This is a guest post by Jakobsen.
Macro Digest: The 19th Party Conference - The biggest Paradigm shift in 100 years?
I think next week’s 19th China Communist Party’s Conference is the single biggest event this year – a confirmation a true paradigm shift
China leads world in credit creation, growth and now in most technology fields… My take remains that President Xi will focus on quality over quantity, that pollution reducing is the number one social issue and that The Party is taking more and more control. The net output will be:
- Lower than expected growth next 18 month (while China converts economy from export engine to one of productivity gains – President Xi wants 2010 GDP per Capita doubled (Rule of 72= 72/7% GDP per year = 10 years) which means objective of 7% growth per year, but most of this will be productivity driven which means investment first (hence lower growth) then higher
- Reduction of pollution = Electrification of cars – BDY says by 2030 100 pc of cars will be EV – this catapult China to leadership in battery, E-engines, and pollution reduction (Don’t forget that from 1900 to 1910/13 the US went from 100% horse carriages to 100% cars!)
- High ratio of R&D and innovation to gain leadership China is already, but will be even more dominant in E-commerce, payments and Fintech. (See Mckinsey report below)
- Slow gradual openness in capital account, more access to market for foreigners and BIG FOCUS on converting global trade from US$ to CNY [Yuan vs Dollar]
- Weaker CNY post conference
- Big negative credit & growth impact on rest of the world
Changes comes much faster than we human beings like – our brain is simply not designed to accept quick changes, and one of the few short comings of the brain is that it likes (and uses) the recent past to extrapolate the future. We think linear but world evolves super log-normal. An excellent example is the pictures below from New York in 1900 and 1913. Notice the difference and that in the space of 13 years only.
I think the next 13 years will surpass those years in terms of change, dynamics and how we act, analyze and live.
China is changing and has changed more than market gives it credit for – the Anglo-saxon economist’ keeps focus on banking system and debt, but unlikely western world China can accelerate growth through release of productivity – The US with President Trump has chosen to “retire” from the global economy on a fundamentally flawed concept of America 1st while China is growing its importance, probably best illustrated by this chart:
Now China also wants a new world order in commodities . China will allow exporters to avoid US$ payments for Yuan or Gold!
China is enjoying US’ indecision on foreign policy, which seems to be driven by indecision, spur of the moment changes and randomness opposite this sits China, with its One Belt, One Road, Asian Development Bank and the Shanghai Cooperation Organisation – There is in excess of 3 billion people in this alliance – and with Pakistan and India joining in 2015 that number will be 4 billion by 2050.
The future belongs to the countries and companies which can command the consumers, no one is better placed than China (and India).
We are witnessing a geo-political reality show where one hegemonic power, the US, almost voluntarily is given up its dominance. The result is clear to me:
The King Dollar is dead, Long live the King CNY!
Mish View - Dollar Not Dead Yet
A paradigm change is indeed underway, but it will be led by cars (autonomous driving and electrification), demographics (aging boomers), the demise of pension plans, a revolt by millennials, and a squashing of the current political class.
A currency crisis is inevitable but it's too soon to say gold gold will be back in the picture. Some suggest SDRs, but I dismiss that idea.
King dollar is certainly not dead yet, and contrary to popular belief, having the reserve currency is more of a curse than a blessing.
Why Dollar is King
- The dollar is king because the US has open capital markets, property rights, and the world's biggest bond markets.
- The US also has a Bill of Rights granting freedom of speech and protections from unwarranted searches. China imprisons people for speaking their mind.
- China is a long way from competing with the US on those important issues. In addition China repeatedly resorts to capital controls to stop monetary flight.
China will not supplant the US for at least two decades and may not ever.
Nonetheless, I agree with the general idea that a massive set of disruptions is underway.
- China’s Population Poised to Crash in Perfect Demographic Storm
- China Spotlight: Capital Flight Intensifies, US Treasury Reserves Plunge, Capital Controls Increase
- Steen Jakobsen on the Next 30 Years: “Everything is Deflationary”
- Hugo Salinas Price and Michael Pettis on the Trade Imbalance Dilemma
By the way, those who think electrification of cars and autonomous cars are a decade away, need consider the lead in image, then think again: California Allows Fully Autonomous (No Driver Present) Vehicle Tests .
Mike "Mish" Shedlock