Chinese Car Trolls

In case anyone was still worried about Chinese world domination ... this is the kind of innovation the country is betting their future on:


http://www.bbc.com/autos/story/20150818-youxia-ranger-x-is-totally-not-a-tesla

"We are no longer surprise by Cinese carmakers paying legally questionable homage to successful Western models"

"The driver interacts with that system through a vertically oriented 17in touchscreen display, much like the driver of a Model S would interact with that car’s vertically oriented 17in display. Small world. "

The idiots who sent this bunch of posers their investment dollars got exactly what they deserved. You are what you invest in.

What Will Tomorrow Bring: Rough Waters

China liquidity crisis. I repeat, China liquidity crisis. Hold on to your hats, kids. I think we're in for a blow. 

Woah, China!

Forget The Vest ... fear THIS:

On Monday, China's premier Wen Jiabao lowered the economy's growth target to 7.5 percent from 8 percent, where it has stood for years.  - AP

Early, of course, to sing a dirge but China's "golden era" of ridiculous growth at all costs seems to be getting a bit more expensive these days. Expect to SLOWLY see:

• Reduction in expenditures for extravagant infrastructure projects
• Asset management shift from their current stance (overweight US Treasuries) to something more akin to Singapore's Temasek
• A review of the commercial tax and licensing structure (hopefully not a Chinese Raj)
• A harder line on international trade, both in terms of limitations and in terms of tariffs
• An attempt to diversify labor-intensive businesses across labor pools (inner-China manufacturing zones, African investment zones) 
• Industrialization deeper into inner-China
• All of which will help pay for increased, but highly-targeted social support funding including medical care and pensions, as well as their continued military build-up
• Targeted efforts to increase enforcement, probably with a focus on IP law, financial regulation, governance (as the Economist said a few weeks back, the Chinese government is the only group that has actually read the entire Dodd-Frank act)
• Maybe even some efforts to address environmental sustainability issues

A better set of incentives to maximize economic efficiency by focusing directly on maximizing economic "intensity"?

Various economic systems have tried to determine the best allocation of goods, services, and capital (which includes labor, money, natural resources, land, etc). Capitalism allocates capital based on who can think of the most profitable use for that capital. This encourages risk-taking and discourages equality. In this system, people who grow wealthy by taking smart risks with their capital "deserve" the resulting profits. People who go bankrupt by taking dumb risks "deserve" that too.

One unfortunate side effect of wealth-creation under this system is that some people stop making smart capital-allocation decisions and become capital hoarders. They don't care that they are creating little value out of the capital, either because they expect the value to go up, or because they have sufficient personal wealth to meet their own needs and wants without squeezing the maximum value out of each asset.

In this case, capital becomes inefficiently allocated to the detriment of the "have nots." Second homes sit empty while homeless people sit on the street. Farmers in developed countries are paid to NOT grow crops while whole villages in developing countries starve. In other words, the usage of that capital (the "intensity") is lower than it could be.

So my challenge to my fellow readers is: could we revise the incentive mechanisms to encourage maximum capital "intensity" while preserving those components of the system which encourage the necessary innovation, risk-taking, and reward-reaping?

And I Suppose People Were Not Expecting This ...

From the FT today:

Dubai shockwave hits global markets

Tremors from the shock request by Dubai’s flagship government-owned holding company for a debt standstill spread through global equity markets on Friday, triggering a sell-off in Asia and heavy losses on Wall Street.

While European markets staged a modest but nervous
rally after heavy sell-offs this week, investor sentiment remained jittery amid
a scramble to assess the broader fallout of the problems of Dubai World.
In depth: Dubai in turmoil - Jul-06
Editorial Comment: Dubai reveals the fragility of finance - Nov-27
Lex: Banks’ Dubai exposures - Nov-27
Opinion: Reality catches up with the Gulf’s model global city - Nov-27
Nakheel’s creditors dash to minimise damage - Nov-27
Abu Dhabi expected to prop up smaller brother - Nov-27

Hmm ... a scrap of the most inhospitable, useless land on the planet somehow convinces the world that it's rich simply by fiat. It goes on a spending spree to prove it. It falls flat on its face. I suppose that won't stop people from being shocked and awed.

Merriam-Webster defines a Mirage as:

... 2 : something illusory and unattainable like a mirage
synonyms: see delusion

Get it? A mirage? In the desert?

How's this for a rule, space cadets: nothing times any amount of leverage is still nothing. Remember that next time you are considering what to do with your kids' inheritance.

What Will Tomorrow Bring: Chinese Reverse Migration

As I blogged a while back, China's key success factor, as well as competitive advantage is it's access to a nearly-unlimited pool of unskilled, impoverished labor.

