Maoism

The subtitle is A Global History and the author is Julia Lovell (2019).

The book strives to make two general points: (1) that Maoism had a global impact and was not merely a Chinese phenomenon, especially in countries at the center of the Cold War, and (2) that the Chinese actively tried to export the ideology around the world, such as to India, Vietnam, Peru and Africa.

The story of Maoism sounds familiar to other socialist tales.  It is about “mass democracy”, preaching equality of outcome not just opportunity, and the disparagement of capitalism, imperialism, and the West.  But Mao Zedong’s version also emphasized that “political power comes out of the barrel of a gun”.  His vision was of perpetual revolution, with an ability to use simple language to invoke his ideas.  And he ultimately prioritized radical revolution over economic growth, which led to a splintering between China and the other great communist power, the Soviet Union.  From that foundation, Mao and China handed out huge aid packages to countries that were coming out of colonialism.  Yet, what seemingly was done with a view of spreading the gospel, ultimately became a power play for Mao and China to spread its influence and power over greater swaths of the planet.  The Great Helmsman, indeed.

So, in looking at the various iterations of Maoism that appeared globally, what one finds is that it provided a reasonable strategy for battling incumbent powers, but did not demonstrate a track record of success once power had been attained.  The emphasis on violence, and seeking retribution against any semblance of opposition, led to brutalization of many civilian populations that were supposed to be the greatest beneficiary of socialist edicts, encouraging a “process of degeneration”.  The greatest apostles of Maoism often took the propaganda at face value, failing to confirm for themselves whether China was as great as advertised, or that life in the West was as oppressive as the CCP claimed.

Two final things that I found interesting.  First, where Maoism took hold, what you can see clearly is the elevation to leadership of people who commonly used brutality to get there and who could be deemed “political entrepreneurs”, where the greatest priority was securing political power.  In looking at China now, the misery of the Mao period (encapsulated by the mass starvation and deaths during the Great Leap Forward and Cultural Revolution) is obscured by the growth that came after Mao’s death and subsequent shift in priorities under the leadership of a more market-oriented premier in Deng Xiaoping.  With the rise of Xi Jinping, though, and the return of a more authoritarian leadership again, we see China’s economic growth beginning to stall out.

Second, the rift between China and the Soviet Union ultimately played an important role in the final collapse of the USSR.  The competition that existed between the two global leaders of communism, to gain influence around the globe, led to huge financial outlays that burdened their domestic economies significantly.  When Mao died in 1976, China prudently stepped back from its efforts to fund revolution globally.  The Soviet Union did not, and felt compelled to stay the course as the global leader, preventing any possible détente with the U.S.

More Perspective

Apropos the book that I just finished, I re-visited an interview from September with Kyle Bass, where he examines many of the same themes about China.  To that end, he offers a view on the trade hostilities between the U.S. and China that I think helps to support President Trump’s position and actions.  Caveat emptor (“KB” is Kyle Bass, “GW” is Grant Williams).

“KB: And whether you like the current administration or not actually doesn't matter. You need to look at what they're doing, right? Not what they're saying, what they're doing. Our administration, whether you voted for President Trump or not-- I didn't vote for him. I don't like the guy. I think he's got some real personal issues, just like everyone does. But if you look at what he's done with NAFTA, with China, with Canada and Mexico, he's done more than the last 15 presidents combined in kind of trying to push back and level the playing field.

GW: But it's interesting that that is couched as Trump getting tough on trade. Do you think-- I know you speak to the higher ups in government. You have good lines of communication open with those guys. Do they get this, or is this-- are they sleepwalked into a really crucial area here?

KB: No, they get it. It's the prior administration's, all the way back to Kissinger and Nixon. Kissinger and Nixon pivoted to China to counterbalance Russia's influence around the world. That was a strategic decision and we basically opened the kimono to China and prostrated ourselves, and we've never looked back, and we've never readjusted that relationship, and we allowed China to ascend in the WTO in 2001. We lost 4 million jobs in literally a nanosecond, as far as geopolitical time is concerned. And interestingly enough, that's what gave rise to President Trump. The Rust Belt flipped from blue to red, and that's why he got elected.

GW: Yeah.

KB: And it's interesting but the inaction with China is actually what produced this kind of president that I don't think many of us approve of. However, the people say Trump's starting a trade war. It's laughable, because there's been a trade war since 2001, and we haven't been fighting.

GW: Yeah, right.

KB: We've just been losing. And so the fact that he's leveling the playing field is the right thing to do.”

