Circling back

China’s “dual-circulation” strategy means relying less on foreigners

Xi Jinping sees the creation of fully domestic supply chains as a matter of national security


At the headquarters of Deli, one of China’s biggest makers of glassware, display shelves hold hundreds of drinking glasses of all shapes, sizes and colours. Some are stubby. Others are impossibly thin wine goblets, marketed as having a “feminine body curve”. 

But it is another curve—the steep upward one that Deli’s mastery of the business has traced—that ought to command more attention. Founded in 1996, the company initially churned out cheap, easily chipped glasses. Little by little it has raised its game, nearly tripling its exports over the past decade. 

It once had no choice but to import equipment for crafting its finest glassware. Now it can use China-made machinery. “Apart from branding, there’s not much that separates us from the world’s best,” says Cheng Yingling, a senior executive.

Deli’s evolution—which has involved getting better and more Chinese at the same time—is what the government wants for the broader economy. These are not exactly novel ideas. For years officials have declared that China must grow more innovative and more resilient. 

To a certain extent it has achieved this naturally, as a result of its fast-paced economic development. But these goals have taken on far greater urgency as tensions with America have mounted. 

American restrictions on exports of critical components, notably semiconductors, have shone a harsh light on the gaps in China’s industrial abilities. Drinking glasses may be much simpler to make—requiring not much more than sand and sodium carbonate plus some relatively basic machinery—but China is not about to stop there. Xi Jinping, China’s leader, has described the creation of fully domestic supply chains as a matter of national security.

The question is how to build them. Chinese officials know that they cannot turn their backs on the world. Exports are still an important source of revenue for many firms such as Deli. And China must attract technology and investment from abroad. Pushing too transparently for “indigenous innovation”, a term once bandied about by the government, only makes foreigners wary. Striking the right balance is tough.

Enter the newest of China’s big economic policies: the “dual-circulation” strategy. At its most basic it refers to keeping China open to the world (the “great international circulation”), while reinforcing its own market (the “great domestic circulation”). If that sounds rather vague, it is: the government has not spelled out the details. 

Nevertheless, it has fast emerged as the most talked-about economic policy in China, with analysts and businesspeople jostling to put their spin on it. 

The strategy lies at the heart of the five-year plan for 2021-25, an outline of which was released by the Communist Party on November 3rd. Its implementation—especially how China resolves the tension between the two kinds of circulation—will be critical to the way that China’s economy develops.

The term “international circulation” was coined in 1988 by Wang Jian, a government researcher who argued that China should pursue an export-led growth strategy, plugging its vast pool of cheap labour into global production networks. Well into the early 2000s, this was a guiding principle for China’s economic planners. 

Yet circumstances have changed. Exports have shrunk as a share of gdp—from 36% in 2006 to 18% last year. The government has repeatedly vowed to make consumption within China a bigger engine of growth. So scholars have been turning their attention more to the domestic kind of circulation.

In May it became evident that this academic debate had reached official ears. At a meeting of the Politburo, Mr Xi described dual circulation as the framework for economic policy. 

Initially, jaded veterans of Chinese official rhetoric were tempted to dismiss this as just another way of phrasing the long-stated goal of rebalancing towards domestic demand. 

But it has become clear that something bigger is afoot. More recent comments by Mr Xi on the economy have been less about promoting consumption and more about bolstering China’s defences. China needs “self-developed, controllable” supply chains, with at least one alternative source for vital products, he said in a speech published on October 31st. 

Even more striking was his inversion of the idea of international circulation. Instead of talking about it in terms of the economic benefits China reaps from globalisation, he emphasised only the strategic purpose of opening China’s doors to foreign firms, ie that making them more dependent on the Chinese market would deter foreign powers from putting pressure on the country.

That combination—the pursuit both of economic self-reliance and of greater economic leverage over foreign countries—now describes much of what China is doing. Mr Xi refers to changes “unseen in a hundred years” sweeping the global order—a way of saying that, while China is rising, America is declining and trying to stop the new power (see Chaguan). 

“Where linkages with the global economy create vulnerabilities, China wants to minimise them,” says Andrew Polk of Trivium China, a research firm. “Where the linkages create benefits, China wants to expand them.”

