Military watchers around the world eagerly anticipated China's Sept. 3 military parade to commemorate the 70th anniversary of the surrender of Japan and the end of World War II. It was the largest since at least 2009, when the Chinese Communist Party celebrated 60 years in power.

The most notable weapons on display were the cruise and ballistic missiles. Tanks, self-propelled artillery and other armored vehicles also rolled by while large numbers of fighter aircraft (including the J-15 carrier-based fighter) and helicopters flew overhead. Missiles that were previously closely guarded were also shown, such as the DF-16 short-range ballistic missile, the DF-21D anti-ship ballistic missile, the DF-10A land-attack cruise missile and the DF-26 intermediate-range ballistic missile.

Ballistic and cruise missiles, especially those in the very long-range categories, are a crucial part of Beijing's nuclear deterrence doctrine. For instance, land-based intercontinental ballistic missiles form the primary leg of the Chinese nuclear triad. Shorter-range Chinese ballistic missiles (up to intermediate range) as well as cruise missiles also play a key role in China's conventional deterrence strategy.

Armed with non-nuclear warheads, ballistic and cruise missiles give the Chinese the ability to strike at a heavily defended enemy from a considerable distance, degrading the enemy's fighting ability before an invasion, neutralizing enemy airpower by knocking out airfields and even striking at naval vessels at sea. When used as part of a layered strategy in conjunction with other weapons and forces, ballistic and cruise missiles can be highly effective.

The Chinese have been steadily amassing short-range ballistic missiles and cruise missiles — nearly 1,500 are in stock now — within range of Taiwan. In the event of a potential Chinese conflict with the island, China's DF-16 short-range ballistic missiles and DF-10 land-attack cruise missiles can now strike Taiwanese air defenses, ports, vessels, airfields, command and control centers and infrastructure in a first salvo.

Given the rapid speed at which these missiles travel, the Chinese would benefit from a slower Taiwanese reaction time (especially in a surprise attack) as well as greater survivability against Taiwanese defenses. The Chinese can then, at least theoretically, mount an air and naval campaign against a Taiwan with weaker defenses.

China also can use these missiles as part of a layered strategy in hopes of deterring, delaying or degrading an external response, particularly one from the United States. China could try to deter or degrade any U.S. intervention by aiming an array of missiles, such as the DF-21C and DF-26, at U.S. airbases in the region (especially Kadena Air Force Base in Okinawa and Andersen Air Force Base in Guam), as well as by aiming YJ-18 anti-ship cruise missiles and DF-21D anti-ship ballistic missiles at U.S. carrier battle groups.

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NOW WATCH: China has been upgrading its military and is now stronger than ever

“He who knows when he can fight and when he cannot, will be victorious.”

– Sun Tzu

A couple of weeks ago I was complaining about 47,000 China reports clogging my e-mail. The number now feels like it is well into six figures (perhaps a slight exaggeration). Maybe my memory is going, but there wasn’t nearly as much China talk on the way up. Funny how that works.

Is China collapsing? I think parts of China are under severe pressure if not outright recession, and clearly the stock market is a disaster. Anyone who bought Shanghai or Shenzhen stocks on margin this year is probably on the brink.

That said, China itself is not collapsing. There are parts of China that are doing just fine, thank you very much. It does have serious problems, though. The Pollyannas and the Cassandras are both wrong. The change in tone in the Financial Times is quite amusing. Their recent hyperbolic, bearish section called “China Tremors” is a case in point. Of the last 30 articles on China on their website, I found less than a handful that were positive on China. My take? China will muddle through, at least for the near term.

China is in transition, a transition that was clearly telegraphed if you have been paying attention. Our recent book on China (A Great Leap Forward?) clearly laid out this new path. Today we are going to talk about this precarious, difficult transition, which may impose profound impacts on much of the rest of the world. This transition is going to change the way global trade has worked in the past. There will be winners and losers.

But first, a brief comment on today’s employment report and how it impacts the need for a rate hike by the Federal Reserve in September. I offer a little different perspective on the coming decision.

To Hike or Not To Hike – That Is the Question

Today’s unemployment report was lackluster, as has been the case for the initial reporting for the last two Augusts. Both were revised significantly upward – August 2012 was eventually revised up 96,000 jobs, while August 2013 saw a final revision upward of 69,000 jobs, and August 2014 saw a final count of +213,000 jobs. Part of the reason for the major revisions is that only some 70% of the potential survey participants actually responded (hat tip Joan McCullough). Evidently the United States is becoming like Europe, and we are all going on vacation in August. Or at least the department personnel responsible for handling employment figures are. Expect to see significant upward revisions in the coming months, just as July saw another 30,000 added and June saw a plus 14,000.

This report was not so ugly that it would take the breath away from hawks wanting to raise rates or force doves into agreeing to a rate increase. Nothing changed, really. That is illustrated by the two articles below that were side-by-side on the New York Times website within an hour of the release of the report (hat tip Brent Donnelly). Everybody got to see what they wanted to see.

I can’t remember a time when there was such serious disagreement over what the Federal Reserve should do regarding a rate hike. I have been in several groups of analysts and economists in the last few months, and I must confess to being surprised at the split in opinions.

Upon reflection, I think I can actually understand both positions. First, the Fed keeps reiterating that they are “data-dependent” – thus the focus on every little bit of data, no matter how trivial. Let me see if I can explain why both sides can feel they are right and then why, to my way of thinking, they are missing the point.

On the side of those who feel that a rate hike should be postponed at the September meeting, it must be remembered that most rate hikes are in anticipation of an economy beginning to pick up speed. The Fed has said they want to see low unemployment, and under the leadership of Bernanke and now Yellen, they have a 2% inflation target. Remember, their congressional mandate is to promote stable prices and full employment.

While unemployment did drop to 5.1%, that is a “soft” unemployment figure. The participation rate is down. The number of part-time workers wanting full-time jobs is still high. And the new employment trend is not encouraging.

August's gains were well below trend. The average of the previous five months is 211,000; for the previous six before that it was 282,000. The yearly employment gain, 2.1%, is off 0.2 point from the late 2014/early 2015 rate. The private sector gain is 60,000 below the average of the previous six months. (The Liscio Report)

We are not close to 2% inflation; and, frankly, it doesn’t look like we’re going to get there for a while. The economy is, at best, stuck in a low, Muddle Through gear (as I predicted years ago); and getting back to a stable 3% growth rate, let alone the occasional 4–5% that we used to see, seems out of reach. The dollar is strong and getting stronger and is not only holding down inflation but also, anecdotal evidence suggests, slowing down exports in various sectors of the economy. There were those who argued that a bubble was developing in the stock market, but it appears the stock market is taking care of itself to make sure it doesn’t become overheated. There is no need to pile on to see if we can drive asset prices even lower. Further, we are just in the beginning of a housing recovery. Why raise mortgage rates, etc., at the beginning?

In such an environment, why would you raise rates in order to keep the economy from overheating? The last thing we seem to be doing is overheating, let alone even getting to a slow boil. Instead, we may already be cooling down. If the economy does start to pick up and inflation becomes an issue, we could raise rates then as fast as we would need to. Or so Kocherlakota and his friends on the FOMC say. And thus we should postpone a rate increase until we see a reason for it. Kind of like, don’t shoot till you see the whites of their eyes.

Those who think we should raise rates likewise have an array of data to support their case. GDP grew 3.7% in the second quarter. If you take out the weather-related first-quarter 2015 GDP figure, GDP growth is running well over 3%. Given the global headwinds currently buffeting economies, that’s about as good as it’s going to get. This economy has weathered tax increases and the abrupt changes of Obamacare, as well as a significant drop in capital spending related to oil production and has “kept on ticking.” If there is a recession in our near future, as David Rosenberg points out, it would be the first recession ever that did not see consumer spending or employment go down for the count.

We’ve always been able to find negatives in the unemployment rate. Even if unemployment were somehow to ratchet down to less than 200,000 per month, it will be for only two quarters at the most; and it may be that before the end of the year we will be under 5% unemployment.

