Back in the February 2016 report, the key intelligence question "What Is The Czar's 'Core' Strategy?" was asked.
(Source: Seeking Alpha)
The name 'Czar' was used to describe President Xi because clear parallels were developing between his behavior and that of the current Czar of all the Russians. It has recently emerged in the public domain, that the Chinese Communist Party is about to depower the Politburo Standing Committee, the custodian of China's collective leadership system; and concentrate executive power in one supreme leader, ahead of reshuffle of personnel at the 19th Party Congress. President Xi Jinping, who will celebrate the 10th anniversary of his inauguration in 2022, therefore appears to be paving the way for a prolonged one-man rule (of his own!) by breaking the practice in which the Chinese leader is replaced every 10 years. One China policy, will be supplanted by One Leader policy which effectively removes the One Party connotation associated with the said One China policy.
President Xi Jinping seems to adopting the modus operandi of President Putin. The Chinese move to a Presidential system, rather than the current party system, also seems to be linked to the dropping of the fixed 10 year term for the supreme leader. The President effectively becomes a Fuhrer and the party and its leader swear allegiance to him above all else.
The Fuhrer analogy became a little more apposite when it was announced, in conjunction with the signal about President Xi's One Leader initiative, that a more effective group of "Storm Troopers" will be commissioned under his enforcer Wang Qishan to enforce control. This announcement took the form of a communique from the Standing Committee, informing that a pilot program for reforming China's supervisory system will come into force in order to strengthen the crackdown on graft.
This pilot enforcement program will set up new supervisory commissions in Beijing, Shanxi and Zhejiang provinces, by integrating their respective governments' supervision departments and corruption prevention bureaus; as well as the divisions for handling bribery, dereliction of duty and prevention of duty-related crimes under their People's Procuratorates. The pilot program therefore forms the perfect legal cover for a re-enactment of the Night of the Long Knives, should it be required.
The disturbing national socialist undertones and overtones, associated with this political movement, in the Eurasian sub-continent have not yet fully begun to reverberate around the democratic capitals of the world. Currently, said capitals are dealing with their own populist insurrections and attacks from Islamic fundamentalists. As usual, the West is fighting the last war whilst the new existential threat awaits discovery in the media.
(Source: The Oligarch Kings)
When the West wakes up however, President Trump will doubtless be chosen as the man of the hour to defend Western democracy from this new existential threat. Given his campaign posturing isolationist, populist and protectionist rhetoric not to mention his admiration for President Putin, it remains to be seen if he will answer the call or come to some form of accommodation with these putative Eurasian dictators. During the election campaign, President Trump pledged to reset the relationship with Russia created by President Obama. Thus far he appears to be holding true to this pledge. He has played down the importance of the Russian interference in the election process, even going as far as to praise President Putin for being smart. President Putin responded to Obama's sanctions and expulsions, in retaliation for the alleged election interference, by opening up the Kremlin to American schoolchildren; an act which drew fulsome praise from President Trump.
(Source: The Times of India)
The Times of India recently published an interesting perspective on this Western awakening and what it portends for 2017. It is fair to say that this perspective maybe be somewhat biased, by its view of what is good for India, but it is highly informative in an objective way none the less. This Indian perspective frames current geopolitics in terms of the Treaty of Westphalia which set diplomatic limits to sovereignty and influence in other sovereign entities. This view informs that President Trump leads a rapprochement and understanding between NATO and Russia, which then allows America freedom to deal with China. Since India is on friendly terms with both Russia and America, it's good for India. Taking out what's good for India, to create an objective perspective, one can still see rationality in the thesis.
It sounds like the kind of potted history lesson in reverse that Henry Kissinger gave to President Nixon, when the American foreign policy created the Chinese monster that it faces today, out of the political expediency which prioritized the Soviet Union as the existential threat. President Trump should be forgiven for his misgivings about foreign policy wonks, especially the Globalists, if he notices how Dr Kissinger's real time suggestions have a habit of creating future problems that he is then asked to come back and solve much later. This cynicism is apparently lacking at present, since it is rumored that Dr Kissinger will be given a special advisory role by President Trump. Evidently, President Trump wishes to deal with the present and leave the future problems created for some later administration. Such is the nature of the presidential cycle.
