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HINDESIGHT NEWSLETTER
Originally posted in July 2015
"It doesn't matter if the cat is black or white as long as it catches mice." Deng Xiaoping, 1904-1997
Red Capitalism is thriving. The Communist Party (CP) has managed to authenticate and legitimise the gambling habits of a billion plus people, that is its very own party members. They have officially sanctioned a stock investment boom, providing untold riches to its people. They have instigated one the greatest feats of financial engineering, barring the US sub-prime heist, to mitigate risk by implementing the largest debt-to-equity swap in history. They have provided all of the debt ridden SOEs with a means of re-capitalising their ailing balance sheets by shifting their debt into equity and transferring the risk from their own (and by definition the State's) balance sheet onto that of the people's very own household balance sheet. So lucky are Auntie and Granny Wang that they sang on brokerage floors to herald the benevolence of their leaders.
Even when the debt-for-equity became more of a debt-for-debt swap, as new listed SOEs and quite frankly every man and dog borrowed to enjoy the nation's gift, their leaders continued to endorse the growing mania. Even when the recent stock mania just fell into panic, no matter, the State ended the red peril to their comrade’s accounts by effectively closing the market. You see there is no end to the tools that a command driven economy can access to guide posterity.
China has been a curious conundrum for analysts of any discipline, understandably so because the country is a maze of opaqueness. Dr John Hulsman, a member of the Council of Foreign Relations recently wrote of China that, 'about the only thing I am entirely sure of is that it remains the least understood great power in the world and it’s that analysts are all so very confident and yet so very polarised about its future'. He went on to surmise that China watchers of all stripes seem unequivocal in their belief that the CP leadership exudes administrative excellence unparalleled in the world. A testimony to Confucian education of China's elite. We would concur, so fabled is the PRC regime control that it has become an unquestioned truism.
Deng once pronounced it was glorious to be rich. But at what expense? China's debt has surged from an official US$2 trillion to US$28 trillion, with $1 of growth in GDP to be shown for $4 of debt. China resides over the largest misallocation of capital in history predicated on the accumulation of vast amounts of excess debt. In this HindeSight we explore how a particular psyche prevalent in China has led to an economic miracle fallacy. The Chinese regime is ailing and it bodes ill for the global economy and the interaction between State and man. China's continued mishaps prove the State is not omnipotent and the control of the issuance of money has untold and harmful ramifications for sovereign rights, both national and individual.
In the knowledge that most analysts seem so certain of the CP leadership, we posture gently that China's cultural affinity for gambling is so endemic in its society, that its leaders have subconsciously and unwittingly made increasingly risky wagers with the economy. At first incremental in their planning they have now moved from more majhong-esque strategy to the more ‘all-in’ Western betting form - a martingale. To win at the martingale strategy one doubles up on each bet, but to succeed one needs unlimited resources.
Central banks may have unlimited ability to print money but they are constrained by the fiscal and psychological effects of people's faith in the value of the currency created. So not even governments have such a luxury, as eventually a 50 - 50 call will break any central bank. China, over the last decade since the GFC, has made a number of such bets which when observed through the prism of the global debt gamble, makes the CP seem no more sophisticated than their Western counterparts. The CP likewise are stumbling under the weight of their own debts.
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