Posted by: Dr Pano Kroko Churchill | August 28, 2015

Beijing Blues — Seattle Rocks — DC Weeps

Mr Xi Jinping has arrived in Seattle and “tout-le-mond” is going to his dinner this evening. And as am dusting-off my official party frocks — am also thinking of the far ramifications and considering the repercussions of China holding so much US debt on it’s books, that makes the symbiotic relationship hard to stomach…

Although this visit is billed as Economic, and there is a Tech Roundtable of Technology Leaders that I’ve been invited to participate, where China’s President Xi-Jinping, and the heads of all the Big Technology firms from the US like Apple’s TIm Cook, and Satya Nadela of Microsoft, and the Google heads and from China, and all… will get together this Wednesday — the real focus is still the other Washington’s wrath.

A wrath so justified that it might put warships on a different route and it might bring the Pacific fleet on the brink at the straits of Formosa…

They say their beef is about CyberSecurity but the reality is far different and more complex than that.

Because as You can see Economic Wars are undeclared wars and when a country halves it’s foreign debt by a swift devaluation of it’s currency and by deflating it’s equities bubble — the other side gets to hold the bag of shite with plenty of egg on the face…. you know that’s a pretty aggressive move.

And as it turns out in High Finance — same as in a high street gunfight — He who moves FIRST has the advantage. In a Mexican standoff, it tends to be the faster shooter that gets to walk away with his life inside his skin… Sadly the US would wish to have made the move and reduce it’s debt first; but now it’s too late. This elevator has already left with one occupant inside… and that one is China, going up to conquer new heights.

So before I put on my fancy dress in the Washington of the West in Seattle and as am looking forward to the reasoned speeches and the slow reasoning at the official economic-ties dinner tonight — I’ll make some predictions about what comes down the pike next in the Sino-American relationship…:

“Rough weather up ahead.”

Best don the foul weather gear if you are sailing around the South China Sea, and especially if you are in any way exposed to China, as is the whole of America and Europe.

And who isn’t?

Military and civilian alike — best go on full scale alert and turn on the defensive mode…

So tonight it’ll be a political dinner because in the back of our minds we all have Diplomacy & Political Economy. And as our old friend Henry K. says — this kind of imbalances are ultimately and primarily political too…

A political speeches dinner and with Henri Kissinger and Henry Paulson on board tonight promises that it will also be an economic dinner — but it really is a political one. Yet above all else, it would be a reading of the tea leaves ceremony because Beijing’s aggressive and sudden, sharp currency devaluation of the Yuan has a quality all of it’s own. This is because it not only bolsters China’s global competitiveness — but because it also undercuts capital flight from the Mainland, and it curbs the appetite the Chinese “Neculturniy” nouveau rich, towards buying foreign assets, exotic homes, French vineyards, and otherwise spending their money outside their country.

Things the Chinese were buying outside China like second and third homes are now suddenly rather expensive, with the Yuan devaluation – and yet the local Chinese homes seem like a far better bargain by comparison. This was an internal arrangement that China undertook but it had significant reverberations roiling markets all over the world.

China’s President Xi Jinping visit to Seattle follows a tradition begun in 1979 by Deng Xiaoping who was the Great Reformist and opened the country to Capitalism. Deng allowed markets to flourish and spurred the growth that China enjoyed for thirty years now. He called for the cat that catches mice regardless of colour, and stripe. And since then along with the rising fortunes of China, Washington State has elevated its relationship with China beyond recognition so that it is now the greatest trading partners.

China is now home to some of the world’s biggest companies, same as Washington state is. Seattle and Washington, we’re home to some of the world’s leading companies — such as Boeing, Microsoft, Starbucks and Amazon — and so is China too, because all of these companies have large corresponding relationships and outfits in China’s mainland. Further Washington state as a major producer, has established the export relationship with China as our largest export customer. Our burgeoning clean-technology industry has much to offer China in addressing its severe environmental challenges. Washington’s companies and institutions and China are partnering in producing breakthroughs in affordable medicines and vaccines. We enjoy extensive sister-city and sister-port relations, and thousands of Chinese students flock to our college campuses. These exchanges create opportunities for partnerships in aerospace, information technology, life sciences, agriculture, viniculture, medicine, pharmaceuticals, and most other innovation fields.

Indeed, the world is a far different place today than 1979 when Deng Xiaoping opened up the Chinese markets hesitatingly first to Washington state and then to the rest of the world. Then, China was an impoverished, isolated country aligning strategically with the United States against the Soviet Union, and emerging from the nightmare of its Cultural Revolution. From an American perspective, geopolitical issues were paramount, as US businesses on the other hand, imagined a future with a billion new potential consumers. We gave China special status, and trade and other relations grew exponentially. We backed expanded trade and China’s accession to the World Trade Organization despite occasional disputes. Because of that special status, we complained but took little action to counter China’s unfair industrial policies, IP theft, and espionage. Under Xi’s leadership, economic and strategic concerns have increased, as have issues such as the denial of people’s Liberty, basic freedoms, human rights, and the rule of law. Denial and lack of free speech, and Democracy’s suppression, are also thorny issues between the two countries…

Today, China’s economy is roughly comparable in size to that of the United States, and its military power is rapidly growing. Our two countries no longer face a significant common enemy. We have an enormously complex economic relationship with many mutual benefits, but the dollar value of Chinese exports to the United States is four times that of U.S. exports to China. And Washington state’s extraordinary trade with China does not reflect the national bilateral picture. This critical relationship requires a clear understanding on both sides of shared and conflicting interests, and requires from the United States a far more sober diplomacy that protects our interests based on a new strategic framework.