When the US needs more cheap labor, we turn a blind eye at the southern border for a while. When China needs the same, they simply open the tap slightly by granting a few thousand (or million) migration permits allowing poor western farmers to migrate to the cities in search of menial jobs, at which they're assured to make triple what they could in their home village. You see, in China, you must have a permit to live in the affluent cities of the coast.

As we've seen time and again in history, and as Marx and Engels were kind enough to highlight, growing income disparity pisses off the less fortunate. As such, there has long been fear (as Deng was acutely aware) that coastal modernization, liberalization, and the consequent wealth creation might ignite a repeat of the People's Revolution. Hence the restrictions on the mobility of the peasant class. Conventional wisdom holds that the only way to avoid revolution is with political reform and liberalization. However, the Chinese commies have so far avoided making any painful (for them) changes. Instead, whether intentional or by necessity, the government has allowed a continual trickle of peasants to flow east to partake, thus releasing just enough steam to keep unrest down to a manageable magnitude.

For those migrant workers lucky enough to be allowed into "the city," the transition must arouse a mix of ambition, hope, confusion, and humiliation. Up to that point, they have led traditional agrarian lives just as their ancestors had for hundreds of years. Then suddenly they find themselves witnessing first-hand the "foreign" trappings of wealth being played out on Chinese territory ... and by (Fendi-clad) Chinese. This is a lifestyle they never aspired to ... until they arrived in the city. But once they're exposed to it, this lifestyle must become a thing to covet, or at least worthy of animosity. Unlike America, however, the Chinese government makes it clear that migrant workers should not hold such aspirations. Their proletarian lot is fixed. They are to work. The caste system is alive and well in towns like Shanghai and Beijing.

At least the work was always there ... and at least these people could count on sending money home to make their families wealthy by local standards ... to be enjoyed when (if) they ever reunite. At the same time, they've been keenly aware that this right could be revoked by government fiat. Between them, these two forces have maintained a strong incentive for migrant workers NOT to rock the boat.

Oddly, the world financial downturn may grant them their wish. As China's growth rate has slowed, it's demand for incremental labor has evaporated. For the first time since Mao, unemployment is shockingly on the rise. Keep in mind that "official" numbers never count the western farmers, so the conclusion is that this unemployment spike is happening on the coast. That means workers who have migrated east in the last 10 years are, for the first time, not able to find work.

Some may choose to return home to their villages, as they always planned to do. However, others may have to go against their will. While it's denied by the government, unemployed migrant workers quite often have their permits cancelled by the government. This forces them to return home or go underground. It's a tidy way for the commies to keep unemployment just where they want it.

The government's tea-leaf-readers have suggested that they may not be able to count on a quiet reverse migration this time around. It is possible that critical mass of disgruntled migrant workers may choose to stand up for themselves. This plays into the prevailing theory that an increase in Chinese unemployment might unleash a wave of pent-up social unrest. As we remember from 1989, China doesn't like unrest.

And that's why they've taken the unprecedented and fascinating Keynesian steps to stimulate the economy such as subsidizing private enterprises to take on (or at least keep) workers they don't need. These are the same enterprises the government only grudgingly allowed to emerge ten years ago. Quite an interesting turn of events!

Train Station photo credit: AP via AFP/Getty

Follow Up: Yeah, What HE Said!

Fear mongering, China style:

“I have lived for three-fourths of the last century, and I can tell you with certainty: should China embrace the parliamentary democracy of the Western world, the only result would be that 1.3 billion Chinese people would not have enough food to eat.”
– Jiang Zemin, President of the People’s Republic of China (1993 to 2003)

I guess Greenspan and Jiang will just have to agree to disagree.

残奥会倒计时一周年晚会 刘德华演唱 ... Inharmonious, Even in Chinese

My second-ever blog post talked about what I thought was wrong and right with China. Eighteen months later I visited the country for the first time and posted a follow-up blog based on what I saw.

Now, more than 3 and a half years later, they've made incredible and undeniable progress, as we all knew they would ... It's the old "damn the torpedoes, full steam ahead!" Unfortunately, those torpedoes are bigger, more numerous, and closer than ever before. Every day, with every move, a few more torpedoes crash into the Chinese hull. From time to time, they wander into storms and scrape reefs, but for now their charge is relentless, most visibly over the upcoming weeks as we all watch their Olympics. We will ooh! and aah! and some will whisper "they've beat us!"

But hold! Each impact, scrape, and squall takes its toll. We need look no further than Newtonian Law (applied to Economics) to know that SS China's rate of progress necessarily and permanently slows every time it runs across resistance. Each battle scar makes the craft slightly less hydro-dynamic. At some point, the Chinese people will tire of the turbulence and demand a smoother ride. Eventually, they'll realize that they need to modernize and reinforce their craft to make it long-lasting. All of these will inevitably slow their progress.

At the end of this blog, you'll find a table of the main torpedoes currently in the water and pinging. I list what's wrong and what's right with their response to each over the last few years.

