Weary of Their Experiment in Capitalism 

Doug Nolan


Bubbles are self-reinforcing, yet inevitably unsustainable inflation. 

There are different types of Bubbles – Credit and speculative asset Bubbles being the most common. 

Inflationary processes are fed by some extraordinary monetary phenomena, with protracted Bubbles invariably enjoying systematic governmental support (i.e. loose central bank policies, government incentives and backstops, stimulus measures, etc.). 

As I’m fond of saying, “Bubbles go to unimaginable extremes – then double.” 

“Quadruple” seems more applicable these days.

Fundamentally, Bubbles at their core are mechanisms of wealth redistribution and destruction, though for some time pernicious effects tend to be masked by the Bubble Illusion of fantastic development, innovation and expanding prosperity. 

Bubble-related inequality intensifies over the life of the cycle, turning highly destabilizing late in the Bubble period. 

Wealth and (financial and market) power become increasingly concentrated. 

Governments face mounting pressure – from an increasingly disaffected populace, as well as from the inordinately powerful financial and corporate sectors. 

Panicky governmental measures to hold collapse at bay invariably become instrumental in climactic “Terminal Phase” blow-off excess. 

I’ll add that Bubble consequences are anathema to communist governments. 

That said, the overpowering seduction of “fantastic development, innovation and broad-based prosperity” can prove irresistible. 

This has especially been the case for a nation tenaciously determined to attain what it views as its rightful standing as a global superpower.

It’s a challenge to place the historic Chinese Bubble into proper context. 

Chinese Bank Assets have inflated more than 10-fold from 2004’s $4.5 TN to June 2021’s $52 TN. 

China ended Q1 with a debt-to-GDP ratio of 329% (IIF data), having doubled since the 2008 crisis. 

And while the latest iteration of Aggregate Financing (China’s measure of broad Credit growth) dates back only to 2017, it captures the parabolic nature of late-cycle excess. 

Aggregate Financing has inflated $7.9 TN, or 18%, over the past 17 months to $46.7 TN, with growth since 2017 at $18.3 TN, or 64%. 

China has never experienced such spectacular wealth. 

Their over 1,000 billionaires exceed even the U.S. 

A booming equities market has lavishly rewarded entrepreneurs and corporate executives, along with the mass of speculators - including the thousands of Chinese hedge funds that have sprung up, along with millions of online retail speculators. 

But when it comes to bountiful growth in perceived wealth, a large segment of the population has enjoyed previously unimaginable gains from apartment price inflation.

Beijing has accumulated a $3.34 TN international reserves war chest, bolstered by years of U.S. trade deficits and global “hot money” flows. 

These reserves have been instrumental in China’s capacity to continue years of profligacy without typical emerging market boom and bust dynamics. 

Links from Fed QE to China’s boom are rather direct.

China’s ascendancy on the world stage mirrors the trajectory of its Credit expansion. 

The “Nine Dash Line” and militarization of the South China Sea. 

The Belt and Road initiative. 

Their uncompromising approach to U.S. trade negotiations. 

The Hong Kong crackdown. 

Playing hardball with Australia and others. 

Military drills off the coast of Taiwan. 

Negotiations with the Taliban. 

Partnered with Russia, China is building a global faction to rival the U.S.-led western alliance. 

Beijing adopted markets and capitalistic development as necessary expedients to meet its development and geopolitical objectives. 

Bubbles inflated - and ran unchecked. 

Beijing repeatedly moved to rein in excess – and repeatedly lost its nerve and backed off. 

To be sure, Bubbles feed off timid policymaking. 

The communist party recognized in 2017 that Bubbles and associated inequality had become serious risks. 

A more determined effort to get the Bubble under control was scuttled, first because of acrimonious Trump trade negotiations, and then in response to Covid. 

The pandemic response saw parabolic Credit excess like never before. 

President Xi and Chinese leadership have grown Weary of Their Experiment in Capitalism. 

It served its purpose, but has turned increasingly problematic. 

They clearly appreciate the risks associated with Bubbles and inequality – perhaps even recognizing the existential threat. 