We just set a record for all measures of corporate profits in absolute terms. We finally set a new record for real disposable personal income in July, again in absolute terms. As Jim Smith says,

What all this means is that when the FOMC meets on September 16 and 17, they will be looking at a US economy in which more people are employed than ever before, earning more money than ever before, producing more goods and services than ever before, and with personal consumption expenditures and corporate profits at the highest levels ever seen. If that is not a prescription for finally raising the Fed Funds rate, then I can't imagine what it would take to get them to move. (source)

Despite the significant slowdown in the oil patch, the level of investment in the second quarter was almost 4% higher than last year. Businesses are optimistic. Even given the turmoil in Canada, China, the Eurozone, and the rest of the BRICS, and even though global trade is beginning to fall off a little bit, the US economy seems to be doing quite well in spite of it all.

What else do you need in order to begin to normalize rates? Inflation is under control and according to most Fed economists seems to be ticking higher. Unemployment is moving lower. The economy is doing quite well. If not now, when? How much better do you want things to get before rates are taken back to something close to normal?

I must confess that I personally lean toward the latter argument, but I have a few additional reasons for thinking the Federal Reserve should act in September. As I have presented in previous letters, there are real reasons to think that low interest rates are not only creating malinvestment but also encouraging companies to use financial engineering and to buy their competition rather than purchasing the tools of production and actually competing head on. These behaviors distort an economy over the long term. They frustrate Schumpeter’s forces of creative destruction.

Further, what policy tools does the Federal Reserve still have available if we enter a recession? I admit that doesn’t seem to be a likely possibility today, but there are many potentials for exogenous shocks to the US economy that could cause a recession. Further, in the history of the United States we have never had a period longer than nine years without a recession. This recovery, relatively weak though it is, is getting long in the tooth. Do we want the Fed to confront the next recession with another round of massive quantitative easing as the only policy tool left to deploy? When their own research shows that QE wasn’t very useful and when we can clearly see the distortions caused by QE in emerging markets around the world?

The Federal Reserve is functionally incapable of not feeling the need to “do something” in the midst of a recession. If the only tool they have is further massive quantitative easing, they will use it. Damn the distortions, full speed ahead!

I would not argue for a rapid rate hike. In fact, I would prefer 1/8 of a point at every meeting, rather than the typical quarter point. But there is no reason not to raise a quarter of a point at this meeting, skip a meeting to make sure everybody can take a deep breath, and then raise once more before the end of the year.

I mean, really? Does the Fed think this economy is so fragile that it can’t take a lousy quarter-of-a-point increase in interest rates? The Federal Reserve needs to begin to restock its policy tool chest now. While I personally think we are a long way from ever seeing 5% Fed funds rates again, a 2% rate can probably easily be absorbed if it comes slowly. And that rate would give the Fed some policy tools when, not if, we enter the next recession.

Now, let’s turn back to China.

Repeat After Me: Chinese Stocks Are Not the Chinese Economy

It’s easy to assume that a country’s stock market reflects the condition of its economy, but that is not always the case. Further, what the stock market really does reflect is the consensus estimate of an economy’s future condition. More specifically, stock prices reveal future expectations for corporate profits.

This generally applies to both the United States and China. One key difference, though, is that most American stocks represent companies that seek to make profits. In China, that isn’t necessarily the case.

The Chinese stock market includes many state-owned enterprises (SOEs), whose executives answer to bureaucrats in Beijing. The government views them as public policy tools. Everyone is happy if the SOEs make a profit, but profit is not the first priority.

If US stock prices generally tell us more about the future than the present, except in times of serious over- or undervaluation, then Chinese stock prices tell us even less about either.

Just as last year’s incredible run-up in Chinese stocks did not signal an economic boom, the ongoing decline does not signal an economic bust. The correlations aren’t just weak, they are nonexistent.

China’s official economic data is also questionable and would be so even if GDP were a precise measurement tool. As we discussed last week, it usually isn’t.

It is no stretch to say we are flying blind about China.

Fortunately, we have diligent researchers like Leland Miller of China Beige Book, whose research firm does the hard work of gathering reliable data each quarter from thousands of companies in China and assembling it in comprehensible form. His data shows that China’s economy has actually been in good shape since China stopped acting Chinese last year. But even then, you have to separate the Chinese economy into several categories.

China Good, China Bad, & China Ugly

Among the many letters and reports on China that I received over the last month, I’d like to single out an excellent research note that the team at Gavekal Dragonomics published last week, called “What to Worry About and What Not to in China.” I appreciated this piece, because it really helped me structure my worrying. I dislike spending energy worrying about the wrong things. Further, worrying about the wrong things can be dangerous. It’s when you are paying attention to the wrong things that what you shouldhave been paying attention to jumps up and bites you on the derrière.

In the spirit of the Gavekal note, here is the good side of China. We’ll get to the bad and the ugly below.

Chinese real estate prices will stabilize. We hear a lot about China’s massive infrastructure boom and the resulting “ghost cities.” These aren’t just rumors. The government mandated the construction of entire cities to house the formerly agrarian population as it shifts to industrial jobs. Provincial governments earned as much as 80% of their revenues from land sales. Essentially, this is a process where they take possession of rural land that has very little value in price terms, declare it to be available for development, and can make profits several orders of magnitude greater than their costs. Nice work if you can get it.

The ghost cities will not stay empty forever. They will fill with people over the next few years (in some cases more than a few). The recent housing bubble is more a function of young people wanting to cram into certain popular areas. The broader internal migration will support housing prices even as the bubble areas pop.

It might be helpful to think of the Chinese ghost cities as analogous to the overbuilt condos in Florida. Prices in Florida did in fact collapse, and places were selling for a fraction of their construction cost. I wrote at the time that I thought they would be very good investments, because the number of people wanting to retire to Florida is actually a fairly steadily growing figure. Low taxes, good weather, positive infrastructure, excellent medical care – what’s not to like, other than it’s not Texas? Just saying…

While it will take time, those ghost cities will eventually fill up. Further, most of that real estate was bought with significant capital, often 50% or more. Those apartments, which are essentially shells because they have not been finished out, function more like stores of value or bonds than they do as traditional apartments. While the original investors may not get the inflation-adjusted returns they want, inflation will eventually mean that they will get some return on their investments. While this may not make sense to most of us in the Western world, given the Chinese experience, owning something that is tangible might make sense. The reality is that there are hundreds of millions of people who are going to want to find a place to live in China over the next few decades. That seemingly endless source of buyers will eventually turn the ghost cities into real ones.

Note: that doesn’t that all of the ghost cities will be developed. Some probably won’t, as they are too far outside the path of growth. But most of them have excellent infrastructure and connectivity to the rest of China. Think of how satellite cities developed throughout the South and Southwest of the United States. Admittedly, in the US this was generally a demand-driven process. In China it was a way to prop up GDP and actually create something tangible, unlike the ephemeral transfer payments and other congressional pork that the US used as “stimulus.” I would argue the Chinese are better off putting their money into some kind of infrastructure than we were putting ours into temporary, nonproductive stimulus.

China is shifting from investment to consumption. The phase of China’s emergence led by exporting and infrastructure growth is ending. The next task is to build an economy that relies less on exports and more on consumer demand and services. This path was detailed in our China e-book. It has been the plan for some time.

This process will continue to be ugly at times. Last week’s Purchasing Manager Index for Chinese manufacturing fell even deeper into contraction territory, where it has languished for six months. Services PMI also fell but not nearly as much; and more importantly, it continues to show a mild expansion.

I know this is anecdotal, but in secondhand conversation with a very-high-profile private equity group here in the US, they report that they have four significant investments in China. None are in the manufacturing area; all are in the services sector. The slowest of their companies is growing at over 20% per year, and some are doing significantly better.

The China of today is not your father’s China. Fifty percent of the economy is now services. That part of the economy is growing – and evidently growing enough to offset the contraction in the manufacturing sector. And we must remember that China actually added twice as much to its GDP in either dollar or yuan terms in the past year than it did in 2003 when its growth was a “miracle.” That helps to put their reduced growth in context. As I have pointed out, the law of large numbers requires that their growth will be slower in percentage terms in future years.

Room for More Stimulus. The Chinese government is spending big bucks to prop up the stock market and the renminbi through various interventions. Estimates vary, but $200 billion to date is a good guess. They will have to spend more. The good news, if you can call it that, is that they can afford it. There is, of course, reason to question the wisdom of trying to prop up a stock market – especially in the rather ham-handed (one is tempted to say “rookie”) way they have gone about it. More about this later.

