Lifton on Chinese directed markets
My 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.
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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 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>