Michael Bond: When the Federal Reserve was slowly raising interest rates a few years back the emerging and overseas economies were being squeezed to include China. Over $12 trillion in overseas bank loans in US dollars were becoming more expensive and the rush for dollars grew. From a trade negotiation point of view this would strengthen the US hand. But instead Trump demanded lower interest rates and he got them and the squeeze ended.
This lesson allowed China to plan ahead. They have pulled in a lot of dollars from US investors but if they now see this flow ending on US policy changes, they can move on to their next round of moves. China’s policy is designed to increase China’s national power. US policy is designed to make wall street and the financial elite wealthier even if it now means supporting China’s rise and the US demise.
Here are some excerpts from Doug’s article seen below.
Risks grow exponentially during the “Terminal Phase” of Bubble excess. I assumed Beijing would move decisively to rein in excess, particularly in lending and apartment speculation. But what is now unfolding goes way beyond measures to contain excess. China has begun a transitioning phase, with momentous yet uncertain consequences and ramifications. What began seemingly as a campaign to rein in apartment speculation and crack down on the big tech monopolies has speedily developed into something much more systemic and Draconian.
They’re battening down the hatches. The broad scope of reform measures, the tone, the heavy-handedness and the apparent urgency. Beijing is preparing for something – but what? Is their focus unfolding domestic hardship, geopolitical or a combination? A bursting China Bubble will be fraught with destabilizing economic and social upheaval. And it would be understandable – even constructive – to begin preparing society for unfolding challenges. Perhaps Chinese leadership even subscribes to the global Bubble thesis – and they’re enacting Draconian measures to ensure China is better prepared for crisis dynamics than its adversaries (employing a similar zero-tolerance mindset adopted with their war against covid).
I think it’s about Bubbles, but I can’t shake the unsettling feeling Taiwan is playing a role. For years, I’ve worried how Beijing might respond to a bursting Bubble. A move on Taiwan would stoke nationalism, while diverting attention away from Beijing’s gross mismanagement of its financial and economic systems (they’re not alone in this regard). “Xi Jinping Thought” and cultivating a “patriotic atmosphere,” while repressing “effeminate” TV personalities and video games. Crazy, alarming stuff – that might be expected from a regime contemplating international conflict.
We certainly observe the dynamic at play in U.S. equities: virtually any risk is today viewed constructively, as it ensures a more protracted period of zero rates and massive QE. So risk is disregarded. Momentous changes are afoot in China, which are difficult not to regard as alarming developments. Yet apparently all that matters is that Beijing will maintain loose fiscal and monetary policies. We’ll see how long the Easy Money Anesthesia continues to work its magic.
Easy Money Anesthesia
by Doug Noland
China’s historic Bubble has been integral to CBB analysis for two decades. I’ve on a weekly basis chronicled how interconnected Chinese and the U.S. Bubbles worked in harmony to inflate one epic global Bubble. Loose U.S. monetary policy and financial conditions were initially instrumental in stoking expansion of Chinese finance and economic output. As for China, it “recycled” massive trade surpluses with the U.S. back into American securities markets, helping sustain U.S. Bubble excess.
It was a symbiotic relationship of far-reaching historical significance. China was desperate for growth and development. The U.S. preferred to deindustrialize – while still enjoying access to cheap manufactured goods (lower CPI, greater monetary accommodation and higher asset prices). Rather than a fledgling competitor, China development was considered a potentially enormous economy determined to adopt free-market capitalism and integrate with the West. They aspired to be like us.
The booming Chinese economy essentially enjoyed unlimited cheap finance. And as dollars flooded in, their ballooning horde of international reserves bolstered China’s pegged currency regime. This stoked “hot money” inflows, while unleashing domestic Credit creation. There were essentially no restraints on Chinese bank lending, as China circumvented the type of currency vulnerability that would typically place constraints on EM Credit Bubble excess.
Bubbles are mechanisms of wealth redistribution and destruction. “Symbiotic relationships” – typified by cooperation and integration – are by their nature transitory phenomena, creatures of the early-Bubble notion of an expanding economic “pie.” Inevitably, late-cycle insecurities and fears of a shrinking pie spur disintegration and conflict.
The prolonged global Bubble period literally inflated China to superpower status, creating rival Bubbles without precedent. The newfound intensity of this rivalry was revealed during the Trump presidency, most conspicuously in fraught trade negotiations. Heated trade talks forced Beijing again to retreat from measures meant to rein in Bubble excess. Understandably, the perception solidified that Beijing wouldn’t dare risk piercing China’s colossal Bubble. The pandemic then incited the most outlandish stimulus measures and system Credit expansion imaginable.
Risks grow exponentially during the “Terminal Phase” of Bubble excess. I assumed Beijing would move decisively to rein in excess, particularly in lending and apartment speculation. But what is now unfolding goes way beyond measures to contain excess. China has begun a transitioning phase, with momentous yet uncertain consequences and ramifications. What began seemingly as a campaign to rein in apartment speculation and crack down on the big tech monopolies has speedily developed into something much more systemic and Draconian.
