Trade Is A Matter Of Survival For China

Authored by James Rickards via The Daily Reckoning,

Many investors are familiar with the fact that President Franklin Roosevelt closed all of the banks in America and confiscated all of the privately-owned gold by executive order in the early days of his administration, which began in 1933.

Presidents since then have seized assets from countries such as Iran, Syria, North Korea and Cuba and imposed sanctions on Russia and many other countries by executive order.

Yet, relatively few are familiar with the statutory authority for these orders.

The president does not need an act of Congress to support such extreme actions. The laws have already been passed and the president has standing authority to act like a dictator with regard to financial assets.

The first such statue was the Trading With the Enemy Act of 1917, TWE. This was used to seize German assets in the U.S. during the First World War. It’s how the U.S. took control of Bayer Aspirin from the German firm Bayer AG.

TWE was the authority FDR used to close the banks and seize the gold. It’s not clear whom FDR considered the “enemy” when he used TWE; probably private gold hoarders. But, in 1977, the Congress enacted an even more extreme version of TWE called the International Emergency Economic Powers Act of 1977, or IEEPA.

This is the equivalent of a nuclear weapon when it comes to financial warfare.

IEEPA allows the president to seize or freeze any asset or block any transaction if the president deems it to be necessary in the case of a national emergency.

The problem is that “national emergency” can be defined broadly to include trade imbalances, lost jobs or any other economic adversity. President Trump may now use IEEPA to block a variety of Chinese deals in the U.S. in retaliation for Chinese theft of U.S. intellectual property.

With the U.S. using its nuclear option in financial warfare, investors should hope that the Chinese don’t respond in kind.

President Trump may not appreciate the extent to which China will go to protect its interests. Trade negotiations are not the art of the deal, as far as China is concerned. Their goal is national survival.

China’s economy is not just about providing jobs, goods and services that people want and need.

It is about regime survival for a Chinese Communist Party that faces an existential crisis if it fails to deliver. The overriding imperative of the Chinese leadership is to avoid societal unrest.

But China is less stable and less powerful than it appears on the surface. Its apparent stability is more of a mask concealing internal divisions.

And it is afraid that its hold on power is weaker than many in the West suspect.

Remember Tiananmen Square?

Rather than showing the power and unity of the Chinese government, Beijing took a different lesson from Tiananmen Square.

As my colleague Kevin Massengill has pointed out, it revealed China’s political fragility.

We all know about the massacre. But what is not widely known is that several army officers refused orders to crush protests throughout China.

Seven retired generals, including a former defense minister, signed a letter opposing the use of force against the people of Beijing:

“Due to the exigent circumstances, we as old soldiers, make the following request: Since the People’s Army belongs to the people, it cannot stand against the people, much less kill the people, and must not be permitted to fire on the people and cause bloodshed; to prevent the situation from escalating, the Army must not enter the city.”

“I’d rather be beheaded than be a criminal in the eyes of history,” said one general commanding forces in the Beijing military district.

They were not the only one who felt that way. As Kevin has noted, armored divisions of 10,000 soldiers allowed themselves to be stopped for days by crowds of students and ordinary citizens who brought them food and water while explaining why their cause was just.

An estimated 3,500 PLA officers disobeyed orders to crush protests. Many Chinese army officers were reportedly executed. Others were demoted, or faced court martial and imprisonment.

The Tiananmen Square Massacre, Kevin says, is an example of why and proves that the position of the Chinese Communist Party is more precarious than is widely understood, even now, almost 30 years later.

Here’s something else not widely known about the protests…

The Tiananmen Square protests and massacre of 1989 did not start out as a liberty movement, although that’s how they are remembered in the West. It started out as an anti-inflation protest, and that’s how the Communists remember it.

And given China’s current economic problem, Beijing’s challenge is becoming more difficult every day. Consider what’s happening in China right now…

Growth in GDP is conventionally defined as the sum of consumer spending, investment, government spending (excluding transfer payments) and net exports.