(Source: Seeking Alpha)
The invisible hand of geopolitical nuncio Henry Kissinger also seems to be present in the unfolding Russian détente; just as it has been seen in the developing relations between President Trump and China in a previous report.
By no coincidence at all, Dr Kissinger was lately seen by European intelligence services in Europe working on a strategy of cooperation between President Putin and President Trump. Thus far, Kissinger's work on relations with Russia seems to be bearing more fruit than that with China. The common denominators of Dr Kissinger with a convergence of Russian and Chinese leadership models to follow an imperial model are noteworthy; and reflect a drift back towards echoes of a Cold War pattern of international relations. This is clearly the environment in which Dr Kissinger was once in his element. The mutual choice of his presence as an agency of dialogue between the three main players, suggests that this is the way that they would like it to play out in real time.
The recent signals that President Xi Jinping is adopting President Putin's governance model, further supports the original use of the word Czar and the framing of his actions in Russian imperial terms. Allegedly the Communist Party is drafting plans to move to a Presidential system from a party based one. To answer the question posited back in February 2016, the "Czar's Core Strategy" is to become President for life.
A further sign of the concentration of power in President Xi came with the news that PBoC Governor Zhou Xiaochuan will step down, rather than face the push in next year's personnel shuffle. Shandong Governor Guo Shuqing is expected to replace him as PBoC Governor. Mr Guo is known for extemporising, often into topics that are irrelevant. Such a predilection should add for some increased volatility, if he strays whilst addressing the issues of capital flight and the growing crisis in the banking sector, which Governor Zhou tried his best to address with practical candor.
Zhou's departure also further weakens the influence of the "Shanghai Clique", to which he belongs, that is led by former President Jiang Zemin. It can be noted that the drift towards One Leader national status, is in some ways a natural consequence of the strategy to remove the interests of various conflicting groups in the leadership of the country. Streamlining the leadership and governance process in this way, has the positive impact of removing factional squabbles that vitiate against the country's progress in general. President Xi's purges in the name of anti-corruption have a similar impact.
There is a school of thought out there, which believes that the streamlining of the Chinese leadership is actually a strategic preparation for an inevitable confrontation with America. The probability of such a confrontation has been elevated by the election of President Trump. Strategically, a streamlined command economy in China may be able to sustain any trade war; and come out of such a war of attrition in better shape than the democratic process in America. This bleak view of relations between China and America was recently posted in an investor newsletter to Pine River's China Fund investors. Without trying to handicap the winner and loser in such a trade war, the undoubtable conclusion is that both would be significantly weakened by any such trade war of attrition; which would set them back significantly against all their global peers. Perhaps for this reason alone, there is great circumspection on both sides of walking the walk that goes with their current tough talk to each other.
The concentration of power process in China is also not without its own inherent systemic risk. The loss of natural checks and balances on the ultimate leader, may create a system that is inherently less stable. Perhaps most importantly for China watchers, PBoC Governor Zhou's departure is expected to significantly weaken the cause of structural economic reform along the lines promoted by neoclassical global thinkers. Governor Zhou's departure, combined with the recent replacement of the famous reformer Finance Minister Lou Jiwei, with a relatively unknown neophyte in global circles, is a double blow for those expecting economic reform along global lines. The risk of a replacement system, that is inherently less stable than the pluralist model (however corrupt) that preceded it, has therefore become an increased probability. Capital flight and capital markets weakness can be expected to continue under the influence of this declining reform narrative.
The February 2016 report noted signs that China was ready for a global currency accord and pegging of its currency to the US dollar. Since then, the yuan has slid to levels that are complicating domestic economic policy. A crisis in the capital markets and a knock on to the real economy, would deal serious harm to President Xi's attempt to gain greater political control. In fact, a crisis may be associated with him and play into the hands of his critics and enemies. Whilst noting this tactical risk to President Xi, it is important not to lose sight of the strategic agenda that he is following however.
