All under heaven

China’s belt-and-road plans are to be welcomed—and worried about

The “project of the century” may help some economies, but at a political cost

SHUNNING all false modesty, China’s leader, Xi Jinping, calls his idea the “project of the century”. The country’s fawning media hail it as a gift of “Chinese wisdom” to the world’s development. As for the real meaning of the clumsy metaphor to describe it—the Belt and Road Initiative (BRI)—debate rages.

The term itself is confusing. The “road” refers mostly to a sea route; the “belt” is on land.

Countries eager for China’s financing welcome it as a source of investment in infrastructure between China and Europe via the Middle East and Africa. Those who fear China see it instead as a sinister project to create a new world order in which China is the pre-eminent power.

All roads lead to Beijing

One cause of confusion is that the BRI is not a single plan at all. A visitor to its website would click in vain to find a detailed explanation of its aims. There is no blueprint of the kind that China’s leaders love: so many billions of dollars to be spent, so many kilometres of track to be laid or so much new port capacity to be built by such-and-such a date.

Chinese maps show the belt and road as lines that trace the routes of ancient “silk roads” that traversed Eurasia and the seas between China and Africa. That was the original conceit, but these days China talks about BRI as if it were a global project. The rhetoric has expanded to include a “Pacific Silk Road”, a “Silk Road on Ice” that crosses the Arctic Ocean and a “Digital Silk Road” through cyberspace.

To the extent that this is all about building infrastructure, the idea is welcome. Trillions of dollars’ worth of roads, railways, ports and power stations are needed in countries across Asia, Africa and Europe. China’s money and expertise could be a big help in spreading wealth and prosperity.

China says anyone can join in. Countries such as Azerbaijan and Georgia, which stand to benefit immensely from better connections to the world, are wildly enthusiastic. One of China’s motives is to strengthen security on its western flank by helping Central Asian countries prosper—thereby, it hopes, preventing them from becoming hotbeds of Islamist terrorism. Everyone would benefit from that, too.

But there are worries. The BRI is bound up with the growing cult around Mr Xi. State media call it “the path of Xi Jinping”. It has become shorthand for China’s overseas aid, state-led investment abroad and for Mr Xi’s much-ballyhooed “great-power diplomacy with Chinese characteristics”. China urges other countries to praise the BRI, so that their words can be relayed back home as propaganda. Few Chinese dare offer open criticism; that makes mistakes more likely.

The citizens of countries hosting BRI projects may come to regret their governments’ enthusiasm. Like all Chinese cash, the BRI billions come without pesky questions about human rights or corruption. Indeed, the terms are often shrouded in secrecy, raising fears that local politicians may benefit more than their people. Projects tend to require the use of lots of Chinese labour. BRI countries risk piling up dangerous amounts of debt, which some fear is designed to give China a strategic hold over them. Pakistan, one of the most important BRI countries, has just held an election in which candidates vied to take credit for Chinese investment; yet the debts are so large that, before long, Pakistan is likely to need an IMF bail-out.

Then there are possible security risks. In his metaphorical flights, Mr Xi sometimes speaks of his belt and road as a single thoroughfare, a “road of peace”. But what if the Chinese navy were to take advantage of ports such as Hambantota? This was repossessed by a Chinese state-owned firm after the Sri Lankan government struggled to repay the debts it had amassed to build it. Military planners worry that China could develop a string of such berths that its ships could use to extend their reach far beyond China’s shores.

Analysts in Asia and the West believe that China wants to displace America as the Asian hegemon. The BRI could end up furthering that plan, even if it is not its focus. China’s crude maps show the belt and road running through disputed territory, including the bitterly contested waters of the South China Sea where China has been busy building fortresses on reefs.

Some Asian countries, including India and Vietnam, are wary and most Western countries share their unease. Last year America’s defence secretary, James Mattis, said that: “No one nation should put itself into a position of dictating [BRI]”. In January France’s president, Emmanuel Macron, warned that the BRI “cannot be the roads of a new hegemony that will make the countries they traverse into vassal states.” He added: “The ancient silk roads were never purely Chinese…These roads are to be shared and they cannot be one-way.”

Keep those American signposts

What should the world do about the BRI? For a start, it needs to keep some perspective. Even if China does hope to use it as a political tool to beat back Western influence, Beijing is bound to face difficulties, as projects go awry, debts go bad and people grow hostile to China’s presence. History suggests that simply doling out money will not, on its own, usher in a Pax Sinica.

