The Independent Market Observer

9/19/12 – The China Channel

Posted by Brad McMillan, CFA, CAIA, MAI

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This entry was posted on Sep 19, 2012 10:11:35 AM

and tagged Yesterday's News

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Perhaps I should be more like my cable provider, which seems to have a channel for any conceivable interest, by starting a China channel, as there will certainly be enough content to fill it. The news from China continues to be worrying on both a political and an economic front.

On the political front, the trial of the police chief who assisted Bo Xilai is over after two days. The Financial Times (FT) reports “Trial of Bo police chief ends” (p. 6), the New York Times (NYT) has “Trial of Ex-Police Chief in China Scandal Ends in a Sign of Leniency” (p. A4), and the Wall Street Journal (WSJ) has “Hints of Leniency for Chinese Police Chief” (p. A11). The good side of the story is that the police chief may get off lightly, and the bad side is that the stories suggest that Bo Xilai may get a much harsher penalty. This is important because, not that long ago, Bo was a major candidate for a central Chinese leadership position. It will be interesting to see, in light of the pending leadership transition, how the Chinese government handles Bo’s trial—if there is a trial at all, even a two-day one. I say again that if China’s economy depends on competent and consistent government, the past couple of months make me even more concerned than I was before.

Other concerns are geopolitical and economic, and the two are intertwined. The FT has a good article, “Protests fuel fears on China-Japan trade ties” (p. 6), that elaborates on the point I made yesterday about how both China and Japan have extensive trade relationships, and any conflict will have significant negative economic effects. The NYT (p. A8) also weighed in on increasing protests, and noted that, although the protests were large and angry, they were also better controlled than the weekend protests, suggesting that the authorities had reasserted control. In the WSJ, “Leaders’ Struggles in Beijing, Tokyo Escalate Island Dispute” (p. A11) talks about how both the Chinese and Japanese governments have backed themselves into a corner over the island dispute, to a point where it is very difficult to even negotiate. The story makes the point that domestic politics are constraining what the leaders can do, which may force continued escalation of the conflict despite the economic consequences.

Neither country needs more economic challenges. The Bank of Japan just held interest rates at the same low levels they have been at for years, as its economy continues to stagnate, while the Chinese slowdown continues to develop. The WSJ’s “FedEx: China’s Problems Growing” (p. B1) highlights how one firm expects the Chinese slowdown to continue—and provides a good overview—and the title of an op-ed in the FT, “China’s credit tide leaves a foul stench as it recedes” (p. 14), is pretty self-explanatory.

Chinese nationalism will not stop at Japan, either. The WSJ, in “Protesters Surround US Ambassador’s Car” (p. A11), and the NYT, in the story mentioned above, cite that the car of the Italian consul in Guangzhou was attacked. If the situation continues to worsen, do not expect China to limit its animus to Japan. Given China’s huge role in the global economy, we can expect this will roil markets if it gets much bigger.

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