China’s ‘good pandemic’ may be ne aring its end

[7 min read]

Dear Reader,

Let’s talk about China.

A word of warning though, I’ve been wrong on China in the past.

I thought the post-pandemic period would be negative for China as global supply chains shifted. That may still be the case, it’s early days.

But let’s face it. China has benefited more from the pandemic than nearly any other nation. Quite ironic considering it likely escaped from a lab in Wuhan at the end of 2019. Worse, the communist dictatorship did nothing about it. It allowed its people to continue travelling for months.

The Wuhan lab theory was a ‘conspiracy theory’ until recently. Whenever the corporate media labels something a conspiracy, you can bet it’s close to the truth.

Now it’s been revealed that even the dodgiest health bureaucrat on the planet, Dr Fauci, was going down this path in the very early days. From The Australian:

‘America’s top medical adviser Anthony Fauci was informed as early as February 2020 that Covid-19 exhibited unusual viral characteristics which could have potentially been engineered in a lab, according to emails published.

‘A trove of private correspondence, obtained by The Washington Post and Buzzfeed, reveal some of the crucial moments leading up to the pandemic in early 2020 when Dr Fauci, the director of the National Institute of Allergy and Infectious Diseases, sought urgent information regarding the nature and origins of Covid-19.

‘Dr Fauci, who led the US response to the outbreak, previously rejected claims that Covid-19 leaked from a laboratory setting, but reversed his position in May, admitting that he was “not convinced” the virus had developed naturally and more needed to be done to investigate its precise origins. In one email from Kristian Andersen, a virologist at the Scripps Research Institute in California, Dr Fauci was told that Dr Andersen and his fellow scientists had to “look really closely at all the sequences to see that some of the features (potentially) look engineered”.’

Speaking of dodgy health bureaucrats, what about South Australia’s Chief Public Health Officer, Nicola Spurrier’s clanger?

After deigning to allow a game of AFL between the Adelaide Crows and a potentially-infected rabble from Collingwood to go ahead on Saturday, here’s what she had to say:

‘“We’re looking at the seating at the moment and of course we’re looking at the ball, because sometimes the ball, not that I’ve been to many football games, but I have noticed occasionally it does get kicked into the crowd,” Spurious has said.

‘We are working through the details of what that will mean.

‘If you are at Adelaide Oval and the ball comes towards you. My advice to you is to duck and just do not touch that ball.’

What have we become?

Sorry, I was meant to be talking about China…

The Middle Kingdom has done well out of the pandemic. The need for protective equipment, tech inputs and spending on manufactured goods (because the services economy in the West collapsed) helped pushed exports higher. Meanwhile, outbound tourism collapsed so services imports were much lower than in the past.

As a result, China’s current account surplus in 2020 was nearly US$300 billion.

In addition, foreign direct investment (FDI) in China in 2020 was US$163 billion, beating the US on this measure for the first time. Including net portfolio flows (as the world buys China’s higher-yielding bonds), it is estimated that net capital inflows were as high as US$450 billion for China in 2020.

As I said, they’re having a very good pandemic.

All this incoming capital has had a big effect on the yuan. It’s trading at its highest level against the USD since 2018 (see chart below):

This is a big part of the reason why iron ore has been so hot. China has money to burn. It’s using its massive capital inflow to buy up the raw materials it needs and reduce pressure on the currency rising even higher.

Here’s the iron ore price overlaid with the yuan…

China has also been buying foreign assets to reduce upward pressure on the yuan. But instead of doing so through the central bank, it’s been doing so via the state-owned banking system. This isn’t just a 2020 phenomenon though. This has been happening since 2014/15.

This is illustrated in the chart below…

Basically, instead of FX intervention occurring primarily through the central bank, it’s not occurring through the banking system.

This is also a reflection of the huge credit expansion that has occurred in the Chinese economy. On the other side of these assets are yuan-denominated liabilities of the banking system…the ones flowing through the Chinese economy.

The broader point here though is that global stimulus has flowed into China via a big rise in the current account deficit. This has in turn given China plenty of ammunition to spend on commodities as well as keep its own credit/banking system expanding.

The question is, is this now yesterday’s story?

The big iron ore miners, for example, all look to be trading on very cheap valuations. That’s the market saying iron ore prices won’t be sustained at these high levels. But this view has been around for some time now, and the price remains elevated.

Take this with a grain of salt, but my view is that this inflow of capital into China is a one-off. The pandemic certainly produced some unintended consequences. But as the size of the global stimulus washes through the system, and longer-term supply chains get rejigged, China won’t have as much money to play with in 2021 and beyond.