Chinese officials tailor their remarks on dual circulation to please foreign ears. In a video address on November 4th at the opening of the China International Import Expo, an annual jamboree in Shanghai, Mr Xi said the concept would involve opening China more widely to the rest of the world. “This is not just what China needs for its development, but something that will enrich the people of all countries,” he said. 

But businesses in China see the concept more as an indication that the government will step up support for favoured industries at home, says Zhu Ning of the Shanghai Advanced Institute of Finance. They are hungry for news of handouts.


In its outline of the new five-year plan (a fleshed-out final version will be adopted next year at the annual session of China’s parliament, probably in March), the party did not specify industries to be coddled. Instead it referred more generally to a need to develop critical technologies at home. 

But other policies already in train suggest that China will prop up any high-tech sector threatened by global vicissitudes. In August it announced tax breaks and loan support for semiconductor and software firms. China currently produces about 30% of the chips it consumes (see chart 1). 

Its goal is to reach 70% by 2025. Another focus is on green technology and renewable energy. That is not just for the sake of the environment (China recently pledged to halt the rise of its carbon emissions by 2030). Investment in such businesses will also limit China’s thirst for imported oil.

In the past, when publishing outlines of five-year plans prior to their adoption by parliament, the party has often announced a goal for average annual gdp growth during the plan period (see chart 2). 

There was no such figure this time. In separate comments, Mr Xi said it was entirely possible that China could double the size of its economy by 2035. That would require average annual growth of 4.7% over the next 15 years. Such a rate would be readily attainable for the first half of that period, but may become much harder thereafter.


China has good reason to abandon such targets. They lead to an overemphasis on investment in infrastructure and other short-term measures to boost growth, rather than on social policies such as those relating to health care or education which can promote growth but may take longer to show results. 

But de-emphasising targets may relate to the new dual-circulation strategy in a way that the government has left unspoken. Making the economy less reliant on global supply chains could crimp its ability to grow.

Arguably China has been the world’s main beneficiary of globalisation, which has enabled it to dominate ever-bigger segments of manufacturing. Turning inward could be costly. It may result in less foreign technology flowing into China, less of the competition that has spurred on Chinese firms, and more wasteful investment as the government throws money at favoured industries. 

Shaun Roache, an economist with s&p, a credit-rating agency, forecasts that China’s average annual growth will be 4.6% in the 2020s. But he reckons it could be about 3% if the drive for self-reliance is overdone. The country’s “tolerance for slower growth may well be tested in the years ahead”, he says. The party, ever fearful that a stagnating economy could trigger social unrest, may find it hard going.

Optimism is a stubborn trait, so some inveterate China-bulls think that emphasising domestic circulation may create a new wave of reforms aimed at making the country’s markets function more efficiently. Take the semiconductor industry. 

Caixin, a Chinese financial magazine, reported last month that Huawei, a tech giant, was rushing to create a “not-made-in-America” supply chain by 2022. Initially, however, that would enable it to make chips with transistors spaced 28 nanometres (billionths of a metre) apart, far less dense than the most advanced ones. 

The bullish case is that China, realising how long it will take to catch up in such areas, will try to boost productivity by cracking on with hitherto slow-moving reforms. Analysts with Huatai Securities, a brokerage, think that could include doing more to loosen the household-registration system known as hukou, which impedes the movement of rural labour to the country’s biggest and most productive cities.

In the meantime, companies are getting on with their work. Mr Cheng at Deli, the glassware firm, says he will not give up on foreign markets despite the pandemic’s impact on demand. But he will mainly focus on brighter prospects at home. 

His team is refining their product range for younger consumers, who are pickier about style and more demanding about quality than their parents. That mix of emphasis, your correspondent ventures, sounds a lot like a corporate version of the dual-circulation strategy. 

“We’re not too clear about what all that means,” he says with a sigh. “We’re just following the market.”

We can avert irreversible climate change

Action is both essential and affordable — but it demands international leaders’ co-operation

Martin Wolf 

    © James Ferguson


A renewed presidency for Donald Trump is likely to be nowhere more consequential than for climate change. The coming decades will determine whether the threat of damaging and irreversible change is averted, or not. Without active US engagement, success seems inconceivable. 

