http://kingworldnews.com/kingworldnews/KWN_DailyWeb/Entries/2010/7/14_Jim_Rickards_-_China%2C_Gold%2C_CNBC_%26_Wilbur_Ross.html

Jim Rickards for King World News – July 14, 2010

3. Neomercantilism. The issue here is whether China is an aspiring member of the global trading system with some imperfections or is a thinly disguised neomercantilist power. There is some reason to fear the latter because employment is paramount in China for reasons of social and political stability. Therefore China will be highly motivated to preserve jobs at all costs even if it means going against the globalist consensus on free trade, free capital flows and floating currencies. The danger, of course, is spreading protectionism in response.

4. China's historic fear of decentralization, disintegration and disorder. There are many historical examples of this including the Taiping Rebellion (1850-1864) and the Warring States Period (475-221 BC). It is one reason why China maintains a tight grip on all policy and does not devolve power to provinces and cities.

5. Unique role of the Communist Party. Americans often suppose that Communist Party (CP) ideology and practice is confined to a few octogenarians with waning influence. That is completely wrong. The CP is alive and well, is being populated by younger, better-educated members and is as strong as ever. Few Americans understand how Communist Parties function. They do not impose discipline from the top down but rather exist as a parallel silo; every aspect of civil society and has correlative CP functionary who observes behavior for conformity to CP policy. The party is very powerful but often invisible to people who don't understand how Communist Parties function. This has important business implications for how decisions are actually made and carried out.

6. Corruption. This exists in all societies but may be a special problem in China where great wealth is being amassed in business but the opportunities to participate in those businesses are limited by cronyism and party control. This leads many officials to seek bribes and kickbacks in exchange for facilitating deals.

7. China's shortage of gold in its reserve position. The U.S., Germany, Italy and France all have between 65-72% of their reserves in gold whereas China has 1.6%. In terms of reserves, China is a paper giant but a gold pygmy. Geithner wants to "rebalance" the global economy from exports to consumption in China, but he has no corresponding solution for rebalancing gold holdings. This is the biggest financial problem in the world today but no central bank officials will discuss it openly.

8. CFIUS (or, Committee on Foreign Investment in the United States) is responsible for reviewing Chinese acquisitions of U.S. companies for national security reasons. CFIUS is best known for the Dubai World Ports deal, which was rejected, and the rejection of China's CNOOC acquisition of Unocal in 2006. But recently CFIUS rejected two other Chinese deals; one to buy a gold mine in Nevada (First Gold) and one to buy a fiber optic company (Emcore). U.S. companies who complain of protectionism in China should be aware that the Chinese feel they have not been given an open door to do acquisitions in the U.S. either.

9. Chinese Q2 2010 GDP will be announced July 15th. There may be less here than meets the eye because of the application of what economists call Goodhart's Law, i.e. once an economic indicator itself becomes the object of policy, it losses the information content which qualifies it as an indicator. In the context of China's goal of maintaining GDP growth of at least 8%, this means that China will misallocate capital and pursue sub-optimal policies just to hit that target. This results in asset bubbles and wasted resources in the long-run.

10. Apparent strength belies hidden weakness; absence of rule of law is critical. China is strong and going stronger economically and militarily. But behind this strength lies enormous vulnerability of which the leadership is well aware. This includes vulnerability to U.S. debasement of the dollar, the shortage of gold reserves, the lack of alternatives to the dollar, competition from lower cost producers in Indonesia and Vietnam, asset bubbles, social unrest, ethnic minorities, male-female demographic unbalance, drought, pollution, etc., etc. This explains China's reluctance to assume the global leadership role that the U.S. seems determined to thrust upon it.

Joe Kernen: “We should actually sort of have empathy for what they (China) are trying to accomplish as communists.”

Joe Kernen: “Why, where’s that going to get us?”

Wilbur Ross: “While the form of the government is communistic, the society is capitalistic. I would argue that in many ways China is a more capitalistic environment than we are moving into.”

Wilbur Ross: “Well the reason there’s a big spread between bid and ask on the banks with their property is they don’t have them marked properly. They’re not really willing to take the hit. It isn’t that there’s a true spread from 50 to 80, 80 is a delusion.”

To see the CNBC interview with Jim Rickards http://www.cnbc.com/id/15840232?video=1543680832&play=1"