An American narrative is needed to disarm China’s victimization rhetoric.

The government in Beijing claims that China is the long-suffering victim of Western powers, Japan, and other countries. In this narrative, China’s rulers bear hardly any faults.

Without any sense of irony, the People’s Republic of China (PRC) repeats its Orwellian twist that China is the “victim” in the South China Sea, though it is the strongest claimant and bullies others to submit to China’s control of areas by using militarized, environmentally-damaging claims to fragile reefs, rocks, islands, and maritime areas within an egregious “nine dash line.”

The PRC propaganda machine manipulates messages by citing a so-called “century of humiliation.” In a self-serving story supposedly speaking for the people, the PRC’s English-language mouth-piece, China Daily, used this convenient definition this past August: “For many Chinese, the ‘century of humiliation’ started with the First Opium War (1840-1842) and lasted until 1949 when the People’s Republic of China was founded.”

A historically-grounded narrative is needed to counter China’s charges, which have real implications for American and other national policies. The PRC plays the “victim” card to its advantage, seeking to compel compliance by putting others on the defensive, to undercut American leadership, to deflect blame, to incite others to regurgitate its case, to indoctrinate internal opinion to support the regime, to stoke “nationalism” for leverage, and to arm psychological warfare that positions Beijing as “just.”

In fact, in a fuller history of more than 100 years, the United States has supported reforms in China for progressive government, liberalization, and education for generations of people, as well as integration of China into the international community (even for the regime of the Communist Party of China).

China has failed to curb excesses in its credit system and faces mounting risks of a full-blown banking crisis, according to early warning indicators released by the world’s top financial watchdog.

A key gauge of credit vulnerability is now three times over the danger threshold and has continued to deteriorate, despite pledges by Chinese premier Li Keqiang to wean the economy off debt-driven growth before it is too late.

The Bank for International Settlements – the central bank of central banks, based in Basel, Switzerland – warns in its September 2016 quarterly report that China’s "credit to GDP gap" has reached 30.1, the highest to date and in a different league altogether from any other major country tracked by the institution.

It is also significantly higher than the scores in East Asia's speculative boom on 1997 or in the US subprime bubble before the Lehman crisis.

Studies of earlier banking crises around the world over the last sixty years suggest that any score above 10.0 requires careful monitoring.  The credit to GDP gap measures deviations from normal patterns within any one country and therefore strips out cultural differences.

China is now the epicenter of global financial risk.  Why?  Because the Chinese banking system is an arm of the Communist Party.

[TTPer Mike Ryan wrote a thoughtful commentary on the Forum regarding China Is Now the Epicenter of Global Risk by Ambrose Evans-Pritchard.  Several TTPers suggested we publish it as a full article.  We are happy to comply.  Thanks, Mike.]

This is in response to a question asked on the Forum, “Can anyone explain the repercussions of the global risk of China to our economy?”  Here are my thoughts.

It is risky to predict the reactions of complex systems that are actively influenced by government, especially when the primary goal of government is power for insiders and the fleecing of outsiders. 

Example: The Clinton Global Initiative and its DOJ support.  Governments spend more on power and control every time there is a financial crisis. 

Some thoughts:

In July, the New Zealand government announced its intention to eradicate all rats, stoats and possums from the entire country by 2050 to save native birds such as the kiwi.

It’s an ambitious plan, perhaps impossible to pull off with the methods available today, but it’s a stark reminder that invasive alien species today constitute perhaps the greatest extinction threat to animal populations world-wide.

The dodo on Mauritius, emblematic of extinction, was wiped out less by hungry sailors than by the rats, pigs, dogs and cats they brought with them. Hawaii once had 55 species of honeycreeper; today just 17 remain, thanks largely to rats and avian malaria, transmitted by alien mosquitoes brought by people. Guam has lost nine species of bird to an introduced snake.

In the Mississippi River, it is Asian carp; in the Everglades, Burmese pythons; in the Great Lakes, Russian zebra mussels; in the South, Indochinese kudzu vine.

In Australia, cane toads from South America; in Lake Victoria in Africa, water hyacinth from the Amazon; in Germany, Chinese mitten crabs; in the Caribbean, lionfish from the Pacific. A fungus spread by African clawed toads (used in laboratories) has wiped out frogs in Central America.

But it turns out there’s a flip side.  None of this is to say that invasive species are always a threat. They can bring positive effects, too, by increasing biodiversity within a region.

The growth rate of nominal GDP in the US has fallen to 2.4%, the lowest level outside recession since the Second World War.

It has been sliding relentlessly for almost two years, a warning signal that underlying deflationary forces may be tightening their grip on the US economy.

Given this extraordinary backdrop, the violent spike in US and global bonds yields since last week is extremely odd. It is rare for AAA-rated safe-haven debt to fall out of favor at the same time as stock markets, and few explanations on offer make sense.

We can all agree that oxygen is thinning as we enter the final phase of the economic cycle after 86 months of expansion. The MSCI world index of global equities has risen to a forward price-to-earnings ratio of 17, significantly higher than on the cusp of the Lehman crisis.

Nonetheless, the Fed cannot plausibly be responsible for the global bond rout. What is true is that markets fear the Bank of Japan and the European Central Bank are reaching their political limits, and may not be allowed to press ahead with their experiments even if they want to.