martes, octubre 04, 2016




China Marks Milestone With Yuan’s Entry Into IMF Reserve Basket

Move confers a measure of legitimacy after Beijiing’s yearslong effort to internationalize its currency; remains far from countering dollar’s status

By Ian Talley in Washington and Lingling Wei in Beijing

 The yuan will be used as one of the International Monetary Fund’s official lending reserves, joining the dollar, the euro, the yen and the pound. Photo: kim kyung hoon/Reuters

China’s yuan officially enters the International Monetary Fund’s basket of reserve currencies Saturday, a telling trophy in the transformation of the Asian giant’s geopolitical status.

Along with the dollar, the euro, the yen and the pound, the yuan will now be used as one of the IMF’s official lending currencies in emergency bailouts. The fund’s stamp of approval confers a measure of legitimacy on the yuan after a yearslong effort by Beijing to internationalize its currency.

The move shows how China’s financial diplomacy has evolved from heavy-handed aid to governments in decades past to a multipronged strategy to challenge the U.S.’s global economic dominance.
Still, many experts say Beijing remains far from truly countering Washington’s clout because of the very limits China puts on its own markets.

The inclusion of the yuan in the IMF’s lending reserves is more a symbolic victory than a market-shaping event. Central banks have only marginally increased their stocks of China’s yuan since the IMF last year announced its decision.

While some economists question the yuan’s inclusion—given Beijing’s tight controls over the exchange rate and cross-border capital movements—the IMF said it was a justifiable acknowledgment of the country’s development into a global economic powerhouse.
“It’s an irreversible path towards opening up, integrating into the global economy and playing the economic game by the rules,” said IMF Managing Director Christine Lagarde.

For Beijing, the inclusion in the IMF basket is a measure of its growing global clout, part of a broader plan to leverage its newfound power as the world’s second-largest economy.


The Communist government is beefing up its military, testing the physical limits of its borders, accelerating its space exploration program, and trying to compete with Hollywood in the global movie industry. And Chinese companies, many of them state-owned, are buying up assets and investing around the world at an unprecedented rate. According to the Rhodium Group, China’s investments and acquisitions in the U.S. alone have ballooned from $3 billion 10 years ago to $81 billion in 2016.

“Back in early 2000s, China’s approach was basically to funnel money into African countries, and they got a lot of pushback,” said Eswar Prasad, a Cornell University economist and former top China hand at the IMF. “Since then, it has become much more savvy in its engagement in the international financial community.”

Official reserve-currency status caps years of efforts to meet the IMF’s criteria. Over the past five years, Beijing has managed to turn a trickle of yuan-denominated transactions into a flood: A third of its total cross-border trade is now in the yuan.

It established banking relationships in major capitals around the world to facilitate trade settlement, including one in New York City earlier this month, the first in the U.S. It set up nearly three dozen standing bilateral credit lines to help cover trade transactions and any potential cash shortages.

Yuan internationalization was only one aspect of its broader diplomatic strategy, though. Over the past decade, China has transformed from a net borrower of development assistance to a net lender.

Beijing has secured a foothold in nearly every major international financial institution, including installing senior executives at the IMF and the World Bank.

It has also set up a host of alternative financing institutions, including the $240 billion Chiang Mai Initiative, the $100 billion Contingency Reserve Arrangement, the $100 billion New Development Bank and the $100 billion Asian Infrastructure Investment Bank, or AIIB.

Just as the reserve-currency status marks a milestone in China’s economic development, many analysts point to the launch of the AIIB as a key marker of China’s growing sophistication as a financial diplomat.

Washington was dealt a major diplomatic embarrassment last year after failing to prevent its key allies around the world from joining Beijing’s new infrastructure bank. Outmaneuvered by Beijing, the administration was later forced to call a truce, saying instead it would cooperate with the institution through its World Bank lending.

And Beijing is countering a move by Washington to bolster its relationships with the countries encircling China through the Trans-Pacific Partnership trade pact. Its “One Belt, One Road” development and trade project is intended to craft a new Asian order with Beijing at the center, at an estimated cost of $1 trillion.

“Putting this in perspective, the U.S. Marshall Plan to finance Europe’s recovery after World War II cost something just over $100 billion in today’s dollars,” says John Copper, author of a three-volume book on Beijing’s foreign aid and investment diplomacy.

Although in flexing its newfound might China is challenging traditional U.S. financial strongholds, it isn’t likely to break Washington’s economic domination soon. There is a reason why most of the world’s transactions and currency reserves are held in dollars: It is considered the safest and most secure economy in the world.

