EDITOR: | August 14th, 2015 | 13 Comments

Lifton on Chinese directed markets

| August 14, 2015 | 13 Comments
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chinesische-mauerMy friends and colleagues have lately begun to ask me “Are the Chinese dumping rare earth surpluses in order to depress prices and retain control of the rare earths supply chain? The answer to this question that I propose seems to confuse most people. I tell them that the answer depends on what you mean by “the Chinese.”

If, by “the Chinese” you mean a purposeful plan organized and operated by either the government, i.e., for example, the Ministry of Commerce or by the government sponsored  Association of Chinese Rare Earth Industries (ACREI) the answer is no.

If by the descriptive term “the Chinese” you mean the mind-set of the Chinese nationals who buy and sell rare earth products inside of China for sale outside of China the answer is still no, but

If you mean the results of the actions of both categories of “the Chinese” described or defined above then the answer is yes.

But in all cases the driver for these actions by “the Chinese” is the Communist Party of China’s, the CPC’s, iron clad policy of maintaining an exclusive (of any other party’s) grip on power. The Party increasingly sees no difference between itself and China.

For the last 30 years the growth of the economy has underpinned the stability of one-party rule in China.

The rate of Chinese economic growth as measured by the rate of growth of GDP is noticeable slowing. Just as many organisms grow only to match the food supply so do economies grow to match output with demand. China’s command capitalism (referred to in China as capitalism with Chinese characteristics) was devised and put into place by Deng Xiaoping in order to save the CPC and carried out by a succession of technocrats who had no exit strategy, because they like all good capitalists believed that either the growth of the economy would go on forever or even if it slowed it would be different this time from all other economic expansions and the slowdown would not be followed by a retreat (recession or even depression) but rather by a return to a higher rate of growth.

China has a massive reserve (war chest?) of “surplus” capital nearly equal to one-year’s GDP (compare that with America’s national debt (not precisely comparable since China has a national debt also) which is now greater than one year’s GDP). So the Chinese Communist Party’s bureaucrats, who not only oversee the economy but control and direct it, are running a “playbook.” They have of course a legion of contemporary economists with Chinese characteristics who read the Financial Times and the Wall Street Journal and go to Davos as well as wear Harvard, Wharton, and London School of Economics class rings. These ladies and gentlemen have read Marx, Keynes and Friedman openly and Hayek by flashlight and I think have been puzzled by Greenspan and Bernake, but perhaps have given thoughtful consideration to Volcker and fearful reverence to Herbert Stein and Margaret Thatcher. Most recently they have been playing the Keynesian game of stimulus, but all of the stimulus went into state owned enterprises and governmental subunits through the state owned banking system, so it accomplished very little but an overexpansion of easy credit. Now China, Incorporated (I.e, the economists of the CPC)  is bailing out local (though very large) stock markets and toying with the exchange rate of the currency. These are unlikely to be winning strategies to permanently reboot the high growth rate of the Chinese economy, and we now need, many think, to worry about “the Chinese” overdoing it and catalyzing more global recession or even, heaven forfend, a global depression.

I believe that “the Chinese” don’t really care very much if at all about the relatively miniscule rare earths markets effect on their economy, but I do believe that they think that if they cannot control even a small supply chain for a natural resource, such as that for the rare earths, in which they dominate and control the global market then when and if the same events (oversupply) hit a major supply chain in which they dominate such as the steel market and they are unable to control it then the CPC might just be out of a job.

This is what they are trying to prevent by any means necessary. They have managed economic growth in such a way so as to ensure the survival of the CPC’s power. IF AND ONLY IF they can control the slowdown in economic growth which is occurring will that power continue.

It’s not the rare earths markets that the CPC is trying to control not at all. It’s their own future. Forget the WTO; forget the TPP; forget the Chinese stock market crash just keep in mind that the goal of any and all policies by “the (only) Chinese (that matter)” is the survival of the CPC in power. Got it?


Jack Lifton

Editor:

Jack Lifton is the CEO for Jack Lifton, LLC and is a consultant, author, and lecturer on the market fundamentals of technology metals. Technology metals ... <Read more about Jack Lifton>


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Comments

  • Dan GORSKI

    Jack
    From all appearances China may be facing the same existential crisis that the USSR did in 1991. If the CPC cannot get control of the economic situation what will be their recourse? Given the demographics of China there doesn’t seem to be many options for them, either the CPC gets control of the situation or China comes apart. I do not see them “going quietly into that good night” like the Soviet Union did.

