Memo to CNOC: We Told You So About Canadian Oil Sands

In 2010, no less, when Canadian heavy oil deposits were beginning to have financial and energy pundits breathe heavily we posted about the economic and environmental problems associated with these deposits, based on our own work on these resources decades back. First of all, not all these deposits are created equal.

Extractive technologies may have improved, but the political and environmental risks, required returns on all-in costs, and realistic oil prices continue to place these resources, as a broad class, relatively low down the value chain.

Today, the CNOC's policy of trying to anticipate global energy futures and cement a strong position in extracting oil sands from its Long Lake project ran aground, according to the Wall Street Journal.
The problems are easy to enumerate, and they are not happening to state-owned Chinese enterprises for the first time:

• When venturing into production areas that are beyond the corporate technical competencies, don't go it alone and don't make big bets.  For this, see also Petrobras' experiences with deep offshore oil.
• Pick an established global partner, even if you have to give up some economics.
• Control is an illusion.  Global markets have confounded smart players in many fields since time immemorial.
• Environmental risks in environments like Alberta and the Arctic, for example, should never be underestimated.

Reducing its capital spending program will make it very unlikely that CNOC can fulfill its global aspirations without significantly reinventing its business model and strategy. 

China Makes The Predictable Play in South China Sea

Back in 2011, we wrote about the web of problems that could be expected from the U.S. failure to sign the Third UN Law of the Sea Treaty, and about our foreign policy with no vision or principles, beyond climate change.

We recently wrote,

"China is probably glad to see that the West doesn't have any teeth in assertions about rolling back territorial grabs like it contemplates in the South China Sea and elsewhere. Japan has to wonder how it could go it alone were territorial disputes with China turn into armed conflicts. Our Saudi friends have already expressed their displeasure at our "leading from the back." "

Now, the Chinese has served their notice to Taiwan, Malaysia, Vietnam and the Philippines that it intends to press its uniquely conceived territorial claims in the South China Sea.  Our hollow claims of some sort of right to free military passage won't pass muster, but worse they won't change Chinese behavior.

The Chinese have also made it clear from 2011 that any challenges to their territorial claims which they say date back to 1947 will be viewed as attacks on Chinese sovereignty.

Coming home in the car today, I heard a report on Vice President Biden's speech visiting Ukraine where he reportedly said that the U.S. won't recognize any Russian annexation of Crimea and that Russia must stop fomenting violence through proxies in masks.  This kind of speech is one the President should have made, but it's good to put something clear, fundamental and principled on the table.

German Chancellor Merkel, who had been very visible during the long, drawn on European currency crisis is conspicuously absent on the world stage.  She must be ruing her ill-conceived energy policies.  Mothballing the German nuclear power industry, creating expensive, inefficient renewable targets, and selling out to Gazprom--a trifecta of policies to play into Russia's hands.

President Putin continues to pull the strings in the Ukraine, but market disciplines through the flight of capital are the only clear signal the Russian President is getting that he may have to tack from his full speed ahead attempts to recreate the Russian empire.

Huawei and Balkanization of IT

The Wall Street Journal reports on the continuing circus at the National Security Agency, where it continues its investigations into the security of IT products.  This is the same issue that we wrote about in 2012, except at that time the discussions were more open in the form of testimony before a Senate committee on Capitol Hill.

Today, Huawei, which is one of several vendors allegedly under investigation by the NSA, calls for avoiding the "balakanization" of IT products by political or national geographies.  Well, it seems that back in 2012, Huawei wasn't forthcoming enough for the standards of the Senate investigators.  Give the customers what they want if the market is important to you.

Of the companies mentioned, Cisco seems to have the most appropriate response in an accessible blog format.  To some extent, they are citing chapter and verse from their own internal controls over IT, and a customer can read the appropriate documents without having to search or call the company.  That itself is a comfort when something like the Der Spiegel article hits.

According to the Journal, HP is waiting for information and documents from Der Spiegel.  That isn't the best public response.

