China's Emergence as a Superpower (till 2014)

[Ray]

And the US collapsed!

In the above post.

Lest misunderstood, I would like to clarify that it was in the sarcastic vein!

In reality, the USSR not only collapsed because of US Foreign policy chiselling away, but made it impotent and it will take years for them to recover.

Observe the US approach to China.

It is not merely military containment, but ruining the Chinese social order, feeding on the Chinese yen for avarice and greed, causing industrial turmoil and social and regional inequalities that will have serious consequence in the overall context.

[Dayuhan]

Make of it what you will...

http://www.telegraph.co.uk/news/worl...-cheating.html

Riot after Chinese teachers try to stop pupils cheating

What should have been a hushed scene of 800 Chinese students diligently sitting their university entrance exams erupted into siege warfare after invigilators tried to stop them from cheating...

... By late afternoon, the invigilators were trapped in a set of school offices, as groups of students pelted the windows with rocks. Outside, an angry mob of more than 2,000 people had gathered to vent its rage, smashing cars and chanting: "We want fairness. There is no fairness if you do not let us cheat."

According to the protesters, cheating is endemic in China, so being forced to sit the exams without help put their children at a disadvantage.

[Dayuhan]

Against better judgment, but...

In reality, the USSR not only collapsed because of US Foreign policy chiselling away, but made it impotent and it will take years for them to recover.

The USSR collapsed not because of US foreign policy, but because of its own utterly dysfunctional economic system.

Observe the US approach to China.

It is not merely military containment, but ruining the Chinese social order, feeding on the Chinese yen for avarice and greed, causing industrial turmoil and social and regional inequalities that will have serious consequence in the overall context.

How is the US ruining the Chinese social order? The Chinese are doing it all by themselves. China has an abundance of social and economic problems, but they are not caused by anything the S has done, just as the social and economic problems of the US are not caused by China.

I don't know that any meaningful US "military containment" of China is really going on. The Chinese seem quite able to pursue their agenda in the South China Sea despite an increased US military tempo.

US port visits in Subic have increased dramatically: 51 in 2010, 54 in 2011, 72 already in 2013. There's a US/Philippine joint exercise starting near Scarborough Shoal tomorrow. Net impact on China's actions is pretty much zero: they are still occupying Scarborough shoal and being as pushy as ever in the Spratlys. The American ships can come and go as they please; the Chinese can ignore them, because they know very well that the Americans are not going to war over Scarborough Shoal or the Spratly Islands. An actual attack on the Philippines might be a different story, but there's no reason to think the Chinese have any intention of going there. Why would they?

[Ray]

US port visits in Subic have increased dramatically: 51 in 2010, 54 in 2011, 72 already in 2013. There's a US/Philippine joint exercise starting near Scarborough Shoal tomorrow. Net impact on China's actions is pretty much zero: they are still occupying Scarborough shoal and being as pushy as ever in the Spratlys. The American ships can come and go as they please; the Chinese can ignore them, because they know very well that the Americans are not going to war over Scarborough Shoal or the Spratly Islands. An actual attack on the Philippines might be a different story, but there's no reason to think the Chinese have any intention of going there. Why would they?

That is what is called 'containment'.

For the life of me, I don't know what else would be classified as 'containment'.

Military action would be called 'war'.

Without the US containment, China would have a cake walk in the SCS and be ruling the roost.

I could elaborate on how the US ensured that USSR came to its economic collapse and so can I on how the US is influencing the social order in China, but then that would not be possible in a short post!

[Dayuhan]

Without the US containment, China would have a cake walk in the SCS and be ruling the roost.!

What does this supposed "containment" prevent the Chinese from doing in the SCS? They sail where they want, they fish where they want, they occupy the territory they want. The US sails around and visits ports, but what does that prevent the Chinese from doing?

I could elaborate on how the US ensured that USSR came to its economic collapse !

I've heard the arguments, and I'm not persuaded. Would any of these things the US did have been at all successful if not for the fundamentally and utterly dysfunctional nature of the Soviet economy and leadership? Certainly the US took steps that accelerated the decline, nbut the core problem of the Soviet Union was that communism doesn't work. It rotted from the inside out. An outside push might have helped topple it, but if it wasn't rotten inside, the outside push wouldn't have meant much.

and so can I on how the US is influencing the social order in China, but then that would not be possible in a short post!

That would be interesting to hear. Not sure how you could make that case without resort to the speculative, but I'd be interested to see the effort.

