The Power of the Sino-Russian Alliance. Part II

Original can be found here: http://independenttrader.org/the-power-of-the-sino-russian-alliance-part-ii.html​

Goal of the Sino-Russian cooperation

First and foremost this collaboration has the political foundation but the economic part is also essential. After being isolated from a share of the European trade revenue Russia is in a bad spot. China due to the attempt to transform their economy from exporting powerhouse to one where consumption drives growth has to advance the relationship with Russia.

China has a great production-consumer base with 1.3 billion people. Question Beijing has to answer is how to transform the Chinese citizen from a saver to a consumer.  Low consumption resulted in 1/5 of the world population producing too much. Until 2014 the solution implemented was to acquire foreign government bonds – mostly American – to credit consumption abroad. This process has finished when the issuer’s bankruptcy risk increased.

The lion’s share of China’s production ends up in America or Europe but the economic crisis in both destinations results in a lower demand for Chinese goods. This is the reason to look for alternative markets, like Africa but this is not enough to balance demand that vanished.

Low demand across the ocean makes Chinese corporations fear for their existence. Differentiation of exports is the key to continuing Chinese boom and Russia is a great alternative. It is great but not perfect alternative as Russians don’t have enough purchasing power to substitute EU’s demand. China understands it very well but aims at solving that problem with many investment projects in Russia.

In 2015 trade between those two countries dropped from 90 bn to 60 bn USD y/y. It is estimated that in the long run it will grow to 200 bn USD per year. The potential is huge but any financial market turmoil makes achieving this goal very hard.

China in the face of crisis

The centrally planned economy reached a dead end. Lower demand makes titanic manufacturing capabilities work far from their maximum efficiency. This, in turn, makes an unemployment surge and social fabric is stretched. People ever more loudly point out that government’s policy failed them. This sentiment is a great chance for the US to incite riots, a coup or even a civil war. We all have seen it before.

The oversupply is not the only one problem Chinese authorities have on their plate. I’m thinking about a huge real estate bubble – it may be the biggest bubble of its kind in history. In just three years Asian economy used enough cement to match the amount the US used in the whole XXth century. Properties are expensive and developers do everything not to lower prices. Families of farmers were given flats in newly built skyscrapers after their properties were taken from them to build huge agglomerations. The majority of Chinese don’t have that much luck and to buy their own place they have to take a lot of debt on their back.

The debt is a factor that only slows down Chinese society transformation. It is possible that the government will have to restructure the debt of their own citizens especially with the unemployment surging non-stop. This situation puts a strain on the banking sector. For now, the government decided to buy a share of bad debts and to slowly extinguish unprofitable ventures. Unfortunately, when we see the scale of such intervention, deflating a humongous credit bubble cannot be done slowly.

How to solve this problem? A Chinese political hybrid of capitalism and communism may be useful here. The capitalism part is seen in ‘lower’ sections of the economy. People are free to have their own small businesses, street vending or any other small initiative which is far from vast government actions or development plans. The centrally planned part is everything which is ‘big’. The burst of the credit bubble is going to be easier to handle when debts of individuals, corporations, and banks will be arbitrarily written-off. This will give Chinese regime a clean slate to start over with a system backed by the gold standard. It can be possible thanks to enormous amounts of gold, bought right now through the SGE, amounting to annual global production. After the reset, everyone else will be left with worthless paper but China could be proud then of their infrastructure built with (written-off) debt and a lot of gold in their reserves. Of course, after public developers file en masse for bankruptcy there will be riots on the streets but then again we are talking about the top-down approach and the government can satisfy society with free properties they have built years before. The ghost towns will finally find their citizens. This is the big advantage over the Western economies where the state would have to cover losses of bankrupt developers.

The plan presented above is very much possible. The circles of Chinese authorities were joined by people like Hong Song Bing who understand threats and obstacles that led to Japan and other Asian Tigers’ failures. China has the upper hand as a result of a surplus gained in international trade all over the world.

If the EU revokes their sanctions against Russia in the future, there would be no match to the powerful Eurasian conglomerate. The business circle of both Russia and China receives hopeful messages from Germany aspiring to join Eastern superpowers. It is hard to tell whether Berlin can emancipate itself from the Washington’s control. The gravity from the East is becoming stronger especially after the Western policy was defeated by Russia in the Middle East. Also, the diplomatic dimension is just a series of Obama’s failures which is utterly uninspiring.

Poland as the US puppet

Poland is the most important country in the East flank of the NATO. It is situated in a place giving great potential for foreign policy games. The problem here is the negative sentiment towards Russia. Instead of trying and ride both horses, like Turks do to achieve the most efficient result, the Polish government tries to get a Western military presence on its own territory.

Poland should be a team player setting high thresholds for their allies because the risk it takes is an existential one. With nuclear weapon aimed at strategic targets in Poland from bordering Kaliningrad, Warsaw should develop its own military and economic potential under a pretext of strengthening the NATO. Simultaneous talks with the opposite camp could guarantee a position of a swing vote and a guaranteed spot at the winner’s side no matter who wins.

Thanks to that Polish people could have a chance to continue being a sovereign during a scenario when China, Russia, and Germany defeats the US. A victory of the Eurasian block is becoming more probable taking under consideration foreign policy problems that the US is facing now. Reasonable leaders just like investors never put all eggs into one basket. This attitude is lacking in the Polish government.

Summary

The Sino-Russian alliance is a fact. Both sides wish to escalate the level of cooperation due to the compatibility of their economies and a common enemy, which neither of them can beat on their own. The production capacities of Chinese corporation is the key here enabling projects like the “One Belt, One Road”. Even without war those projects can marginalise importance of the US in the spectrum of international trade.

The pillar of the strategy to fight with the US is the financial battlefield and dethroning of the dollar. It is thanks to the status of the currency reserve that gives the US the advantage. Washington without the dollar would be like Russia without oil and gas.

Source: pragcap.com

Just like history tells us, the status of the reserve currency is not given forever. As with any power – the abuse of it – is what follows. When authorities abuse their privileged position it leads to crisis and ends up with the status being taken over by someone else. It will be no different for the US. After 2008, when markets lost their connection with the real economy, the petrodollar became unstable with oil price crash, the US treasuries sale and Washington-Riyadh conflict.

Against what the US mainstream media may tell you, the cooperation of Russia and China is accelerating. This puts into question strength of the NATO and whether the conflict for the world dominance will eventually be played out just like during the Second World War in Europe or will the South China Sea be its battlefield.

Independent Trader Team