The Prince of Risk

42

There were four of them, and they sat at opposite sides of the table. Astor and Shank, and Longfellow and Goodchild. Longfellow was his China hand. Goodchild was his currency man. There was no chitchat. No mention of his father’s death. No banter about the Yankees or the Mets or who had screwed which pretty young thing over the weekend in the Hamptons. Goodchild and Longfellow had Bloombergs on their desks, too. They knew the score. If anything, the conference room was colder than the trading floor.

“So,” said Astor, when he’d stared at them long enough. “What the hell’s going on?”

Goodchild was blond and lanky and English, with a narrow, pockmarked face. He splayed his forearms on the table and leaned forward. “Posturing,” he said, eyes darting from face to face as if sharing a secret. “They’re afraid the cracks are beginning to show.”

Longfellow nodded in agreement. “Like a bully puffing up his chest. All show.”

“Really,” said Astor, a very pissed-off devil’s advocate. “What’s the flash PMI?”

“Forty-eight.” Shank responded without taking his eyes off the two traders.

The flash PMI, or purchasing managers’ index, measured economic activity as defined by demand for raw materials and industrial goods. Figures above fifty indicated an expansion of economic activity; below fifty signaled contraction.

A reading of forty-eight spelled catastrophe.

“And GDP is still forecast at nine percent?” said Astor.

“Nine point two, actually,” said Goodchild. “But it’s a sham. Things have only gotten worse since we made our evaluation three months ago.”

“So they put their deputy minister for trade on TV to confirm their policy of allowing the yuan to appreciate to fake us out?”

“No choice,” said Longfellow.

“Yeah, I know,” said Astor. “The cracks are beginning to show.”

“Precisely,” responded Goodchild, as if he were back debating at the Oxford Union.

“The only change,” said Longfellow, “is the increased pressure the Treasury Department is putting on the Chinese to revalue.”

Longfellow was a Scot, a graduate of Fettes and St. Paul’s before he took a PhD in astrophysics from Stanford. He was tall and fat, with messy red hair, beady eyes, and a constant sweat that dampened his cheeks and forehead. At some point in his career he’d spent two years in the Chinese hinterlands-Sichuan Province, to be exact-teaching English to schoolchildren (though with his nearly incomprehensible brogue, Astor wondered just what kind of English his students had ended up speaking).

“It appears to be working,” said Astor.

“Not for long,” retorted Longfellow. “It can’t. The Chinese have to devalue.”

“That means telling the U.S. government to go screw itself.”

“Indeed,” said Longfellow.

“We’re betting a boatload of money on that opinion.”

“It’s not an opinion,” blared the Scot. “It’s fact.”

Astor slammed an open palm on the table. The three other men snapped to attention. But when Astor spoke, his voice was a whisper. “We’re down four hundred million bucks,” he said. “That’s the only fact that concerns me.”

China. The Middle Kingdom. In just over thirty years, the country of 1.4 billion inhabitants had undergone the most titanic economic transformation the world had seen since the Japanese had welcomed Commodore Perry to Tokyo Harbor in 1854 and ushered in the Meiji Restoration.

The basis of the remarkable leap forward was the creation and development of an export-based economy. Cheap Chinese labor lured foreign corporations to manufacture products at an advantageous price. These corporations invested in factories and exported their products to the rest of the world. Housing, primarily in the form of towering apartment complexes, was built to provide lodging for the hundreds of thousands of peasants fleeing the countryside to earn a living wage. Roads were laid to transport raw materials to the factories and finished goods to market. Ports were expanded to enable more and larger ships to take on merchandise. New airports followed. Power plants were constructed to generate and distribute electricity to the rapidly expanding industrial base. Cities like Guangzhou, Shenzhen, and Chongqing exploded, moving from forgotten backwaters to industrial dynamos.

As the country prospered, its citizens enjoyed a rising level of income. In financial terms, per capita income skyrocketed from $300 per year in 1987 to $3,000 in 2012. Gross domestic product, a measure of the country’s economic might, increased 330 percent, at an annual rate of more than 12 percent. (In contrast, over the same period, America’s GDP increased a mere 60 percent.) The populations of Shanghai and Beijing doubled. By 2012 there were 160 cities boasting more than 1 million inhabitants, 35 cities with over 3 million, and 9 urban conglomerations counting more than 5 million people. Shanghai and its suburbs alone were home to 23 million souls.

But instead of spending freely and buying consumer goods-and as a consequence building domestic demand for their own products-the Chinese saved. The Chinese had always demonstrated a maniacal desire to own property and gold. These savings were held in the form of gold coins and bullion or invested in residential real estate. The government stopped being the principal builder of housing. The private sector took over.

The pace of construction accelerated. Banks flush with cash generated by the country’s burgeoning export industry could not make loans quickly enough. Regulation over lending practices was scant, and more often than not overlooked. Speculation was a national pastime. Apartments were purchased as soon as they were built. Investors, many of whom had been farmers or peasants a few years before, flipped properties at a dizzying rate. Values skyrocketed. Simple apartment complexes gave way to larger residential developments, and finally to entire spec cities. By 2012 these “ghost cities,” urban conglomerations complete with homes, parks, storefronts, roads, sewage, even fiber-optic cable to deliver phone, television, and Internet services, could be found all over the country. In short, they had everything but living, breathing human beings.

And still the Chinese built.

The scale of the country’s growth was so enormous as to be unimaginable.