Even with it, it would be unlikely. But, crucially, it would be conceivable. We know what to do and we know, too, that it is affordable. What is unaffordable is not to do what we need to do. But will we? That is the question.

It is indicative of the shift in the perspective of the global policy establishment that a chapter of the IMF’s October World Economic Outlook focuses on “mitigating climate change” — that is, preventing it — via “growth-and-distribution-friendly strategies”. In brief, the IMF insists that humanity can have its cake and eat it: both higher incomes and a safe climate.

As a result of rising concentrations of greenhouse gases in the atmosphere, global average temperatures are already about 1C above pre-industrial levels. On present trends, this could reach around 1.5C in a decade and 2C half a decade later. At that point, warn climate scientists, dangerous and irreversible tipping points in the climate are likely to be passed. 

Most governments do at least pretend to agree. Thus, in the Paris accords of December 2015, they committed themselves to keeping temperatures below these levels, even if their promises fell short of what was needed to achieve this.


As the IMF notes: “Sizeable and rapid reductions in carbon emissions are needed for this goal to be met; specifically, net carbon emissions need to decline to zero by mid-century.” If this is to happen, emissions need to fall sharply this decade and keep on falling thereafter. That would represent a huge turnround from previous trends.

What sort of programme might deliver this outcome? The answer, suggests the fund, is a combination of front-loaded green investments, aggressive funding of research and development, and a credible long-term commitment to rising carbon prices. This is in line with other studies, notably Making Mission Possible: Delivering a Net-Zero Economy, a September 2020 report from the global Energy Transitions Commission. 

The latter also emphasises complementary regulation, to accelerate changes in behaviour. Compensation of poorer losers against the higher fuel prices will be needed as well.


Is a move towards zero net emissions by 2050 affordable? The answer is: surprisingly so, particularly given the economically depressed post-Covid starting point. 

The IMF estimates that achieving this aim might lower world output by 1 per cent, relative to its “baseline” under unchanged policies, once one adds in the benefits of damages avoided. 

Even so, this must be put in the context of expected cumulative global growth of 120 per cent over the next 30 years. It also ignores the benefits of far lower local pollution.

Some estimates suggest that temperature increases of as much as 5C by 2100, in the absence of mitigation, might lower global output by 25 per cent. This does not take account of the massive non-economic disruptions to humanity, indeed all life, to be expected from such an unprecedentedly rapid upheaval in the climate.


Given these estimates of the modest short-term cost of mitigation against the far greater long-term costs of failure to do so, the argument for action is overwhelming. It becomes more so when one allows for the scale of the uncertainty created by unmitigated climate change, as well as its irreversibility.

Taking action might make sense even if the costs were many times as large as now expected. So why is it not happening? One explanation is that it involves changes in lifestyles, which we dislike. Another is that it requires thinking in decades, which is unnatural. But the most important explanation is that it requires long-term co-operation, which we usually find impossible.


Co-operation among five players — China, the US, the EU, India and Japan — would deliver a huge part of what is needed. Unfortunately, this hardly looks likely right now. A shift in the US presidency towards someone sane would be a big help. Without that, sanctions against the US might be necessary. But a more aggressive shift by China than planned will also be essential.


If needed policy shifts are to happen soon enough, it will take statesmanship of a high order indeed. Domestically, programmes must compensate the most vulnerable losers, which is a good reason for using a carbon tax. 

Internationally, leaders must co-operate far more effectively than they did even on the Paris accord. 

If they are to do what is needed, leaders must overcome two other obstacles to wise action: the fossil-fuels-forever resisters; and the ecological fanatics, who argue in favour of a revolutionary overthrow of capitalism and the end of growth — by tomorrow, please.

The only realistic hope is technocratic problem-solving and co-operative policies. These must be guided by moral purpose, but not infused by fantasies of revolutionary transformations. Cries of “repent, for the end of the world is nigh” will not solve this emergency. 

Humanity is at its best when it uses its head. Climate is at bottom a crisis of technology and behaviour; it can be tackled only by changing incentives throughout the system.

As I have argued before, this is now extremely urgent. If we want to prevent a dangerous shift in the planet’s climate, we need to act far more decisively than hitherto. 

We are drinking fossil fuels in the earth’s last-chance saloon. 

The time has come for humanity to sober up.

