Month: November 2019

Authored by Paul Craig Roberts,

Stephen Cohen and I emphasize that the state of tension today between the United States and Russia is more dangerous than during the Cold War between the US and the Soviet Union. For calling needed attention to the risk of nuclear war heightened by the current state of tension, both Cohen and I have been called “Russian dupes/agents” by PropOrNot, a website suspected of being funded by an element of the US military/security complex.

Cohen and I emphasize that during the Cold War both sides were working to reduce tensions and to build trust. President John F. Kennedy worked with Khruschev to defuse the dangerous Cuban Missile Crisis. President Richard Nixon made arms control agreements with the Soviet leaders, as did President Jimmy Carter. President Ronald Reagan and Gorbachev worked together to end the Cold War. President George H.W. Bush’s administration gave assurances to Gorbachev that if the Soviets agreed to the renunification of Germany, the US would not move NATO one inch to the East.

These accomplishments were all destroyed by the Clinton, George W. Bush, and Obama neoconized regimes. President Donald Trump’s intention to normalize US/Russian relations has been blocked by the US military/security complex, presstitute media, and Democratic Party.

The Russiagate hoax and currently the illegitimate impeachment process have succeeded in preventing any reduction in the dangerous state of tensions between the two nuclear powers.

Those of us who lived and fought the Cold War are acutely aware of the numerous occasions when false warnings of incoming ICBMs and other moments of high tension could have resulted in nuclear Armageddon.

Former CIA official Ray McGovern reminds us that on October 27, 1962, during the height of the Cuban Missile Crisis, a single Soviet Navy submarine captain, Vasili Alexandrovich Arkhipov, prevented the outbreak of nuclear war. Arkhipov was one of two captains on Soviet submarine B-59. After hours of B-59 being battered by depth charges from US warships, the other captain, Valentin Grigorievich Savitsky readied a 10-kiloton nuclear weapon capable of wiping out the entire USS Randolph carrier task force, to be readied for launch. It didn’t happen only because Arkhipov was present and countermanded the order and brought the Soviet submarine to the surface. Ray McGovern tells the story here: 

…and you can read it in Daniel Ellsberg’s book, The Doomsday Machine. The really scary part of the story is that US intelligence was so incompetent that Washington had no idea that Soviet nuclear weapons were in the combat area on a submarine undergoing debt-charging by the US Navy. The brass thought they could teach the Soviets a lesson by sinking a submarine and came close to getting the United States destroyed.

Another Soviet hero who prevented nuclear war was Stanislav Yevgrafovich Petrov who disobeyed Soviet military protocol and did not pass on reports of incoming US ICBMs. He did not believe that there was a military/political basis for such an attack and concluded it was a malfunction of the Soviet satellite warning system, which it was.

Many times both Americans and Soviets overrode warnings on the basis of judgment. My colleague, Zbigniew Brezezinski told me the story of being awakened at 2AM with reports of incoming Soviet ICBMs. It turned out that a simulation of an attack had in some way gotten into the warning system and was reported as real. It was a very close call. Someone doubted it enough to detect the error before Brezezinski woke the president.

Today with tensions so high and neither side trusting the other, the probability of human judgment prevailing over official warning systems is much lower.

Over the years I have tried to correct the widespread misunderstanding and misrepresentation of President Reagan’s military buildup/starwars hype and hostility toward Marxist, or perhaps merely leftwing reform movements, in Granada and Nicaragua. With his economic program in place and stagflation on the way out, Reagan’s plan was to bring the Soviets to the bargaining table by threatening their broke economy with the expense of an arms race. The plan also depended on preventing any Marxist advances in Central America or offshore islands. The Soviets had to see that there were no prospects for communist expansion and that they needed to get down to peace in order to free resources for their broken economy.

Reading Ben Macintyre’s The Spy and The Traitor, the story of KBG colonel Oleg Gordievsky, an asset of Britain’s MI6, made me aware for the first time how dangerous Reagan’s plan was. American intelligence was so far off-track that Washington did not realize that a plan designed to scare the Soviets into peace was instead convincing them that the US was readying an all-out nuclear attack.