[Ray]

What does this supposed "containment" prevent the Chinese from doing in the SCS? They sail where they want, they fish where they want, they occupy the territory they want. The US sails around and visits ports, but what does that prevent the Chinese from doing?

Free movement across international waters has been the crux of US policies. Therefore, it is a flawed premise that ‘containment’ should correspond to some Medieval Siege! In modern terms, such a siege that you equate as ‘containment’ would be an ‘embargo’ with blockades, which are often considered to be acts of war. It is reiterated that US is not at war with any country, including China. Nowhere has the US ‘containment’ been translated in preventing free navigation of any shipping in international waters! In fact, it is quite the opposite -the US insists on freedom of movement in international waters. You do injustice to the US with your contentions.

Since it appears that there is some cognitive gap about the US’ China containment policy, a clarification seems to be in order.

China containment policy is a political term referring to a claimed goal of U.S. foreign policy to diminish the economic and political growth of the People’s Republic of China. It also includes controlling Chinese hegemonic ambitions.

Apparently, it is bizarre to believe that anyone who assumedly is conversant with international affair could suggest that "containment" would encompass preventing the Chinese from operating in the SCS international waters! It would not be unfair to believe that such a person merely wants to situate the appreciation, rather than appreciating the situation, obfuscate and muddle issues, so as to make others lose track and to give the impression that something substantial and profound has been stated in reply! Unfortunately, what has been stated as 'profound insight' veers on being merely obtuse and illogical!

Nothing will protect an illogical idea from criticism like calling it practical

In so far as China occupying at will territories inspite of the US, as far as I know, after the US naval exercises, and the US sailing around and visiting ports, China has not occupied any territory, even though they have shown aggressive intent that has turned impotent, as against Japan.

I've heard the arguments, and I'm not persuaded. Would any of these things the US did have been at all successful if not for the fundamentally and utterly dysfunctional nature of the Soviet economy and leadership? Certainly the US took steps that accelerated the decline, nbut the core problem of the Soviet Union was that communism doesn't work. It rotted from the inside out. An outside push might have helped topple it, but if it wasn't rotten inside, the outside push wouldn't have meant much.

No one is in the business of persuading anyone. And why should one try to persuade someone else?

One is merely out here discussing issues and, wherever possible, learning of new things and ideas. I have, myself, found that some of the links appended here, most informative and what I have missed on the subject. Such links also encourages one to delve deeper in the subject and enlarge one's knowledge and perceptions. After all, I don't assume that I know all.

Socrates had said - True wisdom comes to each of us when we realize how little we understand about life, ourselves, and the world around us.

The people who assume they know all and others know nothing should remember the key to success is to never stop learning. The key to failure is to think you know it all.

Did the USSR collapse because of Communism?

USSR did not collapse because of Communism. No political philosophy is perfect. Not only Communism floundered and faded, given the current indications, capitalism seems to be floundering and even though not fading. Therefore, the philosophies and ideologies are not flawed, the practitioners are not true to follow the philosophy in letter and spirit, be it Capitalism or Communism.

Take the case of the Scandanavian countries. What ‘ism’ are they following to be so successful?

The Scandinavian countries are flourishing and the people apparently are satisfied. And yet, their social and political philosophy is unique and almost Communist like – the real welfare States!

Their philosophy is based on egalitarian ideals that have formed the unique social welfare system, benefiting citizens practically from the womb to the tomb. This welfare system centres on the principle that both men and women are fully equal; furthermore society has a moral and legal obligation to remove all barriers preventing citizens from achieving their potential. Policies and laws intertwining gender equality, health care, education, and income distribution are the hallmark of Scandinavia’s welfare system and work interdependently.

They might feel that every other political philosophy is what is making them falter and finally fade. Would they be right? I wonder for after all what is sauce for the goose need not be sauce for the gander.

So, to attribute failure of a Nation solely to a political philosophy or ideology is misconceived. One can't blame anyone for harbouring such a dogmatic line of thinking because we are all influenced by the constant eulogy of our own system, in a variety of ways, and believe that it is better than every other system prevailing. Something on the lines of that of the Pavlovian dogs to conditional reflexes, wherein in an irrational manner, we club such failure of others with a 'catch all' conditioned mindset. As I said, neither the world nor ideologies are perfect. It is the environment, influenced by domestic and international stimuli that dictates the outcome.

One must keep one's mind free from popular biases and independently view issues. And each issue is unique and there is no formatted solution or rational that can be applied.