For the US and China, There’s No Going Back

Even under a Biden administration, the rivalry will only intensify from here. 

By: Phillip Orchard


For months leading up to the U.S. election, there was no shortage of speculation over who Beijing would prefer to have in the White House in January. In several (unsourced) interviews with Western media, Chinese officials insisted that President Xi Jinping and his inner circle didn’t have a particularly strong preference – that neither a Biden nor a second Trump administration would fundamentally reshape the trajectory of U.S.-China relations.

Yet nearly all of Beijing’s recent behavior has betrayed an expectation that there’d be worse to come with either outcome – and that any window of opportunity opened by electoral chaos would likely be far too brief to capitalize on. And for good reason. Beijing’s own immense internal pressures and unforgiving geopolitical imperatives are what’s locking it into its increasingly assertive course. And this, in turn, is forging an increasingly bipartisan consensus in Washington that Communist Party-led China is the country’s foremost strategic and economic challenge. As a result, there will be some tactical differences under a Biden presidency, as well as some changes in what particular challenges the administration prioritizes. But broadly speaking, the U.S.-China rivalry will only intensify from here.

The Bipartisan Consensus

It’s become fashionable to claim that U.S. strategy toward China under several of Trump’s predecessors was grounded in naivete and wishful thinking. The constant emphasis on engagement and bringing it into the global trading system was rooted in rose-colored assumptions that helping China get rich would eventually help bring democracy to China and incentivize Beijing to abide by the rules and norms of the established order – or so the argument goes.

But this argument misreads the historical record. U.S. national strategy documents from the mid-1990s, along with contemporaneous debates over China’s entry into the World Trade Organization, make clear that the Clinton administration was under no illusions about the character of the Communist Party of China and the long-term strategic and economic problems China’s rise was likely to pose. (The crackdown at Tiananmen Square was still recent history, after all.)

Rather, the Clinton administration’s relatively friendly China policies – and those of the George W. Bush and Obama administrations – were shaped by three main things. One was an understanding that the U.S. just didn’t have much leverage to make the CPC do things it didn’t want to do, particularly anything the CPC thought would weaken its control over China. 

The second was the realization that China’s cooperation would be needed on matters of critical shared interest: nuclear proliferation, terrorism, global financial stability, environmental and epidemiological threats, and so on. The third, of course, was the widespread tendency among U.S. business communities to view China overwhelmingly in terms of their bottom line.

This third factor made it increasingly difficult for the U.S. to change directions once it started to more tightly integrate with China. Beijing simply had too many friends and captured interests in the U.S., making the economic and political costs of an abrupt decoupling too high for any administration to stomach, especially when there were much more immediate problems (like the Global War on Terror and the global financial meltdown after 2008) to worry about. U.S. consumers, too, had developed a taste for low-cost imports and were none too keen to give them up.

2017 marked an inflection point, though. By the time Trump launched the trade war, U.S. political, economic and military interests had begun to align. The U.S. middle class had been gutted. Many neoliberals and U.S. business sectors had been alienated by China’s distortion of global markets, its flouting of WTO obligations, and Beijing’s support of things like intellectual property theft. 

China’s rapid emergence as a near-peer military competitor – one willing and capable of dictating terms to most of its neighbors – seemed to have snuck up on the U.S. defense establishment. This, combined with a perceived erosion of the U.S. Navy and Air Force’s technological advantages, sowed doubts among allies about U.S. commitments and generated widespread alarm in D.C. that the U.S. was not ready for great power competition. 

China’s crackdown in Hong Kong dashed any remaining optimism about Chinese democratization, while its concentration camps in Xinjiang outraged anyone with a pulse.

In other words, there’s something about the CPC for just about every powerful constituency in the U.S. to hate. So it’s getting harder and harder for Beijing to capture interests in the U.S., to exploit its internal divides, and to ensure that the path of least resistance for U.S. policymakers consistently favors the status quo with China. 

President Donald Trump’s trade and tech wars made meaningful progress on very few of their core goals. But the fact that he was able to sustain them despite the economic costs, even amid the coronavirus-induced economic implosion, underscored the reality that a paradigm shift is taking place.

