Instant feedback mechanisms in the Middle Kingdom...

Subtle.  Very subtle...and there is nothing Russia can do about it given it's increasingly precarious position.  Sell at cost (or at a loss) to keep the wheels greased in the East while ceding territory in the West.  Such is the power of a defacto monarchy - you can ignore market signals (both financial and political) so long as the local populace is controlled.

One wonders If Ukraine has a plan to retaliate for Russia's targeting of water supplies.  Either direct action (eliminating potable reservoirs/distribution systems) or indirect (attacking arable land/farming concerns)...but unlike the movie (the screenpic above) "Red Dawn", it appears unlikely that Russia will have any ability to capture land as a countermeasure.  

Four years of war and economic isolation have reduced the Russian president to a supplicant in a relationship growing more imbalanced -- and at times tense.

Before Putin made his 14th trip to meet with Xi in China, he publicly signaled that the two countries would strike a breakthrough agreement on energy. Indeed, his May visit had no bigger ambition than persuading Xi to greenlight a second natural-gas pipeline between Russia and China -- known as the Power of Siberia 2, a project two decades in the making that Moscow desperately needs.

But the Russian delegation that flew to Beijing ahead of Putin ran into a brick wall. Chinese officials made it clear to the visiting head of Gazprom, Russia's state-owned gas giant, that they would sign up to the pipeline only if Russia sold them gas at the same lower-than-market rate Moscow sells domestically, said people with knowledge of the talks. In essence, Beijing was asking the Kremlin to subsidize the project.

Driving home their point, Beijing's officials told the Russians not to raise the issue again until the terms changed, the people said.

A day later, Putin left the Chinese capital having signed 42 agreements and joint declarations. The pipeline deal wasn't among them. Beijing offered no public explanation.

"Xi received Putin like an emperor receiving his visitor in his castle," said Joerg Wuttke, a veteran German business executive with long experience in China-Russia relations, "and sent him home."

"Why take a chance?" - Cleaning House in the Middle Kingdom

There is a scene in the movie "Casino" that ushers in an incredibly violent motage that focuses on "cleaning house" (eliminating anyone who could testify or cooperate with law enforcement, aka "rats")

Life imitating art.  Who knows how many are compromised and Xi Jinping must be uttering "why take a chance" under his breath...

By Foster Wong and Josh Xiao
(Bloomberg) -- China removed nine military lawmakers from
its national parliament in the latest sign that President Xi
Jinping’s purge of key defense establishment personnel continues
to widen.
The country’s top legislative body revoked the membership
of Ground Force Commander Li Qiaoming and Information Support
Force Political Commissar Li Wei, along with seven other
military officials, during their two-day meeting this week,
state-run Xinhua News Agency reported on Thursday citing a
notice from the National People’s Congress Standing Committee.
The dismissals from the 14th National People’s Congress
include Ground Force’s Ding Laifu; Central Military Commission’s
Bian Ruifeng and Wang Donghai; Navy’s Shen Jinlong and Qin
Shengxiang; Air Force’s Yu Zhongfu; and Rocket Force’s Yang
Guang, according to the report, which didn’t provide reasons for
the removals.

Venezuelan Testing Grounds and a warning to China.

The recent US action in the Caribbean serves many purposes.  The "1st Order" being a resurrection of the Monroe Doctrine mentioned in the blog before as an opportunistic tool for the incumbent POTUS to wage proxy wars against our enemies in this hemisphere.  The 2nd order effect is a warning and demonstration to China that they are outmatched in the Taiwan straights and will be for the next 30 years (at least - by which time China in its current manifestation will have fallen)

I have written about this before many times.

And now Mr. Trump has seen fit (in a moment of domestic weakness) to deploy it...not only as leverage on petroleum assets but as a demonstration of US capability extrapolated to other theaters.

The USS Gerald R. Ford is in the South Caribbean right now.  It is the greatest, most technologically advanced ship in the history of man.  It's nearest competitor is decades behind and 3 more Carriers in this class are expected to be delivered in the next five years...and its only pulling further ahead in its capabilities.  Rail Guns, Solid State lasers, hypoer advanced guidance systems, etc.  All are on the table for the Ford class once solidly developed.

The only issue it has is combat testing - it has not "officially" seen combat, which is generally left to the old battlehorse Nimitz Carriers.

The South Carribean sea (where, somewhere, the Gerald R. Ford currently patrols) is approximately 1.1 Million square kilometers.

The Taiwain Straight combat area (the location of likely naval conflict between China and the US) is approximately 1.2 million square kilometers.

So, boats the size of small sail boats can be located, targeted, and destroyed in an area of 1.1 million square kilometers.  There is no-where to hide. 

Larger boats would be even easier targets, such is the gap in US nautical and air superiority.

 It is "offically" unknown where the air strikes are coming from, but in terms of capability in a large theater, the CPC has been served notice.  There is simply no counter (blah blah Exocet Missile and blah blah Torpedo.  Neither would get a nautical mile close to the Ford before being disintegrated) to a Ford class Aircraft Carrier Group parked anywhere in the Carribean...or the World.

