Tag Archives: china

George Magnus explains events in China: no collapse, but serious problems

Summary: Continuing our quest to understand events at the other pole of the world economy, today’s post by A-team economist George Magnus explains the 3 key things to know about current events in China.

Globe and China Flag

China’s economy: no collapse, but it’s serious, and so are the politics

By George Magnus, 1 September 2015
Reposted from his website with his generous permission

For the sake of clarity, repeat three things after me:

  1. China’s economy is not collapsing.
  2. What’s going on China is serious.
  3. Political tensions are making things worse.

(1)  China’s economy is not collapsing

People who have become China experts in the last few weeks, point to the sharp falls in power consumption and freight traffic – two of the three indicators in the now famed Li Keqiang index –- but these and other industrial indicators don’t tell us anything about what’s going on in the services or tertiary sector, which accounts for about half of the economy.

Even if producers are having a tough time at the moment, consumers of household goods and services and buyers of real estate haven’t gone to ground. Retail sales were still up by over 10% in July, and property sales registered pretty robust year on year increases of over 13% in the second quarter and 19% in July. The government is going to continue to support the economy with infrastructure spending, monetary easing, and fiscal and debt initiatives.

In August, even though the Caixin and NBS PMI data were down, some of the high frequency data could ‘look’ better in year-on-year terms, largely because of flattering base effects following from declines this time last year. The official data are likely to continue to show the economy growing around 6.5 – 6.8% in annual terms in the next few quarters.

(2) What’s going on China is serious

The economy is the fourth year of a structural slowdown that shows no signs of ending and is becoming increasingly insensitive to the government’s stimulus measures. This chart of the manufacturing, services and total PMI indices in August captures the situation well, and points specifically to the fact that the services component, which still shows expansion, isn’t doing enough to offset the decline in manufacturing.

Continue reading

The big question for the world: is China growing, slowing, or in recession?

Summary: China is both the key driver of the world economy and the least well known of the major nations. With unreliable economic statistics, a rapidly evolving economy that defies easy analysis, and deep corruption, it defies analysis. But its growth or recession might determine the course of the world economy during the next decade. This post provides a realistic outlook, debunking the dreamy consensus expecting continued rapid growth.

“God takes care that trees do not grow to the sky.”
— Ancient German proverb.

From Evercore: China might already be in a recession (red line)

Evencore: estimate of real China GGP

This graph is from a report by Evercore ISI), founded by Roger Altman (Asst Secretary of Treasury for Carter and Deputy Secretary for Clinton) — Excerpt…

“Our proprietary Synthetic Growth Index (SGI) fell 1.1% m/m in July, and was also down 1.1% y/y. No wonder global commodities are so weak. The most recent 18 months have been much weaker than the 2011-13 period. Even if we adjust our SG I upward (for too-little representation of Services — lack of data), we believe actual economic growth in China is far below the official 7.0% y/y. And, it is not improving, Most worrisome to us; the ‘equipment’ portion of Plant & Equipment spending is very weak, a bad sign for any company or country. Expect more monetary and fiscal steps to lift growth.”

A recession under way in China would explain the collapse of most industrial commodity prices (especially oil), and raise the risk of a global “recession” (usually defined as GDP growth slower than 2%). Fortunately, they are probably wrong about China’s current GDP. Such a fast slowing from 7% to -1% would create economics shocks impossible for even China’s government to hide. Like massive layoffs.

I believe their index shows the rising stress in China’s economy. See this anecdotal evidence in The Guardian: “China’s workers abandon the city as Beijing faces an economic storm. Labour disputes are rising and some workers are leaving for the country amid fears a crashing economy could cause political and social unrest.” However, I believe their underlying story is almost certainly correct: most estimates of China’s future growth are delusionally optimistic.

A recent paper by two eminent Harvard economists provides a more realistic forecast of much slower growth — which implies real recessions (falling GDP) for China, instead of just growth slowdowns. This is also likely for India. That would remove the steady wind that has helped power the world economy since 1990, with no obvious candidates to replace them as economic locomotives.

The top line in the below graph shows the common forecast that China will rule the 21st century, as its 6% or 7% GDP growth makes them number one. US GDP is almost $17 trillion, and growing at 2 – 3%, so China will equal us in roughly 10 years — if they can sustain such a high rate of growth. A transition to a slower rate of growth would change the world; doing so (as often happens) by a recession would rock the world.

