Pepe Escobar: New Silk Roads and the Chinese Vision of a Brave New (Trade) World

Yves here. As much as sightings from on the ground are critical to countering perceptions of China from afar, my experience with Japan leads me to take them with a grain of salt. Japan was seen as similarly insurmountable in the 1980s and it looked as impressive close up as it did from a distance. Yet its standing fell due to the collapse of a massive speculative bubble in commercial real estate. Michael Pettis stresses the problems with what he calls the Chinese inverted balance sheet in a January 2015 post and sees parallels to the latter portion of Japan’s boom period:

What is more, because we are in the late stages of China’s growth miracle, we should recognise that historical precedents suggest that balance sheet inversion will have increased in the past few years, and may continue to do so for the next few years, which implies that a greater share of growth than ever is explained not by fundamental improvements in the underlying economy but rather by what are effectively speculative bets embedded into the national balance sheet. Besides commodity stockpiling and real estate purchases by local governments, we have clearly seen an increase in speculative financial transactions by large Chinese companies (the so called “arbitrage”, for example, in which SPEs have borrowed money in the Hong Kong markets and lent the money domestically to pick up the interest rate differential as well as any currency appreciation), which is the Chinese version of what in the late stages of the Japanese growth bubble of the 1980s was referred to as zaitech.

No large country in modern times has made a smooth transition from being investment driven to being consumption driven. China’s investments as a percent of GDP are at an unheard of level and are increasingly going to unproductive commercial real estate investments. It would be better if I were proven wrong, but the Japanese case says there are rough times ahead for China. However, when that occurs is very much open to question.

In this post, Escobar also depicts China as making a smooth transition to being consumption driven. However, he includes services data, which is not the definition most analysts and observers focus on. Note that that would almost certainly include financial services industry and real estate services, both of which would benefit from property, commodities, and stock market speculation. Contrast his reading of the data with a January New York Times article:

Consumer spending, which makes up for 36 percent of the gross domestic product, has been increasing at a decent pace. Retail sales growth, while slowing, rose 12 percent in 2014, with demand for highly coveted products like iPhones continuing to skyrocket.

But many luxury goods, along with the entertainment and services sectors, have been feeling the effect of President Xi Jinping’s crackdown on corruption in China as fewer people buy expensive gifts for officials.

More recently, some big mass-market companies have started to show pockets of weakness. The beer maker SABMiller said sales in China had slowed, while they recently fell at the computer maker Lenovo. Unilever blamed the “sharp market slowdown” for its recent quarterly slump in the country.

“Households themselves realize the economy is going through a soft patch, and that will certainly have an impact on their appetite,” said Kelvin Lau, economist at the Standard Chartered Bank. “That is why we are seeing some slowdown in retail consumption.”

Whether this amounts to a short-term blip or a long-term problem will depend, in part, on China’s ability to push through reforms that encourage consumption and strengthen household income.

Escobar stresses China’s focus on working with other developing countries. This too was a Japanese strategy, to act as a convoy leader for Southeast Asia. While the other countries were willing to take Japanese investment (for instance, setting up plants to allow for lower-cost manufacturing), they were not as subservient in other respects as Japanese leadership had assumed. One big issue is the way China’s geopolitical aims conflict with its economic goals is its aggressive stance regarding sovereignity in the South China Sea. Chinas’s belligerent stance has alarmed its neighbors to the point of achieving the difficult task of making the US look like the better hegemon. China’s focus is admittedly wider ranging than Japan’s circa 1988, but that also implies other types of impediments. For instance, Chinese investors have made a push to acquire agricultural assets in Africa. This has not gone as easily as they had hoped, and quite a few investors have changed strategies or decided to abandon their projects.

So while there are valid reasons to see China as the logical successor to the US as economic superpower, I’m skeptical of the near-term bullishness, indeed, the breathlessness, of Escobar’s reading.

By Pepe Escobar, the roving correspondent for Asia Times, an analyst for RT and Sputnik. His latest book is Empire of Chaos. Follow him on Facebook by clicking here. Originally published at TomDispatch

BEIJING — Seen from the Chinese capital as the Year of the Sheep starts, the malaise affecting the West seems like a mirage in a galaxy far, far away. On the other hand, the China that surrounds you looks all too solid and nothing like the embattled nation you hear about in the Western media, with its falling industrial figures, its real estate bubble, and its looming environmental disasters. Prophecies of doom notwithstanding, as the dogs of austerity and war bark madly in the distance, the Chinese caravan passes by in what President Xi Jinping calls “new normal” mode.

“Slower” economic activity still means a staggeringly impressive annual growth rate of 7% in what is now the globe’s leading economy. Internally, an immensely complex economic restructuring is underway as consumption overtakes investment as the main driver of economic development. At 46.7% of the gross domestic product (GDP), the service economy has pulled ahead of manufacturing, which stands at 44%.

Geopolitically, Russia, India, and China have just sent a powerful message westward: they are busy fine-tuning a complex trilateral strategy for setting up a network of economic corridors the Chinese call “new silk roads” across Eurasia. Beijing is also organizing a maritime version of the same, modeled on the feats of Admiral Zheng He who, in the Ming dynasty, sailed the “western seas” seven times, commanding fleets of more than 200 vessels.

Meanwhile, Moscow and Beijing are at work planning a new high-speed rail remix of the fabled Trans-Siberian Railroad. And Beijing is committed to translating its growing strategic partnership with Russia into crucial financial and economic help, if a sanctions-besieged Moscow, facing a disastrous oil price war, asks for it.

To China’s south, Afghanistan, despite the 13-year American war still being fought there, is fast moving into its economic orbit, while a planned China-Myanmar oil pipeline is seen as a game-changing reconfiguration of the flow of Eurasian energy across what I’ve long called Pipelineistan.