August 30 – Bloomberg: “Chinese President Xi Jinping chaired a high-level meeting that ‘reviewed and approved’ measures to fight monopolies, battle pollution and shore up strategic reserves, all areas that are crucial to his government’s push to improve the quality of life for the nation’s 1.4 billion people. Few details were released about the guidelines discussed on Monday at the meeting of the central committee for deepening overall reform, which includes some of China’s most powerful leaders and has wide powers to shape government policy. Xi in particular stressed the importance of strengthening anti-monopoly regulations, a push that has already cost tech giants hundreds of billions of dollars in market value over the past year.”
September 1 – Reuters (Kevin Yao): “President Xi Jinping has called for China to achieve ‘common prosperity’, seeking to narrow a yawning wealth gap that threatens the country’s economic ascent and the legitimacy of Communist Party rule. ‘Common prosperity’ as an idea is not new in China, but a sharp escalation in official rhetoric and a crackdown on excesses in industries including technology and private tuition has rattled investors in the world’s second-largest economy… ‘Common prosperity’ was first mentioned in the 1950s by Mao Zedong, founding leader of what was then an impoverished country, and repeated in the 1980s by Deng Xiaoping, who modernised an economy devastated by the Cultural Revolution.”
August 31 – Bloomberg (Daniel Taub): “China’s securities regulator said it plans to rein in the country’s private equity and venture capital funds, stop public offerings disguised as private placements and fight embezzlement of assets. The China Securities Regulatory Commission will work to root out ‘fake’ private equity funds that are actually sold to the general public instead of targeted investors… China’s financial regulators have become more assertive in recent months, cracking down in areas from online lending and insurance to initial public offerings and margin financing.”
August 30 – Reuters (Brenda Goh, Yingzhi Yang and Yilei Sun): “China’s market regulator said… it would step up oversight of the so-called sharing economy, where consumers share access to goods and services often with the help of an online platform. The move by the State Administration of Market Regulation (SAMR) is the latest in a drive by Beijing to strengthen control over its society and key sectors of its economy, including tech, education and property.”
August 31 – Financial Times (Edward White): “A blogger’s tirade endorsed widely by Chinese state media has called for Beijing’s snowballing regulatory overhaul to target the high costs of housing, education and healthcare while also instituting deep reforms to finance and cultural industries. ‘This is a transformation from capital-centred to people-centred,’ the writer said, adding that those who sought to block the deep reform efforts would be ‘discarded’. The commentary… has been shared by China’s biggest state and party-controlled media outlets including Xinhua news agency, the People’s Daily and CCTV television network, indicating the broad degree of state support.”
August 30 – Reuters (Kevin Yao): “China’s move to curb disorderly expansion of capital has shown initial results, state media quoted a top-level meeting as saying… Since late 2020, Beijing has been advocating ‘the prevention of disorderly expansion of capital’, kicking off a clampdown on tech giants and private education firms. The campaign has been focused on preventing ‘savage growth’ of some platform companies in a bid to deal with their monopolistic and unfair competition behaviors… ‘Initial results have been achieved in preventing disorderly expansion of capital, and the fair market competition order has been steadily improving,’ state media quoted the meeting on deepening reforms, chaired by President Xi Jinping, as saying.”
Beijing has been bustling with activity. Communist leadership has clearly turned against Capitalism, though it’s difficult to fault their effort to curb the “disorderly expansion of capital.” Untethered finance has so corrupted today’s Capitalism. Under the guise of “market reform,” Beijing is in the process of wresting ever-tighter control over the markets, the economy and society at large. I’ve long assumed Beijing would respond to a bursting Bubble with various forms of financial, economic and social repression, while casting blame on foreign governments (i.e. U.S. and Japan). It appears Chinese leadership has decided to begin executing some sort of plan.
Measures to rein in lending and speculative excess, while clamping down on increasingly powerful business and market interests, are of little surprise. A spate of other pronouncements is not so easily explained.
August 27 – Financial Times (Sun Yu): “A campaign to make children as young as 10 study President Xi Jinping’s political philosophy has been labelled by some parents as ‘disgusting’ and evoked memories of Mao Zedong’s personality cult. More than a dozen parents across the country told the Financial Times they were uncomfortable with the rollout next month of classes on ‘Xi Jinping Thought’. The eponymous philosophy, which features a mixture of patriotic education and praise for the Chinese Communist party’s general secretary, will become part of the national curriculum from primary school to university next month… ‘This is disgusting,’ said a father… in central Henan province… He hoped his daughter would ‘forget about everything after she is done with the exam’. The backlash highlighted the difficulty the party faced in making Xi’s philosophy the nation’s ruling ideology for generations to come.”
August 31 – Reuters (Brenda Goh): “China has forbidden under-18s from playing video games for more than three hours a week, a stringent social intervention that it said was needed to pull the plug on a growing addiction to what it once described as ‘spiritual opium’. The new rules… are part of a major shift by Beijing to strengthen control over its society and key sectors of its economy, including tech, education and property, after years of runaway growth. The restrictions… are a body blow to a global gaming industry that caters to tens of millions of young players in the world’s most lucrative market. They limit under-18s to playing for one hour a day – 8 p.m. to 9 p.m. – on only Fridays, Saturdays and Sundays… They can also play for an hour, at the same time, on public holidays.”
