Thursday, January 30, 2014

Examining China -- While the Carnage Continues In Asia As China PMI Confirms Contraction Deepening , let's examine where China and the US go from here in negotiating very tricky geopolitical waters.....Can the US actually " pivot " toward Asian successfully ? Can China manage the complex relations on its plate ( Taiwan , North Korea , Japan , South and East Sea issues with its neighbors Ex - Japan ) ?

The Carnage Continues In Asia As China PMI Confirms Contraction Deepening

Tyler Durden's picture

Following last week's Flash PMI print of 49.6, the Final print for January China Manufacturing dropped further to 49.5confirming the contraction is deepening.Japanese stocks were down the most since August in the early going as Nikkei futures extended the losses from the US day-session (and rather notably decoupled from USDJPY and breaking below 15,000). The Nikkei is heading for the worst month since May 2012 (-8.66% so far). S&P futures tracked USDJPY as 102.00 was defended aggressively. Chinese stocks are also tumbling (though not as hard as Japan and US) and the PBOC will not be adding liquidity today. Furthermore the blame is being shifted as Deputy FinMin Zhu warns that the "Chinese economy faces risks from overseas uncertainty." EM FX is drifting lower still.

The Final HSBC Manufacturing PMI print dropped from 49.6 Flash to 49.5 - its biggest drop since June and lowest since July 2013...

The Lowlights...
"Employment levels at Chinese manufacturers had quickest reduction of payroll numbers since March 2009"

"New export orders declined for the second month running in January, firms mentioned weaker demand in a number of key export markets."

Bad for Australia: "the rate of input price deflation was marked overall, amid reports of lower raw material costs."

"Reduced cost burdens were passed on to clients and marked the second consecutive month of discounting"

Japanese bank stocks are down 9% in the last 5 days and Real Estate stocks -12.5% in the last 2 weeks. But most concerning to Abe (and the rest of the carry-trade addicted mob) is the disconnect between JPY and NKY...

The Nikei is now down over 500 points from its post-Turkey-is-fixed euphoria.

EM FX continues its slide...

In other news, the Baltic Dry Index has now plunged 51% from its late December highs and has collapsed to 5-month lows...

Charts: Bloomberg

Thursday, January 30, 2014 1:54 AM

China Manufacturing Back in Contraction, Staffing Declines at Sharpest Pace Since March 2009.

The HSBC China Manufacturing PMI shows China manufacturing is back in contraction, following six months of barely positive growth. 
 Key points

  • Growth of output eases to marginal pace
  • Quickest rate of job shedding since March 2009
  • Marked falls in input costs and output charge

January data signalled a deterioration of operating conditions in China’s manufacturing sector for the first time in six months. The deterioration of the headline PMI largely reflected weaker expansions of both output and new business over the month. Firms also cut their staffing levels at the quickest pace since March 2009. On the price front, average production costs declined at a marked rate, while firms lowered their output charges for the second successive month.

After adjusting for seasonal factors, the HSBC Purchasing Managers’ Index™ (PMI™) posted at 49.5 in January, down fractionally from the earlier flash reading of 49.6, and down from 50.5 in December. This signaled the first deterioration of operating conditions in China’s manufacturing sector since July.

Production levels continued to increase in January, extending the current sequence of expansion to six months. However, the rate of growth eased to a marginal pace.

Employment levels at Chinese manufacturers fell for the third consecutive month in January. Moreover, it was the quickest reduction of payroll numbers since March 2009. Job shedding was generally attributed by panelists to the non-replacement of voluntary leavers as well as reduced output requirements. Despite the marked reduction of headcounts, the level of unfinished business at goods producers rose only fractionally over the month.
This is yet another sign of a global slowing economy.

Mike "Mish" Shedlock

Geopolitical chess......

US pivot chafes at vital Asian ties
By Francesco Sisci

BEIJING - Beijing and Taipei this week announced the beginning of their first ever government-to-government talks. It is to some extent a mutual recognition of each other's standing, and as well as a sure-footed step in the process of reunification - so important for the People's Republic of China - it sets an important precedent for any future government in Taiwan.

Even if the opposition Democratic Party of Taiwan were to come to power at the next presidential election, the new president could hardly dismiss the continuation of these talks even as the party wants to proclaim a unilateral independence of island, which is de facto already independent but de jure part of one China. In fact, although the talks are a step in the process of re-unification, they are also the biggest diplomatic achievement ever wrested by a Taiwanese force from Beijing. This will be the historic legacy of the current nationalist president, Ma Ying-jiu, both for the goal of a united China and for the purpose of securing Taiwanese interests. 