Nice Call from McKinsey on China

Another post which continues to draw readers is one based on a McKinsey paper.  Among other things, they made a very timely comment on pork, well ahead of the proposed deal for Smithfield Foods.  Here's the relevant text from the post,

"China consumes 50% of all pork produced globally, and its internal food production, storage and distribution system is already pushed beyond its limits. Pork and chicken prices have risen 100%.  In July 2011, prices rose by 57% year-over-year driven by herd thinning due to high grain prices and by disease.  Foreign imports can't fill the gap, especially because of an "extremely rudimentary cold supply chain."  If the Chinese government wants to see a shift towards consumption, shortages of consumer electronics will not be the issue, but shortages of food and packaged food products may very well be the Achilles heel." 

They also comment about the banking system and the associated capital issues.  This issue is being pooh-poohed by the Chinese government, so far.  More to follow for sure.

I recently read an ambitious book by Heriberto Araujo, Jose Cardenal and Catherine Mansfield, "China's Silent Army." I was surprised at the wide range of sentiment about the book, much of it dismissive.  It was an ambitious project, and partly successful, mostly due to the lack of transparency when the authors looked to interview primary sources.  Nevertheless, it had an interesting overall theme.

In the seventies, the Hunt family tried to corner the silver market, which made news worldwide. A pillar of the Chinese government's long term strategy is to assure itself access to supplies of agricultural, ferrous and non-ferrous minerals, energy, basic and specialty chemicals deemed critical for a future of ultra-high growth.

By itself, this is unremarkable.  It sounds like long-term planning by the state.  The instruments include direct ownership, investment, joint ventures, and long-term contracts.  However, reading the book by Araujo et al., it seems to me that the model as it is being implemented is very much like that of the much maligned British East India Company.

I may write more about this later, but for those interested the book is a very interesting and provocative read.

Chinese Air Pollution and Public Health

www.weather.com

                      Since January, the world press has been forced to acknowledge that urban air quality in China is no longer a red herring issue of economic growth, but a national and international public health menace.  Japanese researchers are looking into potential effects of pollution from China on old arboreal forests in Japan. The long-term costs won't be known for decades, when it may be possible to publish results long term studies of effects on coronary and pulmonary health and mortality.  Children, like the little girl in the photo, who are growing up exposed to the toxic soup would be ideal study candidates.

"Let’s start with the gloom. China’s air quality is already dismal, thanks to an ever-growing number of coal-fired power plants, factories and automobiles. The annual average levels of small particulate pollution, PM2.5, in cities is at 75 micrograms per cubic meter, three times as high as what the World Health Organization considers safe. (And that’s an average — in January, Beijing’s pollution levels soared past 900 µg/m3.)"  Source: Washington Post. 

It's macabre to think that the U.S. Embassy sensors in Beijing only go up to a maximum of  500 µg/m3, a level that would have been viewed as unthinkable.  Middle class Chinese executives and professionals are already sending their children out of the country to private schools abroad to spare them from the air pollution scourge. The parents are soon following when they can work out visa arrangements for the U.S. and Europe. Expatriates are turning down Chinese assignments because of the public health concerns for their families.  

Organizations like Greenpeace, which get exercised about minutiae and non-problems in the U.S., are totally neutered pussy cats in China, where they should be shouting from the roof tops.  India's legendary air quality in Calcutta and Delhi puts it in China's club. It's only a matter of relative sizes of the economies as to how bad both economies are in terms of contributing to global pollution and public health problems.  

What's being done?  Nothing of any import or substance.  Believe it or not, there is a Chinese "cash for clunkers" program.  Public health issues are simply not in the economic calculus of China's national leaders and the system of inefficient public companies and favored enterprises which together have generated the enviable GDP growth and burgeoning reserve balances.  Greenpeace and others await the publication of Chinese CAFE standards for automobiles.  

It's a shame because the Chinese citizenry both in cities and in the countryside deserve so much better from their leaders.  