At the time the Soviet leader was the former KGB chief, Yuri Andropov. The ABLE ARCHER NATO war game during the first part of November 1983 simulated an escalating conflict culminating in a nuclear attack on the Soviet Union. The Soviets did not see it as a war game and regarded it as American preparation for a real attack. What prevented Soviet preemptive action was Gordievsky’s report to MI6 that the Americans were raising Soviet anxiety to the breaking point. This woke up Reagan and Margaret Thatcher to the threat they were creating with their bellicose words and deeds. The CIA later confessed: “Gordievsky’s information was an epiphany for President Reagan . . . only Gordievsky’s timely warning to Washington via MI6 kept things from going too far.”

In my seasoned opinion and in that of Stephen Cohen, with Hillary almost elected president branding the president of Russia as “the New Hitler,” with constant provocations and demonizations of Russia and her leaders, with the accumulation of nuclear-capable missiles on Russia’s borders, with an orchestrated Russiagate by US security agencies blocking President Trump from normalizing relations, things have already gone too far. The kinds of false alarms and miscalculations described above are more likely to have deadly consequences than ever before.

Indeed, this seems to be the intention. Why else are people such as Stephen Cohen and myself branded “Russian agents” for telling the truth and giving accurate heartfelt warnings about the danger of such high tensions when neither side trusts the other?

It is reckless and irresponsible to demonize people of integrity such as Stephen Cohen and myself as “Russian agents.” When telling the truth becomes the mark of being a disloyal American, what hope is there?

Officials in Beijing will combine the country’s state-of-the-art facial recognition technology with a version of their controversial ‘credit system’ to speed up security checks in the city’s overcrowded metro system, according to HKFP.

Long queues and commuters arguing with staff over slow security procedures are common sites during rush hour in the metro system of the 20 million-strong metropolis. –HKFP

Cameras set up at the entrance to subway stations will scan the faces of passengers, sorting them into different security channels, according to the director of the Beijing Rail Traffic Control Center, Zhan Minghui.

He added that the plan will involve the creation of a “passenger credit system” in which ‘white-listed’ individuals will enjoy expedited security clearance. Those who receive “abnormal feedback” after their face scans will be subject to extra security measures.

“The technique aims to improve the efficiency of security checks and includes both body checks and luggage screening when large numbers of passengers enter the station,” Zhan said on Thursday at an urban transportation forum in Beijing.

In May, the Beijing subway announced that it had started “deducting credit points” from passengers who eat in metro cars.

Officials did not announce a timeline for the rollout.

Beijing’s subway system currently handles approximately 12 million trips on an average workday – a figure expected to increase to 17 million within the next two years.

China’s use of facial recognition is becoming more commonplace. The Beijing Universal Studios amusement park which is currently under construction will admit visitors without a ticket – and will use cameras that scan their faces to determine whether they have paid for a ticket.

Meanwhile, a new law published on the Chinese Ministry of Industry and Information Technology (MIIT) website and distributed to all Chinese telecom carriers on Sept. 27th requires that “all telecom carriers must use facial recognition to test whether an applicant who applies for internet connection is the owner of the ID that they use since Dec. 1. At the same time, the carriers must test that the ID is genuine and valid.”

If that wasn’t Orwellian enough, Chinese scientists have recently developed an artificial intelligence (AI) enabled 500 megapixel cloud camera that’s capable of panoramic capture of an entire stadium with the ability to target a single individual in an instant, Global Times reported.

Authored by Robert Bridge via The Strategic Culture Foundation,

All things considered, it seems appropriate that GQ, once the final word on male fashions, chose the Halloween season to detail the ‘new masculinity,’ which is nothing less than horrible, grotesque and, yes, even sinister.

There was a strong temptation to simply ignore the hype over GQ and its October issue, which explores the ways that “traditional notions of masculinity are being challenged.” After all, here was yet another cheap attempt to subvert men and their ‘toxic masculinity’ lest some hirsute XY chromosome carrier attempts to fix a leaking toilet, speak his mind at a meeting or even take out the leader of a nefarious terrorist group. Moreover, the issue had already been chewed over by other writers, so it didn’t seem necessary at first to add to the conversation.