“Xi Jinping Takes Aim at the Gross Inequalities of China’s ‘Gilded Age’,” was the title of Friday’s (August 20th) insightful Financial Times opinion piece authored by James Kynge: 

“Having spent four decades creating one of the most unequal societies on Earth, Beijing is now seized by a mantra of ‘common prosperity’ — or redistributing spoils to hundreds of millions of have-nots… 

‘There is a sea-change in the way the Chinese Communist party sees its legitimacy,’ said Yu Jie, a researcher at Chatham House, a London-based think-tank. 

‘Xi is addressing ordinary peoples’ agonies over unequal distribution of income and the lack of equal access to basic social welfare and some services.’ 

A commission led by Xi issued a call to arms this week. 

It said China would ‘regulate excessively high incomes and encourage high-income groups and enterprises to return more to society’. 

While the party had long allowed some people and regions to ‘get rich first’, it was now prioritising ‘common prosperity for all’. 

At stake is the CCP’s social contract with China’s people, Yu said. 

‘If the party defends the current status quo that is manifestly unfair in its distribution of wealth and opportunity, trust from ordinary people will collapse.’”

Of course, Beijing today seeks to redistribute wealth. 

Mr. Kynge’s article refers to “some 600m Chinese live off a monthly income of about Rmb1,000 ($154).” 

Beijing finds the momentous power achieved by China’s big Internet companies as unacceptable. 

They are determined to crack down on various industries they see as promoting inequality or offering socially undesirable goods and services. 

They will now insist on the communist party having a hand in everything of significant importance. 

And in no way are they willing to now tolerate market forces dictating the nature of the cycle’s downside. 

Beijing is seizing the reins. 

This week offered important confirmation of the faltering China Bubble thesis. 

It has become increasingly clear Beijing is determined to impose a radical shift in the flow of finance, investment, and the allocation of resources and wealth throughout the entire Chinese economy. 

And while government measures can certainly dictate lending and real investment, I don’t see how a destabilizing interruption in the flow of finance and speculative deleveraging can be avoided at this point. 

The risk versus reward calculus for speculative endeavors has been momentously altered, albeit for stocks, corporate Credit and real estate. 

China’s Bubbles are in serious jeopardy – and I would now expect de-risking/deleveraging to gain momentum. 

Unfolding dynamics are putting China’s historic apartment Bubble at grave risk, especially for the highly inflated upper end. 

The week was notable for faltering Chinese Bubble contagion destabilizing global markets.

The Shanghai Composite dropped 2.5% this week, with the growth-oriented ChiNext Index sinking 4.6%. 

Hong Kong’s Hang Seng Index was slammed 5.8%. South Korea’s KOSPI fell 3.5%, and Taiwan’s TAIEX Index dropped 3.8%. 

Japan’s Nikkei lost 3.4%. 

Stocks were hit 2.6% in Brazil. 

The Bloomberg Commodities Index slumped 4.2% this week. 

WTI Crude sank $6.30, or 10.6%. 

Industrial metals were under heavy liquidation. 

Copper fell 5.9%, Lead 3.6%, Nickel 6.1%, Tin 8.7%, and Zinc 3.5%. 

Palladium was crushed 14.3%. 

Iron Ore fell 6.3% (down 38% from May high to a 2021 low) and Steel Rebar 4.5%. Curiously, the soft commodities were also under pressure. 

Wheat dropped 5.9%, Corn 6.3%, Soybeans 9.2%, Rubber 4.7%, Coffee 2.5% and Sugar 1.9%.

Contagion erupted in global currency markets, with the commodity currencies under notable pressure. 

The South African rand declined 3.7%, the Australian dollar 3.2%, the New Zealand dollar 2.9%, the Norwegian krone 2.5%, the Brazilian real 2.5%, the Canadian dollar 2.4%, and the Mexican peso 2.4%. 

China's renminbi declined 0.37% versus the dollar.

It evolved over years into a distinctive global Bubble Dynamic, with highly synchronized risk markets across the globe. 

