#ChinaCoup was trending on Twitter this weekend over rumors that Chinese President Xi Jinping was under house arrest and the country was in a military coup. Airline flights have been grounded over Beijing and there are reports of military equipment in the streets. Here is video that was tweeted by Jennifer Zeng showing military vehicles driving towards Beijing. She reported “the entire procession as long as 80km.” Xi Jinping has not been seen for several days. Many of these reports are coming out of India, and we need to keep in mind that India has their own bias against China. So far these are rumors. We do not know for sure what is going on, but I would like to take a moment and review what has happened to get us to this point.
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Sources:
Tweet from Jennifer Zeng
Tweet about grounded flights
Wall Street Journal “China will not overtake the US”
https://www.wsj.com/articles/will-chinas-economy-surpass-the-u-s-s-some-now-doubt-it-11662123945
AP News “Xi Jinping jails opposition”
https://apnews.com/article/china-crime-stock-markets-police-9c19c66b1bf5a9564fdffaf92d7d7287
CNBC – China housing values drop 40% from peak
Foreign Policy – George W Bush policy on China
CNBC – Obama welcomes Xi Jinping to white house before he became China’s President https://www.cnbc.com/2012/02/14/obama-greets-chinas-xi-with-friendly-words-firm-stance.html
Newsweek – Reports of a Coup in China
https://www.newsweek.com/xi-jinping-house-arrest-china-military-coup-rumors-1746014
VIDEO SUMMARY
It is important to understand the relationship between China and the US all started with George H W Bush. Gerald Ford appointed him as the Chief Liaison Officer to China in 1974. In 1976, he became the head of the CIA. 1988, he became President of the United States. As President, he used his experience in China to grow our trade relationship.
Fast forward to 2000, when Bill Clinton was President. Bill Clinton signed into law the US China Relations Act granting China “Most favored nation” status. This made China a full member of the World Trade Organization.
Fast forward to George W Bush, who continued the efforts of his father to grow the relationship between China and the US. This is a photo of George W Bush in Shanghai taken shortly after the 9/11 attacks on the World Trade Center. The US needed China’s help on the war on terror to help avoid a global recession. It was during George W Bush’s term as President that the relationship with China started to sour. After the housing crisis hit in 2008, the US was meeting with China at a conference in June 2008. The head of the Chinese delegation, Wang Qishan, told US Treasury Secretary Henry Paulson, “You were my teacher, but now here I am in my teacher’s domain, and look at your system, Hank. We aren’t sure we should be learning from you anymore.”
Fast forward to Barack Obama who became the first president ever to visit China in their first year in office in 2009. But even more significant, Barack Obama hosted Xi Jinping at the White House in 2012, BEFORE Xi Jinping became President of China. This is very unusual. Xi Jinping was just the Vice President at the time. How many Vice Presidents of other countries get a private photo opportunity with the President of the United States. I cannot think of one. That meeting gave Xi Jinping legitimacy on the world stage and set him up to become President of China the following year. This is what a lot of people do not realize. The US helped to put Xi Jinping in power.
I go through this brief history, not to point out who is the most friendly or unfriendly towards China. All US Presidents have had their moments of being tough against China. The point is there has been a long term relationship between the US and China, and we have been developing this agenda since the 1980s. Multinational businesses have been pushing this agenda forward, because they can produce goods more cheaply, and increase profits. The result is that manufacturing jobs were moved from the US to China. These trade policies devastated many communities across the US, but financial institutions became very rich, creating massive income inequality in the United States.
But there is a problem. This plan is unsustainable. US and China have two very different economic systems. The US is a Democracy, and China is Communist. The US idea was that if we introduce the benefits of free markets to the Chinese people, that they would also embrace Democratic ideals like freedom of speech, property rights, and the rule of law. Unfortunately, the opposite happened. The Communist party used the inflow of capital to strengthen their power. Quite frankly, we should have seen that the Communists were not going to change, because this is the same regime that shot and killed their own citizens in Tiananmen Square in 1989 when they were protesting for the right to vote.
