This Cycle: It"s Not The Economy, It"s China, Stupid!

Authored by Kevin Muir via The Macro Tourist blog,

I know everything is fan-freaking-tastic - with the tax reform bill and global synchronized expansion and all. I figure the last thing you need is some nattering naysayer throwing cold water on this unbelievable party, so I won’t. At least not for the short run.

This rally will end when it ends. Maybe tomorrow, maybe next week, maybe next month, maybe next year. I don’t know and every time I try to guess, I just end up looking foolish.

But I recently listened to this terrific Bloomberg Masters in Business interview of the legendary hedge fund manager, Felix Zulauf, and he articulated such a compelling argument for the timing of the next slowdown, I felt like Felix was my Spirit Bear.

I have always enjoyed Felix’s viewpoint, but Barry Ritholtz did such a great job during this interview, that I have a new found appreciation for Felix’s career, and more importantly, his market calls. I had mistakenly assumed Felix was always bearish, but the truth of the matter is that he definitely switches from side to side, and is not the pro-typical Swiss hard money uber-bear. I didn’t agree with all of his economic philosophy by any means, but his market (and political) analysis was some of the most compelling dialog I have listened to in quite some time. If you haven’t heard it, then give it a listen.

If you don’t want to take the time, don’t fret - I have transcribed the most important part for you.

Felix: China I believe is in an interesting position right now. You heard President Xi’s speech last week, and in 2021 there is the 100th anniversary of the Chinese Communist party and it’s very clear that they want to have a strong economy at that time. If you want to have a strong economy in 2021, you stimulate in 2020. And they are central planners. So that’s means they have to take their foot off the pedal in 2018, 2019. I think in ‘18 and ‘19, they will address the imbalances in the financial sector and that will slow down the Chinese economy in ‘18 and ‘19, which will also slow down the rest of the world.

 

So we are entering a period where sometime in ‘18, I would say the peak of the market will be in the first half, the peak in the economy is probably from mid-2018 on, and then we slow down into 2020.

 

And 2022 is the next Chinese Congress, and President Xi is probably the first leader who tries to run for a third time. So he wants to have a very good economy in 2021 and 2022. That means he has to first slow things down, restructure some of the imbalances in the system because if he tries to carry through, it could backfire on him. It could be the worst of all worlds. Namely a completely overheated situation, with high inflation rates, etc…

 

That’s why I think the leader of this cycle, China, is going to slow down next year.

 

Barry: So the whole global economy is dependent on President Xi’s re-election desires in 2022?

 

Felix: As I said before, you always need to figure out what is the leading theme in the market cycle. In the last cycle, it was real estate, in this cycle it is China. And that’s why China is so important. China is the second largest economy, and in 10 or 15 years, it will be the largest economy of the world.

Longtime readers will instantly see why Felix’s theory appealed to me. I have long argued that China’s fiscal and monetary policy might be the most two important variables when it comes to forecasting the global economy. And here was Felix making the case that the entire global economic cycle is being driven by China. Felix - you had me at hello.

Now, make no mistake. This is a longer-term call. It’s not going to affect market prices next week, and probably not even next month. But in the coming quarters, it has the potential to be the most important determinant of financial asset performance.

I will take a little more nuanced approach to Felix’s theory, but in broad strokes, I completely agree with his analysis. The Chinese government will not allow their 100th anniversary be anything less than a rocking success. And President Xi is smart enough to know that he can’t just keep the pedal to the metal for the next four years and hope that the economic expansion lasts.

China’s performance over the past year

Remember all the dire warnings from your favourite star hedge fund managers about China’s coming collapse? Well, I don’t want to be prematurely counting any chickens, but it looks like Xi & Co. have managed to successfully navigate another year without the end of the world financial Armageddon scenario coming to fruition.

And it’s not like this has been achieved through growth-at-any-cost with super easy monetary policy. In fact, during the past year, both interest rates and the Chinese Yuan have risen.

It appears as if, bit-by-bit, China has slowly tightened monetary policy. And I suspect that trend will not only continue, but even accelerate from now. President Xi will continue strangling the excesses out of the Chinese financial economy through tighter monetary policy. The PBOC won’t plunge China into a recession, but instead slowly choke off the speculative froth.

But there’s more to the story

Now here is where I will expand on Felix’s theory. China is in the midst of a massive infrastructure spending program with their One-Belt-One-Road initiative. The program is massive, and entails many complicated and extensive transportation system upgrades in all parts of their country. This sort of development is not something that you easily turn on and off. And nor should it be. This is true investment in the future of China. Much like Eisenhower’s interstate highway program that set up America to become an economic powerhouse for decades to come, China’s OBOR initiative is a crucial step for China’s development. Xi will not alter this plan. The course is set, and the money will be spent.

In fact, it’s already happening. And it’s causing China to run the greatest fiscal stimulus in history. Have a look at this chart from the world’s most charming and well-spoken China bear, Kyle Bass:

Yup, that’s crazy. China is running a fiscal deficit of 14% of GDP. Any wonder why the global economy is cruising along so nicely? It sure helps when you have this sort of fiscal stimulus wind in our sails.

Will Xi tap this back? Sure, he might try to trim around the edges, but the reality is that he will not make any meaningful cuts to the OBOR policy.

Therefore, China will be running a hot fiscal policy for years to come, and the only way to counteract its effect, will be by tightening on the monetary side. This will also have the added benefit of causing the financial economy to slow. In fact, we are already seeing this play out in the housing market.

While I was thinking about this situation, I was reminded of a passage in the Market Wizards book where Stanley Druckenmiller spoke about his trade surrounding the unification of East and West Germany:

Everything started to come together at that time. Not only was I trading on my own without any interference, but that same eastern European situation led to my first truly major trade for Soros’s Quantum Fund. I never had more conviction about any trade than I did about the long side of the Deutsche mark when the Berlin wall came down. One of the reasons I was so bullish on the Deutsche mark was a radical currency theory proposed by George Soros in his book, The Alchemy of Finance. His theory was that if a huge deficit were accompanied by an expansionary fiscal policy and tight monetary policy, the country’s currency would actually rise. The dollar provided a perfect test case in the 1981-84 period. At the time, the general consensus was that the dollar would decline because of the huge budget deficit. However, because money was attracted into the country by a tight monetary policy, the dollar actually went sharply higher.

 

When the Berlin wall came down, it was one of those situations that I could see as clear as day. West Germany was about to run up a huge budget deficit to finance the rebuilding of East Germany. At the same time, the Bundesbank was not going to tolerate any inflation. I went headlong into the Deutsche mark. It turned out to be a terrific trade.

Now I know this isn’t the perfect analogy, but I can’t help but wonder if it will be more correct than all the Yuan bears who are predicting a China collapse.

Putting it all together

We have a Chinese President who wants to be re-elected shortly after his party’s 100th anniversary celebration in 2021. Therefore, it will be important that the Chinese economy is humming along at full speed at that time. To do that, he needs to stimulate in 2020, but the problem is, if he doesn’t tap the brakes now, he might risk overheating before then. President Xi will therefore take the hit, and get the pain over with in 2018 and 2019. Yet the story is further complicated by the fact that China’s long run infrastructure program is causing a hot fiscal policy. All of these factors add up to a much tighter PBOC for the next couple of years.

Call me an idiot, but I am tempted to take the long Yuan trade. I know that seems insane - all those really smart hedge fund managers are all forecasting a China collapse. But buying Yuan is probably better than betting on stocks going down because of the tight Chinese monetary policy. Not convinced it’s the best trade, and not even sure if I am going to do it in any real size, but I have often found the hardest trades, are often the best trades.