China emerged as the marginal source of global Credit, speculative leverage, demand for commodities, and much more. 

U.S. market immunity to China’s faltering Bubble began to fade this week. 

So far, “risk off” has been relegated to the “fringe” – with small cap weakness and hints of risk aversion in junk debt. 

But I would expect de-risking/deleveraging to begin gravitating from the “Periphery” toward the “Core.” 

Ten-year Treasury yields dipped two bps this week to 1.26%, a rather uninspiring gain considering China and global market developments. 

This raises the question of how much support the Treasury market has left to offer in the event of an intensifying “risk off” dynamic. 

I believe a major global de-risking/deleveraging dynamic has commenced in China and Asia. 

U.S. “investors” seem oblivious to the risk posed to our highly speculative markets in equities, corporate Credit and derivatives.

Electric vehicles: recycled batteries and the search for a circular economy

The explosion in demand for EVs has spurred a quest for alternative sources of key metals such as cobalt and nickel

Patrick McGee in San Francisco and Henry Sanderson in London

   © FT montage / Bloomberg


Few people have had the sort of front-row seat to the rise of electric vehicles as JB Straubel.

The softly spoken engineer is often considered the brains behind Tesla: it was Straubel who convinced Elon Musk, over lunch in 2003, that electric vehicles had a future. 

He then served as chief technology officer for 15 years, designing Tesla’s first batteries, managing construction of its network of charging stations and leading development of the Gigafactory in Nevada. 

When he departed in 2019, Musk’s biographer Ashlee Vance said Tesla had not only lost a founder, but “a piece of its soul”.

Straubel could have gone on to do anything in Silicon Valley. 

Instead, he stayed at his ranch in Carson City, Nevada, a town once described by former resident Mark Twain as “a desert, walled in by barren, snow-clad mountains” without a tree in sight.

At first glance it is not the most obvious location for Redwood Materials, a start-up Straubel founded in 2017 with a formidable mission bordering on alchemy: to break down discarded batteries and reconstitute them into a fresh supply of metals needed for new electric vehicles.

His goal is to solve the most glaring problem for electric vehicles. 

While they are “zero emission” when being driven, the mining, manufacturing and disposal process for batteries could become an environmental disaster for the industry as the technology goes mainstream.

JB Straubel is betting part of his Tesla fortune that Redwood can play an instrumental role in the circular economy


“It’s not sustainable at all today, nor is there really an imminent plan — any disruption happening — to make it sustainable,” Straubel says. 

“That always grated on me a little bit at Tesla and it became more apparent as we ramped everything up.”

Redwood’s warehouse is the ultimate example of how one person’s trash is another person’s treasure. 

Each weekday, two to three heavy duty lorries drop off about 60 tonnes worth of old smartphones, power tools and scooter batteries. 

Straubel’s team of 130 employees then separates out the metals — including nickel, cobalt and lithium — pulverises them and treats them with chemicals so they can re-enter the supply chain as the building blocks for new lithium-ion batteries.

The metals used in batteries typically originate in the Democratic Republic of Congo, Australia and Chile, dug out of open pit mines or evaporated from desert ponds. 

But Straubel believes there is another “massive, untapped” source: the garages of the average American. 

He estimates there are about 1bn used batteries in US homes, sitting in old laptops or mobile phones — all containing valuable metals.

In the Redwood’s warehouse, Straubel’s team separates out the metals, including nickel, so they can re-enter the supply chain


The process of breaking down these batteries and repurposing them is known as “urban mining”. 

To do this at scale is a gargantuan task: the amount of battery material in a high-end electric vehicle is roughly 10,000 times that of a smartphone, according to Gene Berdichevsky, chief executive of battery materials start-up Sila Nano. 

But, he adds, the amount of cobalt used in a car battery is about 30 times less than in a phone battery, per kilowatt hour. 

“So for every 300 smartphones you collect, you have enough cobalt for an EV battery.”

Redwood is also building a network of industrial partners, including Amazon, electric bus maker Proterra and e-bike maker Specialized, to receive their scrap. 

