China Translated

Following on from my earlier post on Currency Wars 2, this is my translation of the next few pages of the introduction, where Song Hongbing introduces the 18 international banking families he believes are pulling the strings of global finance, and directing the course of world history:

‘The Rothschilds - the ‘godfathers’ of international finance, whose influence spans 200 years

The trusted advisor of Germany’s Iron Chancellor Bismark - Bleichroder

From Cologne in Germany the Oppenheim family

From Hamburg in Germany the Warburg family

Originally from Bavaria in Germany but finding success on Wall Street, the Selingman family

Originally from Frankfurt, but making it big in the USA, the Schiff family

The Schroder family, originally from Hamburg but finding success in London and New York

The Speyer family, originally from Frankfurt

The Mendelsohns from Berlin

The Baring family from England, who were associated with the Rothschilds in the 19th Century

The Hope family from Amsterdam

Advisors to the French royal family, the Fould family

The Mallet and Pereire families, also from France

From Switzerland, the Mirabauds

Finally, the Rockefeller and Morgan families from the USA.

The international banking families are the most powerful group on the international scene.  Their thinking, to a great extent, determines the fate of mankind.  Wherever they go, that place prospers, wherever they leave, that place declines and falls.

With a motion of their hand, they can instigate a period of great creativity and productivity.  With another motion they can seize the resulting riches for themselves.

For the last 200 years, these families have strutted on the world stage, their position unassailable, their influence on the course of Western history impossible to underestimate.  As times change, the star of some families has plummeted from the sky, but the majority retain their power and influence today.

The world is always changing, but the essentials of human nature do not change.  For thousands of years, the thought of wealth has aroused in man feelings of greed and horror, the thought of power feelings of desire and resentment.  Whether it’s the games of political chess that have characterised thousands of years of Chinese history, or the financial machinations of Western history, the same mark of human nature is evident. 

China is no stranger to the history of mans grasping after power, but regarding mans grasping after wealth, we still have a lot to learn.  Let’s start the learning process by examining the lives of the world’s most powerful banking families.’

You can see why the Currency Wars books are so popular.  They combine a romantic insight into an interesting period of Western history, with a plausible explanation of the way the world economy works, and wrap the whole thing up as a lesson for Chinese people on how they can avoid being cheated by the evil global financiers.  Song Hongbing satisifies curiosity about Western history and the global financial system, at the same time as playing to the nationalist peanut gallery.

Banking, Culture, International Relations, US-China Relations

Yesterday I spoke at Macquarie’s China conference, on a panel with He Liping of Beijing Normal University and Zhang Ming of the Chinese Academy of Social Science, moderated by Paul Cavey who is Macquarie’s China economist.

He Liping’s comments focussed on the March trade deficit, which was the first for several years and conveniently timed to head of complaints from trade partners about the exchange rate.  He made the comment that cyclical rather than structural factors explained the slide into deficit, which he expects to be a one off. 

He thought that one of the biggest risks to the growth outlook was a fall in consumption of automobiles.  Apparently there was already evidence that growth in auto consumption is slowing, with inventory piling up in dealers showrooms.  If growth slows, then one of the major supports to domestic consumption will be taken away.

Zhang Ming followed up with some broader comments on the outlook for the Chinese economy.  He noted that last year’s massive increase in new lending, combined with renewed inflows of hot money, has laid the basis for a return of inflation.  He expected the CPI to push up to 4% in July and August of this year.

A 4% increase in prices would be beyond the government’s target of 3% for the year, and Zhang expects a response from the government in tightening monetary policy.  He expects a first rate hike in the third quarter, and 2 or 3 hikes over the course of the year, taking the deposit interest rate up 100 basis points in total.

Zhang noted that the government had already moved against house prices.  He said that transaction volume in residential property markets has already fallen and he expected prices to start to come down.  The situation today is similar to that in the first quarter of 2008.  The danger for the government is that a collapse in house prices might precipitate an end to investment in the sector - which would have a serious impact on GDP growth.

Zhang also spoke on the introduction of a property tax - which the government has begun piloting in several cities.  He thought that introducing a tax would be extremely difficult.  Even though a tax would mean a steady flow of revenue for local government, local government officials preferred the massive slugs of cash they received from land sales.  This is because with a short tenure in any particular location, local officials want to increase revenue fast in the years when they can enjoy it, not have a dependable stream of income for the years after they had moved to a new post.

Fiscal Policy, Monetary Policy, Property

Song Hongbing, the author of Currency Wars, is not a man to rest on his laurels.  With one best seller under their belts, many authors would have taken a well earned rest.  But Song has been hitting the library, and, as a result, his new book has already hit the shelves.  Imaginatively entitled ‘Currency Wars 2′ the book develops Song’s theory that the Western world is run by a shadowy cabal of banking families, led by the Rothschilds.  This is my translation of the opening pages:

‘Who are the international banking families?