Either way, be aware of this multi-year seasonal Chinese economic timing dynamic. Maybe Felix just laid out a timetable for the market to finally roll over, albeit still many months away. That’s probably good because it certainly feels like it will be that long before we get any meaningful correction…

 

Is America Really "Up" For A Second Cold War?

Authored by Patrick Buchanan via Buchanan.org,

After the 19th national congress of the Chinese Communist Party in October, one may discern Premier Xi Jinping’s vision of the emerging New World Order.

By 2049, the centennial of the triumph of Communist Revolution, China shall have become the first power on earth.

Her occupation and humiliation by the West and Japan in the 19th and 20th centuries will have become hated but ancient history.

America will have been pushed out of Asia and the western Pacific back beyond the second chain of islands.

Taiwan will have been returned to the motherland, South Korea and the Philippines neutralized, Japan contained. China’s claim to all the rocks, reefs and islets in the South China Sea will have been recognized by all current claimants.

Xi’s “One Belt, One Road” strategy will have brought South and Central Asia into Beijing’s orbit, and he will be in the Pantheon beside the Founding Father of Communist China, Mao Zedong.

Democracy has been rejected by China in favor of one-party rule of all political, economic, cultural and social life.

And as one views Europe, depopulating, riven by secessionism, fearful of a Third World migrant invasion, and America tearing herself apart over politics and ideology, China must appear to ambitious and rising powers as the model to emulate.

Indeed, has not China shown the world that authoritarianism can be compatible with national growth that outstrips a democratic West?

Over the last quarter century, China, thanks to economic nationalism and $4 trillion in trade surpluses with the United States, has exhibited growth unseen since 19th-century America.

Whatever we may think of Xi’s methods, this vision must attract vast numbers of China’s young — they see their country displace America as first power, becoming the dominant people on earth.

What is America’s vision? What is America’s cause in the 21st century? What is the mission and goal that unites, inspires and drives us on?

After World War II, America’s foreign policy was imposed upon her by the terrible realities the war produced: brutalitarian Stalinist domination of Eastern and Central Europe and much of Asia.

Under nine presidents, containment of the Soviet empire, while avoiding a war that would destroy civilization, was our policy. In Korea and Vietnam, Americans died in the thousands to sustain that policy.

But with the collapse of the Soviet Empire and the breakup of the USSR, it seemed that by 1992 our great work was done. Now democracy would flourish and be embraced by all advanced peoples and nations.

But it did not happen. The “end of history” never came. The New World Order of Bush I did not last. Bush II’s democracy crusade to end tyranny in our world produced disasters from Libya to Afghanistan.

Authoritarianism is now ascendant and democracy is in retreat.

Is the United States prepared to accept a world in which China, growing at twice our rate, more united and purposeful, emerges as the dominant power? Are we willing to acquiesce in a Chinese Century?

Or will we adopt a policy to ensure that America remains the world’s preeminent power?

Do we have what is required in wealth, power, stamina and will to pursue a Second Cold War to contain China, which, strategic weapons aside, is more powerful and has greater potential than the Soviet Union ever did?

On his Asia tour, President Trump spoke of the “Indo-Pacific,” shorthand for the proposition that the U.S., Japan, Australia and India form the core of a coalition to maintain the balance of power in Asia and contain the expansion of China.

Yet, before we create some Asia-Pacific NATO to corral and contain China in this century, as we did the USSR in the 20th century, we need to ask ourselves why.

Does China, even if she rises to surpass the U.S. in manufacturing, technology and economic output, and is a comparable military power, truly threaten us as the USSR did, to where we should consider war to prevent its expansion in places like the South China Sea that are not vital to America?

While China is a great power, she has great problems.

She is feared and disliked by her neighbors. She has territorial quarrels with Russia, India, Vietnam, the Philippines, Japan. She has separatists in Tibet and Xinjiang. Christianity is growing while Communism, the state religion, is a dead faith. Moreover, the monopoly of power now enjoyed by the Communist Party and Xi Jinping mean that if things go wrong, there is no one else to blame.

Finally, why is the containment of China in Asia the responsibility of a United States 12 time zones away?

For while China seeks to dominate Eurasia, she appears to have no desire to threaten the vital interests of the United States. China’s Communism appears to be an ideology disbelieved by her own people, that she does not intend to impose it on Asia or the world.

Again, are we Americans up for a Second Cold War, and, if so, why?

Corruption In China Risks A Soviet-Style Collapse - Party"s Graft Buster

Yang Xiadou is the Party’s number two man in Xi Jinping’s crackdown on corruption in the Chinese Communist Party – although some have seen this, in part, as a convenient way for Xi to bolster his power base.

During the 19th Party Congress last month, Yang was asked about the anti-corruption drive and how to achieve a balance between human rights and party discipline. Yang replied that, having worked in the Tibet Autonomous Region for many years, human rights was an “interesting question”. He recounted a conversation he had with a US assistant secretary of state where he likened Abraham Lincoln freeing slaves in America to China’s actions in Tibet.

“I said in the hearts of Chinese people, Lincoln is a hero, because he freed the slaves.

 

On this point the Chinese people and the American people have the same understanding – this is a human rights issue.

 

In turn, we freed the serfs in Tibet, how come American friends cannot understand this? From Lincoln’s perspective, he should have supported China’s overturning of the serfdom in Tibet.”

No matter that the Central Tibetan Administration, usually called the “Tibetan Government in Exile” has a starkly different view.

Yang’s ability to “paint broad canvases” was in evidence again when he stated that corruption in China could lead to a collapse similar to the Soviet Union. According to the Times of India.

China must step up its battle against corruption in order to safeguard against a Soviet-style collapse, the country"s second most senior graft buster said in an editorial on Wednesday. Yang Xiaodu, the deputy secretary of the Central Commission for Discipline Inspection, who was promoted to the ruling Communist Party"s 25-strong Politburo last month, said failure would risk the "red country changing colour".

In unusually direct and strongly worded criticism of previous administrations, Yang said "in a previous period", corruption had been allowed to fester to such an extent that the party"s leadership had weakened, with supervision soft, and ideology apathetic.

 

"It had developed to the point where if not rectified, the country could change colour," Yang wrote in the official People"s Daily.

 

"The future fate of the party and the country"s people could follow the same old road to ruin as the Soviet Union and the Eastern Bloc."

It"s well known that senior Party officials warn their underlings of the need to study the collapse of the Soviet Union and the importance of maintaining discipline and tight control. China analysts are viewing these comments by Yang and others as evidence that Xi’s crackdown is not letting up despite the former Secretary of the Central Commission for Discipline Inspection, Wang Qishan, stepping down at the Party Congress.

Writing in the People’s Daily last Saturday, Wang’s replacement and Politburo Standing Committee member, Zhao Leji, warned that if the Party lost the battle against corruption it risked “being erased by history”. Yang emphasised the need to press forward in the eliminating corruption, as the Times of India notes.

Yang said Xi"s anti-corruption achievements had been revolutionary in "turning the blade of the knife inward".

 

But he said unhealthy pollutants within the party"s political ecosystem had yet to be completely cleansed, and the anti-corruption fight remained "grave and complex”.

