China's Government Self-Immolation Progresses As We Expected

Tyler Durden's picture

Just a month ago we warned that all was not well in the political elites of China. Critically, expectations of some coordinated and massive stimulus to save the world were far overblown since "the last thing Hu & Co. would want in their final months in office would be to unleash another oligarch-enriching orgy of speculation". Sure enough, as Reuters just reported, 'China's ruling Communist Party is seriously considering a delay in its upcoming five-yearly congress by a few months amid internal debate over the size and makeup of its top decision-making body as the party struggles to finalize a once-in-a-decade leadership change.' The delay will likely further unnerve global financial markets whose perception of Chinese politics as a well-oiled machine has already been shaken this year by the extraordinary downfall of an ambitious senior leader, Bo Xilai, in a murder scandal.

Reuters Exclusive: China considers delay of key party congress: sources

China's ruling Communist Party is seriously considering a delay in its upcoming five-yearly congress by a few months amid internal debate over the size and makeup of its top decision-making body, sources said, as the party struggles to finalize a once-in-a-decade leadership change.

 

The two most senior posts, of president and premier, are not considered in much doubt. But any delay in the congress, no matter the official reason, would likely fuel speculation of infighting over the remaining seats in the nine-member politburo standing committee which calls the shots in China.

 

...

 

One long-time and well-connected U.S.-based investor in China said there were two ways to interpret a congress delay.

 

"One is to say that the leadership is in turmoil and that China is fighting a serious challenge to reform. That will be quite upsetting to the markets, as it may be seen as a challenge from the like-minded allies of Bo Xilai," he said.

 

"The second interpretation is that China is trying to cope with the challenges posed by the shift in the global economic order and does not want to move rashly. That is not positive for markets, either," said the investor, who declined to be named.

 

As Sean Corrigan recently noted (and now seems extremely prescient):

Even if we dismiss the wilder rumours swirling about the offshore websites and the fringes of the blogosphere, it is painfully clear that something very unusual and potentially disruptive is afoot. Given our overdependence on the myth, as much as on the reality, of a China rising inexorably and uninterruptedly to a resource-hungry world primacy over the next decade or two, the interplay of factional political infighting with potential economic meltdown could be the defining influence on the world’s affairs in general, much less on the enthusiasms of those active in its financial market playground, in the coming months.

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AnAnonymous's picture

Neo Colonialists? You mean US citizen?

TheFourthStooge-ing's picture

No. Don't play dumb. He means Chinese citizens.

 

BigJim's picture

He's not just 'playing' dumb.

Dr. Acula's picture

>"We have thermonuclear weapons, we can default on whatever we want"

"If the Asiatics and Africans really enter into the orbit of Western civilization, they will have to adopt the market economy without reservations. Then their masses will rise above their present proletarian wretchedness and practice birth control as it is practiced in every capitalistic country. No excessive growth of population will longer hinder the improvement in the standards of living. But if the oriental peoples in the future confine themselves to mechanical reception of the tangible achievements of the West without embracing its basic philosophy and social ideologies, they will forever remain in their present state of inferiority and destitution. Their populations may increase considerably, but they will not raise themselves above distress. These miserable masses of paupers will certainly not be a serious menace to the independence of the Western nations. As long as there is a need for weapons, the entrepreneurs of the market society will never stop producing more efficient weapons and thus securing to their countrymen a superiority of equipment over the merely imitative noncapitalistic Orientals. The military events of both World Wars have proved anew that the capitalistic countries are paramount also in armaments production."

- Ludwig von Mises, http://mises.org/Books/humanaction.pdf

 

Sandmann's picture

I'd love to see the U.S. try and default on those promissory notes,

 

Would be truly frightening - especially for China. Over 1.5 billion people with a GDP per capita of $4000 and Denmark on $56,000 means China ranks with Jordan.

The US could destroy the global financial system - you confidence that it can control events is wonderful Aziz. I simply don't think the US can control the outcomes.  Are you really too young to remember Japan in the 1980s borrowing for 0% and building huge industrial capacity that noone needed and finding out you go bust if you cannot keep volumes up. Experience Curve Pricing doesn't work if you get pushed up the Cuve by not selling volume.  That is China's problem - Demand is drying up

GeneMarchbanks's picture

'Are you really too young to remember Japan in the 1980s borrowing for 0% and building huge industrial capacity that noone needed and finding out you go bust if you cannot keep volumes up.'

He is.

Aziz's picture

The US could destroy the global financial system - you confidence that it can control events is wonderful Aziz.