The source of China’s problems today is the result of the tension between Democracy and Communism that has been building for the last 40 years. Democracy and Communism will not work together, because free markets do not work without freedom. A good example of this is that the housing market in China is collapsing. The Chinese government does not allow its citizens to invest outside of the country. The Chinese people do not want to invest in the Chinese stock market, because it is so unreliable. The Chinese government can step in at any moment and seize your company. So instead, the Chinese people invest in real estate. The price of real estate sky rocketed, and we have all heard about massive cities of high end apartment buildings called “ghost cities,” because no one lives in them. Morgan Stanley just reported this month that housing sales value in China has decreased by 40% below the peak, a drop of 8 trillion yuan. To put this in context, the US housing market collapse in 2008 resulted in a drop in the Case-Shiller price index of 18%. What is happening in China is far worse.
What we are seeing today is that China’s economy is on the brink of collapse. We have seen this recently with the collapse of the Chinese company Evergrande. Evergrande held more debt than any other real estate developer in the world, with a total of $300 Billion in financial obligations. Now that real estate has dropped by so much in value, there is no way for Evergrande to pay back their debts. It is reported that some of the largest holders of Evergrande’s debt is BlackRock, HSBC, and UBS. So, if Evergrande cannot pay their debts, it affects the entire world.
In every financial collapse, there is always a mistake that was made. What was the mistake that was made here? All of China’s debt was based on a single faulty assumption. The assumption was that China’s growth was going to continue at a high rate forever. You can see this in economic articles for the last twenty years. The majority of economists have been preaching that China’s GDP is expected to overtake the US in the near future. That growth projection is what all the debt is based on, and that growth projection is wrong. In fact, I wrote a book about this in 2014, called “On Wolves and Finance” that this whole YouTube channel is based on where I predicted this exact situation was going to happen. I have been saying this for eight years, and I do not understand why no one is listening to me. What I said then, and what we are seeing today, is that growth rates in economic systems decrease as economies grow larger. This is a fundamental economic principle that was not included in anyone’s economic models on China. If you decrease China’s growth rate over time, China never overtakes the US economy. This month, for the first time that I can remember, a major US news source, The Wall Street Journal, wrote an article saying the same thing I have been saying for eight years. “China’s Economy Won’t Overtake the US, Some Now Predict.”
If what the other economists were saying was true, and if China grew forever at the same growth rates, Chinese companies would have no problem paying off this debt. But the growth isn’t real. Real Estate is related to roughly a third of China’s GDP, so if prices drop by 40%, they cannot make their debt payments. History is now repeating itself. Just like in the housing market crash in 2008, global multinational corporations were so blinded by greed that they did not realize they were using the wrong financial equation.
So in summary, The US began manufacturing in China. China rapidly grows, and funds the growth by taking out debt. The debt is based on faulty assumptions that China’s growth will continue at unrealistic rates. Now they are failing to make debt payments and the Chinese economy is collapsing.
The economic crisis is driving the current speculation at a coup in China. People are so devastated economically, that they are looking to remove Xi Jinping. Xi Jinping is going to do the same thing the Communist party has always done… whatever it takes to remain in power.
Just last week, a political rival to Xi Jinping named Fu Zhenghua, was arrested and sentenced to death with the opportunity for a future reduction to life in prison. He was accused of bribery. Fu was sentenced along with three former police chiefs, who were all part of a political group that was not supportive of Xi Jinping. This is all happening three weeks ahead of the meeting where the ruling Communist Party is expected to reappoint Xi Jinping to another five year term as China’s President. This is widely seen as what dictators do. They weaponize the justice department to go after their political rivals before an election. But if the rumors of a coup are real, it might be that the economic situation is so bad in China, that Xi Jinping’s attempts to remain in power are not working.
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Neither Zach De Gregorio or Wolves and Finance shall be liable for any damages related to information in this video. It is recommended you contact a CPA in your area for business advice.