For instance, there have been countless insurgencies in the world. Are the causes of all insurgencies the same? What was successful in quelling the insurgency in Malaya, why is it not successful in other parts of the world? The environment prevailing for each insurgency, the geostrategic and geopolitical matrices are different and so is the time and the political environment in the timeline of history that manifests itself decides the outcome.

Therefore, the fall of the USSR had many reasons and the US policies were a great catalyst in causing its fall. The same cannot be scoffed over.

You may like to read this:

The Collapse of the Soviet Union and Ronald Reagan
http://wais.stanford.edu/History/his...randreagan.htm

That would be interesting to hear. Not sure how you could make that case without resort to the speculative, but I'd be interested to see the effort.

I think speculation keeps things really interesting.

Only a gypsy fortune teller can read the crystal ball!

I am no gypsy, my moorings are very firm!

[Dayuhan]

Just noticed this today...

http://www.forbes.com/sites/gordonch...rtner=yahootix

Citibank Caught In China Cash Crunch, Not Making Money Transfers

...Last Sunday, customers of the Industrial and Commercial Bank of China, China’s largest bank, were not able to withdraw cash at its ATMs in cities across China or use its online banking platforms. ICBC , as the behemoth is known, blamed “system upgrades” for what official media now calls a “massive banking system paralysis.”

On Monday, a money transfer system at Bank of China, the country’s third-largest bank, went down. Bank of Nanjing customers faced similar problems during the week. Both banks cited technical difficulties.

“I cannot withdraw money from ICBC and BOC, and don’t know who will be next,” complained Wang Yangyu, a customer quoted by Reuters. “Can you banks give me a better explanation?”

Here’s my try at a better explanation. The rash of upgrades and glitches plaguing the Chinese banking system in the past week coincides with the country’s worsening liquidity crisis, which has hit large banks as well as smaller ones. ..

Other coverage:

http://www.bloomberg.com/news/2013-0...since-may.html

http://www.ibtimes.co.uk/articles/48...ty-crunch.htm#

May be less than it seems, but there does seem to be something going on. We'll see... or maybe we won't. Not the most transparent banking industry on the planet. It will not do much for confidence in the banking system, that's for sure.

[davidbfpo]

Dayuhan,

One of the banks with ATM problems, ICBC, is the No.1 bank according to this report:http://www.bbc.co.uk/news/business-23122491

Caution seems wise:

The Industrial and Commercial Bank of China (ICBC) moved into pole position on the back of a 15% increase in capital to $160.6bn.

[Dayuhan]

There is a rush to reassure:

http://www.nytimes.com/2013/07/01/bu...ough.html?_r=0

But even the admission that there has been a problem is unusual. These comments stood out to me:

He also highlighted the risks of wealth-management products, bank-issued securities that have exploded in recent years as households and companies have searched for higher-yielding alternatives to traditional deposits.

“In reality, wealth management products are investment products. Wealth management products are not the same as savings. Investors have to bear investment risk. When banks do these products, are they clearly explaining the risks to investors?” Mr. Shang said.

Analysts have said many who invest in wealth-management products believe their investments carry an implicit guarantee from state-backed banks, even if no legal guarantee exists.

Bank-issued wealth-management products totaled 8.2 trillion renminbi by the end of the first quarter, of which 70 percent were invested in the real economy.

I have to wonder what "invested in the real economy" means, exactly. When people make investments believing that there is protection from risk that does not actually exist, there is some potential for trouble. We will see. It would be interesting to have some first hand observations on ATM traffic and the number/amount of withdrawals, to see if there's any hint of panic withdrawal.

[Firn]

I watched the Chinese banking system for quite a while now but I confess I was a bit surprised by those spikes in the interbank interest rates.

Overall the problem has obvious causes:

1) The Chinese population has a very high saving rate, at least partly for very good reasons like housing, marriage, business investment, eduction for kids and life after work as there seems to be little credit available for the average Chinese guy. So what can they do with their hard-earend Yuan?

2) Small and medium enterprises and even larger private ones have difficulties to secure credits from banks. State-owned ones, which might not be the most profitable ones have in general not the same problem to get it from the - state-owned - banks.

3) The financial system is still not remotely comparable to the one we have in the Western world and good forces of capitalism are not allowed to their due work. It seems to be very hard for private equity to get into the stock market and get capital and to sell bonds. Instead the state-owned banks determine still to a large degree the capital allocation. That mechanism has certainly become quite inefficient in many instances because the risk was deemed non-existent or even necessary thanks to state backing or demand.

