16 October, 2021: Brief Update on China and Taiwan

China’s energy crisis went from bad to worse on Friday with coal prices hitting another record high. With winter now on the horizon and high oil and gas prices forecast, China is now in talks with US LNG suppliers to secure long term contracts. Beijing has been moving frantically to turn the tide in China’s favor. Domestic coal output was raised, and supplies to industries that use high levels of coal have been cut. The current energy crisis is having a detrimental effect on the Chinese economy, which is also suffering from crises in sectors aside from energy. Monthly industrial production is weakening and the uncertainty surrounding Evergrande continues on. These factors weigh heavily on investors and the Chinese government.

Meanwhile, on the other side of Taiwan Strait, the Taiwanese government wants to accelerate the delivery of F-16 fighters. 22 aircraft were purchased in 2019 and normally it takes an average of seven years for the delivery to be completed. Given the recent surge in tensions with China, Taiwan has inquired about the possibility of an early delivery.

China’s Evergrande Debt Crisis

The debt crisis now threatening to overwhelm property developer Evergrande arrives at a decidedly inauspicious time for China. With the national economy continuing to slow, the prospect of an economic crisis centered on a Chinese entity is quite real. Global markets sense it and investors are preparing for the ripple effects. Last week, Fitch Ratings agency downgraded its forecast for China’s economic growth, citing the slowdown in the property sector as the prime contributing factor. Evergrande has been in trouble for some time now and its current problems did not arrive out of nowhere. In fact, alarm bells have been sounding for years over the state of the Chinese property market.

All eyes are focusing on Xi Jinping now as it becomes clear the Chinese government will likely have to intervene. To put it simply, Beijing cannot stand on the sidelines and permit a chaotic default where citizens lose large sums of money. Allowing that could cause a ripple effect in other sectors of the national economy, another prospect Beijing cannot allow. As a hedge against a worst-case scenario coming about, the Chinese government has ordered local officials to prepare for a potential Evergrande collapse. Local governments and Chinese-owned enterprises are being directed to intercede only if Evergrande is unable to meet its obligations. Some Chinese officials have described the measures as storm preparation.

How Beijing handles the crisis in coming days will set the tone for market behavior. If investors are encouraged by the way the Chinese government handles the Evergrande situation it will minimize the damage and perhaps instill a burst of positivity to China’s national image, which has absorbed considerable damage over the past 18 months.

Talking Turkey: 3 August, 2020

Turkey’s reach has been exceeding its military, and diplomatic means in recent months. Erdogan’s efforts to deepen its footprint in the Mediterranean, and Middle East is placing his nation in real danger of becoming overextended at some point in the not-too-distant future. The occupation of northern Syria, decisive intervention in Libya’s civil war, and seeking economic advantage in the natural gas-rich waters of the Eastern Mediterranean are the better-known Turkish adventures of late. There are others going on in places like the Horn of Africa, and in the Persian Gulf region too. Erdogan has been assertively going after perceived threats and enemies to Turkey, while simultaneously prowling after economic interests that hold the prospect of a jackpot level payout down the road.

Unfortunately for Erdogan, there are two factors coming into play which threaten to hinder, or perhaps entirely derail Turkey’s ambitions at some point. As mentioned in the above paragraph, Turkey is running a very real danger of overextending itself in the near future. The Turkish armed forces are stretched thin. Since the failed coup in 2016 Turkey’s military has lost thousands of capable officers to show trials, and purges. Operations in Syria and Libya are costing billions of dollars, and Turkish troops are taking losses in both places. In short, the Turks cannot afford a new military commitment now or in the near future.

The second factor working against Turkey’s regional ambitions is the absence of a clear vision. Ankara’s moves certainly haven’t been guided by ideology, or political alliances on the international front. This is where Turkish actions, and ambitions become confounding as it is working with its allies and friends on some fronts, while directly opposed to them on others. Syria and Libya are two prime examples. Turkey’s military incursions into Syria were frowned upon by many of its NATO allies. However, many of those same nation-states fully support Turkey’s intervention in Libya. In recent years Ankara has deepened the relationship between Turkey and Russia at a time when tensions between Moscow and the West has skyrocketed. The Turks committed to buying SA-21 surface-to-air missiles from Russia which forced the United States, to cancel the sale of F-35 Lightnings to Turkey.