Most large economies other than oil-producing nations get most of their growth from consumption, followed by investment, with relatively small contributions from government spending and net exports.

A typical composition would show a 65% contribution from consumption plus a 15% contribution from investment. China is nearly the opposite, with about 35% from consumption and 45% from investment.

That might be fine in a fast-growing emerging-market economy like China if the investment component were carefully designed to produce growth in the future as well as short-term jobs and inputs.

But that’s not the case.

Up to half of China’s investment is a complete waste. It does produce jobs and utilize inputs like cement, steel, copper and glass. But the finished product, whether a city, train station or sports arena, is often a white elephant that will remain unused.

What’s worse is that these white elephants are being financed with debt that can never be repaid. And no allowance has been made for the maintenance that will be needed to keep these white elephants in usable form if demand does rise in the future, which is doubtful.

Chinese growth has been reported in recent years as 6.5–10% but is actually closer to 5% or lower once an adjustment is made for the waste. The Chinese landscape is littered with “ghost cities” that have resulted from China’s wasted investment and flawed development model.

This wasted infrastructure spending is the beginning of the debt disaster that is coming soon. China is on the horns of a dilemma with no good way out.

On the one hand, China has driven growth for the past eight years with excessive credit, wasted infrastructure investment and Ponzi schemes. The Chinese leadership knows this, but they had to keep the growth machine in high gear to create jobs for millions of migrants coming from the countryside to the city and to maintain jobs for the millions more already in the cities.

The Communist Chinese leadership knew that a day of reckoning would come. The two ways to get rid of debt are deflation (which results in write-offs, bankruptcies and unemployment) or inflation (which results in theft of purchasing power, similar to a tax increase).

Both alternatives are unacceptable to the Communists because they lack the political legitimacy to endure either unemployment or inflation. Either policy would cause social unrest and unleash revolutionary potential.

Instead of these unpalatable extremes, the Chinese leadership is trying to steer a middle course with gradual financial reform and gradual limits on shadow banking. I’ve previously predicted that this gradual policy would not work because the credit situation is so extreme that even modest reform would slow the economy too fast for comfort.

That’s exactly what has happened. China has already flip-flopped and is easing up on financial reform. That works in the short run but just makes the credit bubble worse in the long run. China may soon resort to a combination of a debt cleanup and a maxi-devaluation of their currency to export the resulting deflation to the rest of the world.

It is probably the best way to avoid the social unrest that terrifies China.

When that happens, possibly later this year in response to Trump’s trade war, the effects will not be confined to China. A shock yuan maxi-devaluation will be the shot heard round the world as it was in August and December 2015 (both times, U.S. stocks fell over 10% in a matter of weeks).

I hope President Trump knows what he’s getting into.

Comments

TheSilentMajority wisehiney Fri, 04/06/2018 - 02:55 Permalink

Whatever happened to the righteous philosophy of “short term pain for long term gain”?

Sadly it is a forgotten mantra among muricas corrupted MSM and globalist politicians.

In reality, the USA sheep continue to suffer horrible long term pain in the pursuit of their “leaders” evil greedy short term globalist political/stock market gains.

Trump appears to be the only one trying to remedy the wrongs his country has suffered at the hands of both traitors and China.

In reply to by wisehiney

Laowei Gweilo Four Star Fri, 04/06/2018 - 04:19 Permalink

 >>> "Whatever happened to the righteous philosophy of 'short term pain for long term gain'?" <<<

 

I've seen quite a lot of coverage of this on both sides...

 - most of the US focus has been on the midterm elections or what it means for iPhones or t-shirts

 - most of the Chinese focus has been on 'the history of the US bullying countries and how the Chinese people need to stand together and FIGHT for our nation's interests'

 

 most of the US seems annoyed at Trump for how it'll affect them personally

 most of Chinese seems genuinely angry and even hateful to the UNITED STATES (not just Trump) for essentially declaring 'war' on their country

 

quite the contrast o.0  ... TBH, I'm not a lot less worried about Trump OR Xi, and more about the Chinese people's' zeitgeist that's being created out of this -_- 

In reply to by Four Star

fx Laowei Gweilo Fri, 04/06/2018 - 04:40 Permalink

Rickards is a fool and a clown and a  totally self-absorbed wannabe expert. but he has no clue.