The world can also use its influence to make the BRI more beneficial. Even China’s billions cannot finance everything on offer. Money coming from the West, from the European Union and from institutions such as the World Bank and the IMF should be lent according to international standards—including on such things as transparency, environmental safeguards, public procurement and debt sustainability. So long as they are good projects, let China include them in the BRI if it wants to.

Last is security. The way to assuage fears about the BRI’s threat to the balance of power is not by trying to frustrate China’s efforts, let alone by starting a trade war or by pulling America’s armed forces out of Asia, as President Donald Trump sometimes seems to contemplate. On the contrary, the balance of risks and benefits of the BRI is related to America’s commitment to Asia. If the United States is engaged, the world can mitigate the dangers of BRI and reap its rewards. If not, the risks will outweigh the benefits. The BRI is yet one more argument for America to stay in Asia.

Pensions risk could make schmucks of savers

Post-crisis, banks have become safer but the dangers have been pushed elsewhere

John Authers

Former Lehman Brothers chief Richard Fuld encounters protesters in 2008 following the collapse of the bank © Reuters

When Richard Fuld, the chief executive of Lehman Brothers, received the news in 2008 that no one would ride to the rescue of his failing bank, he is reported to have said: “So I’m the schmuck?”

Almost a decade later, Lehman is still the only US investment bank that was allowed to fail. Its peers have been restored to health with risks removed. Mr Fuld appears to be the ultimate “schmuck” of the financial crisis. But that judgment may be premature.

Risk has been gently and painlessly excised from the US banking system over the past 10 years. On any sensible measure, US banks are far safer now. Europe’s banks, which entered the crisis in a far more parlous state, have at least improved. The nightmare scenario, which seemed very close in 2008, of all-out banking collapse seems now to have been averted. The prospect of ATMs failing to pay out cash, or of companies failing to pay wages, has receded.

While risk no longer sits in the banking system, it has not vanished. It grows ever clearer that risk has been moved, primarily to the pension system. This means that the long-term dangers in the financial system have become more insidious: easier to ignore but ultimately even more dangerous.

Pension funds have been the principal losers from quantitative easing, the main tool used to bail out the banks. QE bond purchases pushed down bond yields. This created pain for pension funds, which buy bonds to offer their members a guaranteed income. The lower the yield on bonds, the more expensive it becomes for them to fund any given guarantee. This problem has created a true crisis among US public sector pensions. Many are looking for ways out of the guarantees made to their members, only to find that courts — rightly — defend the members.

In the US, pension deficits — the gap between assets and the notional cost of funding the guarantees — widened sharply after the financial crisis. According to Mercer, the consulting actuaries, companies in the S&P 1500 index currently face a pension deficit of $229bn, or 11 per cent of their assets. This number has improved this year thanks to a rise in bond yields. At the worst, this deficit exceeded $600bn, or more than 30 per cent of assets.

QE has passed the buck to pension funds in other ways, too. With bonds barely offering an income, many funds have resorted to taking greater risks. That has meant buying into funds and strategies that go under the umbrella term of “alternative assets”, many of which rely on leverage for their returns.

Private equity has been a principal beneficiary of QE, as it has turned pension funds and other large asset managers into willing providers of capital. According to the tally kept by the London-based research group Preqin, the assets controlled by private equity groups have just passed $3tn for the first time, after growth of more than 20 per cent in the past year.Once the preserve of wealthy individuals, private equity is now principally an asset class for large institutions, with pension funds holding more than half of private equity assets.

Meanwhile, hedge funds have also flourished in the post-crisis years, despite mediocre returns. HFR, the Chicago-based research group, found that total assets held globally by hedge funds have risen to $3.23tn, up from $1.4tn at the end of 2008. Once vehicles for the rich to take risks, they now exist to serve large institutions. The policies that gave US banks the breathing space to make themselves safer also allowed alternative asset managers to sell to a new customer base of large institutions.

There are good reasons for pensions to take the strain. Unlike a banking crisis, a pensions crisis has no one moment of critical danger. Its ill effects settle in over time, and there is opportunity to fix them. To put this more negatively, politicians who want to delay a reckoning can do so if the risk is stashed where it can be ignored, or even left to the next generation to sort out.

The sheer complexity of pensions also helps to make them a much more attractive place to bear risks. Few understand them, so they tend not to be the subject of mainstream debate. But the events of 2008 demonstrated that risks that seem complicated and obscure can soon become very relevant indeed, and the subject of extremely heated political debate. Even if the risk of a sudden banking crash has diminished, the risk that much of the population will be subject to poverty in retirement is growing.