As I've said before, it will take China a hundred years to fully recover from their current barrage-laden charge, to repair and upgrade their craft, and to find the safe, stable, deep and open waters where "We" (the US, Japan, and Europe) spend most of our time. We've been through the gauntlet already. We've forged much new territory and it has never been a smooth ride. Today, our people want a cautious hand at the wheel in order to foresee and prevent disturbances. We want a sure financial return on our investment. Plus, we want low costs (financial, political, ecological, and human). All of which explain why we no longer have China's appetite for showing off.

Chinese may think they can "control" their way to a permanently elevated cruise speed. Millions of ex-Communist technocrats have found that they can apply old Marx and Engels to a concept very de rigeur in Western business: performance metrics and control. This has been employed to tremendous fanfare in preparation for the Olympics ... and also to impressive effect. Today, those directing the Chinese economic ship are not in it for the money, but for the power and the growth.

At some point the populace will demand a bigger and more assured share of the spoils. Maybe even a say in how things are done. Someday, China's government will have to start listening to their people and considering the human side of their choices ... So far, they've shown their tone-deafness in this area. No wonder: these are "softer" criteria. It's tough to measure, control, and set targets for national unity or happiness. ISO has no international standard for maximization of human potential ... yet these are all critical once the voice of the people must be considered.

What are these soft criteria? I'm giving a stratospheric view of very human-level concepts. Let's swoop down and get a little more concrete with a few very human tales:

• Wu Ping and the Nail House: The story of a government-anointed real estate developer's battle against a peasant family for their hovel and land, complete with scandal and standoff. It ends with a wrecking ball for the hovel and a phantom payment for the peasants. Phantom because they mysteriously disappear before the money can be paid.


• The Journalists, the Censors, and the Spies: Before they even arrived, foreign journalists had something to gripe about. It came to light that China (with the complicity of the IOC) would be censoring their Internet connections, in contradiction to earlier promises. More insidious, perhaps, is the US Government's warning that visitors should avoid taking their cell phones and laptops to the games to avoid the risk that their devices might get infected with government-sponsored invisible spyware.
  
• China's Special Woebegone Games: (finally, an explanation of the blog's title!) The stereotype is that disabled people in China are hidden to avoid shame. There is no ADA in China. Worldwide, Paralympic athletes will take every opportunity to tell you they want no special treatment. Their event is about self-sufficient, highly trained athletes in ruthless head-to-head competition. It is NOT about creating a fantasy land of love and self-esteem where everyone is a winner. That's the Special Olympics. Which is why they're none too excited about the Chinese Paralympic Committee's official theme song "Everyone is Number One" ("残奥会倒计时一周年晚会 刘德华演唱"). Not to mention they've one-upped our cultural icon Garrison Keillor's Woebegone Effect ("Welcome to Lake Woebegone where ... all the children are above average.")

Torpedoes in the Water!!

If I were captain of SS China, these are the issues I'd be losing sleep over:

What Type of Investors are SWFs

News today that QIA and another Qatari SWF will become Barclay's largest shareholder. Close behind are the SWFs of Singapore and China.

This really represents the nexus between my latest Idle Shareholders blog; my recent discussion about SWFs in Follow Up #3: You've heard of the Illuminati, right? and my coverage of Boone Pickens' concern in Follow Up #3: Power. Perhaps we've found the epicenter of my own personal blogosphere.

The action, itself is nothing earth-shattering. SWFs have been on the prowl for quite some time. The intensity of their hunt has grown just as rapidly as the price of oil. Banks have been on the rocks for over a year. Not surprising, but it calls our attention to interesting questions:

What type of investors are SWFs? Will the QIA be absentee like your average mutual fund manager? Will they be politically activist? Will they quietly drive the company? If so, toward what goals? Stability? Sharia Law? Profitability? Long-term or short?

Will the US be the next England or Rome? If $5/gallon gas isn't enough incentive for us to get off foreign oil, how about the realization that we're giving other countries the money they're using to buy up our (economic) treasures. Middle Eastern and Central Asian countries are getting rich off our insatiable demand for oil. They're awash in Dollars and Euro and must find a productive place to invest. Hence the SWF boom. Happy serendipity for them: US stocks are all on fire sale. If they own our most productive enterprises ... they own the future revenue streams which those enterprises produce. We labor and they profit. Meanwhile we exhaust our remaining wealth to maintain our world influence. One day we wake up as England circa 1950: Broke and Inconsequential.

Will we be able to respond? Hopefully, arguments like mine above will scare many people into looking for a solution. I'm chronically optimistic about the US and our ability to respond in the face of challenge. We have resources of all kinds ample for the effort. Being a democracy, though, we have to go through a period of cacophony and debate where suggestions are raised, debated, and informally voted on.