    Dan Gorski

    August 15, 2015 - 8:59 AM

  • whaleblubber

    Dan: Good points. It is difficult to overestimate the power and control of the CPC in China. The People’s Liberation Army (PLA), the world’s biggest at about 2.3 million, also is the world’s largest PRIVATE army. It belongs to the CPC to which it owes allegiance. It also is under the total control of the Party, not the Minister of Defense. Even as large as it is, the PLA has been downsized. But, at the same time, the paramilitary People’s Armed Police has been greatly expanded. Should “social stability” get a bit too unstable, it is they who are charged with bringing the situation under control. If things spiral out of control as they have for so many times in China’s long history, it is the non-elite who will suffer but who, as you suggested, will not “go quietly into the night”. Fear of instability (plus more recently deadly air pollution) and under increasing pressure from a deepening campaign against corruption, many wealthy Chinese are getting their ill-gotten gains out of China as fast as they can. Facilitated by lax immigration laws, an especially popular money laundering vehicle is West Coast housing, from Vancouver to San Diego. To the chagrin of locals, usually all-cash purchases and seemingly unlimited funds are inflating local real estate prices for higher-end homes. Perhaps after China implodes, it will be the wealthy Chinese escapees, resident in their suburban mansions, who will fund that fully integrated and all American domestic rare earths industry people talk about. Chinese WILL continue to control rare earths one way or another!

    August 15, 2015 - 11:08 AM

  • Dan GORSKI

    I will bet on the PLA. It should be “pucker time” for 1. Taiwan, 2. Korea, 3. Viet Nam, 4. Japan, 5. Philippines, 6. us. It looks like an IQ test. Unfortunately the key here is “us”. We have a sterling record of flunking IQ tests

    Dan Gorski

    August 15, 2015 - 11:30 AM

  • whaleblubber

    Dan: Rare earths are not the only arena in which America withers when facing of with China. Relative to China in almost all areas, the US is a paper tiger. Russia clearly sees this and it, perhaps, is even more apparent to China. From rare earths, to things monetary, trade and military, China marches ahead while the US is hamstrung by a dysfunctional Congress owned by corporate special interests with their own strictly short term and profit-motivated objectives. Slowly but steadily, this is emerging as the Chinese Century not only because of their drive and determination but because of America’s fatal incompetence when it comes to adjusting to a changing world with new realities. Just what is America’s game plan? Failure to deal with rare earths merely is symptomatic of that costly flaw.

    August 15, 2015 - 1:34 PM

  • Alex

    Dan do you know the reason why USSR stop function ? I belive people in USSR thought that they will live in union free world without visas and boarders. They don’ t want to keep socialism and start to bild capitalism instead. More over because of meritrocracy in USSR they want to give something to their children if it was possible .
    What you see Chinese will get from this list?
    To get fee possibility to go abroad – no
    to get something to their children no

    August 16, 2015 - 8:30 AM

  • Billy

    rare earth prices are depressed, the cause is irrelevant, what is relevant is that if they remain depressed, then Lynas simply will not survive

    August 16, 2015 - 9:26 AM

  • Jim

    Lynas may survive if geopolitical interests want them to. Tasman has a less, but similar advantage.

    August 16, 2015 - 12:59 PM

  • Joe o

    Tas. Looks like it’s dying to me. Possibly pick up a few more shares when it goes to 20 cents. Maybe a 5 yr play
    Be nice to hear something from them

    August 16, 2015 - 6:39 PM

  • Investor

    Great article Jack. I agree that CPC’s survival is all that matters.
    So how do we bring this back to rare earths, supply/demand and current pricing??

    August 16, 2015 - 8:11 PM

  • Jeff Thompson

    In addition to the United States-China relationship, also having a bearing on the rare earth market will continue to be China’s confrontational relationship with it’s near neighbors, particularly as it relates to territorial disputes in the East China Sea and South China Sea.

    August 16, 2015 - 10:21 PM

  • Tim Ainsworth

    SillyBilly

    August 17, 2015 - 4:12 AM

  • Jim

    Seeing Lynas’ new dept restructuring, it does appear the Japanese want Lynas to survive. When the rare earth market turns, Lynas is best suited to prosper.

    August 17, 2015 - 8:22 PM

  • charles.1

    No western producer can make money at current prices – REE are seeing the worst of it, but the same can be said for tungsten, tin, indium and to a lesser degree iron. Companies need to be looking at the long term strategy – the rush from one press release to the next needs to be a thing of the past. Its now about strategic advantage and relationships. If a project lacks the geography of being a “natural supplier” their future doesnt look bright.

    August 18, 2015 - 3:19 AM

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