Separately, I started another book that deals extensively in the use and methods of persuasion, and how Trump is a master persuader in the author’s opinion.  So, as a postscript to my other post yesterday, where I made light of the President’s exaggerated trade deficit numbers with China, the author suggests that such behavior is entirely consistent with convincing people of your position.  The point is to be directionally accurate on the topic (i.e., “there is a major trade deficit between the U.S. and China that needs attention and response”), and even if your underlying details and facts are wrong, your opponents get bogged down in refuting you, which allows the subject matter to take on even more importance in everyone’s minds.  You have implicitly convinced people to make the topic a priority.  And, by extension, you/Trump position yourself as the strongest advocate for dealing with this now highly-important issue.

"Truth to Power!!!"

I am anything but a fan of Donald Trump, still I am among the few in my social circle who doesn’t suffer a level of derangement at the mere mention of his name.  Hence, the irony in my title to this post.  Nevertheless, I am happy to point out when he is lying or wrong.  In his pursuit of China, his consternation with their trade policies, IP theft, and other misgivings is justified.  But, his response is misguided, and, more specifically, his interpretation of the data is exaggerated.  In George Magnus’ book Red Flags, one particular data point often volleyed around is clarified to the President’s detriment:

“Yet, this $370 billion US trade deficit with China is not all strict bilateral trade, because China, as Asia’s prime supply chain hub, finishes off a lot of products shipped there by, say, Japan and South Korea.  According to the value-added trade data of the Organization for Economic Co-operation and Development (OECD), which allows for this sort of effect, the US trade deficit with China was just $150 billion in 2017, and once you allow for the US surplus in services, the total deficit was about $110-$120 billion.  This doesn’t mean the Americans don’t have legitimate arguments about Chinese trade and investment practices, but it is important to bear this in mind in assessing the bluster that often passes as trade policy.”

Red Flags

The subtitle is Why Xi’s China is in Jeopardy and the author is George Magnus (2018).

In the broad landscape of literature where analysts and economists opine in hyperbolic extremes about the future of China, Magnus tries to offer a balanced (tilting pessimistic) view of the country’s path forward.  And in erring to the negatives, his focus is primarily on the state-driven nature of the economy, which has led to feckless credit creation and rising credit intensity, weak institutions, and a risk-averse nature when it comes to truly disruptive experimentation that can trigger failure.

In looking at the meteoric economic rise of China over the past twenty or thirty years, Magnus points out that much of that growth stemmed from events that can only be booked once: joining the WTO, moving people from low-productivity rural life to high-productivity urban manufacturing, the massive real estate boom, the wave of globalization in the 1990s and 2000s, and enrolling all children in secondary schools.  All of those events are highly transformative, but not repeatable.

In addition, Magnus notes that much of that exponential advancement came under the relatively progressive and reformist leadership of Deng Xiaoping.  By contrast, the current leader, Xi Jinping, has shown a more autocratic and dictatorial tendency which hearkens back to Mao, where rules and processes become far less predictable.  Contributing to that, because it seemed that China was performing relatively well while the West struggled through the 2008 financial crisis, the continuing emphasis on reform was substituted with a misguided belief in the power and superiority of the Communist Party.  Thus, with more decisions and edicts made from up high, the underlying features which helped China to grow have become stifled.  None of which is promising as it tries to navigate its debt trap and still increase productivity.  And p.s., add to all of that, China is ageing more rapidly than any other large economy.

Still, in going through these realities, Magnus admits that the final story has not yet been written.  But, if we are honest, if China does manage to thread the needle and deal with these myriad issues in a way that avoids significant pain, their case study would be the first of its kind.  To be continued.

Asia's Cauldron

The subtitle is The South China Sea and the End of a Stable Pacific and the author is Robert Kaplan (2014).

I first got introduced to the author through his prior work at Stratfor, and subsequently read one of his books last summer about Romania and Eastern Europe.  This book looks at the dynamics at play in the South China Sea region and why so many countries have contesting territorial claims over that body of water – the list of states includes China, Taiwan, Vietnam, the Philippines, Malaysia, Borneo, Singapore, Brunei and Indonesia.

Depending on your perspective, any number of explanations could suffice.  For starters, there are some estimates which suggest that there are 130 billion barrels of oil to recover, which would put it behind only Saudi Arabia in terms of hydrocarbons.  If that were true, the necessity to import fuel from the Middle East, which requires travel through the Strait of Malacca, would be reduced.  Another view focuses strictly on business and trade – it is the meeting point of Southeast Asia and India, and having control over this sea would enhance any one of the mercantilist economies of the region.  One move past that, and thinking strictly in terms of the largest and most powerful country in the area, one might consider it to be China’s Caribbean.  Thus, in the same way that America felt that controlling the main maritime thoroughfare in its backyard was critically important, and thereby opened it up to become a global hegemon once it was secure, China feels the same way about the South China Sea.

The interesting wrinkle that Kaplan notes is that because all of these explanations speak to commerce, it does not garner the attention of humanists and the media.  And because it is about contested waters, the likelihood of war is further reduced.  Nevertheless, this contest lies at the heart of the fastest growing region in the world, and its evolution will have ramifications that should not be ignored.