Pharrell for GQ – The New Masculinity Issue 2019 #pharrell #gq pic.twitter.com/M8SfwEO4HC

— Magazine Covers (@_MagazineCovers) October 14, 2019

Of all the various commentary on the subject, however, none dared mention the elephant in the GQ hate piece – and make no mistake, it is hate.

This is not the ongoing war against males and their so-called ‘toxic masculinity” per se, but rather the war against ‘white toxic masculinity’ and the malignancy believed to be lurking below the surface of every social ill, known as ‘white patriarchy’. In other words, there is a lot more to this PC obsession with masculinity than first meets the eye. So let’s start at the beginning.

On the GQ cover we have Pharrell Williams, American rapper and songwriter, all dressed up with nowhere to go in a flowing and very flaccid pumpkin dress. Some might be wondering, since GQ apparently did not, why men would take any masculinity cues from an individual who once penned an outwardly misogynist song entitled ‘Blurred Lines’ – one of the best-selling singles of all time – which only succeeded in blurring the lines between consensual sex and full-blown rape? The video has been described as an “orgy of female objectification.”

Nevertheless, GQ editor Will Welch celebrated his joyfully “frictionless” day with Williams where the rapper opened his soul about the ‘new masculinity,’ which, in these post-MeToo times, has no safe space for White males. The conversation quickly turned to transgender lifestyles and the villainous white patriarchy that apparently is to blame for things being so out of whack in the world today.

“On the surface, it is an older-straight-white-male world,” Williams complained. “But it has prompted this [transgender] conversation that I think is deeper than what the new masculinity is or what a non-gender-binary world looks like.

“I think we’re in spiritual warfare.”

Almost imperceptibly, GQ has already made the sleight of hand from ‘white patriarchy to toxic masculinity to transgender lifestyle.’

Had Welch just stopped the conversation at the esteemed Mr. Williams, perhaps we could just let this ‘new masculinity’ magazine slip harmlessly into the dust-bin of obscurity. But alas, GQ does not stop at the glorified rapper, but goes on to pick the brains of 18 “influential people who are shaping our culture now.” Since we are talking about GQ (of former ‘Gentlemen’s Quarterly’ fame) it might be assumed that mostly rugged males and perhaps one or two token females would be chosen to speak their minds on the issue of masculinity. Not in these woke times. In fact, this assembled confab would have trouble putting together a single XY chromosome among them.

This diverse and very colorful group that apparently knows so much about masculinity is comprised of nine feminists, one transgender male (that is, a biological female), three homosexual men, and three men who are in heterosexual relationships, none of whom, by the way, are representative of the white Caucasian race. The lone ‘rugged male’ among the pack, white NBA star Kevin Love, is unmarried and childless. Love devoted the bulk of his interview to explaining why men are “supposed to be emotional,” which may go far at explaining his present bachelor status.

Masculinity then and now pic.twitter.com/fJZQWaWhfX

— Nicole Russell (@russell_nm) October 14, 2019

The advice proffered by this collection of voices is so incredibly discordant I would suggest the reader take the time to examine them individually, painful as that may be. Personally, two particular comments really left an impression and revealed the real agenda at play here. All this talk about ‘toxic masculinity’ is in fact aimed at ‘white toxic masculinity’ and the white male population in general. This is revealed first of all by the demographic makeup of the cast of characters, of which there are only two white males, the one being homosexual, the other an emotional bachelor. Needless to say, that is not a fair representation of the US demographics with regards to straight white males, which (still) make up the overwhelming majority of the American male population.

Furthermore, the term ‘white’ is bantered about with disdain so deep you’d think the subject were climate change or male pattern baldness. In fact, I’d go so far as to call it hate. For example, Asia Kate Dillon, introduced heroically as the “actor who brought gender nonconformity to America’s living rooms,” spoke about how she carries “white-body privilege” as if she were speaking about the Bubonic plague.