It already receives e-waste from, and sends back repurposed materials to, Panasonic, which produces battery cells just 50 miles north at the Tesla Gigafactory.

Straubel is betting part of his Tesla fortune that Redwood can play an instrumental role in the emergence of “the circular economy” — a grand hope born in the 1960s that society can re-engineer the way goods are designed, manufactured and recycled. 

The concept is being embraced by some of the world’s largest companies including Apple, whose chief executive Tim Cook set an objective “not to have to remove anything from the earth to make the new iPhones” as part of its pledge to be carbon-neutral by 2030.

China is where much of the world’s battery production takes place before being shipped to the US or Europe © AFP via Getty Images


Cobalt’s 20,000-mile journey

If the circular economy takes root, today’s status quo will look preposterous to future generations. 

The biggest source of cobalt at the moment is the DRC, where it is often extracted in both large industrial mines and also dug by hand using basic tools. 

Then it might be shipped to Finland, home to Europe’s largest cobalt refinery, before heading to China where the majority of the world’s cathode and battery production takes place. 

From there it can be shipped to the US or Europe, where battery cells are turned into packs, then shipped again to automotive production lines.

All told, the cobalt can travel more than 20,000 miles from the mine to the automaker before a buyer places a “zero emission” sticker on the bumper.

Despite this, independent studies routinely say electric vehicles cause less environmental damage than their combustion engine counterparts. 

But the scope for improvement is vast: Straubel says electric car emissions can be more than halved if their batteries are continually recycled.

US energy secretary Jennifer Granholm says that the global market for clean energy technologies will be worth $23tn by 2030 © Callaghan O’Hare/Bloomberg


In July, Redwood accelerated its mission, raising more than $700m from investors so it could hire more than 500 people and expand operations. 

At a valuation of $3.7bn, the company is now the most valuable battery recycling group in North America. 

This year it expects to process 20,000 tonnes of scrap and it has already recovered enough material to build 45,000 electric vehicle battery packs.

Advocates say a circular economy could create a more sustainable planet and reduce mountains of waste. In 2019 the World Economic Forum estimated that “a circular battery value chain” could account for 30 per cent of the emissions cuts needed to meet the targets set in the Paris accord and “create 10m safe and sustainable jobs around the world” by 2030.

Kristina Church, head of sustainable solutions at Lombard Odier Investment Managers, says transportation is “central” to creating a circular economy, not only because it accounts for a sixth of global CO2 emissions but because it intersects with mining and the energy grid.

“For the world to hit net zero — by 2050 you can’t do it with just resource efficiency, switching to EVs and clean energy, there’s still a gap,” Kunal Sinha, head of copper and electronics recycling at miner Glencore says. 

“That gap can be closed by driving the circular economy, changing how we consume things, how we reuse things, and how we recycle.

“Recycling plays a role,” he adds. “Not only do you provide extra supply to close the demand gap, but you also close the emissions gap.”

Unintended consequences

Although niche today, urban mining is set to become mainstream this decade given the broad political support for electric vehicles and policies to address climate change.

Jennifer Granholm, US secretary of energy, has called for “a national commitment” to building a domestic supply chain for lithium-based batteries.

It is part of the Biden administration’s goal to reach 100 per cent clean electricity by 2035 and net zero emissions by 2050. 

Granholm has also said the global market for clean energy technologies will be worth $23tn by the end of this decade and warned that the US risks “bring[ing] a knife to a gunfight” as rival countries, particularly China, step up their investments.

In Europe, regulators emphasise environmental and societal concerns — such as the looming threat of job losses in Germany if carmakers stop producing combustion engines. 

Meanwhile, Beijing is subsidising the sector to boost sales of electric vehicles by 24 per cent every year for the rest of the decade, according to McKinsey.

This support, however, could have unintended consequences.

About 500,000 Nissan Leaf cars, as of 2019, were registered in places such as Ukraine and Georgia where getting a hold of the end-of-life batteries is hard © Nissan


A shortage of semiconductors this year demonstrated the vulnerability of the “just-in-time” automotive supply chain, with global losses estimated at more than $110bn. 