 

"There is no road for retreat, only forward in attack, and definitely no pause or relax," Yang wrote. China has plans for a national supervision law and a new commission next year to oversee the expansion of Xi"s graft fight. Yang, who is also minister of supervision, had been Wang"s deputy since 2014 and his promotion to the Politburo is seen as another display of the importance the central leadership attaches to fighting corruption.

In the wake of the Party Congress, we can deduce that Xi means business on deleveraging and cooling the property bubble, stepping up efforts to reduce pollution, in addition to attacking corruption. We continue to believe that China is entering a more risky phase than financial markets are discounting at this point.

The Deeper Purpose Of Trump"s Asia Trip

Authored by James Rickards via The Daily Reckoning,

President Trump is wrapping up his historic visit to Asia today. Trump’s journey is the longest overseas trip of his presidency and the longest Asian visit of any president in 25 years.

After a stopover in Hawaii, Trump proceeded to Japan, where he met with Japanese Prime Minister Shinz? Abe, and then to South Korea where he met with President Moon Jae-in.

The capstone of the trip was Trump’s arrival on Nov. 8 in Beijing for meetings with Chinese President Xi Jinping. Trump then headed for Vietnam late in the week and is concluding meetings in the Philippines today.

Much of the reporting on this trip has involved international trade, but it’s a mistake to focus on that. This trip was a prewar gathering of allies (Japan and South Korea) and potential allies (China) in a last-ditch struggle to head off a hot war with North Korea, led by the reckless Kim Jong Un.

At this point, there are only four possible outcomes of the U.S.-North Korea confrontation over nuclear weapons:

1.Kim Jung Un stands down and gives up his nuclear weapons program.

 

2. The U.S. and China combine forces to decapitate the Kim dynasty and force regime change in North Korea.

 

3. Preventive attack on North Korea by the U.S. before March 20, 2018.

 

4. The U.S. accepts a nuclear-armed North Korea and relies on containment and deterrence to constrain its actions.

Based on public statements of U.S. officials, my recent meetings in Washington with the director of the CIA and the national security adviser and other sources, I estimate the degree distribution of those possible outcomes as follows:

• Kim stands down: 10%


• Regime change: 20%


• War: 70%


• U.S. lives with nuclear North Korea: 0%.

Trump’s visits to Japan and South Korea were about leaving the door open to negotiations in the hope that Kim would stand down while also preparing for war.

Trump’s visit to China was about asking for assistance in regime change. Xi is unlikely to agree to help the U.S. in this regard.

This means war. Instead, Trump and Xi no doubt discussed China’s “red lines” in North Korea so that a war between the U.S. and North Korea does not escalate into a war with China.

Almost none of this is fully priced in public markets, although markets seemed to be getting the message last week.

A war between the U.S. and North Korea will cause a global flight to quality assets and currencies at the expense of other asset classes.

Here are the likely market moves as the prospect of war becomes clear: Dollars, euros and Swiss francs will rally at the expense of emerging-market currencies. U.S. Treasury bonds will rally in price, pushing yields lower.

Gold will rally strongly, well past the $1,325 level, and then push higher.

Curiously, U.S. stocks may rally after an initial pullback when the shooting starts. Defense contractors, tech companies, commodities producers, utilities and energy companies should all rally. War is generally good for some sectors of the economy and may finally give the Fed the inflation it’s been looking for in vain the past eight years.

The war is likely coming in a matter of months.

Kyle Bass Warns: Xi Has "Built The Chinese Economy On A Foundation Of Sand"

Earlier this week, Chinese leader Xi Jinping became the third ruler in the communist country’s history to have his named enshrined in its constitution – and the first to receive this honor while still alive. But as China celebrates its most popular, and most powerful, leader since at least Deng Xiaoping, Kyle Bass, hedge fund manager and noted China bear, told Bloomberg the Communist Party will one day regret standing idly by as Xi consolidated his power.

“Today Xi is celebrated in media reports, but when future historians look back, he will be blamed for recklessly building the Chinese economy on a foundation of sand,” Bass, founder of Hayman Capital Management, said in an email Wednesday.

“Xi desperately seeks credibility, but true developed economies do not impose severe capital controls or move short-term rates hundreds of basis points overnight in attempts to manipulate their own currency.”

Xi, who launched the twice-a-decade National Party Congress last week with a three-hour speech where he laid out his vision for “communism with Chinese characteristics in a new era,” the philosophy that was enshrined in the country’s constitution by a unanimous vote. In a move that seemingly confirms suspicions that Xi plans to break with precedent and seek a third term after his second ends in 22, Xi appointed five new members to the Politburo,

China’s most powerful body, all of whom are too old to be viewed as credible heirs. Typically, Chinese leaders have pointed to a successor or possible successors by the time they begin their second term, ensuring that there’s a clear path of leadership transition.

Of course, Bass and others have been highly critical of the Communist Party’s heavy handed tactics. For example, the PBOC and the Chinese ‘National Team’, which exert powerful influence over the company’s financial market, have successfully tamped down equity market trading volume and volatility in the runup to the Congress, while guiding the yuan higher against the dollar.

However, China’s closed financial system and manipulated markets aren’t the only target of Bass’s criticism. He also pointed to China’s ever-growing pile of debt. Borrowing has swelled to 260 percent of gross domestic product at the end of 2016, Bloomberg Intelligence data show. Earlier this year, the country’s soaring debt burden inspired Moody’s Investors Service and S&P Global Ratings to downgrade the country’s sovereign credit rating.

In an interview earlier this month, Bass, who has called for a 30% drop in the Chinese yuan, said he expects the government to relax its grasp on the exchange rate after the National Party Congress. He said he believed once Xi consolidates power, he’ll allow natural economic forces to reassert themselves in the country’s banking system.

Since the yuan joined the IMF’s Special Drawing Rights basket a year ago, China has made little progress in making its currency more convertible and accessible. To wit, the yuan remains a secondary currency for settling global payments.

“China remains an emerging backwater when it comes to global currency settlements,” he said Wednesday.

As Bloomberg pointed out, Bass, who made a fortune betting against U.S. subprime mortgages, said in early 2016 that losses in Chinese banks could be four times bigger than those suffered by American lenders during the global financial crisis. He has said that crucial figures, like the share of non-performing loans, have been understated.

“Recklessly growing a banking system in pursuit of global economic growth and respect will cause severe financial instability in the years to come,” he said on Wednesday.

 

“The dangerous $40 trillion credit experiment with Chinese characteristics will run its course.”

As reported earlier this month, Bass has stuck to his pessimistic views on China (though he has moderated his view a bit, pushing back his expected timeline for signs of instability in the country’s debt market to emerge) while other noted bears reversed their positions as the next big yuan devaluation failed to materialize.

While China bears have underestimated the nation’s unique ability to control its market, the sheer pace and volume of credit creation can’t possibly be sustained forever, Bass said.
 

All Hail Chinese Emperor Xi Jinping: Will He 'Make China Great Again'?

Perhaps no event embodies the unyielding abstruseness and the unforgiving hierarchy of China’s ruling Communist Party as much as its Party Congress, the government’s most important leadership conference. Attended by some twenty-three hundred delegates from across the country, it is held every five years in Beijing’s Great Hall of the People—and when the weeklong meeting finally begins, one can be certain that the crucial politicking has already concluded. What proceeds is a choreographed spectacle bearing fastidiously scripted speeches, pro-forma elections of what has heretofore been determined (a leadership reshuffle in the seven-member Politburo, the highest echelon of power), and, in the case of the 19th Communist Party Congress, which opened today, high-spirited, propagandistic posters reminding the masses that “Life in China Is Good! Everyday Is Like a Holiday!”