In contrast, while the yuan is now an international reserve currency, it isn’t a “safe haven” currency.

China isn’t engendering the trust of foreign investors, Mr. Prasad said, because it doesn’t have strong financial institutions like an independent central bank, trusted rule of law, and an open and transparent form of government with checks and balances.

“China has made abundantly clear it’s not going to have any of these,” he said, adding that will limit likely limit global reserve holdings of yuan to 5% to 15%.

Comparing the yuan with other elite currencies shows the challenges that still lie ahead, including for China’s economic diplomacy more broadly. China’s currency is used in only 1.86% of the world’s total payments—compared with 42.5% in the dollar, 30% in the euro and 7.5% in the pound. While the stock of central-bank reserves held in the yuan have nearly doubled in the past several years, it is still between 1% and 2% of total assets.

And private demand for the yuan has soured as the country’s growth slows faster than expected. Yuan deposits in Hong Kong, the biggest offshore clearing center, have fallen from 1 trillion in July last year to 0.7 trillion in July this year.

“In the long run, China will eventually liberalize its capital account to a larger degree,” said  Jin Zhongxia, Beijing’s top representative to the IMF and a former senior People’s Bank of China official. The exchange rate will also become much more flexible, Mr. Jin said.

“But that will not happen in one step,” he said. “It will go through a gradual, or evolutionary, process.”

China’s Growing Credit Risk

The bubble grows as Beijing keeps pushing growth before reform.

       Photo: Getty Images

Respectable financial analysts once derided the tiny coterie of “China bears” for warning that the country could face a financial crisis. But over the last year the risk of a bad loan reckoning has become conventional wisdom. While Beijing possesses the resources to shore up the banking system, its continuing efforts to stimulate growth with more lending are complicating China’s economic and political predicament.

The latest alarm comes from the Bank for International Settlements, the clearing house of central banks in Basel. Its latest quarterly review shows that China’s credit-to-GDP gap, which measures credit growth above a country’s long-run trend, is now 30.1%. Anything above 10% is usually considered a red flag.

The idea behind the ratio is that there is no specific debt level that causes problems in all economies, but a sudden borrowing spree is a good predictor of a crisis. It suggests a mania in which loans create the illusion of high returns, which justifies more borrowing. The U.S. credit-to-GDP gap breached the 10% level in 2007 right before the housing bubble burst. As Goldman Sachs GS 0.13 % warned earlier this year, “Every major country with a rapid increase in debt has experienced either a financial crisis or a prolonged slowdown in GDP growth.”
The speed of China’s borrowing was staggering as Beijing opened the credit taps to stop the effects of the global financial crisis from reaching China. Total debt in the economy zoomed to more than 250% at the end of last year from less than 150% at the end of 2007.

This is especially worrying because the ratio continues to climb despite Beijing’s decision last year to rein in wasteful investment and undertake supply-side reforms. The government promised to stop state banks from evergreening, the practice of making new loans so troubled borrowers can repay old ones. Such zombie companies were supposed to go bankrupt. Instead China has seen few defaults.

Beijing has a good political reason for its caution. Carrying out reform promises would slow growth, and every time that happens social unrest soars. The protests this year in the town of Wukan seem to reprise the violence seen there in 2011, the last time the economy went south.

In the past few months Beijing has encouraged the three policy banks to finance new investments by state-owned enterprises. Banks have also fueled a mortgage boom that has boosted property prices. While the central bank hasn’t cut rates or reserve requirements, it has used open-market operations to give banks more liquidity.

Government statistics show that the banks’ nonperforming-loan ratio is approaching 2%, an 11-year high. But even officials acknowledge that the real number is much higher. Banking analyst Charlene Chu has predicted that it could reach 22%. That would require Beijing to recapitalize the banking system as it did in the early 2000s.

Fixing the financial system could be much messier this time, due to the advent of shadow banking. The state banks have created a complex web of “wealth management products” that attract investors with higher returns than ordinary deposits. According to Ms. Chu, WMPs grew by $1.1 trillion last year, accounting for nearly 40% of total credit growth.

These short-term liabilities fund long-term assets, a mismatch that has exacerbated crises elsewhere.

And many of the buyers are other institutions, reminiscent of the U.S. mortgage-backed securities in 2008. Savers don’t understand the risks, and banks have been forced to repay their principal when the WMPs fail. A run on these investments could cause serious unrest and erode middle-class trust in the government.

