Wednesday, October 25, 2017

China, China, China, It Is All About China And Japan

President Xi Jinping's Opens With Speech Of "New Era"
China is coming off its 19th National Congress where it is all about a "new era" for China where the country should take "center stage in the world" but under the surface, all is not well. Something is happening there and it's not exactly clear what is going on. It is difficult to ignore that China's central bank has warned extreme credit creation and trouble in the shadow banking system could lead to a full-blown financial crisis. In response, they continue pumping out liquidity. If they don't the whole system might seize up and cease to function, on the other hand, such actions only create more problems going forward.

So much for the assumption that many people hold that this particular kind of crisis cannot develop in a state-run financial system like China's where the banks are under Communist Party control. Wake up folks, you are delusional if you think any financial system or banking system is not under similar control. Whether it is the Fed or the BOJ politics do matter and those in charge of such institutions do not put the general public first. As for the title of this piece. "China, China, China, It Is All About China And Japan" it should be noted that Japan was added because they currently lead the way in a new central bank experiment to ignore debt and print their way to glory by using the money they print to purchase equities. By doing so Japan is in effect nationalizing companies and transferring ownership from the private to public sector.

A matter that has not garnered enough attention or has been discounted is how economic problems that develop in China will spill over and directly impact Japan. The Japanese economy is very vulnerable to a negative feedback loop that could have strong ramifications on its economy. Even with a strong distrust possibly even a dislike between the people and cultures years ago the two countries joined together in an effort to maximize profiting from exporting to America. Over the years the interdependence has intensified, China and Japan have become major trading partners with Japanese direct investments surging and Japanese technology playing a critical role in the development and competitiveness of China’s global supply chains. In some ways, the two have become joined at the hip.

China Plays A Corrupt Game That Will Not End Well
Returning to the subject of China, recently Zhou Xiaochuan, the governor of the People’s Bank (PBOC), spoke of “fierce market reactions” and a possible Minsky Moment, the tipping point when credit cycles break and euphoric booms collapse under their own weight. Mr. Zhou told China Daily that asset speculation and property bubbles could pose a “systemic financial risk” made worse by the plethora of wealth management products, trusts, and off-books lending taking place throughout the country. He warned that corporate debt had reached disturbingly high levels and that local governments are using tricks to evade credit curbs.

We should not underestimate the strong bonds between China and Japan or the amount of corruption that runs through the Chinese economy. We should also remember it is not in the interest of Japan to see the yen strengthen because of the impact it has on their ability to export. In the same way that many people overestimated the strength of the Soviet Union prior to its fall in December of 1991 or the Japanese economy from 1986 to 1991, today people tend to exaggerate the strength of China. When Japan slipped from grace the real estate and stock market prices which were greatly inflated before its massive bubble burst in early 1992 crashed causing the "lost decades" and the problems that still haunt them today. I contend we do the same with China's economy, it seems Americans tend to supersize anything they can conjure up as a challenge to their supremacy.

Unlike events that happen in Las Vegas that has prompted the saying, "anything that happens in Vegas stays in Vegas" things that happen in China do not stay in China. This is obvious from the huge amount of wealth fleeing the country over the last few years. The same can be said of Japan. While this is being downplayed by many economists that are busy with charts searching for what they call growth. The money flowing across porous borders can be seen in soaring house prices in Vancouver and most of Australia. Both China and Japan have been busy supporting zombie companies and not allowing them to fail all in an effort to convince the world all is well. These countries are both very big players in the global economy and when they fall it would be wise to look out below.

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