So batting practice for the Gerald R. Ford has begun, and I am sure some folks are eager to see it hit some home runs vs. Venezuela. 

So where are the other (Nimitz) Carrier groups?  Guam.  Near Taiwan.  Near the Taiwan Straight combat area.

The dots connect themselves.

 

Trump, China, and Nobility vs. Bourgeous virtues...

 As stated here before the following moves:

China counters with a "34% retaliatory tariff".  This is a bluff and too strong of a move.  They will be forced to the negotiating table within 3 months once the fallout from the US actions take hold.

Trump embodies a shift to "Nobility" virtues (courage, loyalty, hospitality, honor to a select few), etc.  These are much different than the Bourgeois virtues the world has come to expect from the US in the last 50 years.

I am ambivalent regarding the absolute value of the above virtues, and merely express that this is a sea-change for international relations, and will be interesting to see how these actions play out given the US recipe for dealing with competitors:

Cooperate, Assist, Tolerate...then suddenly...violently...Compete.

One of the overwhelming strengths of the US is its ability to adapt and change, both on socio-economic and political levels, and the SPEED which it does so.

One wonder how the CCP will attempt to mirror this given very little institutional/cultural memory on how to digest what is coming.

This "all" about China.  And this is also why Russian peace is important.  Japan to the East, Russia to the North, and Australia to the South.  

Meanwhile...an important signal amongst the noise...

 While every news outlet is making sense of "reciprocal tariffs" and the resultant ramifications, a credit rating service (yes, I have railed against them in the past so this is to be taken with the usual cautions) downgrades the Paper Dragon.  Note the "rising public debt" trajectory" language.

Managing the political and social fallout from the coming 3-5 quarters of chaos will be a tall order for the CCP.  

Yuan Falls Versus Dollar as Fitch Downgrades China’s Rating to A

2025-04-03 12:45:46 GMT

By Nour Al Ali

(Bloomberg) -- The Chinese yuan fell further against the US

dollar, underperforming all major peers, after Fitch downgraded

China’s rating to A from A+. The outlook is stable.

Fitch said the downgrade reflects their “expectations of a

continued weakening of China’s public finances and a rapidly

rising public debt trajectory.” Meanwhile, China pushed back and

said the downgrade does not fully reflect the country’s economic

recovery momentum, calling it “biased”.

One MILLION jobs...

...a nice round number.  This is analogous to me threatening a restaurant owner that I will not eat all the meals his current kitchen and his as yet unopened future restaurants can produce in perpetuity because we must discuss the meat/pasta ratio in his spahghetti.

Threatening imaginary numbers is not really the effective and professional response one would like to hear from the middle kingdom. 

"Alibaba’s founder and chairman Jack Ma says the Chinese mega e-commerce company no longer has plans to create 1 million jobs in the US, citing the ongoing trade conflict as the reason Alibaba is retracting its promise to Donald Trump. A new round of tariffs between the US and China will make mutual trade more difficult.

A new API.

To make a techy analogy: The current administration acts as a different API ("application programming interface") between the United States and China.  However, the outputs and reaction functions continue to play a similar tune:

So we see statements like this:

"China called on the United States to play its part in resolving trade frictions between the two countries, and said Beijing isn’t devaluing its currency to boost exports as tensions simmered ahead of President Xi Jinping’s first meeting with U.S. President Donald Trump."

In light of evidence like this:



(Graph depicts Yuan dropping against the dollar since May...a bit counter-intuitive given the tarriffs put in place.)

Now, Trade Deficits are like political positions themselves...they typically change state ("good" or "bad") depending on whatever political position one wants to make at a given time...more on that later.  Devaluation is a response based on purchasing power, and is much more systemic than Trade arguments in that it effects all goods and services.***

***Which is, of course, why Trade Deficits/Surpluses are not quite as meaningful anymore.  In the Days of Adam Smith or David Ricardo, goods and services may have been unique to a country or region.  In the modern era, a product designed in California, with parts manufactured in several Asian countries, yet assembled in Latin America makes the very notion of country balances a much less powerful indicator of economic position.

Of course it is.

China is building a replica of the Titanic.

Can countries sink to the bottom of the sea?  This particular rendition of the Titanic will not even sail.  A massive construction project to build an enormous boat which will never drop anchor.

Patrons of the Restaurant China have had a nice dinner, but it is time to skip dessert and request the check.

Poof

Abracadabra, sayeth the magician...

Its also no wonder housing prices in the U.S. Cascadia region as well as British Columbia have exploded.  Will the last politically connected corrupt billionaire please turn off the lights before they leave?

Authorities in China have arrested 21 people on suspicion of defrauding almost one million Chinese investors of 50bn yuan (£5.3 billion) after an online peer-to-peer lender turned out to be a giant Ponzi scheme, state media has alleged.

Police used two mechanical diggers for 20 hours to retrieve 1,200 account books that were buried six feet underground as part of the investigation into one of the biggest financial frauds in the country’s history, Xinhua state news agency said.