Aside from its multi-trillions in FX reserves, the People’s Bank of China still has plenty of room for monetary stimulus. Short-term interest rates in China are over 4%, far higher than in most of the rest of the world. That means the PBOC can probably make several more small cuts without overly weakening its currency. Yes, I know that they devalued their currency a whole 2–3% recently. Given that the euro and the yen are down well over 30% against the dollar, I really find the overreaction in the West quite laughable.

The IMF says China has to float its currency in order to be included in the SDR (Special Drawing Rights). Okay, so they’re starting that process. As I have said repeatedly for the last four years, when they finally float their currency, the likely direction of the renminbi is down, not up. All the ranting of Donald Trump and US senators combined cannot push back the tide of what the market sees as the true value of the renminbi.

China’s banking system is also on a strong footing. Banks have little exposure to the stock market. Chinese brokers have very conservative (by Western standards) capital requirements. Gavekal says not to worry about a systemic crisis. (The Chinese shadow banking system is something else altogether. See below.)

Despite all this, China is enduring an economic slowdown that may get worse. We have plenty of legitimate worries. Now, here come the bad and ugly parts.

Idle Industrial Capacity. The transition from an investment-driven export economy to a consumption-driven service economy will take years. Further, it won’t be easy for those on the industrial side of the house. While it may be hard to believe, over the years China has lost more steelworkers than the US and Europe have. They overbuilt steel mills. It seemed that every province wanted its own mills, and their production capacity just grew too large. It likely still is too large.

The government hopes to reuse some of the idle capacity in its very ambitious (and quite expensive) “One Belt, One Road” or New Silk Road initiative. That strategy may help – as long as lower exports don’t slow down the plan. But that is a decades-long process and is unlikely to relieve much pressure over the next few quarters or years.

As every parent and employer knows, idle hands are never a good thing. You have to keep people occupied, or they will find suboptimal things to do. The last thing Beijing needs right now is a few million idle, i.e., unemployed factory workers. It is some somewhat ironic that China is facing the same problem as the US is: what do you do with excess manufacturing workers, and how do you help them transition to jobs in the service economy? I guess the best you can say for the Chinese is that the jobs in their manufacturing economy were not high-paying so the transition will not be as economically wrenching.

Chinese Stocks Are Still Overvalued. Calculating “fair value” is difficult for Chinese stocks. As mentioned above, many companies are subject to government interference. Data integrity can be a problem in others. We can’t always make apples-to-apples comparisons with non-Chinese stocks.

Whatever yardstick you use, Chinese stocks are still quite richly valued, even after recent losses. The losses, recall, are simply the undoing of a rally that was never justified in the first place. It was a momentum-based rally in a market of retail investors who come to the stock investing with a gambling mentality.

It’s also worth noting that some Chinese stocks haven’t traded a share in weeks. Further, the government has forbidden insiders from selling in other cases, so it’s hard to know whether the index values and share prices we see are trustworthy right now. I suspect many are not. Which leads to the “ugly” part…

We Don’t Know Whom to Trust in China. Until 2–3 months ago, most China watchers believed that the country’s leaders had a thoughtful, comprehensive economic plan. I don’t know many people who think so anymore. I should note that in our book I was very clear that I thought the Chinese government was not prepared to deal with the nature of the transitional economic crisis they were faced with. None of the leadership has any true experience in dealing with major economic issues in a modern economy.

Walt Whitman Rostow wrote a book back in 1960 called The Stages of Economic Growth: A Non-Communist Manifesto. He outlined five stages that mark the transformation of traditional agricultural societies into modern mass-consumption societies. The first three stages are actually suited to top-down command-control governments. The fourth and fifth stages – at least according to him, and he has been proven right over the ensuing 55 years – can’t happen under the same type of government. There must be a bottoms-up, consumer-driven economy.

So when I say that China’s leadership has no experience in dealing with a modern economy, I mean it in that context. They’ve done a heck of a job for the last 35 years, especially given where they started. What they have done is unprecedented. So hats off. But just as we keep reminding investors that past performance is not indicative of future results, so should we be skeptical about the future quality of government decisions. And frankly, I did not expect the truth of that assertion to become apparent so quickly and so blatantly in China.

If the leadership did have a plan going into the stock market tumble, it must have gone out the window. The on-again, off-again interventions and conflicting statements could not have been part of any rational plan, unless the plan was to confuse everyone. They succeeded, if that was the case. They are clearly making up their game plan in the middle of the game.

In the space of about two months, Beijing reversed years of statements that had almost convinced the world that China really believes in market discipline. That PR campaign is now in shambles. The best-case interpretation is that the leadership is in disarray amid Xi Jinping’s corruption crackdown and unable to coordinate its messaging and intervention strategies – which is obviously not good, either.

Many people thought that at least the central bankers at the PBOC were competent and as immune from political interference as it is possible to be in China. No more. The PBOC may well have tried to assert its independence; but if it did, it failed.

The Chinese government is once again a “black box,” at least in terms of its economic policy. We don’t know who is making the decisions, nor can we be sure what they want to accomplish.

Just a few weeks ago, we all thought China wanted to float the renminbi so it could go in the IMF’s reserve currency basket. The IMF has bent over backwards trying to help China do this, even extending the review period by a year so China would have more set-up time. Beijing is not taking the hints. Either they have abandoned that goal or they don’t understand what they need to do to accomplish it.

Enter a Billion Dragons

As Worth Wray and I wrote in A Great Leap Forward?, China is engaged in a transition from which it cannot turn back. Well over a billion Chinese are in various stages of joining the modern world. Our planet has never seen anything like this, so it’s no surprise that the process is rocky. The transition will continue regardless, because China has no other option. If you want to know more about China, you really should get a copy of this book now. I priced it at a very reasonable $8.99 as an electronic book. It now appears that my regular book publisher, Wiley, is going to bring the book into print and will take over the e-book marketing, so prices will go up.

Investors want to know about China’s stock market and currency. Even after all of this year’s stimulus, the Chinese leadership still has plenty of ammunition. They can prop up the markets for a long time if they are willing to spend the money. Of course, that will drain reserves.

Beijing has always prioritized stability over free markets, and I think they will continue to do so. The risk they run is that shoving problems under the rug simply stockpiles them instead of solving them. Eventually they become unmanageable, and you have to throw back the rug and confront them. What that will look like in a Chinese context, I don’t know; but I bet it won’t be pretty.

Before we Yankees get too smug, let’s remember that we have our own black box over here, called the Federal Reserve. Its independence is also questionable at times, and it just spent the last six years interfering in our own economy via multi-trillion-dollar QE programs. What would we say if the PBOC did the same thing in China? And now we can say the same thing about Japan and Europe.

In the short term, I think the major risks lie not with China itself but with China’s energy and raw materials suppliers. Countries like Australia, Brazil, Chile, Angola, Saudi Arabia, and Russia are all going to lose as China continues shifting to services and away from infrastructure building and manufacturing. China is not going to turn off the spigot, but it will reduce the flow of materials into the country. Those commodity-exporting countries will, in turn, reduce their purchases of US, Canadian, and European goods and services.

We’ll all feel China’s pain to some degree. That, ironically, is the main reason I think China will get through this. By virtue of its sheer size, it has spread its impact over practically the whole globe. Just as we all shared in China’s growth, we will all share in its contraction.

Detroit, Toronto, NYC?

My September travel schedule looks surprisingly light. Right now there is nothing until the end of the month, when I will go to Detroit for a day and then on to Toronto for a few days. In Toronto I will be speaking at the annual CFA Forecast Dinner. I am told there will be some 1200 people there. For whatever reason, I have been making the circuit of Canadian CFA forecast dinners for the past few years. I have done British Columbia, Alberta, and Manitoba. Thankfully this one is not in January – Edmonton was cold; Winnipeg was colder. I find speaking for CFA groups somewhat intimidating, as the majority of the audience knows more about what you are talking about than you do. I will also be doing a completely different presentation the night before for my Canadian partners, Nicola Wealth Management. More info on all the events in a later letter.

I will probably have to be in New York for a few days sometime in the middle of this month. Then October looks to be busier, but not too much so. Which is fine by me, as I am really diving into the new book I’m writing on how the world will change over the next 20 years. I’ve been wanting to write this book for at least 10 years, and now seems the right time to do it.