Next, in its interview with rapper ‘Killer Mike,’ GQ asks about his “weapon of choice to fight white patriarchy?” Hold on, Mr. Welch. I thought this was supposed to be an expose on the ‘new masculinity.’ So why has this conversation veered off the road into a bigoted discussion on race, specifically white race?

Later, Hannah Gadsby, the “comic who’s taking on toxic masculinity,” explains with all the dead humor she can muster, that “this is the first time that straight white cis men have been forced to think of themselves as anything other than human neutral,” which makes zero sense, thus explaining why nobody thought to broach the topic before.

In any case, the underlying message here is that it is not so much ‘masculinity’ that is toxic and worthy of extermination, but rather ‘white masculinity’ and, as the article screams between and in the lines, ‘white patriarchy.’ Why is there no negative singling out of the Black Americans, for example, or Muslim men in this discussion on ‘toxic masculinity’? Are we to assume that only white masculinity is infected with toxicity? The rampant violence in America’s inner cities, as well as abroad in European capitals that welcomed millions of Middle Eastern refugees, should warn us against jumping to such radical, unfounded conclusions. White Europeans have been guilty of historical crimes, but certainly no less than any other race of peoples. Yet American liberals are determined to change that historic record, for what ulterior motive I have no idea.

Yet nowhere is common sense being applied when discussing ‘toxic masculinity’ and ‘white patriarchy,’ which are now being used recklessly in the same sentence in a cause and effect relationship. That is a very dangerous and shortsighted assessment of the social, cultural and political realities facing Western civilization. We embrace it at the risk of total societal collapse.

It isn’t just trade where China has been beating the U.S. over the last decade.

In fact, those who have been paying attention have surely noticed that the U.S. is now trailing behind China in numerous technologies, like 5G networks, drones, batteries, solar energy and cryptocurrency. 

The role of private the private tech sector in the U.S. is becoming more critical as the country tries to keep pace, according to the Wall Street Journal, who cited a Defense Department official. 

Michael Brown, director of the Defense Innovation Unit, a branch of the Pentagon commented that the list of technologies where China has the lead is now “extensive”. And in areas where the U.S. has the lead, it is hardly insurmountable, Brown says. 

Brown commented: “A number of them are concerning from a national-security standpoint.”

One example is that the U.S. government and military use drones manufactured by Chinese companies DJI Technology Co. 

Brown believes that part of the problem is a lack of government investment in the U.S. The government’s investment in the military has been on a steady decline since the 1960’s, he notes.

And so that leaves the the work to technology companies in Silicon Valley. Tensions between Washington D.C. and Silicon Valley can make that partnership difficult, however. Certain companies, like Alphabet, have opposed working on technology that could be used in combat, while other startups worry about the bureaucracy of doing business with the Pentagon. Other companies worry about lucrative commercial deals that could be tossed aside as government projects take precedence. 

Google pulled out of a project last year to help the U.S. develop aerial-drone imagery after opposition from its employees. 

Brown says that many tech companies don’t want to work with the Pentagon – especially smaller companies focused on building revenue. Brown has helped bring about 60 new vendors, mostly small tech companies, to the Department of Defense since 2015.

He comments that the relationship can be difficult if big companies “crowdsource” their business strategy by listening too much to their employees’ political views while making business decisions. 

Brown commented: “The private sector isn’t necessarily going to take the risk to invest in long-term technologies where the payoff is uncertain. That is the role of government.”

Brown also said China’s government-led initiative to tech dominance was a good example to follow.

“The U.S. has been a bit allergic to how China manages their economy with industrial policy,” he continued. He also said that China’s approach is “moving them forward.”

Brown co-authored a Department of Defense paper in 2017 that warned about Chinese investments in private tech startups giving the nation the “crown jewels” of the U.S. The paper was followed by new policies restricting Chinese investments in startups, but was also criticized as stereotyping Chinese investors as spies.

Which, of course, some of them are – but that’s besides the point, we guess.

Brown concluded: “They are very focused on technology transfer because they see that as a way to economically transform their society. The concern I have is that [the paper] is used too much as a justification for protectionist ideas and not enough for stimulus for further investment.”