The Dollar

Another great interview on Real Vision with Luke Gromen.  He covered a lot, but I thought his summary below of Bretton Woods and how other countries are turning their backs on it, and the implications, is very useful.  Not for nothing, but part of the reason to prefer a Trump over Clinton was because of the belief that Clinton was prone to follow path one:

“…look, the deal was-- to be flip, the deal was, you take our jobs. You take our factories. You take our dollars. And then you lend us back the dollars, and we'll buy the stuff from you. And in third quarter '14, with the rollover in FX reserves, the world's saying, we're not taking the dollars anymore. And so I think what's ultimately happening is there's two paths for the US to go with that. Path one is, we'll invade your country and make you take the dollars. And path two is, fine. Deal's off. We'll bring the factories back. We'll bring the jobs back. If you don't want the dollars, you don't get to keep the factories. It's your choice.”

Oil

From Louis Gave (on Real Vision):

“2 and 1/2 years ago Xi Jinping went to Moscow and signed a 50 year deal where China was buying natural gas at a fixed price, which was like half the market from Russia, paid for in renminbi. Now when you think that, who's the marginal buyer of oil in the world? It's China. For all the talk about how Chinese growth is collapsing, et cetera, Chinese oil imports last year were up 16% year on year to new all-time highs. So China needs energy, and keeps on. The reason oil went to $150 was China's emergence. So when China does a side deal with Russia and says basically, hey, we're covered here, then if your marginal buyer disappears, then all of a sudden the cost of oil doesn't go to the price where the marginal buyer's willing to pay, it goes to the price of where the marginal producer produces it. And so it eventually went-- And now we're obviously at the marginal cost. But that marginal cost may go down again. Because now with Donald Trump, we're going to get the Keystone Pipeline. I mean, you go to Alberta, your oil is at $25 a barrel. It's stuck there because it can't move. You put the Keystone Pipeline in and oil price goes down…”

Duterte and the Philippines

Courtesy of Geopolitical Futures:

"China wants to have the Philippines as an ally. The Philippines wants to become less dependent on the U.S. The United States wants the Philippines to behave as the U.S. wishes. However, desire does not determine reality. Until either China or the Philippines is willing to give up sovereignty claims in the South China Sea, it is hard to see how an alliance between Beijing and Manila could work. Until the Philippines develops a better military or finds a naval power capable of replacing the U.S. security guarantee, the Philippines will remain an American ally, if a reluctant and boisterous one. The U.S. has always been slow to learn that self-righteous moral indignation does not translate into strategically valuable action and will have to re-examine its approach to the Philippines if it wants the relationship to be based on anything more than superior strength and need. Duterte is likely to produce plenty more eyebrow-raising quotes, but until one of these variables changes, the Philippine relationship with China won’t progress much beyond a tease."

Trade Wars

Courtesy of Geopolitical Futures:

“The U.S. and China are dependent on each other in different ways, but the oft-repeated assertion that the economies are too interconnected for the U.S. to increase protectionism does not hold up to scrutiny because the dependencies are not equivalent. Trump will be compelled to do what he claims to do best: negotiate a better deal for American workers. As he does this, he will be able to deploy three main arguments in his negotiations with the Chinese. The first is that U.S. dependence on Chinese goods is a matter of convenience, not of China possessing critical commodities the U.S. can’t obtain anywhere else. The second argument is that although the manufacturing sector of the U.S. economy has been hurting for years and is significantly degraded, a great deal of unused U.S. capacity remains; in the event of a serious economic conflict with China, this unused capacity could be relied upon to pick up much of the slack. The third argument is that U.S. protectionist measures raised against Chinese goods will hurt China far more than any of China’s potential retaliatory responses will hurt the U.S.”

China

From Bloomberg:

All of which raises a simple question: Why is Beijing working so hard to prop up the yuan and crack down on outward capital flows?

The common answer is that it fears the trade consequences of a declining yuan. But that's not it. Since the government devalued the yuan on Aug. 11, the combined value of imports and exports has fallen by only 8 percent, even as the value of the yuan has fallen 8 percent against the U.S. dollar. Any coming decline in the currency won't make much difference, given the weak global economy and the product mix China is buying and selling.

The real reason is that the government is concerned about the implications of further liberalizing. China's rickety banks, with delinquency rates of 30 percent, are receiving regular liquidity injections from the People's Bank of China. Money market rates have been rising, from under 2 percent this summer to above 2.3 percent in Shanghai today. Allowing international capital mobility could easily trigger larger withdrawals -- and hence liquidity crunches for banks already feeling the pinch of bad loans.

In other words, China is caught between trying to prop up a currency facing long-term decline and letting capital leave at will, risking a bank crisis.