Beijing faces a daunting challenge of engineering a market-driven deleveraging of an economy that has become dependent on monetary and fiscal stimulus. Managing the inevitable political fallout could be as dangerous as the economic risks.

The Recent COT Report Gives Us Some Insight In The Current Mindset Of Gold Investors

by: Hebba Investments

- Gold speculators increased their net long position by 43,000 during the week. 
- Silver speculators were much less bullish as they only increased their own net long position by 4,300 contracts.
- This suggests that speculators are buying gold because they are risk averse and seeking defensive positioning.
- The large build in speculative gold net longs with only a small increase in the gold price suggests weakness in other areas of the gold market.
- Investors need to be buying back some of their gold speculative positions but since we expect a further drop in gold wait until then to be fully invested.

With the Fed behind us and the US presidential debate and the Deutsche Bank(NYSE:DB) drama taking center stage in financial markets, this past week's Commitment of Traders report saw a large build in gold speculative traders. While not unexpected considering the European banking issues that have roiled markets, we would have expected larger rise in the gold price considering the position increase in speculative gold bulls. Interestingly enough, silver did not follow gold's lead and speculative traders' silver positions only increased slightly.
We will get a little more into some of these details but before that let us give investors a quick overview into the COT report for those who are not familiar with it.
About the COT Report

 The COT report is issued by the CFTC every Friday, to provide market participants a breakdown of each Tuesday's open interest for markets in which 20 or more traders hold positions equal to or above the reporting levels established by the CFTC. In plain English, this is a report that shows what positions major traders are taking in a number of financial and commodity markets.
Though there is never one report or tool that can give you certainty about where prices are headed in the future, the COT report does allow the small investors a way to see what larger traders are doing and to possibly position their positions accordingly. For example, if there is a large managed money short interest in gold, that is often an indicator that a rally may be coming because the market is overly pessimistic and saturated with shorts - so you may want to take a long position.

The big disadvantage to the COT report is that it is issued on Friday but only contains Tuesday's data - so there is a three day lag between the report and the actual positioning of traders. This is an eternity by short-term investing standards, and by the time the new report is issued it has already missed a large amount of trading activity.
There are many different ways to read the COT report, and there are many analysts that focus specifically on this report (we are not one of them) so we won't claim to be the exports on it. What we focus on in this report is the "Managed Money" positions and total open interest as it gives us an idea of how much interest there is in the gold market and how the short-term players are positioned.
This Week's Gold COT Report
As investors can see, this week's report shows that speculative longs broke a two week decline in positions and increased their positions by a very chunky 38,621 contracts - the largest increase since mid-June. Shorts continued their lackluster trading as their positions decreased by 4,137 contracts for the week.
Given that gold only rose by 1% for the week, this net speculative position increase of a little under 43,000 contracts is not very inspiring for the gold longs - we would have expected to see a larger move in the gold price with that large increase in speculative bulls.
Moving on, the net position of all gold traders can be seen below:
The red-line represents the net speculative gold positions of money managers (the biggest category of speculative trader), and as investors can see, speculative traders significantly increased their positions for the week which ended before we saw the Deutsche Bank issues taking center stage in markets on Wednesday and Thursday. Currently, those positions sit at a net long position of around 262,000 contracts, which we expect to be a bit lower as of Friday's close as gold showed a bit of weakness in the later end of the week (the COT report only shows positions as of Tuesday).
As for silver, the action week's action looked like the following:
The red line which represents the net speculative positions of money managers, saw a slight increase on the week of around 4,000 net contracts, but nowhere near the rise that we saw in speculative gold positions for the week. Put in percentage terms, gold's 43,000 contract rise in net speculative positions represents a little over 5% of the total gold open interest count of 793,000 contracts. This compares to silver's 4,300 contract rise in the net speculative position which only represents a little under 2% of the total silver open interest count of 224,000 contracts.
Why this divergence? We aren't sure what to make of this, but knowing that silver speculators tend to be a more speculative type of trader than those that buy gold and seek greater gains and have a greater risk profile, we think this bit of a divergence may be proof that the gold trade is now primarily based on defensive positioning - investors are seeking protection rather than appreciation here. That makes a lot of sense considering their quite a bit of potential market-moving geopolitical risk events in the next few months, and just this week Deutsche Bank's problems brought a possible European banking crisis in as another risk factor for investors.
Conclusion for Gold Investors
Last week we emphasized that investors need to begin rebuilding gold positions if they sold over the past two months because as we move away from Fed speak and into, what we believe are serious possible negative catalysts for global markets, it would be irresponsible not to own at least some gold.
Having said that, the fact that we saw a large build in speculative gold longs last week and not much of a pop in gold suggests that there is some weakness in the non-speculative and physical markets that is taking some of the wind out of the sails of gold. Investors should also remember that gold speculators have a net long position in gold that is close to all-time highs and much higher than the positions we saw back in 2011 when gold was trading at $1800 per ounce - gold is currently not an out-of-fashion contrarian trade right now.
Thus we expect a bit more of a pull-back in gold in the short-term but we urge investors to start building back some of their gold trading positions in the gold ETF's such as the SPDR Gold Trust ETF (NYSEARCA:GLD), ETFS Physical Swiss Gold Trust ETF (NYSEARCA:SGOL), iShares Silver Trust (NYSEARCA:SLV) because despite this pull-back the risk is too great that one of these upcoming catalysts (US presidential elections, the Italian Referendum, European banking shortfalls, etc) shakes markets and shoots gold much higher. But don't buy back all of the sold positions quite yet, as we think there will be a retest of $1300 and there will be a better buying opportunity as some of these speculators jump ship.

