When we see a great man desiring power instead of his real goal we soon recognize that he is sick, or more precisely that his attitude to his work is sick. He overreaches himself, the work denies itself to him, the incarnation of the spirit no longer takes place, and to avoid the threat of senselessness he snatches after empty power. This sickness casts the genius on to the same level as those hysterical figures who, being by nature without power, slave for power, in order that they may enjoy the illusion that they are inwardly powerful, and who in this striving for power cannot let a pause intervene, since a pause would bring with it the possibility of self-reflection and self-reflection would bring collapse.” - Martin Buber

Our Konideo team has been interested in China for the past 5 years, when our own personal interests converged and eventually made us meet there. At that time, the Western world was still trying to cope with the crisis and China was gaining increased traction. The story of an economic miracle was attractive, and so were the prospects of a giant market with 1.3 billion consumers.

Still, through the amazing work of Michael Pettis, we rapidly understood that this ‘miracle’ was not much more than an old recipe first experimented from Japan (who in turn studied German and American economic development and theories). Worst, it seemed that only a few analysts truly understood the underlying drivers of growth: massive economic distortion led by financial repression, which translated into exports and then infrastructure/ real estate bubbles funded with cheap credit.

The world is now slowly waking up to the fact that China’s expected ascension may be more a mirage than anything else. The economic model is outdated and should have change 10 years ago and today’s Chinese politics is getting more obscure and unstable. It appears that President Xi wants to dramatically reform the economic model, but to do so he is willing to concentrate power equally dramatically, a paradox that is well noted in foreign media but not well understood.

It is unclear how much opposition President Xi is actually facing and thus how successful he will be in this major undertaking. In the meantime, the numbers, statistics and economic situation are not on his side. Scenarios range from difficult but ultimately successful rebalancing to an economic crash triggering a political upheaval, or even outright wars with neighbors (feel free to choose any neighboring country).

Whatever the outcomes, the world must learn to deal with an increasingly assertive China, who evolved from a low key operator to world top position in a variety of industries and statistics. The US will remain the world largest power for the foreseeable future, but it doesn’t appear to be accommodating for now: it is indeed a fine line to walk between economic cooperation, political meddling of various sorts and geopolitical confrontation.

But the US’ disengagement from the Middle East is not fully operational and the management of the Eastern Europe crisis is requiring a lot of time, which means that the Asian pivot has not yet reached the required level of resources to address the challenges raised by China. The country has been trying to find its place in a world system dominated by bullying powers, and is constantly frustrated in its attempt.

The worst case (and increasingly likely) scenario would be to devote enough attention to its needs only when the West will have effectively made China into an opponent, as the West is doing with Russia. By continuously interfering with internal affairs and creating troubles in neighbouring countries, the West is creating, reinforcing and fostering mistrust in the world’s largest countries.

Science, General Knowledge & Environment

Global warming is now slowing down the circulation of the oceans — with potentially dire consequences – “It appears that we’ve just seen yet another surprise from the climate system — and yet another process, like the melting of Antarctica, that seems to be happening faster than previously expected.

Are smartphones making our children mentally ill? – “It is battering our children’s brains. They have no times for the goodies in life – kindness, acceptance, conversation, face-to-face, nature, nurture. They need to find a sense of purpose by connecting with other people, not being on the Internet all the time.

History & Geopolitics

The new authoritarianism – “The new autocracies often simulate democracy, holding elections that the incumbents almost always win, bribing and censoring the private press rather than abolishing it, and replacing comprehensive political ideologies with an amorphous resentment of the West.

France is Europe’s ‘big problem’, warns Mario Monti – “France is the big problem of the European Union because the whole construct has been leveraged on the foundation of a solid Franco-German entente. If it isn’t there then there is a poor destiny for Europe. We’ve seen that the strong axis is no longer so strong.

Growth alone will not stabilise Europe – “But ultimately France and the rest of the member states need more than a modest uptick in growth to restore the health of their political systems. They need mainstream politicians that can paint a convincing and optimistic picture of the future.

Russia Targets NATO With Military Exercises – “Considering the military tensions surrounding the Ukraine crisis and its fragile cease-fire, these exercises are an aggressive signal, particularly since they immediately follow Putin’s mysterious disappearance last week. Russia has an interest in flexing its military muscle to remind everyone of the havoc it could wreak and to dissuade anyone from taking radical action in Ukraine.

Decades of deadly conflict will spread across the Middle East – (Hat tip Lao Ho) – “All of which brings us back to Europe’s 30 Years War. Civil wars fuelled by outsiders with religious and political agendas tend to end for one of several reasons: order is imposed by one side or a third party, or the sides settle, usually out of exhaustion. Alas for the Middle East, no such scenario seems imminent.

Saudi Arabia and Iran Compete in Yemen – “Washington sees Iran, Hezbollah and even the Syrian government — except for President Bashar al Assad — as partners in the fight against the Islamic State, a development Saudi Arabia feels threatened by.

Conversation: Yemen Spirals Out of Control – [Video] – “Stratfor Senior Managing Editor Ben Sheen and Vice President of Tactical Analysis Scott Stewart discuss Yemen’s deteriorating stability as various factions vie for control.

US risks epic blunder by treating China as an economic enemy – “The only hope for the world in the 21st Century is for the US and China to govern together in G2 condominium. The West must pick its quarrels with care, always going with the grain of its Asian alliance system.

China’s Fragile Evolution – “Other Asian nations that underwent significant economic and political transformation, from Meiji-era Japan to Park Chung-hee’s South Korea, each made more radical and rapid changes — something that may be forced upon China’s leaders. But each did so with the attending major social disruption and a heavy hand in domestic security.

Conversation: Gauging China’s Response to its Slowing Economy – “Stratfor contributor Jay Ogilvy and Vice President of East Asia Analysis Rodger Baker discuss the economic and political challenges facing China’s leaders.

Finance & Economics

Albert Edwards: Next crash baked in – “I don’t think that real economy factors – such as inflation or growth – justify a tightening. But rates are too low for the financial economy: they are encouraging financial smarty-pants to do the same sort of things that got economies into a jam in the first place.” And indeed his chart below makes the point perfectly. While asset prices have rocketed upwards consumers are unusually reluctant to borrow and spend.

The Coming China Crisis – Must read! – “Some believe that through continued high productivity gains, China can sustain high growth without worsening its private-debt picture. But in recent years private-debt growth has almost equaled China’s increased productivity, calling into question the sustainability of those increases absent continued high private-debt growth.

Number of the day: The Coming China Crisis – “As a result, China is now sitting on top of the greatest accumulation of bad debt and overcapacity in history. According to the Survey and Research Center for China Household Finance, more than one in five homes in China’s urban areas is vacant, with 49 million sold but vacant units, and 3.5 million homes that remain unsold. Behind those vacant and unsold units is private debt, both loans to developers and mortgage debt. Housing values in China increased on the same perilous trajectory as in the United States before 2008 and Japan before 1991—and they have now started a similar decline. Meanwhile, real estate was 6 percent of U.S. GDP at the peak in 2005; today, it is as much as 20 percent of China’s GDP.

Picture of the day: Crisis in Yemen

YemenKidWheelchair

About Carlito Riego

"Great perfection may appear imperfect, but its usefulness is inexhaustible. Great abundance may appear empty, but its usefulness cannot be exhausted. Great correctness may appear twisted, great skills appear crude, great eloquence appear awkward. Activity conquers cold; inactivity conquers heat. Clear serenity governs the world." - Lao Zi