Easier to admire were China’s engineering marvels. There was the free economic zone of Guangzhou and Shenzhen, where hundreds of thirty-story apartment buildings stood as close to one another as soldiers on a parade ground on land that until twenty years before had been rice paddies. There was the Three Gorges Dam, the creation of which had formed a 50-mile lake and which counted itself as the world’s largest hydroelectric power plant. (Little was said of the more than 5 million peasants forcibly relocated with little or no compensation.) There was the Bird’s Nest Stadium, built for the 2008 Olympic Games in Beijing to herald to one and all the arrival of a glittering, technologically advanced, and thoroughly modern China. And the strangely futuristic Pudong district of Shanghai, with its weird skyscrapers topped by gigantic globes.

China’s most recent obsession was the drive to construct a high-speed rail network connecting the nation’s largest cities. In one frenzied year, the Chinese succeeded in laying 800 miles of rail between Beijing and Shanghai, reducing travel time from nearly a day to five hours. By 2015 a national high-speed rail system running the length of the eastern seaboard from Guangzhou to Dalian, with spurs to the mammoth and largely forgotten cities of the inland, would be complete.

But as Longfellow declared, there were cracks.

For every benefit of prosperity, there was a cost. Smog and pollution were rampant. Beijing laid claim to having the world’s worst air quality. On a recent day, the particulate count had risen to ten times the maximum level deemed safe for human respiration. Visibility routinely dropped to 200 yards, with the sun hidden behind a dense yellow cloud of muck. It was not uncommon for five hundred people to drop dead from respiratory distress in a single day. In Hong Kong, one of the world’s most scenic harbors, pollution from coal-fueled power plants to the north cloaked the island in a noxious cloud so thick it was impossible to see Hong Kong Island from Tsim Sha Tsui, only 500 yards across the water.

It was not only air quality that was abysmal. The rivers were fouled. The Yangtze, the country’s primary tributary, was a repository of industrial waste, raw sewage, dead animals, and toxic chemicals. To put it more colorfully, the river was a stinky, brown, slow-moving, 3,000-mile-long cesspool. Deforestation in the mountain districts caused landslides and erosion. Strip mining denuded thousands of square miles of land. Toxic runoff poisoned water tables. There were no environmental laws to govern such practices.

And, worst, there was corruption. Power rested in the hands of appointed officials at every level of government. A village mayor’s power was absolute. The police chief’s power was absolute. A district governor’s power was absolute. Each had a fiefdom, and tribute must be paid.

On top of this creaky mountain sat the provincial mayor. Mayors of megalopolises like Chongqing (25 million), Shanghai (27 million), and Beijing (30 million) acted as de facto warlords: all-knowing, all-powerful, all ruthless. The federal government had no sway.

There was no national medical care.

There was no system of social security or pensions for the elderly.

In short, it was every man for himself.

The Chinese people were on their own.

And for the first time in their long, benighted history, they showed signs of no longer tolerating the bad with the good. Too many were being trampled underfoot by the headlong rush to economic primacy. Each day found public demonstrations taking place in one part of the country or another. Some were confined to villages, but others numbered hundreds, if not thousands, of angry souls. A month earlier, 50,000 people had filled the streets of Shenzhen to complain about government corruption. Before that, 25,000 had marched in Beijing. Unrest was no longer the exception but the norm. The first ripples of discontent were rapidly rising into a tsunami.

Yet despite all this, Astor knew that all would be forgiven so long as the nation’s economy was thriving.

In China, there was one rule and one rule only: make money and get rich.

There was a knock on the door, and a receptionist entered bearing a tray of mineral water, espresso, and biscotti. Astor added three sugars and knocked back his espresso in a single draft. His heart responded nicely. He sat a little taller. “So we’re agreed. Chinese exports are under pressure. If exports keep tanking, so will GDP. If GDP tanks, civil unrest will explode.”

“The country is in dire straits,” said Goodchild. “Credit is drying up. Real estate prices have collapsed. Factories are shuttering up and down the coast. The PMI numbers are bogus. So is the GDP. The only way out is to pump up exports, and the only way to do that is to devalue.”

Longfellow nodded. “The only way China can contain unrest is to stoke the economy. It goes back to the first rule. Make money. Get rich.”

While everyone in the world was certain the Chinese would accede to U.S. demands to increase the value of the yuan, Astor saw things differently. The Chinese would devalue.

If the Central Committee of the Chinese Communist Party wanted to quell unrest, the government must return GDP to more than 11 percent. The only means to boost GDP to that level was to boost exports, and the only way to boost exports was to keep the costs of those exports as low as possible. Ergo, devalue.

QED.

No shit, Sherlock.

And so he’d bet against the yuan.

But there was another reason.

After the meeting, Astor retreated to his private apartment. He checked his watch to make sure it was a reasonable time over there and used a landline to dial a fourteen-digit number. He had waited long enough.

“Hello, Bobby.”

“Just what the hell is going on?”

“A momentary disagreement in Beijing.”

“A disagreement? Sounds like anything but. Our trade rep said you’re continuing your policy of revaluing the yuan to the tune of an additional three percent this year.”

“He had to, didn’t he?”

“You tell me.”

Astor was pleased to hear his friend’s calm voice. They had known each other for ten years, dating to an investment conference in Hong Kong where they had both been featured speakers. At the time China was not actively investing abroad, but his friend had a plan to change that. The plan was the China Investment Corporation, the country’s first sovereign wealth fund, and it turned out to be a bigger success than anyone could have imagined. Since then, the men had met once or twice a year in New York, Beijing, Hong Kong, and even Paris. They shared opinions about their countries’ respective economies and the world at large. Each had been correct more times than not.

“You promised me your country was going to devalue,” said Astor.

“And so it will.”

“This is America, not China. We’re not known for our long attention span. We don’t like journeys of a thousand steps. More like ten.”

“Things will change soon.”

“How soon?”

“Friday at the latest.”

“What makes you so sure?”

“Trust me,” said Magnus Lee. “I’ve heard that something dramatic is going to happen.”