China's Breakout: McKinsey's Thoughts

McKinsey partner Gordon Orr has written a piece for the McKinsey Quarterly on issues for the Chinese economy in 2013. We recently posted on Ruchir Sharma's "Breakout Nations," which has a longer-run perspective about emerging markets, but Orr's article tangentially touches some issues of longer-run concern.

In the short run, McKinsey expects Chinese banks to underperform. As a result of the post-2009 economic stimulus and programs in prior years, the Chinese banking system has a a large volume of underperforming loans which need resolution.  As the banks looked for new income streams, they sold wealth management products to well-heeled customers and small savers.  These products, McKinsey says, have to right-sized on bank balance sheets.  The net effect, McKinsey says, is that the system will need 1.3 trillion renminbi ($208 billion) in new capital within the next five years.

Even if this problem comes to light in 2013, its resolution will take years, and the initial extent of the banking system's problems should prove, as in the case of every other other national banking crisis, to be understated.

China consumes 50% of all pork produced globally, and its internal food production, storage and distribution system is already pushed beyond its limits. Pork and chicken prices have risen 100%.  In July 2011, prices rose by 57% year-over-year driven by herd thinning due to high grain prices and by disease.  Foreign imports can't fill the gap, especially because of an "extremely rudimentary cold supply chain."  If the Chinese government wants to see a shift towards consumption, shortages of consumer electronics will not be the issue, but shortages of food and packaged food products may very well be the Achilles heel.

Local protests are said to be rising in frequency and intensity, McKinsey says.  The government is reluctant to begin visible clampdowns in a Twitter and SnapChat-filled communications world.  There is, the author says, a growing resistance to building more pollution-generating projects like mining and chemical ventures in the countryside.

As the push for infrastructure spending increases, the issue of capital efficiency will come to the fore.  Efficient use of capital, some research has shown, is a key for countries to breakout from emerging market status to that of a developed economy.  Chinese capital utilization has been splashy and visible, but not necessarily efficient.

Online retailing may turn traditional Chinese store retailing on its ear.  A particular model being used by Chinese-American entrepreneurs in the U.S. may work very well in China.  The model produces frequently changing designs of consumer textile products on small runs, which encourages new orders and established customers to frequently check the offerings.  If this model were exported to China where labor rates are lower, it might work.  The point is that traditional big box retailing might not have a future in China apart from the super-cities.

Middle class parents are said to be hedging their bets by enrolling their young students in foreign boarding schools, as their parents also acquire property in these countries, from Switzerland to the United States.

Foreign investors, McKinsey says, are increasing their investment in the Chinese Super League, as football club prices in England's Premier League are at relatively stratospheric levels for the top clubs.  This would be a good sign and a potentially good way for foreign investors to indirectly play the rise in consumer income and wealth.  It remains to be seen how, and if, foreign investors can make money and achieve liquidity.

China is increasingly looking to take stakes in foreign agriculture, as it is already the second largest importer of rice and barley, and among the top ten importers of corn.  The country already leases hundreds of thousands of hectares of crop land from Australia to Kazakhstan for growing soybeans. Moving large volumes of grains, seeds and oils is probably one factor in the interesting venture recently announced among Cargill, private equity and Chinese shipbuilders.

Smart, agile traders will have some money making opportunities in the next few years as the Chinese economy adjusts to longstanding imbalances and begins a different stage in its economic development.

Continuing Fog Around Coal

According to the International Energy Agency, as of March 2012 about 40 % of the world's electricity is generated by burning coal, and it is still the second fuel source globally behind oil. Coal is plentiful, relatively easy to mine and cheap to burn.  However, as we know from our own history in Pennsylvania and Appalachia, it also imposes very heavy long-term public health costs on  miners, plant operators, and on the general public.  This week's photos of the air quality in Beijing are a vivid reminder of what we have all known for generations. 

The first cry going out from the environmentalists is to make coal burning "cleaner." Significant academic research has been going on for decades trying to bring this dream to reality.  Unfortunately, an economically feasible solution is still in the labs. 

