China Rising

Foreign Policy Magazine thinks the rise of China and the fall of America is inevitable.

...when it comes to the broader geopolitical picture, the world of the future looks even more like a zero-sum game, despite the gauzy rhetoric of globalization that comforted the last generation of American politicians. For the United States has been acting as if the mutual interests created by globalization have repealed one of the oldest laws of international politics: the notion that rising players eventually clash with established powers.

In fact, rivalry between a rising China and a weakened America is now apparent across a whole range of issues, from territorial disputes in Asia to human rights. It is mercifully unlikely that the United States and China would ever actually go to war, but that is because both sides have nuclear weapons, not because globalization has magically dissolved their differences.

Well that is optimistic. If it weren't for the fact that China with its one child policy is aging at the rate of about .9 year per year while the US is holding more or less steady at around 40 years. China has a 20 year window before demographics get them. At roughly $4,000 per capita income they will have to grow 10X larger to have a per capita wealth equal to the US.

But there is a fly in the ointment. They seem to be having some economic difficulties.

Following the now extremely well documented surge in short-term SHIBOR [Shanghai Interbank Offered Rate - ed.] and Chinese repo rates, it appears that banks have begun attempting to extract the missing liquidity from end consumers. Various Chinese commercial banks raised lending rates between 10 and 45% over the benchmark rate because of a shortage of funds, the China Securities Journal reported today, citing an unidentified bank official. In the meantime, SHIBOR refuses to pull back, hitting an unsustainable 8.05%, which is worse than Portuguese 10 year rates. Will this sustain? Unclear - the Chinese new year must pass and the recent surge in snowfalls will have to recede before a steady state evaluation can be made, however as we have been warning since December, in a country having one of the biggest asset-liability mismatches, the negative curve convexity on tightening fears, will blow up the near end, isolating bank liquidity. To say that this is bad news if it persists is an understatement.

Uh. Oh.

I can't count the number of times in my lifetime when the US was counted out and then came back stronger than ever. The USSR and Communism. Japan. And now China. I'm not buying it. America will be back once we get our political class sorted. And that is happening as we speak.