This is a message that Xi Jinping, who was appointed President at the previous Party Congress, in 2012, is eager to instill in a country that continues to grapple with a vertiginous pace of change and the outsize influence of politics in everyday life. Xi is almost certainly guaranteed another five-year term, if not longer. Since taking office, he has sought to launch the greatest ideological campaign since the days of Mao.

Xi has made clear from the outset, he is intent on both defining a new world order and restoring to Chinese culture its former esteem.

Yet Xi’s mission should be regarded in the context of a collective and profound post-traumatic stress disorder, the result of almost two centuries of cataclysmic events in China. For every Tang Taizong, who ushered in the golden years of the Tang Dynasty, there were many others like Empress Dowager Cixi, who usurped the throne, crippled the path of progress, and contributed to the downfall of the Qing Dynasty.

As Xi made clear today, during his three-hour address to the Party Congress, he sees this moment as “a new historic juncture in China’s development”—and himself as the man to seize it. He seems to believe that the more power he amasses, the easier it will be for him to enact the kind of monumental changes necessary to transform China into the world’s leading superpower. In this sense, he is positioning himself as a savior with a cause noble enough to justify his autocratic turn. The logic is akin to that which animated the ambition of many of the Middle Kingdom’s five-hundred-odd emperors. Sure, Xi has rerouted all tributaries of power to run upstream to him, but isn’t it in the service of rejuvenation?

Xi has also used his growing power to curb that of his citizens. Under his rule, China has become increasingly repressive. The media is censored and civil society has been muted. Activists have been silenced and human-rights lawyers arrested. More than a million officials have been disciplined. Despite paying lip service to the constitution—the Party devoted an entire plenary session during the 18th Congress to a discussion of “judicial independence”—Xi is steering the country away from the rule of law and toward the rule of the Party.

Xi’s vision for China’s future suggests a great leap backward, in which old lessons remain unlearned.

The 7 Key Takeaways From Xi Jinping's Vision For "A New Era" In China

As reported first thing this morning, China"s President Xi Jinping outlined his vision for the next five years, ushering in a "new era" (a term he repeated 36 times) of development in China, as the Communist Party’s 19th Congress opened in Beijing on Wednesday. During a 3½-hour long speech, Xi said the internal and external situations facing China were undergoing complicated changes which the party needed to address. Xi started with the opening remark that “the prospects are bright while the challenges are also grave”, before reminding his audience of his achievements over the past five years, which included: poverty reduction, strengthening the one party rule, national security, cutting down pollution and the Belt and Road infrastructure initiatives. One can also throw in "nationalizing China"s capital markets" in this list.

Further, as DB"s Jim Reid wrote overnight, Xi"s anti-graft drive has achieved an “important and irreversible’ momentum and he insisted that China has ‘zero tolerance” on corruption. On the long term, he wants to set the agenda for the country to be “a modern, socialist power” by 2050. On the economy, he says the liberalisation of both interest rate exchanges will continue as "the door China opened will not close but will open wider and wider".

Elsewhere, Xi wants China to make the "quality and efficiency" of growth a priority and deepen supply side reforms as well as insisting on the need to reduce excessive capacity and debt ratios. On housing, he said "houses are for people to live in, not for speculation" and he promised to provide more homes through a variety of different channels.

Before his formal address, Deputy central bank chief Pan also noted that he expects that the Yuan will have a more secure foundation after the congress allowing the central bank to push exchange rate market reforms.

Xi also vowed to step up ideological guidance within the party, strengthen its anti-corruption campaign, retain the government’s grip on Hong Kong and Macau, and oppose any moves towards independence in Taiwan.

Courtesy of SCMP, here are the seven major takaways from Xi"s report:

1. A new name for Xi’s political philosophy

Xi said China has formed “socialism with Chinese characteristics for a new era”. The idea will be the guiding principle for the country’s development in the coming years. The slogan was released amid speculation about how Xi’s political thought would be enshrined into the party’s constitution. There are 14 elements behind the concept, with one key idea being that the party should lead in every aspect of life in China.

Xi said the dream of national rejuvenation would only be a fantasy without the leadership of China’s Communist Party. The party should lead in all areas and the authority of the party central leadership should be respected, he said. Cadres should keep in line with the party leadership, while the party should tighten its lead on ideological work. “The party resolutely opposes all attempts that will weaken, distort or reject the leadership of the party and the implementation of socialism,” he said adding that a “principal contradiction” had emerged in Chinese society because of uneven development and the public’s demand for a better life.

2. Becoming a nation with leading, global influence by 2050

Xi laid out some ambitious targets for the next 30 years and more. The first batch should be achieved from 2020 to 2035, Xi said. China will be a top ranked innovative nation by 2035 with a large middle-income population and narrower wealth gap. China’s soft power should be boosted, Xi said. From 2035 to 2050, China should become a nation with pioneering global influence.

3. Keeping up with the “irreversible” momentum of anti-corruption campaign and maintaining the rule by law

China will set up a leading group for comprehensive rule by law. Xi repeatedly talked about the concept during his speech and vowed the party and the government would rule the country under the law and through public oversight. No one would be able to put themselves above the law, he said. He added that China must watch out for any attempt to copy Western-style democracy.

Xi also issued a warning to delegates at the Great Hall of the People on corruption, saying China insists on “zero tolerance” of graft. He said the government has been unswerving in “fighting tigers, destroying flies and hunting down foxes”, referring to the government’s sweeping anti-corruption campaign. He said a national supervision law would be formulated and shuanggui – a party disciplinary practice – would be replaced.

4. Protecting national sovereignty

China’s capability to deal with national security should be boosted as the nation will resolutely protect its sovereignty and interests. Xi said China has made a “historical breakthrough” in national defence and military reform. The navy has protected the nation’s maritime interest and its army rapidly upgraded its weaponry. For the coming years, China will continue pushing for integration between the civilian and the military sector. The People’s Liberation Army should be a “world class” force by 2050. China also opposes separatism under the guise of religion or extremist thought, Xi said.

5. Upholding central government authority over Hong Kong and Macau and opposing Taiwan independence

Xi said the “one country, two systems” principle will not be changed nor distorted in Hong Kong. The central government’s jurisdiction over the two Special Administrative Regions, which also includes Macau, should not be shaken, he said.  On Taiwan, Xi said Beijing has properly handled the changing situation facing the island and will continue to resolutely oppose any move to seek independence for Taiwan.

6. Creating a level playing field for foreign businesses

Countering foreign diplomats and business concerns that the government was blocking overseas investment, Xi said China would give equal treatment to all businesses. “The China which has opened up will not close, but will open wider and wider,” he said. China’s GDP has increased from 54 trillion yuan (US$8.2 trillion) five years ago to 80 trillion yuan and the government would aim for growth that is of higher quality and sustainable, he said.

7. Protecting the public interest

Fighting poverty was crucial for China to become a moderately prosperous society, Xi said. All provinces which are under the poverty line should climb above that threshold by 2020. He also pledged to create more jobs for college graduates and migrant workers. Addressing concerns over rising property prices, Xi said houses were for people to live in, not for speculation.

* * *

Not enough? Then here are 6 more key highlights, this time from Goldman"s China economist, Yo Song, who writes that "overall the report sent few new signals on either near-term cyclical policy or longer term structural policy, in our view, although there are a few changes/ highlights/ new concepts to note, which we outline below."