I have to confess that I was not as diligent with my diet and in working out in August. There were just too many fabulous meals with friends and too much temptation, so when I got back last Sunday I put myself on the most serious diet and workout schedule I’ve ever attempted. Before this, my concept of diet was to cut back a little, as opposed to the more controlled calorie restriction that both my friend Pat Cox (who is the biotech expert at Mauldin Economics) and my doctor Mike Roizen, head of wellness at Cleveland Clinic, keep telling me to try. To my utter surprise, it is working better than I could have imagined.

I was surprised at how quickly I could get out of shape. The Beast has been putting me through my paces this last week. Yesterday, I finished my workout by walking the 17 flights of stairs to my apartment. I will admit I had to stop a few times to catch my breath. It brought to mind my experience in Zimbabwe some 23 years ago. I was with my friend Pat Mitchell, who lived in Johannesburg. I had done him a big favor, so to repay me he treated me to a long, first-class vacation in Botswana and Victoria Falls. The Chobe Lodge was fabulous. Amazing safaris. Highly recommended. The last day we white-watered the Zambezi below Victoria Falls, which is a class 5 rapids.

It was hot as Hades (it was summer there), and the rapids could get your adrenaline pumping. We came to the end of the run in a canyon, where we were informed that we had to walk to the top in order to get back to the hotel. It was some 400 vertical feet of switchbacks. Fortunately for me, Pat was seriously out of shape and had to stop every 30 or 40 feet to rest, so I didn’t have to reveal how out of shape I was. What was embarrassing, though, were the 60-year-old men who were running up and down porting the equipment back up. I swear I saw the same man four times, and he couldn’t have been much younger than I am now. The young guys weren’t intimidating, but I still recall that old man walking rapidly up that trail carrying a kayak. Today, I decided I needed to walk up to my apartment more often.

This is Labor Day weekend in the United States. My brother and his family and all but one of my kids, along with six of my grandkids, will show up Sunday night for a cookout by the pool. Six of my seven kids have harassed me into playing a game called Cards Against Humanity, which they swear is fun. Have a great week.

SEE ALSO: China just gave the game away

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Chinese inflation data for August has come in mixed, with consumer price inflation jumping to a one-year high despite producer price inflation falling to a fresh six-year low.

From a year earlier consumer prices increased by 2.0%, well above the 1.6% pace of July and expectations for an acceleration to 1.8%.

It was the fastest pace recorded since August 2014.

Breaking down the report, much of the increase came from food prices, which jumped 3.7% thanks to a 19.6% surge in pork prices.

Excluding food, prices rose by a more modest 1.1%, unchanged from July.

They don’t dub the CPI release the “China pork index” for nothing.

While CPI accelerated, the PPI fell to a fresh multi-year low, sliding 5.9% from a year earlier, significantly below the 5.5% drop expected. Not only was it an acceleration on July’s 5.4% decline, it marked the fastest pace of deflation since September 2009.

Despite the CPI jump, much of the report’s focus will be on the PPI reading given the former was largely impacted by a sudden jump in pork prices. The continued deceleration in raw material prices will do little to quell concern about sagging domestic demand, nor broader concerns about a slowdown across the Chinese economy.

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BEIJING (Reuters) - A deputy head of the Chinese Communist Party's graft watchdog visited Interpol as part of a trip to France to push for greater international cooperation in China's fight against corruption, state media said on Thursday.

The government earlier this year unveiled an initiative called "Sky Net" to better coordinate its fight to return corrupt officials and published a list of 100 suspected corrupt people believed to be abroad and subject to an Interpol "red notice".

Officials say only about 10 people on that list have been returned to China so far, from countries with close ties to Beijing.

Xinhua news agency said that Zhao Hongzhu, a deputy head of the Central Commission for Discipline Inspection, met French government officials, including the justice minister, and then went to Interpol headquarters in Lyon on a trip that ended this week.

"The main point (of the Interpol visit) was to increase international cooperation in fighting corruption and exchange views on recovering dirty assets and corruption suspects (from overseas)," Xinhua said, without elaborating.

Interpol, in a statement on its website, said that Secretary General Jürgen Stock told Zhao he valued its cooperation with China.

President Xi Jinping has launched a sweeping campaign against graft since assuming power in late 2012, but has been hampered to an extent by difficulty in getting corrupt officials and assets back from overseas.

China does not have extradition treaties with the United States or Canada - the two most popular destinations for suspected economic criminals.

Western countries have baulked at signing extradition deals with China, partly out of concern about the integrity of its judicial system and treatment of prisoners. Rights groups say Chinese authorities use torture and that the death penalty is common in corruption cases.

(Editing by Nick Macfie)

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Chinese Premier Li Keqiang has ruled out the use of quantitative easing as a policy to help stimulate growth in the world's second-largest economy. 

He said during a speech at the World Economic Forum in Dalian on Thursday that quantitative easing alone could not solve structural problems in economic growth and that it would lead to negative and spillover effects. 

He said a slower or higher speed of growth was acceptable as long as job creation and people's incomes were strong and the economic environment improved.

His comments came after data released on Thursday suggested that China’s manufacturers slashed prices at the fastest rate in six years last month as commodity prices fell and demand cooled.  

Poor economic data released Wednesday also fueled further gloom about China's slowing economic growth.

The figures are likely to increase expectations that the government will introduce further stimulus measures.

Li ruled out the possibility of a hard landing for the country's economy during his speech and said government policies had started to take effect and economic indicators had improved in recent months. 

The government is trying to rebalance the country's economy from a model based on exports and cheap manufacturing to one fueled by greater innovation and domestic demand.

"The stable fundamentals have not changed," he said. "We are fully capable to address it if there are signs that the economy slips beyond a reasonable range. China won't see a hard landing in the economy."

Growth of 7% in the first half of the year has fueled concerns around the world about China's economic slowdown, but Li said opportunities still outweighed any challenges.

He also pledged that China would implement more active import policies and outbound investment would continue to grow. 

China's devaluation of the country's currency by nearly 2% last month sent jitters around world markets.

Li told the forum in Dalian on Wednesday that the government had no plans to further devalue China's currency.

He added on Thursday that Beijing would allow overseas monetary authorities to directly invest in the interbank foreign-exchange market and it would set up a cross-border yuan settlement system by the end of the year.

Li also said Beijing would help provide finance for Chinese companies at home and operating overseas. 

China's economy grew by 7.4% in 2014, its slowest rate of expansion in 24 years. 

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TAIPEI (Reuters) - Computer maker Dell Inc will invest $125 billion in China over the next five years, its CEO said on Thursday, as the firm continued to expand in the world's second-largest economy.

The world's third-largest maker of personal computers said the investment would contribute about $175 billion to imports and exports, sustaining more than one million jobs in China.

"The Internet is the new engine for China's future economic growth and has unlimited potential," Chief Executive Michael Dell wrote in a statement.

"Dell will embrace the principle of 'In China, for China' and closely integrate Dell China strategies with national policies," Dell said, adding that the company would continue to expand its research and development team in China.

Dell announced in 2010 it planned to spend $250 billion on procurement and other investments over the next 10 years in China, its second largest market outside the United States.

The company ranked third in global PC shipments in the second quarter after Lenovo Group Ltd and Hewlett-Packard Co, according to research firm International Data Corp.

(Reporting By Yimou Lee)

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The Bank of England is unlikely to rates anytime soon because of a slowdown in China's growth and it's crazy stock market volatility, says Investec's chief economist Philip Shaw.

UK interest rates have stayed at a record low of 0.5% since 2009.

Although two members of the BoE's rate setting panel – the Monetary Policy Committee – came out in August to warn that interest rates will rise "pretty soon," Investec believes that the knock-on effect from China makes it too risky for the central bank to hike rates.

"What you're looking at is a domestic picture that is looking pretty good ... particularly because of the service sector, and that growth momentum is gaining gradually," said Philip Shaw, chief economist at Investec, on the BBC's Today programme.

"However, there's a less comfortable international background" he added, due to a potential slowdown in Chinese growth and stock market volatility. 

The MPC will publish its latest decision on interest rates later today, alongside the minutes of meeting.

A low interest rate stimulates the economy  because it reduces the cost of borrowing. In other words, it helps those in debt to make repayments and boosts the amount of money in people's pockets. This was necessary when the economy was hit by the credit crisis on 2007/2008.

However, the UK economy has expanded since then and latest data from the Office for National Statistics shows that the UK economy was 2.6% larger in the second quarter (April to June) in 2015, compared to the same quarter a year ago. It also revised up its forecasts for the expansion of the British economy this year. 