Authored by Steven Guinness,

Over the past three years a popular narrative has sprung up in the independent media, which says that the UK’s decision to leave the EU and Donald Trump’s rise to U.S. President is somehow evidence of globalists (and by extension central banks) ‘losing control‘. From what I’ve observed this belief is cultivated in large part by those who are ideologically disposed in favour of Brexit and/or Trump, rather than it being indicative of reality.

The suggestion that central banks in particular have ‘backed themselves into a corner‘ on monetary policy is often where attention is focused. But there is a great deal more to central banks than just their stance on interest rates and stimulus measures.

Following on from a series of articles I published over the summer, the Bank of England and the Federal Reserve are quietly progressing with plans to radically reform their payment systems, primarily to make them compatible with Fintech providers and lay the foundations for the introduction of central bank digital currency (CBDC).

First let’s look at some recent developments from the Bank of England.

Bank of England

Whilst Mark Carney is the man that analysts and the media pay closest attention to at the bank, it is Victoria Cleland – the BOE’s Executive Director for Banking, Payments and Innovation – that has the most to say right now on the subject of the future of money.

In a speech given on September 24th (Payments: A platform for innovation), Cleland reiterated a key message from the BOE motivated by a Future of Finance report published in June this year: ‘a new economy and new demographics demand a new financial system‘.

Cleland breaks this down into five areas: the enhancement of payment systems for the digital age; endorsing a platform to improve access to finance for small firms; supporting transition to a carbon-neutral economy; developing a regtech (regulatory technology) and data strategy; facilitating businesses use of technology. The latter is a generalised term that when broken down encompasses distributed ledger technology.

The UK’s Real-Time Gross Settlement payment system was earmarked for reform back in January 2016, and is a system which Cleland admits ‘not much business can be done without it, and most consumers are ultimately reliant on it.’ Quite clearly, though, this is not sufficient for the Bank of England. Hence why they are in the process of ‘renewing‘ the service amidst the growth of digital technology.

The pace of this renewal has gathered significant momentum over the past twelve months. In her speech Cleland confirmed that a consultation paper will be published in 2020 that will focus on ‘the appropriate level of access for payment service providers to the bank’s infrastructure and balance sheet.’

As I have made mention of previously, the ‘renewal‘ of RTGS is being undertaken, in Cleland’s own words, through choice rather than necessity. Here she reaffirmed that overhauling RTGS is a ‘challenging but necessary programme.’

Within central banks and global economic institutions, there is a fixation on the need for the ‘financial architecture‘ to be reformed in the face of geopolitical disorder. The architecture they have in mind includes the adoption of technology such as distributed ledger, an essential component in the quest to introduce CBDC’s.

Whilst the BOE’s position is that the renewed RTGS will not be built on DLT, it will nevertheless have the required functionality so that firms using the technology can connect to the service. Cleland was adamant that the next generation of RTGS will be ‘future-proof”, meaning it will be sufficiently advanced so that companies yet to exist will be able to ‘interface‘ with it.

Non-bank payment service providers already hold accounts in the current RTGS. According to Cleland, ‘many more firms are exploring the possibility of joining.’

As for when the new service can be expected to launch, the timetable is beginning to look more clear. The onset of 2022 will see the first phase of technology changes, with 2023 being targeted as the moment when the core RTGS service will be replaced. By 2024, ‘additional functionality will be delivered, to further drive innovation and change.’ 2025 is when the BOE expect to close the programme. If Cleland is to be believed, the bank are ‘on track against our plan.’

Important to appreciate is that the BOE’s work in the field of payment systems is not in isolation. As Cleland points out, ‘close collaboration is a crucial part of how we can collectively transform the payments landscape‘.

Which brings us onto the Federal Reserve.

Federal Reserve

The Fed’s equivalent to Victoria Cleland is Lael Brainard, who is chair of the Committee on Payments, Clearing, and Settlement as well as being a member of the board of governors.

On August 5th Brainard gave a speech at the Federal Reserve Bank of Kansas about the Fed’s decision to develop a new round the clock real-time payment system called FedNow. I wrote an article about this at the time, but since then the conversation has advanced somewhat.

