Too Long, Didn’t Read Summary:
• China is economically screwed up beyond belief.
• Xi realizes this (being the leader of financial reform in China).
• China’s economy is going to implode.
• Xi has to make sure he survives.
• Xi can’t reform the economy, so he’s prepared by purging the party of all opposition.
• Xi has anointed himself emperor so a future leader cannot scapegoat and execute him.
• Xi has to make sure the communist party survives.
• To maintain the imperial mandate of heaven, he has to unite the Chinese people around the Chinese Communist Party instead of having the people blame the CCP.
• Trump is perfect.
• Foreign aggressor.
• Plays on racial memories of the Boxer Rebellion and subjugation by the west.
• Incoherent trade war spun in the Chinese press as unfairly attacking China.
• Trump’s proposals won’t bring jobs back to the USA (as the factories will just move from China to other SE Asian manufacturing countries).
• China’s best way out of the financial implosion is rapid and drastic RMB devaluation. A trade war gives political justification for this.
• 40% minimum devaluation needed to save the Chinese financial system. SPX goes to 500.
• Trump gone at SPX’500. China can then negotiate with new American president.
China’s greatest fear is social unrest. Xi Jinping has declared himself emperor of China because:
• After trying for several years as the head of financial reform, he knows that the Chinese have built the largest, most disastrous financial bubble in the history of mankind.
• Any attempt to constrain the Great Leap Forward in credit creation is impossible. All China can do is keep stimulating until the collapse.
• It will collapse at some point.
• At that point, if Xi is in power and there is an opposition faction in the CCP, the opposition party will blame Xi and there will be civil war.
• At that point, if Xi has already stepped down, the new leaders of the CCP will blame Xi and his liver will be paraded through Tiananmen.
• So Xi has purged the party and installed himself as emperor. This way, he’s safe from the CCP.
But, the imperial, dynastic cycle, the mandate of heaven stipulates that imperial regimes that falter will be replaced. So Xi is safe from the CCP, but not if the nation turns against him. The CCP’s mandate of heaven has been an increasing standard-of-living for the Chinese populace.
If the Chinese populace loses its steadily increasing standard-of-living, then the CPP, like the imperial regimes before it loses its mandate of heaven.
Xi is trying to prolong the inevitable bubble collapse and the CCP’s loss of its mandate of heaven, but in the end, he knows, as the head of reform, that China’s economy is going to collapse. It’s an inevitably losing position.
Up to now, there has been no way out for Xi and the Chinese Communist Party. Until now. Trump’s poorly thought out trade war (exactly what is Trump hoping to accomplish? Raising tariffs will only send the factories to Vietnam, Thailand, etc. The jobs aren’t coming back to the USA unless there is a comprehensive, coherent, global plan) is heaven’s gift to Xi and the Chinese Communist Party.
China has already lost – it’s going to suffer an economic collapse. But, Trump offers a way for the CCP to stay in power. Blame everything on Trump. Trump started the trade war. China was attacked by a foreign aggressor. The economic collapse can be blamed squarely on Trump. Instead of turning on the CCP, the Chinese people will rally around it in the defense of China.
The trade war is hopeless. Raise tariffs 25%? China just needs to devalue the RMB 25% and Trump is back to square one. 25% reduction in RMB? World-wide economic recession, SPX immediately back to 1500 (linear extrapolation of 2015 RMB 4.5% revalution).
In actuality, China probably needs to devalue at least 40% to keep the entire Chinese financial system from defaulting (SPX to 500), but there has been no way for China to do this without serious political repercussions – until now. Trump’s trade war provides the CCP an excuse to save itself.
The CCP will turn a losing situation (economic collapse) into a winning position (maintain social harmony and stay in power). Trump thinks that a trade war with China is easy because he thinks the Chinese will lose. What he doesn’t realize is that the Chinese have already lost – the credit bubble China has blown is too large to solve. What a trade war will do is give nationalistic cover to the Chinese Communist Party’s legitimacy to rule through a massive economic collapse.
If China retaliates with a tit-for-tat 25% RMB devaluation, the USA bull market ends immediately. If China retaliates with the 40+% RMB devaluation needed to stay (somewhat) solvent, it will cause a financial crisis in the USA greater than 2008. Remember, the 2015/16 lows were initiated by Chinese RMB devaluation of only around 4.5%.
But the CCP will stay in power, with the Chinese people united behind it because the CCP can blame everything on Trump. After the indignities of the Boxer Rebellion, the Chinese people will never let a foreign power aggressively threaten their nation. The CCP’s best chance of staying in power and avoiding a civil war is to let Trump wage a trade war. That’s why China’s response has been (strangely) so strong and immediate with no sign of concession. Trump is the CCP’s best chance to get out of the bubble alive and in power.
With the SPX at 500, Trump will be gone and the CCP can re-negotiate with next administration.
What Americans don’t realize:
• Trump thinks he can win and make China lose.
• China has already lost control of their economy.
• Chinese leaders know this.
• Chinese leaders are looking for a way to save themselves and save the party.
• The vehemency of the Chinese reaction is extremely out of character.
• China is going to invite a trade war because it’s the best way out for China.
• Xi and the CCP know that if they can hang on, there will be a new American president soon after SPX’500.