Staying the Course

To Beijing, the Trump era was not a paradigm shift; it was a confirmation of long-held suspicions that the U.S. is singularly focused on kneecapping China’s rise. If the trade and tech wars changed anything in elite circles, it was by narrowing the space for dissent and quieting those who’ve grown concerned that China’s “wolf warrior diplomacy” and constant antagonization of its neighbors may backfire. 

This is why the CPC's rigidly top-down, censorial institutional culture matters. It creates echo chambers, suppresses informed, creative thinking, and incentivizes everyone who wants career success to toe the line. It also creates a dependence on stoking nationalism among its citizens and thus raises the political costs of compromising with the great Satan.

More important, though, the current leadership firmly believes the party’s survival, to say nothing of the country’s security and prosperity, hinges on a continuation of most of the policies that anger the U.S. most. This is why Xi is doubling down on state-managed mercantilism, as made explicit in a recent speech. It’s why Beijing seems content with hostile reactions to its moves in India, Australia, Taiwan and elsewhere. And it’s why it made an exceedingly risky bet in Hong Kong.

Critically, Beijing also happens to believe most of its policies are succeeding – in its mind, for example, it passed the ultimate systemic stress test posed by the pandemic – and that the U.S. is a wheezing superpower in denial about its decline. The CPC sees little reason to change course, even if it means locking itself into a self-reinforcing feedback with the U.S. and putting it on a risky path toward confrontation.

This is the challenge Joe Biden has inherited. The optimal strategy toward China would sustain the balance of power, persuade like-minded states to assume the risks of retaliation by joining an implicitly anti-China coalition, address domestic economic and technological vulnerabilities without doing excessive harm to the U.S.’ own economic well-being, and deter Beijing's most aggressive impulses without making cooperation on shared interests impossible – and without closing critical off ramps from a potential path toward war. 

In reality, many of these goals conflict. And any degree of meaningful progress will be expensive, both in financial terms and in political capital. Both will be in short supply given the intersecting domestic crises Biden will be juggling.

So while his administration will talk a big game about multilateralism, human rights and doing more to look out for the interests of friends and allies in the region, it will struggle to back it up. It will want to dramatically increase security assistance to partners along the South China Sea, for example, but everyone in Washington will have bigger budgetary priorities. 

It will want to do more to directly defend the material interests of U.S. partners in disputed waters – and dash Beijing’s belief that it’s on course to fundamentally overturn the balance of power in the Western Pacific – but the U.S. Navy and Coast Guard are already overstretched and in dire need of an overhaul. 

It may strike a quick deal with Beijing to scale back the bulk of the tariffs on Chinese imports that disproportionately hurt U.S. consumers, but Beijing won’t concede much. 

The leverage required to curb Chinese mercantilism and technology theft will remain elusive, especially since trade pacts like the Trans-Pacific Partnership will be a political nonstarter. It won’t force U.S. firms who don’t want to leave China to leave.

Thus, exactly what the Biden administration chooses to prioritize with China, and the tactics it employs in its pursuit, is up in the air. But there’s no going back to the status quo. 

The fundamental question now is where two countries can find equilibrium on the spectrum between strategic competition and war.

America’s Alliances After Trump

Donald Trump’s reckless contempt for America’s allies has weakened the country and created a far more dangerous world. President-elect Joe Biden will need a deft pair of hands to repair Trump’s wanton destruction.

Kent Harrington


ATLANTA – America’s allies should be forgiven if they are confused about where American foreign policy is headed. Who isn’t, given the go-it-alone recklessness of Donald Trump’s presidency? 

Over the past three years, Trump has sowed strategic chaos, and his foreign policy, if one can call it that, brought new meaning to incoherence. President-elect Joe Biden will be better almost by default. But has Trump changed America so much that the world cannot count on it ever being normal again?

Not only did Trump pursue a love affair with North Korea’s nuclear-armed dictator and remain smitten with Russian President Vladimir Putin – a man waging political war on the West. He also championed Brexit and badmouthed America’s European allies, when he was not undermining them outright. 

At the annual Munich Security Conference in 2020, French President Emmanuel Macron and German President Frank-Walter Steinmeier both acknowledged that Trump had fundamentally damaged the transatlantic alliance. 

Their message was clear: If Trump won a second term, the historic partnership that has long constituted the geopolitical “West” would never be the same. Prudent world leaders were doubtless preparing for even more instability and uncertainty had Trump been re-elected.