Consider this, as an example. Yes, China has a credit and debt bubble and serious malinvestments. Everybody knows that, though the extent is debatable. While there are indeed ghost cities, there are far less of them than Rickards suggests and implies.

But here is the important thing: A debt bubble, once it starts to deflate (orderly or not) is always highly DEFLATIONARY! So IF bejing can engineer a gradual slopw down in credit expansion and gradually clean bad debts out of the financial system (the central government has a clear intention to do both and  ample financial firepower to do so), it will be deflationbary (and reduce nominal growth, of course). There ain't no second Tienanmen uprising from higher inflation in that scenario.

then, does it ever occur to Rickards, that what bejing proposed in retaliation would actually be adding to inflation in China, namely higher prices for meat due to the spoybean tariffs? Now, why would bejing do that, if they were indeed afraid of skyrocketing inflation?

Rickards and his nonsense are best ignored., since he has proven for decades that he has absolutely no clue about china, about currencies or about anything he writes on.

In reply to by Laowei Gweilo

Scipio Africanuz fx Fri, 04/06/2018 - 07:17 Permalink

It's an existential battle for both China and USA, the problem is that the Chinese understand the risks they're taking along with the expected damage, the USA, not so much. Trump, though I support him (not on the trade war though) has zero idea of what he's getting the USA into.

Americans are not prepared for the damage, they'll wilt when the heat gets turned up, the Chinese will hunker down and eat grass if necessary. Will Americans eat grass? That's the critical question...

In reply to by fx

silverer Zero Point Fri, 04/06/2018 - 08:16 Permalink

“Due to the exigent circumstances, we as old soldiers, make the following request: Since the People’s Army belongs to the people, it cannot stand against the people, much less kill the people, and must not be permitted to fire on the people and cause bloodshed; to prevent the situation from escalating, the Army must not enter the city.” '“I’d rather be beheaded than be a criminal in the eyes of history,” said one general commanding forces in the Beijing military district.'

 

Heroes. And nobody knows their names.

In reply to by Zero Point

Putrid_Scum ted41776 Fri, 04/06/2018 - 03:48 Permalink

My girlfriend is a communist party member.

No greenbacks for her, she's a stacker baby :)

By the way, what was this article all about, deflation? What's that? How can deflation happen in a monetary system that can create infinite money? 

hmmm.. ??  ..

What was the point of this article? "bad commie gov will be bad to citizen slaves.."  Newsflash: All governments are scum.  

Social unrest in China? Sure. It can happen. Probably will. But what's never mentioned is that the Chinese people have become very wealthy in recent years, and "The Communist Party" --I think that's my employer, not sure, didn't ask-- told them to buy GOLD!!

Sounds like good advice... 

The Reset will be incredibly painful, but the stackers will be fine, and there are a lot of stackers in China. And they'll be very thankful and praiseful of the Communist Party when that happens. And the peasants here have no guns.

Not sure about the US population tho... they got guns and generally, no gold.

Putrid

www.beforethecollapse.com/2017/05/23/the-reset/

 

 

In reply to by ted41776

Moe Howard ted41776 Fri, 04/06/2018 - 09:30 Permalink

At this late stage in the game, it should be abundantly clear that "communism" is really just a label for just another gangster government. The entire premise of "communism" is first, economic.

Is China operating as a "workers paradise" where the workers own the means of production? From each according to his abilities, to each according to their needs? Come on.

Just another gangster government.

 

In reply to by ted41776

Yen Cross Fri, 04/06/2018 - 02:51 Permalink

   Where's the SWIFT alternative?

 China could sell the treasuries yesterday. They'll just get twisted.