The US could destroy the global financial system, thereby destroying its own ability to acquire the goods and resources it — and its military — needs to function. Great idea.

A
re you really too young to remember Japan in the 1980s borrowing for 0% and building huge industrial capacity that noone needed and finding out you go bust if you cannot keep volumes up. Experience Curve Pricing doesn't work if you get pushed up the Cuve by not selling volume.

Is that really all you've got? Demand is drying up? Demand dried up in the 30s in the US too, and as I say by 1945 the U.S. was the pre-eminent power. I'm not saying there won't be some kind of economic turbulence and hard-landing afflicting China. Their economy is messy, very messy, Hu Jintao even admits it. But when you are the world's productive base you are the world's productive base. Demand can come back. Harder for America to rebuild its productive base than for demand to return...

A war would do it...

Sandmann's picture

and as I say by 1945 the U.S. was the pre-eminent power.

Really ? Yet it could not risk war with the USSR. In 1945 the world had just seen a war on a scale China could not handle and where the US was the only intact major power. The US was hugely in debt in 1945 and financial repression lasted throughout the 1950s to pay for the Debt Mountain. Yet it was still BRitain that produced the world's first civilian jet aircraft, the first civilian nuclear reactor, and built its own hydrogen bomb - even as a major indebted nation. It was not cHina or japan or France or Germany or the USSR or USA.

 

You simply have to get used to the idea Aziz - we are superior

Sandmann's picture

thereby destroying its own ability to acquire the goods and resources it — and its military — needs to function. Great idea.

Not really - economic growth depends on US trade deficits. China is simply parasitic and it is unsustainable. The destruction of the Cinese Communist Party is the greatest prospect of current turmoil and when Tariffs return and Import Controls China will have a People's Revolution against the New Emperors

Aziz's picture

China is simply parasitic and it is unsustainable.

That is absolutely Orwellian backwards logic. The country that produces is the parasite, and the country that consumes is the host?

Think about that for a second. The producer is the parasite? How do you even produce that kind of logic?

By the way, GDP growth is just circulation of money (i.e. a derivative) it doesn't really refer to any real economic activity. 

Sandmann's picture

of a hostile foreign power who fucking hate the West for the opium wars....

 

Opium Wars were simply Jardines looking for a product to sell the Chinese and export a surplus from India. China had a Protectionist Policy and would not buy Western goos but demanded Silver for its exports so a product had to be found to appeal to Consumer tastes. The Chinese must learn to avoid Mercantilism and building up unsustainable trade surpluses. 

MarsInScorpio's picture

Aziz, I don't think you are quite getting it.

 

The issue is not what they've got in foreign reserves, the issue is what can they do with them.

 

Or to put it another way, what can they buy that raises their standard of living for the enslaved masses? (And we know they are, in fact, often literally enslaved. The Reds are good at organization, but quality of life, not so much.)

 

So before you get carried away about their foreign reserves, let me respectfully suggest you think about how they can use them to improve the life of their population. Digital dollars in the BoC don't put food on anyone's plate.

-30-

Aziz's picture

It's relatively easy to improve your standard of living when you have the world's manufacturing base in your back yard.

That was the basis of America's development, in fact — manufacturing and credit. Now it's not Detroit, it's Guangzhou. 

People still accept dollars in payment for goods. China is sucking up gold. It's sucking up foreign farmland. It's sucking up foreign resources. As I say we can talk about China's problems all day, just as we could talk about America's problems all day in the 30s. Didn't stop America becoming the global superpower based on its manufacturing base, and it being creditor to the world.

GeneMarchbanks's picture

Well, great. I agree, however my time-frame isn't a century I'm only concerned about what might likely happen next and that is a purge of bad investment and internal strife for countless reasons. Yet, therein lies the trick: should they play the next decade poorly it jeopardizes the long term.

30s US is a poor analogy because there was a war involved.

Aziz's picture

Are you dismissing the possibility of a war this decade? I'm not.

Sandmann's picture

No but my bet is on Pakistan watching stray Indian rockets re-model its cities

GeneMarchbanks's picture

Please read at least one of the links as it pertains to your questions: http://www.atimes.com/atimes/China/NE09Ad01.html

War between ? I see the provocateurs in many places but I rule out nothing.

Sandmann's picture

US became Creditor to the world because Europe IMPLODED TWICE having shipped its Gold and its scientific talent to the USA

Aziz's picture

The US imploded once so far having shipped its manufacturing base to China.

Is two or three times out of the question?