On coal gasification with pre-combustion carbon capture and storage, MIT's research is probably at the forefront. 

Similarly, pressurized coal combustion in an advanced oxy-fuel chamber has attractive properties for efficiency and greenhouse gas reduction, but the characterization of the process using computational fluid dynamics is still in its relative infancy.  

Finally, there is the dream of integrated carbon capture and storage. The demonstration project in Estevan, Saskatchewan is one of the largest of its kind. If environmentalists are agitated about fracking and the movement of underground gas near aquifers, they should predictably raise a hue and cry about deep well injections of gas.  Aside from these concerns, the real issue, as always, is the economics of these projects and their effects on electricity prices, which all consumers and businesses use.

China, if for no other reason than the health of its citizens, should be developing many such demonstration projects to burn its coal cleaner.  The same could be said for India, and India should also make a wholesale replacement of its urban diesel bus fleets, which choke the lungs of the Indian populace with soot and noxious gases. 

We really need to have a portfolio of energy sources with which to deal with the economic transitions among fuels and with a sensible path to reducing greenhouse gases.  Windmills and solar won't do the trick. Remember this favorite. "The Windmills of Your Mind?"  

Two Senators Torpedo Law of the Sea Treaty

Republican Senators Bob Portman (R-Ohio) and Kelly Ayotte (R-NH) torpedoed any chances of the Law of the Sea Treaty being ratified this year by sending a rambling and somewhat incoherent letter to Senate Majority Leader Harry Reid.

The Treaty is criticized for being long, cited as being 320 articles and 200 pages long.  The treaty's principles and articles are intended to cover all economic uses of the oceans beyond national jurisdiction: a pretty tall order. The Dodd-Frank bill was over 3,200 pages long, and it didn't even contain the actual rules and regulations, whereas the LOS Treaty describes the regulatory framework of the International Seabed Authority.  By comparison then, the Law of the Sea Treaty is like a Cliff's Notes for the oceans! 

The Senators want assurances that the treaty will be "enforced impartially and in a manner consistent with U.S. interests."  This is an example of incoherence.. The requirement that all disputes be resolved in a manner consistent with U.S. interests wouldn't be acceptable even if the treaty were signed only by the U.S. and the six biggest naval powers in the world.  Provisions of the dispute resolution process have been negotiated by multiple Administrations over decades. Like any treaty, they represent trade-offs our representatives felt acceptable because we gained what we wanted in other areas, such as international shipping and access to deep ocean resources for U.S. companies.

The authors make a big deal out of this Article: "Article 207 decrees that “[s]tates shall adopt laws and regulations to prevent, reduce and control pollution of the marine environment from land-based sources … taking into account internationally agreed rules.”

Realistically, I'm not sure that there are any internationally agreed rules governing ocean pollution from land based sources, so Article 207 could be disputed longer than patent claims between Microsoft and Apple. Also, the U.S. is active in UNEP and GESAMP (Group of Experts on the Scientific Aspects of Marine Pollution).  Both these bodies would have something to say in the actual implementation of Article 207, if and when it came to that point. A fear about this article is not reasonable in the prevailing institutional practice.

To take the other side of this argument,decades long overfishing of deep ocean stocks by former Taiwanese and Korean industrial trawlers and the subsequent pollution  from processing-at-sea was something that all nations, including the U.S, wanted stopped.  Without enforceable treaties, this economic abuse couldn't be addressed at all.

The two Senators make an unfounded claim that usual and customary practice in international law and bilateral negotiations are sufficient to maintain peace and defend our national interests.  The evolution of usual and customary practice relating to the 200 mile limit was made possible by the same multinational, consultative approach with they now decry. In fact, I believe that Chile and Peru were first to claim sovereignty over that limit, and U.S. declarations followed theirs as international law evolved.   What happens when Exclusive Economic Zones overlap?  If resolutions are always bilateral, what if the dispute, let's say, is between a nation like China and a nation like Vietnam?  Isn't it worthwhile to have an internationally accepted framework which governs the delineation of zones and disputes? 

