China's Confidence Game

Nearly a year ago, we warned of what might happen if a crisis of confidence strikes China's economy. Recent economic numbers return this worry to the spotlight.

In 2018, China's economy grew at its slowest pace in nearly 30 years. In response, the country's central bank moved earlier this month to boost bank lending and then pumped a record $84 billion into the banking system.



Then we got a warning that excessive lending itself has become a problem with news that bad debt has reached its highest level in a generation. The International Monetary Fund warned recently that the biggest current threats to global economic growth are a "no-deal Brexit" and a sharp slowdown of China's economy. At the World Economic Forum in Davos last week, Kenneth Rogoff, a widely respected expert on debt crises, warned that China may be forced to rescue large parts of its financial and economic system.

China's economy has been cooling for several years, and there's no sign yet the country's leaders have lost confidence in their ability to manage. The government's latest moves signal concern, but not panic, about the current strength of the economy and its ability to weather the storm created by the trade war with Washington. A speech by President Xi Jinping last week at a special meeting of central and provincial-level leaders focused on other risks to China's future.

But China's leaders can't control how markets see their country and its economy. Particularly since, as I wrote last February, all of China's big political and economic decisions are made behind closed doors by seven men — the Politburo Standing Committee of China's Communist Party.

The day is coming when doubts about China's economic resilience will abruptly begin to grow, and it won't be easy for state officials, even if they're telling the absolute truth about what they believe, to calm markets. Today, there is confidence in the stats that China's government produces mainly because growth is believed to be relatively strong. That makes it easy for investors to ignore stories about Chinese provincial governments admitting they've faked their GDP data.

But here's the key question: During a Chinese market meltdown, when the government tries to ease fears with a release of reassuring numbers, will investors believe them?

Facebook unveiled plans for a new cryptocurrency and payment system on Tuesday. It's called the Libra, and it's not-so-modest goal is to "reinvent money," and "transform the global economy" so that "people everywhere can live better lives." Ambitious much, Zuck?

This is a huge political gamble, but the rewards could be enormous. Here's a quick look at the tradeoffs:

The risks: Facebook is asking its 2.5 billion users — and government regulators — to entrust it with something that's vitally important to people everywhere and a power that governments jealously protect: access to money. And it's doing so at a time when trust in Facebook and other big Silicon Valley companies is at a low ebb.

Whether it's a concern that Big Tech has become too powerful or that it's not doing enough to protect privacy or put a stop to fake news, it's a heck of a time to launch a new techno-utopian project that could give Silicon Valley much more power — including the ability to track not just what people say they like but how they spend their money.

Mark Zuckerberg understands this — the Facebook founder is setting up Libra as a Swiss-based non-profit that will be governed by an "association" of 28 tech and financial companies and non-profits of which Facebook is just one member. He's also promising that Facebook will not mix personal data with payment information, and to cooperate with regulators.

But this will always be Zuckerberg's baby, and by launching Libra, he's painting a big new political bullseye on his own back.

The payoff: If Libra can survive the inevitable political and regulatory storm (and convince its billions of users that they can trust the underlying technology and financial stability of the new cryptocurrency) the upside could be enormous.

How enormous? The Libra website claims that more than 30 percent of the world's population — about 1.7 billion people — currently lack access to traditional bank accounts. Many more pay steep fees to transfer money using traditional payment services. Libra, by contrast, promises access to anyone in the world with a simple smartphone — and to make payments as inexpensive as sending a text message.

Plug those capabilities into a social network whose user base is roughly double the population of the biggest country in the world, and the results could be revolutionary — not just for billions of people who would gain new access to financial resources, but for Facebook's business model, and for central banks and governments that have traditionally sought to control the flow of money through their economies.

That would be a techno-utopian dream come true, but it's a power that governments won't willingly surrender.

Does the leader of Hong Kong appear weaker withdrawing the extradition bill?

Well as we'd say in Australia, "Is the Pope a Catholic?" Of course. This means that Carrie Lam's authority within the Hong Kong SAR is reduced and her standing in Beijing is reduced as well. But I think the bottom line is that China will resist any efforts to remove her from office, despite local pressure.

Is the US – China trade war coming to an end anytime soon?

Depends Dr. Bremmer on what your definition of "any time soon" happens to be. My prediction is simply this: once they get to the G20 meeting in Osaka Xi Jinping and President Trump will agree to reboot the negotiations process but then it's a question of the substance of the deal. My prediction is A) there will be a deal sometime between now and the end of the year. And secondly, the nature of the deal will be America yielding on the questions of tariffs to the Chinese and China yielding to the Americans on the amount that President Trump expects in the purchasing order of future American goods by the Chinese. That's my bottom line. Both countries need the economic outcome. Both countries therefore have a deep interest in securing a deal. Doesn't mean the end of the economic war however, technology reigns supreme.

If Willis's story on Tuesday about Argentina being plunged into darkness after a nationwide power failure didn't get you packing a flashlight and checking that your car has a full tank of gas, this one should. Over the weekend, the New York Times said anonymous US officials had revealed a US campaign to plant "potentially crippling malware" inside Russia's power grid "at a depth and with an aggressiveness that had never been tried before."

Quick thoughts:

This is a big provocation. It's the cyber equivalent of mining a harbor — an aggressive move that falls short of actual conflict but sends an unmistakable message: mess with us, and we'll mess you up.

The leak was probably intentional. The campaign fits with the new US strategy, launched under the Trump administration, of trying to deter cyber adversaries like Russia, China, and Iran from hacking its critical infrastructure. By disclosing the US campaign, US officials are effectively telling Russia (and by extension China and Iran), that they've got a loaded gun cocked and pointed at their economies.

That's dangerous. People — and governments — may not always behave rationally when a gun is pointed at their heads. Russia might be even more inclined to lash out. And unlike more conventional forms of conflict, cyber isn't a domain where the US can be sure it has an overwhelming advantage if push comes to shove.

It gets worse. The Times said US cyber officials described a "broad hesitation" to go into details of cyber operations against Russia with President Donald Trump because they feared he might cancel it or tell other governments about it. Among other things that are disturbing about this story, a lack of communication between the President and US cyber warriors could send mixed signals that further embolden US adversaries.

It's no secret that cyberattacks are becoming more commonplace. But where do most of them originate and what countries do they target most? The graphic above shows the most significant offenders and victims since 2006. Hackers in China, Russia, Iran, and North Korea account for three-quarters of all major attacks. Nearly a fifth of attacks, meanwhile, have targeted institutions or companies in the United States.

(At least that we know of: this chart highlights known attacks on government agencies, tech companies, and other operations that caused more than $1 million in economic damage. But many cyberattacks are never disclosed, and some countries are more transparent than others, so consider this a cross-section of a much bigger — and more disturbing — picture.)