It is difficult to focus on esoterica like this at a time of political anger across the world. But as it stands, pension savers — virtually all of us — may find to our horror that we are the schmucks.

From a Space Station in Argentina, China Expands Its Reach in Latin America

Our correspondent went to the deserts of Patagonia to examine how China secured its new base, a symbol of its growing clout in the región.

By Ernesto Londoño

    The Chinese space station, including a 16-story-tall parabolic antenna, in a remote area of Argentina’s Patagonia region.CreditMauricio Lima for The New York Times

QUINTUCO, Argentina — The giant antenna rises from the desert floor like an apparition, a gleaming metal tower jutting 16 stories above an endless wind-whipped stretch of Patagonia.

The 450-ton device, with its hulking dish embracing the open skies, is the centerpiece of a $50 million satellite and space mission control station built by the Chinese military.

The isolated base is one of the most striking symbols of Beijing’s long push to transform Latin America and shape its future for generations to come — often in ways that directly undermine the United States’ political, economic and strategic power in the region.

The station began operating in March, playing a pivotal role in China’s audacious expedition to the far side of the moon — an endeavor that Argentine officials say they are elated to support.

But the way the base was negotiated — in secret, at a time when Argentina desperately needed investment — and concerns that it could enhance China’s intelligence gathering capabilities in the hemisphere have set off a debate in Argentina about the risks and benefits of being pulled into China’s orbit.

“Beijing has transformed the dynamics of the region, from the agendas of its leaders and businessmen to the structure of its economies, the content of its politics and even its security dynamics,” said R. Evan Ellis, a professor of Latin American studies at the United States Army War College.

China, with Argentina’s help, is engaged in a bold effort to explore the far side of the moon. A satellite was launched from China in May to aid the effort.Creditvia Agence France-Presse — Getty Images

For much of the past decade, the United States has paid little attention to its backyard in the Americas. Instead, it declared a pivot toward Asia, hoping to strengthen economic, military and diplomatic ties as part of the Obama administration’s strategy to constrain China.

Since taking office, the Trump administration has retreated from that approach in some fundamental ways, walking away from a free trade pact with Pacific nations, launching a global trade war and complaining about the burden of Washington’s security commitments to its closest allies in Asia and other parts of the world.

All the while, China has been discreetly carrying out a far-reaching plan of its own across Latin America. It has vastly expanded trade, bailed out governments, built enormous infrastructure projects, strengthened military ties and locked up tremendous amounts of resources, hitching the fate of several countries in the region to its own.

China made its intentions clear enough back in 2008. In a first-of-its-kind policy paper that drew relatively little notice at the time, Beijing argued that nations in Latin America were “at a similar stage of development” as China, with much to gain on both sides.

Leaders in the region were more than receptive. The primacy over Latin America that Washington had largely taken for granted since the end of the Cold War was being challenged by a cadre of leftist presidents who governed much of the region — including Brazil, Argentina, Venezuela, Ecuador, Uruguay and Bolivia — and wanted a more autonomous region.

Beijing’s invitation came at a fortuitous time: during the height of the financial crisis. Latching onto China’s voracious appetite for the region’s oil, iron, soybeans and copper ended up shielding Latin America from the worst of the global economic damage.

Then, as the price of oil and other commodities tanked in 2011, several countries in the region suddenly found themselves on shaky ground. Once again, China came to their aid, striking deals that further cemented its role as a central player in Latin America for decades.

Even with parts of Latin America shifting to the right politically in recent years, its leaders have tailored their policies to fulfill China’s demand. Now Beijing’s dominance in much of the region — and what it means for America’s waning stature — is starting to come into sharp focus.

“It’s a fait accompli,” said Diego Guelar, Argentina’s ambassador to China.

Back in 2013, he published a book with an alarming-sounding title: “The Silent Invasion: The Chinese Landing in South America.”

“It’s no longer silent,” Mr. Guelar said of China’s incursion in the region.

Trade between China and countries in Latin America and the Caribbean reached $244 billion last year, more than twice what it was a decade earlier, according to Boston University’s Global Development Policy Center. Since 2015, China has been South America’s top trading partner, eclipsing the United States.

Perhaps more significantly, China has issued tens of billions of dollars in commodities-backed loans across the Americas, giving it claim over a large share of the region’s oil — including nearly 90 percent of Ecuador’s reserves — for years.

China has also made itself indispensable by rescuing embattled governments and vital state-controlled companies in countries like Venezuela and Brazil, willing to make big bets to secure its place in the region.

