The Independent Market Observer

9/18/12 – It’s Called the Middle Kingdom for a Reason

Posted by Brad McMillan, CFA, CAIA, MAI

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This entry was posted on Sep 18, 2012 11:11:52 AM

and tagged Yesterday's News

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Looking at the papers today, I decided to do two posts instead of one. I try to keep my posts to a reasonable length, and with everything that is going on in China, it warranted its own discussion. I’ll cover the rest of the world in a second post.

Throughout history, China has considered itself to be at the center of the world, and, because of that, the country has been known as the Middle Kingdom. In recent centuries, of course, the West has believed that it is the center. Look at any map made in the U.S., for example—we are in the middle! If you look at the news, though, it does all seem to revolve around China nowadays. Perhaps we will have to redo our maps.

Each of the papers today has a front-page story on China and at least one follow-up article deeper in. They are all about problems, conflicts, and tensions. On the New York Times (NYT) front page, we have “In Car Country, Obama Trumpets China Trade Case,” followed by “Trade Case May Produce Few Results” on p. B1. Both articles are about a newly filed WTO trade complaint on China. More conflict for few results. The Wall Street Journal (WSJ) has “China Tensions on the Rise” on the front page, which discusses both the new WTO complaint and the island conflict. (We’ll get to that in a minute.) The Financial Times (FT) points out that, given this new concern and Romney’s past comments on China, “Trade case sets China at heart of election race” (p. 3). This also ties in with the growing protectionism around the world, which we have discussed before.

Some more encouraging articles include “Trial Begins for Police Chief in Chinese Political Scandal” (NYT, p. A8) and “China Starts Trial of Ex-Police Chief Key to Bo Scandal” (WSJ, p. A11). It’s a closed trial—of course—of one of the cronies of Bo Xilai, the former governor and Politburo candidate who has disappeared from public view. More concerns about the Chinese political process. The NYT also has “US Accord with Japan Over Missile Defense Draws Criticism in China” (p. A7); China really does not like the U.S. playing in its sandbox.

Especially with Japan and especially now. The conflict over the Senkaku islands just keeps getting bigger. It made the front pages of the WSJ and the FT with “China Tensions on the Rise” and “Japan businesses in China shut as protests over islands escalate,” respectively. Japanese firms (and others) are shutting down, at least temporarily, to protect their assets from the protesters. The WSJ also hits this story with “Wary of Protests, Japan Firms Lie Low” (p. A8).

These stories are interesting for a couple of reasons. First, they point out a potential crack in China’s economy; China and Japan are major trading and investment partners, and the shutting down of Japanese firms could be a major hit to the Chinese economy, which is already slowing. Second, if such a shutdown continued or expanded, it could impact many global supply chains for a surprising number of products, including, at a minimum, cars and consumer electronics. Even setting aside the geopolitical and military implications of the island conflicts, the economic effects could be surprisingly widespread.

One of the points that has been made repeatedly by a geopolitical service I subscribe to is that, although the Chinese government has encouraged the anti-Japanese sentiment—and to some extent the protests—there is a risk that the protests will grow beyond what the government can control and may start to take on other causes as well. In the context of the leadership transition—with the associated political uncertainly vividly illustrated by the Bo Xilai case and the Xi Jinping disappearance—the economic slowdown, and the island conflicts (Japan is not the only country having such conflicts with China), the risk level associated with China does appear to be rising. As readers know, I am and have been a China bear for some time, but it does seem that we are getting close to some sort of breakpoint. The Chinese curse, “May you live in interesting times,” comes to mind.

Have a great day!

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