This has led to BoE rate-setter Kristin Forbes warning that Britain needs to hike interest rates or risk killing the recovery. In July, governor Mark Carney suggested we'll have a better idea on the path for interest rates "at the turn of this year."

However, China is in an incredibly turbulent period right now. Its stock market has fallen around 40% since hitting multi-year highs in mid-June and the government is burning through cash reserves to prop it up.

Meanwhile, China's economy grew at its slowest rate of expansion in 24 years, by only by 7.4% in 2014. My colleague Ben Moshinsky pointed out last month that Britain's fortunes have been linked to the global economy for centuries and 2015 is no different:

As Chinese growth weakens, the country's manufacturing sector slows down and needs fewer raw materials. As demand for commodities falls, so does the price, hurting economies such as Australia that depend on exporting them. This leads back to less demand for China-made goods.

The UK economy, being outward looking for a lot of its goods, isn't out of this loop.

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WELLINGTON/BEIJING (Reuters) - The risk China's economy enters deflation is growing, data suggested on Wednesday, as signs emerge that some foreign central banks are increasingly worried about the impact falling Chinese prices and a weaker yuan could have on their economies.

New Zealand's central bank governor Graeme Wheeler said that China's surprise devaluation of the yuan, or renminbi, last month had left them concerned about the risk they may let it slide further.

"We've seen authorities basically say they want to stabilize the renminbi, but if there were to be a very substantial depreciation in the renminbi it would certainly export deflation around the rest of the world, so everybody is looking closely at China," he said at a press briefing following an interest rate cut in New Zealand.

The deflation threat was underlined by data showing that Chinese manufacturers cut prices at their fastest rate in six years, with the producer price index (PPI) down 5.9 percent in August from a year earlier, though consumer prices are rising for now.

A growing worry for overseas central banks like the Reserve Bank of New Zealand (RBNZ) is that falling Chinese factory gate prices coupled with a weaker yuan mean the price of exports from China will fall sharply, feeding downward price pressures into their economies.

Wheeler's comments came despite attempts by Chinese policymakers to reassure global markets that the yuan will remain stable and China's economic growth, whilst slowing, is still set to be around 7 percent this year.

"The RBNZ...verbalised it but this is probably an underlying concern shared by policymakers around the region," said Sim Moh Siong, foreign exchange strategist at Bank of Singapore.

Wheeler said his central bank's view is that the Chinese economy is actually growing somewhere between "5-6.5 percent at this point", a rare public comment by a central bank governor suggesting that China's growth is below where the country's policymakers say it is.

The slide in Chinese factory prices is not yet feeding into the consumer price index (CPI), which posted a rise of 2 percent in August from a year earlier, though the National Bureau of Statistics flagged that last month's gains were mainly due to soaring food prices, not an improvement in economic activity.

"The risk for China is still deflation, not inflation," said Kevin Lai, chief economist for Asia, excluding Japan, at Daiwa.

"PPI deflation will eventually filter down to affect CPI, and aggregate demand will continue to be weak," he added, noting that he's just cut his inflation forecast to -0.5 percent from 0.5 percent.

REASSURANCE

Economists believe China's surprise currency devaluation of nearly 2 percent in mid-August will have little impact on inflation in the near term, with sharply lower commodity prices likely to be the main drag.

Since the devaluation, China has scrambled to stabilize the yuan as markets bet it may fall further, running down its foreign exchange reserves by a record amount in August to support the currency. Markets still believe it could fall further though, with the offshore yuan rate trading at a 1.3 percent discount to the managed onshore rate on Wednesday.

Chinese Premier Li Keqiang, for the second day running, used a speech to tell business leaders and investors on Wednesday that China does not want a currency war and that the slowdown in its growth rate will be modest. The economy grew 7.3 percent last year.

"China's economy will not see a hard landing" he told a gathering of the World Economic Forum in Dalian in northeastern China.

"Once there are signs of economy slipping out of the reasonable range, we will be fully capable of handling (the situation)."

The economic signs are gloomy. After Li spoke, the China Association of Automobile Manufacturers said auto sales in China in the first eight months of the year were unchanged from a year earlier, raising the specter of the market's first contraction since foreign carmakers started to focus on China over 25 years ago.

Global markets' worries about Beijing's handling of the economy and its currency have been exacerbated by China's attempts to stem the slide in its equity markets. Despite unleashing a barrage of policy measures to support stock prices and push out speculators, its equity markets have fallen around 40 percent since June.

The past two days though have seen Chinese stocks push higher, with the positive sentiment feeding into other major equity markets around the world. Still, that optimism was waning on Wednesday, with share prices back in the red.

The CSI300 index of the biggest stocks listed in Shanghai and Shenzhen was down 0.86 percent at 0633 GMT, while the Shanghai Composite Index was 0.83 percent lower. 

(Additional reportying by Winni Zhou, Xiaoyi Shao and Kevin Yao in Beijing, Nathaniel Taplin in Shanghai, Masayuki Kitano in Singapore, Ian Chua in Sydney, Gerry Shih in Dalian; Writing by Rachel Armstrong; Editing by Neil Fullick)

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Google Inc CEO Sundar Pichai has made no secret that he wants to get back into China via Google Play, the app store for its Android mobile operating system.

But it's unlikely to be a smooth ride.

Google largely pulled its services out of China five years ago after refusing to continue self-censoring its search results.

Since then, it has maintained a limited presence in the world's biggest Internet market, but most of its services, including Play, have been rendered borderline inaccessible.

"Google needs to be in China, period," says Andy Tian, CEO of Asia Innovations, a Chinese app developer and former Google executive. "Once in China, they can expand into other services. They need a beachhead, and the beachhead is Google Play."

Google declined to comment on reports it plans to ramp up its Play store in China this year. Instead, it pointed to comments Pichai has made about exploring how to bring Google Play to China.

But Tian and others say Google has lost basically all ground in most of its major services, especially search and video streaming, to Chinese players such as Internet giants Baidu, Tencent, Alibaba and Qihoo 360. All have built their own products and services to replace or even surpass Google's offerings.

In China and elsewhere in Asia, the centers of gravity in mobile have shifted away from app stores as the point of control to applications like messaging, which act as gateways for third parties to provide services.

Tencent's WeChat, a messaging app originally similar to WhatsApp, has become a digital Swiss army knife, allowing its 600 million monthly active users to play games, book cabs and make payments, among many other things.

Too big to ignore

But China is too big a market for Google to ignore. Apple Inc complies with local laws and made $13.2 billion last quarter in Greater China, which includes the mainland, Hong Kong and Taiwan, making it its second-biggest market.

Some in the industry doubt whether Google can use the Play store to help get its other services into China as domestic rivals are now well established and Google would have to comply with Chinese law. That would mean storing all data in China, and meeting information access and censorship requests, a thorny issue, particularly if the U.S. government gets involved.

Others say focusing on Google Play may make things easier. Chris MacDonald, a business ethics expert at Ryerson University in Toronto who oversaw a case study about Google’s operations in China while at Duke University, says Chinese regulators will see Play as less threatening than Search and Gmail, reducing the frequency of government-led probes.

"It's highly unlikely the Chinese government is going to come asking, 'Did anyone download Tetris?'" he said. "If Google doesn't have any highly private information, it can't be asked for highly private information." 

Back in the game?

China will this year become the world's largest mobile gaming market by revenue, earning more than $6 billion, says Peter Warman, CEO of Dutch mobile analytics company Newzoo, which analyses data from its Chinese partner TalkingData. Up to 90 percent of money spent on mobile goes to games, he said.

Google Play is available in China, but reaches only 21 million of an estimated 800 million Chinese mobile users, Warman said. The primary app stores of Internet giants Qihoo, Tencent and Baidu account for two thirds of the market.

These players are unlikely to give away that advantage. 

And handset manufacturers like Huawei and Xiaomi  have their own app stores which not only bring in revenue but enable them to control how their devices look and feel, at least in China.

"The fact of the matter is that Google is late to China. Maybe almost too late," says Shiv Putcha, who covers mobile in Asia for IDC, a consultancy.

Indeed, some question whether China needs a single Google-controlled app store. 

Rohit Dadwal, Managing Director Asia Pacific at the Mobile Marketing Association (MMA), says his organization has worked with mobile players and app stores on standards and guidelines that help brands measure the success of their ads, a key source of revenue.