Here in Argentina, a nation that had been shut out of international credit markets for defaulting on about $100 billion in bonds, China became a godsend for then-President Cristina Fernández de Kirchner.

And while it was extending a helping hand, China began the secret negotiations that led to the satellite and space control station here in Patagonia.

      Satellite imagery of China’s space station in Argentina.CreditGoogle Earth

Argentine officials say the Chinese have agreed not to use the base for military purposes. But experts contend that the technology on it has many strategic uses.

Frank A. Rose, an assistant secretary of state for arms control during the Obama administration, said he spent much of his time worrying about China’s budding space program. American intelligence and defense officials watched with alarm as China developed sophisticated technology to jam, disrupt and destroy satellites in recent years, he said.

“They are deploying these capabilities to blunt American military advantages, which are in many ways derived from space,” Mr. Rose said.

China is not alone in regarding space as a critical battlespace for future wars. Last month, the Trump administration announced it would create a sixth military branch devoted to space.

Antennas and other equipment that support space missions, like the kind China now has here in Patagonia, can increase China’s intelligence-gathering capabilities, experts say.

“A giant antenna is like a giant vacuum cleaner,” said Dean Cheng, a former congressional investigator who studies China’s national security policy. “What you are sucking up is signals, data, all sorts of things.”

Lt. Col. Christopher Logan, a Pentagon spokesman, said American military officials were assessing the implications of the Chinese monitoring station. Chinese officials declined requests for interviews about the base and their space program.

Beyond any strategic contest with the United States, some leaders in Latin America are now having doubts and regrets about their ties to China, worried that past governments have saddled their nations with enormous debt and effectively sold out their futures.

But Mr. Guelar argued that hitting the brakes on engagement with China would be shortsighted, particularly at a time when Washington has given up its longstanding role as the region’s political and economic anchor.

“There has been an abdication” of leadership by the United States, he said. “It surrendered that role not because it lost it, but because it doesn’t wish to take it on.”

    The entrance to a Chinese area in Buenos Aires.CreditMauricio Lima for The New York Times

‘A Window to the World’

The Argentine government was in crisis mode in 2009. Inflation was high. Billions of dollars in debt payments were coming due. Anger was swelling over the government, including its decision to nationalize $30 billion in private pension funds. And the worst drought in five decades was making the economic situation even more bleak.

Enter China, which stepped forward to brighten the outlook. First, it struck a $10.2 billion currency swap deal that helped stabilize the Argentine peso, and then promised to invest $10 billion to fix the nation’s dilapidated rail system.

In the middle of all this, China also dispatched a team to Argentina to discuss something that had nothing to do with currency fluctuations: Beijing’s ambitions in space.

The Chinese wanted a satellite-tracking hub on the other side of the globe before the launch of an expedition to the far side of the moon, which never faces the Earth.

If successful, the mission, scheduled to launch this year, will be a milestone in space exploration, potentially paving the way for the extraction of helium 3, which some scientists believe could provide a revolutionary clean source of energy.

China Satellite Launch and Tracking Control General, a division of the country’s armed forces, settled on this windswept 494-acre patch in Argentina’s Neuquén Province.

Flanked by mountains and far from population centers, the site offered an ideal vantage point for Beijing to monitor satellites and space missions around the clock.

Félix Clementino Menicocci, the secretary general of Argentina’s National Space Activities Commission, a government agency, said the Chinese had pitched officials with promises of economic development and the prospect of enabling a history-making Endeavor.

“They’ve become major players in space in the span of a few years,” Mr. Menicocci said of China’s space program.

After months of secret negotiations, Neuquén Province and the Chinese government signed a deal in November 2012, giving China the right to the land — rent free — for 50 years.

When provincial lawmakers caught wind of the project after construction was already underway, some were aghast. Betty Kreitman, a lawmaker in Neuquén at the time, said she was outraged that the Chinese military was being allowed to set up a base on Argentine soil.

“Surrendering sovereignty in your own country is shameful,” Ms. Kreitman said.

When she visited the construction site, she said, she pressed Chinese officials for answers but walked away feeling even more concerned.

“This is a window to the world,” she recalled the Chinese supervisor at the site saying. “It gave me chills. What do you do with a window to the world? Spy on reality.”
    Workers at a housing site in Bajada del Agrio, the closest town to the space station. “People see it as a military base,” one local said.CreditMauricio Lima for The New York Times

Rapid Growth, and Then Peril

The pitch was certainly not subtle, but then, it was never meant to be.