France and Germany, of course, have many reasons to disagree with the United States, be it on trade relations, Macron’s outreach to the Kremlin, or both countries’ relatively less confrontational approach to China. Macron, who last November called NATO “brain dead,” has made no secret of whom he holds responsible for the alliance’s decay and the broader sense of disarray among US partners and allies.

But in Paris and Berlin, as elsewhere in Europe, the reaction to Trump was not just about his bullying, trade tactics, or divisiveness. Europeans saw his administration charting a course that rejected the transatlantic security relationship and its central role in US global engagement more generally. 

Biden will ditch the unconstrained unilateralism. But even with a new approach, the damage Trump has done won’t be repaired easily, or alter views among European leaders that the continent increasingly will need to fend for itself.

Trump’s treatment of US allies in Asia has given Europeans ample warning to be prepared for more deterioration in the security relationship. Despite the North Korean nuclear threat and China’s growing power, Trump tried to turn America’s crucial alliances with South Korea and Japan into pay-as-you-go relationships. 

Fortunately, Biden understands what Trump doesn’t: that US defense pacts with those two countries have underpinned East Asia’s stability for 70 years and paid off handsomely for the US. Trump viewed both relationships as “bad deals,” and Biden will need to persuade Americans to turn away from his transactional diplomacy.

Moreover, Trump wasn’t the first US president to lean heavily on jingoistic rhetoric, and putting the MAGA genie back in the bottle may not be simple for Biden. Both South Korea and Japan can attest to the fact that “America First” was no mere slogan. 

With the Host Nation Support Agreements that determine the details of America’s presence in each country up for renegotiation this year, Trump repeatedly threatened to withdraw US forces from both countries unless they paid more for what he called American protection. Biden will have to work hard to restore Japanese and Korean trust as he seeks to renew these agreements.

In fact, South Korea and Japan already share mutual defense costs, and have underwritten the US military presence in Northeast Asia for decades. South Korea pays more than 40% of the operating costs of US forces stationed there; it also covered 92% of the US command’s $10.7 billion move to new facilities outside of Seoul, and it purchases billions of dollars’ worth of US military hardware. 

For its part, Japan provides $2 billion per year to support 54,000 US troops; it purchases 90% of its military hardware from US companies, and it has furnished $19.7 billion (77% of the total costs) for the construction of three major bases.

For nearly a year, Trump administration officials have demanded that their South Korean counterparts quadruple their country’s current $1 billion in financial support. Add to that leaks describing possible US troop withdrawals and the announcement in July that 12,000 US forces would leave Germany. Clearly, Biden’s administration will need not only to devise a new negotiating strategy, but also to reboot the US security guarantee.

Even with Biden in charge, the currently testy political relationship between South Korea and the US (which walked out on the earlier base talks) means negotiations won’t be easy. In Japan, formal talks began last month, and the government has until March 2021 to renew its agreement. 

Trump’s defense officials told their Japanese counterparts to expect the same treatment as South Korea. Biden will certainly change that script as well. But Japan’s new prime minister, Yoshihide Suga, likely still expects arduous negotiations, albeit without the take-it-or-leave-it attitude that raised questions about the durability of America’s security guarantees.

A simple return to treating allies like allies should go a long way for Biden. Trump demonstrated no concern for his policy’s political fallout in Seoul and Tokyo, or for its impact on the political fortunes of South Korean President Moon Jae-in and former Japanese Prime Minister Shinzo Abe. 

In the interest of security, both leaders tried to pander to Trump’s “stable genius” over the last three years, with little to show for it but domestic political embarrassment. Biden’s election undoubtedly brought sighs of relief in Seoul and Tokyo.

Sadly, Trump’s malignant legacy will survive his departure. With everything from health care to climate change begging for Biden’s attention, foreign policy is certain to take a backseat to domestic priorities. For US allies, patience will remain a virtue. Righting the wrongs of the Trump years will take time. 

As he has said at least since 1990, Trump wanted to reshape America’s defense arrangements and radically alter its role in the world. Trump may be a pathological liar, but he kept his word on this issue.


Kent Harrington, a former senior CIA analyst, served as national intelligence officer for East Asia, chief of station in Asia, and the CIA’s director of public affairs.