In the same days, the main South Korean news agency, Yonhap, reported that about 100 relatives of former North Korean second in command Jang Song-thaek, including women and children, were killed on the orders of North Korean leader Kim Jong-eun. Kim, a nephew of Jang and not yet 30, had already executed Jang and some of his closest associates in the largest, most senseless and most blood-curdling political purge since the end of the Cold War. The purge bodes ill for North Korean intentions about South Korea. If young Kim can slaughter so easily some his closest kin, including his mentor, one can only imagine what he could do to a patently sworn enemy. Yet Seoul failed to react.

The gesture with Jang was domestic but carries important foreign implications. Jang was somewhat close to China, a country which had initially also opposed Kim's promotion as supreme leader in Pyongyang.

Yet Beijing, usually very sensitive about political insults, decided to largely ignore the episode. The only reaction could be found in an article by Central Party School professor Zhang Liangui, [1] who modestly argued that the remains of Chinese volunteers killed in the Korean war and buried in North Korea should be repatriated. The argument was reasonable and supported by the fact that the US also brings home for burial all the bodies of its soldiers killed around the world.

Yet the reaction from North Korea was furious. A spokesman from the North Korea embassy [2] retorted that Mao himself ordered those bodies buried in North Korea and among them is the body of Mao's son, Mao Anying. In a way, North Korea was accusing China of going against Mao, and possibly Pyongyang was extremely annoyed by the fact that Zhang Liangui quoted the US tradition as one reason for repatriating the bodies.

The other annoying fact for Pyongyang was that Zhang said North Korea is in economic difficulties and thus cannot attend to the cemetery properly. To this the spokesman replied that the tombs are in splendid order. Zhang was hinting that the North Korean economy should be reformed, and Pyongyang answered that everything is in order.

Bringing back the bodies would also symbolically mean a breaking or loosening of the bond that has linked North Korea and China since the 1950 war. In any case if Zhang's argument was the Chinese official reaction, it was insignificant compared to the bloody purge carried out by young Kim. Moreover, China and South Korea reactions were muted compared to the international outrage aroused by the purge.

A growing pace of convergence in analyses on Pyongyang is apparent in Beijing and Seoul. Both seem to agree that Pyongyang's actions, however despicable, leave little room for sudden and dramatic reaction - a course advocated in some Western circles.

The relationship with North Korea is certainly the biggest problem for the South, and the convergence with Beijing on this strengthens bilateral ties immensely. Similarly the relationship with the mainland is of paramount importance for Taiwan. In both cases, for South Korea and Taiwan, politics is upheld by a growing commonality of economic interests, as bilateral trade and investment with Beijing are pillars of both economy.

In a time when the United States is re-examining its strategic rebalancing to Asia, Washington may want to pay close attention to these developments. South Korea and Taiwan ties with America are extremely important, but these governments would be very unhappy if they were to be forced to make a choice between US and China. In that case the broad US goal of "containing" China (or whatever you want to call in a politically correct jargon the process of trying to check China) would run against the specific and urgent political necessities (for Seoul) of bottling explosive North Korea and (for Taiwan) of finding a more viable bilateral modus vivendi.

Even without South Korea and Taiwan, the number of China neighbors who feel antagonized by Beijing's behavior is ample. This week China's Navy patrolled the James Shoal, which are disputed with Malaysia, and in the same hours Chinese ships entered waters around the Senkaku islands, disputed with Japan.

The Philippines has its own long list of claims with China, and Vietnam would be happy to push Beijing back in the South China Sea. But without South Korea and Taiwan any anti-Chinese cordon could soon become extremely weak. A political defeat of the US-backed Philippines (for instance) could reflect badly on the US in Asia, a region where "face" is extremely important. Therefore, how far can the US push/support anti-Chinese moves that are voided by the pro-Chinese stand of some US regional allies (South Korea and Taiwan)?

However, the successful weakening of the first version of the Pivot to Asia does not mean that Beijing can push on its sea borders unhindered. In fact, it is just the opposite. Chinese pushes against the Philippines or irking the US creates problems not only for China (something that Beijing may decide to solve internally) but also for China's new friends - South Korea and Taiwan, which are torn between Beijing and Washington and Manila.

This is something that has potential to hurt Beijing. In modern global diplomacy everybody speaks with anybody, and anybody's actions have an impact on everybody. Therefore embarrassment from new friends, plus resistance or more coordinated actions from neighbors could make Beijing trip and stumble in its eastern and southern seas, especially if its actions are fueled by hubris.