"It's not the Wild West," he said. "It's a diversified, fragmented market, but each niche provides value."

For some local developers having a single market place would be a boon, since it would free them from the restrictions and quirks of app stores. Piracy and malware are problems too: a study by Tsinghua University, Microsoft Research and China's Ministry of Science and Technology found that only a quarter of apps on local app stores are safe.

But, says Tian and others, it would make most sense for foreign developers trying to break into China's market. Of the revenue generated by the top-100 games in China, only a tenth goes to publishers outside China, says Newzoo's Warman.

"If they could pull it off it would be good for the ecosystem, but it's going to be tough," said Adam Morley, Beijing-based product manager for Chinese social app Nice.

"You have a lot of players with skin in the game in a position of power." 

(Reporting by Jeremy Wagstaff and Paul Carsten; Additional reporting by Heather Somerville in SAN FRANCISCO; Editing by Ian Geoghegan)

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China is cracking down on some of the ways people move large sums of money out of the country, as it battles with the problem of capital flight.

The State Administration of Foreign Exchange (Safe), the unit of the central bank responsible for policing the currency, has ordered banks to strengthen controls on all foreign exchange transactions, according to a report from the Financial Times.

The SAFE is paying particular attention to people who fiddle contracts for imports and exports as way of moving money out of the country without declaring it – a ruse which involves over-billing for goods not delivered.

Meanwhile, it's a different picture in Greece, which is moving to liberalise its foreign-exchange market a bit, as Europe takes a breather from the sovereign debt crisis.

Francois Cabau and the Economic Research team at Barclays said in a note today that the Greek Finance Ministry eased capital controls on Wednesday allowing more money to flow out of the country.

Big companies were allowed to double their daily limit on international payments from €7 million (£5 million) to €14 million (£10 million).

Capital flight is a big problem for a slowing economy. For China, the money flows out of the country have had several knock-on effects. Mostly, it's made it more expensive to support the currency because sending money overseas creates a higher demand for assets not denominated in yuan, pushing down the price of the currency. 

It's also battling slowing inflation. Analysts Xiaojia Chi and Sylvia Sheng at Bank of America Merrill Lynch note that "domestic liquidity has become tighter partly due to capital outflows and PBoC’s FX intervention." The money that's left in the country is sloshing around at a slower rate.

Producer price inflation, which is an indicator of wholesale demand, is down at six-year lows in China:

If Greece is loosening capital controls and China tightening, it shows the differing levels of confidence between the two. 

It's an insider play. The tight foreign exchange rules are a sign that the richest people and most liquid companies think their money is safer out of the country than in.

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An epic military parade earlier this month showed off some of the Chinese military's new toys, unveiling heavy vehicles in maritime camouflage as the country's island-building in the South China Sea sits in US military planners' minds.

So how does China stack up to other world powers when it comes to aircraft carriers, one of the biggest factors in air and sea dominance?

Take a look at the photos and graphics below to get an idea of China's naval power:

SEE ALSO: Every surface ship in the Chinese navy, in one chart

This is China's only aircraft carrier, the Liaoning. Like much of China's military hardware, the Liaoning is a reworking of an older Russian-made model.

The Liaoning's particulars and capabilities sound impressive.

Source

The Admiral Kuznetsov, which the Liaoning is based on, is Russia's sole aircraft carrier. The ships have the same size and speed, and they both feature the "ski jump" platform.

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The market is going to have to show David Tepper a few things before he jumps in with more of his cash.

In an appearance on CNBC's Squawk Box, the billionaire founder of hedge fund Appaloosa Management said that the world is now in a cycle of volatility as economies adjust to a post-financial crisis interest rate regime.

It's not just the US Federal Reserve facing a difficult decision about its raising interest rates for the first time since the global financial crisis. The European Central Bank is at a critical point as well, as is the Bank of Japan.

On top of that, you have China making "policy mistake after policy mistake after policy mistake" in an attempt to transition its economy from one based on investment to one based on domestic consumption. 

"It's good when it's a $1 or $2 trillion economy on a learning curve," Tepper said. "It's kind of bad when they're an $10 trillion to $11 trillion economy on a learning curve and they influence a third of the world's economies."

That said, Tepper doesn't think that this is the end of the world. It's just a new world order.

"We're not talking systematic risk and the end of days like '07, '08 ... we're talking about the market having to come to certain new realities ... and while they're adjusting to those new realities, there will be blood," Tepper finished with a chuckle.

That's when Squawk co-host Andrew Ross Sorkin asked Tepper if there was anywhere in the world "where there's so much blood in the water already that it actually looks good?"

Tepper thought for a second, and then put it like this:

"Here's when I'll tell you. What I like to see is when some of those big stocks with big emerging market components — their P/Es [price earnings ratios] come down. Show me that," he said.

"Show me when hedge funds aren't in these last two years with increased volatility ... and they're out of this last two year range. Show me that.

"Show me when mutual fund cash levels are a little bit higher the way they were the past five years before these last two years. Show me that.

"Show me those things and maybe I'll jump back in the water again. I've got nice bathing suits, I think maybe I'll get a new bathing suit," said Tepper.

The opportunities are going to be there, he said, continuing the metaphor.

"I want to be ready for it ... Because you don't want me to lose my bathing suit."

No. No we do not.

Tepper's fund is up 11.5% for 2015 and lost only 1.83% in August when markets and managers around the world were getting slaughtered.

So we're all safe from him losing his suit for now.

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The world has never been more afraid that China's economy will have a hard landing.

Societe Generale tracks the number of news articles discussing disaster in Beijing, and over the past four weeks they have reached an all-time high.

"At first glance, the strong increase in the number of hard landing news articles could simply be viewed as a sign that the Chinese outlook is deteriorating rapidly," Societe Generale strategists Arthur van Slooten and Alain Bokobza said in a note.

"If that is the case, the indicator would be a precursor to rather dramatic changes in economic consensus that we have not seen so far."

It's not hard to understand why so many people around the world may be fearing a hard landing, or crash: China's transition from an investment-based economy to one based on domestic consumption — what the government has called "the new normal"— has been brutal.

Growth in the old drivers of the economy, such as manufacturing and real estate, has slowed faster than expected. Exports plummeted almost 9% in July, and employment is stagnating. This prompted the government to devalue the yuan slightly last month.

On top of that, China's two main stock markets — Shanghai and Shenzhen — started crashing back in June after experiencing a rally of nearly 150% over the previous year and a half. Now both have given back nearly all of their gains for 2015.

The Societe Generale note said: "The unprecedented stream of articles related to a Chinese hard landing has fueled collective (and apparently not so latent) fears.

"So even without the chart in hand, but just by reading the press, one can be excused for thinking that a China hard landing is imminent. In this context, it is hardly surprising that the general risk appetite has strongly diminished.

"It's kind of bad when they're a $10 trillion to $11 trillion economy on a learning curve and they influence a third of the world's economies."

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In China, security camera footage across multiple years shows drivers accidentally striking passersby, realizing their error, and subsequently rolling back over the injured pedestrians to make sure they're dead.

Why?

According to Geoffrey Sant, a professor at Fordham Law School and board member at the New York Chinese Cultural Center, if a driver in China hits a pedestrian, the goal isn't to minimize damage. It's to maximize it.

China's hit-to-kill mentality has been around for the better part of two decades, Sant explains in a recent article he penned for Slate.

Not only is it common, Sant says. It's embraced.

"Judges, police, and media often seem to accept rather unbelievable claims that the drivers hit the victims multiple times accidentally," he says, "or that the drivers confused the victims with inanimate objects."

People do this because of the money at stake, both present and future.

In China, it is customary after an accident for the offending party to cover the victim's medical expenses. However, this doesn't just happen once after the victim has left the hospital. It can go on for decades.

Killing the victim right away, in other words, avoids years of potentially crippling debt.

"The Chinese language even has an adage for the phenomenon," Sant writes. "'It is better to hit to kill than to hit and injure.'"

The most disgusting cases involve children. In 2010, a man driving a BMW backed out of a parking spot and accidentally struck a 3-year-old boy, security footage shows. Rather than check to see if the boy was alright, the man proceeded to roll his car over the boy's skull several times before driving off.

Sant says these cases are all too common, and rarely do the courts or public express outrage.

But sometimes they do.

In 2013, onlookers attacked a man who killed a 6-year-old with his car. News reports argued the crowd had misinformation, although numerous bystanders all agreed the man was at fault.

