The Chinese distrust of Xi-topia

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Hi everyone,

since there has been lots of China talk this recently, I would also like to take a swing at it. There have been several articles produced by The Economist that I think deserve putting together, because the big picture we get is quite interesting.

For some time already our Chinese big brother has been slowing down and that is a hard sale for the Chinese propaganda. If you are over 40 years constantly told how awesome your leaders are and how fabulous the economy is and slapped every year with the huge growth it is probably hard to believe that a slower growth will be just as good. China has hopped onto the emotional roller coaster that we call free markets quite recently and so they are utterly unfamiliar with its ups and downs. So when they found out it is not always going to be just easy peasy lemon squeezy they started to panic, which made us panic too, which made them panic even more. You catch my drift. Then the government ran in with the magical anti-depressant-like regulation that as we all know are only a temporary fix since, just as with regular anti-depressants, if you want them to work you need to raise the dose.

So what’s the girl (i.e. China) got to do. Uncle Xi (yes that is what they call him) has a plan. Of course. Just like every proper Communist autocrat he is China’s fix-it-all guy. President Xi is also called the chairmen of everything, because he seems to have under his control all key resorts and committees. I mean that wouldn’t have to be so bad if Xi actually knew something about free market economy. Which he doesn’t. None of his policies were particularly successful. As The Economist probably correctly pointed out Papa Xi is a tremendous politician, the most powerful since Mao in fact, but tedious in coming up with some real solutions. It seems like the Chinese businesses have picked up on that.

This year has seen a massive increase in Chinese takeovers of foreign companies. It has amounted up to $100 billion which is a huge number even by international standards. Now, let us think about why would they do that so suddenly. The first explanation at hand is to make profit and destroy the competition. I do not think that that is their only motive. As shown by The Economist these Chinese companies are making huge debts in China in order to take over foreign companies. The cash flows in from Chinese banks backed by the government which in turn makes it look like a safe deal so the companies do not have an issue with debts as high as 70% of their equity. That is particularly high in western terms, but it doesn’t seem to scare off western banks like Credit Suisse or HSBC either. Having the Chinese government footing the bill in case something goes wrong is probably very enticing.

Let me draw an analogy here with the 2008 crisis in the USA. The USA at the time had and still has banks that are simply too big to fail. Therefore if trouble comes up the government has no choice, but to bail them out. That is what happened in 2008. Doesn’t that sound like a familiar scenario ? China certainly would never copy any product of the US, right ? What if this sudden expansion by Chinese businesses abroad is basically nothing else than transfer of capital out of hands of the government and safeguarding it against the collapse of the Chinese economy ? I am not claiming that the economy will fail, but with tightening restrictions, regulation and erratic moves of ever-powerful Uncle Xi one should not be surprised that the Chinese businesses are giving themselves a way out. In case their domestic market fails the money will be safely out of the system and in western businesses and the Chinese government will be kicked to the curb. One must ask who is then going to pay for the massive debts that Chinese banks and the government have ? Wouldn’t HSBC and the rest of the gang be affected too ?

In my humble opinion the collapse of China (which is a real possibility considering how the government steers the economy) would mean a forced visit to the good old 2008 train. I am just not convinced that we have enough to pay for the ticket this time round. I have no doubt the US will suddenly be too busy to pick up the phone.

Michael

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Korea – Unwanted Unification

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Hi everyone,

in reaction to the speech made by Antony J. Blinken (U.S. Deputy Secretary of State) just yesterday, I thought I should take a look at the elephant in the room that is the unification of Korea.

As you all surely know, Korea has been divided in two states ever since the Korean war (1950-1953). The two states, one stalinist-communist and the other deep right-wing democracy/dictatorships (depending on who you’re talking to), are very much at war. Year after year, due to North Korean propaganda picked up by popular media, it seems like the peninsula is going to self-destruct and yet nothing ever happens. Majority of Koreans, presumably from the South, feels like the unification is just around the corner and even if they don’t they at least keep the hope that it is going to happen during their lifetime. To me that sounds awfully positive, so why is that that nothing ever happens ?

I believe that the answer is very simple despite also being very complex. Nobody wants it to happen and especially not Koreans themselves. North Korea is one of the most oppressive and underdeveloped countries in the world. It has a population of over 20 million people that has only experienced hardships, propaganda and Communism. The country lacks proper infrastructure, functional industry or even functioning agriculture. On the other side, there is South Korea where 90% of its inhabitants have access to broadband internet and which is home to tech giants like Samsung (which is by the way manufacturing all the fancy chips and screens for our beloved Apple in addition to flooding markets with their own devices). According to some estimates the unification would cost South Korea around US$2.7 trillion. Honestly, I can’t even say how many Samsung S6 Edge+ they’d have to sell to pay for that. It would essentially send South Korea from being among top 20 largest GDP nations to medieval times for decades. No wonder the South Korean leadership is no hurry. Surely one must admit that once this little hiccup is out of the way unified Korea could swing back up using natural resources of the North combined with business experience and tech savvy to counter giants like China, but that is like saying  you could win the marathon, but you need to shoot yourself in a leg first and wait till it heals. Who would want to be the leader that does that.

That brings me to why literally nobody else wants the unification to happen despite fancy speeches and declarations. The United States consider their position in Asia as very important as proven by the official pivot of Obama administration towards Asia. Australia and central Asia produce great deal of resources that are then pumped into US and Chinese economies and Asia in general is where lots of US trading happens. Therefore the US needs a strong foothold in Asia. It has its troops in Japan, treaties with Taiwan and up to 60% of its navy in the region, but most importantly it also has up to 30’000 soldiers sitting in South Korea, presumably safeguarding the country against North Korean aggression. China does not like that at all. China is like your egocentric younger sibling who constantly eats your chocolate and blames it on the dog. China fears that after the unification the US is going to move its troops towards the new border and ,frankly, it is not all that far from Yalu river to Beijing. Basically a missile launch away. In public, China and North Korea are great buddies while actually China thinks of it as the lesser evil.

Surely the US would be forced to withdraw its forces out of Korea once the country is stable, thus loosing a very important reason to be there. After all, what motivation would Japan have to keep the US base on Okinawa if North Korea is out of the picture ?

From the economic point of view neither Japan, China, Taiwan or Philippines would benefit from the unification since who needs a nation that could, given enough time, turn from a tiger to a lion (sorry, can’t think of an unbiased animal stronger than tiger) and drag in all the business that everyone wanted to get their hands on.

In my opinion, the only way towards unification of Korea leads through collapse of regime in China and subsequent collapse of North Korea once the scales of power are tipped towards everyone there having no other choice than to support it. Until then, maintaining the current status quo is more than comfortable state of affairs for all parties concerned.

Michael

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