One popular inclination will be to suggest we take our toys and go home ... hiding behind a wall of protectionism and xenophobia. Prevent them from coming here. Prevent them from owning our shares. Unilaterally refuse to recognize their ownership of our assets. This is Iran's favorite trick. Only if we want to end up like them in 50 years should we pursue such an option.

Another popular inclination will be to hand the whole problem over to governments. Socialism for everyone. In fact, let's make a single worldwide communist state so that we can steal China's and Qatar's wealth to feed our starving faces.

Surely many will say "that's capitalism!" and roll over on their backs to show subservience to the inevitability of the markets. This would be nothing more than an excuse. Capitalism is not Imperialism. Empires fail when freedom is removed (more on this coming soon to a blog near you!). Capitalism is survival of the fittest ideas; it's a framework for making decisions (another blog coming attraction!). The true capitalistic response to a challenge like this is counter-attack with better ideas. This shouldn't be hard. Countries like Qatar, Saudi, Russia, Iran, and even Chile are not becoming wealthy on the backs of a million citizen-entrepreneurs with a hundred million value-creating ideas. To the contrary - their wealth comes from the lucky happenstance of living atop a commodity we all want.

As I am wont to do, I'll leave you to cogitate on these for a bit. I'll be back shortly to share my thoughts.

The Impact of Energy Prices on the Rest of the World

We're all justifiably concerned about increased energy prices. Yeah, it sucks to pay $75 to fill up your car just so you can drive to work every day. Yeah, it sucks to pay $500 for a flight to Vegas for the weekend when it used to be $199.

Yeah, more importantly it's running US businesses into the ground, causing stagflaton, job loss, and a steady leak in our national wealth. It may even lead us into new wars.

It may toss the US, Europe, and Japan into recession and your 401k may look anaemic for a while but there's no reason to worry that either will not come back. Just be thankful you're not in charge of a rapidly-industrializing country like India, China, Indonesia, or Malaysia.

The recent success of these countries relies entirely on the shift from subsistence agriculture to low skill and energy-intensive manufacture for export. As Thomas Friedman says till he's hoarse, the incredibly low cost of long-haul freight enables their success by allowing them to manufacture cheaply and then sell where prices are high (=in the US, Japan, and Europe).

Here in the US, we have used sophisticated financial leverage (=borrowing) to throw fuel on our economic fire. In industrializing countries, they use the more direct means of government subsidy. Via price controls, via controlled exchange rates, or via direct subsidies, all these countries attempt to deliver cheap inputs (especially energy) to their "national champion" businesses.

The most sensical among the subsidizers see it as a temporary way to vault their countries into the league of rich nations. The less admirable do it to retain their political power. For evidence of this look no further than the 12 cent gas in Venezuela.

Regardless of the motivation, these subsidies are quietly bankrupting national governments. India and Malaysia are but two examples of countries who have recently been forced to decrease their subsidy on oil. Malaysia recently raised gasoline prices by 40 percent and plans further increases in the future. The economic impact won't bee seen for a few quarters, even in countries which are not so astute at cooking their books (ahem - China). Eventually, these governments will have to admit that they cannot continue to be the buffer between the world economy and their own. Oil subsidies will not be the end, either. Governments will have to admit they can no longer afford the luxury of other economic accellerants such as tax credits on businesses.

Moreover, businesses which have become successful (but dependent) on the back of cheap energy and favorable fiscal treatment will face a tremendous test. Most of these businesses are only as old as the current boom. They've never felt the pain of an economic downturn, which explains why most never saw the need to put safety nets or buffers in place. These businesses will close. Their entrepreneurial chiefs will be fine, having squirrelled away for a rainy day. The labor force, on the other hand, have also grown up in the boom and will be caught out.

On a macro level, these countries will have to admit that their heady growth is going to dip. I see the current credit/mortgage and energy/inflation crises as a testament to the robust, large, open and free Western economies. We will absorb and we will rebound. Industrializing countries, including India are going to have a much rougher time of it.

Fiscal crises inevitably lead to political crises. People will riot when the price of their heating and cooking oils goes up. They will get violent when increased transport costs cause their food prices to increase. It will be an extreme challenge for leaders in much of Asia and South America to maintain their positions of power. Due to their past propensities, it's safe to assume socialism will present itself as a savior, and many people will take that bait.

The question for countries and businesses is: what can they do about it? Some suggestions:

• De-industrialize in favor of Western-style virtualization and services
• Raise prices (at the risk of losing competitiveness)
• Finally invest in efficiency over volume
• Liberalize to become more robust
• Go green. We're seeing hints that China wants to become the greenest country on the planet ... sheesh they have a long way to go!
• Find closer markets
• Shift to cheaper, low-friction transport (boats and trains instead of trucks and planes)
• Ally together in an attempt to gain the necessary economies of scale
• Ally with nearby developed countries (think NAFTA and EU)