As the world is shocked by $1 trillion of capital leaving China in 2015, Beijing is looking to lay off up to 400,000 steel workers as a first step to reducing overcapacity.
As of January 1, the government has set up a industrial restructuring fund expected to draw over $7 billion to focus on transitioning laid-off workers to gainful employment in other industries (or presumably early retirement where possible).
Another report has the central government in Beijing spending $15 billion annually to this end, with local governments pitching in about the same to bring the annual total to about $30 billion.
These sums are key to the success of the much-needed restructuring; earlier this month, analysts voiced skepticism that China's latest official efforts to curb steel overcapacity will gain much traction, citing the fact that unwillingness of local governments to lose key sources of tax revenue and shoulder social security costs of masses of unemployed workers have hitherto rendered such endeavors ineffective.
Hopes seem high that things this time will be different: Asian steelmaker stocks rallied on news of the latest plans.
Per the first article cited above (Bloomberg), some 3 million workers in the steel, coal, cement, aluminum and glass industries are endangered by a production cutback of 30 percent over the next 2-3 years. If overcapacity in other industries is considered, perhaps as many as 10 million workers face the chopping block between now and 2020; assuming the bulk of this redundancy is from the inefficient state-owned enterprise (SOE) sector, that's up to one-sixth of the entire state enterprise workforce of about 60 million.
These numbers, while large, are actually tame compared to the estimated 30 to 40 million state enterprise workers who were axed in a short period between 1998 and 2000 in the run-up to China's accession to the WTO in 2001. Those workers got only a fraction of the employment transition assistance that's now proposed.
In fact, the big losers in this round of restructuring could be the party bosses at the heads of defunct SOEs: the climate of graft-busting makes it unlikely that they can pocket public assets in closed-door sweetheart deals even as their workers lose their livelihoods, as they notoriously did in the past. And that will also be a big plus, especially for the Xi-Li administration's legitimacy.
As well, although local governments will lose tax revenues from plant closings, this fiscal burden should be relieved within a few years by a normalized steel market, with prices rising back up from their presently depressed levels.
These downsizing plans for steel and coal are just a start to ridding China of overcapacity, but they are effectively pilot programs which must exhibit demonstrable progress first before broader restructurings can cut across other industries.
And they will be crucial to ease renewed fears that China is once more goosing short-term growth at the expense of deeper retooling of the economic development model - something Li Keqiang has attempted to assuage with recent statements.
As many would have expected, only actual deteriorating market and economic conditions could have compelled Beijing to finally do something about its industrial overcapacity and deflation; the country clearly can't have another $1 trillion of capital leave it in 2016.
The strains on the financial sector will be too great: though risk remains minimal for big state bank failures, overall banking industry concern about overcapacity-related credit risk is rising.
Tuesday, January 26, 2016
Monday, January 25, 2016
China's state enterprise conundrum: a crisis, not an existential threat (yet)
The "d" word is weighing heavily on the global economy several weeks into 2016, and in fact how China sorts out its industrial deflation crisis is likely to be the single greatest economic story for the whole year - as it will largely determine the timing, direction, and magnitude of fluctuations of prices of virtually every asset class on every major equity, debt, and commodity exchange worldwide. It has become imperative for anyone concerned about the markets to get a realistic overall picture of the Chinese deflation problem and where it is likely headed.
Cautious optimism is warranted at this time; the doom-and-gloom of the China bears is largely a reflection of their "free market fundamentalism" - that is, their deep skepticism of the communist political system. If one instead takes the view that this autocratic system is still essentially sound, then one can be considerably more sanguine about China's prospects in 2016 - even while allowing for repeated bouts of China-induced global market volatility throughout the year.
To begin with, China's present crisis was a long time in the making, and contrary to what the pessimists seem to suggest, it has not caught Beijing unprepared or by surprise. Today's unfolding troubles were quite clearly in view when the fifth-generation leadership of Xi Jinping and Li Keqiang assumed power in 2013. Xi's signature anti-corruption campaign has actually been a prelude to and preparation for the difficult reforms of the state-owned enterprise (SOE) sector that many expect to finally get off the ground this year and next, because the success of these reforms is primarily a matter of the central government's authority to bring to heel the party's vested interests in local governments and the SOE power hierarchy.