Scorched Earth 

Doug Nolan


November 18 – Reuters (Rodrigo Campos): 

“Global debt is expected to soar to a record $277 trillion by the end of the year as governments and companies continue to spend in response to the COVID-19 pandemic, the Institute of International Finance said in a report… The IIF… said debt ballooned already by $15 trillion this year to $272 trillion through September. Governments - mostly from developed markets - accounted for nearly half of the increase. Developed markets’ overall debt jumped to 432% of GDP in the third quarter, from a ratio of about 380% at the end of 2019. Emerging market debt-to-GDP hit nearly 250% in the third quarter, with China reaching 335%, and for the year the ratio is expected to reach about 365% of global GDP.”

Covid’s precision-like timing was supernatural – nothing short of sinister. A once in a century international pandemic surfacing in the waning days of an unrivaled global financial Bubble. 

A historic experiment in central bank monetary management already floundering (i.e. Fed employing aggressive “insurance” QE stimulus with stocks at record highs and unemployment at 50-year lows). 

A Republican administration running Trillion-dollar deficits in the midst of an economic boom. Yet, somehow, reckless U.S. fiscal and monetary stimulus appeared miserly when compared to the runaway excess percolating from China’s epic Credit Bubble. Monetary, fiscal, markets, at home and abroad: Covid bestowed end-of-cycle excess a hardy additional lease on life.

From the FT: 

“Global debt rose at an unprecedented pace in the first nine months of the year as governments and companies embarked on a ‘debt tsunami’ in the face of the coronavirus crisis… From 2016 to the end of September, global debt rose by $52tn; that compares with an increase of $6tn between 2012 and 2016.” 

According to the IIF, U.S. debt is on course to expand about 13% this year to $80 TN. 

As a percentage of GDP, U.S. debt jumped from 327% to 378%. U.S. government borrowings inflated a dismal 26 percentage points to 127% of GDP. Globally, developed (“Mature”) economy debt surged 49 percentage points to 432% of GDP. 

From the IIF: “… There is significant uncertainty about how the global economy can deleverage in the future without significant adverse implications for economic activity.”

Emerging market debt is expected to jump 26 percentage points this year to 250% of GDP, as indebtedness rises to $76 TN (Chinese borrowers accounting for $45 TN). 

China rapidly expanded already massive indebtedness, adding a staggering 30 percentage points to 335% of GDP (up from about 160% in ’08). China’s corporate sector added 15 percentage points to 165% of GDP. And more indications this week of mounting Credit stress (see China Bubble Watch below). 

Malaysia and Turkey added almost 25 percentage points of debt-to-GDP this year, with Colombia, Russia, Korea and Chile jumping around 20 percentage points. Thailand, South African and India each gained almost 15 percentage points, with Hungary, Mexico and Brazil near 10. 

From Bloomberg: 

“About $7 trillion of emerging-market bonds and syndicated loans are slated to come due through the end of 2021… Emerging markets, especially those in Latin America, have faced more pressure on credit ratings this year as debt loads rose…”

IIF projections have global debt increasing $70 TN, or a third, over what will soon be five years of synchronized “Terminal Phase Excess.” The past year, in particular, has seen rapid acceleration of non-productive debt growth. On a global basis, governments accounted for over half of new debt. 

In the IIF’s one-year sectoral breakdown, Global Government Indebtedness surged from 69.1% to 77.6% of GDP – led by a $3.7 TN increase in U.S. governmental borrowings. This was the largest of the sector gains (compared to 73.7% to 79.6% growth in Non-Financial Corporates). Canada, Japan, the UK, Spain and Italy were also notable for their massive expansions of government indebtedness.

Examining the current extraordinary market backdrop, the “pain trade” has been higher. Despite extreme bullish sentiment, many have remained less than fully invested. FOMO (fear of missing out) has been excruciating. The poor bears have been decimated. Short positions remain easy – big fat bear in a barrel - “squeeze” targets, with little concern these days for those pesky bears shorting overextended stocks. Devoid of selling pressure, the sky’s the limit.

But, mainly, there is today a pool of speculative finance without precedent. Positive vaccine news stoked a manic rotation, catching most in a highly Crowded marketplace tech heavy and underexposed to financials, small caps, myriad lagging sectors, EM and the broader market more generally. 

