Thursday, September 12, 2019


This week’s news that the John Bolton era as President Trump’s national security adviser has ended seems to be a step toward calming tensions in the Middle East. That is, at least, what oil markets told us as crude prices dropped almost a full dollar in the immediate aftermath of the announcement.

Meanwhile, markets in other resources help illustrate the rising tensions against defining Mr. Trump’s preferred geopolitical rival — China.

As the South China Morning Post reported this week, pork prices have doubled since July, the result of a double-whammy hit of retaliatory tariffs against American imports and a bad case of African swine flu devastating local hogs. Coupled with reports that the Communist Party has overstated nationwide inventory of frozen pig, consumers are feeling the squeeze in the world’s largest pork-consuming country.

Of course, the economic troubles facing Chinese citizens are not simply limited to their favorite protein becoming more expensive. Official inflation data showed 2.8 percent inflation, higher than expected, though Chinese data is itself infamously unreliable. The combination of rising food prices, rent and currency devaluation means that Chinese purchasing power of paychecks is starting to stagnate significantly for the first time in decades.

This is a situation the Communist Party has not had to face in the 21st century, and all of this is without any mention of the political tensions in Hong Kong that have captured international headlines in recent weeks — stalling one of China’s most important cities.

The question is how will it respond?

Of course, one way to lighten the pain would be to reach a deal with the United States — and it seems obvious that the Trump administration is serious about wanting one.

While Mr. Trump’s brand of economic nationalism is often referred to as “protectionism,” it seems more accurate to view it as a form of economic gangster-ism. Mr. Trump seems to instinctually understand that tariffs are a form of soft warfare, and he has successfully used them similar to how a Mafioso may show a weapon in order to reach better terms on a protection deal.

The administration’s top trade aims seem to be new trade deals Mr. Trump can add his signature to — hardly the act of a classical protectionist.

Meanwhile, Chinese President Xi Jinping’s government has seemed to prefer to wait out the American president who has to deal with a pesky election next year.

The problem for Mr. Xi is that Mr. Trump’s trade war could not have come at a worse time for his Communist Party, as there are major signs that the Chinese economy is on the brink of crisis.

Largely overlooked by American media, the Chinese banking system increasingly appears to be the economic equivalent of Chernobyl. After a decade of massive credit expansion, with tens of trillions of dollars’ worth of loans being funneled into projects based on the whims of central planners, rather than actual Chinese entrepreneurs, there is growing concern that their banks are full of toxic loans. Three banks have had to be publicly bailed out by Chinese officials in recent months, each one larger than the last.

While there has been much talk of potential retaliatory measures from China against the United States for the trade war — such as selling off U.S. debt or attacking the dollar with a gold-based yuan — the reality is that China’s bigger issue is desperate need of more dollars. While the Bank of China can inflate away debts denominated in their own yuan, the country needs foreign currencies to pay for loans made in dollars and euros. Hedge fund manager Kyle Bass has identified a dollar shortage as one of the potential catalysts to an all-out crisis in China.

While American politicians fear losing elections, Chinese politicians fear revolution — a painful economic crisis is the perfect environment for such an uprising.

With or without a trade deal, it’s hard to imagine a way for Chinese authorities to navigate a financial crisis without very real pain trickling down to its citizens. Many already seem to realize the danger the banking sector poses, which explains significant capital flight in the form of domestic gold purchases and international real estate investments.

Once upon a time, it was widely believed by both academia and the press that the superiority of Soviet communism was obvious and its economic ascension over the United States was inevitable. Instead, its Communist central planning rotted it from within.

While recent protests in Hong Kong have highlighted the culture clash between the former British colony and the mainland China’s Communist Party, the greatest challenge to the Xi regime does not come from young revolutionaries demanding democracy nor a trade war with Mr. Trump. It comes from the fallacy that free market capitalism can be replaced with communism with market characteristics.

The question is whether Mr. Xi can do what the Soviets could not, and survive this economic reckoning.

• Tho Bishop is associate editor for the Mises Wire at the Mises Institute.

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