No halfway house will do: Theresa May will go for a hard Brexit

Martin Wolf

Britain will be meaner and poorer but no middle way exists between EU membership and a tough exit

Brexit means Brexit.” As circular as it is concise, this three-word sentence tells us much about the style of Theresa May, the UK prime minister. I take this to mean that the UK will, in her view, formally leave the EU, without the option of a second referendum or a parliamentary override. If so, it seems overwhelmingly likely that the outcome will be “hard Brexit”.
By “hard Brexit” I mean a departure not only from the EU but also from the customs union and the single market. The UK should, however, end up with a free-trade arrangement that covers goods and possibly some parts of services and, one hopes, liberal travel arrangements.
But the “passporting” of UK-based financial institutions would end and London would cease to be the EU’s unrivalled financial capital. The UK and the EU would also impose controls on their nationals’ ability to work in one another’s economies.
This is not the outcome many desire. As the Japanese government has made brutally clear, many Japanese businesses invested in the UK in the justified belief that the latter would provide a stable base for trade with the rest of the EU on terms as favourable as those available to producers anywhere else. These businesses are understandably worried about their prospects. The same applies to many others whose plans were made on the assumption that the UK had a settled policy of staying inside the EU.
“Hard Brexit” would disrupt their plans. Should the UK leave the customs union and enter a free-trade agreement with the EU, rules of origin would apply to exports of goods from the UK to the EU. This standard bureaucratic procedure would be needed to ensure that imports into the UK did not become a route to circumvent the EU’s external tariff. Rules of origin would put UK-based exporters at a disadvantage vis-à-vis those based in the EU. The same would be true for, in particular, banks should the UK leave the single market.
Why then is a hard Brexit the most likely outcome? My belief rests on the view that this UK government will not seek to reverse the result of the vote and that it will feel obliged to impose controls on immigration from the EU and to free itself from the bloc’s regulations overseen by its judicial processes.

Continued membership of the customs union or the single market, from outside the EU, would deprive the UK of legislative autonomy. The former would mean it could not adopt its own trade policy. The latter would mean accepting all regulations relating to the single market, without possessing any say on them, continuing with free movement of labour, and, probably, paying budget contributions. A country that has rejected membership is not going to accept so humiliating an alternative. It would be a state of dependence far worse than continued EU membership.

The only reasonable alternative to hard Brexit would be to stay inside the EU. Parliament is constitutionally entitled to ignore the vote result. The people could also be asked if they wanted to change their minds. But the Conservatives would surely follow Labour into ruin if they tried to reverse the outcome. Their Brexiters would go berserk.

Of course, it is logically possible that the EU might alter the terms of engagement. It might, for example, change its mind on the sacred status of free movement. If it had done so, the referendum would surely have had a different result. But this now looks near inconceivable.

If “hard Brexit” is, indeed, the destination, the aim must be to get there with the minimum of damage to both sides. Some Brexiters propose that the UK should simply repeal the European Communities Act, rather than go through Article 50. That would violate its treaty obligations.
Such egregious treaty breaking would hardly be a helpful precursor to the negotiation of new trade agreements.
It is essential for the UK’s future to go through the formal process of negotiating a departure. But, as Charles Grant of the Centre for European Reform notes, that will be just one of six tough negotiations. The others will be: an ultimate trade pact with the EU; an interim agreement with the bloc, to cover the period between exit and the longer-term deal; re-entry into the World Trade Organisation as a full member; new arrangements with the 50 or so countries that now have an accord with the EU and, presumably, with additional countries, too, such as the US and China; and, finally, UK-EU ties in foreign and defence policy, police and judicial co-operation and counter-terrorism.
Make no mistake, this is going to take years. A decision to adopt unilateral free trade, proposed by some Brexiters, would simplify this. It will not happen.