 Thanks Emperor Xi. Petroyuan? lmfao!  How much arable land does China have?

 

 Okay smart slope head. China buys arable land in Africa and S.A.

 How is China going to ship it, without a Navy? Spratly islands are a still target, in the South China Sea.

   Both Bushes were fucking traitors to the United States.  Trump is taking care of business, you fat twelve sandwich eating gasbags.

  Feel the BURN, when you do a few sit-ups Bitchez.

sparksmass Fri, 04/06/2018 - 02:57 Permalink

"This wasted infrastructure spending is the beginning of the debt disaster that is coming soon" 

Who is all this debt owed to, who was it borrowed from?

I never hear this discussed when China's debt is mentioned.

Setarcos sparksmass Fri, 04/06/2018 - 04:00 Permalink

Well not a Rothschild central bank.  Best information I have is that they owe it to theyselves and that it can be mostly written off, but apparently what worries them is US debt owed to them, so they are dumping Treasuries as fast as possible and basically funding a lot of development with U$D/Treasuries whilst they still can, it's a race to get things set up with One Belt, One Road, the Shanghai Cooperation Organization, BRICS and Russia's Eurasian Project before the U$D is worthless/the US defaults.  Well that's what I've read, the author of this piece seems oblivious that two different systems are involved.

In reply to by sparksmass

laodan Setarcos Fri, 04/06/2018 - 04:45 Permalink

Yes the large portion of US treasuries owned by China have been used as collateral to get loans to finance projects mostly under the OBOR umbrella. So we will not witness the dumping of large quantities of US treasuries by China as some pundits are suggesting. Smarter for them to default on the loans guaranteed by those treasuries... the US could then eventually be called upon by China's creditors to repay its failing debt. Ah ah ah...

In reply to by Setarcos

laodan sparksmass Fri, 04/06/2018 - 04:34 Permalink

It was borrowed from the Chinese banks that account for the savings of the Chinese citizens. Foreign debt levels are very low and their range are within the amounts of of the country's foreign reserves.

Corporate financing in China is largely realized through loans. The stock market was created in the end of the nineties and access by corporations was rigidly controlled till recently which explains the relatively low level of corporate financing through stock. But this is rapidly changing...

Personal savings (individuals) in bank accounts, translated in dollars, represent between 21 and 30 Trillion USD depending on the source one consults. Citizens also own stocks, bonds, gold, silver and so on. But most importantly approximately 90% of the families own their homes... and the saving rates are in the order of 40% of global income...

Debt structure:

- Private (individuals) debt represents approx. 50% of GDP mostly contracted to pay for housing. But to get a loan the banks impose a down payment of 30 to 50% of the purchase price... So basically the risk for the banks is inexistent.

- Corporate debt today represents some 170 % of GDP (down from 180-185% a year ago). The government is aggressively pushing loan restructuring down the throat of private corporations (selling of assets to pay back loans) while public corporations are being restructured (closing of non profitable units and absorption of smaller profitable units by "national champions".

- Public debt (central + local) represents some 46% of GDP. The big chunk of this debt is owed by local administrations. Debts owed by the central government are very low indeed which suggests that the central government has the capacity to take over some of the coming failing corporate obligations... Furthermore money creation is in the hands of the central bank that is under the direct authority of the State council which means that the central government can use money creation as an instrument to absorb future eventual corporate collapses...

 

 

In reply to by sparksmass

Setarcos Sy Kloine Bee Sat, 04/07/2018 - 00:42 Permalink

Yep, like importing Nazis like von Braun and Mengele in 1946, to steal German secrets about rocketry and Gestapo techniques (for the newly-formed CIA).  Or leaning on debtor Britain to send Meteor jet fighters to the US, so that the engines could be copied.  It's all pot kettle black and convenient amnesia.  Hey why not recompense China for gunpowder, paper, fine porcelain, etc..  I'm not at all against periods of patent and copyright for individuals, but when it comes to the antics of governments it's darkly comical.