Continue reading

Seeing behind the headlines about China’s attack, stealing the governments’ jewels

Summary:  China attacked! Playing a script from countless action-adventure movies, our political leaders and columnists gear up for bold headlines by screaming for war while they know nothing. It’s America. But the info highway gives us information to see beyond the headlines and sort fact from fancy. Here’s the latest news about the massive theft of Federal personnel data. It’s a follow-up to the post describing the attack and who was at fault.

“Experts, shmexperts. Time for action…. Attribution solid enough for the US government is solid enough.”
— Tweets from a man on the street. The kind of American that rulers dream of having.

Cyber Warriors


  1. Dueling US officials.
  2. About attribution of attacks.
  3. What we know.
  4. For more information.


(1) Dueling US officials

From the initial announcement of the theft of files from the Federal Office of Personnel Management (OPM), anonymous officials confidently blamed China — which journalists repeated as fact. The FBI has made no official statement since its “we working” on it statement on June 4. China has denied the accusation, of course.

Today we got more useful information from the GeoInt 2015 Symposium (geoint: geospacial intelligence):

“So what really makes you think that, as the head of NSA and Cyber Com, I’m going to talk with you about this,” he told a reporter here today. … Rogers’ response did seem a trifle dismissive of a reasonable question asked reasonably in an open forum. {Breaking Defense}

Rogers spoke in response to a question about how the National Security Agency was going about attributing the breach to the Chinese government. “You’ve put an assumption in your question,” he said. “I’m not going to get into the specifics of attribution. It’s a process that’s ongoing.”

… Rogers’s hedged response, given during a question-and-answer session at the GEOINT symposium in downtown Washington, comes in stark contrast to the NSA’s approach to attribution during the Sony hack. In that case the FBI, working with the NSA and DHS, quickly named North Korea as the perpetrator, resulting in the prompt issuance of sanctions.

Rogers called that a great example of cross-agency collaboration. “Working across the United States government, DHS, FBI and the National Security agency, we were able to relatively quickly come to consensus about the characterization of the activity we were seeing coming in, which formed the basis of our attribution, and with a relatively high confidence factor, which allowed us to respond in a very public and direct way.”

Why hasn’t that collaboration worked in the case of the OPM hack? Said Rogers: “every dataset is different.”  {Defense One}

Director of National Intelligence James Clapper also spoke at GeoInt, giving a remarkably casual statement on a matter of such importance.

Continue reading

About the theft of the Federal government’s personnel records: sorting fact from fiction

Summary: We’re into the phase of the OPM records breach scandal where the US public policy crisis process predictably breaks down into finger pointing and aggressive guessing. Here is a brief on what little we know, and pointers on what we certainly don’t know.  {2nd of 2 posts today.}

cyber war


  1. How was it done?
  2. What was taken?
  3. Who was at fault?
  4. Who did it?
  5. Panic!
  6. For More Information

(1)  How was it done?

We can learn the bare bones about this series of attacks from the statement by Office of Personnel Management (OPM) Director Katherine Archuleta (bio here) to the House Oversight and Government Reform Committee. For an easier to read version see this typically excellent ars technica article by

Department of Homeland Security Assistant Secretary for Cybersecurity Dr. Andy Ozment testified that encryption would “not have helped in this case” because the attackers had gained valid user credentials to the systems that they attacked—likely through social engineering. And because of the lack of multifactor authentication on these systems, the attackers would have been able to use those credentials at will to access systems from within and potentially even from outside the network.

Beyond this we hear mostly guesswork.CyberEspionage

(2)  What was taken?

Lots of high-volume guessing in the news. The best answer might be: lots was taken. The Director’s statement says “we have not yet determined its scope and impact”. For a more precise answer see…

Continue reading

A China briefing from one of the West’s best-connected experts

Summary:  This post provides a deep briefing about China from a major expert. It’s long and somewhat technical, but of the quality that executives and officials pay a lot to get.  {2nd of 2 posts today.}

Globe and China Flag

China Visit: May 2015

Simon Hunt Strategic Services
Economic & Copper Advisory Services

Posted with his generous permission.