In all this, the crucial negotiation, to accompany talks under Article 50, is over transitional arrangements, to ensure the UK does not lose all preferential access to EU markets upon leaving.

Ideally, this deal should be some sort of “free trade plus”. How much it could be “plus” depends on flexibility on both sides, especially over free movement. In practice, it would probably not be very plus. But the UK government should state that it will not trigger Article 50 until the EU agrees to discuss a transitional agreement that, ideally, would be close to a final one.

Do I like this outcome? No. I would like a government prepared to overturn the referendum.

Nothing has changed my view that the UK is making a huge economic and strategic blunder.

The country is going to be meaner and poorer. David Cameron will go down as one of the worst prime ministers in UK history. But the halfway houses between membership of the EU and hard Brexit are uninhabitable. So what now has to be done is to move to the miserable new dispensation as smoothly as possible.

The UK has chosen a largely illusory autonomy over EU membership. That has consequences.

It will have to accept this grim reality and move as quickly as it can to whatever the future holds.

The Fundamental Attraction of Gold

John Embry

For investors who are both just beginning their foray into gold investment, and for those who have been long time proponents of gold, Sprott Senior Advisor John Embry breaks down the recent history of the U.S., highlighting the pressures that have brought fiat currency to the brink, U.S. debt liabilities to staggering heights, and gold back to the institutional investor’s crosshairs. It’s a must-hear, dispassionate and highly instructional speech for anyone seeking to fully understand the state of the global economy and its implications for gold and silver, and why gold remains a cornerstone of a well-constructed portfolio today.

To quote Voltaire: “Paper money eventually returns to its intrinsic value. Zero.”

The U.S. has provided the world’s reserve currency since Breton Woods. Though we did not lose the implicit gold backing until 1971, the pressure of the 1960s set the stage. As President LBJ tried to fund both his Great Society program and the Cold War era arms race and the Vietnam War, cash was flying out of U.S. coffers. In the process, an ever-greater amount of U.S. cash – gold-backed cash - was ending up in foreign hands. At the time, only central banks could redeem U.S. currency for gold, and they came forward with arms outstretched. By 1970, the U.S. gold reserves were depleting at an alarming rate, causing Nixon to close off the vaults and unpeg the dollar. Few could imagine the financial engineering that was to follow.

After that came the reigns of Fed Chairmen Paul Volcker and later Alan Greenspan, who began to take enormous liberties with monetary policy, effectively addicting the financial markets to stimulus. Inflation remained muted, thanks in part to emerging China flooding the world with cheap goods, and therefore financial returns were spectacular. It has also corresponded with dramatic market dislocations.

The bond market bottomed in 1981. The stock market bottomed in 1982. The stock market crashed in 1987. The dot com bubble popped in 2001, followed by real estate – and essentially the global economy – in 2007 and 2008. And the central bank’s been there every step of the way, accommodating fresh paper money – monetary heroin -- to shore up markets at any sign of trouble. And what has been the result?

In 1981, when Ronald Reagan was sworn in, federal debt was $960 billion, an amount accumulated over the better part of 200 years.

In 2007 and 2008, federal public debt was $10 trillion, a 10-fold increase in 26 years. This only led to greater stimulus via QE.

Eight years later and we find ourselves saddled with federal funded debt which has doubled again to $19 trillion. And this isn’t the whole picture: Off-balance sheet debt liabilities, including Freddie Mac and Fannie Mae, at an estimated $5 to $6 trillion; unfunded liabilities for Medicare, Medicaid, and social security, estimated between $60 trillion and $150 trillion; plus other liabilities, equals a range of about $85 trillion to $175 trillion. Factor in that U.S. GDP is a mere $18 trillion, and we can see that our obligations are between 4x and 8x our productive capacity. And how long can this charade continue?

China, Germany and Sliding US Demand

Declining U.S. demand for major exporters’ goods could spell disaster.

