The Independent Market Observer

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

Posted by Brad McMillan, CFA, CAIA, MAI

Find me on:

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

and tagged Yesterday's News

Leave a comment

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!

Subscribe via E-mail

Crash-Test Investing
Commonwealth Independent Advisor

Hot Topics

Have a Question?

New Call-to-action

Conversations

Archives

see all

Subscribe

Disclosure

The information on this website is intended for informational/educational purposes only and should not be construed as investment advice, a solicitation, or a recommendation to buy or sell any security or investment product. Please contact your financial professional for more information specific to your situation.

Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. Diversification does not assure a profit or protect against loss in declining markets.

The S&P 500 Index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. All indices are unmanaged and investors cannot invest directly into an index.

The MSCI EAFE Index (Europe, Australasia, Far East) is a free float‐adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the U.S. and Canada. The MSCI EAFE Index consists of 21 developed market country indices.  

Third party links are provided to you as a courtesy. We make no representation as to the completeness or accuracy of information provided at these websites. Information on such sites, including third party links contained within, should not be construed as an endorsement or adoption by Commonwealth of any kind. You should consult with a financial advisor regarding your specific situation.

Member FINRASIPC

Please review our Terms of Use

Commonwealth Financial Network®