And this is just part of the frenetic action shaping what the Beijing leadership defines as the New Silk Road Economic Belt and the Maritime Silk Road of the twenty-first century. We’re talking about a vision of creating a potentially mind-boggling infrastructure, much of it from scratch, that will connect China to Central Asia, the Middle East, and Western Europe. Such a development will include projects that range from upgrading the ancient silk road via Central Asia to developing a Bangladesh-China-India-Myanmar economic corridor; a China-Pakistan corridor through Kashmir; and a new maritime silk road that will extend from southern China all the way, in reverse Marco Polo fashion, to Venice.

Don’t think of this as the twenty-first-century Chinese equivalent of America’s post-World War II Marshall Plan for Europe, but as something far more ambitious and potentially with a far vaster reach.

China as a Mega-City

If you are following this frenzy of economic planning from Beijing, you end up with a perspective not available in Europe or the U.S. Here, red-and-gold billboards promote President Xi Jinping’s much ballyhooed new tagline for the country and the century, “the Chinese Dream” (which brings to mind “the American Dream” of another era). No subway station is without them. They are a reminder of why 40,000 miles of brand new high-speed rail is considered so essential to the country’s future. After all, no less than 300 million Chinese have, in the last three decades, made a paradigm-breaking migration from the countryside to exploding urban areas in search of that dream.

Another 350 million are expected to be on the way, according to a McKinsey Global Institute study. From 1980 to 2010, China’s urban population grew by 400 million, leaving the country with at least 700 million urban dwellers. This figure is expected to hit one billion by 2030, which means tremendous stress on cities, infrastructure, resources, and the economy as a whole, as well as near-apocalyptic air pollution levels in some major cities.

Already 160 Chinese cities boast populations of more than one million. (Europe has only 35.) No less than 250 Chinese cities have tripled their GDP per capita since 1990, while disposable income per capita is up by 300%.

These days, China should be thought of not in terms of individual cities but urban clusters — groupings of cities with more than 60 million people. The Beijing-Tianjin area, for example, is actually a cluster of 28 cities. Shenzhen, the ultimate migrant megacity in the southern province of Guangdong, is now a key hub in a cluster as well. China, in fact, has more than 20 such clusters, each the size of a European country. Pretty soon, the main clusters will account for 80% of China’s GDP and 60% of its population. So the country’s high-speed rail frenzy and its head-spinning infrastructure projects — part of a $1.1 trillion investment in 300 public works — are all about managing those clusters.

Not surprisingly, this process is intimately linked to what in the West is considered a notorious “housing bubble,” which in 1998 couldn’t have even existed. Until then all housing was still owned by the state. Once liberalized, that housing market sent a surging Chinese middle class into paroxysms of investment. Yet with rare exceptions, middle-class Chinese can still afford their mortgages because both rural and urban incomes have also surged.

The Chinese Communist Party (CCP) is, in fact, paying careful attention to this process, allowing farmers to lease or mortgage their land, among other things, and so finance their urban migration and new housing. Since we’re talking about hundreds of millions of people, however, there are bound to be distortions in the housing market, even the creation of whole disastrous ghost towns with associated eerie, empty malls.

The Chinese infrastructure frenzy is being financed by a pool of investments from central and local government sources, state-owned enterprises, and the private sector. The construction business, one of the country’s biggest employers, involves more than 100 million people, directly or indirectly. Real estate accounts for as much as 22% of total national investment in fixed assets and all of this is tied to the sale of consumer appliances, furnishings, and an annual turnover of 25% of China’s steel production, 70% of its cement, 70% of its plate glass, and 25% of its plastics.

So no wonder, on my recent stay in Beijing, businessmen kept assuring me that the ever-impending “popping” of the “housing bubble” is, in fact, a myth in a country where, for the average citizen, the ultimate investment is property. In addition, the vast urbanization drive ensures, as Premier Li Keqiang stressed at the recent World Economic Forum in Davos, a “long-term demand for housing.”

Markets, Markets, Markets

China is also modifying its manufacturing base, which increased by a multiple of 18 in the last three decades. The country still produces 80% of the world’s air conditioners, 90% of its personal computers, 75% of its solar panels, 70% of its cell phones, and 63% of its shoes. Manufacturing accounts for 44% of Chinese GDP, directly employing more than 130 million people. In addition, the country already accounts for 12.8% of global research and development, well ahead of England and most of Western Europe.

Yet the emphasis is now switching to a fast-growing domestic market, which will mean yet more major infrastructural investment, the need for an influx of further engineering talent, and a fast-developing supplier base. Globally, as China starts to face new challenges — rising labor costs, an increasingly complicated global supply chain, and market volatility — it is also making an aggressive push to move low-tech assembly to high-tech manufacturing. Already, the majority of Chinese exports are smartphones, engine systems, and cars (with planes on their way). In the process, a geographic shift in manufacturing is underway from the southern seaboard to Central and Western China. The city of Chengdu in the southwestern province of Sichuan, for instance, is now becoming a high-tech urban cluster as it expands around firms like Intel and HP.

So China is boldly attempting to upgrade in manufacturing terms, both internally and globally at the same time. In the past, Chinese companies have excelled in delivering the basics of life at cheap prices and acceptable quality levels. Now, many companies are fast upgrading their technology and moving up into second- and first-tier cities, while foreign firms, trying to lessen costs, are moving down to second- and third-tier cities. Meanwhile, globally, Chinese CEOs want their companies to become true multinationals in the next decade. The country already has 73 companies in the Fortune Global 500, leaving it in the number two spot behind the U.S.

In terms of Chinese advantages, keep in mind that the future of the global economy clearly lies in Asia with its record rise in middle-class incomes. In 2009, the Asia-Pacific region had just 18% of the world’s middle class; by 2030, according to the Development Center of the Organization for Economic Cooperation and Development, that figure will rise to an astounding 66%. North America and Europe had 54% of the global middle class in 2009; in 2030, it will only be 21%.

