CHINESE CHECKERS IN AN ECONOMIC WORLD OF CHESS
CHINESE CHECKERS IN AN ECONOMIC WORLD OF CHESS
Recently over a home-cooked meal with close friends that go back a long time, we got around to the economic future for China. Two of our friends are of Vietnamese ancestry, which makes them follow the actions of “big brother” to the north with a watchful eye. Moreover, the husband and I go back many years in the oil business of Vietnam. I related my experiences in Russia and China as a backdrop to the conversation and drew the distinction between the two goliaths who basically surround Mongolia. Some years back, the state oil company of China owed me a substantial amount of money. I went to Daqing, China and explained that I expected them to honor their contract and their obligation to my company of $52,700,531. They quickly dismissed my friendly attempt to follow an international binding agreement. Finally, my Chinese assistant said we would be obligated to follow “Russian” rules which puzzled them until she explained it in four-part harmony. We resolved our differences quickly after that, I declined a dinner with our hosts and immediately left for the airport.
In case you may not be aware of “Russian rules,” Prigozhin, the deceased head of the Wagner mercenary group who is shown below, was probably reminded of those rules for a split second before his aircraft fell from the sky. Several of the Russians who made that clause clear to me have not survived the Moscow “house-cleaning” that has transpired since the Ukraine invasion. Ravil Manganov, Chairman of Lukoil, fell out of his hospital room following criticisms he voiced regarding the Russian invasion of Ukraine.
It goes without saying I have not returned to China since that afternoon which places both Russia and China on my personal no-fly zone. Nonetheless, I continue to follow the events of China and the actions of Xi Jinping which we have covered in this post for many years. Although both Russia and China have similar autocratic dictators as rulers, Russia is blessed with vast natural resources that require less sophisticated planning and management than the situation in China where the resource has been low-cost labor.
Recent articles in The Economist, entitled Xi’s Failing Model and Power Trip portray the Chinese economy as being in a dire state. The headlines in the world news keep getting worse with a deflationary economy, a 20% drop in trade with their biggest customer, the U.S., coupled with a sick property market which has been the economic driver representing 20% of GDP. The fundamental premise is that China’s economy is suffering because an increasingly autocratic government is making bad decisions. Therefore, the dragon driver seems to have been replaced by a snail engine as illustrated below. Moreover, the expression on Xi Jinping’s face seems to suggest that there are difficult times ahead.
The Financial Times has kept the world informed of the financial woes of Chinese large scale property developers such as China Evergrande which has sought bankruptcy protection in the U.S. while pursuing a debt restructuring agreement with foreign investors that hold billions of dollars of their bonds. The company has some $19 billion in overseas liabilities and a lot of see-through, high-rise buildings as shown below.
Fellow developer Country Garden, the largest privately owned homebuilder, was thought to be relatively safe until they missed payments on international debt this month. The fundamental concern is the loss of real estate as the principal engine of the economy will infect other segments of the economy. In the meantime, Beijing is grappling with deflation, weak exports, and soaring youth unemployment. The Financial Times stated that Luck Runs Out for Country Garden’s Woman of Fortune. In 2021 Yang Huiyan, shown below, was the richest woman in Asia worth $30 billion as the majority shareholder of Country Garden. If she looks grim in this image, remember she is trying to stave off bankruptcy.
The headline of Daisuke Wakabayashi and Claire Fu in The New York Times said it all about China’s economic outlook—A Crisis of Confidence Is Gripping China’s Economy. For some forty years, China’s economy seemed unstoppable shaping the country into the mold of a superpower. However, in the recent few months that destiny has been tainted by a real estate crisis, a debt crisis, and now the most serious one of all—a crisis of confidence. A growing lack of faith in the future of the Chinese economy impacts spending and investment that creates jobs. The China consumer confidence index is down some 35% in the past nine months. I may be wrong, but I doubt that Xi Jinping, shown below, has the charisma to lift the spirits of his people. Has anyone ever seen him smile?
In the meantime, Hollywood envisioned an Asian gold mine ahead of them in the Barbie Film and purposedly took steps to be on the right side of the Beijing Government. Many of you may know there is considerable friction in the South China Sea as to the territorial waters of most countries there versus absurd China claims. A nine-dash line area claimed by The Republic of China from 1912-1949 covers most of the area in the South China Sea which is in stark contrast to the recognized territorial waters of the countries in that region. The issue has been in front of tribunals which have ruled in favor of the respective countries located adjacent to those waters though it is ignored by China. As my company explores for oil in Vietnam waters, we are quite aware of the China claim line as their warships would cut our seismic streamers if we crossed into their claimed area.
For those of you who may have seen Barbie, if you looked closely at the map on the screen, you would have seen a squiggly pink dashed line on the far right that comes into Vietnamese claimed territory. That is an interesting detail included to placate the Chinese and build viewing attendance there and preclude any argument from their censors. On the other hand, the film has been banned in Vietnam for that reason. If the Vietnamese wanted to shame the Chinese, they could provide them an account of their soaring economy which is doing quite well despite their lack of Barbie movie ticket sales.
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