• Change in the “principal contradiction facing Chinese society,” which is usually viewed as the guidance on the Party"s key area of focus. In the report, Xi said that “the principal contradiction facing Chinese society has evolved to be that between unbalanced and inadequate development, and the people"s ever-growing needs for a better life,” a change from previously, “the principal contradiction in our society is still between the ever-growing material and cultural needs of the people, and the backwardness of social production.” (This statement had been in place since 1981.) We view this change in “principal contradiction” as an acknowledgement of the need for more efficient and balanced economic development. Instead of purely focusing on the speed of economic growth, policy makers now also emphasize higher productivity, higher profitability, more innovation and efficient distribution, as well balanced development between urban and rural areas, and among different regions of the country. This is also consistent with the tone from policy makers in recent years (e.g., the “new norm” from Xi, and “focusing on not just the quantity but also the quality of development” in the Central Economic Working Conference).


• Xi’s thoughts on socialism with Chinese characteristics for a new era. The report came up with thoughts on socialism with Chinese characteristics for a new era, which should be effectively a summary of Xi’s thoughts and will likely be incorporated into the Party Constitution during the Congress. There are 14 fundamental principles, which have been mentioned previously in different situations, with the first being “ensuring Party leadership over all work.” On economic areas, Xi mentioned “continuing to comprehensively deepen reform and “adopting a new vision for development,” which reiterated Xi’s five development concepts (i.e., innovation, coordination, green development, opening and sharing), and reemphasized letting the market play a decisive role in resource allocation. Environmental issues are listed as a separate principle under “ensuring harmony between human and nature,” and the report mentioned plans to “implement the most rigorous ecological and environmental protection system.”


• A new two-stage development plan. In the report, Xi emphasized importance of the period up to 2020 as "the decisive stage in building a moderately prosperous society," and said that "all requirements on building a moderately prosperous society from the 16th, 17th, 18th Party Congress must be followed." Presumably, this would include the goal of doubling income by 2020 established in the 18th Party Congress, though it was not explicitly mentioned here. Then Xi proposed a two-stage development plan from 2020 to the middle of the 21st century, with the first stage from 2020–2035 to see that socialist modernization is basically realized, and the second stage from 2035 to the middle of the 21st century to develop China into a great modern socialist country. However, there are no quantitative details in the plan currently.


• Characterizing the economy as turning from a high-growth phase to a high-quality development stage. The report also mentioned building a modern economic system. Major measures for this include deepening “supply side” reforms (e.g., reiterating key structural tasks such as over-capacity cuts and de-leveraging), strengthening innovation, promoting SOE reforms with mixed ownership, developing a twin policy management framework with both monetary policy and macro-prudential tools, “significantly” loosening market access to domestic service sectors and protecting foreign enterprises’ legal rights in China.


• Other highlights included a proposal to establish a central leading working group on the comprehensive rule of law, although the exact form of the group has not yet been specified. In social areas, Xi highlighted a policy intention to widen the coverage of education, reduce income gaps between low- and high-income groups, strengthen social protection (e.g., retirement, unemployment), reduce poverty and deepen ongoing medical service reforms. He also reiterated that, “houses are for living, not for speculation” and mentioned plans to “speed up the development of a housing system with supply from multi entities, protection from multi channels and combination of rental and sale.”


• The next publication will be the list of Central Committee members on Oct 24, followed by revealing of appointments to the Politburo Standing Committee on Oct 25.

The above was summarized best by UBS" chief economist, Paul Donovan, in just one sentence: "China"s economic challenge is that the successful model of the last twenty years will not work in the next twenty years."

And while we previously gave a full preview of what to expect from the 19th Congress, here is a 2 minute summary for those pressed for time:

Rickards Warns "Prepare For A Chinese Maxi-Devaluation"

Authored by James Rickards via The Daily Reckoning,

China is a relatively open economy; therefore it is subject to the impossible trinity.

China has also been attempting to do the impossible in recent years with predictable results.

Beginning in 2008 China pegged its exchange rate to the U.S. dollar. China also had an open capital account to allow the free exchange of yuan for dollars, and China preferred an independent monetary policy.

The problem is that the Impossible Trinity says you can’t have all three. This model has been validated several times since 2008 as China has stumbled through a series of currency and monetary reversals.

For example, China’s attempted the impossible beginning in 2008 with a peg to the dollar around 6.80. This ended abruptly in June 2010 when China broke the currency peg and allowed it to rise from 6.82 to 6.05 by January 2014 — a 10% appreciation.

This exchange rate revaluation was partly in response to bitter complaints by U.S. Treasury Secretary Geithner about China’s “currency manipulation” through an artificially low peg to the dollar in the 2008 – 2010 period.

After 2013, China reversed course and pursued a steady devaluation of the yuan from 6.05 in January 2014 to 6.95 by December 2016. At the end of 2016, the Chinese yuan was back where it was when the U.S. was screaming “currency manipulation.”

Only now there was a new figure to point the finger at China. The new American critic was no longer the quiet Tim Geithner, but the bombastic Donald Trump.

Trump had threatened to label China a currency manipulator throughout his campaign from June 2015 to Election Day on November 8, 2016. Once Trump was elected, China engaged in a policy of currency war appeasement.

China actually propped up its currency with a soft peg. The trading range was especially tight in the first half of 2017, right around 6.85.

In contrast to the 2008 – 2010 peg, China avoided the impossible trinity this time by partially closing the capital account and by raising rates alongside the Fed, thereby abandoning its independent monetary policy.

This was also in contrast to China’s behavior when it first faced the failure of its efforts to beat impossible trinity. In 2015, China dodged the impossible trinity not by closing the capital account, but by breaking the currency peg.

In August 2015, China engineered a sudden shock devaluation of the yuan. The dollar gained 3% against the yuan in two days as China devalued.

The results were disastrous.

U.S. stocks fell 11% in a few weeks. There was a real threat of global financial contagion and a full-blown liquidity crisis. A crisis was averted by Fed jawboning, and a decision to put off the “liftoff” in U.S. interest rates from September 2015 to the following December.

China conducted another devaluation from November to December 2015. This time China did not execute a sneak attack, but did the devaluation in baby steps. This was stealth devaluation.

The results were just as disastrous as the prior August. U.S. stocks fell 11% from January 1, 2016 to February 10. 2016. Again, a greater crisis was averted only by a Fed decision to delay planned U.S. interest rate hikes in March and June 2016.

The impact these two prior devaluations had on the exchange rate is shown in the chart below.

Major moves in the dollar/yuan cross exchange rate (USD/CNY) have had powerful impacts on global markets. The August 2015 surprise yuan devaluation sent U.S. stocks reeling. Another slower devaluation did the same in early 2016. A stronger yuan in 2017 coincided with the Trump stock rally. A new devaluation is now underway and U.S. stocks may suffer again.

By mid-2017, the Trump administration was once again complaining about Chinese currency manipulation.

This was partly in response to China’s failure to assist the United States in dealing with North Korea’s nuclear weapons development and missile testing programs.

For its part, China did not want a trade or currency war with the U.S. in advance of the National Congress of the Communist Party of China, which begins on October 18.

President Xi Jinping was playing a delicate internal political game and did not want to rock the boat in international relations. China appeased the U.S. again by allowing the exchange rate to climb from 6.90 to 6.45 in the summer of 2017.

China escaped the impossible trinity in 2015 by devaluing their currency.