Follow the money, and the value you get for that money, too. For instance, no less than 200,000 Chinese workers were involved in the production of the first iPhone, overseen by 8,700 Chinese industrial engineers. They were recruited in only two weeks. In the U.S., that process might have taken more than nine months. The Chinese manufacturing ecosystem is indeed fast, flexible, and smart — and it’s backed by an ever more impressive education system. Since 1998, the percentage of GDP dedicated to education has almost tripled; the number of colleges has doubled; and in only a decade, China has built the largest higher education system in the world.

Strengths and Weaknesses

China holds more than $15 trillion in bank deposits, which are growing by a whopping $2 trillion a year. Foreign exchange reserves are nearing $4 trillion. A definitive study of how this torrent of funds circulates within China among projects, companies, financial institutions, and the state still does not exist. No one really knows, for instance, how many loans the Agricultural Bank of China actually makes. High finance, state capitalism, and one-party rule all mix and meld in the realm of Chinese financial services where realpolitik meets real big money.

The big four state-owned banks — the Bank of China, the Industrial and Commercial Bank of China, the China Construction Bank, and the Agricultural Bank of China — have all evolved from government organizations into semi-corporate state-owned entities. They benefit handsomely both from legacy assets and government connections, or guanxi, and operate with a mix of commercial and government objectives in mind. They are the drivers to watch when it comes to the formidable process of reshaping the Chinese economic model.

As for China’s debt-to-GDP ratio, it’s not yet a big deal. In a list of 17 countries, it lies well below those of Japan and the U.S., according to Standard Chartered Bank, and unlike in the West, consumer credit is only a small fraction of total debt. True, the West exhibits a particular fascination with China’s shadow banking industry: wealth management products, underground finance, off-the-balance-sheet lending. But such operations only add up to around 28% of GDP, whereas, according to the International Monetary Fund, it’s a much higher percentage in the U.S.

China’s problems may turn out to come from non-economic areas where the Beijing leadership has proven far more prone to false moves. It is, for instance, on the offensive on three fronts, each of which may prove to have its own form of blowback: tightening ideological control over the country under the rubric of sidelining “Western values”; tightening control over online information and social media networks, including reinforcing “the Great Firewall of China” to police the Internet; and tightening further its control over restive ethnic minorities, especially over the Uighurs in the key western province of Xinjiang.

On two of these fronts — the “Western values” controversy and Internet control — the leadership in Beijing might reap far more benefits, especially among the vast numbers of younger, well educated, globally connected citizens, by promoting debate, but that’s not how the hyper-centralized Chinese Communist Party machinery works.

When it comes to those minorities in Xinjiang, the essential problem may not be with the new guiding principles of President Xi’s ethnic policy. According to Beijing-based analyst Gabriele Battaglia, Xi wants to manage ethnic conflict there by applying the “three Js”: jiaowang, jiaoliu, jiaorong (“inter-ethnic contact,” “exchange,” and “mixage”). Yet what adds up to a push from Beijing for Han/Uighur assimilation may mean little in practice when day-to-day policy in Xinjiang is conducted by unprepared Han cadres who tend to view most Uighurs as “terrorists.”

If Beijing botches the handling of its Far West, Xinjiang won’t, as expected, become the peaceful, stable, new hub of a crucial part of the silk-road strategy. Yet it is already considered an essential communication link in Xi’s vision of Eurasian integration, as well as a crucial conduit for the massive flow of energy supplies from Central Asia and Russia. The Central Asia-China pipeline, for instance, which brings natural gas from the Turkmen-Uzbek border through Uzbekistan and southern Kazakhstan, is already adding a fourth line to Xinjiang. And one of the two newly agreed upon Russia-China pipelines will also arrive in Xinjiang.

The Book of Xi

The extent and complexity of China’s myriad transformations barely filter into the American media. Stories in the U.S. tend to emphasize the country’s “shrinking” economy and nervousness about its future global role, the way it has “duped” the U.S. about its designs, and its nature as a military “threat” to Washington and the world.

The U.S. media has a China fever, which results in typically feverish reports that don’t take the pulse of the country or its leader. In the process, so much is missed. One prescription might be for them to read The Governance of China, a compilation of President Xi’s major speeches, talks, interviews, and correspondence. It’s already a three-million-copy bestseller in its Mandarin edition and offers a remarkably digestible vision of what Xi’s highly proclaimed “China Dream” will mean in the new Chinese century.

Xi Dada (“Xi Big Bang” as he’s nicknamed here) is no post-Mao deity. He’s more like a pop phenomenon and that’s hardly surprising. In this “to get rich is glorious” remix, you couldn’t launch the superhuman task of reshaping the Chinese model by being a cold-as-a-cucumber bureaucrat. Xi has instead struck a collective nerve by stressing that the country’s governance must be based on competence, not insider trading and Party corruption, and he’s cleverly packaged the transformation he has in mind as an American-style “dream.”

Behind the pop star clearly lies a man of substance that the Western media should come to grips with. You don’t, after all, manage such an economic success story by accident. It may be particularly important to take his measure since he’s taken the measure of Washington and the West and decided that China’s fate and fortune lie elsewhere.

As a result, last November he made official an earthshaking geopolitical shift. From now on, Beijing would stop treating the U.S. or the European Union as its main strategic priority and refocus instead on China’s Asian neighbors and fellow BRICS countries (Brazil, Russia, India, and South Africa, with a special focus on Russia), also known here as the “major developing powers” (kuoda fazhanzhong de guojia). And just for the record, China does not consider itself a “developing country” anymore.

No wonder there’s been such a blitz of Chinese mega-deals and mega-dealings across Pipelineistan recently. Under Xi, Beijing is fast closing the gap on Washington in terms of intellectual and economic firepower and yet its global investment offensive has barely begun, new silk roads included.

