By Michael Every of Rabobank
August saw a bumper Chinese total social financing number, up much more than the market had expected at CNY3,580bn. That’s around USD500bn in one month in new borrowing, an annualised pace of USD6 trillion, if far lower in y/y terms due to seasonality. The last time we saw a number like that was March, when Covid was smashing growth, as it has everywhere else too: and this is an economy ostensibly doing far better than everybody else.
While it seems Beijing has gone for a bells and whistles growth approach, the details are less ‘positive’- if that is the right word. (And for market-based Western economies that have long relied on non-market-based Chinese borrowing, it is the right word.) M2 money supply was up just 10.4% y/y in August, down from 10.7%: where is this new borrowing going if it isn’t into the money supply? That should set alarm bells ringing as it’s even worse than the Western/Japanese problem of a flood of new money seeing ever-lower velocity of circulation. It may even suggest rather than the historical correlation between the ‘China credit impulse’ and global real yields meaning the latter will rise due to higher China-driven inflation and then even higher global bond yields, it may instead hold due to low bond yields and even more biting deflation.
That’s already the threat from a US economy with no new stimulus package close to being passed; from a UK economy trying to head for Hard Brexit shortly after its job-protecting furlough scheme is rolled back; and as Israel becomes the first country to enter into a second national lockdown, showing Covid-19 will still be an issue well into 2021. Plus, of course, China itself is openly talking about “internal circulation”, which would reduce the global flow-through from it to the rest of the world – with the exception of the commodities it says it will stockpile so aggressively.
Against that backdrop, there is a virtual summit today between the EU and China to try to agree a bilateral investment treaty. In typically European fashion, this began years ago in an environment where thus was entirely technocratic, and ends in one where it is geopolitical. China is openly stating it wants Europe to align with it more closely --against the US-- just ahead of a US presidential election that could potentially prove pivotal for the future of US-EU relations.
The EU will want to show it has options. Rather inauspiciously, however, the talks begin with China having just banned German pork imports; and China’s Global Times has published an editorial which is far louder than the wolf (warrior) whistle blown at India last week titled ’China must be militarily and morally ready for a potential war’. Imagine if the New York Times published a story like that based on White House sources.
The GT argues:
“Chinese people don't want war, but we have territorial disputes with several neighboring countries instigated by the US to confront China. Some of these countries believe that the US support provides them with a strategic opportunity and try to treat China outrageously. They believe that China, under the US' strategic pressure, is afraid, unwilling or unable to engage in military conflict with them. Thus they want to pull the chestnuts out of the fire. Considering that there is also the Taiwan question, the risk of the Chinese mainland being forced into a war has risen sharply in recent times.
Chinese society must therefore have real courage to engage calmly in a war that aims to protect core interests, and be prepared to bear the cost. In that way, China's comprehensive strength can be effectively transformed into a strategic deterrence against all kinds of provocateurs… China must be a country that dares to fight. And this should be based on both strength and morality.”
Of course, that probably won’t stop the EU/Germany pressing ahead with its fabulously-successful-and-not-at-all-mercantilism-over-other-values policy of “wandel durch handel”, or ‘change through trade’. However, the US will be watching what is decided very closely.
Meanwhile, of course, actual and potential divisions are as evident within the US (and within the EU and the UK for that matter) as they are between the US and others. Exemplifying the point, US President Trump has now been nominated not once, but twice, for the Nobel peace prize: one for a Middle East economic normalisation between Israel and the UAE and Bahrain, to be signed with full fanfare tomorrow; and the other for a normalisation of relations between Serbia and Kosovo. (And there is a link between the two: see this inadvertently hilarious clip.)
In an age in which it is now a counter-trend to see barriers to trade and travel coming down, both should arguably be celebrated, regardless of provenance. The response from The Atlantic magazine, however, was “End the Nobel Peace Prize”. Without wishing to make a partisan point, there did not appear to be such problems when the prize was won by Aung San Su Kyi, since tarred by the genocide against the Rohingya; by President Obama’s ”vision of a world free of nuclear arms”, who subsequently committed the US to a USD1 trillion modernisation of its nuclear arsenal; or of Henry Kissinger, who illegally bombed Laos to smithereens – prompting Tom Lehrer to note “Political satire became obsolete when Henry Kissinger was awarded the Nobel Peace Prize.” Or perhaps The Atlantic is correct, but has only just got the joke. Or, perhaps we can muse if one day someone will win the Nobel peace prize for bringing the bitterly-divided US back together?
Indeed, against the present news backdrop, rather than wade through further market waffle I will instead share Lehrer’s lyrics to “So Long, Mom”. Feel free to whistle along.
“So long, mom; I'm off to drop the bomb; So don't wait up for me.
But while you swelter; Down there in your shelter; You can see me; On your TV.
While we're attacking frontally; Watch brinkally and huntally;
Describing contrapuntally; The cities we have lost.
No need for you to miss a minute; Of the agonizing ho-lo-caust.
Little Johnny Jones he was a US pilot; And no shrinking violet was he;
He was mighty proud when world war three was declared; He wasn't scared; No siree!
And this is what he said on; His way to ar-ma-geddon…
So long, mom; I'm off to drop the bomb; So don't wait up for me.
But though I may roam; I'll come back to my home; Although it may be; A pile of debris.
Remember, mommy; I'm off to get a commie; So send me a salami; And try to smile somehow.
I'll look for you when the war is over….An hour and a half from now!”