  1. The depth of the leadership’s intent to reform the country’s financial system, restructure industry and to internationalise the RMB (its currency) is largely unappreciated and/or misinterpreted by the media and investors.
  2. What is starting to take place is nothing more than reshaping the country and in so doing that of the world.
  3. To understand how serious and widespread will be this transformation we must have an idea of President Xi’s own philosophiesandobjectives.Theycentre around four dynamics:-
    • He sees himself as the saviour of the party and the country since corruption had grown so deep and widespread that it threatened social stability.
    • By reaching back to Mao’s Mass Line philosophy he has got the middle class and the greater mass of population on his side even though others may seek opportunities to unseat him. He has probably got enough cards in his hands to stop any such move.
    • The President wants to develop a more equal society where the income and wealth divide are narrowed. The future of the real estate sector is fundamental to this change. No significant rescue will be mounted so allowing private sector developers to fend for themselves with the State sector being readied to prevent any crash in prices.
    • The president is shifting the country to the left of centre implying that state-owned enterprises (SOEs) will become the cornerstone of growth with the private sector encouraged to join the state sector.
  4. There is an international timetable that the leadership must work within to effect this transformation. It is the autumn meeting of the IMF where once again the proposal to allow China’s currency to join the IMF’s special drawing rights ( SDR) comes up for Board approval.
  5. America and Japan between them have 23.3% of the votes. China is playing hard ball with the remainder to ensure that the resolution is passed.
  6. To help the proposal being passed China will open up its capital account and will make the RMB at least partially convertible by the time of the meeting, at least enough to satisfy the requirements of the IMF articles.
  7. Other moves will mean that credit conditions will be tight in the second half of the year forcing bankruptcies and failures to accelerate as an essential part of bringing price power back to the manufacturing sector.
  8. Fiscal policy is focusing on very specific infrastructure projects that will bring added value to the country; and the currency will appreciate against its trade weighted index.
  9. The implications of a successful SDR resolution will be widespread internationally and domestically in China.
  10. One such implication is that central banks and financial institutions will have to sell dollars to make way for the RMB. Another is that de facto the dollar will start losing its dominant role in trade financing.
  11. Another is that India supports China’s view that a Washington centric world is no longer appropriate for world stability and that a multipolar world should be structured.
  12. China’s monetary policy continues to be prudent. The cuts in required reserve ratios (RRRs) are not intended to stimulate the economy but to help liquefy the banks given the huge demands on them for additional working capital and because they know what is coming down the line.
  13. Real interest rates remain very high given that PPI fell by 4.6% in March implying that real interest rates were 10.8% in March. Credit remains very difficult within the SME sector.
  14. The cuts in interest rates are partially for this reason and because with the opening up of the capital account interest rates must fall towards international levels or risk a serious inflow of capital.

In summary, the leadership is putting China on the road to greatness but having first to suffer the consequences of previous governments’ love affair with credit.

Continue reading

Will China’s Asian Infrastructure Investment Bank begin a new world order?

Summary: China has created the Asian Infrastructure Investment Bank (AIIB) and signed on enough nations to make it a significant global force, but opinions differ about its odds of success and long-term significance. Some people expect nothing; some expect the world to change. Here I review the various bets and pick a winner.   {1st of 2 posts today.}



  1. The AIIB is perhaps important, & bad
  2. It’s big news. It’s the end of US rule.
  3. Skeptical voices, with good reason
  4. My conclusions
  5. For More Information


(1)  The mainstream view: the AIIB is perhaps important, but bad

For the mainstream view we turn to the Washington Post, where journalist Fareed Zakaria describes the situation and the consensus wisdom of its implications:

This summer, China spearheaded an agreement with Brazil, Russia, India and South Africa (known collectively as the “BRICS” countries) to create a financial organization that would challenge the International Monetary Fund. In October, Beijing launched a $50 billion Asian Infrastructure Investment Bank, explicitly as an alternative to the World Bank. And last week, Xi declared that China would spend $40 billion to revive the old “Silk Road” trading route to promote development in the region.

… But if China uses its growing clout to keep asking countries to choose between the existing arrangements or new ones, it might create conditions for a new kind of Cold War in Asia. It will certainly help to undermine and destroy the current international order, which has been a platform on which peace and prosperity have flourished in Asia for 7 decades.