In reply to by Sy Kloine Bee

ElTerco Fri, 04/06/2018 - 03:02 Permalink

The problem with China is that they are such meticulous planners over a long time horizon, it is unclear whether their economy can handle a large unexpected external shock (i.e. massive trade war).

Yen Cross Fri, 04/06/2018 - 03:10 Permalink

 Who's buying usd/jpy again?

  Sure as hell, isn't the PBoC.

 Look at the divergence in Zero Lag MACD vs The Fisher vol.

 This isn't hedge funds or CTA buying. It's the fucking desperate BoJ, and Kampo.

  Now we know who owns all those hedged euros?  The euro is looking pretty oversold on the h-4 charts?

 Give me that capitulation candle Baby.

  London is blowing it's wad early. Anticipation is keeping me waiting. I want my ketchup !

Brazen Heist Fri, 04/06/2018 - 03:18 Permalink

Fuck the US empire......it cannot coexist at peace with others unless its its way or the highway.

The coming collapse will be fully deserved.

The empire is getting greedy even during war.....fighting multiple countries at once.

Empire and pissing contests Vs. democracy and governance is the mutually exclusive tradeoff we're ultimately talking about. The Deep State voted for the former, while the people voted for the latter. The Deep State wins = Everybody else loses.

francis scott … Fri, 04/06/2018 - 03:28 Permalink

And when all the Christmas imports from China don't 

ship in Q2, Q3 and Q4 of 2018 to Longview, Washington

down to the Port of Long Beach and the shelves at

Walmart, Target and America's Malls and the

warehouses of the online retailers are absolutely empty

by Black Friday at the end of November, and the month

before Jesus's birthday you can fire assault weapons 

down the aisles of Macy's and Sears and not hit a soul...

 

How will that affect America's feeling about

who won the trade war with China?  How will

that affect America's tax receipts for 2018?

How much more will Washington have to borrow

to convince the world that all is well along the

Potomac and US bonds are still AAA and the best

risk free place to park money?

Yen Cross Fri, 04/06/2018 - 03:30 Permalink

 There we go!

   I knew some more euros were going to get barfed up

 Probably a smart time to cover[take profit]

  There's a substantial squeeze coming soon.

inosent Fri, 04/06/2018 - 03:35 Permalink

I'm tired of made in China crap. Those yella slanty eyed schemers are handed 100% of our market and they hitch about a b/e trade bal? Go Trump on this issue. It's sad the the America Trump wants to make great again is long gone. But why not take a whack at the commie chinks on the way down? Ammiright? Little bastards sell us all their garbage and show up loaded with cash to buy our real estate. They have their own country, with 2 billion. They can sell their s- to themselves,.

haruspicio Fri, 04/06/2018 - 04:08 Permalink

Red necks calling for a trade war. Who do you think will suffer from the trade war? The 0.01%, the 0.1%, the 1% or the rednecks? Clue for rednecks, the answer begins with 'R'.

Sudden Debt Fri, 04/06/2018 - 04:20 Permalink

Trump needs to win the nobel price if he succeeds!

Finally all those bastards who destroyed the western economy will feel the burn

 

Trump should also make an exchange with Africa mandatory! Stop exporting their people and forced repatriation or else! Same with the rest of South America!

Call an end to all the bullshit!!!

AmarUtu Fri, 04/06/2018 - 04:30 Permalink

This is why the Chinese whales have been land banking across the west for a good decade.

The dilemma we may encounter is, if the west truly believes the Chinese stole this wealth through IP theft and can PROVE it, then they may reclaim a trillion+ dollars worth of residential property that can be used to pay off govt debt.

But this scenario annihilates China and rebuilds the west rather aggressively. You would be looking at day zero in terms of economies needing to rebuild manufacturing. Your talking hundreds of millions of jobs, those who see this type of situation also realize those jobs will soon be automated but may realize the debt can never be paid under the current cirumstance.