China’s policy document on Latin America in 2008 promised governments in the region to “treat each other as equals,” a clear reference to the asymmetric relationship between the United States and its neighbors in the hemisphere.

As “our relationship with the United States diminished, our relationship with China grew,” said Brazil’s former president, Dilma Rousseff, whose ties with the Obama administration suffered after revelations that American officials had spied on her, her inner circle and Brazil’s state-controlled oil company. “We never felt that China had imperial designs on us.”

The new alliance paid off, helping propel Latin America to the kind of growth rates that Europe and the United States envied.

“Latin America won the China lottery,” said Kevin P. Gallagher, an economist at Boston University. “It helped the region have its largest growth spurt since the 1970s.”

Yet, Mr. Gallagher said, the bounty came with significant peril. Industries like agriculture and mining are subject to the boom-and-bust cycles of commodity prices, which made relying on them too heavily a big gamble over the long term.

Sure enough, global commodity prices eventually tumbled. In July 2014, as several leftist leaders were presiding over distressed economies, China signaled even more ambitious plans for the region. At a summit meeting in Brazil, President Xi Jinping announced that Beijing aspired to raise annual trade with the region to $500 billion within a decade.

In an interview with journalists, Mr. Xi hailed the trust his government had built in Latin America by quoting a Chinese proverb: “A bosom buddy afar brings distant lands near.”

For emphasis, he quoted the Cuban national hero José Martí and the Brazilian author Paulo Coelho, and recited a line from the epic Argentine poem “Martín Fierro” by José Hernández: “Brothers be united because that is the first law.”

Soon, China took a step that startled the Pentagon. In October 2015, China’s Defense Ministry hosted officials from 11 countries in Latin America for a 10-day forum on military logistics titled “Strengthening Mutual Understanding for Win-Win Cooperation.”

The meeting built on the ties China had been making with militaries in Latin America, including donating equipment to the Colombian military, Washington’s closest partner in the región.

Borrowing from the playbook the United States had used across the world, China organized joint training exercises, including unprecedented naval missions off the Brazilian coast in 2013 and the Chilean coast in 2014. Beijing has also invited a growing number of midcareer military officers from Latin America for career development in China.

The contacts have paved the way for China to start selling military equipment in Latin America, which had long regarded the United States defense industry as the gold standard, said Mr. Ellis, the War College scholar.

Venezuela has spent hundreds of millions on Chinese arms and matériel in recent years. Bolivia has bought tens of millions of dollars’ worth of Chinese aircraft. Argentina and Peru have signed smaller deals.

Mr. Ellis said the Chinese had also probably pursued cooperation relationships with Latin American nations, with an eye toward any possible confrontation with the United States.

“China is positioning itself in a world that is safe for the rise of China,” he said. “If you’re talking about the 2049 world, from the perspective of Latin America, China will have unquestionably surpassed the United States on absolute power and size. Frankly, if it was a matter of sustained conflict, you reach a point where you can’t deny the possibility of Chinese forces operating from bases in the region.”

Just weeks after the space station began operating in Patagonia, the United States made an announcement that raised eyebrows here in Argentina.

The Pentagon is funding a $1.3 million emergency response center in Neuquén — the same province where the Chinese base is, and the first such American project in all of Argentina.

Local officials and residents wondered whether the move was a tit-for-tat response to China’s new presence in this remote part of the country.

American officials said that the project was unrelated to the space station, and that the center would be staffed only by Argentines.
Lily Huang, 28, right, from China, works at the Argen-Chino supermarket in the town of Las Lajas, about 37 miles south of the Chinese space station.CreditMauricio Lima for The New York Times

No Need for New ‘Imperial Powers’

Latin America experts in the Obama White House watched China’s rise in the region warily. But the administration raised little fuss publicly, sharing its concerns with leaders mostly in private.

Besides, former officials say, Washington did not have much of a counteroffer.

“I wished the whole time I was working in Latin America that any administration had as well thought-out, resourced and planned a policy as the pivot to Asia for Latin America,” said John Feeley, who recently resigned as the American ambassador to Panama after a nearly three-decade career. “Since the end of the 1980s, there really has never been a comprehensive hemispheric long-term strategy.”

While President Barack Obama was widely hailed in the region for restoring diplomatic relations with Cuba in late 2014, Washington’s agenda never ceased being dominated by two issues that have long generated resentment in Latin America: the war on drugs and illegal immigration.