Singapore’s former foreign minister George Yeo sees the newly emerging world order as a solar system with two suns, the United States and China. The Obama administration’s new National Security Strategy affirms that “the United States has been and will remain a Pacific power” and states that “while there will be competition, we reject the inevitability of confrontation” with Beijing. The “major developing powers,” intrigued as they are by China’s extraordinary infrastructural push, both internally and across those New Silk Roads, wonder whether a solar system with two suns might not be a non-starter. The question then is: Which “sun” will shine on Planet Earth?  Might this, in fact, be the century of the dragon?

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  1. MRW

    So while there are valid reasons to see China as the logical successor to the US as economic superpower, I’m skeptical of the near-term bullishness, indeed, the breathlessness, of Escobar’s reading.

    I’m not. I think Escobar is reading it correctly and without hyperbole. China is not Japan. China announced in late 1979/early 1980 that it would rape the US manufacturing base, take it, and it did. The current US sanctions against Russia and the neocon interference in the Ukraine (which Obama has not understood because he’s been lied to about how the monetary system works, and therefore does not understand the tribal deceptions against the US by meritocrats like Kagan/Nuland recast through bubblehead pronouncements/assertions by Rice and Power) will be seen by history to be the greatest gift to China for the next 15 years, and the death of the US dollar reserve status.

    Unless saner heads than what we have now prevail within the next two years, US hegemony is finished, done. The Saudis foolishly think that they can capture the Chinese fuel market–the Saudi desire–even when sales percentages have dropped precipitously from month-to-month, and China has openly declared it wants to help its buddy Russia. The Saudis are three years late. We, the USA, languish with pseudo-science dictated by activist scientists and even more ignorant (sloppy) journalists pursuing out-of-date green energy agendas. The Chinese, however, still practice real science. You have only to read their scientific papers to understand that, and their contempt for what we think. They are happy to accommodate our ignorance and pat us on the head: it’s working to make us subservient to them. Wait until the PDO and AMO indices are 100% negative.

    1. NotTimothyGeithner

      Besides O’s natural petulance, the linchpin of Chinese growth is Russia. Besides the natural resources and world class science, Russia offers inroads to the -istan countries, Southeast Europe, and the Middle East as well as providing counter balance to India/China. The neocons desperately wanted to isolate Russia or bring about the fall of Putin. Neocons arent overly bright. Russia was perfectly willing to join our sphere in exchange for non-interference.

      As for Africa, we wrecked Libya. The Russians have made pals with Egypt, and South Africa is the S in BRICS. South Americans despise the U.S.

      1. vidimi

        the neocons (in both parties) tend to view the US and her allies as The World. It’s no surprise then that they thought that by imposing sanctions on Russia they would isolate her from The World without factoring in the real world.

    2. susan the other

      The US is pursuing “out of date green energy agendas”? And the Chinese, who practice real science, not activist science, are surpassing us technologically? I’d love to hear the accounting on air pollution, water pollution, and land pollution; give me some good Chinese numbers backed by real science. Since other forms of Chinese accounting are too byzantine to actually audit, something tells me that their environmental science is too.

      1. susan the other

        When the newest weather satellites were launched, maybe 10 years ago, they provided pretty clear proof that the dust from China’s west desert storms rode clear across the Pacific and only began to dissipate when it hit the Rockies, but it still made it into the farm belt. And everyone knows the radiation pollution from Japan rode the jet stream around the world in only about 3 days and is still circulating because those particles are measurable and have a unique signature as well. Our satellites can see the result of river and lake pollution; deforestation devastation; you name it. Ironically, on a bad day, satellites actually cannot even see the city of Beijing. Maybe the Chinese will write a paper on this. This satellite information is not scientistic. It is real. China has been overtaken by her own events. To pretend that science is now so agenda-driven as to make it irrelevant is simply to allow China its own sloppy development practices, and it is going to end badly.

    3. Lune

      In other words, this time, it’s different. I’m not so certain…

      At any rate, your assertion that the USA is pursuing a green agenda foolishly is ironic, since most green activists in the USA point to China and their long-term plans of capturing the solar industry (completed), wind, and even nuclear as the type of long-range strategic planning we should be doing.

      Furthermore, everything looks like a juggernaut until it isn’t (the US included). China may yet succeed in its ambitions, and I wouldn’t begrudge the long-term planning that went into that success, but being blind to the environmental degradation, the brewing political issues, etc. can threaten to derail that success.

    4. Fiver

      MRW says:

      “We, the USA, languish with pseudo-science dictated by activist scientists and even more ignorant (sloppy) journalists pursuing out-of-date green energy agendas. The Chinese, however, still practice real science. You have only to read their scientific papers to understand that, and their contempt for what we think.”

      Feel free to expand on that with some facts to back it up.

    5. different clue

      Pardon my hard-of-thinkingness, but when you say . . . “(which Obama has not understood because he’s been lied to about how the monetary system works, and therefore does not understand the tribal deceptions against the US by meritocrats like Kagan/Nuland recast through bubblehead pronouncements/assertions by Rice and Power)” . . . what are these tribal deceptions of which you speak?

    6. different clue

      Oh, and . . . could you say specifically what “pseudo-science” you refer to, and which activist-scientists by name push it, and what is specifically “pseudo” about it? With graphs and charts to illustrate and demonstrate the “pseudo-ness” of the “pseudo-science”?

      And what are these “green energy” ideas to which you refer, and what specifically makes them “obsolete”? And in light of what, exactly?

    7. different clue

      Hey! I remember you, MRW! You’re the guy who said that no Canadian DilbiTar pipeline has ever leaked anywhere. And every time I reminded you with links about the Enbridge DilbiTar pipeline spill into the Kalamazoo River right near Marshall, Michigan you pretended not to notice and repeated the same “no spill” claim over and over.