Signs of this larger strategic agenda were visible in China's latest rebalancing of the yuan's trade-weighted currency basket. Once again, the weight of the US dollar was incrementally reduced to the benefit of China's emerging trade partners. More significantly, the yuan is strengthening against its expanding list of trading partner currencies, even whilst it falls against the US dollar. China's ability to run trade surpluses, with its ex-America trade partners, whilst its own currency appreciates against theirs is something that America has failed to do. Narrow focus on China's US dollar trade balance position, ignores the significant fact that the yuan is now behaving like a global reserve currency in its own right even though it is not freely convertible. The continuation of this gradual process, evinces China's strategy to completely circumvent the IMF's SDR basket regime and replace it with a yuan based reserve system.
To maintain this subterfuge and also to prevent it from unraveling through a disorderly yuan-dollar devaluation move, PBoC chief economist Ma Jun sought to downplay the situation. In order to maintain the vestiges of commitment to the IMF SDR regime, of freely convertible currencies, he tried to frame the recent regulatory interventions into the conversion of yuan to foreign currencies as "Not" capital control. The resetting of the annual $50,000 limit on individual currency conversions however suggests the direct opposite.
The current hype and hysteria about the value of the yuan versus the US dollar, are therefore headlines driven by an American agenda to reinforce the dollar based global trade regime. Whilst paying passing reference to this by moving to join the SDR basket, China is actively undermining it. President Trump's overt protectionist agenda if followed, will only accelerate China's move to create an alternative global trading system. If there is a trade war between America and China, then China's alternative global trading regime will soften the blow for the Chinese economy. The decline in the yuan versus the US dollar should therefore be looked at as a proxy for the decline in the relative importance of America for China, as much as any sign of a problem for the Chinese economy. President Trump's strategy to arrest the decline in the yuan, is counterproductive since it accelerates Chinese preparations for an alternative reserve system. President Trump's new director of the National Economic Council however understands the more nuanced situation perfectly; as well he should since his former employer Goldman Sachs was instrumental in creating it.
Gary Cohn's view on the value of the yuan stands in stark contrast to that of President Trump to such an extent that it is hard to imagine why he got the job in the first place. The President sees the yuan as undervalued whilst Cohn sees it as overvalued, or at least he did when he last spoke on the subject. Perhaps the yuan's slide versus the US dollar since he last spoke may have changed Cohn's view. Assuming that Cohn's view has not changed however, he clearly articulates the Goldman worldview that the firm was responsible for creating when John Thornton was its official key China hand. This hand worked carefully with another ex-Goldman key hand of Secretary Paulson in setting up the rules of the game under the "W" Bush administration, which are now up for a reset.
Cohn (and hence Goldman) sees both the US dollar and the yuan as over-valued versus their global peers, to such an extent that he believes that these other currencies should revalue or tighten monetary policy to reflect to correct the situation. This implies that he sees the dollar and the yuan as fairly valued relative to each other. Such an implication may therefore form the basis of the currency accord that this author thinks will form the basis of a trade agreement with China. The "Cohn/Goldman View", unfortunately for President Trump, still gives China the opportunity to pursue its alternative reserve system strategy. It does however give China such joint billing with America, that the incentive to pursue this alternative trading system which will encounter significant US hostility and undermining, is greatly reduced. In effect going forward, there will only be America and China politically and economically speaking. If America and China can reach an agreement by which they can trade exclusively with each other, they have very little use for other nations apart from the commodity exporting ones.
Thanks to the non-coincidental rise in global populism one could argue that the world is heading in this bi-polar superpower direction anyway, so a move to accelerate this process is only natural. Despite this inevitability, or rather manifest destiny, the latest acceleration will come as a great shock to other economies. The Eurozone for one will have such a massive shock that it may in fact fall into the waiting arms of President Putin! Whilst there are no outcome certainties right now, more will become clear soon; so that all probabilities must remain on the table for evaluation at this point in time. The world is currently on the doorstep of a major change though.
It now remains to be seen if President Trump is sold on the "Cohn/Goldman" big idea. Should such an agreement occur with China, based on the implications of this big idea, the trade wars of 2017 will be between a combined America and China versus the rest of the world. Such an outcome would come as a great surprise to many. China seems to be preparing itself for all outcomes, by adopting a flexible approach to both its domestic economic policy and negotiations with President Trump.