Big bad incentives for much money flowing into housing or in those infamous WMP. It is important to keep in mind that a couple of years ago banks&Co started to package away risk and transformed terrible loans to financial gold, at least for some time. Housing prices can indeed only go up and I fear to some extent that many a smart guy in China fell into the same trap. It is important to keep in mind that I do think that in the next twenty years or so China will see good growth. This is the reason why I invested recently in a broad ETF of Chinese stocks, even if a good deal of them are big state-owned banks. The better the reforms and policies the better the growth will be.

[Dayuhan]

This takes a fairly benevolent view of China's economic prospcts:

http://www.project-syndicate.org/com...9343b-24634629

but this bit:

Given that outstanding loans already amount to nearly double China’s GDP – a result of the country’s massive stimulus since 2008 – new loans are largely being used to pay off old debts, rather than for investment in the real economy.

sticks out as a potential problem, especially given the prevalence of crony lending.

[Dayuhan]

And this one is downright scary...

Loan Practices of China’s Banks Raising Concern

... By the end of last year, China’s shadow banking activity was valued at $6 trillion, twice the level in 2010, and now equal to 69 percent of China’s gross domestic product, according to a report released in May by JPMorgan Chase. Now, even state-run banks are doing shadow lending, extending financing to companies in high-risk sectors.

Who is responsible for the loans is not always clear, and that’s where everyone starts getting nervous.

“If a wealth management product defaults, who is on the hook?” asked Michael Pettis, a finance professor at Peking University in Beijing and senior associate at the Carnegie Endowment for International Peace. “It’s all very murky. In these things, the banks are technically acting as intermediaries.”

Financial experts worry about the lack of transparency in the market when China’s economy is weakening. They also fret about whether some borrowers have the cash flow to repay their loans.

Fitch Ratings, the credit ratings agency, began warning two years ago that “wealth management activity carries unique liquidity and credit risks.” But the lending continued and increased.

In a newspaper opinion piece last year, Xiao Gang, then head of the Bank of China, a leading commercial bank, and now the nation’s top securities regulator, referred to shadow banking as “fundamentally a Ponzi scheme.”

The government has so far tolerated shadow banking because getting rid of it is all but impossible, analysts say. Wealthy customers are accustomed to getting better returns, and a large segment of the economy is desperate for capital and cannot easily gain access to regular bank loans, largely because of government restrictions. But they are willing to pay the shadow banks 9, 10, even 15 percent interest...

[Firn]

Yeah I posted something similar. From an investor's point of view it is no surprise that so little money seems to flow into stock market as long-term investment if you can get such a big return in the short-term for those WMD, sorry WMP.

If the capitalistic West bails out private banks then it is just proper that the socialist East does so with his very own.

[Dayuhan]

Sorry, forgot the link on the above...

http://www.cnbc.com/id/100858445

This is where it gets really shaky...

Consumers withdraw money from their regular savings account and put it into a wealth management product that promises a much higher rate. "Usually banks will have higher-yielding products at the end of each quarter," said Wang Yanan, a 24-year-old accountant who works in Shanghai. "If I happen to have money at those moments, I'll buy some."

Though the products are popular, their disclosure is often poor. Bank employees insist the principal is guaranteed, but contracts for wealth management products are usually vague, simply noting there could be risk. Most offer little detail about where the money will be invested.

Much of the money, analysts say, is lent to property developers and local government financing vehicles, areas that have government officials worried because of an explosion in property development and soaring housing prices. Regulated banks will not make the loans because the borrowers are too risky.

So people who think the prinicipal is guaranteed are funneling money into products that effectively just turn around and loan the money to borrowers with a risk profile too high to get conventional loans.

At the same time, you have people borrowing to the hilt and buying apartments with the intention of flipping them at a big enough profit to cover the loan.

Makes you wonder what happens when the carousel stops. Could make 2008 in the USA look like the proverbial Sunday-school picnic.

[Dayuhan]

A bit more...

http://www.project-syndicate.org/com...-by-minxin-pei

The Politics of a Slowing China

Minxin Pei

The recent financial turmoil in China, with interbank loan rates spiking to double digits within days, provides further confirmation that the world’s second-largest economy is headed for a hard landing. Fueled by massive credit growth (equivalent to 30% of GDP from 2008 to 2012), the Chinese economy has taken on a level of financial leverage that is the highest among emerging markets. This will not end well...