      Yeah . . . I remember you now. You are a proponent of the “lilac” approach. When challenged, you “lilac” hell.

  2. timbers

    To MRW:

    “The current US sanctions against Russia and the neocon interference in the Ukraine … will be seen by history to be the greatest gift to China for the next 15 years, and the death of the US dollar reserve status.”

    IMO Obama’s abrupt pivot towards war against Russia is the longterm strategic equivalent to GWB’s military blunder of invading Iraq, and will hasten America’s decline from hegemony, whenever it occurs. While Pepe Escobar may/may not be guilty of near-term bullishness, the trend of recent events (the huge deals Russia is making with China and others, Europe becoming hostile towards and less integrated with Russia) is going to accelerate U.S. decline. How much faster as a result of Obama’s blunder against Russia is hard to know.

  3. Jim Haygood

    ‘One prescription might be for them to read The Governance of China, a compilation of President Xi’s major speeches, talks, interviews, and correspondence.’

    Sure. After you’ve finished Hillary Clinton’s Hard Choices [which really should’ve been the title of Bill’s autobio] and Jeb Bush’s Immigration Wars.

    Then go on disability and stare at the tube all day, with your mind turned to Jello.

    1. different clue

      If they reissue it and call it Thoughts of Chairman Xi, I’ll buy a copy just for the irony value. I don’t know if I will ever read it, though.

  4. Jagger

    I wish he had discussed the impact of peak oil on China’s intention to reach 1st world status in the 21st Century. What economically sustainable, high energy sources will be available to push growth for such a huge population center. Also what impact will climate change have on these long term economic goals? I would think both those factors must come into play in the 21st century regardless of the best laid national plans.

  5. Michael

    Escobar is a hype machine. I agree with a lot of what he has to say but for different reasons. On this occassion I do not agree with his assessment on China. Yves hits most of the points in her post but I think people overlook that the Chinese are prone to revolutions when the coast gains too much power. There are also a percolating ethnic conflics in China.
    I do think that China is the obvious choice to replace the US but a lot of things can still go wrong for the Chinese that do not even include a war with foreign powers. China is not a unified culture despite what Mao did to that country. There are still conflicts and if Escobars assertion of urban huds is correct then China may resemble soemthing similar to the EU but with stronger ethnic divisions that can lead to open warfare. Just some thoughts.

    The move towards manufacturing in the interior is a good step but it still relies on Western firms that can leave.

    1. NotTimothyGeithner

      Here is the beauty of the reliance on Western firms in China. If Apple leaves, China will still have the IPhone factories. I don’t see the Chinese moving the factories the way we did.

      1. lolcar

        Chinese domestic brands are also maturing – much as happened in Japan and South Korea – and I suspect as time goes on Western brands will find it harder and harder to compete in the Chinese market – much as in Japan and South Korea. When the Western firms leave, I doubt the Chinese will miss them much.

        1. OpenThePodBayDoorsHAL

          When I was very young, “Made in Japan” meant “cheesy”. South Korea was probably next, now they make fantastic, dominant products. Apple is a marketing company that completely relies on Chinese manufacturing expertise, that’s showing up now in Xiaomei and elsewhere. Alibaba will eat Amazon’s lunch, buy direct from the guy who made something instead of a middleman. What does America make anymore? Oh, yeah, porn, Hollywood, social media, toxic financial products, and of course the best new ways to kill people across the globe.

          1. jo6pac

            Alibaba, if the manufactures can get a better payment what you say is very true. I have bought a few items from the site and more companies are taking pay-pal and if the get to were they take on line checks or CC, lookout.

        2. jo6pac

          Very true on the home team brands. They showed with a car at one of the shows in Amerika and everyone said who cares. Three years later the car is with a year or two of entering the Amerika market like Japan did yrs ago. The race is on.
          Then they announce the other day all cars will be electric in major cities in less than 10yrs.

  6. ltr

    The prejudice against China among so many Western analysts is continually shocking, nonetheless prejudice does not change what is real and China has experienced 37 years of an average of 8.7% real per capita growth, dramatically bettering the lives of hundreds of millions of people, and China is now the largest economy. There will be more to come and understanding rather than dismissing the accomplishments in China would really help.

      1. JoeK

        Exactly. The elephant in the room is the severely degraded environment. Close behind is lack of energy and food self-sufficiency. Greatly exacerbating all of the above is the tragico-comically huge population. These are huge and intractable problems.

        1. different clue

          Not all these problems are intractable. They can be solved by overseas and overborder conquest, especially the soft stealth conquest being waged by China today. China will get its food, oil, etc. from captive overseas contractees and from vast overseas landholdings in Africa and elsewhere . . . Maybe Ukraine and America in the long run.

          Their homeland environmental degradation may be intractable. Perhaps the ChiCom regime-lords secretly count on that to reduce China’s huge population. Why else would the ChiCom regime encourage so much smoking all over China, for example? How else would you kill 500 million people with lung cancer and make it look like an accident? (If all the very most senior ChiCom GoverLords themselves all smoke, then my theory is disproved right there. But if the mid-level-and-above ChiCommies all go smokeless then I consider my theory supported. “Only the little people smoke cigarettes”. Li O Na Helmsley).

          What makes their environmental degradation even more intractable is that the Great Han Chauvinist authorities are degrading the environment of occupied Tibet ( including so-called “Chinghai Province”) deliberately on purpose through the same kind of scorched earth resource extraction as practiced in parts of Appalachia. I theorise that they are doing it in part to destroy the Tibetan ecosystems thoroughly enough that Tibet will never rise again. Something like salting the earth of Carthage. Many “link salads” ago we were offered an article about the Chinese authorities killing off all the picas in a part of Tibet, to “improve the grazing”. I don’t believe the Chinese authorities are that dumm. I think they know very well that killing all the picas will destroy the soil-maintainance performed by the picas and help turn
          grassland into a grass-free packed-clay desert. They are doing it on purpose to destroy this resource base which supports free and hard-to-control Tibetan livestock-nomads.

