May 052012
 
 May 5, 2012  Posted by at 5:31 am Finance
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The good old days are over

Over the past few weeks I've read an absolute avalanche of articles on China, but because of all the traveling we were doing never got around to turning the information into stories for TAE. By the way, we're on the Sunshine Coast, an hour north of Brisbane, for a week or two right now, staying with friends and trying to catch our breath. It's where the Australasia tour started 11 weeks ago, so it feels kind of fitting. We’ll move over to Europe on May 15, and we will be available for lectures over there. We’re also looking for a place to stay for a month or so by the way, to do some catching up.

But back to China. It's been a while since BHP Billiton warned that its steel sales to China were plateauing, and that may be a good starting point. All the talk about hard landing vs soft landing is funny at times, but not much more than that. The BHP report was at least real. Of course we also all know the reports on Chinese ghost cities, but they have probably seemed a little abstract until now.

I was also thinking about China with regards to for instance Peak Oil. Whereas it's very clear today that petrol and/or gasoline consumption in the US and Europe has dropped significantly, I see people claim all the time that demand in India and China rises so fast, there's still so little oil to spare that prices must of necessity rise on account of that. I think not. If the Chinese steel industry (a major part of both the economy and the boom in it) has stagnated, I simply don't see how oil usage could rise enormously.

If you ask me, there's a real chance that what is happening is that oil producers, because they sell less, are trying to push up prices just to make the same amount of money. That will work for a while, and then it won't. Which will be a grave danger to Saudi Arabia and all other oil states that need the revenues just to keep a restless young and unemployed generation satisfied enough not to start burning down the house.

Supply and demand will start to work again in the field, though, and at that point producing all you can, and more, will be the only way to keep those revenues from plunging. Could be interesting. Sure, China could fill some reserves. So could others. More tankers could be left floating fully loaded for weeks or months.

But the game is on, and China doesn't look capable of boosting its demand, and double digit GDP growth – any time soon, if ever. The Chinese government has issued a warning on growth numbers, and premier Wen Jiabao added a stern warning on the need for economic reforms.

There are obviously different views on China's future prospects; in investors circles, Jim Rogers is a bull while Jim Chanos is an endangered bear species. Then we have voices such as Michael Pettis and Patrick Chovanec, academic feet on the ground, who've sounded some pretty strong alarm bells on where China is going, and where it's really at right now, which is far worse than government stats would suggest. Hugh Hendry isn't thinking China is Nirvana either.

In October China will see its "5th Generation" leadership change. The government of Hu Jintao and Wen Jiabao will have to leave after 10 years. And the jockeying for position has started for real, not just among individuals, but also between two main ideological factions: one that wants to stay with, or return to if you like, Maoist ideas, and another (among others the current rulers) that seeks to "reform" the economy.

Now economic reform is a term we read all the time these days: every western nation needs to reform its economy, say the leaders of the IMF et al, as well as political honchos everywhere. It always means the same thing: giving international finance increased access to your economy. And cut security and benefits for your people. The disaster doctrine.

This can lead to situations that are obviously not beneficial to a society, as in the case of Greece where much of the domestic infrastructure is being sold off for pennies on the dollar. In New Zealand, the government even wants to sell off huge chunks of its hydro power generation, the one thing that could keep the country alight once other sources start failing. In Venezuela, Argentina and Bolivia, on the other hand, leaders are now trying to turn back previously closed sales to foreigners of essential resources.

In China, economic reform represents an earlier state of this same game. Even though it will be very attractive for those leaders who can personally profit from it to sell off important infrastructure. But no matter how you want to define it all, I think Jim Rogers was way off when he said recently that the – political – power change to the 5th Generation would not change much at all: there are big potential differences in policies between reforms (disaster doctrine) and continued domestic control over the economy.

This just in. Blind activist. Chen Guangcheng. The whole thing looks staged; a blind activist, aided from the US by a Chinese American business man, escapes his house arrest (all his guards were asleep?!) and travels hundreds of miles to the US embassy in Beijing, only to arrive there just in time for Hillary Clinton's planned visit.

If staged, by whom? By his allies and friends, or by the US itself, or perhaps by China, which very much likes the fact that the western press doesn't talk about Bo Xilai anymore? Hard to tell. Still, the blind activist case is nowhere near as interesting (except perhaps for himself and his family) as that of Bo, even if it's very convenient for distracting media focus away from other matters.