Two months after the FedNow announcement, Brainard followed up with another speech (‘Digital Currencies, Stablecoins, and the Evolving Payments Landscape‘) at ‘The Future of Money in the Digital Age‘, an event held in Washington D.C. and sponsored by the Peterson Institute for International Economics. Also in attendance was Hyun Song Shin, the head of research at the Bank for International Settlements.

To substantiate the intrigue around digital currencies, Brainard cited Facebook’s planned Libra project as giving ‘urgency to the debate over what form money can take‘, chiefly because of its ‘potential global reach.’ Ten years ago it was Bitcoin that first introduced to the public the concept of digital currency, a fact that Brainard recognised when she said that its ‘emergence created an entirely new payment instrument supported by distributed ledger technology.’

When the initial plans for FedNow were released, Brainard made no specific mention of distributed ledger technology. At the time she said that ‘engagement between the Fed and the industry’ would determine the final make-up of the payment system.

As discussed in August, my position remains that when the final design of FedNow is ratified, it will almost certainty have the ability to interact with systems that operate distributed ledgers. This appears logical when you consider that the Bank of England are moving in this direction. In 2018 they announced that their new RTGS service would enable systems that use DLT to achieve settlement in central bank money.

On DLT, Brainard stated in her speech that the advantages it could offer to central banks include ‘operational resilience, increasing transparency, and simplifying recordkeeping.’ This is one of the reasons why commercial banks are actively incorporating the technology that underpins digital currencies, either by going into partnership with Fintech companies or by issuing their own variants. Hence the rise of what are known as Stablecoins.

Brainard made the point that if consumers came to depend on ‘Stablecoins‘ – which she characterised as being assets that seek to ‘maintain stable value by tying the digital currency to an asset or basket of assets‘, then this could ‘shrink demand for physical cash.’ It is no secret that endeavours now underway at central banks are rooted in attaining the necessary mix of technological advancement and knowledge in order to position the global monetary system to becoming cashless. Which is why introducing digital currency through the likes of Bitcoin and Facebook’s Libra has been of importance to banking elites. They are already gaining large scale public acceptance of cashless technology by marketing digital payments as being more convenient and secure. But in terms of managing to fully ostracising cash as a relic, they are not there yet.

We get a sense through Brainard’s words of how central bank plans for a digital currency future have taken shape. She spoke of how ‘the rapid migration of payments to digital systems prompted interest in the issuance of central bank digital currencies‘, and how the ‘potential for global stablecoin systems has intensified the interest in CBDC’s.’ This is not surprising given that CBDC’s are the long term objective of internationalists.

Even so, a continued narrative has been how access to CBDC’s by consumers would raise ‘profound legal, policy and operational questions.’ Were CBDC’s issued to consumers, Brainard believes it could ‘conceivably require the central bank to keep a running record of all payment data using the digital currency – a stark difference from cash.’ Again, this is part of the plan. The abolition of cash would result in the abolition of anonymity, meaning no citizen could interact with money without being permanently monitored. Monetary surveillance if you will.

Already Brainard is openly asking if the Federal Reserve could acquire the authority to ‘issue currency in digital form and, if necessary, to establish digital wallets for the public.’ China have been the pioneers in the field of digital wallets through Alibaba and WeChat. Now this technology is gearing up to become commonplace in the West at the expense of cash.

But the Fed may not stop there. Due to ‘the operational risks of central bank digital currency,’ Brainard revealed that this could require the Fed to ‘develop the operating capacity to access or manage individual accounts, which could number in the hundreds of millions.’

The greatest deception around the whole topic of digital currency is how under the auspices of central banks it would function within a decentralised structure. The point of FedNow, and the Bank of England’s RTGS renewal, is that payments will continue to go through them. Introducing CBDC’s would further tighten their grip over the financial system. The set up that central bankers favour is of a permissioned blockchain network, as opposed to a permissionless network. The former would require permission to access, whereas the latter theoretically has no such restrictions.