Take the Rothschild family as representative of the 17 main international banking families.  Beginning in Holland, England, France and Germany, they slowly spread their influence to Austria, Italy and the USA, finally ending in our own time with a financial network that spans the Western world.  In the 19th Century, as Europe reeled from the shocks of a capitalist revolution in France and an industrial revolution that swept across the entire continent, the balance between the great powers was disturbed, leading to the outbreak of war.  The international banking families shrewdly seized this historical opportunity, using the financial system to provide capital to expanding industry and to warring nations.  At the same time as these families amassed great wealth, they revealed their enormous influence in world affairs.

The power of wealth is expressed in the corruption of power, in the thirst for power, and in the desire for influence.  In the market for capital, the international banking families gradually exerted control over the channels through which capital and credit flows, till the entire game was played according to their rules.  From the monopoly rights given to the Bank of France by Napoleon to the financing of the Louisiana purchase.  From the hyper inflation of the 1920s to the rise of Hitler.  From the emergence of the US dollar as the global reserve currency to the financial crisis of 2008.  In all of these events, indistinctly, in the background, is visible the shadowy outlines of these international banking families, and their control of the channels of capital and credit.

The international banking families have humble origins, working through connections with people in positions of power they gradually established their economic strength, grasping control of the channels of distribution of capital, exerting control over commerce and industry, and from there beginning to influence government policy to favour their interests.  They use enticements that are difficult to turn down to influence everything from the direction of economic policy, to the appointments and promotions of military officers, from shaping the agenda for public policy, to controlling what information is available to the public.  Over 200 years of experience, the international banking families have matured.  In the past they wielded influence, now they exert control.  They are the power behind the scenes in Western society, riding roughshod over laws, governments, and rights, completing the metamorphosis from the possession of wealth to the wielding of power.’

I translated a part of the first Currency Wars in an earlier post (Currency Wars Translated), and it doesn’t seem that Song has moved very far from his original thesis.

I’ll try and come back and translate a little more of the first chapter in the future.

Banking, Culture, International Relations

Hu Yaobang is former Party Secretary of the Communist Party, ousted from power in 1987 for his failure or unwillingness to deal with a wave of student protests.  His death in 1989 is seen as one of the catalysts for the more widespread protests that year, which ended so tragically.

Hu was also the mentor for Premier Wen Jiabao and, 21 years after Hu’s death, Wen has published a reminiscence of a rural inspection tour they made together to a town called Xingyi in Guizhou in 1986.  This is my translation of the central part of the story:

‘Comrade Yaobang beckoned me to join him, and said ‘Jiabao, I have a task for you, wait a while, then take some of the comrades out of the town and check the conditions in one of the nearby villages, but don’t tell our hosts what you are doing.’

I remembered hearing that, on inspection tours, Comrade Yaobang often liked to deviate from the planned route, to meet with the people, and to check conditions at a grass roots level.  He would explain to his hosts, the local party chiefs, ‘I want to see an area you have not prepared for my visit’.  So when Comrade Yaobang gave me this task I knew he wanted me to find out about the real conditions at a local level.

After it was dark, I lead several comrades out of the guest house and into the countryside.  At that time, Xingyi township had only one road, the houses alongside it were low, the street lamps dim, and the street empty.  We walked along the road for 10 minutes before arriving in the outskirts of the town.  Here, everything was farm land, it was pitch black, and we could not tell north from south or east from west. 

In the distance, we could see the lights of a village, we felt our way forward.  Entering the village, we called on a number of houses.  Seeing a group of outsiders arriving in their dimly lit village at night time, the simple country folk were a little perplexed.  But when they knew the purpose of our visit they enthusiastically greeted us.

At around 10pm that night, we finally returned to the guest house.  I entered Comrade Yaobang’s room to find him seated on a bamboo mat waiting for me.  I gave him a detailed report on the conditions in the village we had visited.  Comrade Yaobang listened attentively, and frequently asked questions.  He told me that leadership corps must visit the lowest levels of society to find out the true situation, experience the hardship of the people, listen attentively to their voice, and grasp first hand the real state of affairs.  The greatest danger, is for leaders to separate themselves from reality.  Many years later, those words still echo in my ears.’

Premier Wen is, of course, noted for his media friendly visits to the sites of disasters: the Sichuan earthquake, the fractious crowd at the railway station at Chinese New Year in 2008, the latest trip to drought blighted Guizhou which inspired this reminiscence.  But I wonder whether he still leaves his minders behind to make unplanned stops, check on local conditions that have not been carefully prepared by local party chiefs, and have unscripted conversations with people on the ground.

I wonder also about the significance of this latest move to rehabilitate Hu Yaobang, whose name, along with that of Zhao Ziyang, is closely associated with political reform.

Here’s a link to Wen’s complete essay.

Communist Party, Social Policy

Today Wen Jiabao convened a meeting of China’s State Council.  On the agenda, a discussion of the economic situation in the first quarter and a charting of the course for economic policy in the months ahead.

A readout of the meeting has now been published, with what looks like a realistic assessment of the state of the recovery and the challenges ahead. 