Of course, Chinese politics have always and notoriously been very dirty even by US standards (or just more openly so?!), and 2012 will not be an exception. And even if we need to take all news from Beijing with a pound or two of salt, the Bo Xilai case could be revealing inner secrets that can tell us a thing or two about what the stakes are going to be come October. These guys are all as corrupt as you imagine in your worst dreams: China’s few dozen politburo members reportedly have accumulated vastly more wealth between them than even the few hundred members of the US Congress and Senate combined, no beggars themselves, and often stored it offshore.

Bo Xilai is a "princeling", a child of – formerly – powerful party members, who was therefore himself destined for power. He made it all the way to the leadership of Chongqing, the perhaps largest city in the world with some 35 million inhabitants. And through a Politburo seat Bo seemed destined for more, perhaps much more.

But then his career fell to pieces; he was relieved of all his duties through this spring, after the "defection" of his police chief to the US consulate at Chengdu during Superbowl night. The police chief, unlike the blind activist, was made to leave the consulate within 24 hours, and surrendered to Chinese officials carrying papers incriminating Bo and his wife.

Bo's wife, Gu Kailai, is a lawyer. She once solved cases for Chinese companies in US courts. In China, she dealt a lot with British family friend Nick Heywood. There are pictures of a UK lovenest the two allegedly shared when Bo's son studied there. There are also stories about vast amounts of money Heywood helped the Bo family send overseas. And then there's Heywood's death in November 2011, for which Chinese authorities have now arrested Gu Kailai.

Gu is the youngest of 5 sisters. At least one of which, who's become a Hong Kong national, is worth at least $120 million. Bo has a few brothers, apparently in high banking circles, who are also worth a comparable amount.

But that may not be why he was brought down (they all do it). It may not even be his wife's alleged involvement in Nick Heywood's death. It may, however, be the again alleged wiretapping of high politburo officials that Bo is apparently accused of. Or his neo-Maoist ideas, which do not match the reform policies the outgoing government seems to desperately want.

Bo's downfall plays out against the backdrop of a potential plunge in Chinese economic fortunes. Michael Pettis has a bet going with The Economist that Chinese growth will be just 3.5% annually over the next decade. Now, that may look viable at first glance (like if you compare it with Europe), but it's like an ocean liner or a freight train that step on the breaks and fold like harmonicas: everything in the Chinese economy is geared towards much higher growth, say in the 8-10% range, and a sudden decrease could therefore have disastrous consequences.

So on the one hand Bo is emblematic of the infighting on the threshold of a leadership change, but on the other hand he's also a huge and glaring symbol of the corruption many Chinese have always suspected but until now never really seen proven beyond a reasonable doubt.

And that, the corruption, which I read somewhere took $2.74 trillion from the Chinese economy in the first decade of the millennium, is what may decide the fate of the nation as people see the economy decline and perhaps force a halt or even reversal in the largest human mass migration in history by far, that of country folk to the cities where the trinkets are made.

There is only on solution for the politburo, and it fleetingly escapes them wherever they look: raising internal consumption and getting the economy off the addiction to exports. The Chinese don't have enough faith in their leaders to spend their savings, and there's very little in sight that would make me believe that's going to change sometime soon. Certainly not now real estate prices are falling.

And Chinese people know how to protest: we like to think the French got that down, but they have nothing on China once the unrest starts spreading for real. They don't have 1.3 billion people either. Who don't even have a democracy. But who do have modern social media at their disposal, and a government which has an ever harder time to block the use of it, not in the least because the government itself used the internet to smear Bo Xilai.

So if the power change is accompanied by a struggling economy, and the debate between politicians gets ugly and heated, the Chinese people could well demand the vote they don't have, in massive and bitter protests. If the politburo attempts to quell such protests in the way it always has in the past (China still executes more people than all other countries combined), it may find that bloody repression doesn't work anymore in this day and age. The revolution may not be televised, but it could well be twittered. To hundreds of millions of people in China, and hundreds of milllions abroad, at the same time, all the time.

 

Home Forums China, or How To Live in Interesting Times

This topic contains 0 replies, has 0 voices, and was last updated by  Raúl Ilargi Meijer 1 year, 11 months ago.