A total of 21 people were arrested at Ezubao, the company at the centre of the scam, which rose to become China's largest online financing platform in just 18 months.

The firm launched in July 2014 and attracted business by offering investors annual returns of between 9pc and 15pc, far higher than mainstream financial products.

Cnidarian Bleaching...

...occurs during the sudden collapse of symbiosis between corals and the polyps that reside in them.  This may be caused by many factors and scientists appear to be unable to consistently predict which causal factor determines the final outcome.

There are many factors contributing to the collapse of symbiosis between the U.S. and China, a significant one being the importation by China of U.S. fiat currency policy without associated oversight and built-in safeguards and failsafe mechanisms not implemented but evolved from experience with the shortcomings and dangers of the policy.

A major liquidity crisis is underway and the paper dragon is not equipped to counter its effects...and will find few friends given its myriad other objectionable political positions.

I note also China has announced it "intends" to cut its military personnel by 300k.  This announcement was made at a military parade.

Subtle.

Band-aids...

...over bullet wounds.

China's devaluation does not address any of its core problems and will only exacerbate financial imbalances.  It merely serves as a signal to party members (and their families) that the party will go on a bit longer.

Do not be shocked if Bermuda and the Caymans suddenly benefit from massive custodial fund balances.

Recall this story...

...from last month...

June 14, 2015 6:02 am
China's hedge fund industry blooms as stocks boom

More than 4,000 new Chinese hedge and private equity funds have
launched in the last three months, fuelling a mass exodus from
traditional investment houses, as ambitious fund managers seek to
profit from the country's booming stock market.

The number of private investment funds — including securities, private
equity, and venture capital — totalled 12,285 by the end of May, up
from 7,989 three months earlier, figures from China's securities
regulator show. Assets under management increased by $75bn to $433bn.

Feng Gang, chairman of hedge fund WinSure Capital, said the government
is encouraging entrepreneurship in finance. He launched his fund in
January after 14 years at Chinese mutual fund companies, most recently
China International Fund Management, a joint venture with JPMorgan
Chase.

"In the past 14 years I've never seen regulators so encouraging of
innovation. In the investment industry, we're taking the lead."

Last February, the government switched to a streamlined registration
procedure for private equity and hedge funds, abandoning the more
onerous approval process.

Employees at hedge and private equity funds have risen by over 60,000
in three months, topping 199,000 by the end of May.

Signs of the punch bowl...

...getting empty.

China’s main stock index is in freefall after enjoying a bull run that saw the Shanghai Composite gain 106pc in the past year on a wave of exuberance among investors lured by valuations, talk of initial public offerings and the expectation that Beijing will eventually launch a massive fiscal stimulus programme to boost the economy.

On Friday, the blue-chip CSI 300 index plummeted 7.8pc, while the smaller Shenzhen Composite declined by the same margin to post its lowest close since May. In the past two weeks around $1.2 trillion (£600bn) has been wiped off the value of Chinese listed companies since the market reached its peak on June 12.

Leverage works...

...on both sides of the ledger.

Another one for the "what could possibly go wrong" file.  U.S. margin debt at galactic levels as well.

SHANGHAI, May 5 (Reuters) - China stocks slumped early on Tuesday, as media reports of tougher margin requirements by some brokerages added to concerns about market liquidity ahead of a new batch of share listings.

Several Chinese brokerages, including CITIC Securities Co Ltd, Haitong Securities Co Ltd and Huatai Securities Co Ltd have tightened requirements for margin financing this month in a bid to control risks, the Shanghai Securities News reported on Tuesday.

The move could curb money inflows in a highly-leveraged stock market rally. The outstanding value of margin financing - the amount of money investors have borrowed to buy stocks - has exceeded 1.8 trillion yuan ($290 billion) and repeatedly smashed records in recent sessions.

The answer...

...to the question of "Why does China not spend more of a portion of GDP on defense?" has always been "why would we give Billions to generals who may be in the unenviable positon of preventing revolution...and expecting them to simply return to the status quo.

Having found themselves shut out of local bond and loan markets seven years ago, a band of developers began looking elsewhere for funds. First an initial public offering, and then a dollar bond sale. It became a well-trodden path. By 2010, a core group of four -- Kaisa Group Holdings Ltd., Fantasia Holdings Group Co., Renhe Commercial Holdings Co., Glorious Property Holdings Ltd. -- raised a total of $5.6 billion. On Monday, Kaisa buckled under $10.5 billion of debt and defaulted.

China’s home builders became the single biggest source of dollar junk debt in Asia amid government measures to prevent a property bubble. Developers already funneled $78.8 billion from international equity and bond markets into an industry that’s grown to account for one third of the world’s second-biggest economy. Most of the first rush of dollar offerings, in 2010, falls due in the next two years.

“It was an unintended consequence of the Chinese government that property developers are selling equity and debt to offshore investors,” said Ben Sy, a Hong Kong-based managing director in JPMorgan Chase & Co.’s private banking division. “There happened to be huge demand from international investors in the past few years driven by the intense search for yield.”