DLT is often lauded as decentralised technology, but should it become part of the next generation of payment systems then it will in part be controlled through regulation. The BOE and the Fed form part of their country’s regulatory authorities.

According to Brainard, U.S regulators are ‘closely examining the specific functions of particular stablecoins and cryptocurrencies more broadly to determine whether and where they fit in the existing regulatory structure and whether additional authorities or guidance is necessary.’

Meanwhile, in ‘supporting payments innovation‘, the Fed are ‘actively investing in our payments infrastructure‘, at a point in time when the central bank ‘potentially enters another phase in the evolution of money and payments.’

We will likely see far-reaching innovation in payments in the coming years, with a plethora of new and emerging options, including stablecoins.

Does this sound like a central bank that is losing control? Just as the technology necessary for digital currencies is progressing to the stage of its imminent introduction, the central banking community is redefining their payment systems to accommodate it. Rather than their power base diminishing, they are instead working hand in hand with private developers to ensure that they remain the arbiters of the global financial system. So far, they are succeeding.

China’s manufacturing PMI slumped deeper into contraction on Thursday — as economic growth in the country fell to its weakest pace in three decades. The economic slowdown, coupled with massive corporate leverage, has created a ticking debt time bomb, which could explode in the next global recession. 

The unraveling and coming debt crisis in China will take a series of corporate debt defaults to spook investors, and perhaps, the first series of defaults has already started. 

The latest causality is Shandong-based steelmaker Xiwang Group Co., who defaulted on a $142 million bond last week, has sparked contagion fear with other companies in the same region, reported Bloomberg.

Then on Wednesday, Shandong Sanxing Group Co.’s 2021 dollar bond and China Hongqiao Group Ltd.’s dollar bond due 2023 plummeted to their lowest levels ever as contagion from Xiwang’s default continued to frighten investors. 

“Xiwang’s default onshore has raised concerns that other privately owned enterprises in Shandong, particularly those from the same locality, may have been associated with the firm,” said Wu Qiong, executive director at BOC International Holdings Ltd. in Hong Kong, who spoke with Bloomberg. 

China’s onshore credit markets continue to erupt with stress after 2019 defaulted bonds have already hit 2018 highs.

Fitch Ratings said the default rate of all Chinese issuers in the first three quarters of this year was 1.03%. By historical standards, the default rate is much higher than last year. Most of the firms skipping out on bond payments were private entities. 

The cash crunch comes at a time when overleveraged companies in China are reeling from a global synchronized slowdown and a controlled deleveraging period by the government to create a soft bottom in the economy. 

“Defaults are likely to continue rising, as many medium- and small-sized private firms are facing significant refinancing pressures,” Zhang Shuncheng, associate director of corporate research at Fitch, said in an interview. “Private companies suffer from many problems in their own operations, not to mention the impact from the slowing economy and tight credit environment.”

China’s corporate sector downfall is overleverage, taken on during the global synchronized recovery. Now, a synchronized decline, these firms are starting to deleverage, adding to the downward pressure in the economy. 

Hedge fund manager Kyle Bass, the CIO of Hayman Capital Management, has famously said China’s coming economic crash could be three to four times bigger than the 2008 subprime crisis. 

Bass said in August, China’s “recklessly built” banking system could come tumbling down in the next global recession. 

As long as Beijing refuses to spark a massive credit injection spree, the global economy will continue to falter — this could usher in the next global crisis, one where China’s corporate sector implodes, well that’s at least what Bass thinks… 

Submitted by Strategic Macro Blog,

China is one of the most important economic stories as it and the US have been the main contributors to global GDP growth in this cycle.

As we know, Trump has been driving his trade agenda and has forced China to negotiate; but discussions are stuck on three key points:

1. Forced knowledge and technology transfer in exchange for Chinese market access

2. IP theft

3. State subsidies for key industries

So why are these the key points and why is China so unwilling to negotiate on them?

The answer is that China is an authoritarian state, ruled by the Chinese Communist Party. Their ‘pact with the people’ has been growth, peace and stability in exchange for one party rule. It has worked pretty well for the economy, albeit with large imbalances built up.