While the Trump administration has yet to articulate a clear policy for the hemisphere, it has warned its neighbors not to get too cozy with China. Former Secretary of State Rex W. Tillerson publicly cautioned that Latin America did not need new “imperial powers,” adding that China “is using its economic statecraft to pull the region into its orbit; the question, is at what price?”

That question is being vigorously debated in some corners. Former President Rafael Correa of Ecuador was interrogated by prosecutors in February as part of an investigation into whether the decision to promise the country’s crude reserves to China through 2024 harmed national interests.

In Bolivia, which has also seen a surge of Chinese investment, several industries have withered as Chinese products have become cheaper and easier to buy, said Samuel Doria Medina, a Bolivian businessman and politician who has run unsuccessfully against President Evo Morales three times.

“Our financial, commercial and, ultimately, political dependency keeps growing,” Mr. Doria said. Bolivia and several other leftist leaders who have tied their lot to China, he warned, have “mortgaged the future” of their nations.

Yet China’s influence has not diminished, even as Latin America shifts to the right politically. In recent months, Beijing persuaded Panama and the Dominican Republic to sever ties with Taiwan, notable victories in one of China’s foreign policy priorities.

China’s clout, analyst say, is also a sign of how much the Trump administration has alienated governments in the region by adopting harsh immigration policies and pursuing hardball tactics on trade in a part of the world where Washington already has an ample surplus.

Jorge Arbache, the secretary for international affairs at Brazil’s Planning Ministry, said Washington’s “lack of predictability” had prevented a more ambitious partnership from taking root, while China had been far clearer about its vision.

“Everyone expects China to become even more influential,” Mr. Arbache said.

Residents enjoying a street violinist at dusk in the Buenos Aires neighborhood of Belgrano, where Chinese residents are concentrated.CreditMauricio Lima for The New York Times

‘People Are Afraid’

Soon after being nominated as Argentina’s ambassador to China in late 2015, Mr. Guelar said, he steeled himself for an arduous task: pushing to renegotiate the space station agreement.

The former government, he said, had given away too much, recklessly failing to specify that the base could be used only for peaceful purposes.

“It was very serious,” he said. “At any moment it could become a military base.”

To his surprise, he said, the Chinese agreed to the use base solely for civilian purposes. But that did not assuage concerns in Bajada del Agrio, the closest town to the station, where residents speak of the Chinese presence with a mix of bewilderment and fear.

“People see it as a military base,” said Jara María Albertina, the manager at the local radio station. “People are afraid.”

The mayor, Ricardo Fabián Esparza, said the Chinese had been friendly and even invited him to look at the images the antenna produces. But he is more apprehensive than hopeful.

“From that telescope, they probably can even see what underwear you’re wearing,” he said.

The United States is the one that should be most concerned, he said. The base, he said, is an “eye looking toward that country.”
The antenna is the centerpiece of a $50 million station built by the Chinese military.Credit Mauricio Lima for The New York Times

Daniel Politi contributed reporting from Buenos Aires, and Lis Moriconi and Manuela Andreoni from Rio de Janeiro.

China, Russia and the Nature of Forecasting

Checking the pulse of our annual predictions, every two weeks.

By Jacob L. Shapiro

Editor’s note: The following report is our second Forecast Tracker, a biweekly checkup on the health of our annual forecast. The format has been modified to reflect some of the feedback we received on the first installment, the improvements on which would not have been possible were it not for the participation of our readers. Please allow us to offer you a heartfelt thank you and to ask that you continue to share your thoughts on how we can improve this new feature.

Before we begin, I’d like to take a moment to talk about forecasting, which means different things to different people. We do not focus on predicting discrete events, but rather on the broad forces that shape events. Weather forecasters predict when a storm will strike. We predict the conditions that create the storm. We care less about individual events – like, for instance, an election – than we do about the political, economic, cultural and martial forces that define a country’s behavior no matter who wins.
Thus is the essence of our long-term forecasts, which serve as both our mission statement and our moral compass. It’s what keeps us objective. Now, objectivity is an easy thing to claim – everyone in today’s media landscape claims it, and maybe some even mean it. Our Forecast Tracker is our attempt to back up our claim. It’s our way of showing that we are motivated by the desire to be accurate, not to be partisan. It’s why we are investing so much time in sharing it with you.

To that end, the past two weeks saw major developments for two of the most important trends we identified in our 2018 Annual Forecast: that Russia would seek compromise abroad to help itself at home, and that economic reform would strain the Chinese government. We also note that one of our mid-shelf forecasts – external competition for influence in Central Asia – has seen a lot of activity in the past two weeks.

