Actions complete and all achieved, they flew aloft.
Journey to the West, Wu Cheng En’s epic account of China’s manifest destiny may intimidate would-be readers due to its size. However, within its 99 transformations in over 1,700 pages, one can begin to see the archetypal logic which seems to inform today’s global market dynamics. For those who are seriously intent on understanding the movements being made by the Chinese government, Journey to the West should be the top of the reading list.
Prior to the formation of the current National Development and Reform Commission or NDRC (formerly known as ICC-SCORES), its director arranged for me to receive an authorized translation of Journey to the West. “Understand this,” he said, “and you will begin to understand China.”
To the Western reader, the simple moral of the epic is that things are not as they seem. What meets the eye is not only not the case but is diametrically opposed to the truth. Consummating in the final interaction with Buddha in which the heroes find a paradox in the scrolls, wisdom and enlightenment are only discerned from altering perspectives and freeing observation from preconception.
This week, I was puzzling over the prevailing ignorance evidenced by monetary policy and government experts on how to deal with China. In our reductionist myopia, we seem to believe that China is constrained by the same legacy and logic that characterized our ascent to global market economic hegemony. Our leaders seem incapable of looking at things free from preconceptions. This incapacity is inextricably linked to our undoing.
Take stock of the following certainties over which U.S. or European arrogance have little to no effect:
1. Gold – While the Responsibility Jewellery Council and other NGOs seek to advocate for more ethical and responsible gold production, and Western investors seek to hedge currency risk with vacuous metals bets, China has announced its commitment to increase their reserves eight to ten fold. In the West, market conversations circle around the price of gold and irrationality of the Chinese buying such quantities at market prices. What is ignored is the close to 8 years of sophisticated development of Chinese gold extraction efforts – including those coordinated by Robert Friedland, one of the world’s most notorious metals men. Friedland’s Ivanhoe Mines (TSX: IVN and NYSE: IVN) have been actively working with the Chinese to vastly expand domestic production of gold, copper, molybdenum, and coal and have focused considerable attention of the tough to access and tougher to audit claims of vast gold reserves in Southern Mongolia. Friedland and Apple’s Steve Jobs spent early life together in the land of and with the people of Journey to the West. With no love lost between Friedland and the U.S. Justice Department, one has to wonder whether China’s alliance with Friedland is, in part, fueled by the “He who laughs last” truism. China is not going to buy their 10,000 tonnes, they’re going to extract them. And an American (supported by the Toronto and New York stock markets) is going to aid the process.
2. Consumerism – We continue to hold a naïve belief that the only way for China to advance economically is through American-style consumerism supported by debt. We do not have the capacity to consider market conditions which not only challenge our notions but may, in fact, preclude China from following the American path. As I indicated before, the 60 – 100 million males (a consequence of China’s one-child policy leading to gender inequality) are going to create a market dynamic without modern precedent. All of the earning potential and inherited wealth of these men are going to be expended in a single generation. The degree to which this dynamic is managed with consumption vs. alternative market actions is unknown. Clearly, placating a male population which may be at times quite displeased with their lot in life will be a primary concern for the Chinese government. Doing whatever is necessary to keep this population docile is of paramount concern. There are reports from many nations that financial incentives are being offered by the Chinese government to induce African, Pacific, and South American countries to provide residence to men relocating to other countries. China can invert its export economy rapidly by producing for domestic consumption and still have yet-unseen models to fundamentally alter its economy.
3. Energy – President Obama’s nostalgia for a Kennedy-style shoot-for-the-moon science and technology stimulus with clean, green energy technologies would be admirable were it not delusional. Whether it’s electric cars, biofuels, solar, wind, or nuclear, China’s millions of technology trained engineers have already out-maneuvered their U.S. counterparts at most turns. Uranium linkages with Australia and Central Asia, coal deposits in Mongolia, and oil and natural gas contracts with Iran, African states and partnerships with South America mean that legacy energy feedstock control will allow China to time its conversion when it’s ready – not when the U.S. dictates new energy mandates. And, by the way, the new saber rattling with Iran doesn’t help. An “oops” tactical nuclear strike would make Iranian oil and natural gas fields difficult to access due to the possible cloud of uranium hexafluoride. However, as that radioactive, toxic cloud drifts with the prevailing winds into Pakistan and India, the last hope for resolution of our Middle East position will wither in an atomic instant.
As you read this posting, it’s not good enough to just puzzle over the enigmas wrapped in this seventh century poem. It is time to take action. If you fear currency volatility, do not run to gold. The game is over and, unless you have a mine in your backyard, you’re the pawn, not a player. If commodities are interesting, follow those which have deployable use. We’ll have more batteries, semiconductors, and, yes, sweet food in the future than we’ll have use for gold. If your business is counting on U.S. consumerism fueled by easy credit to rebound, wake up. The experiment ended and your government simply accelerated its demise. It is time to put direct efforts into building trading networks across the globe where interdependence will build mutuality of interests. And if you think that we’re going to solve unemployment with green jobs, prepare to be the out-sourcing country. That’s right. If you can install power systems whose instructions are shipped in Chinese and Hindi, you’re going to be more employable. And, by the way, when your children learn Mandarin in school so that they can respectfully engage with our colleagues to the West, recommend Wu Cheng En’s Journey to the West. It will help them become better neighbors.