Cornucopia

by John Kinsella

  “Ah, there we have those who think the winning roll will go on forever, all good things regretfully come to an end.”

  “Let’s hope it won’t be sticky,” said Pat with a grin.

  “Sticky?”

  *

  A show of authoritarian government incompetence came in the way the stock market bubble was first allowed to develop followed by the botched handling of the inevitable crash. The world looked on agog. The methods, if the situation hadn’t been serious would have been risible. State owned institutions were ordered to step in buying up stocks, then trading companies were accused of illegally manipulating securities and futures exchanges and ‘malicious short sellers’ were arrested.

  Barton doubted the ability of China’s inflexible government to lead the nation towards an advanced economy. If China’s leaders got their calculations wrong the temptation of returning to its old ways was too great, as Vladimir Putin had clearly demonstrated in Russia.

  Behind the heavy veil of secrecy, political and business elites were engaged in a life of death struggle, a free for all, with no holds barred as to the way forward: the choice between economic progress and the political reforms.

  Vested interests led to secrecy and conflict between the different factions of China’s ruling classes, where the losers often ended up behind bars. Wu confided to Pat Kennedy that certain of the most powerful families were targeted in the anti-corruption campaign in the same way Putin targeted his enemies.

  As the political elites argued over questions that concerned the survival for the ruling establishment, China’s poor peasants continued to head towards the cities, exchanging their ancient way of life for the grim, dusty, outskirts of Beijing and regional capitals in the hope of finding work. Even though the flow of migrant workers had slowed, young men and women continued to leave their villages for distant cities, abandoning their spouses, children and elderly parents in the hope of providing them with the means to improve their miserable existence.

  Without training or education the best they could hope for was a menial job on a production line while the most unfortunate struggled to survive collecting scrap or working like beasts of burden in the most squalid conditions.

  It was nothing new. Twenty five years earlier John Francis had witnessed similar misery and beggars in the centre of Canton; a time when China’s economy was gearing up for the economic miracle that was about to transform it and propel the masses into the third millennium. Times had changed. The race to development had more than achieved its initial goals. The question was whether the men at the helm could accomplish the next phase, to reach out to the distant corners of China and transform the nation into a modern consumer society.

  Francis wondered whether the ongoing financial crisis was a mere taste of things to come, or just a passing event on China’s ambitious road to attaining its own version of the American dream. What China’s leaders feared the most was a situation that could escape their control, leading to a rebellion against the Faustian contract, in which economic prosperity was assured in exchange for unquestioned allegiance to the Party’s leadership.

  The signs of a slowdown had already started to appear. Just a few kilometres from the Forbidden City poor immigrant districts were feeling the pinch as demand for scrap and recycled materials fell. Other once prosperous sectors were being hit by overseas competition as the manufacture of labour intensive products, from jeans to basic electronics, were moving to new low cost production centres in Vietnam, Burma, Moldavia, Ukraine and Central America.

  There were signs of labour unrest and migration to cities slowing down. Some said that it was indicative of a maturing economy, but nothing was less certain with six hundred million peasants, have-nots living in near poverty, were fixed to their television screens watching the antics of the haves at the feast.

  The rust belt provinces of Liaoning and Heilongjiang in the north-eastern were hit as the demand for heavy industrial products fell after the country was hit by slowdown in construction and infrastructure projects. Certain observers spoke of unrest as a result of increasing debt as unemployment rose and demand, manufacturing and exports fell.

  Authoritarian regimes had been consistently overthrown, suddenly and often violently, when they failed to fulfil the aspirations of their peoples, witness the Arab Spring or the Maidan uprising, not forgetting the collapse of the Soviet Union.

  It was however not the case of China, which was far from such an event, but the risks were there and growing economic stress increased pressure on the Party to carry out the necessary reforms.

  “It is very difficult to know what is happening in Zhongnanhai, there are many worried people there today,” Wu told Pat.

  “Zhong...?”