Jacob L. Shapiro, director of analysis

From the Forecast: “Russia has been somewhat isolated from the rest of the world since 2014, when it responded to the Ukrainian revolution by annexing Crimea and supporting uprisings in eastern Ukraine … Russia cannot afford to be isolated any longer. It has almost spent all the money in its Reserve Fund, and it must begin the process of economic transformation now if it is to have a chance of taking root. Put simply, Russia needs to rejoin the world. It is open to compromises as long as the compromises don’t make Russia appear weak. Appearances are more important than ever for Russia as it manages difficult times at home.”

Update: The major event of the past two weeks (related to this forecast, anyway) was the Helsinki summit – an issue we also addressed in our previous Forecast Tracker. The meeting between Russian President Vladimir Putin and U.S. President Donald Trump took place on July 16. Putin said the talks were successful and useful, but almost no important and concrete decisions came from them. In fact, the only agreement that seems to have been reached was a joint decision for their national security teams to continue their discussions at the working level – but even this is contested.

And yet, despite the ambiguity of the agreements that came from Helsinki, that the meeting took place at all was notable, as was the fact that Putin and Trump at least appeared to try to find a more pragmatic basis for bilateral relations. The summit – to say nothing of other indicators, including EU-backed talks with Ukraine over the transit of natural gas – suggests Russia is looking for ways to diffuse its problems with its neighbors and rivals.

Still, this is Russia we’re talking about – and the Russian government cannot afford to be seen as weak, especially as Putin navigates the internal politics of pension reform. While Russia has entered the EU-backed gas transit negotiations, it has also prepared retaliatory sanctions against Ukraine and five other EU countries that signed onto EU-sanctions linked to Russia’s annexation of Crimea.

Russia is looking for an accommodation with the West, but the cost may be too high. The U.S. secretary of state released a statement on Wednesday that left little room for compromise on the Ukraine issue despite the Trump-Putin summit. If that’s the case, it goes against our forecast. For now, the trend line is averaging around a “C” – our measure for when there is no clear movement in one direction or another on a forecast. But that’s less a testament to the forecast’s ambiguity than it is to the vagaries of all involved.



From the Forecast: “For decades, China was an engine of economic growth throughout the world. Those days are gone. Instead of encouraging growth for the sake of growth, Beijing will try to implement structural reform without alienating or angering any segment of its population so much that it would question Beijing’s rule. China should be able to manage this relatively well in 2018. Xi is at the height of his power and has the support of the people. But the thing to watch is how effective Xi’s reforms prove to be and how the consequences of his actions limit his plans – if they do at all.”
Update: It has been a busy two weeks for the Chinese government. The rumors of gunfire in Beijing that surfaced July 18 have still not been substantiated, but President Xi Jinping was noticeably absent from state media for a few days, and a number of other oddities – like a Xinhua article about the downfall of Communist Party chairman Hua Guofeng in 1980 – all point toward exactly the types of political instability we predicted in China this year.
China appears to have the situation under control for now. Xi has returned to the front pages, evidently confident enough to embark on a multiday trip to the United Arab Emirates, Senegal and South Africa this week. China has censored the media’s coverage on the trade war with the United States. And despite a few exceptions, Xi’s reform plan appears to be in place, and Xi himself appears to be no worse for the wear.

At this point, the opposition to Xi is small and scattered, so successful has Xi been at eliminating his rivals and taming China’s vast bureaucracy. Sure, there has been outcry over the government’s handling of a faulty vaccine scandal, and sure, Xi continues his various reshuffles of the bureaucracy. (Most notably, he moved the Communist Party’s disciplinary chief in Beijing to boss of Guangzhou, capital of Guangdong province, one of China’s most important economic centers and historically a bastion of opposition to rule from Beijing.) This is how we expect the rest of 2018 to play out: A series of challenges will emerge, and Xi will deal with them via purges or other restrictions – but at the end, Xi will be the last man standing, stronger than ever before.



From the Forecast: Historically, Central Asia has been an arena in which greater powers compete for influence and therefore tend to destabilize the region. Things were no different in 2017, and things will be no different in 2018. Central Asia has been Russia’s backyard for almost a century now. But Russia has weakened, and now outside forces are beginning to act accordingly. China sees the region as central to its new Silk Road plans. India sees it as a place to thwart Chinese ambitions. Jihadists from Afghanistan and the Middle East see it as fertile recruiting ground, a place where poor, disillusioned youths might adopt radical political Islamic ideology.”