China escaped the impossible trinity again in 2017 using a hat trick of partially closing the capital account, raising interest rates, and allowing the yuan to appreciate against the dollar thereby breaking the exchange rate peg.

The problem for China is that these solutions are all non-sustainable.

China cannot keep the capital account closed without damaging badly needed capital inflows. Who will invest in China if you can’t get your money out?

China also cannot maintain high interest rates because the interest costs will bankrupt insolvent state owned enterprises and lead to an increase in unemployment, which is socially destabilizing.

China cannot maintain a strong yuan because that damages exports, hurts export-related jobs, and causes deflation to be imported through lower import prices. An artificially inflated currency also drains the foreign exchange reserves needed to maintain the peg.

Since the impossible trinity really is impossible in the long-run, and since China’s current solutions are non-sustainable, what can China do to solve its policy trilemma?

The most obvious course, and the one likely to be implemented, is a maxi-devaluation of the yuan to around the 7.95 level or lower.

This would stop capital outflows because those outflows are driven by devaluation fears. Once the devaluation happens, there is no longer any urgency about getting money out of China. In fact, new money should start to flow in to take advantage of much lower local currency prices.

There are early signs that this policy of devaluation is already being put into place. The yuan has dropped sharply in the past month from 6.45 to 6.62. This resembles the stealth devaluation of late 2015, but is somewhat more aggressive.

The geopolitical situation is also ripe for a Chinese devaluation policy. Once the National Party Congress is over in late October, President Xi will have secured his political ambitions and will no longer find it necessary to avoid rocking the boat.

China’s President Xi Jinping awaits appointment to a second term at the 19th National Congress of the Communist Party of China, starting October 18. His reappointment is a foregone conclusion.

China has clearly failed to have much impact on North Korea’s nuclear weapons ambitions. As war between North Korea and the U.S. draws closer, neither China nor the U.S. will have as much incentive to cooperate with each other on bilateral trade and currency issues.

Both Trump and Xi are readying a “gloves off” approach to a trade war and renewed currency war. A maxi-devaluation of the yuan is Xi’s most potent weapon.

Finally, China’s internal contradictions are catching up with it. China has to confront an insolvent banking system, a real estate bubble, and a $1 trillion wealth management product Ponzi scheme that is starting to fall apart.

A much weaker yuan would give China some policy space in terms of using its reserves to paper over some of these problems.

Less dramatic devaluations of the yuan led to U.S. stock market crashes. What does a new maxi-devaluation portend for U.S. stocks?

We might have an answer soon enough.

China On Pace To Dethrone The US

Authored by James Holbrooks via TheAntiMedia.org,

“Not sure whether China will be nice to self-ruled Taiwan? Wait until after the 19th National Congress of the Communist Party.

What’s in store for the hotly disputed, resource-rich South China Sea, where Beijing has taken a military and technological lead since 2010? Wait until after the Congress.

Coffee maker wouldn’t start today? Wait until after the Congress.

Wait. But you get the idea: This event, due to start Oct. 18, is monumental enough to put a lot of Asia on hold — and make it worry.”

That’s how Ralph Jennings opened his piece for Forbes on Wednesday. Humor aside, the point he’s making is the same one I made at the end of September — that China’s upcoming National Congress is a really big deal.

China sets the regional tone on nearly all matters, as Jennings points out in his article:

"Chinese foreign and economic policies shape much of Asia. China’s ever-growing efforts to build and fund infrastructure around the subcontinent through initiatives such as One Belt, One Road have obvious impact on smaller countries that might otherwise struggle to finance their own projects. Neighbors from Japan to India are watching China for foreign policy cues that affect their iffy diplomatic relations with the region’s major power.”

But China’s geopolitical influence extends far beyond Asia. The country has long been viewed as the rising global superpower on pace to dethrone the United States. Much has been written and said about China’s willingness to embrace this role as more and more countries turn to it for guidance.

China is highly conscious of this trend. It feels the world’s eyes aimed squarely in its direction and very much wants everything at the upcoming Congress, during which President Xi Jinping is expected to be reaffirmed as leader and appoint his own trusted allies to key positions of power, to go smoothly.

This is why, as I pointed out last month, the Chinese government has implemented a system-wide crackdown - both in the streets and in cyberspace - on political dissent ahead of the Congress. It all goes back to perception and the desire to present to the world the “One China” the country’s government says exists.

But perhaps there’s even more to it than that. It may be that once power is further solidified under Xi at the Congress, China will be ready to fully embrace the role of world leader. On Wednesday, its state-run Xinhua News Agency ran an article titled “China offers wisdom in global governance,” which opened with the following:

“With its own development and becoming increasingly closer to the center of the world stage, China has been injecting positive energy into the international community in pursuit of better global governance over recent years.”

Xinhua writes that China’s leadership ability is already well-established and that even though it’s currently undergoing a restructuring of its own, its vision for the world is one rooted in peace and innovation:

“As the world’s second largest economy and the biggest contributor of global economic growth, China’s innovative concepts on improving global governance and promoting global peace and common prosperity have gained wide recognition and support from other countries.

“Undergoing structural reforms, China is implementing its new concept of innovative, coordinated, green, open and shared development, eyeing a quality growth model driven by innovation.

“Meanwhile, the country is assuming its international responsibility to promote common development with other countries in the interconnected world.”

Continuing, Xinhua points to international acceptance of One Belt, One Road as evidence of China’s ability to take the lead in adapting to the modern era:

“The Belt and Road Initiative, building a community of shared future for mankind and the principle of extensive consultation, joint contribution and shared benefits, all proposed by China, have been incorporated in U.N. resolutions, showing wide international consensus on the concepts.

“Equality, mutual respect and win-win cooperation feature in the Chinese plans, which also safeguard the irreversible trend of globalization.”

This “win-win cooperation” is China’s guiding principle, Hu Angang of Tsinghua University in Beijing, told Xinhua. He even dubbed the philosophy “win-winism,” as the state news organ explains:

“’Win-winism’ highlights an open world economy for common development of all countries and joint efforts to address global challenges such as climate change and terrorism, and exchanges of different cultures, said the researcher.”

Xinhua goes on to write that Liu Wei, president of Renmin University of China, says the country has taken the lead by “putting forward new concepts, thoughts and plans to reshape the global governance system.”

With China in the spotlight ahead of the National Congress, it shouldn’t be taken lightly that the superpower would allow such bold language by one of its state mouthpieces. Indeed, it could be that a post-Congress China will be a far more assertive player on the world stage.

China Desperately Silencing Opposition Ahead of Critical Communist Conference

(ANTIMEDIA Op-ed) — It’s no secret that China has placed an incredible amount of importance on 19th National Congress of the Communist Party of China, and the Asian superpower has and is taking steps to ensure the affair, set for October, goes off without a hitch. From Reuters on Thursday:

“China is tightening security for next month’s twice-a-decade Communist Party Congress, canceling police leave in Beijing, limiting tourism to Tibet, and clamping down on the spread of political rumors.

“High-level meetings in China are typically accompanied by a security crackdown — as well as uncharacteristically smog-free blue skies — with the stability-obsessed party not wanting to run the risk that anyone or anything offers a distraction.”

Continuing, Reuters notes that Chinese authorities and their enforcers in the streets will tolerate no political protests leading up to and during the event:

“Some 2,000 delegates will converge on Beijing for the Congress, staying at hotels across the city, and security will only get tighter as its opening nears, meaning any protests will be quickly shut down.”