          A political economy based on this sort of scorched earth extractionism in China’s “Wild West Indian Country” will eventually be brought home to Core China when there is no earth left to scorch in Sinjiang, Tibet, etc. That will be an intractable social and cultural problem.

          1. different clue

            One little example of China’s scorched-earth extractionism will be the oil drilling China will do in that Amazon headwaters national park in Ecuador. But China didn’t bully or cheat its way in there. They are there at the express invitation of President Rafael Correa of Ecuador.

            Does anybody else remember what I remember about that park? I remember somebody, maybe Correa himself, setting it aside to be a park because of its biodiversity,
            water-purity, etc. Then I remember Correa deciding to authorize oil drilling in the park and overseas park-lovers complaining about it. Correa took the park hostage and said
            that if overseas park lovers loved it enough to give his government a bunch of money, he would honor the park’s status. Otherwise he would invite in the drillers. It reminded me of that National Lampoon cover: If You Don’t Buy This Magazine, We’ll Kill This Dog.
            ” Hand over the money, see? Or the park gets it!” China will find such leaders all over the world.

            1. Santi

              I’m not happy of the environmental destruction, but… :)

              If Europe and the US want to keep biodiversity and the park, they (we) should pay for the lost profits that Ecuador is not getting. Unless we put out wallet where our mouth it, say by diminishing energy use so that drilling is less worthwhile, by raising environmental taxes in the first world, etc. we don’t have any right to complain. I’m quite sure that Correa would prefer bank transfers to exploiting the oil.

              1. different clue

                Well, you restate Correa’s case for taking the park hostage very well.
                Clearly the park itself never meant anything to Correa and means nothing to the Corristas within Ecuador. In which case, why did he bother decreeing it to be a park in the first place? To build some overseas cred with the eco-salon set?

                As far as I am concerned, that Ecuadorean park is an Ecuadorean problem. If there are enough Ecuadorean Indians and others who think a clean park with clean water is worth more to their specific selves than a bunch of money to Ecuadoreans OTHER THAN themselves would be worth, then they can start an insurgency about it. If there aren’t, then Correa’s Chinese will come in and drill baby drill.

                If that spills oil and drilling-waste into those Amazon headwaters to flow downstream into Brazil, that is Brazil’s problem. And if Brazil thinks that is big enough a problem to be worth invading Ecuador and removing the Correa government to keep the Chinese drillers out, then that is Correa’s problem.

                Don’t get me wrong. I “care” about the park. I just don’t CARE “care” about it. I certainly don’t give enough of a rat’s ass about it to pay Correa a ransom for it just because he decided to take it hostage. That doesn’t mean I have to pretend this is anything other than an eco-kidnapping and that Correa is anything other than a ” hand over the money! Or the park gets it, see?” kind of guy. He isn’t. And neither are the Chinese.

                (“Oh! and neither were we!” I hear the liberal guilt mongers wailing.
                To which I say . . . “Yeah? And so what?” Our day is passing and China’s day is dawning. China will be the future’s problem, as we recede into being little more than a bad memory.)

      1. jonboinAR

        I don’t know what you’re talking about. I, and just about everyone else I read on these “Internets”, find China’s rise to manufacturing super-dominance to be most worrisomeA as far as it regards the US position at least in terms of world economics. I see no indication of China patronization.

      2. Yves Smith Post author

        It is not disdain to point to facts:

        1. They have made massive investments in unproductive residential real estate that sits vacant. A recent paper on why the growth of the finance sector slowed economic growth tied it DIRECTLY to overinvestment in collateralizable projects, and that is overwhelmingly real estate. And in the countries, that real estate is used! The investment properties are also for what by Chinese standards are middle and upper middle class people, not the peasants who will come to cities (if they have jawbs) looking for work. There’s a huge mismatch between the property being built and where the market needs are.

        2. Pollution is a huge huge problem

        3. The Chinese economic stats have long been known to be highly unreliable.

      3. Calgacus

        ltr: Quite right. Shocking is the right word for the prejudice against China. Naked Capitalism, even when it is wrong imho, is generally very serious and is not disdainful or prejudiced. One cannot say that of most Western analysts, or of many commenters here, unfortunately.

      4. cnchal

        . . . disdain for China . . . or not.

        Twenty five years ago, a then respected economist as head of the World Bank suggested it would be a good idea to send dirty industrial work done here, that was getting cleaned up through environmental rules, to the third world. His rationale, boiled down to it’s essence, I shit you not, was that third world people were cheap to poison and kill.

        Until only a few years ago, this economist sat Jabba the Hut like on his throne at the policy table, dispensing advice to US presidents starting with Clinton and ending with the current one. The presidents, to their everlasting shame listened and agreed to his advice, and North American manufacturing was steadily destroyed.

        During the 90’s Walmart was the most prominent offshorer, demanding that companies producing here close their plants and move production to China. Which they gladly did. Firing the $15 to $20 per hour worker here and replacing that worker with someone making $2.00 per day in China boosted profits, stock prices, and swelled the heads of these companies CEOs to the size of a hot air balloon. You see, these self identifying visionary, brilliant business managers claimed they deserved huge pay increases for moving production to China, where workers can be poisoned and killed with impunity, and the environment can be destroyed, without cost to themselves or the companies they managed.

        Chinese leadership is good with this, and allow the Chinese worker to be abused by the likes of Walmart and Apple. Sadly, for the Chinese worker they don’t have a multimillion dollar escape home in Vancouver or San Francisco that they can fly to when the air gets sticky.

        1. different clue

          I thought Jabba the Summers was specifically referring to sending toxic and radioactive waste to Africa. I thought Jabba the Summers’s support for Free Trade with China was specifically about furthering the International Free Trade Conspiracy’s agenda of destroying all industry in America and making America as poor as Tibet. Am I wrong about that?