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May 5, 2012 at 5:31 am #8544

Raúl Ilargi Meijer

  The good old days are over Over the past few weeks I've read an absolute avalanche of articles on China, but because of all the traveling w
[See the full post at: China, or How To Live in Interesting Times]

May 5, 2012 at 4:49 pm #3020

Golden Oxen

So China is not immune to a severe recession, no country is. How long will it last; more importantly what will their response to it be? Big money printing, currency smash down, massive military expenditures, economic marriage to Japan? Who knows, but it will not be the end of the world or of China. Severe recessions are as common as rainy days.

May 5, 2012 at 5:34 pm #3021

einhverfr

Prior to 1973, oil was a demand-constrained market, with prices roughly tracking inflation and a great deal of price stability. After 1973, it was a supply constrained market where little changes in supply and demand affect prices significantly. I often refer to 1973 as peak oil year because it was when supply began to drop relative to demand (or rather supply rose slower than demand)

It is clear that oil producers, worried about the fact that we are already past peak oil reserves (1982 when we hit that oil peak) are starting to ration output, so that can account for things too. Prices too low? Pump less. Make people pay more as supply is reduced.

Peak oil theorists assume that we are pumping oil as fast as we can. This is not the case, and so we have been living peak oil for decades. Prices rise relative to inflation, and are more volatile. Little disturbances like Libya cause prices to jump significantly.

But in the end supply or demand numbers by themselves don’t mean anything. It’s supply relative to demand which is the relevant measure. By that measure we have past peak oil nearly 40 years ago.

May 5, 2012 at 6:51 pm #3025

FrankRichards

First, 1973 was the US, and specifically the lower 48, peak. The actual shortages in the 70s were clearly political — no one claimed anything else.

Then there was plenty of oil available on a worldwide basis throughout the 80s and 90s.

It was only in 2005 that supply stopped tracking price, causing price to go up. (Ilargi referenced an Oil Drum article with the relevant numbers fairly recently.)

I’d very much like to see your evidence that basically the whole world as not producing flat out in the spring and summer of ’08 when the price skied. Whether or not you believe that oil prices influenced the financial mess, it is not in the producer’s interest for price to go up that far, that fast: consumers will take steps to get out from under.

There was of course a big dip in production during the crash, but it’s been back up since 2010. Likewise, there were many big projects in progress in ’07-08. However many were deferred and some cancelled after the crash. North American and Angolan production is up, but not enough to cut the Arabs a lot of slack, with Venezuela and Mexico headed down.

Anyway, who is it that you claim has the ability, jointly or individually, to add even 4 Mbd of production (<5%) on a sustained basis? I’ll buy that the Arabs (all of them together) could do it for 90-180 days, but after that deferred maintenance and workers exhausted from overtime would start to catch up to them.

May 5, 2012 at 7:49 pm #3027

jal

When we do it its called The American Dream.
When they do it its called corruption.

May 5, 2012 at 8:38 pm #3029

steve from virginia

If you assume every nation has balance-of-payment issues …

Which nation would not have balance of payment issues? Not the thrifty Swiss or oil-endowed Norwegians, nor the middlemen-par-excellence Singaporeans. Nobody has enough money! The need-for-money ‘pull’ requires a counterbalancing ‘push’ of some kind. If there are materials to sell they will be sold. Crude is $110 today. Tomorrow it will be ??? Why take a chance when money is needed now: a bird in the hand.

Conclusion: assuming balance of payment issues across the board is reasonable. It also holds to reason that oil states are pumping what they have. Not only is export demand increasing but the higher rate of returns-on-exports enables increasing consumption within the oil states themselves.

Crude extraction rates (on the market) exceeded demand to the greatest degree within mature markets in 1998: $11.xx per barrel. Today, the price is 10x the eleven bucks and the only way to pay is to borrow and borrow some more. The fact of the borrowing speaks for itself. There is insufficient cash flow within so-called ‘modern’ resource-waste economies to support bringing new petroleum to market.

The world cannot afford to borrow any more, what’s left is outright theft and competitive demand-destruction (of the other guys).

Where does this leave China? First of all, China and the EU are the top-tier ‘other guys’, the low hanging fruit. Both depend to large degree on external capital: flows can be manipulated to unhinge capital structures. An increasingly hard-appearing dollar creates preference for that currency within China which in turn amplifies inflation. China is likely to ‘go with the flow’ and add RMB credit to its economy: inflation is less disruptive than a ‘money shortage’ caused by hoarding scarce yuan.

The issue is what China can export at lowest cost to the US: cheap plastic crap or its petroleum demand? Not a hard question to answer from an American standpoint.