Since breaking cultural traditions is easier said than done, China is unlikely to give up the practice of covering years worth of medical expenses. 

Perhaps the easiest workaround is simply making pedestrian life safer — in other words, reducing the number of opportunities drivers have to hit people. China is already in the process of improving its public transit system and bike lane infrastructure through the use of physical barriers and more trains in operation. 

In the short-term, China can look to Japan for cues on how to stay safer. The Greater Tokyo area boasts the most sophisticated railway system in the world, servicing 40 million people daily and has one of the lowest rates of traffic fatalities of any city.

In the future maybe it can become more like Denmark, where half the country commutes by bike and traffic fatalities are pretty much extinct.

Or, a simpler solution — just stop killing people.

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China is being rocked by the biggest market reforms it has seen in two decades, General Electric's Chairman and CEO said Thursday in an interview with CNBC's Squawk Box.

And those changes will be incredibly difficult. He said that GE's orders in China are likely to slow to the single digits this year.

"There is real reform (in China), so people are more hesitant to buy, and there is a lot of change going on — as much change as I have seen in 20 or 25 years in China," Immelt said.

For the last year and some, China has been working to change its economy from one based on foreign investment, to one based on domestic consumption. That means allowing old drivers of the economy — like real estate, exports and manufacturing — to carry less of the weight of the economy, and allowing the services sector to rise.

It also means reforming China's debt laden corporate sector.

But the transition hasn't been going well. Old drivers have growth have plumeted faster than new drivers have risen, slowing the economy faster that the governement had imagined. On top of that, the stock market — which the government hoped would finance the corporate sector through its reform period — crashed in June and August.

The country also devalued its currency, the yuan, last month in part in an effort to boost exports.

"I think it used to be easy for everybody in China because it was a macro story. Everything in China grew," Immelt said. "Now it's more of a micro story."

In other words, as China goes through this difficult transition, the story will no longer be of one massive economy growing at stunning speed. The story will be of the winners and losers who survive a painful, but necessary  change.

Immelt said that there is still growth in the aviation sector and in the electricity business (winners), but that mining and construction are going to be "quite tough" (loosers).

Watch the CNBC clip here.

SEE ALSO: The market has never been more terrified of China

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One of China's largest state-owned automakers said Thursday it has opened a technology research center in California's Silicon Valley and is teaming with U.S. electric-car startup Atieva to develop EVs for China and global markets.

Beijing Electric Vehicle Co, an affiliate of government-owned BAIC Motor Corp Ltd , said its new tech center outside San Francisco will focus on development of EVs and eventually self-driving cars.

BAIC follows another large state-owned Chinese automaker, SAIC Motor Corp , which also is setting up a research facility in Silicon Valley and is developing electric and self-driving cars.

Atieva is one of several startups in China and the United States focused on building electric cars to rival those of Tesla Motors Inc .

BAIC's research center, which initially will house 20 employees, is located in Fremont, near the assembly plant where Tesla builds the Model S electric car.

BAIC, which said it will become Atieva's largest shareholder, will jointly develop an electric car with its U.S. partner, to be unveiled next spring at the Beijing auto show.

Co-founded in 2007 by former Tesla executive Bernard Tse, Atieva, based in Menlo Park near Stanford University, is one of several startups developing electric vehicles with funding from Chinese investors.

Shanghai-based NextEV in late August told Reuters that it is developing a prospective Tesla competitor, with backing from Chinese internet entrepreneurs. NextEV has several global research facilities, including one in Silicon Valley.

A third startup, Faraday Future, in July said it is developing an electric car that also could challenge Tesla. FF, as it is called, is based in Gardena, outside Los Angeles, and is said to be funded in part by Chinese tech entrepreneur Jia Yueting.

Both Atieva and Faraday have hired a number of former Tesla employees.

Driven down this year by low fuel prices and ample petroleum supplies, demand for pure electric vehicles in the U.S. and China - the two largest global markets - continues to lag well behind industry and government forecasts. An estimated 27,000 EVs were sold in China in the first six months, with an estimated 29,000 sold in the U.S.

(Reporting by Paul Lienert in Detroit; Editing by Alan Crosby)

SEE ALSO: I love my new Toyota Prius a lot more than I thought I would

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WASHINGTON/LOS ANGELES (Reuters) - In early June, in cities across America, U.S. immigration agents arrested more than two dozen Chinese nationals with unfulfilled deportation orders, telling them that after years of delay, China was finally taking steps to provide the paperwork needed to expel them from the U.S.

But, not for the first time, China failed to provide the necessary documents, and three months later not one of those arrested has been deported, and many have been released from custody. They form part of a backlog of nearly 39,000 people Chinese nationals awaiting deportation for violating U.S. immigration laws, 900 of them classed as violent offenders, according to immigration officials.

The issue, which is likely to come up during a state visit to Washington later this month by Chinese President Xi Jinping, has further strained a U.S.-China relationship already frayed by tensions over economic policy, suspected Chinese cyber hacking and Beijing’s growing military assertiveness.

Meanwhile, China is pushing the U.S. on a different immigration issue: the return of Chinese citizens it says are fugitives from corruption investigations at home.

The June arrests, described by immigration lawyers, U.S. officials and some of the arrestees themselves, grew out of meetings aimed at speeding up a clogged process that has long frustrated the United States.

China has been extremely slow, U.S. immigration officials say, to provide the proof of citizenship necessary to send visa violators home. Some of the nearly 39,000 Chinese immigrants awaiting deportation have been under orders to leave for well over a decade, and the backlog continues to grow.

An apparent breakthrough came, officials say, at a March meeting in Beijing between Sarah Saldana, director of Immigration and Customs Enforcement (ICE), and Zheng Baigang, a top Chinese Public Security official. Their discussions produced a “memorandum of understanding,” agreed to by both countries, to help expedite the process.

In April, Department of Homeland Security Secretary Jeh Johnson traveled to Beijing, where his Chinese counterparts "agreed to begin repatriation flights from the U.S. for Chinese nationals with final deportation orders," said DHS Press Secretary Marsha Catron.

As part of that agreement, two Chinese officials traveled to the U.S. to interview those arrested in the June sweep, along with more than 50 others on the deportation list, including many with criminal convictions in the United States. China promised their cases would be resolved quickly.

In the past, an ICE official said, China has explained delays by saying it can be difficult to verify citizenship, a process that might require visits to distant villages and towns.

But one U.S. official suggested another reason for the holdups: "They do not want these people back.”

A senior Obama administration official told Reuters, ahead of Xi's visit, that the U.S. would like to see China move on this issue. “We have made that very clear, and pressed them to do so," the official said.

SWEPT UP

One of the immigrants detained in the recent sweeps was Daniel Maher, who was arrested as he left for work from his San Francisco Bay area home on June 2. Four uniformed immigration officials pulled up behind his car, he said, shackled his  wrists and legs and then drove him to a U.S. deportation office.

There, Maher says, he was searched along with 13 other Asian men and put into a prison jumpsuit. "We were told there was a 99.9 percent chance the travel documents were arriving to deport us to China," said Maher, who was born in Macau, a former colony of Portugal that  became a special administrative region of China after Maher immigrated to the United States. "I was told I would need a jacket, because the plane would be cold."

But Maher, who was convicted of holding up a San Jose, California auto parts warehouse in the 1990s and served a six-year term before being ordered deported in 2000, has since been released.

In a statement provided to Reuters, ICE said Maher was let go on August 14 “after it became apparent the agency would not be able to obtain a travel document in the foreseeable future to carry out its repatriation.”

U.S. frustrations over the massive deportation backlog come as Beijing is pushing for more help in tracking down and repatriating dozens of alleged fugitives living in the U.S. who are wanted in China as part of a widespread crackdown on corruption dubbed Operation Fox Hunt.

Officials in the U.S. put distance between the two issues, saying there will be no ‘quid pro quo’ agreement to provide Operation Fox Hunt suspects in exchange for cooperation on immigration violators. But they acknowledged that there are parallel discussion on the matters.

China, however, sees the two subjects as tied. In a statement, China's Foreign Ministry said: "China believes that there should be no double standards when it comes to the issue of handling the repatriation of illegal immigrants," urging “support for China's efforts to fight corruption."