          1. cnchal

            Am I wrong about that? No

            DATE: December 12, 1991
            TO: Distribution
            FR: Lawrence H. Summers
            Subject: GEP

            ‘Dirty’ Industries: Just between you and me, shouldn’t the World Bank be encouraging MORE migration of the dirty industries to the LDCs [Least Developed Countries]? I can think of three reasons:

            1) The measurements of the costs of health impairing pollution depends on the foregone earnings from increased morbidity and mortality. From this point of view a given amount of health impairing pollution should be done in the country with the lowest cost, which will be the country with the lowest wages. I think the economic logic behind dumping a load of toxic waste in the lowest wage country is impeccable and we should face up to that.

            2) The costs of pollution are likely to be non-linear as the initial increments of pollution probably have very low cost. I’ve always thought that under-populated countries in Africa are vastly UNDER-polluted, their air quality is probably vastly inefficiently low compared to Los Angeles or Mexico City. Only the lamentable facts that so much pollution is generated by non-tradable industries (transport, electrical generation) and that the unit transport costs of solid waste are so high prevent world welfare enhancing trade in air pollution and waste.

            3) The demand for a clean environment for aesthetic and health reasons is likely to have very high income elasticity. The concern over an agent that causes a one in a million change in the odds of prostrate[sic] cancer is obviously going to be much higher in a country where people survive to get prostrate[sic] cancer than in a country where under 5 mortality is 200 per thousand. Also, much of the concern over industrial atmosphere discharge is about visibility impairing particulates. These discharges may have very little direct health impact. Clearly trade in goods that embody aesthetic pollution concerns could be welfare enhancing. While production is mobile the consumption of pretty air is a non-tradable.

            The problem with the arguments against all of these proposals for more pollution in LDCs (intrinsic rights to certain goods, moral reasons, social concerns, lack of adequate markets, etc.) could be turned around and used more or less effectively against every Bank proposal for liberalization.

            —Lawrence Summers,
            Is it possible for an economist to have a criminal mind?

            The last paragraph, where he uses no logic to equate moral revulsion of the idea to ship our poison to the lowest wage country with “Bank proposal for liberalization” is a message to the plutocrats, that he is a good steward of their needs and concerns.

            And he was! Larry kept his word to them.

  7. knowbuddhau

    Thanks a million for both featuring PE and the analysis. Mostly the analysis, since I’ve already read this. :) I’ve been following him for years now. I, too, have been wondering about his enthusiasm for the New Silk Roads. But I haven’t known how to evaluate his claims. I’m much obliged.

    Speaking of which, I couldn’t help out with the fundraiser right now, but I’m on the verge of starting to clean banks full time. Supporting your invaluable work will be one of the first things I do.

  8. Quantum Future

    In 2014 the IMF stated that China was the new defacto GRC. Nearly 40 big central banks and the IMF are renominating in Yuan. China becoming GRC is a feature, not a bug. Part of the job of GRC is policing global trade. Media will grok ‘China becoming global bully’ memos for the next 40 years. It will be for public consumption as the general populous does not understand much of GRC’s including most investors that think the USA is “losing” the status. It was given, we passed the baton. GRC is a blessing and in later stages a curse

    Central Banking now choosing a new GRC every 80 years reminds me of Rome moving to Constantinople.

    The massive debt issuance in the USA masked the hollowing out of our productive sectors of the economy for a time. I hope this commentary is insightful.

    1. OpenThePodBayDoorsHAL

      Everybody else needs to make a profit, buy a dollar, then buy a barrel of oil or a bushel of wheat, America can just print oil and wheat. GRC may have its problems but it sure does have its benefits, too.

  9. different clue

    I have briefly skimmed this article in the short time remaining before I have to start work. I will certainly read it slower and deeper on breaks.

    At first skim it appears to validate what I have been thinking . . . that the New Silk Road is China’s long-term plan to turn Europe into China’s Mexico . . . destroy every industry in Europe and maquiladority the remains and transfer all the jobs to the New Silk Maquiladoras. The Europeans will be permitted to do those things the Chinese consider themselves too good or too bored to do. Perhaps Europe will be maintained as a cultural petting zoo for the delectation of Chinese tourists. Those who have long resented the American Hegemony over Europe will find it replaced with a new Chinese Hegemony. Perhaps Russia will be China’s “branch manager” for the “European operations”. A rising Chinese hegemony could be better than the fading American hegemony under which our European brothers have chafed lo these many years.

    But we Americans won’t be laughing last. We will be coping with China’s efforts to turn America into one big Overseas Tibet.

  10. Jeremy Grimm

    As Yves stated in a comment above, the Chinese are making unproductive investments on a large scale. They have huge pollution problems. Much of their growth is a lie.

    The Chinese also have a huge production base of capital and the knowhow that only comes from the cut-and-try of producing goods. They have a huge skilled and unskilled labor base. They have many clusters of co-geographic producer chains and trees organized in their sum around the production of almost every category of manufactured product. In contrast, the United States, and other countries have sent away their capital, lost their knowhow, and fashioned long fragile chains of supply many of which originate in Chinese industry.

    The United States skilled labor languishes and grows old. Work is underway to dismantle what remains of the professional labor force as engineering, accounting, and law — and I foresee medicine joining them — fall prey to off-shoring and H1-B workers on-shore. Our higher education has become a profit center with students as revenue sources. The jobs we work are being routinized and rationalized to remove what skills they once required and the resulting products of our work reflect the quality of this rationalization.

    If trade between the United States and China were shut-off for any reason, I think we would suffer the greater pain. What little industry we have is dependent on parts and materials from China. A major portion of the goods in our stores come from China. Of course we would shift to suppliers from other countries and slowly recover. But not unlike China a large part of our domestic investment is unproductive investment.