We are headed to more and more of these situations. as pictured below:

Xinhua News Agency (China)

The picture, released to the Associated Press, shows a Japanese coast guard vessel (left) encountering a Chinese patrol boat near disputed islands in the East China Sea.  

I'm not saying by any means that having a treaty in place would create an oceanic Eden.  The current patchwork quilt of customary practice, bilateral treaties, military pacts, and aggressive assertions by Russia and China is inherently unstable. Our military leaders recognize this. 

In fact, as the Journal writes,

"One of the enduring mysteries of the treaty is how it has failed to even come up for a ratification vote given the breadth of support it enjoys from widely disparate groups. Former secretaries of State, both Republicans and Democrats, top civilian and uniformed Pentagon officials, the U.S. Chamber of Commerce, environmentalists, and former presidents George W. Bush and Bill Clinton have all been vocal supporters"

It's always better to throw some papers around in an international court disputing a boundary than it is to be firing rounds from a naval vessel in a far off sea.

EU Intransigence May Turn Airbus into Airbust

From today's Wall Street Journal:

"BRUSSELS—China's ambassador to the European Union said it "makes sense" for Chinese airlines to shun Europe's Airbus planes in favor of competing American models from Boeing Co. in response to the EU's new levies on aviation greenhouse emissions.


Wu Hailong's comments are among the first by a senior Chinese official linking Beijing's displeasure with the EU's emissions trading system, or ETS, to jetliner sales by the Airbus unit of European Aeronautic Defence & Space Co.

EADS chief executive Louis Gallois on Thursday said that the Chinese government is withholding final approval on contracts for 45 Airbus jetliners with a catalog value of $12 billion because of ETS.

Mr. Wu said that when the EU includes a Chinese airline in the ETS, "it makes sense for them to go to Boeing."

Under the EU program, any airline operating at an EU airport must hold special credits to offset its carbon dioxide emissions since the start of this year. Airlines have said their inclusion in the ETS, which already covered many EU industries, will cost them billions of dollars annually.

Airbus warned last spring of the risk of foreign backlash against the EU plan, as China and others had threatened action if their airlines were forced to comply.

Governments outside the EU, including China, the U.S., Russia and India, have accused the 27-country bloc of exerting extraterritorial authority by levying fees on emissions that occur outside EU airspace."


The final arrogance of the EU is their unilateral imposition of these wacky standards without any consultation, as the Chinese have rightly pointed out.

If international flights aren't allowed to even fly over European airspace, this will be much more disruptive to global economies than any realistic possibilities attached to the Strait of Hormuz blockade.  Someone is going to have to blink on this one, and let's hope that the Eurocrats come to their senses, but it's not guaranteed. 

China 2030: World Bank Imprimatur for Reforms

The Wall Street Journal today previewed a report from the World Bank and a Chinese consulting company, entitled, "China 2030," in which it looks in the rearview mirror and says that Chinese growth is slowing.  It also brings up the issue of the dominant state owned enterprises and the inefficient use of capital.  Here's a chart from the Wall Street Journal:

It sounds like the nature, timing and presentation of this report all fit the goal of presenting useful and politically acceptable analysis for the next generation of leaders and policy makers.  In that sense, without having had a chance to read the report itself, it's a helpful step forward.

Economics and GDP are not everything, though; political economy and social issues will have to be part of a real discussion about the future of China's development. 



China Ascendant? US Declines? Maybe, Maybe Not.

Long term forecasts are always wrong, almost by definition.  So, when I read that Arvind Subramanian wrote in Foreign Affairs, "China's dominance is a sure thing," I can comfortably feel, "That must be wrong."  It's a clever assertion  because I'm not sure what it really means. Enough semantics, though.

Michael Beckley's article, "China's Century? Why America's Edge Will Endure," provides an interesting framework for discussing this question. He writes that the rise of China is the most read-about news story of the 21st century. 

