Well, thank goodness we dodged that financial crisis. The worry last week was that the looming financial collapse of leveraged Chinese property developer Evergrande would be China’s ‘Lehman moment’. And like the collapse of Lehman Brothers in 2008, it would usher in a disorderly and chaotic deleveraging in world financial markets.
For now, it looks like the communists who run China’s financial system are going to stiff foreign creditors and try to reschedule or restructure Evergrande’s domestic obligations to creditors, investors, and savers. You can do that in a financial system with a closed capital account. That simply means that even if it wanted to, panicked money couldn’t cross the border or find safe harbour.
Of course, there’s no such thing as panicked money. Money doesn’t have a mind of its own. Investors (usually, but not always) DO have a mind of their own. I say usually, but not always, because in markets driven by liquidity and momentum, it doesn’t pay to think TOO hard. You buy, hold, hope, and then buy again on a dip if you can.
That may be what’s happening this week around the world. Unless you’re exposed in a meaningful way to Evergrande’s dollar-denominated bonds, the impact of the story will be indirect. That’s what I told publisher James Woodburn last week in a recorded conversation (available to some, but not all, subscribers). What did I mean?
Real estate is a big driver of Chinese GDP AND demand for Australian commodities. Local and regional Chinese government authorities make money selling real estate to developers. Developers make money leveraging up and selling apartments, houses, and structured financial products (often promising higher yields) to savers and investors.
It’s a lot of activity for activity’s sake. Whether anyone gets rich (or poor) from it is another matter. The relevant point for Aussie investors is what a slowdown in Chinese GDP growth might mean for commodity prices and commodity demand. The prices have already reacted (iron ore especially). But long-term final demand for resources?
That depends on what happens next in China. What I suggested to Woody is that China actually began a process of cracking down on capitalism, capitalists, and leverage last year. Remember Jack Ma? Chairman of Alibaba — China’s version of Amazon and at one point a trillion-dollar company?
Around this time last year, Ma was getting ready to take a new financial services company (Ant) public. He gave a speech in which he criticised the Chinese banking system and Chinese financial regulators. Not long after, Ant’s initial public offering was cancelled and Ma disappeared. Where is he now?
Good question. No one’s really seen him. A few reports here and there have reported him playing gold, educating himself on the importance of ‘common prosperity’, and otherwise tending to his reduced empire. But the simple explanation is that Ma is under the thumb (or iron fist) of the Chinese Communist Party and its head, Xi Jinping.
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That phrase ‘common prosperity’ is one the CCP has used to criticise China’s superstar CEOs like Ma. In a collectivist political economy, you can’t celebrate or venerate individual success or brilliance. And though Deng Xiaoping once said that ‘to get rich is glorious’, he didn’t mean TOO rich.
Ma got too rich. And too big for his britches. So the party took him down a peg or four. And then they systematically reduced the amount of leverage available for property developers. This, too, was with an eye toward the ‘common prosperity’. Booming Chinese house prices threaten to make them unaffordable for millions. If there’s inequality in a one-party state, it’s the party’s fault.
To keep the public on side and the billionaires and speculators in check, the communists have been on the counterattack. Evergrande’s forced deleveraging is one aspect of that. China’s latest attempt to ban Bitcoin [BTC] (late last week) is another aspect. In a command economy, the state gets to decide how rich is too rich and what money is REAL money.
Mind you, China’s communists aren’t the only people concerned with (and cracking down on) private money and cryptocurrencies. In the latest Bonner-Denning Letter, I’ve written about the demonisation of cryptocurrencies and stablecoins by central bankers, regulators, and government officials. It’s almost like it’s a concerted attack to stop Satoshi Nakamoto’s monetary rebellion dead in its tracks.
Nakamoto released bitcoin into the world in response to the last financial crisis. He started a monetary war in which decentralised money — secured by cryptography — posed a theoretical threat to the State’s control over money. That control is the source of political and military and social power to many states.
Well, the State is fighting back. Just after my newsletter went to press, President Joe Biden nominated a central-planning communist to head the US Office of Comptroller of the Currency. It sounds like a bureaucratic and boring job. But the job is to define and defend the State’s right to say what money is.
Biden’s nominee, Saule Omarova, wants to ‘end banking as we know it’. In academic papers, she’s argued for replacing retail banks with accounts held by the public at the central banks. Those deposits could then be directed by a new national investment authority to invest in projects designed to produce more equity in society and fight climate change (and enhance the ‘common prosperity’).
Omarova will find lots of people who agree with her on the problems with current financial architecture, especially the slowness and cost of the payment and settlement system. But to radically remake that system so that the State is not only the sole creator of money (central bank digital currency) but ALSO the chief allocator of capital in the economy?
That’s straight up central planning-style communism from the heady days of the Soviet Union. We already know what it does. It creates a two-tiered society. The planners and ‘deciders’ get fat jobs with the government or government-controlled enterprises. The vast majority of the population gets poorer and is slowly starved into submission, when they’re not actually jailed (or killed) into submission for having the ‘wrong’ views about freedom, the Rule of Law, sound money, and private property.
Who will win the battle over money? Good question! Here’s an encouraging thought…the real revolutionaries are always at the margins of polite (and civil) society. They are small in number but loud in voice. And when they control the media, government, and the entertainment industry, they SEEM louder and more prevalent than they really are.
And this time around, they are one step behind the technology. Private money, decentralised finance, and technology that secures and promotes privacy are working against them. What do they have? Bullhorns, legislatures, and batons. Will it be enough?
Until next week,
Editor, The Rum Rebellion
PS: I generally never trust the mainstream media to give me an accurate picture of what’s going on — anywhere at any time. That’s the case now when watching Australia — especially Melbourne — from afar. The mainstream media portray the Victorian Police as cracking down on far-right, anti-vaxxer ‘nutjobs’ who have the audacity to desecrate the Shrine of Remembrance by protesting there.
But it’s even worse on social media — where the algorithms suppress independent media voices. Even worse, social media is filled with the worst kind of armchair keyboard warriors cheering on police violence against the public in the name of health and safety. You begin to realise why Germans in the 1930s cheered on measures designed for your own ‘safety’ — even if it meant cracking skulls.
The pictures coming out of Melbourne of riot police firing rubber bullets at people on the streets, body slamming people to the ground, or violently restraining and arresting people for not wearing masks are shameful. They’re an indictment of public officials and health authorities caught in the grip of a psychosis about eradicating a virus that the rest of the of world has managed without turning themselves into a police state.
Anyone cheering on those images of uncommon brutality needs to have a good hard look in the mirror and ask themselves what kind of country they want to live in. One where the state has the power to declare an indefinite emergency and then enforce house arrest on millions of people with riot police and violence? Or one where the people are sovereign and ruled by laws, not by a handful of unelected and unaccountable public officials.