The real reason I made the point in comments here I sought to put in the foreground is that the illusion that our deliberate policy acts directly cause major social outcomes, and it is an illusion, is pervasive. Ideas such as “Major banks succeed because they play the game better,” or that “China is a success because they have a superior policy program,” are common expectations, but they do not withstand any serious scrutiny, certainly in historical perspective. Oh, policies have to have been superior at some point, some times; just plain luck only dominantes a few outcomes. Few consistently have success in their deliberate, decision-by-decision policies. What wins in the long term is sensible, sustainable processes, not the bold play.

In that context, China training a gazillion hungry engineers is an optimal process. China brining in Chinese diaspora capital on favorable terms but keeping Western self-interested corporate capital at arms length is an optimal process. China capturing the low end export markets to Latin America and Africa—which no one else wanted but which make up in volume what they bring thinly in margin, and which keep the low end export sector humming along for now—are optimal processes. It’s not like they have no shortcomings. The downside to industrializing is truly horrendous environmental damage, for example, which China has in spades.

Too many discussions about China’s transformation seem predicated upon the perception that this export market exists to service the US: it does not, we are just a valued customer, a large gear in their larger design. China can look at Taiwan or Korea, which went from negligible export activity to successful operators in a generation, and whose pace in transition China has cut in half. That is their goal, and the objective behind their ‘operational process’ decisions. China does not have the luxury of putting it’s feet up and counting the dollars rolling in, because they cannot stay where they are now in productive organization. They must either make the next leg up or they will fall back down the ladder again like Mexico or the Philippines—and they know it. So I expect they will find a way to make the jump.

You should start your own blog.

Terrific posting. You have that broad sweep of history in front of you, proving the “last man standing thesis” of banking works every time (i.e. as a banker, be the gutless one under the table in a financial fight when everyone else is brave – and is killed – and you come out the winner).

I call this the “Lock, Stock and Two Smoking Barrels” Theory of banking success.

Oh, and when you look into the future, it’s so clear what the Chinese financiers will invest in: AGRICULTURAL LAND. The only true love for the Chinese is FOOD. Arable land is collapsing worldwide.

There’s going to be big upside for phospherous and for arable land. Big upside.

They'll do what we did in the '70s, invoke wage and price controls. Trudeau in Canada did his famous 6 & 5 during this time.

In any event, they'll find a way. The incentive to do so, motivated by social unrest of hundreds of millions of unemployed, I would imagine to be quite acute.

And that leads to the second problem: that too many state-funded Chinese companies were run to create jobs, and therefore have thin profit margins. Profit margins are insurance against a downturn; without those margins, the Chinese companies will have to cut staff to match any slowdown in exports.

The idea of the Chinese economy shifting from exports to internal goods and services is a nice one, but I don’t see how it can happen quickly enough. If factories are shutting down as quickly as stories indicate they are, the Chinese cannot stay at the same level without massive government stimulus–the road to inflation and eventual instability.

So Chinese banks may become major players simply by not being allowed to buy bogus buck-bonds. They take currency risk, but that’s only going down ~%30 rather than ~+75%. Losing less can be the same as winning.  More than a few big US financial firms of the 19th century got that way by being out of the money on investments that took the other guys down the tubes. Think about it. I’ve wondered for years whether smart Gulfie sovereign capital would do the Dutch thing and come out of their peak earning decades as major international lenders. Doesn’t look like _they_ will, though: They are building castles in the sand with their dough rather than getting a piece of financing international capital flows. Some of the Qatari’s have thought big and right, but they had the least money, and those with more timid and without vision. It’s almost too late to get into the swing of things there, their capital hordes vast increase of late notwithstanding. Big capital movement takes expertise, experience, and pre-existing financing operations. We see this more and more in China, but nothing much like it in Arabia, where they are ‘investing’ in the losing bets of others rather than ‘financing’ the activities of others—unless Gulfie capital is secretly financing activity in Iran, for example, something regarding which I’ve wondered but haven’t seen any credible ‘what ifs’ by those in a position to have an opinion that counts.

I am far from sold on the idea that China will have a major slowdown. Oh, they’ll have a slowdown of exports, or rather of some exports to some places. There are many, many other places for their economy to grow. If ex-peasant factory labor is their sweet spot of growth, then yes they will hit a bad patch as that vector flattens. If domestic investor innovation has any real traction, internet or many another place, then we will see some traction from it’s pull if it picks up, even without central government push: their is a great deal of off shore money invested into China, and by no means all of it is devoted to re-export operations. If ‘decoupling’ has any real meaning, it is not necessarily that ‘new vector’ Chinese growth will pick up for ‘export vector’ Chinese growth yuan for yuan in real time; there is likely to be a lag, particularly as off shore and domestic solid investor capital refocuses. —Which is just what the shuttering of all those excess Guandongese sneaker factories is, a creative destruction of old vector excess. . . . So what are those guys investing in _instead_? When that is known, we will know how much value to put on decoupling. I think that value will be positive, in two years a major positive. But that’s just my first best guess, so.

Thanks for the yeoman posting, Paul. Yves and company are likely watching polar bears bob along on bits o’ glaciers or the like as we type this.