U.S. officials say they are not averse to cooperation on Operation Fox Hunt, but that despite requests, Beijing has failed to produce the kind of evidence of criminality needed under American law to support deportation.

There is no extradition treaty between the U.S. and China, and Western governments have long been reluctant to hand over suspects because of a lack of transparency and due process in China's judicial system. In the past, Chinese government officials convicted of corruption have sometimes been sentenced to death.

BRIEF COOPERATION

Anoop Prasad, a San Francisco immigration attorney who represented Maher and others arrested in the June sweeps, says the Northern California detainees were transferred to an ICE facility in Adelanto, California, about a week after their arrest. There, they were each interviewed by two Chinese officials during a brief moment of cooperation between the two countries on the matter. They were also each ordered to fill out applications for Chinese passports.

"Those interviewed were selected because ICE determined that there was a significant likelihood of their removal in the reasonably foreseeable future," an ICE spokesperson said in a statement to Reuters.

And although no paperwork has yet come, the spokesperson added, "ICE expects the Chinese will honor their commitment to issue travel documents for those individuals confirmed to be Chinese nationals."

ICE acknowledges, however, that the backlog has been caused largely because of Chinese failure to provide documents and proof of citizenship.

Prasad said he believes his clients are being used as pawns in international diplomatic negotiations between China and the U.S., with America looking for help to reduce the backlog, and China wanting help in hunting down its corrupt fugitive officials, although Prasad admits he has no proof of that.

Prasad also questions why Maher was targeted. Since his release from jail in 2000, the attorney says, Maher, who is now married with a family, has turned his life around, working full time since 2005 and keeping all supervision appointments with ICE for the past 15 years.

U.S. officials say the two Chinese officials who conducted the interviews returned home in August.

(Additional reporting by Elizabeth Dilts in New York, Matt Spetalnick in Washington and Ben Blanchard in Beijing; Editing by Sue Horton)

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BEIJING (Reuters) - China has begun developing a new generation of attack helicopter which will have stealth abilities and should start deliveries to the Chinese armed forces by about 2020, the official China Daily newspaper said on Friday.

The helicopter is being developed by Aviation Industry Corp of China (AVIC), one of the country's leading arms manufacturers, the state-run English-language publication said.

Its stealth capabilities will "reshape the combat patterns" of the People's Liberation Army, company chairman Lin Zuoming was quoted as saying.

"It is a trend that the ground force will become increasingly dependent on helicopters because they have better strike capability and mobility than armored vehicles, and transport supplies to frontier troops," Lin said.

The company's chief helicopter designer, Wu Ximing, said the aircraft would have "supreme maneuverability in complicated environments, outstanding survivability and joint operation ability", the report added.

It provided no other details.

President Xi Jinping has pushed to toughen and modernize the country's 2.3 million-strong armed forces as China takes a more assertive stance in the region, particularly in the South China and East China seas.

That has included developing a series of high-tech weapons, including stealth jets, aircraft carriers and emerging technology aimed at shooting down satellites. 

(Reporting by Ben Blanchard; Editing by Joseph Radford)

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BEIJING (Reuters) - China's auto sales could be heading for a rare fall this year, but one bright spot is in so-called green cars, where sales have almost quadrupled so far in 2015.

With a part-carrot, part-stick strategy of incentives and targets, Beijing is pushing car makers to develop battery electric cars, seeing this as its best shot at closing a competitive gap with global rivals who have a 100-year headstart in traditional combustion engines.

Electric powertrains are simpler to develop, and driving a push to green cars fits President Xi Jinping's policy goal of reducing pollution.

With an eye on both big subsidies and looming fuel economy targets, automakers in China are earmarking at least 50 billion yuan ($7.86 billion) this year for developing and making 'new energy' vehicles, a Chinese catch-all term for electric and highly electrified cars, data compiled by Reuters shows.

"Some time ago, Xi Jinping explained it very well, saying that developing new energy vehicles is the Chinese auto industry's only road to grow from being big to being strong," Xu Heyi, chairman of Beijing Automotive Group and a high-ranking Communist Party official, told reporters recently.

Electric and plug-in hybrid car sales jumped 270 percent to 108,654 cars in January-August, the China Association of Automobile Manufacturers (CAAM) said on Thursday, and China is on track to overtake the United States as the world's leading producer, making more than 130,000 such cars this year, according to consultancy LMC Automotive.

The government has set a goal of annual production of 1 million new energy cars by 2020, though industry researcher IHS Automotive forecasts output then at nearer 791,000.

FUEL ECONOMY GOALS

As for the carrot, drivers in Shanghai, for example, can save up to 182,600 yuan ($28,600) over a traditional gasoline-powered car, by taking advantage of free license plates for some green cars and other subsidies, according to official data and analysts' estimates.

However, Beijing said in April it would roll back subsidies faster than expected, and may now lean increasingly on fuel economy requirements that grow progressively stricter to 2020.

Authorities haven't yet spelt out how these requirements will be enforced, though a feasibility study released by Great Wall Motor Co last month suggested automakers could face big fines for failing to meet the requirements.

The central government plans to roll out a California-style system that rewards manufacturers and drivers for going electric, while punishing those who rely on traditional gasoline cars, Beijing Auto's Xu said in July.

Chinese automakers are leading the charge to invest in green cars, with domestic brands such as Geely Automobile Holdings and Great Wall raising money in private share placements or building factories specifically earmarked for new energy vehicles.

Among foreign automakers, General Motors Co's joint venture with SAIC Motor Corp said in April it would invest 26.5 billion yuan in new energy technologies and increased electrification by 2020. A spokeswoman said this was still on track.

GM and SAIC's other joint venture, with Wuling Motors Holdings , said last month it would build a $470 million new energy vehicle factory with 200,000-car capacity by 2017, though it did not specify whether the cars would be traditional hybrid, plug-in hybrid or full electric.

HOMEGROWN MODELS

While official data doesn't break down market share for green cars, Chinese marques dominate the lists of top-selling electric and hybrid models.

BYD leads the market with its Qin plug-in hybrid, while Beijing Auto subsidiary BAIC Motor Corp sells the leading full-electric car, the E-series, according to the China Passenger Car Association (CPCA).

"Foreign carmakers don't believe the technology is evolved," said Yale Zhang, managing director at Shanghai-based industry researcher Automotive Foresight. "They don't think there's enough demand for pure-electric vehicles."

Some foreign car markers are showing faith, however, in the long-term demand for electrified vehicles in China.

Toyota Motor Corp is gearing to launch by the end of this year a lower-cost gasoline-electric hybrid, similar to its Prius, which has been developed specifically for China.

Tesla Motors spokesman Gary Tao said that the company was optimistic about the EV market in China after it recorded rapid sales growth this year, contributing to a near doubling of sales in Asia-Pacific in the second quarter compared with the first three months of the year. He declined to give exact sales numbers.

"Gradually people can be more knowledgeable about these EV cars and better accept EV cars, then the whole market could be ready for the mass market (EVs)," Tao said.

"Quality and best-in-service will be a good base for the future of long-term development ... more than volume at this stage." 

(Reporting by Jake Spring; Additional reporting by Beijing newsroom; Editing by Ian Geoghegan and Alex Richardson)

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BEIJING (Reuters) - Iranian Foreign Minister Mohammad Javad Zarif will visit Beijing next week to discuss Iran's nuclear agreement and efforts to boost ties with China, China's foreign ministry said on Friday.

China and Iran have close diplomatic, economic, trade and energy ties, and Chinese Foreign Minister Wang Yi has been active in pushing both the United States and Iran to reach agreement on the nuclear issue.

China had long railed against unilateral sanctions imposed on Iran by the United States and Europe, though it has supported U.N. ones, and had denounced threats of force.

Zarif will travel to China on Sept. 15 at the invitation of Wang, Foreign Ministry spokesman Hong Lei told a news conference.

News of the visit came a day after a Republican-backed effort to kill the Iran nuclear agreement was narrowly blocked in the U.S. Senate, clearing the way for its implementation.

Under the deal, agreed in July, sanctions imposed by the United States, European Union and United Nations will be lifted in return for Iran agreeing to long-term curbs on a nuclear program that the West has suspected was aimed at creating a nuclear bomb.

In July, Chinese President Xi Jinping told U.S. President Barack Obama that China would work with the United States and others to ensure the implementation of the agreement. 

(Reporting by Sui-Lee Wee; Editing by Robert Birsel)

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