Digest: China’s New “Little Brother”

Plus, U.S. Banks Get the Dreaded “Vote of Confidence.”

Welcome to your weekly digest… my breakdown of the things we’re thinking about and talking about in the Global Intelligence world.

First up, this week… Russia, China, and the new world order.

In October 1949, Communist leader Mao Zedong formed the People’s Republic of China after defeating the Nationalists in the Chinese Civil War. Just two months later, he traveled to the USSR on his first overseas trip.

The Soviet hierarchy commissioned a song to commemorate the visit, the opening line of which went, “Russians and Chinese are brothers forever.”

The meaning was clear—the world’s two socialist powers were united in brotherhood… except, of course, there was no mistaking who the older brother was.

After Mao arrived in Moscow, Soviet dictator Joseph Stalin kept him waiting for weeks for an audience, treating him like a minor dignitary from a vassal state.

Mao was humiliated but had no choice but to wait. After all, he owed his victory to Russia. After World War II, the Soviet Union turned over a large amount of military supplies, and the entirety of the arms it had captured from Japan, to the Chinese communists.

Moreover, China was in ruins after decades of war. It had no navy, no air force, no modern economy, and was stricken by poverty and hunger. By comparison, Russia, though still recovering from World War II, was an emerging superpower with atomic weapons and modern industries.

Mao needed to meet Stalin to plead for help rebuilding his fragile nation…

Fast-forward to March 2023 and another Chinese leader, Xi Jinping, has been visiting Moscow. Though now the power dynamic could not be more different.

Isolated from the West over its invasion of Ukraine, Russia has become economically dependent on China.

Trade between the two countries jumped nearly 30% last year, as Russia’s trade with the West collapsed. Russia also overtook Saudi Arabia as China’s largest oil supplier. And China’s yuan has surpassed the U.S. dollar as the most traded currency on the Moscow stock exchange.

Essentially, China—which has an economy 10 times the size of Russia’s—is single-handedly keeping Russia afloat. This is giving it massive leverage over Russia.

In the past, when China angered Russian President Vladimir Putin, he would turn around and sell more natural gas or oil to Europe, and vice versa. But now, he has nowhere else to turn but China.

Russia and China have been working together for some time to reshape the world order, as evidenced by their efforts to introduce a new global reserve currency to challenge the dollar (which I wrote about in the January issue of our monthly Global Intelligence Letter).

But Russia had probably envisioned taking part in these plans as an equal partner. Now it is the enfeebled, junior partner.

Mao never trusted Stalin, and resented being treated as the junior partner in their socialist alliance. Ultimately, he fell out with the Soviet leaders in Moscow… to the point that the two sides almost went to war in the 1960s.

It will be fascinating to see whether Putin and Russia can get used to being the little brother in the Chinese-Russian relationship.

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Next up… the dreaded “vote of confidence.”

Few jobs in the world are more precarious than soccer coach. In last year’s English Premier League, nine of the 20 head coaches who started the season were fired by mid-February (little more than halfway through the season).

As pressure is building on a soccer coach in England, the media will inevitably track down the club’s owner or board of directors and ask them whether they intend to fire the coach.

This is when they get the dreaded “vote of confidence.”

An owner or chairman saying that they have complete confidence in the coach is almost always followed in quick-fire fashion by the coach getting fired.

The pattern has repeated so often that the expression “vote of confidence” has come to have the opposite meaning… everyone knows a coach who gets a vote of confidence is destined for the gallows.

What relevance has this got to anything, I hear you ask?

Well, if there’s an economic equivalent of the vote of confidence, it’s the reassurances of the Federal Reserve.

At its meeting this week, the Fed raised interest rates by 0.25%… despite widespread concerns about the ongoing banking crisis that has seen three banks collapse in the U.S. as well as the failure of Credit Suisse in Switzerland. (I wrote to you to warn about likely banking collapses back in October.)

In a statement released after the meeting, the Fed said that “The U.S. banking system is sound and resilient.”

I feel so much better…

This is the same Federal Reserve that failed to foresee the rise of the current inflation crisis, claiming the inflation that emerged during the pandemic was “transitionary.”

This is the same Federal Reserve that failed to prevent the subprime mortgage debacle that devastated the global economy in 2007-2008. Even after that crisis emerged, then Fed Chair Ben Bernanke told Congress as late as 2007 that the mortgage crash was “likely to be contained.”

This is the same Federal Reserve that created the global financial crisis in the first place by keeping rates exceedingly low during the early 2000s… which encouraged greedy bankers to make stupid, risky loans so they could goose corporate profits and secure bigger bonuses for themselves.

So, now the Fed says that the banking system is “sound and resilient” despite the failure of three banks in the span of a week… and media reports suggesting that almost 200 other U.S. banks are vulnerable to the same pressures that killed those institutions.

The Fed has issued its dreaded vote of confidence.

Maybe this time, the Fed is right… but I wouldn’t bet on it.

That brings us to the end of this week’s digest. Many thanks for being a subscriber. And if you have any feedback or questions, reach out through the contact form on the Global Intelligence website.

Enjoy the rest of your Sunday.