The chip shortage is perhaps a harbinger of a much larger disruption caused by coming bottlenecks for nickel, cobalt and lithium as every carmaker looks to electrify their vehicle portfolio.

Electric car sales last year accounted for just 4 per cent of the global total. 

That is projected to expand to between 24 and 34 per cent in 2030 and then swell to between 30 and 70 per cent a decade later, according to BloombergNEF.


“There is going to be a mass scramble for these materials,” says Paul Anderson, a professor at the University of Birmingham. 

“Everyone is panicking about how to get their technology on to the market and there is not enough thought to recycling.”

Monica Varman, a clean tech investor at G2 Venture Partners, estimates that demand for battery metals will exceed supply in two to three years, leading to a “crunch” lasting half a decade as the market reacts by redesigning batteries with sustainable materials. 

Recycled materials could help ease supply concerns, but analysts believe it will only be enough to cover 20 per cent of demand at most over the next decade.



So far, only a handful of start-ups besides Redwood have emerged to tackle the challenge of reconstituting discarded materials. 

One is Li-Cycle, based in Toronto and founded in 2016, which earlier this year raised more than $600m in a merger with a special purpose acquisition company valuing it at $1.7bn. 

Li-Cycle has already lined up partnerships with 14 automotive and battery companies, including Ultium, a joint venture between General Motors and LG Chem.

Tim Johnston, Li-Cycle chair, says the group’s plan is to create facilities it calls “spokes” around North America, where it will collect used batteries and transform them into “black mass” — the powder form of lithium, nickel, cobalt and graphite. 

Then it will build larger “hubs”, where it can reprocess more than 95 per cent of the substance into battery-grade material.

Without urban mining at scale, Johnston worries that the coming shortages will be like the 1973 Arab oil embargo, when US petrol prices quadrupled within four months, imposing what the US state department described as “structural challenges to the stability of whole national economies”.

“Oil you can actually turn back on relatively quickly — it doesn’t take that long to develop a well and to start pumping oil,” says Johnston. 

“But if you look at the timeline that it takes to develop a lithium asset, or a cobalt asset, or a nickel asset, it’s a minimum of five years.

“So not only do you have the potential to have the same sort of implications of the oil embargo,” he adds, “but [the effects] could be prolonged.”

Li-Cycle co-founder Tim Johnston, right, worries that without urban mining at scale the coming shortages will be like the 1973 Arab oil embargo © Li-Cycle


Design complications

Beyond aiding supply constraints and helping the environment, urban mining could also prove cheaper. 

A 2018 study on the recycling of gold and copper from discarded TV sets in China found the process was 13 times more economical than virgin mining.

Straubel points out that the concentration of valuable material is considerably higher in existing batteries versus mined materials.

“With rock and ores or brines, you have very low concentrations of these critical materials,” he says. 

“We’re starting with something that already is quite high concentration and also has all the interesting materials together in the right place. 

So it’s really a huge leg up over the problem mining has.”

The top-graded lithium found in mines today are just 2 to 2.5 per cent lithium oxide, whereas in urban mining the concentration is four to five times that, adds Li-Cycle’s Johnston.


Still, the process of extracting valuable materials from discarded products is complicated by designs that fail to consider their end of life. 

“Today, the design parameters are for quick assembly, for cost, for quality, fit and finish,” says Ed Boyd, head of the experience design group at Dell, the computer company. 

Some products take 20 or 30 minutes to disassemble — so laborious that it becomes impractical.

His team is now investigating ways to “drastically” cut back the number of materials used and make it so products can come apart in under a minute. 

“That’s actually not that hard to do,” he says. 

“We just haven’t had disassembly as a design parameter before.”

‘Monumental task’

While few dismiss the circular economy out of hand, there are plenty of sceptics who doubt these processes can be scaled up quickly enough to meet near-exponential demand for clean energy technologies in the next decade. 

“Recycling sounds very sexy,” says Julian Treger, chief executive of mining company Anglo Pacific. 