Quant strategies run amuck.  Throw in all the manic derivatives trading – beloved call options in particular – and one can easily explain the origins of market “melt-up” trading dynamics. And such a speculative, dislocated and devious marketplace welcomes negative news flow. 

This only entices some new short positions along with put buyers - to then be summarily torched by a carefree market gleefully climbing the proverbial “wall of worry.”

In reality, there’s plenty to worry about. As welcome as positive vaccine news is right now, the conclusion of the pandemic will not, unfortunately, usher in a return to normalcy. 

The massive amount of debt noted above will overhang the system for years, as will deep scars throughout the real economy. 

From the New York Times: 

“Maps tracking new coronavirus infections in the continental United States were bathed in a sea of red on Friday morning, with every state showing the virus spreading with worrying speed and health care workers bracing for more trying days ahead.”

U.S. daily infections surpassed 100,000 for the first time on November 4th. And just over two weeks later, we’re on the cusp of a 200,000 day (194,000 on Friday). 

Coronavirus taskforce coordinator Dr. Deborah Birx: “This is faster, it is broader and, what worries me, is it could be longer.” 

Hospitalizations nationally have surpassed 84,000, almost double the month ago level. 

Many states reported a doubling of hospitalizations over the past week. One in five hospitals now expects to face critical staff shortages within a week. Friday saw California report a record 13,005 new infections. 

U.S. equities traded to record highs on February 20th, seemingly oblivious to the unfolding pandemic. And then, within 10 trading sessions, markets were overwhelmed with panic. 

The Fed responded with rapid-fire rounds of increasingly panicked stimulus measures. These days, markets have once again been content to disregard a deteriorating pandemic environment. When the crisis erupted in March, markets confronted unknowns with regard to the pandemic as well as the scope and efficacy of the crisis response. 

Beyond the vaccines, markets’ current willingness to “look over the valley” rests firmly on confidence that fiscal and monetary policymaking will again rise to “whatever it takes.” 

A Friday evening Bloomberg headline: “Investors Look Past the Chaos and Throw $53 Billion at Stocks.” 

In “one of the biggest deluges of cash ever recorded,” U.S. equities ETFs have attracted $53 billion so far this month. What an odd backdrop for throwing caution to the wind and rushing into the market. Clearly, way too much “money” has been chasing highly speculative markets. 

November 20 – Bloomberg (Christopher Anstey and Saleha Mohsin): 

“The top two U.S. economic policymakers clashed over whether to preserve emergency lending programs designed to shore up the economy -- a rare moment of discord as the nation confronts the risk of a renewed downturn spurred by the resurgent coronavirus. 

The disagreement erupted late Thursday when outgoing Treasury Secretary Steven Mnuchin released a letter to Federal Reserve Chair Jerome Powell demanding the return of money the government provides the central bank so it can lend to certain markets in times of stress. Minutes later, the Fed issued a statement urging that ‘the full suite’ of measures be maintained into 2021. 

‘This is a significant and disturbing breach at a critical time for the economy,’ said Tony Fratto, who worked at the Treasury and the White House during the George W. Bush administration. ‘We need all the arms of government working together and instead we’re seeing a complete breakdown,’ he said, noting that Washington remains at an impasse on fiscal stimulus as well.”

As has become quite a habit, markets brushed off Mnuchin’s surprising termination of several of the Fed’s emergency programs. Remarkably, the entire contested election issue has been one big nonissue for an ebullient marketplace. 

With Biden ahead six million popular votes and holding a commanding electoral college lead, markets aren’t taking President Trump’s ranting, raving and suing seriously. 

The assumption is bluster peters out and a peaceful transfer of power emerges around January 20th. 

Does that leave two months for “Scorched Earth” shenanigans? 

Does Mnuchin’s move against the Fed foreshadow a bevy of measures meant to hamstring the new Biden administration and rattle the markets. 

From day one, President Trump suffered a peculiar obsession with all things stock market. 

Record equities prices were exalted as a reflection of his leadership prowess and adroit policymaking. So far, not even an inkling of the market crash a Biden presidency was to incite. 

If there is indeed some “Scorched Earth” scheme at work, why would the stock market not have a bullseye on its back?