China Jumps Into The Fray Using Sun Tzu’s Art Of War

The “markets” continue trading with rigged, hyper-suppressed volatility while in critical-threats mode. Of particular note is that China has suddenly emerged front and center into the global geopolitical fray. Conditions with the U.S. have deteriorated even more rapidly over the last week or so. The two countries are hurling cyber-spy accusations at each other as if that is a new development. Troubles with neighbors like Vietnam are developing. There are probably two factors driving this: 1) tightening up the Russia-China alliance, and 2) creating a diversion from China’s massive economic imbalance and credit bubble. But there is more going on.

I see Premier Li Keqiang as a practitioner of Sun Tzu’s Art of War. This is the operative principal.

“Engage people with what they expect; it is what they are able to discern and confirms their projections. It settles them into predictable patterns of response,occupying their minds while you wait for the extraordinary moment — that which they cannot anticipate.”  ― Sun Tzu, The Art of War

This can be illustrated in spades in the following excerpts from a  Reuters report. Is the translation from Chinese to “war chest” coincidental?

“Li said, ‘China’s war chest of foreign currency reserves has become a headache as its continued rise could stoke inflation in the long term. He pledged to reduce the country’s trade surplus. China’s foreign exchange reserves are $4 trillion. ‘Frankly speaking, foreign exchange reserves have become a big burden for us,because such reserves translate into the base money, which could affect inflation. From China’s perspective, macroeconomic controls could face tremendous pressures if the overall trade is imbalanced.’ China will take steps to reduce its trade surpluses with the rest of the world.”

Realistically nobody would really argue that accumulating even more Old Maid Card securities from bankrupt adversaries such as the the U.S., Japan and Europe still makes sense. What Li is conveying is more than a thinly veiled threat. Although this concept is not new, the geopolitical and financial tensions that have built up are. Li is focusing western attention on the gorilla in the room, namely that China doesn’t want more IOUs, nor does it particularly care about its old mercantilist trade strategy.

I have argued for a awhile that China’s motives are to weaken its adversaries without war. This is another Art of War principle. This does not come without cost, but it is far less expensive than war in terms of dealing with out-of-control foes. Pull the plug on the West’s symbiotic debt relationship with China and the whole U.S.-U.K.-Japan house of cards collapses. I have addressed gold’s role in this ad nauseum. It will be repriced.

Behind geopolitical strategies of knocking a very vulnerable U.S. and Japan down to size, the bottom line is that a large chunk of this $4 trillion foreign reserve needs to be redeployed in an attempt to shore up China’s financial mess. For instance, a Thomson Reuters survey of data on China’s more than 2,300 stock market-listed firms found the median collection time for billings crawled up from 71.4 days to 90.42 days. It was the first time China’s market-listed firms averaged more than 90 days in a decade. “It’s a pretty loud warning bell,” said Paul Gillis, an accounting professor at Peking University’s Guanghua School of Management.

Meanwhile, according to the Chinese financial publication Securities Daily, emergency real estate rescue packages have been launched in large cities such as Wuxi, Nanning, Hangzhou, Tianjin, Tongling and Zhengzhou in the last month alone. “Zhengzhou created a mortgage guarantee policy to win back banks’ confidence”.

Bank bailouts and recapitalizations can’t be far behind. This is going to be expensive. But if Li is to be believed, printing money will not be the first recourse toward funding this. Instead, foreign reserves will be liquidated for multiple purposes and I think at an “unanticipated moment” of China’s choosing.