  Z

  hongnanhai

  “Zhongnanhai, that’s in Beijing, where the Offices of the Central Committee, the State Council, the Central People's Government and other government organisations are located.”

  “Oh.”

  “It means Central and Southern Seas. When we say Zhongnanhai we are referring to the government ... like you say the Whitehouse or Downing Street.”

  “I see,” said Pat noting the information for future use.

  “It was part of the Imperial compound built around a park and lake adjoining the Forbidden City. It goes back eight hundred years and was modified during the Ming and Qing dynasties and was used by Cixi. In 1949, Zhou Enlai transformed it into the central government compound, where Mao, Deng Xiaoping and Zhou himself lived?”

  Pat was pensive.

  “Funny how the leaders of the people ended up in a palace of the emperors,” said Wu.

  “Like the Kremlin.”

  The living conditions in Zhongnanhai were certainly very different from those of many of the minorities who lived in China’s impoverished corners of undeveloped provinces, far from the capital, bypassed by the prosperity of coastal cities, without electricity and running water, and in a barter economy where most people had never seen a doctor.

  The spectacle of the Shanghai stock market debacle had changed nothing for the poor, apart from the fact that they would remain poor. Those who lived at subsistence levels in miserable homes beyond the cash economy were not the top priority of politicians and officials in Zhongnanhai. Poverty stricken regions such as Henan and Hunan were starved of investment, crushed by pernicious corruption, and their young forced to emigrate to rich coastal cities in search of employment.

  China’s growth model was broken, and the planned transformation from an export oriented economy to one of consumption was unlikely to help those hundreds of millions of peasants lacking basic education, not to mind training of any sort, which of course excluded them from becoming consumers.

  THE HAND OF GOD

  The Pope’s visit to Cuba had made headlines in Latin America, but for Colombians an event of more far reaching and down to earth importance came a week later. The Cuban leader, Raul Castro, presided over the conclusion of an agreement between the Colombian President, Juan Manuel Santos, and the Farc led by Rodrigo Londoño, otherwise known as Timochenko.

  Tom Barton for one was happy, it was a major step forward in ending five decades of conflict between the Colombian government and the Fuerzas Armadas Revolucionarias de Colombia, otherwise known as the Farc, a Communist guerilla movement. The agreement signed in Havana foresaw the signing of a final agreement to down arms in the weeks that followed.

  It also signalled the normalisation of relations between Washington and Cuba after more than half a century of confrontation and embargoes.

  Barton felt vindicated in his decision to put down roots in Colombia, which could now look forward to a period of peace and prosperity. His first move was to tweet Pat Kennedy, who on receiving the news called Barton to meet up in Havana.

  Kennedy’s enthusiasm bubbled over as he fixed his sights on a new Caribbean adventure. The chance to spread his growing New World interests into what would be a Cuban-American boom with the help of Tom B
arton’s Colombian family business.

  CHINA

  As market volatility intensified, Tom Barton wondered what spark would provoke the next crisis. Like many analysts it was commodity markets that had been troubling him, a sector in which he had reduced his interests after its phenomenal expansion, a period during which China had gobbled up every kind of raw material imaginable to feed its seemingly endless growth.

  Barton had watched as commodity producers invested by borrowing countless billions on international markets; taking advantage of historically low interest rates. He like other cool headed investors knew it was only a question of time before the market soured and the precursor signs were already there for those who cared to look.

  China could not go on forever growing and investing at the rate it had been doing for the last two decades. Suddenly, as always, the bubble burst. Shanghai’s stock market plunged. Property prices fell. A crisis which announced a brutal deceleration of the country’s voracious appetite for commodities as industrial production and construction went over a cliff.

  Suddenly all eyes were on Glencore as its shares started to yo-yo dramatically. After a week of spectacular volatility, a sure sign that the commodity supercycle had well and truly come to an end, Glencore’s shares plunged thirty percent. Investors asked themselves whether the company had been the victim of its own extravagant ambitions; the abrupt end of China’s economic boom; low interest loans; or all three.