This is because China puts a high value on perception, national unity, and loyalty to the party. Perhaps this is best evidenced by the actions of the country’s leader in his urging of Chinese artists to direct their work toward the betterment of China. From state-run China Daily on Thursday:

“President Xi Jinping called on the country’s cultural workers and artists to focus on the people during their cultural creation work, thereby providing strong spiritual power for the great rejuvenation of the Chinese nation.

“Xi, also general secretary of the Communist Party of China Central Committee, made the remark in a recent instruction on the country’s building of spiritual civilization.

“Noting that culture is the bugle for the progress of the times, Xi said that the country’s cultural workers and artists should work for the people and socialism. He encouraged cultural workers and artists to boost innovation, be dedicated and make continuous efforts to produce excellent creations.”

Highlighting Xi’s tightening grip on power — at the Congress, the leader is expected to appoint his own trusted people to key positions in the government — a member of the influential Standing Committee, Liu Yunshan, backed his president’s play while speaking at the same seminar as Xi on Wednesday:

“The cultural workers and artists should learn and implement the president’s culture and art thoughts, devote themselves to cultural creation, and make more excellent cultural products, he said.”

And while China’s political leaders encourage unity, the country’s Thought Police are intensifying efforts. It’s long been recognized that China is more aggressive than Western nations in policing its cyberspace, but ahead of the Party Congress the government is taking sharper aim at dissidents. Also from China Daily on Thursday:

“Chinese cyber police and leading tech firm Baidu have launched an online service to control the spread of rumors.

“The service is imbedded [sic] into the country’s top search engine, and all news portals and online forums that Baidu operates.”

All this focus on harmony and a “One China” is precisely why the independence movements in Hong Kong and Taiwan are such a thorn in the superpower’s side. How can China promote strength and unity to the world when two of what it considers its territories want to break away?

The problem is perfectly encapsulated in China’s current relations with Singapore, as Reuters highlighted on Thursday:

“China wants to improve its military relationship with Singapore, but is resolutely opposed to any country having defense ties with self-ruled Taiwan, China’s Defence Ministry said on Thursday, obliquely criticizing Singapore’s Taiwan links.

“China is suspicious of the city state’s good military relations both with the United States and Taiwan, claimed by China as its own.”

The current Taiwanese government is a remnant of the one that was forced to flee the mainland to escape the communists in 1949. While the country is recognized internationally as an independent state, China has never accepted that reality.

Hong Kong, on the other hand, is not a country but a “special administrative region” of China that retains a high degree of autonomy. That’s been the situation since 1997, following Britain’s decision to relinquish control of the area in the 1980s.

But concerns over China exerting its influence over the region were there from the start and eventually culminated into mass, coordinated protest rallies that began in September of 2014.

The desire for independence has only gained strength since then. According to the South China Morning Post, on Thursday — the third anniversary of when the protests kicked off — the co-founders of the movement “implored the people of Hong Kong to continue to fight for universal suffrage and defy what they say is Beijing’s resistance to democracy in the city.”

China wants to present a unified front at the upcoming National Congress. It wants to prove there really is only “One China,” as it’s always said. The problem with that, as is becoming increasingly clear, is that not everyone under the country’s supposed control feels the same way.

Op-ed / Creative Commons / Anti-Media / Report a typo

China Orders No Market Turbulence Ahead Of Party Congress

The most important event in China in five years is about to take place, and Beijing isn"t taking any chances.

Ahead of the Communist Party’s twice-a-decade congress - an event so massive that according to Bloomberg "nothing escapes its pull" - which is slated to start on October 18 in Beijing, regulators have made it clear to the nation’s top brokers, bankers and financiers that they don’t want to see any major turbulence in markets.

In a repeat of the fiasco that followed the bursting of China"s equity bubble in the summer of 2015 when Beijing effectively nationalized the stock market, and went so far as to throw prominent hedge fund managers and assorted "speculators" in prison, the China Securities Regulatory Commission has ordered local brokerages to "mitigate risks" and ensure stable markets before and during the Communist Party’s leadership congress next month, according to Bloomberg. Additionally, to leave virtually nothing to chance - and to have ready scapegoats in case someone does in fact sell - the CSRC also banned brokerage bosses from taking holidays or leaving the country from Oct. 11 until the congress ends.

Brokerage bosses were told to avoid travel of any kind from Oct. 11 until the congress ends, including business trips.

Luckily for them, China’s national day holidays are coming up in the first week of October. Local markets will be shut for an entire week, providing plenty of time to recharge for the congress.

Since the congress, which is expected to replace about half of China’s top leadership, is of paramount importance to President Xi Jinping who will use it as a foundation to cement his influence into the next decade, nothing is allowed to spoil the optics of supreme control at this critical moment.

And while China routinely takes steps to reduce market swings during key political gatherings, the travel ban on brokerage chiefs illustrates how seriously regulators are taking next month’s meeting, according to Bloomberg.

Still, the news will hardly come as a surprise to most market participants, and explains why Chinese markets have already rallied significantly this year amid expectations of government support, while equity volatility has tumbled to the lowest level in over 2 decades. The Shanghai Composite Index touched a 20-month high on Tuesday, while the yuan has strengthened 6.4% against the dollar this year.

In addition to the travel ban, China"s regulator told brokerages and futures companies to check for risks in their liquidity, operations and financial health, effectively warning that it does not want to see any selling. The regulator also ordered firms to assess their information system security and credit risks and report their findings before October, Bloomberg"s sources added.

Of course, with so much focus on how effective China will be at keeping its equity markets growing at a steady, controlled pace and avoiding turbulence ahead of the critical summit, anyone hoping to make a political statement against the Xi regime - whether domestically or offshore - could do so simply by causing even a modest market correction sometime in mid-October, especially since even the smallest spike in volatility could lead to a panicked selloff in light of such an unexpected move.

De-escalation? Trump Says Military Action In North Korea "Not His First Choice"

In yet another attempt at de-escalation by the US, moments ago as president Trump was leaving the White House, he responded to a reporter question on whether there will be military action in North Korea, saying that "it"s not his first choice", but adding that "we"ll see what happens."

• TRUMP: WILL HAVE TO SEE WHAT HAPPENS WITH NORTH KOREA


• TRUMP: MILITARY ACTION IN NORTH KOREA NOT FIRST CHOICE

NEW: On military action in North Korea, President Trump tells me it"s not a first choice, but "we"ll see what happens."

— Trey Yingst (@TreyYingst) September 6, 2017

The announcement prompted a modest relief rally in the USD, as well as a knee jerk reaction across other markets, with gold and Treasurys both ticking lower, while the USDJPY has rebounded by 25 pips to just shy of 109.00.

And some other comments further hinting at descalation:

• TRUMP LEAVING WH SAYS TO REPORTERS HAD "VERY FRANK & VERY STRONG CALL" WITH CHINA"S XI JINPING

Earlier in the day, Xinhua elaborated on the phone call, making it clear that China will not allow a non-peaceful resolution of the North Korea crisis.

• CHINA TO STICK TO TALKS, PEACEFUL MEANS ON KOREA ISSUE: XINHUA


• XI PERSISTENT ON DENUCLEARIZATION ON KOREAN PENINSULA: XINHUA


• XI, TRUMP EXCHANGE VIEWS ON KOREAN PENINSULA OVER PHONE: XINHUA

More from Reuters:

Korean Peninsula nuclear issue through talks and peaceful means, Chinese President Xi Jinping told U.S. President Donald Trump in a telephone call on Wednesday. 

