China the ticking time bomb. President Barack Obama and Chinese leader Xi Jinping “blazed a new trail” away from the two nations’ past differences, a senior Chinese official said after a recent two-day summit in the California desert that ended with few policy breakthroughs but the prospect of stronger personal ties. A lot of hopes for both nation, but where is China heading over the next few years.
First what has the past 30 years brought these two leader’s nations? Its been no secret that China has been a rising economic juggernaut. In five short years the Chinese economy will be the same size as the US and in 10 years potentially double that of the US. For the citizens of the two countries, China has a rising middle class and the US has a falling middle class.
This has come about by the trade policies the two countries have chosen – off-shoring (labor arbitrage) of US technology and jobs. Its obvious why China agreed to this, but the US politically and business establishment basically threw the US middle class under the bus. Through a matrix of propaganda and trade deals, they have fooled the people into thinking that all these globalization efforts would be good for them. This obviously has not been the case, making a few US citizens fabulously wealth at the expense of the rest.
For China the great labor arbitrage game is ending soon. Their best customer, the US (as well as the EU), is broke (speaking largely of its dwindling middle class). They will have to pivot soon to an internal consumption based economy to keep up the growth rates it enjoys today. The Chinese population expectations are running high. Back tracking from this will be catastrophic to the undemocratic leaders of China. There people have largely accepted this form of government as they see their lives improving. But what if it doesn’t? The leadership of China have gotten fabulously wealth from their experiment into government controlled capitalism.
The legislature of the world’s last major communist country, is certainly the wealthiest in the world, according to a popular rich list that names 83 dollar billionaires among the delegates to China’s parliament this year. Meanwhile, in America there is not a single billionaire in the House of Representatives or the Senate while the wealthiest member, Texas Republican Michael McCaul, is estimated to be worth a paltry $500m, according to the FT. America’s wealthy are smart enough to outsource their will to a paid manager class.
Is China living in a modern-day “Animal Farm?” Animal Farm, a Orllien fictional novel, that describes the revolt of the animals against a tyrannical farmer, only to later become the very thing they sought to defeat. The rise of the Chinese communist state was born to usher in a utopian egalitarian state. Now adopting western style capitalist policies, the Chinese leadership, are quickly replacing the farmer on the Animal Farm. Human nature is such, that once you have power and money it is very hard for these new leaders to share and worse yet to not even want more.
As traders we are often left to play the odds of a certain Trade Plan. What are the odds that the Chinese leadership are in fact benevolent and/or democratic and can pivot to ensure all the Chinese people really benefit in the economic rise of China? Nill. China is a ticking time bomb.
Daily Market View: (click here for the video)