All in all, it is a very subtle game and it can be won or lost on details. In theory, this should help China, whose strategy, newly acquired wealth and huge manpower are better equipped to act on local policies and details. However, political know-how, old ties and local nuances are also at play for Japan or America. While many Chinese officials have badly tarnished the Chinese image in the region by being rough and heavy-handed, both sides have enough clout perhaps to stall each other, and to avoid stalemate, or worse, some change in direction is necessary from both sides. 


Is The US-China Rivalry More Dangerous Than The Cold War?

Tyler Durden's picture

Submitted by Zachary Zeck via The Diplomat,
The prominent realist international relations scholar John Mearsheimer says there is a greater possibility of the U.S. and China going to war in the future than there was of a Soviet-NATO general war during the Cold War.
Mearsheimer made the comments at a lunch hosted by the Center for the National Interest in Washington, DC on Monday. The lunch was held to discuss Mearsheimer’s recent article in The National Interest on U.S. foreign policy towards the Middle East. However, much of the conversation during the Q&A session focused on U.S. policy towards Asia amid China’s rise, a topic that Mearsheimer addresses in greater length in the updated edition of his classic treatise, The Tragedy of Great Power Politics, which is due out this April.
In contrast to the Middle East, which he characterizes as posing little threat to the United States, Mearsheimer said that the U.S. will face a tremendous challenge in Asia should China continue to rise economically.The University of Chicago professor said that in such a scenario it is inevitable that the U.S. and China will engage in an intense strategic competition, much like the Soviet-American rivalry during the Cold War.
While stressing that he didn’t believe a shooting war between the U.S. and China is inevitable, Mearsheimer said that he believes a U.S.-China Cold War will be much less stable than the previous American-Soviet one. His reasoning was based on geography and its interaction with nuclear weapons.
Specifically, the center of gravity of the U.S.-Soviet competition was the central European landmass. This created a rather stable situation as, according to Mearsheimer, anyone that war gamed a NATO-Warsaw conflict over Central Europe understood that it would quickly turn nuclear. This gave both sides a powerful incentive to avoid a general conflict in Central Europe as a nuclear war would make it very likely that both the U.S. and Soviet Union would be “vaporized.”
The U.S.-China strategic rivalry lacks this singular center of gravity. Instead,Mearsheimer identified four potential hotspots over which he believes the U.S. and China might find themselves at war: the Korean Peninsula, the Taiwan Strait and the South and East China Seas. Besides featuring more hotspots than the U.S.-Soviet conflict, Mearsheimer implied that he felt that decision-makers in Beijing and Washington might be more confident that they could engage in a shooting war over one of these areas without it escalating to the nuclear threshold.
For instance, he singled out the Sino-Japanese dispute over the Senkaku/Diaoyu Islands, of which he said there was a very real possibility that Japan and China could find themselves in a shooting war sometime in the next five years. Should a shooting war break out between China and Japan in the East China Sea, Mearsheimer said he believes the U.S. will have two optionsfirst, to act  as an umpire in trying to separate the two sides and return to the status quo ante; second, to enter the conflict on the side of Japan.
Mearsheimer said that he thinks it’s more likely the U.S. would opt for the second option because a failure to do so would weaken U.S. credibility in the eyes of its Asian allies. In particular, he believes that America trying to act as a mediator would badly undermine Japanese and South Korean policymakers’ faith in America’s extended deterrence. Since the U.S. does not want Japan or South Korea to build their own nuclear weapons, Washington would be hesitant to not come out decisively on the side of the Japanese in any war between Tokyo and Beijing.
Mearsheimer did add that the U.S. is in the early stages of dealing with a rising China, and the full threat would not materialize for at least another ten years. He also stressed that his arguments assumed that China will be able to maintain rapid economic growth. Were China’s growth rates to streamline or even turn negative, then the U.S. would remain the preponderant power in the world and actually see its relative power grow through 2050.
In characteristically blunt fashion, Mearsheimer said that he hopes that China’s economy falters or collapses, as this would eliminate a potentially immense security threat for the United States and its allies.Indeed, Mearsheimer said he was flabbergasted by Americans and people in allied states who profess wanting to see China continue to grow economically. He reminded the audience that at the peak of its power the Soviet Union possessed a much smaller GDP than the United States. Given that China has a population size over four times larger than America’s, should it reach a GDP per capita that is comparable to Taiwan or Hong Kong today, it will be a greater potential threat to the United States than anything America has previously dealt with.