  Glencore’s losses totalled nearly fifty billion dollars, a gut wrenching sum even for Qatar Holdings, the Emirate’s sovereign wealth fund and Glencore’s largest shareholder. Since Glencore’s peak the fund had marked up losses of monumental proportions.

  As one of the world’s most important commodity traders, Glencore, was very different from it pairs in that it was not only a trader but also a miner with huge assets, a business model which theoretically should have given it a competitive advantage.

  Forseeably the collapse of demand had quite the opposite effect and Glencore found itself in a desperate situation with its shares losing eighty percent of their value. With nearly twenty billion in derivatives Glencore posed a potential problem for financial markets in spite of claims it could meet its obligations.

  All of a sudden City & Colonial found itself in the front line. Under Hainsworth’s guidance the bank had heavily invested in commodity and energy producers in Australia, South Africa, Brazil, Russia and the Middle East.

  Fear took over, driving commodity prices down sending Glencore into an uncontrollable spiral with outstanding debts of thirty five billion dollars and the imminent threat of demands for increased cash collateral.

  If Glencore failed it would provoke a chain reaction, threatening the very existence of City & Colonial, which in addition counted resource companies such as BHP Billiton, Anglo American and Rio Tinto amongst its clients, all of which had suffered steep declines in revenues and equity values, a potentially catastrophic situation.

  G

  lencore Copper Mine

  Whatever the outcome it was clear in Barton’s mind the Glencore episode would be repeated many times over once interest rates started to climb and indebted businesses and nations found themselves caught like rats in a trap, after being lured by the bait of cheap loans and low interest credit.

  His years as a City mortgage broker reminded him of how the alternative to unsustainable debt was bankruptcy, bring with it the spectre of the poorhouse, transforming those who had fallen on hard times into social and moral outcasts.

  *

  Pat had seen the bad news coming. The collapse of commodity prices was a harbinger of things to come as China’s economy slowed. An economic model in the throes of change as production exceeded export demand. Where the only alternative outlet was to develop the domestic market, increasing home consumption of both goods and services.

  The problem was China’s domestic market had, at least for the moment, not responded to the change, and as no other market was available to pick up the slack, the outlook was negative.

  The generally held consensus that billions in the developing world would soon attain middle class purchasing power far off the mark. To start with India was no where near catching up with its neighbour, and those regions of the world that had looked so prosperous exporting oil and commodities to a previously booming China were now in the dumps.

  The idea that China’s boom could go on forever, drawing developing nations along in its slipstream, requiring unprecedented quantities of raw materials, had created the lure of huge profits, driving oil, copper, iron ore and cotton prices to all-time highs, leading to a headlong stampede to invest in the production of commodities.

  It was the definition of middle class that posed the question. If one listened to the experts, the majority of the Chinese population, according to their definition, had reached middle class status. However, most of those, as well as those in the developing world, that is eighty percent of the world’s population, had incomes below that of the US poverty line.

  In all it was a distorted vision since from a global view nearly ninety percent of those living above that strict definition of the poverty line lived in the US and Europe.

  Whatever, the supposed Chinese middle class was clearly incapable of absorbing the massive oversupply of raw materials produced thanks to Western investment and debt encouraged by easy money and low interest. The printing of trillions of dollars, euros, yen and pounds had created a massive commodity bubble that overflowed into financial and property markets, creating a fugacious wealth effect.

  The revenues of Brazil, Chile, South Africa, Asia, Australia and Russia collapsed as their mountains of unsold iron ore and copper grew and their miners faced the spectre of bankruptcy.

  For a few the collapse of commodity prices brought a welcome surprise, amongst them was owners of INI Hong Kong, who looked on with undisguised schadenfreud as City & Colonial, nine months after grabbing control of INI London, found itself on the end of a sharp hook.