May 6, 2012 at 1:33 am #3039

Karpatok

There is a rumor being bandied about that Stoneleigh and Illargi are considering moving to Australia. Was that the real reason for the “tour”?This is a fine time to sell into the Canadian real estate market since that bubble has not yet imploded and would probably make paying the Aussie $750000.00 a whole lot easier. And apropos any conversation about “human nature” trumping all, I guess it does make sense to jump the North American sinking ship’ rats or no rats. After all, what is shared experience among a few thousand anxious fans? And where does the greater safety of Australia lie vis a vis the above post? Wasn’t that the scene of Mad Max? Just sayin as the Surly would say.

May 6, 2012 at 3:43 am #3042

FrankRichards

@Karpatok, so what.

I personally think Canada (hell, the US) is a better deal than Oz, and they are both too old to be welcome in New Zealand, but why [pick an expletive] shouldn’t they take a look?

May 6, 2012 at 5:30 am #3044

Reverse Engineer

I have no idea how many times I have dropped this graphic onto China threads, but it remains as true as ever. The Chinese are

China is an export driven mercantilist economy which built its rapid fortune with Slave Labor and massive debt undertaken to build an industrial infrastructure. They don’t have their own local supply of Oil to run the machines, and if their markets dry up because everyone else is too impoverished to buy what they export, both the factories AND the Slave labor are worthless. The Slaves themselves cannot form an internal market, they are not paid enough to buy the toys they make.

So the Elite Chinese have spent a few decades here sieving out a lot of wealth and sequestering it overseas, but overall the Chinese came into the Industrial game a Day late and a Yuan short here. Their Factories are as much malinvestemnt as their Ghost Cities are. In the process of building all of it and supplying western consumers with a whole lotta Junk for the last 20 years, they have throughly polluted their environment AND moved a whole lot of people into Big Shitties and off the land in probably the largest mass migration in all of recorded history from Ag to Industrial labor. Reversing that migration on a dime is not gonna happen here.

On that note, unless Hoser Idioms are way different than those here in the FSofA, it’s not Harmonicas that fold up, it’s ACCORDIONS. Just sayin’. LOL.

RE

http://www.doomsteaddiner.org

May 6, 2012 at 5:56 am #3045

Reverse Engineer

Karpatok post=2652 wrote: There is a rumor being bandied about that Stoneleigh and Illargi are considering moving to Australia. Was that the real reason for the “tour”?This is a fine time to sell into the Canadian real estate market since that bubble has not yet imploded and would probably make paying the Aussie $750000.00 a whole lot easier. And apropos any conversation about “human nature” trumping all, I guess it does make sense to jump the North American sinking ship’ rats or no rats. After all, what is shared experience among a few thousand anxious fans? And where does the greater safety of Australia lie vis a vis the above post? Wasn’t that the scene of Mad Max? Just sayin as the Surly would say.

I don’t see that in aggregate Oz is any better than the Great White North. Its resource base is not that much better or worse, and population density in good locations isn’t much better or worse. Oz also has a lot of Desert areas, but more than anything what Oz has is 1.3B Chinese just to the North who are going to want to GTFO of THAT Dodge here at some point by whatever means possible, and you can island hop from China to the North Coast of Oz in a freaking Kayak through Oceania.

Same parameters are true in Oz as in the Great White North, or here on the Last Great Frontier also. If you go to areas of Oz on the north coast which are Swamps and do the Crocodile Dundee thing, you probably will not have too may other people, even Chinese ones who will join you there or try to live in such an evironment either. On the other hand, if you have a nice Doomstead on a nice piece of temperate Oz Ag land, lieklihood will be somebody will want to take that property from you. Either the State or Warlords, but it will be soembody more powerful than you are.

If you want to be LEFT ALONE, you have to go where No Man WANTS to Go. THAT is the “Final Frontier”. Its where the Bushmen of the Kalahari live, it’s where the Inuit who stil live by the Old Ways live, its where the Amazonian tribes still live. They still can live that way in those places because nobody else ever wanted to LIVE there and bring Industrialization to such places. Too cold, too hot and humid, to rocky and moutainous fo building roads, whatever.

Besides going so far out to such marginal territory, all other places have the same sets of parameters within the limits of their population density and resource base. Canada and Oz are not too much different in this respect. If I already had a good Doomstead set up in the Great White North, I wouldn’t trade it for one in Oz, unless of course you get a sucker to give you a really good price for it and you can then do Doomstead Flipping to a bigger better one in Oz. Perhaps this is the RE Bubble of the future? Doomstead Flipping? LOL.