Sandmann's picture

So write off Chinese output and close our markets. We can quickly install that same Japanese and German equipment to manufacture in Europe and USA. China may have a big shock coming. It was once the major manufacturing power in the world centuries before Britain industrialised and Spain was once a world power - China has too many hungry people and too few rich ones - time for a Revolution

Dr. Acula's picture

>That was the basis of America's development, in fact — manufacturing and credit. Now it's not Detroit, it's Guangzhou.

Yawn... manufacturing is so 20th century.

Sandmann's picture

go broke by accumulating huge piles of cash

 

Forex isn't Cash. When you get to big numbers Cash doesn't exist.  Cash is only for little people - Big People have Paper Claims.

Sandmann's picture

So Aziz explain to me how they sterilise the FX Reserves so they do not lead to Domestic Credit Expansion. Explain how these Reserves are held and just how China stores $3 Trillion of FX Reserves - in what form. Explain how the transmission mechanism of the Chinese State Banking System functions and how the Investment in China is funded and just how much it costs to keep the Renminbi undervalued yet buy in raw materials.

 

China is No1, Japan No2,  Saudi Arabia No.3, Russia No4, Taiwan No5, Brazil No6, Germany No10, USA No17, UK No19

http://www.google.co.uk/url?sa=t&rct=j&q=us%20%20forex%20reseves%20held%...

So what are the US Reserves held in  and how are they deployed - all $149 billion - Euros perhaps ?

China is rather heavy in US Dollars because it has nowhere else to go but Fannie Mae and Freddie Mac and whatever else Goldman and JP Morgan can dish out......Student Loans perhaps ?

No, there is absolutely no way China can go bust holding such valuable AAA-paper as fine investment houses like Goldman and JPM can offer for sale.......the US would never let its main supplier of iPhones down......

 

GeneMarchbanks's picture

Easy Sandmann, Jeez...

We don't want to scare him off, but yeah he can't 'explain' very much.

Aziz's picture

China is rather heavy in US Dollars because it has nowhere else to go but Fannie Mae and Freddie Mac and whatever else Goldman and JP Morgan can dish out......Student Loans perhaps ?

Gene gave a good list, and it begins with gold. Continues with farmland, productive assets, etc.

Let me shatter an illusion you seem to have: there's no such thing as a currency manipulator — that's like saying there is a natural price for currency beyond what the market sets. They had an advantage and used it to agglomerate tech, resources, manufacturing, IP (Made in China gives CPC blueprints), and dollars.

Now I don't even think they need our consumption anymore. Consumption is easy under a fiat system. If they wanted to they could set up their own fractional reserve system using their dollars, but that's beside the point (which in a technical sense is what the RMB kind of is). They wanted a strategic international advantage based on a powerful manufacturing base, and now they have it.

And good luck running the U.S. war machine without Chinese co-operation, because they make a lot of the necessary components and sub-components, and have a monopoly in certain resources.

America will pay up. China will get their pound of flesh.

GeneMarchbanks's picture

Aziz you messed up.

Sandmann Bio

Monetary Economist, Businessman German Speaker



 

Aziz's picture

Thing is, this is not really a matter of monetary economics. 

This is about geopolitics, supply chains and the flow and shape of international commerce and trade.

We will see who is right and who is wrong in the next ten years, but believe me when you are the world's productive base in components, sub-components, finished goods, assembly, etc, and have monopolies in lots of things the world in its current globalised consumeristic shape needs that puts your rivals and frenemies over a barrel, and that's just reality. 

GeneMarchbanks's picture

Last paragraph is what I like to call an ill-proportioned truism. Not that you're wrong but you're seeing one angle only it seems.

The fact that China is a one-trick pony with little flexibility escapes you.

Aziz's picture

It pays to be a one trick pony if your one trick is producing the goods that the world in its current consumeristic globalised shape needs to function. 

Sandmann's picture

Not really. Demand is decaying and container shipments from sHanghai are falling. Every dog has its day and the Chinese elite knows it

Aziz's picture

Shipments are falling because of a global slump in demand. This has nothing to do with China per se. As I say, it is easier to reinvigorate demand than to rebuild a domestic US industrial base that no longer exists.

Sandmann's picture

Vickers paid Krupp royalties during the First World War for fuses in shells.  Merlin engines were produced by Packard under licence and supplied to the USSR. The MIG fighters in Korea were powered by copies of Rolls-Royce engines supplied by Britain to the USSR in 1946 and the USAF Sabres were powered by derivatives of Rolls-Royce jet engines supplied to GE in 1943.