The devaluation of the Yuan was called the singular war-like move that roiled the world’s financial markets and turned the stock exchanges around the globe into quicksand. The Markets with mud on their head this past weeks have framed the Chinese coin devaluation move, as a mere adaptation to the wishes of others. Simple minded observers specifically believe that China bowed & kowtowed to the International Monetary Fund, and to their exasperating trading partners, or to the Obama administration — which have long urged China’s central bank to use more market-based criteria in setting its exchange rate.

The Truth as usual is far different than that…

China is the cornerstone of global resource demand and that game is now up…

Ask any shipping tycoon to vouch for that.

And the truth is this isn’t skin deep. It goes way further than that.

But let’s examine the trends deeply, and see if we can discern the Truth by practicing the ancient Art of tea leaves examination.

China has suddenly devalued it’s coin and thus it has broken everybody’s favourite cup of tea. Yet it just so happens, that doing so at this moment cheapened the yuan//renminbi, against the dollar; which actually boosted the competitiveness of Chinese exports and hurts the sale of U.S. goods in China.

This smart and secret move is also a way to reduce the Carbon intensity of China and make Climate Change slower. Energy imports become more expensive and therefore are lessened automatically. Capital investment in China increases. All those are Great Things for China. In the political chess arena — it is a winning move. And even accounting for Capital flows and flight — it has a rather positive protectionist effect for the Chinese Internal Economy. And if you can’t see that — then sorry but You are blind…

Predictably populist and easily erring politicians ranging from Donald Trump to Senator Charlie Schumer, are crying “currency war is coming and the sky is falling.”

But those are Fools with a capital F and if you are listening to them — then you are a fool too…

Am saying this because what that faulty interpretation overlooks is that China’s currency has gradually but steadily appreciated over the past 10 years, rising 25 percent versus the U.S. dollar, and the latest move reverses only about a sixth of that. It would not seem to be in China’s interest to let the bottom fall out of the yuan//renminbi, because that would trigger ruinous capital flight from the country.

Something that at any rate has already begun long time ago… Capital is free flowing and no amount of government control can stem the flow; except the iron laws of Beneficial IRR. The law of Returns. And the law of Compound Interest…

Tweaking the currency, like previous expedients the government has tried (stimulating a short-lived stock-market bubble and bailing out the losers, for example) may indeed boost exports, thus enabling Beijing to paper over this fundamental contradiction for a while. It won’t solve it. To the contrary, Beijing’s action reinforces the impression that the regime is improvising in the face of a growth slowdown that’s actually worse than official statistics suggest.

But now Confucius reins supreme in China again much like that time in the Middle Kingdom some 1600 years ago…

It’s no coincidence that, in addition to a troublesome economy, President Xi Jinping is also presiding over what Human Rights Watch’s most recent annual world report called “the harshest campaign of politically motivated investigations, detentions, and sentencing in the past decade, marking a sharp turn toward intolerance of criticism.” The most recent wave of arrests targeted more than 100 human rights lawyers in July.
Beijing’s formula for social peace is economic growth plus political homogeneity. As long as the Dollars keep coming in and are shared amongst the new Middle Classes — all is well in the Sino landscape of thousands of differing constituencies…

However when the economic landscape become a rough terrain to navigate and the less wealth and prosperity the Chinese Leaders can deliver — the more Autocracy they must impose. Because what the Communist Party absolutely refuses to permit, is intellectual freedom, democratic participation, governmental transparency and a reliable rule of law, which are indispensable ingredients for a truly prosperous market economy.

Freedom of Thought and Expression is also the key ingredient for Innovation and that is now lacking seriously depriving the Chinese Economy from Market and Technological Innovation further weakening the new economic growth prospects of the country; relegating it’s best entrepreneurs to simple Imitation and Copying of others’ successes. The leaders understand that and that is why your intellectual property is worth jackshit in China — no matter how man patents you’ve got or special dispensations.

Naturally the elliptical moves of the historical pendulum, towards permissiveness, human rights, and market reforms, is not an easy one to predict — but it is a forthcoming harbinger of change. And nowhere is change more welcome than n China’s Entrepreneurial class. The market makers fully understand and embrace that…

So we need a bot more loosening up of the controls and more freedom. and unless the Party bosses understand that and until they change, China’s people and the rest of the world, including the US, and EUrope’s producers, consumers and investors very much included — we will all be vulnerable to the vagaries of secret politburo decision-making.

Yours,

Dr Kroko

PS:

Dr Fu Manchu once famously said: “Watch my nails grow”

That about captures the glacial speed of China’s change.

So don’t expect anything changing speedily.

But the wheels are already in motion…

The convenient economic picture is that the Chinese are in deep economic trouble, and the small coterie of Communist Party officials who run the country are somewhat at a loss for what to do about it.

Macro Economic Growth has been flagging, yet the ruling elite is hesitant to turn from the state-led investment-dominated policies that worked in the past, because putting the private sector and consumers in charge would imply a loss of political control.

All the more reason for President Obama to press the cause of democracy and human rights with Mr. Xi when he arrives to the other Washington for the state visit next few days as he will no doubt press for MFNS and other goodies…

The cleavage between Washington and Beijing today could not have been any greater…

WHo understands whom?

Most likely they will both agree to be misunderstood.

But what I think the best way for China and the US to go forward is, only Peace and Understanding, in order to let a Thousand flowers bloom.

And some more…

And to find solace at this time of Crisis I look at our old friend Wisdom and remember that the best is yet to come if we are still alive…

Keep in mind that it is always “The gentleman who seeks righteousness; whereas the petty man only seeks profit.”

Couldn’t have said it better myself.

That’s another confusing quote from old man Confucius…

But then what do you expect from the Chinese Socrates besides confusion that makes you think?

Now it makes you question which one are You?

Right?

And looking inwards is what I call constructive thinking.

Mission Accomplished.


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