[Dayuhan]

Interesting observations...

http://ineteconomics.org/china-econo...tegy-fail-work

Unintended consequences made the PBOC’s strategy fail to work

...However, there were a couple of unintended consequences of the PBOC’s hawkish action. First, more than 1 trillion wealth management products would mature in the end of June and the banks had to meet regulatory requirements at quarter end. As interbank rates soared, the banks had to issue more wealth management products at higher returns which would attract more money to the shadow banking sector and the banks would have to do more risky business because of higher funding cost. Therefore, the idea of cracking down shadow banking by lifting interbank rates failed to work...

[Dayuhan]

And more...

http://blogs.wsj.com/chinarealtime/2...-debt-mystery/

China’s Local Debt Mystery

Leaders in Beijing know that swelling local government debt is one of the greatest threats to China’s economy. What they don’t know, apparently, is just how big the threat is.

Speaking to reporters ahead of high-level meetings between U.S. and Chinese officials next week, China’s Vice Finance Minister Zhu Guangyao said the government was aware of the risks associated with both shadow banking and local government debt.

“A very crucial task for this administration is to clearly determine exactly how much debt there is in local financing platforms,” he said, noting that the most recent estimate was a 2011 report by the National Audit Office that put total local government debt the previous year at 10.7 trillion yuan ($1.74 trillion) – equivalent to 27% of gross domestic product at the time.

“I think this number is going to go up,” following a national survey, Mr. Zhu said...

[Dayuhan]

You know it's mainstream when Krugman jumps on the bandwagon...

http://www.nytimes.com/2013/07/19/op...all.html?_r=1&

Hitting China’s Wall

...China is in big trouble. We’re not talking about some minor setback along the way, but something more fundamental. The country’s whole way of doing business, the economic system that has driven three decades of incredible growth, has reached its limits. You could say that the Chinese model is about to hit its Great Wall, and the only question now is just how bad the crash will be...

What all this means... there's a building consensus among Western economists that China may be closing in on a major economic dislocation. That of course was inevitable, but when remains an open question: the consensus of economists is not always correct. It might, however, be correct, and there's a notable lack of discussion (at least that I've seen) of what the implications of a serious recession could be for domestic political stability and for regional security.

There's no way to know what will happen or to change what's shaping up, but it can't hurt to be prepared...

[Bill Moore]

You know it's mainstream when Krugman jumps on the bandwagon...

http://www.nytimes.com/2013/07/19/op...all.html?_r=1&


What all this means... there's a building consensus among Western economists that China may be closing in on a major economic dislocation. That of course was inevitable, but when remains an open question: the consensus of economists is not always correct. It might, however, be correct, and there's a notable lack of discussion (at least that I've seen) of what the implications of a serious recession could be for domestic political stability and for regional security.

There's no way to know what will happen or to change what's shaping up, but it can't hurt to be prepared...

I would just caution these estimates are made by experts in a field (economics) where there are no experts. I suspect if someone did a non-bias study on economic forecasts more than half would turn to be incorrect, but even if they get half right, then we would just as well off flipping a coin.

I remember the projections that Japan was going to pass the U.S. and become the world's largest economy and our worthless media was bringing on "expert" talking heads and telling them that their kids needed to learn Japanese. Then when Asia had their meltdown due to globalism the U.S. economy was at great risk. It created little more than a ripple, similar to the EU crisis. It also these experts that created derivatives, and collapsed a number of major banks. The list is endless.

However, I certainly agree China's economy may take a significant downturn, and if it does we should attempt to assess the impact on the region and our interests. It may present an opportunities for us to regain some of the market we lost? It may also lead to dangerous instability within China that isn't in anyone's interest. I think we should embrace our inability to know and develop plans for multiple contingencies. Plans is really too strong of term, what we actually need to do is start thinking about multiple contingencies.

[Dayuhan]

Certainly we can't conclude that the Chinese economy is about to implode, but it's also pretty clear that the Chinese economy, much like the overhyped Japanese economy of the early 80s, is not the unstoppable world-devouring eternal growth juggernaut that it's sometimes cracked up to be.

China will, of course, eventually have a serious recession. We don't know when that will come or how it will arrive, but it will come. There are many signs that all is not well, which may or may not mean anything in the short term sense.

Of course there's nothing to be done about it, but there's a real possibility that if the domestic economy gets rocky the Chinese government may try to fire up support with some patriotic jingoism. Arguably that's already going on.

Of course in the event of serious domestic instability (very hypothetical at this point but thoroughly possible) the probable winner would be the PLA, and as you say that would do no good for anyone, except perhaps the PLA.