More often than not, a simple incident, an unguarded moment, a throwaway remark will reveal more than what thousands of pages of analysis and research would fail to do. That is what I gather from the Financial Times news item on the brawl that broke out between a Chinese basketball team and a visiting basketball team from Georgetown University in the US, comprising students:
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Before they left for China, the Georgetown Hoyas were briefed by the US state department on their roles as ambassador, while their 10-day trip was cited as an example of “sports diplomacy”. Sadly, it seems nobody held a similar briefing for the Chinese side… The game was confrontational from the start, but when it became obvious that the mid-ranking US college team were going to handily outplay the older professionals, the hometown referees started calling fouls on the Americans on almost every play. …The Bayi player responded by pummelling the Georgetown man to the ground, where he was joined by his teammates armed with chairs. In one of the most evocative photos from the melee two uniformed Bayi players, along with a Chinese man with absurdly muscly legs wearing civilian clothes, are seen stomping on a Georgetown player, who cowers on the ground, while one of his teammates looks on in horror.(Source: http://on.ft.com/qzZIvx).
While Chinese government officials and ministers can make thousands of speeches on China’s peaceful rise, instincts come to the fore when threatened with defeat or embarrassment. Hence, the rest of Asia and the world must look on with nervousness if and when China’s economic machinery fails to keep humming.
In 2008, when China faced the shock of global demand collapse, it unleashed a credit boom that is still reverberating throughout the Chinese economic system. Fast forward to the summer of 2011. Notwithstanding the odd strong economic data (for example, durable goods orders for July in the US), signs are palpable that the US, Europe, Japan and even major developing countries such as Brazil and India are slowing. China once again faces a significant slowdown, if not collapse, of export demand. It is doubtful—notwithstanding what Sinophiles would say—if China has the ability to unleash another wave of credit and budget stimulus. Put differently, the costs of such an undertaking might exceed the potential benefits.
Paul Cavey of Macquarie Securities writes that, absent continued growth in property sales, China’s economy is at risk of the triple whammy of slowing export growth, domestic tightening and collapsing real estate construction. If property sales continue to grow, then one must wonder if China’s inflation rate would ever moderate.
Recently, China has been allowing the nominal exchange rate of the yuan to appreciate against the dollar. Perhaps, it is left with no choice since the future of both the dollar and the euro faces grave question marks. However, it is still a big unknown if China would persist with this policy in the face of a pronounced growth slowdown.
It is unreasonable to expect stock markets to assess the implications of the basketball brawl for asset prices. The great discounting mechanisms that they are, they were focused on the assembly of global central bank chiefs at Jackson Hole, Wyoming, US. The US and European stocks have rallied in the days leading up to the conference. Contrary to many interpretations, Bare Talk thinks that US Federal Reserve chairman Ben Bernanke promised some action in the near future. That is why stocks rallied on Friday and gold recouped much of its losses of the previous days. While it is reasonable for gold to rally, it is incredibly naïve on the part of stock market investors to take heart from Bernanke’s promise of action. It is equivalent to a drug addict feeling happy at the prospect of his supplies being restored in the days to come.
The price of Brent crude oil is back above $110 per barrel. The S&P Goldman Sachs Agricultural Commodities Total Return Index is up nearly 10% from its recent lows. Producer and consumer price inflation rates in the US are uncomfortably high, especially given the pronounced economic slowdown. Inflation rates in Asia are incredibly slow to retreat, if they are retreating at all.
Investors should do well to brush up on their history lessons. As we head into 2012, geopolitics would dictate how geo-economics and geo-financial markets evolve. We need to gauge the personal and narrow national (or, nationalistic) interests and incentives at play in order to guess the likely path of asset prices—financial and real.
Investors have to learn to tailor their return expectations when “risk-free” rates of (real) return are near zero per cent almost globally. Looking for investment ideas that would deliver 15-20% annual returns—in whatever reference currency—is to invite trouble and substantial grief.
V. Anantha Nageswaran is an independent macroeconomic and investment strategy consultant, based in Singapore. Your comments are welcome at email@example.com