    The United States no longer perceives or effectively pursues what is in its national interests. At great loss and cost we drag through endless wars serving no known national interest for going on fifty years. Our political system serves corporate persons and persons of sociopathic strivings.

    The Chinese have so far remained patient and methodical in pursuing their claims on Taiwan and in asserting dominance in their regional sea lanes. The Chinese government seems cognizant of the threat inherent in fostering a large unhappy population and therefore more careful to keep growing the opportunities of their people. Their most recent revolution isn’t approaching its tricentennial. In stark contrast with the United States Chinese leaders seem able to grasp most of what is in Chinese national interest.

    Looking elsewhere in the world — Europe is destroying itself with austerity. Japan is aging and like the United States sends more and more of its industry to China. Korea is assuming the role Japan once held as a supplier for well-designed high quality manufactured goods, but Korea is not of the same scale as China. Looking further, I just don’t see any contenders with China as possible successor to the United States as the primary world power.

    I don’t know about the New Silk Road, but in spite of many near-term and long-term problems China appears to have many advantages as the future unfolds. I remember Kenichi Ohmae’s maxim of strategy that a small advantage — well-exploited — is sufficient to overcome an opponent. I believe the Chinese have a big advantage in having a government well able to advance Chinese national interests.

    1. different clue

      One ought not fault or blame the ChinaGov for pursuing its interest. That is what rising empires do. One of China’s hidden strengths is all the running dog lackey flunky stooges China has here in the US . . . people like Bill Clinton and everyone else involved in advancing the Free Trade Conspiracy with China. And all the Free Trade Hazbarists like Steven ” the Cock” Roach whose pro free trade anti-patriotectionist articles I used to read at a site called Prudent Bear.

  11. different clue

    I have read the article more thoroughly here at lunch. It appears to be Escobar’s breathless wonderment at the globe-spanning strides of China preceded by Yves Smith’s cautious demurrals with regard to certain weaknesses in certain aspects of China’s performance just now.

    I think Escobar is basically correct about China’s medium-term agenda and likelihood of achieving it. They will get their New Silk Roads and their New Silk Pipelines built. They will inhale more and more raw materials and exhale more and more products, tourists, and skydumped carbon. Escobar’s breathlessness comes from his European intellectual disdain for the crass vulgar hubris of the American Hegemony. He hopes and believes that China will be the Nemesis to America’s Hubris. He may be right. But only for a while. The most intractable problem China will face along with everyone else is a Big Heat Future of Climate D’Chaos Decay moving along with CO2/methane/NOx/etc. skydumping-driven heat retention. And the “flowback” from destruction of all the Greater Asian River headwaters as part of Operation Scorched Tibetan Earth”.

  12. Jeremy Grimm

    Climate change does indeed trump matters of economics and politics. But how the world responds to the too soon climate disasters will very much depend on matters of economics and politics. Neither the United States nor China seem well suited to world leadership in what is too soon to be. A power able to act in world rather than national interest is what is called for.

  13. MG

    It is interesting to get the alternative perspective which Escobar provides. What I want to know is just how feasible and realistic does Escobar think it will be feasible to move the volume of trade he is talking about via high-speed rail lines vs sending it by container ship by sea?

    As Asia’s income continues to grow (along with it middle class) and China’s trade with her neighbors continues to grow by leaps and bounds, it might become less relevant say 20 years down the road. In the interim and next decade, though I don’t see how what Escobar is advocating is feasible from a logistics standpoint unless it is a natural gas/oil pipeline standpoint.

  14. Fiver

    I’ve read Escobar in various places over the last few years, and this is fairly typical fare. He is clearly an enthusiast re the notion of a rising China, and with Russia/India/Iran/Turkey, a colossal rising Eurasia, driven I suspect by a somewhat desperate hope that said development might ‘contain’ US global imperial designs and re-introduce real balance into the management of global affairs across the board. He’s not blowing smoke, though, as all the various plans and programs are moving forward and in the direction he claims, but I’m not sure they can get there, for 2 sets of reasons:

    1) What Yves said. They have truly massive financial, environmental, excess capacity, excess infrastructure etc., losses to deal with at some point, along with the huge social stresses incumbent in the greatest urbanization/industrialization/modernization effort ever undertaken, and almost certainly the last. While China has every right to aspire to its vision as per Escobar, it cannot get there without simultaneously dealing with these profound issues – vulnerabilities almost certainly to be exploited by

    2) The US – before China is strong enough. With control of sea lanes and key global resource producers other than Russia (including Persian Gulf, Brazil, South Africa, Canada, Australia, Congo and many more) the US is in the position at any time to shut China down far from where China is in any position to do anything about it. And in any cyber-war scenario, the US is still ahead. The same is true with respect to the global financial system. The US capitalist core has embedded too many ways to lay ruin to ‘enemies’ via its control of the entire apparatus of international finance/commerce/trade, all of the globally integrated systems, standards, law the works. It is the Empire, after all, from the day the first white men started to pay for Native American scalps as proof of ‘kills’, clearing the land of its inhabitants, to Obama’s re-entry into Iraq – another ‘humanitarian’, ‘right-to-protect’ mission to deal with the latest useful Frankenstein the US, and (as Wesley Clark describes them) “our friends and allies” created to oust Assad and destroy his ally, Hezbollah.

    Current US policy unequivocally asserts that no other State power will be allowed to become a real competitor. As I see no difference between a Clinton vs Bush Presidency, or any substantive change in US policy over the next decade absent massive change in the US body politic, the best China can hope for is to keep US militancy at bay long enough for that positive change within the US to occur, otherwise waiting it out until the US craters internally. History, though, suggests a show-down before decline is too advanced, in which case the best-case is a rupture into 2 global systems without war – not the most likely case, though, I fear.

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