“But, ultimately, [it] is like smelting and refining. It’s a value added processing piece which doesn’t generally have enormous margins.”

Brian Menell, the founder of TechMet, a company that invests in mining, processing and recycling of technology metals and is partly owned by the US government, calls it “a monumental task”. 

“In 10 years’ time a fully optimised developed lithium-ion recycling battery industry will maybe provide 25 per cent of the battery metal requirements for the electric vehicle industry,” he says. 

“So it will be a contributor, but it’s not a solution.”

The real volume could be created when the industry recycles more electric vehicle batteries. 

But they last an average of 15 years, so the first wave of batteries will not reach their end of life and become available for recycling for some time. 

This extended timeline could be enough for technologies to develop, but it also creates risks. 

G2 Ventures’ Varman says recycling processes being developed now, for today’s batteries, risk being made redundant if chemistries evolve quickly.

Even getting consistent access to discarded car batteries could be a challenge, as older cars are often exported for reuse in developing countries, according to Hans Eric Melin, the founder of consultancy Circular Energy Storage.

Melin found that nearly a fifth of the roughly 400,000 Nissan Leaf electric cars produced by the end of 2018 are now registered in Ukraine, Russia, Jordan, New Zealand and Sri Lanka — places where getting a hold of the batteries at end-of-life is harder.

Berdichevsky of Sila Nano says his aim is to make EV batteries that last 30 years. 

If that can be accomplished, pent-up demand for recycling will be less onerous and costs will fall, helping to make electric vehicles more affordable. 

“In the future we’ll replace the car, but not the battery; of that I’m very confident,” he says. 

“We haven’t even scratched the surface of the battery age, in terms of what we can do with longevity and recycling.”

Chinese ructions test the buy-the-dip reflex of investors

Sell-off comes after a series of market rallies from shocks

Katie Martin

A girl stands near an outlet of private educational services provider in Beijing. A crackdown on the sector has triggered falls in Chinese shares. © REUTERS


Whatever the shock to markets, equity investors have a strong impulse: buy the dip. 

The latest ructions relating to China’s apparently poorly anticipated crackdown on foreign-listed shares could test this reflex.

The buy-the-dip muscle memory is strong. 

One after the other, potential hits this year have proven to be passing hiccups. 

An explosion of retail trading fervour at the start of 2021 provided lively entertainment and posed some tough questions around the everyday punter’s access to public markets. 

However, it left the rest of the investor community largely unscathed.

The fierce pullback in the US government bond market in the first quarter failed to have a lasting impact on equity investors’ enthusiasm. 

The implosion of the Archegos family office, complete with multibillion-dollar hits to a clutch of investment banks, stayed in its lane. 

And more recently, the wobble attributed (rightly or wrongly) to the Delta variant of coronavirus faded the following day. 

They just don’t make proper market shocks like they used to.

Bank of America has done some interesting number crunching on this. 

The Delta mini-shock on July 19 was, the bank says, a two-sigma event — a big departure from the norm, for those of a less mathematical persuasion. 

Looking at other one-day shocks to the S&P 500 of a similar magnitude so far this year, the average recovery time is just around 2.6 days, the bank said. 

That is around the fastest recovery pace since 1928.

Persistent central bank largesse “continues to incentivise investors to compete for ‘dip-alpha’” — excess returns from leaping in to declines — the bank added.

Now the question is whether this week’s rough patch in Chinese markets, amplified by a crackdown from Beijing on profits made by education companies, could infect the rest of the system, and if it does, whether it is treated as another dip to buy. 

China’s market shock is so far not on the scale of the last really severe shake-out in 2015. 

But consecutive days of declines in China’s CSI 300 index of more than 3 per cent is not to be sniffed at. 

Chinese tech stocks have suffered their worst month since the financial crisis of 2008. 

Morgan Stanley warned clients not to try and catch a falling knife in Chinese equities: “We reiterate: no bottom-fishing yet.”

US tech stocks have caught the bug, albeit relatively mildly. 

In a more severe sell-off, though, might Germany’s Dax be at risk? 

