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Notes from the 2009 Central Propaganda Department in China:

C. Currently, our country’s main internal contradictions (conflicts) are:
i. Mass incidents caused by changes in businesses.
ii. Problems with ex-members of the armed forces. The central government
requests: they must be well taken care of, every effort must be made to resolve
their difficulties, and it is necessary to prevent them from being used by hostile
iii. Irregularly petitioning for redress. It is the right of citizens to petition higher
levels of government; however, using irregular means of petitioning for redress
influences social stability.
iv. Large scale mass incidents caused by demolitions and the taking of rural land.
v. Large scale mass incidents caused by serious criminal activity. For example,
multi-level marketing schemes and illegal fundraising.
D. The challenges to social stability brought by the widespread use of the

Source: China Digital Times

“Furthermore, despite optimistic projections of China’s future growth potential, its economy is still beset by numerous imbalances and risks in the medium term. These include persistent and even widening regional economic disparity and rural-urban income inequality, rising social unrest and inter-ethnic conflicts, rampant corruption, and serious economic degradation. An eruption of any or several of these ‘fault lines’ could put a sharp brake on the ascent of the Chinese economy, and as the same time propel the renminibi onto an inordinately volatile trajectory.”

                             Friedrich Wu, Professor at Nanyang Technological University in Singapore

“Asia is leading the world out of global recession, but the financial crisis may yet have a dangerous sting in the tail – the risk of social unrest as unemployment and inequality rise even as economies recover.

“Fears of widespread unrest last year failed to materialize, and most Asian economies are now posting impressive growth. But unemployment is a lagging indicator, and many political risk consultancies are warning that 2010 may hold nasty surprises.

“’Although we maintain that the crisis has already inflicted its deepest wounds, its impact will continue to be felt throughout 2010,’ the Economist Intelligence Unit said in a report.

“The main downside risks to economic stability this year include asset price bubbles, deflationary pressures, and the danger of ‘an increase in the frequency and intensity of social and political unrest, given increased unemployment, weak growth and impending fiscal austerity measures in many countries,’ the EIU said.

“Much of the risk is concentrated in Asia.

“The EIU rates China in the ‘high risk’ category for social unrest in 2010, upgraded from ‘moderate’ risk in 2009. Also in the high risk category are Thailand, Indonesia, the Philippines, Sri Lanka, Cambodia, Bangladesh and North Korea.”

                             Andrew Marshall, Reuters

“Although most believe that China’s substantial stimulus package announced earlier this year is being invested in infrastructure, many analysts agree with my perception that most of it is ending up in overheated stock and real estate markets. The Chinese refer to this as ‘stir fried’ markets.

“…Just take a look at China’s ten largest companies which are all state-owned or state-controlled, as are thirty-four of the top thirty-five companies listed on the Shanghai exchange.”

                             Carl Delfeld, President of Chartwell Partners

“There has been some hope that boosting trade with developing countries, and especially with developing Asia, will result in a new source of net demand. James Kynge said something like this in the Financial Times earlier this week:

Popular narratives sometimes overshoot. One of the latest to outlast its veracity is the conventional wisdom that China’s export engines have been spiked by subsiding consumer demand in the US. This, so the argument goes, leaves Beijing with no option but to spur domestic demand to compensate for lost export revenues.

This became an über-narrative last year. Its snowballing popular appeal was powered by two unassailable charms: it made sense and seemed largely true – but not any longer. Its potency appears set to wane in coming months not so much because of a challenge to its central plot, but by other things happening off stage.

The telling off-stage action is the recent upsurge in trade with south-east Asia and the “newly-rising economies” of Brazil, Africa and India. Although Chinese trade with these places has historically been limited, it has grown so fast in the past five years that a robust performance in 2010 may be enough to offset any moderate weakness in China’s trade with the US.

“A friend wrote to me to ask what I thought of this possibility, citing Kynge’s article, and my response (with some editing) was:

“The idea that net demand from developing countries can replace net demand from the US is alarmingly widespread, both in China and abroad, and mainly indicates to me a lack of familiarity with the history of developing countries. The developing world excluding China is roughly the same size as the US, so if you want them to replace the US you need the developing world to run trade deficits of roughly equal to 7% of their GDPs.

“Leave aside the huge problem that most developing countries also want trade surpluses and have a stubbornly tough time understanding why they should run deficits in order to help Chinese employment, the historical evidence suggests that just a few years of trade deficits of 2% of GDP will lead to external debt crisis. For example it took the Asian Tigers just a few years of deficits after 1993-94 to run into the Asian crisis. Do Malaysia, Indonesia, Vietnam and so on really want to go through that again?

Developing country demand cannot replace the US. Even Europe cannot replace the US. This is an unrealistic hope.”

                             Michael Pettis, Professor at Peking University

FX Trading – Party on dudes…
Question: Is it a Black Swan event when so many people are already talking about it? No, but the China cheerleaders will say it is so…

DJ Shanghai Stock Index Weekly: Divergence? Stay tuned.