Wargamers view of Shanghai market jitters

Rumors of Chinese economic policy changes are planted, never leaked, and smell of orchestrated geopolitics rather than mere economics.  This post looks at the implications of the Shanghai market correction from the perspective of an imagined Chinese economic wargamer, looking five years back and forward.

A key assumption is that China is using economic methods to counter US military power, and key conclusion is that Australia is about to become economic and political cannon-fodder.  It’s a scenario I’ve been outlining for a few years, and unfolding faster than I imagined.

When reading this, remember that most arguments about the US economy also apply to Australia, except that Australia has raw materials that China wants, and that Australian consumers form an insignificant market for Chinese manufacturers.  The value of the Australian dollar is maintained by having a higher interest rate compared to the greenback.

The game so far…

The low Yuan with the Chinese practice of using the proceeds of US purchases to buy US bonds, supporting the greenback at higher values than warranted by US indebtedness, has encouraged US consumers to keep buying Chinese goods on ever-extending lines of credit.  Unlike Europe, the US lacks innovative products, so with high relative costs, US manufacturing capacity has slumped.

The shape of the end-game

Were the Yuan allowed to rise to "natural" levels against the greenback, and China were to call in US debt and offload their huge reserves of US dollars, price increases in consumer items would hit US/Oz retail spending, then the service industry, the greenback and stocks, with increasing interest rates and a positive feedback loop, crashing the US/Oz economy (and the funds available to the US military).  Checkmate!

China doesn’t want this,… yet.

The medium-term game-plan?

US consumer spending (preferably on credit) is needed by China only for two to five years, until Asian consumer spending becomes the largest market, and trans-Himalayan trade reaches 30%-40% of trade for both China and India.  After that, China can pull the plug on America whenever it likes.

Offsetting this is the value to China from an American military buildup in Slavic Eastern Europe (countries not yet formally part of the EU), and to a lesser extent the ‘Stans, to contain an increasingly quasi-fascist but energy-rich Russia.  The last thing China wants is Russian-US co-operation.

China can encourage good relations between anti-US Iran and wannabee-European Turkey, allowing oil to flow to Europe from Iran and the Caucasus, further insulating a grateful Europe from Russia’s hydrocarbon standover tactics and decreasing US influence in Turkey.

China wants a blatantly dominant position at all negotiating tables, at the UN Security Council, the WTO, for climate change, Taiwan, the militarization of space, controlling US military adventurism, but most importantly, the pricing of raw materials China is buying.

The next year

Political control of the Chinese economy will allow a smiling dragon to have the credible threat of slowing down construction and demand for raw materials, so US companies will lobby US politicians to take more conciliatory positions at all negotiations.

This threat also allows China, as the major buyer, to turn the seller’s market in minerals to a buyers market, making countries like Australia lower the prices of iron ore and coal.  Resource companies will be forced to take the approach of "half a loaf is better than none".

To do this, China needs assurances that US/Oz markets know they are sensitive to sneezing dragons.  The rumors of regulation of Shanghai markets were merely a way of testing the water, and the results were exactly what Beijing wanted.

Another Shanghai tremor before June 2007, well-timed and large enough to mess with end of financial year figures of Western companies, would drive home the message that everyone has to keep China happy.

Meanwhile, expect a "Mr Nice-Guy" China to have more diplomatic successes, such as the recent deal on North Korea.

When you’ve got them by the balls, hearts and minds will follow.

What of Australia?

With China constraining resource prices, together with the blow-out on our national credit card, Australia will be caught betwen increasing interest rates to support the dollar, or rising prices of imported goods if the dollar drops.  Either way, Australians will have to tighten belts, with a crash in retail spending, and implosion of the services sector.

Because our consumption of imports is insignificant compared to the US market, China might even see crashing Australia as a useful practice-run for later attacks on the US economy.  As a nation only capable of supplying raw materials, Australia would be as vulnerable as a part-time worker happy to get extra hours no matter how low the hourly wage.

Australia could easily move into recession by early 2008, particularly the eastern states, with little chance of recovery, regardless of who wins the Federal election – the only difference to Australians being whether they have a government liable to keep the safety net, or decrease benefits to an increasing number of poor and allow employers to be even more rapacious.

Australians lose.  The rate of decline can be slowed by supporting Chinese policy, or as John Howard puts it, "being an honest broker between the US and China". Fat chance of that with all the Echelon bases we have!

In reality, Australia will have to act like a bitch to two pack leaders, each wanting to be top dog and getting their jollies at the same time.  It’s not going to be a comfortable ride.  Short of an overnight transformation into Barry Jones’ "Clever Country", a southern-hemisphere Finland, we’re screwed.

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UPDATE: See also: UN Press Conference 2007-05-30 MidYear update of world economic situation, prospects which is concerned about unsustainable US debt, and the associated World Economic and Social Survey 2006

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