As China recovered from the Cultural Revolution, the first stage of growth was in basic industries, then more advanced industries, then high tech and now aiming to be global leaders in new high tech industries.

So how do you make the leap from basic industries to high-tech? You put state resources into education and you invite foreign tech companies to set up manufacturing bases to access cheap labor. You also force knowledge transfer and allow domestic IP theft.

That growth strategy has brought China to the upper level of middle income status with median wages of around $12k a year. Below is a chart showing China’s progress relative to the US from 1960 to 2008 (the most recent one I could find). While China has moved up, relative to the US, its still in middle income status and there are a large number of other countries that are stuck in the middle income trap:

Targeting high-income jobs and industries

If we set aside development issues like corruption, capital flight, inefficient SoEs, lack of basic rights; in order for China to keep growing and avoid the so called middle income trap and get to high income status, China needs to generate hundreds of millions of higher income/ high productivity jobs, mainly in domestic services, but a significant number in goods producing and globally competitive export industries.

Put simply they need global leader companies that can compete in their markets. The problem is the global technology/ pharmaceutical/ biotech/ high end industrial markets are protected by patents and trade secret laws and the owners of those patents are US/ EU/ Japanese companies. To survive without subsidies in most mature global industries you need to be in the top 3 of each segment and while Chinese companies can achieve that domestically, they usually can’t globally.

So China needs to target the new industries where they can register patents and achieve scale and competitiveness. So the government provides state subsidies to companies like Huawei to help them become global leaders in the new markets as they open up. These are the same new markets that US/ EU/ Japanese companies want to compete in. But the Chinese companies can operate at break even or a loss for as long as it takes to drive foreign competition out of a new market. They can also invest whatever it takes in R&D for these new industries.

Trump is pushing back against this development model. But the problem the CCP has is their growth pact. They have to deliver higher standards of living and productivity to avoid falling into the middle income trap and these three core policies are their strategy to deliver it. Without these policies, it is not clear to me how they will create the numbers of high income jobs they need in order to escape middle income status. Then China would become little more than a large market for high end western goods, similar to Russia or India.

So overall it seems unlikely that China will make a full compromise on these areas and for now they are saying these key principles are non-negotiable. I suspect that next year they will try and position a compromise that is in their interest and does not effectively stop this development model.

If Trump does not really want a deal and just wants to make it look like he tried hard before ending negotiations and putting more tariffs on, he has the excuse already. I think this outcome is likely, but that Trump wants the bad news to come out in stages. Partly to not roil markets and partly as it takes years to reposition supply chains. 

Hong Kong protests, could they spill into China?

The Arab Spring came about because a baby boom of young men born in the 1980s came of age, couldn’t find work and saw no future. It seems that the Hong Kong protests have similarities. Young Hong Kongers, who have no allegiance to the CCP, live in what is a developed market, but cant afford property and lack the basic self-determination rights.

The Hong Kong authorities can act to bring down real estate prices, but giving democracy and greater rights seems to be incompatible with the Mainlanders not having those same rights. My former colleagues, who are Chinese and based in Hong Kong, are expecting a ruthless crackdown on the protesters by the CCP at any time.

The risk is that leads to more protests and more loss of control or even the protests starting in China itself. My former colleagues are fairly sceptical of this spillover happening, given CCP brainwashing and control of media and communications. They also think the CCP would ruthlessly end any initial Mainland protests, out of sight of the global media.

But I think this comes back to the common issue. If the CCP fail to deliver their growth pact and China starts to stagnate in middle income status, with many economic imbalances built up or starting to unwind, perhaps there can be protests in China as well.

If that happens and the CCP start to lose control, it would trigger a 1997-style Asian and EM meltdown as commodity prices and the flow of USD’s to EM collapse. While China runs a large trade surplus with the US and EU, it runs almost a $200bn goods deficit with Asia and EM.

I don’t know how likely it is that Mainland protests start and my former colleagues are confident they would be ended ruthlessly, as the CCP’s primary aim is survival, but given the potential of this scenario, its worth considering the possibility and the impact it could have.