  Hard hit by the stock market rout in China and its investments in commodities, more precisely its interest in Glencore, whose share value had fallen a backbreaking eighty percent, City & Colonial was forced to restructure its holdings and consolidate its market position after the bank’s commodity trading unit incurred massive losses.

  *

  Francis’ role as head of the think tank set up by Michael Fitzwilliams in 2007, was to analyse world events, anticipate crises and pre-empt the negative effects they could have on the functioning of his banking group. As such Francis had warned the banker of the growing risks of Russian business, but even he had not see the Ukrainian Maidan uprising, the ousting of Viktor Yanukovych and Vladimir Putin’s reaction. It was a Black Swan event as was the seizure of the Crimea and imposition of sanctions against Russia by the West.

  No one had seen the reversal of Russia’s policies in 2014 and 2015. On the positive side Francis had foreseen the volatility of oil prices, which in reality had not been that difficult. But for all the wrong reasons. What changed was not American shale oil production, but the speed with which it had pumped up levels of production. That conjugated with Putin’s Ukrainian adventure had seriously blurred his vision.

  Much worse was the totally unseen, or even imagined, predatory move by City & Colonial, aided by the British Treasury, to dispossess Fitzwilliams of his bank. The coup had arrived so astonishingly suddenly the banker had been literally hoodwinked into signing away the control of his bank, all because of a liquidity spike that had not lasted forty eight hours.

  Since the advent of the drama, Michael Fitzwilliams had gone. The elections were over; the Tories had been returned to power; banks would not quit London; and Labour would not ruin the country. Even that bastard, Hainsworth, who had set up the organised the theft of the bank had been expedited into early retirement.

  The commodity bubble had burst and Sir Alec Hainsworth was accused of presiding over a Johnny-come-lately policy of financing exporting countries
in their reckless expansion race.

  Commodity producing countries saw themselves not only burdened with vast stocks of unsold, overpriced, raw materials, but huge debts, much of which had no chance of being repaid. Accused of straying foolhardily outside of the bank’s traditional activities, Hainsworth was forced to step down, as the banking group announced a series of economic measures, which included deleveraging and the sale of its interests in a number of subsidiary holdings, notably in INI London.

  At the beginning of the year Hainsworth had grabbed control of INI London through an injection of fresh capital against a new issue of shares bearing special voting rights, giving City & Colonial a controlling interest, ousting Fitzwilliams from the board and leaving his family as simple shareholders.

  That capital had been raised via a complex private placement montage in which City & Colonial and a number of high net worth individuals participated. Certain of those individual investors were Chinese, who after being caught short in the Chinese stock market bubble, sold their shares in a behind closed doors arrangement to Pat Kennedy and the Wu family.

  The fact Hainsworth had not understood the multifarious structure of INI Holdings and its Hong Kong and Chinese emanations was another of his hastily made miscalculations. INI had not been the monolithic entity he had imagined, unlike City & Colonial itself. In a certain manner of speaking, apart from it City interests, INI was to all intents an almost a virtual entity, with its various external holdings quasi independent.

  The Wu family moved swiftly acquiring City & Colonial’s remaining interests in INI London and promptly announced the relocation of it headquarters to Hong Kong, thus consolidating its existing interests in INI Hong Kong with Pat’s brother-in-law as CEO.

  A new generation of the Fitzwilliams family, led by his nephew, regrouped their different interests in Castlemain Holdings Ltd., a bank that had been incorporated in the Caymans by his uncle in the nineties, specialised in private banking, investment and asset management, and offering a wide range of investment strategies for a small number of very select clients. The family holdings included interests in INI’s Irish Union Bank in Dublin, Nederlandsche Nassau Bank in the Netherlands with its Caribbean branches, as well as properties in Ireland, the UK, France and the Caribbean. In addition a new management hub, Castlemain Private Capital, owned and managed by George Fitzwilliams, a nephew and successor of the late banker, was established Mayfair, London, one of the world’s leading hedge fund centres.