September 2 – Reuters (Josh Horwitz and Brenda Goh): “Authorities told broadcasters… to shun artists with what they called incorrect political positions and effeminate styles, to strictly enforce pay caps for actors and guests as well as to cultivate a ‘patriotic atmosphere’ for the industry. It marked the expansion of a campaign that has targeted what authorities have described as a ‘chaotic’ celebrity fan culture. Last month, China barred platforms from publishing popularity lists and regulated the sale of fan merchandise in August after a series of controversies involving performers.”
August 30 – South China Morning Post (Jamie Tarabay): “Chinese officials have been warned by President Xi Jinping to ‘discard their illusions’ about having an easy life and ‘dare to struggle’ to protect the country’s sovereignty and security. ‘The great rejuvenation of the Chinese nation has entered a key phase, and risks and challenges we face are conspicuously increasing,’ Xi said… ‘It’s unrealistic to always expect easy days and not want to struggle.’ He told an event on Wednesday to mark the new semester at the Central Party School… that: ‘[We] must not yield an inch on issues of principle, and defend national sovereignty, security and development interests with an unprecedented quality of mind.’ His remarks to hundreds of mid-level cadres from around the country did not elaborate on the need to struggle but were made amid growing tension with the United States on a range of fronts, including geopolitics, the economy and technology.”
They’re battening down the hatches. The broad scope of reform measures, the tone, the heavy-handedness and the apparent urgency. Beijing is preparing for something – but what? Is their focus unfolding domestic hardship, geopolitical or a combination? A bursting China Bubble will be fraught with destabilizing economic and social upheaval. And it would be understandable – even constructive – to begin preparing society for unfolding challenges. Perhaps Chinese leadership even subscribes to the global Bubble thesis – and they’re enacting Draconian measures to ensure China is better prepared for crisis dynamics than its adversaries (employing a similar zero-tolerance mindset adopted with their war against covid).
September 1 – Bloomberg: “The world is undergoing profound changes that are unseen in a century and are evolving more quickly, the official Xinhua News Agency cites Chinese President Xi Jinping as saying in a speech at the central party school in Beijing… China ‘must not yield an inch of ground’ on matters of principles and uphold China’s sovereignty, security and development interests with unprecedented resolve: Xi. It’s not realistic to hope for peaceful days and refuse to struggle: Xi”
I think it’s about Bubbles, but I can’t shake the unsettling feeling Taiwan is playing a role. For years, I’ve worried how Beijing might respond to a bursting Bubble. A move on Taiwan would stoke nationalism, while diverting attention away from Beijing’s gross mismanagement of its financial and economic systems (they’re not alone in this regard). “Xi Jinping Thought” and cultivating a “patriotic atmosphere,” while repressing “effeminate” TV personalities and video games. Crazy, alarming stuff – that might be expected from a regime contemplating international conflict.
September 1 – Reuters (Kevin Yao): “China will boost financing support for small firms by increasing annual relending quotas by 300 billion yuan ($46.39bn), the cabinet said… China will step up support for small- and medium-sized firms to help stabilise economic growth and employment, as rising commodity prices push up production costs and receivables, the cabinet said… The central bank will provide support via rediscount instruments to help ease financing burdens of small firms, while financial institutions will conduct bill discount financing for small firms, the cabinet said. The government will strengthen its policy reserves and improve cross-cyclical adjustments, state media said, adding that local government special bonds will help drive effective investment.”
August 30 – Reuters (Xu Jing, Ryan Woo and Winni Zhou): “China’s currency regulator has been conducting a rare survey of banks and companies to ask about their risk management processes and ability to handle volatility in the yuan, three banking and policy sources told Reuters. The State Administration of Foreign Exchange (SAFE) surveyed ‘how companies in different sectors managed their FX exposure and how they used hedging tools’, said one of the sources, who was directly involved in the survey. The SAFE did not give a reason for the survey…”
September 3 – Bloomberg: “China’s various industry crackdowns from technology to education mean monetary and fiscal policies will likely remain loose on the margin to offset the drag on economic growth, economists at Goldman Sachs… said. The economy is in a ‘micro takes and macro gives’ environment, where regulatory tightening in specific sectors will likely be accompanied by supportive policy from monetary and fiscal authorities, Goldman’s chief China economist Hui Shan and others wrote in a note.”
We certainly observe the dynamic at play in U.S. equities: virtually any risk is today viewed constructively, as it ensures a more protracted period of zero rates and massive QE. So risk is disregarded. Momentous changes are afoot in China, which are difficult not to regard as alarming developments. Yet apparently all that matters is that Beijing will maintain loose fiscal and monetary policies. We’ll see how long the Easy Money Anesthesia continues to work its magic.
Original Post 4 September 2021
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