By Lili Bayer

The world’s exporters are in turmoil. Over the past days, we learned that Chinese exports fell 2.8 percent in August compared to the same time last year, while Japanese exports declined 4.8 percent. German exports plummeted 10 percent year-over-year in July, while the European Union’s overall exports fell 2 percent between January and July compared to a year earlier. But this data does not come as a surprise: the world’s exporters are undergoing a major crisis, as economies that revolve around selling products abroad struggle to find buyers.
But there is now reason to believe that the global economy is entering a new phase of export woes. U.S. demand for imports from some major economies is declining, thus threatening to further undermine the stability of already struggling exporters.

We have written extensively about the exporters’ crisis. In January, we ranked the 
top 10 victims of the crisis. Large exporters like China and major oil producers like Saudi Arabia and Russia topped the list.

The U.S. is not only the world’s largest economy, but also its biggest importer. The U.S. accounted for 14 percent of global imports in 2015. Demand in the U.S. for foreign goods is thus a key engine of economic growth elsewhere. In fact, troubles in the U.S. economy in large part sparked the exporters’ crisis. The crisis started in 2008, as economic problems in the U.S. and Europe led to reduced demand for goods. This slowdown in demand affected countries like China, which in turn bought fewer commodities. China’s slowdown has continued, and exporters of commodities like oil still grapple with low prices and sluggish demand.

But U.S. demand for imports quickly began to rebound after 2010, and while many European and East Asian economies still struggled, U.S. consumers helped somewhat ease the pain for exporters. Germany, for example, became more reliant than ever on the U.S. market as a destination for its exports. In 2015, the U.S. replaced France as 
the number one consumer of German exports for the first time. Similarly, the value of China’s exports to several of its major trading partners fell between 2014 and 2015 (Hong Kong by 8 percent, Japan by 9 percent and Germany by 5 percent, according to U.N. Comtrade data). And yet, despite these declines, the U.S. market provided some relief for Chinese exporters, with the value of Chinese exports to the U.S. growing by 3 percent over those two years.

Now, however, there are signals that U.S. demand may no longer be mitigating some of the effects of the exporters’ crisis. U.S. Census Bureau data shows that overall U.S. import of goods each month this year were lower than during the same time in 2015. In fact, the beginnings of a slowdown in U.S. import demand could already be observed following 2014. For example, U.S. import of goods in July 2014 amounted to about $197 billion. In July 2015, that figure was $187 billion and by July of this year it was $182 billion.

The reduced U.S. demand for foreign goods is hitting two major economies in particular that already face serious challenges: 
Germany and China.

For Germany, the U.S. is a major market. In 2015, 9.5 percent of German exports went to the U.S., according to U.N. Comtrade statistics. These exports consist largely of machinery, cars and pharmaceuticals. The latest data from the U.S. Census Bureau, however, shows that U.S. imports of goods from Germany have declined four months in a row. In July 2016, the most recent data available, import of goods from Germany fell by 12.2 percent. Last week, we noted a German government report that the country’s 
exports fell 10 percent year-over-year in July. We can now confirm, therefore, that much of that drop was the result of decreased U.S. demand for German goods – a somber development for German businesses that pinned their hopes on U.S. customers in the face of sluggish European economies.

Value of US Imports of Goods from Germany


When it comes to China, U.S. imports have also largely declined this year compared to 2015, despite some modest gains in June and July. In July 2016, U.S. imports of goods from China were about 4 percent lower than the same time last year. This fall is not as dramatic as the decline in demand for German goods that month, but 18 percent of China’s exports go to the U.S. What on paper appears like a small shift in reality could have a significant impact on already struggling Chinese businesses.


Value of US Imports of Goods from China


It is unclear precisely why U.S. demand for imports is declining now, and we will be monitoring U.S. economic indicators carefully for any further shifts in behavior. But it is clear that the U.S. is importing less from countries whose economies are incredibly weak and depend heavily on exports. Perhaps more important, these economies are far from isolated – Germany and China are giants whose economic fortunes define the stability of the world’s economy. It seems like every day we see more cracks in the world’s economic system, and they are growing bigger.

Never Ending War

Why The Cease-Fire in Syria Won't Help

By Christoph Reuter

The cease-fire agreed to by Russia and the United States in Syria means that Aleppo and other devastated cities have been given a chance to breathe. But the temporary calm is unlikely to bring us any closer to the end of the war.

First came two quiet nights. Then another 48 hours without bombs, a few days in which the people trapped in Aleppo and elsewhere could live without the constant fear of approaching jets. So great is the yearning for peace that people everywhere rejoiced in the peace this week -- despite coming just a short time after markets and hospitals had been bombed, leaving dozens dead.

The cease-fire that went into effect on Monday night in Syria is fueling the wish around the world for an end to this war. The desire is so great that each additional day of calm is being commented on as if it were a break in the weather, a natural dynamic trending toward peace.