So the west AKA the US and a few others, may be seeing a new tax base, or a tax base that is no longer accessible through the status quo, really the middle class is now dead and dying in the western world, so who is going to pay once everything starts to transition to AI and robotics??

I guess all this will be answered through future escalation. The biggest hurdle facing manufacturing is rare earth materials. So you could see a flip on who exports and produces using dark factories.

My bet is not China.

Dilluminati Fri, 04/06/2018 - 06:05 Permalink

I read this shit and the entire article is written from the perspective of one side of the ledger, ohhh woe China.. as if China's problems should become the worlds problems?  Not a single sentence in the article about the affects on the USA after trade imbalances for now nearly 20 years if you use the 9/12/2001 date as the start of most favored trade status, but stretching back even further.  So the "white elephants" or outright western financial support of peoples liberation army troops by unfair trade with the USA, or the nuclear issue with North Korea, again.. all areas of controllable policy that China would not accommodation.  

When it came to the south sea security and demilitarization of that region, what was China's number one goal?  To read the article one would be believe it was trade that was the top policy, it was not!   

When it came to the Korean peninsula and Rocket man tossing ICBM's at neighbors, To read the article one would be believe it was trade that was the top policy, it was not!   

When it comes to intellectual property theft, cyber theft, and other areas of cooperation that facilitates trade, To read the article one would be believe it was trade that was the top policy, it was not!   

There is this paternalistic attitude of the west that is as if we look at China like little children, or a capitalist nation wanting to grow up, that instead has to be rethought as a nation that just created a rule for life leader, XI is now an emperor for life, no elections, no moderation, no compromise, XI's way or the gallows.  So touching the soldiers who would not fire on the citizens and then of course the boss found someone who would.

Here is a harsh truth.. Trump was by and large elected on some principles he had better get back to.  Maga isn't just some fucking hat, and the American people are tired of the intellectual elites and 1% making the types of arguments that you read in this article while a train of shit sits in their backyard all in the name of "trade." 

It has never been the top priority of China to make trade their top priority, their top priority has and remains military power projection beyond their borders.   In China all crimes get settled at the end of a rifle, they will deal with neighboring countries the same, and someday with the USA the same.  

This paternalistic fantasy China wants to grow up to be western is absurd, they instead want strongman leadership and military expansion instead.

Your instead witnessing the rise of an Asian Hitler in XI.

 

21st.century Dilluminati Fri, 04/06/2018 - 07:40 Permalink

well then, ALL trade with the Oriental Hitler should be ended.

as if the world doesn't see the rising of the Ping Dynasty.... which will be a very short Dynastic period if Ji stays on this path. The article points out some of the internal pressures at play ... and they are real. Let the images appear of Chinese goons cracking pumpkins ..

few see China as anything more than a communist state... but yet it is China that has projected the images of their shinny, happy subjects ablaze in neon 

advertising and Panda births in US Zoo's. 

More eyes than the US are on China.  

In reply to by Dilluminati

Davidduke2000 Fri, 04/06/2018 - 06:19 Permalink

no buddy, it is not a matter of survival since all China's export to the us represent only 16% of all Chinese exports to the world.

We know that china can easily survive without any imports from the us, while the us will have to pay the tariffs it imposed on Chinese imports because the Chinese products are much needed.

Obama tried to create with the TPP an alternative import stations in Asia such Vietnam, South Korea , Thailand, Singapore , etc, but trump who does not play chess flipped out and cancelled the deal and he is paying the price, but of course with or without the TPP the results are the same since the TPP would have taken 20 years to take effects as there is a deep hate in Vietnam for the us and the population was not motivated to work for anything american.

Again obama knew that saudi was the most hated entity in the middle east after israel and wanted Iran to replace it as the major regional power, but trump love of israel and money decided otherwise and is baking the losers.

China would have no problem replacing it's 16% of export to the US by increasing less than 0.5% of exports to other major countries leaving the us inflation rate up by at least 5% extra and its supply chains in ruins.