The fortunes of the German industrial sector are, after all, closely tied to demand from China. 

César Pérez Ruiz, chief investment officer at Pictet Wealth Management, is on the worried side. 

Some exposure to China still makes sense, he says, but overseas investors must be careful to be “aligned with national objectives”.

That is fine, as long as you have a strong sense of what those objectives are. 

For now, it seems like cutting education costs and taming the housing market are key goals for Beijing; sectors like biotech, semiconductors and aerospace, for instance, are less affected. 

For now.

Previous serious market ructions, like in March of 2020, have demonstrated that when the going gets really tough, fund managers do not always sell the securities they want to offload. 

They sell what they are able to offload, what ever is most easily tradeable. 

It may be no coincidence that Apple shares weakened this week for the first time since May. 

It is a stretch, but not impossible, to imagine a dent to portfolios stemming from China sparking fire sales of other assets.

“The potential risk is that every single investor, apart from a few, has been long [running positive bets on] emerging markets,” says Pérez Ruiz. 

“That’s how this could create volatility.”

He recalls a period in the summer of 2018, when Chinese stocks were wilting under the pressure of a trade war with the US, and he had to break a family holiday and return home (with his dog) to deal with the fallout. 

“It was very difficult to stop the shorting,” he remembers. 

He does not intend to buy any dip just yet. 

“I’m thinking we might take some risk off our portfolios,” he says.

This may turn out to be too cautious. 

But no one wants to be the person hauled up in front of the boss at the end of the quarter to explain why they took on more risk just as a well-known bad situation turned worse.

More broadly, the view seems to be that this will pass. 

Alan Ruskin, a macro strategist at Deutsche Bank, laid out what he called “the case against China global contagion” in a note this week. 

Any flows out of Chinese equities will probably find a home in stock markets and risky assets elsewhere, he said. 

Flows out of Chinese bonds would also likely end up in US Treasuries, he said — a shift that, if anything, would boost other markets.

“The single strongest short-term impact on global risk is likely to come only if some other dominant factor, like Fed policy, is the catalyst for a global risk sell-off, in which case events in China could be seen as augmenting such a move,” he concluded.

Barring that, “dip-alpha” could be just around the corner.

The Circular Economy Grows Up

If we do not abandon the prevailing “take-make-waste” pattern of global production and consumption soon, we will need the equivalent of almost three Earths to provide enough natural resources to sustain current lifestyles, and annual waste generation will increase by 70%. But there is a better way.

Andrew Sheng, Xiao Geng 


HONG KONG – Every year, 400 million tons of heavy metal, toxic sludge, and industrial waste are dumped into our waterways. 

At least eight million tons of plastic end up in our oceans. 

Some 1.3 billion tons of food – about one-third of all that is produced – is lost or wasted, while hundreds of millions of people go hungry. 

Our oceans are being overfished, our lands degraded, and biodiversity rapidly eroded. 

Meanwhile, devastating natural disasters – flash floods in Europe and China, forest fires in the United States, and locust infestations in Africa and the Middle East – are becoming more frequent.

The unsustainability of our linear “take-make-waste” pattern of global production and consumption has never been more obvious. 

In fact, if we do not abandon it by 2050, we will need the equivalent of almost three Earths to provide enough natural resources to sustain current lifestyles, and annual waste generation will increase by 70%. 

But there is a better way: we can embrace the circular economy.

The circular economy would decouple growth from the consumption of finite resources, keep products and materials in use, and regenerate natural systems. 

The European Union is already embracing this approach. 

Its Circular Economy Action Plan – a pillar of the European Green Deal – introduces legislative and non-legislative measures that would affect the entire life cycle of products, with a view not only to saving on materials, but also to creating jobs, improving human well-being, and protecting nature.

The manufacturing sector is a case in point. 

As the plan notes, up to 80% of a product’s environmental impact is determined at the design phase, yet manufacturers do not have sufficient incentives to design sustainable (or circular) products. 

The EU plans to strengthen these incentives through legislation.

Ultimately, this will help manufacturers. 