But it's not.

In contrast to the three previously announced agreements, the American and Russian negotiating partners have limited the duration of this cease-fire to seven days. Not with the intention of immediately beginning further negotiations, but instead to conduct joint air strikes against all groups they will have by then identified as terror groups.

Starting at the beginning of next week, the plan calls for Russian and American military leaders to meet in the Joint Implementation Center to exchange target coordinates, voice objections and then deploy warplanes from both air forces to conduct strikes. As such, the agreement represents a reversal of Western policy. If implemented, the US will be flying sorties together with Russia against Assad's enemies.

Dual Targets

Islamic State (IS) is the one undisputed target. But there is a second one as well: the radical Islamist group that began as the Nusra Front and whose leaders swore allegiance in 2013 to al-Qaida. In July, the group split off from al-Qaida again and renamed itself Jabhat Fatah al-Sham (JFS), or Front for the Conquest of Syria.

"We must go after these terrorists," US Secretary of State John Kerry said in Geneva on Sept. 9, "so that they cannot continue to use the regime's indiscriminate bombing in order to rally people to their hateful crimes."

But Kerry seems to have overlooked one thing: It was the former Nusra Front that ended the blockade against eastern Aleppo at the beginning of August and, in a joint advance involving several other rebel groups, temporarily broke the seige that had been established by Assad's troops. It was largely due to JFS that food could be brought into the city again, resulting in sudden popularity for the group in Aleppo and other rebel-held areas. The United States, the United Nations and European governments had called for an end to the blockade, but they never went beyond making appeals.

"How can I not appreciate what Fatah al-Sham achieved?" Modar al-Najjar, one of the most prominent rebel commanders to have stayed in Aleppo, told SPIEGEL. "The people in eastern Aleppo were all facing slow death by starvation. They didn't care who broke through the siege. They want to survive."

Washington and Moscow have now given all rebel groups one week to cut their contacts with JFS and to leave jointly held sections of the front. Otherwise they risk getting bombed. Just who the Joint Implementation Center will define as "terrorists," how decisions will be made and what the review process will look like, remains vague. "We're going to have Russians and Americans sitting down in a room together" to select mutually agreed targets, a senior US defense official told Foreign Policy magazine. But the intelligence-gathering methods, sources and why a particular target might be important "will not be exchanged," the official told the magazine. "Just the lists of targets." That won't be a loophole -- it will open the barn door for attempts at deception.

That helps explain the considerable opposition to the plan within the Pentagon. The Russians have "had about a year to demonstrate to us" whether they would do what they say, Evelyn Farkas, a former senior Defense Department official told Foreign Policy. But "the Russians have consistently lied to us." US Director of National Intelligence James Clapper, for his part, warned in July against exaggerating the threat posed by the former Nusra Front.

The question as to whose fighter jets will be deployed starting next week still hasn't been clarified. Assad's air force could continue to attack JFS in "strikes that are agreed upon with Russia and the United States," Secretary of State Kerry said on Monday. Hours later, his spokesman issued a correction, saying there were no provisions in the cease-fire to authorize new air strikes by the Syrian regime. Russian Foreign Minister Sergey Lavrov, for his part, said that Syrian aircraft would carry out operations in areas where neither the Russians nor the Americans were bombing.

No End to the Suffering

There is very Little to suggest that the new agreement will lead to an end to the Syrians' suffering. It repeats the mistake of previous efforts in that it doesn't envision any kind of sanctions in the event that Assad's air force blocks humanitarian relief deliveries or continues to bomb residential areas, markets and hospitals with barrel bombs and chlorine gas. The territorial gains made by Assad's troops since February also won't be called into question, but will instead be accepted as the status quo. Furthermore, the joint airstrikes -- agreed to without any control mechanism and with a US government that will be leaving office in several months' time -- will further escalate the situation.

In talks with the US, Russia prevailed on all its core demands. There is no demand to lift the sieges with which the regime's troops are starving up to a million people. The fate of the 200,000 prisoners being detained under murderous conditions by the regime was also omitted.

So too was the role played by foreign Shiite militias in Syria. Only Sunni militia groups were named in the US-Russia agreement. The Lebanese Hezbollah, the Iranian Revolutionary Guard and the Iraqi Kata'ib Hezbohllah -- groups which, with their thousands of Shiite fighters, form the backbone of Assad's ground forces -- all go unmentioned. Yet these very groups have been listed by the US Treasury as terrorist organizations for years now.