Compounding Turkey’s burgeoning issues on the foreign front is the current state of the Turkish economy. Turkey is working to prevent a currency crisis in the face of economic turbulence brought on by the COVID-19 pandemic. That topic will be touched on later in the week as we hopefully have the opportunity to expand the discussion on Turkey.

The Coming Shape of US-China Relations?

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Relations between the United States and China were trending downward even before the COVID-19 pandemic appeared on the horizon. The Trump administration’s China policies have been a far cry from those of preceding administrations, and these policies have played a prime role in creating the toxic atmosphere between the US and China. Now, I am not a China apologist or anti-Trump pundit by any stretch of the imagination. Quite the opposite in fact. So when I say that the current administration’s policies have helped bring about the rift in relations, I am not assessing blame. Again, quite the opposite. 😊

From the start of President Trump’s first term he has played hardball with China on practically everything from trade disparities, to geopolitical matters. The Trump administration’s approach to China is a striking contrast from previous administrations. Whereas the Obama and Bush administrations chose to handle China with kid’s gloves, the Trump administration has come out armed with brass knuckles and swinging. Washington’s primary objective has been reestablishing strategic and economic parity between the US and China.

The hardline US stance shook Beijing, and the Chinese government has been on the defensive practically since January, 2017. In many regards it has been trying to play catch up to the Trump administration in the geopolitical, and economic arenas but without much success. To complicate matters even more, China has been contending with alarming domestic issues even before COVID-19 came into existence. Economic growth was coming to a halt for the first time in decades. This has been exacerbated by the global pandemic, and now it appears the Chinese economy will almost certainly shrink for the first time in decades. Hong Kong erupted in protests last June over an extradition bill allowing the transfer of fugitives to mainland China. Months of protests and violence followed, transitioning to pure political upheaval for a period of time. The pandemic has brought an end to the protesting, but it is temporary. When the world returns to normal the protests will resume again. China has yet to figure out an effective solution to the Hong Kong matter.

The global pandemic has also contributed to the emerging new dynamic in US-China relations. Washington has challenged China’s handling of the initial outbreak, accused it of undermining the World Health Organization, and questioned the numbers of COVID-19 cases and deaths released by China. Beijing’s response has been a mishmash of propaganda, thinly veiled threats, and attempts to distract world attention from the case Washington is trying to make. When the world emerges from the global pandemic, US-China relations are going to be centerstage. For better or worse, the new form of the relationship is presently being shaped by current events. If the US-Chinese dialogue in recent weeks is a sign of what’s to come, relations could be looking at a deep freeze in the not-to-distant future.

Global Recession Fears Hit Wall Street Hard

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Fears of a global economic slowdown reached Wall Street today. The Dow Jones Industrial Average dropped 800 points during trading today. It was the fourth largest point loss on record, and by far the worst of 2019. It was a perfect storm of news and events that came together to wreak havoc on Wall Street today. Reports of the slowest Chinese industrial production rate in 17 years, and that Germany’s economy actually shrank last quarter fed into fears of a coming global recession. Yet what really sank Wall Street today was the inverted yield curve, which historically signals an approaching recession. Just when that recession may arrive is unclear. It could be within months, or up to two years off in the distance. Asian and European markets also suffered considerable losses.

The current geopolitical climate, and the impact of the US-China trade war also played a key role, and will continue to. Aside from the trade war currently underway, Hong Kong, and Iran are two areas investors are watching carefully. Events earlier this week in Argentina are also on investors minds. A loss by the incumbent president in the primary election touched off a near economic route and brought forward investor concerns that Argentina could default on its IMF loans at some point in the coming year.