In the last report, the strategic decision to drop the 6.5% GDP target was observed. Whilst noting that this was a pre-requisite, to allow China to have greater flexibility in negotiating with and setting policy, in relation to President Trump's agenda, it was also viewed as a tacit acceptance by Chinese policy makers of their loss of the ability to stimulate economic growth. The dropping of the growth target is therefore not without a political cost to be born in order to achieve flexibility. To mitigate this cost, the PBoC has begun to set some kind of limits around the national policy commitment to growth, so that some vestige of an image of prudence and control remains. The abandonment of any growth target would leave perceptions and market reactions in the hands of speculators and foreign commentators, which could prove dangerously counter-productive.
PBoC adviser Huang Yiping started the process of framing perceptions of the tolerance limits of policy makers for growth, to avoid the dangerous speculative void, by opining that there should be a range between 6 and 7 per cent tolerance limits. This would put the current growth rate somewhere near the middle of this range, and guide perceptions and monetary and fiscal policy expectations by the markets going forward. Policy would then be viewed as neither too stimulative nor restrictive.
Mr Huang framed the reduced growth target in the terms of structural economic reform, in order to give it the positive interpretation by commentators. In his opinion, the industrial overcapacity associated with the past growth curve should now be removed, because there is enough growth in the industrial sectors of the future to do the heavy lifting. This transition and restructuring phase will inevitably be a volatile one, requiring the wider tolerance bands for the aggregate growth effect. His logic is seductive, however it stands in stark contrast to President Xi's current strategy of maintaining the overcapacity in old industries in order to register any economic growth at all and also to provide the societal benefit of employment for the obsolete workers.
(Source: Seeking Alpha)
In addition, it had been noted in a previous report that China had deliberately created scale in its old industries in order for them to remain globally competitive on price. Presumably the election of President Trump and the threat of trade wars have made this strategy obsolete itself, thus requiring a new approach involving restructuring. Whatever the cause for this change of opinion, it is not yet clear that President Xi has embraced the slashing of spare industrial capacity and jobs at this point in time.
(Source: The Red Wire)
The space-race between China and America, identified in a previous report, officially blasted-off with the recent publication of China's White Paper on its Space Strategy for the next five years. This should be viewed as an example of the industries of tomorrow that PBoC adviser Huang Yiping is advocating a transition towards. This sector may still be too much in its infancy to do the economic heavy lifting however. In addition it requires a smaller yet more highly educated workforce.
Whilst framing its intentions and capabilities as friendly and cooperative for the peaceful exploration of space, there was a reference to national security and economic security issues in the paper. The previous report had observed China's promotion of its Space Strategy out of strategic necessity to develop its high-tech industries and hence economic growth of the future. The White Paper was consistent with this thesis. China's Space Strategy is "strength in size"; which clearly evinces the scope and scale of state spending that is going into this initiative.
All eyes will now be on President Trump's inaugural speech to see if he takes up the challenge. Despite the bi-partisan rancor which Democrats promise to unleash on his proposed fiscal stimulus plan, a new space-race could be something that unites consensus through fear of China. President Obama wants to take America to Mars circa 2030. President Trump must now decide if this journey will be via the Moon, in order to deal with Chinese strategic focus on the dark side of this satellite as the driver of its Space Strategy. China's stated intention to land men on and plant its flag on the dark side of the Moon in 2017, out of the view of terrestrial observers, followed by a Mars probe in 2020 is not something that can be easily ignored by American strategists.
President Xi Jinping's New Year message was measured and avoided getting dragged into the rhetorical war of attrition that President Trump's social media invective provokes. Domestic policy will be more inclusive and distribute economic benefit and participation more evenly throughout society in terms of employment and housing affordability. There was no mention of structural reform here, nor was there a vision of the space race. On foreign policy, President Xi underlined the red line on maritime expansionist policy which remains non-negotiable. If President Trump does not counter with any Tweets specifically on the South China Sea, there remains sufficient goodwill and a plethora of other issues to negotiate and reach agreement on which will boost the prestige of both leaders.
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I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.