Supply chains are fun but when push comes to shove products have not been exclusive since Napoleon's Continental System required British manufactured goods. When Germany could not get rubber from british Malaya in WW2 it produced butadiene and when Argentina couldn't get Execote rockets from France durimng the Falklands Condflict it bought them from Israel. China is hardly a major manufacturer - it produces whatever cheap labour and low environmental standards permits - but strategic production is not given to China which is why it engages in so much industrial espionage.

China will one day produce quality goods worthy of being repaired instead of substandard tat - it has no reputation for quality

Aziz's picture

China is the major manufacturer of so many components and sub-components, not just in the consumer world, but in things like chips and semiconductors in military hardware. I think you will be hard pressed to find a single advanced technological product that doesn't have at least one sub-component or labour process that has gone through China. Yes, if China start playing a trade war game eventually there will be a shift and supply chains will emerge in different parts of the world but shifting supply chains really isn't as easy as it sounds, particularly when there are many components and resources (particularly in hi-tech) where China has a monopoly today.

Marginal Call's picture

Chips are made in Japan, and then shipped to China for the worker to install prior to jumping to his death.

Dr. Engali's picture

It wouldn't surprise me a bit if things deteriorated to the point where Obummer would try the same thing.

Cognitive Dissonance's picture

We already live under a modified version of Martial Law enacted on 09-11-2001. They just figured out that it would go over much better if they didn't tell us slaves.

I've been told that ignorance is bliss. Seems "they" were right.

tarsubil's picture

I think he is deemed so worthless by his handlers that that type of revolt would not end well for him. Perfect false flag. Ubumba I think will go away quietly to his private bath house and mirrored counter tops.

Dr. Engali's picture

I disagree. A man with his degree of narcissism doesn't go away quietly.

old naughty's picture

"Civil" war.

You don't usually see fighting in the Peoples Congress...

smb12321's picture

China is moving toward the great decision - whether to continue liberalization in the social as well as business sense or retain Communist party rule and authority.  It cannot have both forever.   Considering their past, I'd choose authoritarian rule and a withdrawl.

A Man without Qualities's picture

I agree, but I think it's a bit more nuanced than that.  As can be seen from the Bo Xilai scandal, the "liberalization" has mainly resulted in regional and national CCP members getting very rich, very fast, often through some pretty nefarious means.  They are trying to create modern housing for the rising middle classes, but the elite have used their power to get credit to build property empires which has put prices far beyond the reaches of most.  Added to that, the completely out of control credit markets have pushed up the prices of basic commodities.

There are some at the top who see this as the classic failing of China, very similar to the conditions that Confucius saw - an elite who put personal ego above the system.  They can also see the biggest danger to Chinese "communist" system are many of the members.  What they need is a purge of the corruption, all the way across the nation, but the fear is that many have built very strong ties with the military, so it is a battle they may lose and that could easily destroy China.  History shows when civil wars break out in China, millions starve to death very soon.

azzhatter's picture

In other news, Emporer Obama has decided to delay the November election for a few more months to determine the size and scope of his reign

Cranios's picture

What is a "murder scandal" in China? That a party leader didn't commit enough of them?

mayhem_korner's picture

 

 

+1 brutally funny, Charlie.

AnAnonymous's picture

Ummm, that would be when they adopt US citizenism.

They have to progress toward US citizen civilization with total unaccountability of representatives.

They are still at the barbaric stage that a caught representative is a dead representative.

They need to move to the next stage: a caught representative is a victim.

Joe The Plumber's picture

You should look up the definition of an overvalued idea

I knew chinese were envious of us americans and had a secret inferiority complex. I didnt know that they obsess about us all the time lol

Do you ever go an entire day without thinking about USA citizens? I can go weeks at a time without a single thought on china

AnAnonymous's picture

Oh, that is not only the Chinese who are obsessed with adopting US citizenism. To be more accurate, a specific segment of the chinese are obsessed with US citizenism.

As for the rest of the world.

And those are the people who are obsessed with the 'freedom' provided by US citizenism, that is getting away with the negative consequences of their acts.

Go ask any manager who bottles it and faces death penalty if he would not prefer US citizenism and its nihilistic hedonism.

akak's picture

 

Oh, that is not only the Chinese who are obsessed with adopting US citizenism. To be more accurate, a specific segment of the chinese are obsessed with US citizenism.

To be more accurate, your self-created fantasy of "US Citizenism" is nothing but a figment of your own twisted, virulently bigoted and retarded roadside-(and online-)shitting imagination.