One of the things I find interesting about these statements is that they generally end with a few inspirational words for the troops.  I guess this is a hangover from the old days of government by campaigns and strugles.

The statement from this meeting concludes with the following invocation (my translation):

‘The Council requires all areas and departments to…

-act carefully and according to the situation

-effectively conduct investigation and research

-strengthen their work ethic

-firmly implement and perfect policy measures

-improve the quality of regulation

-work in a practical way

-focus on delivering results

-and make great efforts to bring about the positive and rapid development of the economy.’

There’s nothing wrong with any of these sentiments.  Acting in accordance with the real situation, conducting careful research, and focusing on results are all admirable objectives.  But what I think statements like this miss is any recognition that to change behaviour, some thought about the institutions and incentives that shape it is necessary.  

You can see the complete State Council statement here.

Communist Party, Culture

China’s sudden rise invites comparisons with the equally abrupt arrival of its near neighbour Japan on the world scene a few decades ago.  China’s leaders also like to draw lessons from the economic mismanagement of Japan, which has resulted in a lost decade of torpid growth.  In particular, China’s leaders like to point at the problems caused by Japan’s revaluation of the yen, as part of their argument against revaluing the yuan.

But exchange rates are not the only point of comparison between China and Japan.  A cartoon doing the rounds on the Chinese internet invites comparison between the Japanese property sector of the 1980s and the Chinese property sector of today. 

The diagram gives a stylised history of the collapse of the Japanese property sector:

1985 - the Japanese yen appreciated

1986 - speculative capital started flowing into Japan

1987 - house prices had tripled in value (it doesn’t say from what level)

1988 - property prices collapsed but were supported by real estate moghuls

1991 - property prices fell again, there was no one to support them, and the real estate sector collapsed.

The author of the diagram suggests that the Chinese property sector is going through the same process: appreciation of the yuan in 2005, hot money inflows in 2006, sharp rises in property prices in 2007, a fall in prices halted by intervention by real estate developers in 2008, and set for a total collapse in 2011.

Property prices in China are certainly high, and much higher as a multiple of average income than in the US and EU, or even other emerging market economies.  With property prices out of line with fundamentals there’s a risk of a correction, and perhaps a sharp correction.  But I am not sure the comparison with Japan is necessarily the best one to make.  China today is still a developing country with a low level of urbanisation.  Rising incomes and a continual shift of the  from the countryside into the cities will underpin demand for property.  Japan in the 1980s was already a developed and urbanised country, so the property sector could rely on neither of these supports.

You can see the original cartoon here.

Exchange rate, Property

I just got back from a few days in Yangshou, or more precisely from a small village just outside Yangshou - an area famous for its spectacular karst scenery.

The village was very rural, everyone was employed in either agriculture or tourism.  Water buffaloes abounded, chickens clucked, hills like jagged teeth jutted out, their tops wreathed in mist.

Yangshou itself has a population of about 50,000 clustered around what looks like a thriving high street.  Young men hang around busy corners plying their trade as motor-bike taxis, electric cars wait by the river for tourists to arrive from nearby Guilin on bamboo rafts.  An enormous billboard reminds the citizens of the importance of diligently following the precepts of scientific development.

GDP per capita in Guangxi province is just under CNY15,000 (2008 data), and I would guess that GDP per capita in Yangshou is slightly lower.  But that didn’t mean there wasn’t what looked like a thriving retail sector.

I was especially struck by the proliferation of low end sports brands.  Everyone knows the story about Li Ning, the Olympic gold medalist Chinese gymnast who is taking on Nike and Adidas.  Li Ning is a reputable brand in China, but foreign observers would immediately notice that its tag line ‘anything is possible’ sounds suspiciously similar to Adidas ‘impossible is nothing’ and that the Li Ning swoosh looks suspiciously like the Nike swoosh.

In Yangshou, Nike and Adidas are nowhere to be seen, but that doesn’t mean that Li Ning is getting a free ride.  Anta, another domestic brand, is jostling alongside Li Ning, and its swoosh also looks strangely familiar.  And where Li Ning is trying to shift its basic running shoe for north of CNY300, you can pick up a pair of respectable looking Anta running shoes for CNY150.

Neither is Anta the only pretender to Yangshou’s sportswear throne.  If you thought Li Ning was shameless in its play on the Adidas slogan, you’ll be shocked to learn that Adivon have gone one step further, with a blatant copy of the Adidas logo, colour scheme and name.  A pair of Adivon running shows will also set you back around CNY150 and they also had some rather cool leisure sneakers for CNY220.

The pretty young shop assistants in Adivon looked slightly embarrassed when asked about the relationship between Adivon and Adidas but said they were separate companies.  Anta’s shop assistants were happy to point us toward the rival Li Ning outlet, but as we reached the turn in the street, remembered their brand loyalty, shouting ‘Anta’s also a good buy.’

Nike and Adidas might have captured the sportswear market in first tie cities like Beijing and Shanghai, but further down the chain, it appears, it is all to play for.

Competition, Regional, Retail