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By Staff | Nov 11, 2016

Beijing has successfully revived flagging economic growth in China, but in doing so, through easy credit and fiscal stimulus, has created asset bubbles that are unsustainable.

There are little bubbles in some small markets including some commodities and there are big ones such as in housing.

Apartment prices rose 47.5 percent in Shenzhen last year according to the WSJ. There was nothing like that anywhere else in the world. Chinese money has rushed into many investments with herd mentality. While they have GDP achieving their target they are running out of schemes and devices in order to keep it going.

They are fully invested in their real economy and most sectors have crossed a line into speculation. There is significant overcapacity of many industries in China which has hurt corresponding industries in competing countries.

Markets often become volatile when they are forming a major top and that condition is also evident in Chinese markets. There is too much money chasing intangible goods. The shoe-clerks in China are fully invested and can give you financial advice as to what high return investments that you should put your money into. I liked one statement made by a Chinese finance professor, “There would have to be an improbable number of economic coincidences coming together for all of these mini-bubbles not to be a sign of a bigger economic issue.”

Here in the U.S. we say that if it walks and quacks like a duck, it is a duck. This would be a “Peking duck,” no different.

China’s debt relative to GDP has climbed from 154 percent to 260 percent since 2008. When their stock market crashed they made selling illegal and the government bought stock.

Every-time there is a slowdown threatened Beijing opens the vault further handing out money.

Not all of it went to good investment as there are still state-owned enterprises that are just welfare dispensaries. It is an unlikelihood to an impossibility for Beijing to deflate the asset bubbles without a dire recession.

That has not been politically acceptable, but sometime that may not matter. Recessions are part of market economies.

The contention that China is invulnerable to recessions is preposterous. They said similar things at the top of Japan’s bubble in 1989.

Most U.S. businesses found out that China is a pretty tough place to do business in and access typically required technology transfer to Chinese partners.

There is no bilateral investment treaty between the U.S. and China.

It should not have taken the USTR so many years to file a WTO complaint against Chinese Ag subsidies. Yet the U.S. ag economy is bound at the hip (and around the throat) to Chinese demand.

The soybean and pork exports going to China that these commodities are reveling in can be sliced through by the double edged sword if it swings the other way. China represents 60 percent of U.S. soybean exports. That is terrifying to be that dependent on one customer.

The Chinese economy is a bubble and Donald Trump is a pin. He has shown no cognizance in either his immigration or trade policies of the impact they would have on the ag sector. He is oblivious and his surrogates are powerless.

China bashing is par for the course during any U.S. presidential election, but then it goes back to business as usual after the votes are counted. Neither candidate will be as charitable to Sino-U.S. relations post-election this time as in the past.

Ironically, the Trans-Pacific Partnership is, in part, a foreign policy vehicle almost as much as it is a trade agreement as it ties Asian countries to us rather than China.

The risk is that by not ratifying TPP those countries will gravitate into China’s economic circle.

President Obama is planning to move on the issue asking Congress to ratify the TPP where it is likely to fail. Clinton will take a harder line on China, but no-where near as hard as will Trump. Trump will see a bubble in the Chinese economy as leverage that we can take advantage to use against them.

He will hold up his pin and ask them if they know what he could do with it. They can expect trade sanctions that will be returned tit for tat and a complete reset of trade relations between us.

Trump has no problem with a nuclear Japan which China abhors. Trump talks peace, but he also demands respect. In order to get the latter he is going to kill somebody, literally.

I will bring up my Happy Day’s Fonzie analogy again. When the Fonzie walked into a room, the other tough guys there moved back giving him space, shying away. Asked why they did that, the Fonzie said that it was because, “Once I hit somebody.”

We have no idea who it is going to be that Donald will hit and it really doesn’t matter (except to them). It may well be someone like North Korea that deserves it (Trump may determine what risk is worth the reward).

Trump is going to hit somebody so hard and so devastatingly that it will deck them so they don’t get up. That is how he will command his respect. A lot of Americans will cheer him on.

If he is elected, America will change and China will duck, but then hit back. Guess who will be hurt here? There will be confrontation and the U.S. ag sector will be on the front line leading with its chin.

David Kruse is president of CommStock Investments Inc., author and producer of The CommStock Report, an ag commentary and market analysis available daily by radio and by subscription on DTN/FarmDayta and the Internet.

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