The Global Language Monitor's survey of 50,000 publications worldwide shows that the China ascendancy story has surpassed 9/11 for total world readership.

U.S. "declinists" see the U.S. as turning benefits of the global reserve currency and globalization into economic hegemony which cannot be sustained.  These authorities believe  either though benevolence or impotence that the U.S. is unable or unwilling to maintain the future international order.  These discussions often use the term, "multi polar world" when producing their dire forecasts. 

The U.S., according to Beckley, spends 25% more in real dollars than it did in 1968 at the height of the Vietnam War.  However, as he rightly points out, the U.S. effectively guarantees the security of some 50 nations worldwide, and those countries, including the wealthy Japanese, get a very valuable free ride. 

Turning to historical comparisons, Beckley notes that spending 4% of GDP on defense is not in the realm that has financially undone hegemonists like the Roman Empire, which ultimately overextended itself and its legions with far flung outposts. 

Looking at GDP comparisons can be misleading, most of all because that number it itself inadequate as a measure of global political power and the ability to project that power.  In a chart, Beckley's article shows that the average Chinese citizen is $17,000 poorer relative to their American counterpart in 2010 compared to 1991. 

As a nation, our politicians and Wall Street are in love with numbers.  Unfortunately, government numbers are modern propaganda and should be treated with disbelief.  Wall Street's numbers are generated by promoters and should be treated wtih skepticism.  So, we are told that Chinese GDP has and will continue to grow at 8% per year. That means it doubles every nine years.

This growth has not come in a sustainable model.  Beckley points out that much of China's investment has been funneled through investment entities connected to local governments, which issue debt.  Taking this local government debt into account, China's debt to GDP ratio goes from the stated 19% to 75-150% . 

Trees don't grow to the sky.  The World Bank wrote in a 2006 study, "...most (80%) of a country’s wealth is captured by what we called intangible capital residual. ... By construction, the intangible capital variable captures all those assets that are unaccounted for in the wealth estimates. These are often intangible assets such as the skills and know-how embodied in the labor force. It also includes social capital, that is, the trust among people in a society and their ability to work together for a common purpose. The residual also includes all those governance elements that boost the productivity of labor. So, for example, if an economy has a very efficient judicial system, clear property rights, and an effective government,the effects will be demonstrated by a higher total wealth and thus a higher intangible capital residual"  

Jack Baranson has written about the experience of Cummins, an American company and worldwide leader in large diesel engines, producing the same engine in Japan and India.  Japanese workers learned quickly and produced the requisite quality product at the projected cost.  This was due to their intangible assets described above.  Indian workers, however, produced "second rate engines" at 3-4x the projected cost.   Indian workers do not have the benefit of their government and society having put those intangible assets into place.

 Our declinists often talk about our aging population.  Beckley writes that the "One Child" policy will leave China "with the most severe aging process in human history."  (that sounds like a long-term forecast to me) The reader will get the point.

Beckley writes that half of China's engineers are auto mechanics or graduates of two-year vocational programs.  The brain drain of the top scientific minds to Western institutions continues.  Even the Chinese government's intentions to create a network of "world class universities" attracting the top students from all over the world seems far fetched.  If money were the issue, every Ivy League university student would have graduated  in Saudi Arabia or Qatar. 

Talking economic statistics, many observers have pointed out a deficiency in current world trade statistics. Over 90% of China's high tech exports are produced by foreign firms from imported components assembled in China, which then records the final good export.

Beckley's conculsion is that the U.S. is "coercive and capable" of maintaining a world order consistent with rebalances of power, but which is not a sunsetting of U.S. hegemony.

Of course, we have no reason to be complacent.  Our society is being alternatively roiled by Wall Street's cycles of financial recklessness and by social engineers and their political enablers.  Our ship may be listing, but it has historically righted itself, and the collection of intangible assets we have don't seem to be duplicated anywhere else. 

Cause for optimism?  Maybe so.