RE

May 6, 2012 at 6:51 am #3047

Karpatok

@Frank Richards: Let me count the ways. SNICKER! I won’t describe the dependence of Australia on China’s importation of all things mined,since RE has pretty well taken care of most of that. In regard to your expletive I was referring to the strong mindset in certain quarters that “human nature” being for the most part described as putting self interest first and that being the ultimate cause of the state we are presently experiencing as against the view that said state has been created by those with that ulterior motive to destroy or plunder others. Against this background, I suddenly saw quite cynically the push for seeking “Alpha” on the part of two leaders seen apriorely as beneficient in their presience. Silly, silly blind me, AGAIN!

May 6, 2012 at 8:42 am #3054

einhverfr

In 1973, the major shortages were political, but I picked it for a couple of reasons.

The key thing is that oil prices prior to 1973 more or less tracked inflation exactly, and were stable. In other words, producers pumped out of the ground as much oil as people wanted to use. Prices were non-volatile and slowly dropping relative to inflation.

After 1973,. we see a very dynamic oil market where little changes in supply or demand create big changes in price. Decreasing demand allows oil prices to slowly sag (inflation-adjusted) through the 1990′s except during the Gulf War, when we see a price spike, but the prices are still volatile compared to 1972 and before. This is why I say it was peak oil supply relative to demand. Now we see more new little disturbances (like Libya) causing big changes in oil prices. And producers are not just pumping more oil to meet demand. The closest thing you have to that are tar sands extraction, and that is limited by the fact that it is a very intensive process economically.

Political issues may have been the catalyst, but I think the root issue is that oil discoveries peaked in the 60′s and so change was getting ready to happen anyway.

So as far as peak oil, we can see peak discovery (60′s) peak supply relative to demand (73), peak reserves (82), and at some point we will see peak maximum supply if we haven’t already (but it isn’t clear when that will happen). These are all significant points depending on how you track it.

May 6, 2012 at 10:35 am #3058

ben

i’ve posted this before, but i thought it might be of interest again.

peak oil?

josh posted this chart two ways at the Undertow on 3/20

May 6, 2012 at 4:54 pm #3059

paddyg

The BHP report appears to have been widely misinterpreted, initially in response to a speech at a recent iron ore conference in Australia. Steel consumption in China is not plateauing, it’s the rate of growth that is plateauing. At a projected 5-7% this year, seel consumption growth in China remains significant albeit well down on recent years.

I get a bit twitchy when TAE jumps on this as it makes me question everything else for which I have no particular inside opinion. Are we just hearing what we want to hear?

May 6, 2012 at 5:59 pm #3062

Bot Blogger

RE: Doomstead Flipping! That is the funniest thing I’ve read on this blog in a long time. I wonder what the fluffers do, to sell it. Granite counter tops with fresh cookies in the oven and a small bomb proof closet for the children to play in. We really need a doomstead of the week thread. Something where people can get doomstead envy. Mmmm. Doomer porn at it’s best.

May 6, 2012 at 10:05 pm #3065

Reverse Engineer

Bot Blogger post=2675 wrote: RE: Doomstead Flipping! That is the funniest thing I’ve read on this blog in a long time. I wonder what the fluffers do, to sell it. Granite counter tops with fresh cookies in the oven and a small bomb proof closet for the children to play in. We really need a doomstead of the week thread. Something where people can get doomstead envy. Mmmm. Doomer porn at it’s best.

I do try to keep Doom as Funny as possible :D LOL

RE

http://www.doomsteaddiner.org

May 8, 2012 at 7:56 am #3111

TheTrivium4TW

Karpatok post=2652 wrote: There is a rumor being bandied about that Stoneleigh and Illargi are considering moving to Australia. Was that the real reason for the “tour”?This is a fine time to sell into the Canadian real estate market since that bubble has not yet imploded and would probably make paying the Aussie $750000.00 a whole lot easier. And apropos any conversation about “human nature” trumping all, I guess it does make sense to jump the North American sinking ship’ rats or no rats. After all, what is shared experience among a few thousand anxious fans? And where does the greater safety of Australia lie vis a vis the above post? Wasn’t that the scene of Mad Max? Just sayin as the Surly would say.

I’d evaluate the risk of world wide turmoil and China will likely want to secure Australian assets… by force, if necessary.

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