Rebalancing the colour of the sky – China links

The 16 percent decline in hot-rolled coil prices over the past month, compared with a 7 percent decline in rebar, suggests that a reversal of that value proposition is underway. Instead of a robust private sector outspending the state, it looks like government cash is protecting the steel industry from a brutal slowdown in demand.

The stimulus from Beijing, however, is evidence that the country’s almost-forgotten ambition to rebalance away from investment and toward consumption is still a pipe dream. [Link]

Caixin notes that there were fewer days of blue skies in Beijing in the first quarter. that fits in with the story above and the story below. That means that smokestacks China is doing well and that rebalancing away from rebalancing.

FT reports:

Water-guzzling coal-conversion projects are springing to life in arid western China, setting the stage for the large-scale deployment of what was previously a niche industry. A three-year downturn in coal prices has revived projects that convert coal to motor fuel, petrochemical feedstock or gas, after many were shelved in 2008 because of concerns about water supply and pollution.

Projects that work in China’s state-dominated economy may not be practical elsewhere. Coal conversion has become profitable in China because of an unusual combination of low coal prices relative to state-set gas or petrol prices. Coal-to-liquids projects normally make economic sense only when oil prices are high or supply is limited. The technology was first developed in Nazi Germany, and commercialised in apartheid-era South Africa. [Link]

Natixis report on China’s first quarter trade data and GDP growth forecast for the first quarter also confirms that ‘old industries’ did well in the first quarter. No wonder, Beijing had few ‘blue sky’ days. That is a good barometer of China rebalancing or its absence.

I may have blogged on this earlier. But, it is worth repeating. The article ‘Alienation 101’ is about the life of Chinese students in the University of Iowa. American Universities, in search of incomes, had aggressively wooed overseas students, particularly Chinese. It has not gone down well. Indeed, try searching with the key words, ‘Iowa, China Students’ and you get some very interesting stories. This long article in the 1843 magazine of The Economist has a fascinating and yet chilling account of how China controls its students coming to study in the Universities in America and how it prepares to be the extended propaganda arms of the Communist Party and the Chinese government:

The Chinese students aren’t really disengaged, however. They are just immersed in a world that is largely invisible to the rest of the university. At its centre is the Chinese Students and Scholars Association (CSSA), funded and monitored by the consulate in Chicago. Its structure even mimics the Communist hierarchy, with a “propaganda department” and a tight circle of leaders tacitly approved by the consulate. It puts on four big events each year aimed almost exclusively at Chinese students, including a Lunar New Year gala marking the biggest holiday in China. Last November, Mingjian attended a CSSA “speed dating” show in which male students in tuxes declared their love for female students in flouncy dresses, with nearly 300 students egging them on. It was conducted entirely in Mandarin.

One of CSSA’s main purposes is to make students aware that Beijing is watching over them. A Communist Party directive last year exhorted members to “assemble the broad numbers of students abroad as a positive patriotic energy”. At Iowa, the effort starts even before the students leave China: at the university’s pre-orientation session in Shanghai last summer, student-information packets included a dvd produced by the Chinese consulate in Chicago called “Rules for Studying Abroad”. And in January, the CSSA posted on social media a Lunar New Year’s greeting from the Chinese students’ official minder, Chicago consul-general Hong Lei. “He is the idol of students in the United States!” the message went. “He is the pride of the Chinese people!”

The CSSA also stands ready to protest against any campus speaker deemed harmful to China’s interests. In February, the CSSA at the University of California, San Diego, blasted the university’s choice of commencement speaker, the Dalai Lama, whom Beijing considers a traitorous monk, saying in a letter that it was “awaiting the advice of the Consulate General.” Over the past few years, the Chinese government’s direct involvement in CSSAs has prompted two other universities, Columbia and Cambridge, to ban them temporarily.

