed and the economy adapts, the price shock is normalised as the economy learns to cope with the new normal.

The immediate critical risk is another new shock; that a stronger than expected US CPI (inflation) report triggers major wobbles across markets by raising expectations of aggressive central banking rate tightening – that’s given some impetus by the comments of Bank of England governor Andrew Bailey who said :“bringing inflation down to the 2% target is our job, no ifs or buts”. The market expects a 50 bp Bank hike in early August – there is little else left in the Bank’s armoury.

The market is split on where the inflation threat goes from tomorrow:

  • There are naysayers who say trying to address the multiple inflation shocks now hitting global markets with recession inducing monetary tightening is just daft.
  • There are others who say it’s all the fault of the overly-easy monetary experimentation of artificially low-rates and QE of the last 14 years: inflation everywhere is a monetary phenomenon. (Inflation is very real and it has enormous socio-economic consequences.)
  • There are some market watchers who believe inflation already peaked, and June will mark a high for this inflationary spike as the economy successfully adapts and digests the Ukraine energy shock and the end of pandemic supply chain crisis. They argue there is significant resilience built in that will ease tensions.
  • There are others, including myself, who believe inflation could yet spike higher, and could remain persistently higher for longer than central bank dot-plots suggest. The energy crisis is not over – and could get substantially worse if Putin does not reopen the gas valves to Europe (currently closed for “maintenance”) later this month. Coronavirus lockdowns in China remain a threat to keep supply chains malfunctioning, and growing wage-inflation as industrial unrest ferments across Europe is going to hit hard in Q3/4 as recession bites.

What’s a fund manager to do? Inflation hurts earnings – as this current earnings season will no-doubt show. Interest rate rises will hit stock returns, balance sheets and prices. One argument is to buy stocks in the expectation the economy will adapt while strong fundamentals re-establish themselves.

On Monday there was a fascinating intervention on the inflation conundrum for asset managers from retired bond king Bill Gross – reminding us bonds diminish risk but lower returns.. “Jim Cramer famously says there’s always a bull market somewhere but I’m straining to find one now.” Gross goes on to say investors should mitigate the pain, accept its happening and “12 month Treasuries at 2.7% are better than your money market fund and any other alternatives!” He has a point – although others say this is time to buy duration to up the return to 3%!

On the other hand, maybe there is more pain to come? Maybe it will be Europe where Euro parity to the dollar is doing precious little to boost economies heading into a new recession, where energy security is perilous, and politics looks a-dither.

And, there are growing signs all is not well in China..

There is a widely held view Paramount Leader Chairman Xi feels so secure, and the distracted west looks so riven, it’s time for a quick operation to seize Taiwan. Maybe not – the Chinese, who share tactical doctrines with the now discredited Russian steamroller, look embarrassed by its shortcomings. For all its’ military posturing and new weapons, the Chinese are not an “outward bound” empire – historically, they prefer to internalise. The spectacular growth of China over the last 30 years has come from the internal control and expansion of its domestic economy, initially through exports and now through domestic consumption.

That’s bound to have created internal tensions – which can be seen in terms of inequality, environmental damage, and the limitations on internal freedoms – all of which we know..

But, over the last 2 years of Covid, China has effectively sequestered itself from the global economy. We think we understand how it works, but in reality… do we? Look at how dramatically and swiftly Hong Kong has been spun from being the premier western entrepot into a kow-towing domestic city.

China is big and it matters. It is like and unlike the west. It has multiple growth problems and demographics that will trigger whole new issues the West has yet to adapt to. The Covid lockdowns, understanding of the Party and government, and now bursting economic bubbles and what looks like a developing banking crisis – I’m beginning to wonder if the Middle Kingdom is more trouble than we think? If so it will have enormous global consequences – it could be a massive No-See-Um that could destabilise the global economy.

I’ve been reading up on the Chinese Banking riots in Henan Province. The fact Chinese protestors wanting money back from local banks following a run were set upon is hardly unusual – the immediate suspicion is corrupt local politicians were protecting themselves. But there are two aspects to the story to consider:

The first is Chinese Surveillance Capitalism: clamping down on reporting, using unidentified security personal to beat up and break up protestors, and local officials manipulating Covid “personal health codes” to ping protestors as likely Covid carriers takes state-control to a new level. Observers are not surprised – they saw the mandatory health codes as a way in which Government could control the masses. If surveillance capitalism is so established – why is party corruption still such an issue?

The second is the scale of the domestic banking problem. Is it really just a local, one province problem? What are we not seeing? Could it be the whole Chinese banking system is teetering?

The official line is it’s a local banking problem caused by criminality, presenting the line “local gangsters” have been systematically looting some small banks after “capturing” them up to a decade ago – which sounds like bad regulation and incompetent bank inspection. But runs on banks and lines of people asking for their money back is very 2007.

I am convinced much of the UK banking crisis following the run on Northern Rock that year would have been avoided if the Bank of England had stepped in to provide liquidity earlier. It was when the plentiful liquidity that supported bank property and corporate lending suddenly dried up as it became clear just how unbalanced that lending was that the global financial crisis was triggered.

Let me ask a rhetorical question: Is it possible China’s well known hot property bubble, it’s corporate borrowing binge, plus the high degree of corruption within the system, is fuelling a very real banking crisis in China? Is China about to suffer its’ very own internalised version of the Global Financial Crisis of 2008? How much worse will it be made by the ongoing Covid bogey being used to keep the economy under control? Are Covid Lockdowns being used to disguise the scale of a massive Chinese financial crisis?

Just asking…


Source : Morning Porridge