Bond Stats Suggest US Economic Improvement

Ward McCarthy's Fixed Income Group at Jeffries (JEF) issued their bond market update last week.  To follow up our previous post on China's ability to forestall a hard landing, JEF had some good statistics from the U.S. Treasury on foreign holdings of Treasury securities.  As of the October 2011 reporting period, China's holdings of U.S. Treasury securities were $1.134 trillion.  The next biggest foreign holders were Japan at $979 billion and the U.K. at $408 billion.  Chinese holdings represented 24% of total foreign holdings, which might actually be an underestimate of their holdings because of the consistent upward revisions to Chinese holdings in the past. 

Total Chinese holdings of foreign assets may be in excess of $2.5 trillion, although this estimate is not  for the same period from the U.S. Treasury.  The point is the same made in the previous post: there is a lot of high powered money to be put in service should the Chinese economy be subject to severe economic stresses from a collapse of its export markets in Europe and the U.S. 

McCarthy's group was fairly pessimistic about the U.S. recovery back in August, but they note that some bond market technicals suggest that bonds are discounting modest improvement in the U.S. economy from here.  They note, for example, JP Morgan's issue of a 30 year bond with the lowest coupon of any high quality, financial issuer since 2005.  JPM's coupon of 5.40% was 250 bp above the 30 year T bond. The group also suggests that investor appetite remains strong for high quality corporate paper in the primary market, particularly from financial issuers.  Go figure, but it's interesting data as the high quality corporate market winds down until Q1 2012.

China's Future: Western Optimism and Chinese Pragmatism

Back in March, we posted about a declining phase in Chinese growth and the need for a new economic model.  Hedge funds which have made bets on a "hard landing" for China are likely to be disappointed.  The reasons are rather simple.  In Western financial markets, shocks are transmitted quickly through financial speculation, markets turn volatile and overshoot before a new equilibrium is found.

This scenario shouldn't apply to China.  Investments are controlled by the government and directed into jumbo, state run enterprises.  The government is sitting on vast hordes of liquid currencies and securities, and the currency is managed.  Financial markets are not all transparent. Numbers cannot be trusted. Look at the long running fiasco at Sino Forest, which would have collapsed within weeks on any major international exchange.  Sophisticated investors are as powerless as retail investors in a pink sheets stock. 

The Chinese landing won't be a hard landing.  It will be more like a King Air that loses both its engines.  If the Chinese government is a good pilot, the plane will continue to fly and glide to a landing, perhaps with some bumps at the end.  This isn't to say that there won't be  prices to be paid among segments of the Chinese population.  The private sector folks who have made quick fortunes on light manufacturing will be chastened by recessions in their customer countries.  Since the Chinese model is a mercantilist, managed model with humongous external balances and muted internal demand, a steady hand on the stick can bring the plane in. 

The longer run question is what happens when China continues to pursue its own nationalistic, pragmatic interests.  Isolation from the international community could be an unintended  and undesirable consequence.  We've written before about sweeping Chinese claims in Pacific waters around contested islands.  In the absence of an operative Law of the Sea Treaty, the U.S. has no basis to dispute any of these claims, except to object and refer to customary international law. 

As an example of China's thumbing its nose at Western trade management mechanisms, we have the Chinese government slapping tariffs and anti-dumping charges on SUV's exported by General Motors.

    credit: David Gray/Reuters in New York Times, 12/15/2011
Even though the Government is said to have conducted a two year study into the issue of subsidies and dumping, their results weren't shared with the Office of the US Trade Representative, even as a courtesy. 
With the already high levels of taxes and fees, GM's commitment to this potentially lucrative market is likely to yield no results in a profitable vehicle line.  Meanwhile the sight of its Buick SUV's covered in dirt and clay on a Chinese pier does nothing for the brand equity either.  Don't think that this little poke in the eye wasn't carefully orchestrated. 

Besides indignation, the U.S. has no meaningful response, except pushing papers and filing claims.  There may not be as much gold in Shangdu as hoped for GM and other US exporters.