While helping newcomers in from the airport, CSSA representatives welcome them with advice about settling in – and a reminder that their behaviour reflects on the entire Chinese nation. The students do not really need reminding, for their education at home has inculcated in them the virtues of, and importance of loyalty to, the Communist Party. Their own encounters with American students – whose views on China can be condescending, even hostile – tend to intensify their reflexive patriotism, even if, like Sophie, they choose to keep their opinions to themselves.

Outspoken patriotic fury tends to be reserved for fellow Chinese. Last October, after Professor Tang gave a talk about Beijing’s sensitivity to public opinion, he received an angry email from a Chinese student: “I’m so ashamed of you. You just bought into American propaganda against China. Where is your moral limit as a Chinese citizen?” Tang, who is now an American citizen, shakes his head. “This generation has been indoctrinated since day one.” [Link]

While I was searching for the above article, I ran into a five-part Reuters story on the tactics and methods that foreign students, particularly Chinese, employ to gain admission into American Universities. I just saw and read the third part. Links to other parts are available in the article. The ‘competition’ that hard working and sincere students are up against is frightening. The obsession to succeed at all costs and against all norms is not normal. It is a pathological obsession – a mental condition.

Benn Steil has some good charts on the Renminbi strength or the lack thereof. He says that RMB internationalisation has stopped. He is right. Chris Balding thinks that the analysis is flawed. I am not sure. Renminbi has stopped internationalising because the Chinese government is simultaneously exerting controls on exchange rate outflows and has also placed restrictions on foreigners’ repatriation! Benn Steil acknowledges that.

Brad Setser’s ‘Follow the Money’ blog is worth following. He is tracking China macro data and external data with clinical efficiency as he used to do before. He is a great resource. He has shown why it might be difficult to label China a currency manipulator now. He shows the periods in which it would have been appropriate to do so. That was mostly between 2005 and 2012. Both Bush and Obama were asleep at the wheel, then.

This sarcasm of his in the end, is well deserved (by China). Well, they had earned it!:

I also have great confidence in the ability of China’s authorities to engineer official outflows that would substitute (he means, ‘compensate’) for reserve growth should China start buying foreign exchange in the market. I consequently doubt that China will ever trigger the 2% of GDP in reserve growth threshold. But that is a topic for another time.

In another post, he has expressed scepticism on China’s current account balance having come down drastically in the last one year. Interestingly, current account balance is one of the parameters tracked under the IMF Exchange Rate surveillance and US Treasury’s Enhanced Enforcement Monitoring.

Lingling Wei’s long-form article in the Wall Street Journal is an important read. It shows the impossible set of foreign exchange goals that China is pursuing. Some predict – as I think – that China would let go off exchange rate stability in return for financial stability. We do not know when the tipping point arrives. China has been skilfully plugging the leaks in the dyke with band-aids, for several years now. It will be silly to venture and put a timeline on it.

China is tightening interest rates because the Federal Reserve is doing it. But, President Trump may have just gotten them out of jail on that one. See my MINT column on Tuesday (18.4) on that one.

Barrick Gold, the world’s largest producer of the precious metal, has agreed to sell a 50 per cent stake in one of its biggest mines to a state-backed Chinese company. [Link].

China tightens grip on football in Italy. A Chinese consortium has bought Berlusconi controlled football club AC Milan. Chris Balding calls it the purchase of a ‘money losing asset’ and that China is taking its economic model global!

Finally, two Martin Wolf pieces on China. One is about the impossibility of China escaping the debt trap and the second is about Chinese financial system storing up trouble for the rest of the world. Both are not new and nothing much that is not known has been said in these articles. China is ‘too big to fail’ in the eyes of the United States. North Korea is a physical security threat and China is a economic security threat.

The U.S. has no clear way – not that many have better answers – of handling both. It is buying time and appeasing and threatening alternately. The United States too has lost its ability to take them on and face the consequences. Its economy too is too weak and indebted. I guess this implosion or combined mutual assured destruction of China and American economies will happen when we least expect it to.


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