Is Washington without a Plan?

It's difficult to determine whether Secretary of State John Kerry failed in efforts to obtain his country's key demands. The real question is whether Washington still even has any. In a memorandum sent in June, over 50 diplomats warned in vain that "failure to stem Assad's flagrant abuses will only bolster the ideological appeal of groups such as Daesh (the Arab word for Islamic State), even as they endure tactical setbacks on the battlefield."

In contrast to Washington, Moscow appears to plan its intervention in Syria several steps in advance. "When Russia intervened on Sept. 30, 2015, it had three aims," Kyle Orton, a Middle East analyst at the Henry Jackson Society in London, wrote on his blog earlier this week.

"Rescue a tottering Assad regime, eliminate all possible workable oppositionists, and thereby rehabilitate Assad, converting military successes into political achievement by subverting the political process that was supposed to transition Assad into one that set the terms of his remaining. It has proceeded more or less to script."

When Russia's air force began airstrikes in the fall under the pretense of battling Islamic State but instead bombed those rebels doing battle against IS and the Assad regime, Washington did nothing.

Rather than continuing to provide assistance to the non-Islamist groups that make up the Free Syrian Army, the United States gave them less and less support and soon none at all. Even when from the fall of 2014 to March of 2015 the Nusra Front became a threat to secular rebel groups like Division 13 or the Hazzm Movement, the US did nothing to protect these moderate groups.

This allowed Nusra Front to continue to expand, simply because the other groups had shrunk.

Or, as one rebel commander in Aleppo put it just days ago, "They're here, it's true. But why?

Because no one else is here. Where were the US and Russia? The US was nowhere and the Russians bombed us. And now both are saying: 'Trust us!'"

The remaining rebel groups aren't rejecting the Russian-American plan -- they are maneuvering. They are doing so for the same reason they cooperate militarily with former Nusra fighters: pragmatism born out of necessity.

The following scenario could develop over the next few months: More moderate rebels will neither decouple themselves from the radical groups nor will they go up against them. Doing so would be tantamount to military suicide.

Charles Lister, an Anglo-American author and likely the most knowledgeable person out there about Syrian rebel groups, wrote recently on his Facebook page: "Having spoken with leadership figures from several dozen armed factions in recent weeks, I can say that not a single one suggested any willingness to withdraw from front-lines on which JFS is present. To them, doing so means ceding territory to the regime." One way or another, Assad stands only to profit from the deal. If the rebels split, then even what is left of his army, weakened or not, could retake their areas. If they don't split, then they will be bombed by the imminent Russian-American air alliance.

Falling Short

But if the stated goal of this agreement is to negotiate a solution making an end to the war possible and, moreover, to prevent a radicalization of the rebels, then it is promoting precisely the opposite on both points. It creates absolutely no pressure whatsoever for Assad to agree to negotiations. For as long as Iran's Revolutionary Guard continues to provide it with a supply of fighters and Russia guarantees the long-term deployment of its air force, the Syrian dictator can continue to pursue military victory. Without them, however, he would go under pretty quickly.

In a recent report, former Russian colonel Mikhail Khodarenok gave the Syrian forces devastating marks. "Assad's soldiers busy themselves with collecting bribes at checkpoints," the report reads. "The Syrian forces have not conducted a single successful offensive in the past year."

He writes that much of the fighting is conducted by foreign units, mercenaries and Syrian militias.

"Assad's generals do not believe their troops can bring the country to order without military aid from foreign states." He says a dramatic dearth of men, morale and supplies is responsible.

"It is impossible to win the war with such an ally as Assad's army." That's why "a drastic decision" is needed to end the Syria campaign in 2016, involving the withdrawal of troops and leaving only the military bases, he writes.

Playing Into the Propagandists's Hands

The desolate situation of its protégé is one of the primary reasons that Russia intervened in Syria one year ago. But since September, Russian air force squadrons have also shown that they are perfectly capable of destroying Syria all on their own. It was nevertheless important to Moscow that it join forces with the US for the Joint Implementation Center, because it means the Americans will also be politically liable for the bombings, the targets of which they aren't even certain of. Radicals will die, as will moderate rebels and civilians. On the ground, it will look as though the Americans have taken over the task of killing from Assad.

And it all plays right into the hands of all the jihadist propagandists. They have long been spreading the idea that the American government ultimately wants to keep Assad in power and that all of the political talk has been nothing but a smoke screen. Kerry's statements, the plans for next week and the targeted US attacks in Idlib and Aleppo all fit disturbingly well together.