Given that raw materials currently account for about 40% of manufacturers’ costs, on average, closed-loop models can significantly increase their profitability and protect them from resource-price fluctuations. 

This latter point highlights the circular economy’s geopolitical dimension: As the Dutch plan for developing a circular economy by 2050 notes, “of the 54 materials that are critical for Europe, 90% must be imported, primarily from China.”

The EU estimates that applying circular-economy principles comprehensively could increase its total GDP by an additional 0.5% by 2030, and create around 700,000 new jobs. 

Crucially, measures aimed at implementing the circular economy in the EU would be introduced in a broad-based manner, including initiatives by communities and local and regional governments.

Given that the EU is a manufacturing powerhouse, it can help to set global standards for product sustainability and influence product design and value-chain management worldwide. 

But Europe is also taking a more direct approach to driving forward global progress toward a circular economy. 

This past February, it launched the Global Alliance on Circular Economy and Resource Efficiency. 

It is also pushing circular-economy principles through global trade negotiations and in its partnerships with African countries.

But, if this effort is to succeed, we must first understand why it has taken so long for the circular-economy concept to take root. 

Part of the answer lies in how mainstream economic ideology regards nature.

As John Ramsay McCulloch put it in his introduction to the 1828 edition of Adam Smith’s The Wealth of Nations, “water, leaves, skin, and other spontaneous productions of nature, have no value, except what they owe to the labor they required for their appropriations.” 

More broadly, the prevailing economic models since Smith have been linear and mechanical – an approach that is out of step with cyclical natural systems.

In a recent report, Partha Dasgupta was diplomatic in excusing mainstream economics for ignoring nature (defined interchangeably as natural capital, the natural environment, the biosphere, and the natural world). 

In the immediate post-World War II period, he noted, absolute poverty was endemic in much of Africa, 

Asia, and Latin America, and much of Europe lay in ruins. 

It was therefore “natural” to focus on the accumulation of physical capital (infrastructure and goods) and human capital (health and education). 

“To introduce Nature, or natural capital, into economic models would have been to add unnecessary luggage to the exercise.”

The unwillingness to carry the “luggage” of nature has meant that economic accounting has focused almost exclusively on GDP growth – the more, the better – for over 70 years, without any regard for the impact of economic activity on the natural environment. 

No surprise, then, that the situation has gotten so desperate.

But there are promising developments. 

In March, the United Nations Statistical Commission adopted the System of Environmental-Economic Accounting Ecosystem Accounting, a framework for organizing data about habitats and landscapes, measuring ecosystem services, tracking changes in ecosystem assets, and linking this information to economic and other human activity. 

And both the Japanese G20 Presidency in 2019 and the current Italian Presidency have pushed for global action on the circular economy.

China has also taken important steps in this direction. 

In August 2008, it became one of the first countries to pass a law aimed at promoting the circular economy. 

As Dasgupta noted in his report, China also enshrined the concept of an “ecological civilization” in its constitution in 2018. 

And China’s dual-circulation strategy – a feature of its 14th Five-Year Plan (covering the 2021-25 period) aimed at cushioning the blow from economic decoupling – evolved from the circular economy model.

While the EU and China might disagree about the circular economy’s technical, economic, and political uses, their shared commitment to moving toward such a system is good news. 

More economies should follow suit, with targeted multilateral aid and technical assistance provided to emerging economies.

The circular economy is our only hope of achieving the 17 UN Sustainable Development Goals and ensuring humanity’s long-term survival. 

If great powers must compete, it is here that they should be doing it.


Andrew Sheng, Distinguished Fellow of the Asia Global Institute at the University of Hong Kong and a member of the UNEP Advisory Council on Sustainable Finance, is a former chairman of the Hong Kong Securities and Futures Commission. His latest book is From Asian to Global Financial Crisis.

Xiao Geng, Chairman of the Hong Kong Institution for International Finance, is a professor and Director of the Institute of Policy and Practice at the Shenzhen Finance Institute at The Chinese University of Hong Kong, Shenzhen.