That doesn’t mean everything will go pear-shaped. But it does have important implications for the yuan, and in turn iron ore and the Aussie dollar…not to mention the ‘inflation’ narrative that is all the rage this year…

Regards,

Greg Canavan,
Editor, The Rum Rebellion

The Stink of Zombies
By Bill Bonner

The subject this week is transformation. And zombies.

The Biden bunch wishes to transform the government, making it bigger and better than ever. To make a long story short, what they are really doing is zombifying the whole country.

But the transformers are on the march everywhere.

Path of righteousness

Each group has its bugaboos…

The ‘anti-racists’ are trying to transform the human mind…no more shall we have the prejudices and inequalities that come so naturally to us all.

Vegans are trying to transform the human diet…say goodbye to those beef steaks and ‘got milk?’ slogans…not only would this stop the exploitation of animals, it would also stop all that cow flatulence that is destroying the planet.

Democrat activists seek to destroy the last vestiges of the Republican Party, giving themselves a permanent lock on power.

Republican activists hope to rise again…and put the country back on the path of righteousness…or, at least, Trumpeousness.

And activists wish to transform the oil companies into clean energy companies.

For us, this is not just a matter of academic curiosity. Our Trade of the Decade features oil and gas on the long side (we’re short the US dollar on the other side).

How are we doing? Keep reading…

Thriving capitalism

Just because activists target an industry doesn’t mean it’s a bad investment. Capitalists connive…and capitalism survives. It goes about its business the best it can, swatting every curveball that comes its way.

Remember, government is inherently reactionary…always trying to protect the old elite who control it. So the more the feds ‘transform’ an industry, the more the insiders are likely to profit.

Consequences of activism

When activists or the fed target an industry, the first consequence is that money turns away from the sector. Fearing higher taxes, bad press, or stricter regulation, investors move on.

Nobody starts a new cigarette company when the feds are trying to ban smoking. And few investors are going to put their money into building new oil rigs when the feds are insisting on going ‘green’.

This has the effect of making the existing capital — already invested in the industry — more valuable. No new competition, in other words; higher profits.

The second consequence — which is why we are so bullish on energy — is that the lack of new investment means supply goes down.

But today’s standard of living depends largely on the dense energy in oil and gas. Over time, uranium, hydrogen, solar panels, and windmills may play bigger roles. But for now, it’s oil and gas we use.

And with new competition largely eliminated…and little growth or fresh investment…the oil companies will be more profitable than ever.

But they will be transformed too — into zombies.

Output will fall…demand will continue to increase…and prices will rise. (Later, activists and the feds will blame the ‘greedy’ oil companies for raising prices.)

Gasoline use has already returned to pre-COVID levels in the US.

And our oil and gas investments are up more than 50% since the beginning of the year. So far this year, oil is the best-performing sector.

Not only are investors anticipating higher profits, they’re also looking to oil and gas to protect them from inflation.

Once you’re pumping oil, your capital expense is ‘sunk’. You can keep pumping until the well goes dry. And you can easily keep up with inflation by adjusting prices upward.

Government policy

Yes, that was a big story last week too — inflation.

When the supply of goods and services goes down (thanks to the zombification of the economy) and the supply of money goes up (in the 12 months of the COVID-19 hysteria, major central banks added nearly US$10 trillion to their balance sheets)…

…Mr Market rations those aforementioned goods and services by raising prices.

Which leads us to more footnotes in our Chronology of a Declining Economy.

The US budget deficit last year was $3.2 trillion…or 14.9% of GDP.

(For comparison, Argentina, with 50% inflation, had a budget deficit last year of 8.5% of GDP.)

And now, Joe Biden has proposed a US$6 trillion budget. Inflation is now government policy — intentional…deliberate…and disastrous.

Inflation herald

The Financial Times is on the story: ‘Key inflation gauge registers big jump in the US’.

‘A US inflation measure closely watched by the Federal Reserve posted its biggest year-on-year jump since the 1990s in April, rising more than expected and fuelling concerns about price increases.’

This is the Personal Consumption Expenditure Index (PCE) they’re talking about. It’s now going up at 3.1% year-on-year. (The Consumer Price Index, CPI, another important inflation measure, rose at a 5% annual rate during the first quarter.)

Which is not so alarming in itself. But it heralds the inflation trend we expect.

Combining the latest figures for CPI and PCE, the statistical glop ‘gives off a faint whiff of stagflation,’ said Paul Ashworth at Capital Economics.

Even over here, drifting across the crystal sea on the North Atlantic wind to our current Diary headquarters in Ireland, the smell of zombies is unmistakable.

Regards,

Bill Bonner,
For The Rum Rebellion