Update: The headlines Russia and China captured the past two weeks have elided important events happening elsewhere in the world, namely Central Asia. Caught between China, Russia and Iran, and a region of interest for Japan, India, the U.S. and Europe, few other places are at the center of so many conflicting forces and agendas.

We proudly note that Central Asia is among our most accurate forecasts of the year, though no one event sticks out more than the others in the past two weeks. The thing to note is the sheer number of developments happening that show how Central Asia has become such an arena of competition. Russia has agreed to build a nuclear power plant in Uzbekistan and to dispatch teachers to Kyrgyzstan. China is buying influence in Tajikistan and increasing purchases of natural gas from Turkmenistan. A Saudi delegation visited Tajikistan, and Iran’s president announced a visit next month to Uzbekistan – a country the U.S. has also been attempting to get closer to. EU member states, including Germany, are also active in the region.

As foreign powers try to get a foothold here, Central Asian states are contending with deep-rooted economic, political and social challenges. The threat of terrorism and extremism is spreading. Tajikistan has beefed up security forces because of the Taliban and the Islamic State, both of which point to perhaps the most destabilizing element in the region: the deterioration of Afghanistan, which shares a border with Uzbekistan, Turkmenistan and Tajikistan. Its continued decline will put more pressure on a vulnerable part of the world that has so far managed to avoid widespread radicalization because of the draconian security apparatuses its rulers employ.

We did not expect 2018 to be the year that these pressures come to a head, but we did expect the pressures to mount, and so far, that is playing out.



Why Gold Investors Should Ignore The Swings

By Alex Kimani


There’s an old maxim in trading pits that says they don’t ring a bell at tops or bottoms.

Although it literally refers to the opening bells rung during market open and close, it actually means that it’s hard to tell when a positive or negative sentiment has run its course.

A simple rule of thumb, though, is that when everyone, especially perma-bulls, turn bearish, then a bottom is nigh. Conversely, when even the most ardent bears throw in the towel, a top is beckoning.

The big problem is that there is no sure-fire way of telling when the majority of bulls or bears have left the building until it actually happens.

We have a couple of proxies though, and one is called herding behavior. Case in point: At the height of the Dotcom boom back in 1999, mutual funds were falling over themselves to change their names to include the designation “internet” even when actual connections were dubious at best. We all know how that one ended.

Well, the inverse also rings true when a highly unloved stock suddenly turns the tables on the bears.

Of course, this is not an admonition to go out and try and catch a falling knife. It’s always prudent to carefully analyze the fundamentals of such companies before pulling the trigger (think of a formerly unloved tech company like AMD whose shares have tucked on 90 percent YTD).

The same goes for gold. It’s not been a good year for gold by any stretch of the imagination, and it just keeps getting worse.

Bad enough to attract record shorts from hedge funds:

(Click to enlarge)

And even causing perma-bulls like Vanguard to shift allegiance. Vanguard Precious Metals and Mining Fund, a $2.3 billion fund, has just denounced gold after announcing that it’s changing its name and investment style to Vanguard Global Capital Cycles Fund.

Sentiment might not be a bona fide timing mechanism, but gold bearishness has now reached epic proportions.

(Click to enlarge)

Does that mean a bottom bell is ringing for gold? Could be. Fred Hickey, editor at The High Tech Strategist, thinks so:

(Click to enlarge)

The Golden Shakeout

A gold bottom tends to be quite unlike those by your average stocks or other asset classes.

Instead of quickly rebounding after touching a crucial support level, gold tends to break support more convincingly—as if it’s trying to shake out all but the most die-hard of bulls.

MoneyShow says that using the 400-day moving average as a support line instead of just the usual 200-day MA has worked for them in the past. They advise that buying at these bottoms has usually maximized their returns for the cyclical asset.

Sounds like good advice for investors who are in it for the long-term. But nobody says it’s easy to do:

You’ve got to divorce yourself from the emotionally-draining swings that are part of the gold market.

MoneyShow recommends buying the gold juniors at this point by saying that their relative illiquidity tends to work in their favor at points like this. Investors should, however, note that junior mining stocks are leveraged to gold in both directions and can lead to hefty losses if gold continues sliding much lower.

Other Bullish Indicators

There are two more key indicators that are currently bullish for gold.

The first is the Commitment of Traders (COT) report from the CFTC that shows large speculators are now net short gold. This rarely happens, and the two times it has, gold has rallied-- big time.

The second is that the greenback appears to have run out of steam and has been going nowhere--no matter how much the longs keep piling in.

(Click to enlarge)

(Click to enlarge)