The Economist gives a deeper analysis, but being The Economist we should assume it gets the details right but misses the big picture. Excerpt:

But the real, unstated tension stems from a deeper shift: China will use the new bank to expand its influence at the expense of America and Japan, Asia’s established powers. China’s decision to fund a new multilateral bank rather than give more to existing ones reflects its exasperation with the glacial pace of global economic governance reform. The same motivation lies behind the New Development Bank established by the BRICS (Brazil, Russia, India, China and South Africa).

… Reforms to give China a little more say at the International Monetary Fund have been delayed for years, and even if they go through America will still retain far more power. China is, understandably, impatient for change. It is therefore taking matters into its own hands.

Continue reading

‘Warring States’ — The Coming New World (Dis)order

Summary:  Geopolitical understanding comes through seeing the the world through others’ eyes, from other perspectives than our own. Today we have a description of the new world order as seen from China, written by Eric Li (a Chinese venture capitalist).


“Our first objective is to prevent the re-emergence of a new rival, either on the territory of the former Soviet Union or elsewhere, that poses a threat on the order of that posed formerly by the Soviet Union. This is a dominant consideration underlying the new regional defense strategy and requires that we endeavor to prevent any hostile power from dominating a region whose resources would, under consolidated control, be sufficient to generate global power.”

— Draft of the Defense Planning Guidance for the 1994-99 (18 February 1992) written by Undersecretary of Defense for Policy Paul Wolfowitz and his deputy Lewis “Scooter” Libby. The resulting uproar forced a prettier final version that masked the government’s true intentions. See Wikipedia for more comparisons between the honest draft and the pretend-final version.

Shang Yang

Shang Yang, statesman of Qin (390 – 338 BC)



  1. Introduction: about the old global regime
  2. The Ailing Narrative of Dichotomy
  3. The Dragon Reemerges
  4. Levithan vs. Free Rider
  5. Leviathan Retreats, a New Future Opens
  6. About the Author
  7. For More Information


‘Warring States’ — The Coming New World (Dis)order

By Eric Li
Originally published at The Asan Forum, 7 October 2013
Adapted from a lecture given at the Asan Institute for Policy Studies in Seoul.
Reposted here with their generous permission

The Korean Peninsula is the last citadel of a bygone era. Since the end of the Cold War, the United States as the reigning superpower has been the anchor of a global architecture built after World War II and solidified during the post-Cold War period. It is organized around a narrative of dichotomy that has dominated international relations for more than half a century. It is a single fault line narrative and ideology is its cornerstone. A worldwide Western alliance, of which South Korea has been a staunch member from almost day one, led and paid for by the United States, is charged with the mission of maintaining and continuing to expand this global architecture.

This era has gone through two phases. The first was the post-WWII phase during which two universal ideologies were engaged in an existential struggle around the globe: Soviet communism vs. democratic liberalism. Both were modern and both were Western. Furthermore, both were brands of historical determinism in that each claimed the inevitability of a preconceived destination for all mankind. In Soviet communism, class as the fundamental unit that transcended all cultural identities would take the whole world to the communist utopia. On the other side of the coin, democratic liberalism counted on divinely empowered individuals to vote their way to the liberal paradise. Both armed themselves to the teeth and drove their visions from continent to continent. In the end, the Soviet Union collapsed and the American-led West lived — hence the American century.

The second phase was the post-Cold War period. Victory in the Cold War led the West to embrace, in the traditions of Hegel and ironically, Marx, an inexorable linearity to history. The United States would lead the victorious Western alliance to implement the utopia of democratic liberalism to cover every corner of the earth. Electoral democracy and market capitalism were to be the building blocks of a new world order. Six billion rational individuals would all make the right choices in the voting booth and the marketplace and, thereby, eventually unify the world under a single set of political, economic, and even moral rules. In the euphoria of globalization many were led to believe that national sovereignty was passé and universality was within reach. Here, the single fault line is between the democratizers and market openers on one side and those who resist conversion or are yet to be converted on the other. Three approaches have been pursued against the latter: direct military containment or invasion (North Korea and Iraq), fostering color revolutions (former Soviet republics and the Middle East), and peaceful evolution (China).

Continue reading