Washington and its allies have said there is a growing urgency for China, North Korea"s top trading partner, to apply more pressure on its already isolated neighbour to get it to back down on its nuclear weapons and missiles programmes. China "unswervingly" works to realise denuclearisation on the Korean Peninsula and to safeguard the international nuclear non-proliferation system, Xi told Trump, according to a statement from China"s Foreign Ministry. 

"At the same time, we always persist in safeguarding peace and stability on the Korean Peninsula and resolving the issue through dialogue and consultation," Xi said. "It is necessary to stay on the path of a peaceful solution." 

Xi also said that China attaches importance to Trump"s visit to China later this year.

The statement cited Trump as saying that the United States was deeply concerned about the Korean nuclear issue and that it valued China"s "important role" in resolving the problem.  U.S. Ambassador to the United Nations Nikki Haley accused North Korean leader Kim Jong Un on Monday of "begging for war" and urged the Security Council to impose the "strongest possible" sanctions. 

It is unclear if China will back further sanctions. Beijing fears that completely cutting off North Korea could lead to its collapse, unleashing a wave of refugees into China"s northeast. China accounted for 92 percent of North Korea"s trade in 2016, according to South Korea. China"s foreign ministry said on Tuesday it would take part in Security Council discussions in "a responsible and constructive manner".

China and Russia have advocated a plan in which the United States and Seoul stop major military drills in exchange for North Korea halting its weapons programmes, but neither side is willing to budge.

Trump and Xi last spoke by telephone on Aug. 12. The White House said in a statement at the time that their relationship was "extremely close" and "will hopefully lead to a peaceful resolution of the North Korea problem." 

But tensions in China-U.S. ties have increased since Trump took office, with the U.S. president having authorised an investigation into China"s alleged theft of intellectual property, and suggesting trade relations would be linked to Beijing"s help on North Korea.

China Unveils Emergency Drill To "Shut Down Harmful Websites"

China"s 19th National Congress of the Communist Party - the quinquennial confab where the party selects new members of the Politburo, its ruling council - is expected to begin this fall (official dates have not yet been publicly announced). And in an effort to guarantee that the leadership reshuffle goes off without a hitch, President Xi Jinping is tightening the government’s grip on the internet to help protect the official narrative that Xi"s "Chinese Dream" remains intact.

According to Reuters, China held a drill on Thursday with internet service providers to practice taking down websites deemed harmful.

“Internet data centers (IDC) and cloud companies - which host website servers - were ordered to participate in a three-hour drill to hone their "emergency response" skills, according to at least four participants that included the operator of Microsoft"s cloud service in China.

China"s Ministry of Public Security called for the drill "in order to step up online security for the 19th Party Congress and tackle the problem of smaller websites illegally disseminating harmful information", according to a document circulating online attributed to a cyber police unit in Guangzhou.”

The Communist Party “protects” China’s 1.4 billion citizens from the influence of subversive foreign using nationwide system of internet censorship known as the “Great Firewall.” But as the country’s financial regulators grow increasingly concerned about the country’s dangerously overleveraged economy, which is threatening to sink the country’s fragile stock market, it’s likely that the government sees local business media as a threat. Two years ago, following the spectacular runup and collapse of the Shanghai Composite, authorities arrested one of China’s most respected financial journalist and forced him to make an on air “apology” after the government blamed his reporting for triggering the crash.

Earlier this year, authorities began a crackdown on VPNs like the Tor network which can allow mainland residents to circumvent the “great firewall.”

“China has been tightening its grip on the internet, including a recent drive to crack down on the usage of VPNs to bypass internet censorship, enlisting the help of state-owned telecommunication service providers to upgrade the so-called Great Firewall.

Apple last week removed VPN apps from its app store, while Amazon"s China partner warned users not to use VPNs.”

During the drill, the country’s internet data centers were asked to practice shutting down target web pages and report relevant details to the police, including the affected websites" contact details, IP address and server location, according to Reuters. With five of the seven Politburo members retiring, this year’s National Congress presents President Xi with his best opportunity yet to consolidate power. And as tensions escalate between China and several of its geopolitical rivals (notably the US, which is theatening a trade war, and India, which could instigate a real war), expect the crackdown to continue.

Billions Of Lives At Stake As China Threatens India With War After "Blatant Sovereignty Infringement"

Authored by Mac Slavo via SHTFplan.com,

It could be argued that there’s never been a time in history, where so many Americans thought that we were on the brink of another major war. If you pay attention to the constant news stream of stories regarding Syria, North Korea, or Russia, you’d be hard pressed to deny it. In fact, a recent poll found that 76% of Americans are worried that another war will break out in the next 4 years, and 80% were afraid that we could be embroiled in a conflict with North Korea in the near future.

There’s no doubt that Americans are fraught with fear over the thought that a new war is on the horizon, especially if that war could lead to another global conflict. But most Americans forget that the world doesn’t revolve around them. They worry a lot about their nation engaging in another world war, but they forget that there are several powerful nations that could spark a global conflagration without America’s input.

Among them are China and India, who have been engaged in a border dispute for decades. That dispute has flared up once again, as China hurls threats of war with India.

The ruling Communist Party of China has issued a stern warning to neighboring India, with which it is engaged in a bitter border dispute that has recently seen Chinese live-fire drills and media speculation of extensive Indian military casualties denied by both sides.

 

After accusing Indian troops of crossing over the disputed Sikkim border last month, Chinese Communist Party outlet Global Times published a commentary Tuesday urging restraint by both belligerents, but warning that China was prepared to engage India in a battle for the contested land. The piece chalked up the conflict to a greater competition for economic and political dominance between the two leading Asian powers and said that Beijing would amass troops and armaments at the border in anticipation for what could turn into an all-out war.

This isn’t the first time that these two nations have been at each other’s throats over their borders. In 1962 their armies clashed, leading to defeat of the Indian army, and thousands of casualties on both sides. Based on the rhetoric coming out of Beijing’s state sponsored media, it appears that China is willing to replicate that conflict. From the Global Times’ op-ed.

On June 16, Indian border guards crossed over the Sikkim section of the China-India border to the Chinese side, triggering a face-off with Chinese troops. India"s action this time is a blatant infringement on China"s sovereignty.  

 

As the confrontation goes on, China needs to get ready for the face-off becoming a long-term situation and at the same time, needs to maintain a sense of rationality. Within China, there are voices calling for the Indian troops to be expelled immediately to safeguard the country"s sovereignty, while Indian public opinion is clamoring for war with China. However, the two sides need to exercise restraint and avoid the current conflict spiraling out of control.

 

“China doesn’t recognize the land under the actual control of India is Indian territory. Bilateral border negotiations are still ongoing, but the atmosphere for negotiations has been poisoned by India,”

 

“China doesn’t advocate and tries hard to avoid a military clash with India, but China doesn’t fear going to war to safeguard sovereignty either, and will make itself ready for a long-term confrontation.”

Of course, if war did break out again between China and India, there would be one significant differences from the Sino-Indian war of 1962. This time around, both nations would have hundreds of nuclear weapons. And it’s possible that Pakistan, another nuclear armed nation that India has fought border disputes with in the past, could also be swept into the conflict. It should go without saying that billions of lives are at stake every time these nations hurl threats of war at each other.

Americans often worry about various geopolitical hotspots that could drag our nation into a world war. But they shouldn’t forget that there are plenty of places where another global war could start without our country ever lifting a finger. The whole planet is a powder keg.