SOEs are at the heart of the Chinese industrial deflation that began quite some time ago - late 2011 and early 2012 - but that only became a major global risk in earnest in mid-2015. The present crisis has its roots in the early-2009, $586 billion stimulus package unveiled by Beijing to rescue China from the global financial meltdown: the bulk of this massive spending was in the form of ultra-cheap loans by state-owned banks to SOEs in the heavy, infrastructure-related industrial production sector. Over three years, 2009-2012, this made China the engine of the world economy: it accounted for nearly two-fifths of global GDP increase as its factories pumped out massive quantities of industrial commodities like steel, other industrial metals, cement, glass, plastics, chemicals, etc. in a frenzy to saturate the entire country with roads, railroads, ports, airports, telecom networks, energy and power systems, water and gas supply and management systems, skyscrapers, high-rises, apartment complexes, new homes, public transit systems, shopping malls and commercial centers, and so on.
This was a boom of an unprecedented combination of speed and scale - the largest Keynesian pump-priming operation in human history. Prior to the 2007-2009 financial crisis, China had already exhibited what many feared to be a rapid over-investment in commercial and residential real estate, which led to its stock market crash of late 2007 and early 2008; but the 2009 stimulus demonstrated that this was a mere warm-up for the true infrastructure and investment splurge driven by the seemingly bottomless pockets of the communist party state, which now became the savior of the global economy and especially the darling of commodity-producing countries, regions, and corporations, which now enjoyed unprecedented export volumes of their resources at elevated prices.
By late 2012, when Xi Jinping ascended to party leadership, it was clear that all was not as well as the torrid GDP growth figures made it seem. Images of "ghost cities" throughout the country now became emblematic of the obvious fact that a lot of money had been wasted on unprofitable, commercially unsound investments - even as more were still being made. The explosion in credit throughout the economy - that is, debt - had begun to spiral out of control with the alarming rise of a massive "shadow banking" sector of officially unauthorized, high-risk and high-interest financing entities. Real estate prices had vaulted into the stratosphere, especially in first-tier cities and regions, but in many second and third-tier areas the sticker prices were utterly unsupported by actual market demand, and there was now a glut of idle or badly underutilized infrastructure and construction in virtually every province, which cast a darkening cloud of overcapacity and deflation over the heavy industrial sector. As of early 2012, China's producer price index (PPI) had already slipped into negative territory - it has only sunk deeper in the red since.
In January 2013, the city of Beijing was walloped by an "Airpocalypse" of catastrophic smog which revealed the extent of the wasteful overproduction plaguing its surrounding coal-burning industrial enterprises. This was followed in June by a credit crunch engineered by Chinese authorities in response to the US Federal Reserve's announcement that it would end quantitative easing (QE) to support the US economy, which triggered a so-called "taper tantrum" in emerging markets worldwide; owing to their disproportionate share of financing from the banking sector, the SOEs were heavily impacted. Then in July, Xi Jinping began his anti-corruption campaign that has already lasted far longer than most observers expected, and this put local governments and SOEs squarely in the target sights of the newly empowered graft-busting bureaucrats.
Thus, by the time Xi unveiled his ambitious economic policy agenda in November 2013, a new era had already begun for the bloated state-owned enterprise sector: as the officially approved SOE reform goals indicated, they would still be central to the Chinese economy, but now had to respond to market demand, i.e. they could no longer do their "business as usual" of sucking up vast sums of cheap financing from state banks to pour into large investments which typically prioritize the self-enrichment and self-empowerment of their own ensconced power and patronage structures over the wider public good.
It is thus incorrect to say that simply because virtually no SOEs have been outright allowed to fail, there has been no progress whatsoever on their reform. In the first place, Western-favored privatization has never been a realistic outcome for what remain essential pillars of the communist system; the real issue in China - ever since reform and opening began in the 1980s - has always been how to maximize efficiency and minimize waste in the state-controlled foundation of the economy whose priority will never purport to be innovation or dynamism, anyway. As such, the best route for Beijing is the one it has already embarked on: mild "supply-side" reforms focused on consolidation of redundant enterprises and capacity, which of course strikes Western market fundamentalists as monopoly promotion, but which actually closely mirrors the actual (as opposed to idealized) situation of oligopoly that exists in various industries even in developed OECD markets.
In the more strictly economic sense, the SOEs have already been largely contained, even if they haven't been downsized. With crushing deflation taking hold from 2013 on, their real cost of borrowing remained high because the People's Bank of China (PBOC) was initially stingy with interest rate and reserve requirement ratio (RRR) cuts that would ease their steadily increasing liquidity strains. It wasn't until the second half of 2014, when the yuan shot up in tandem with the dollar against other currencies (a turn spurred by a combination of crashing oil prices and the end of QE in the US economy), that the central bank aggressively eased domestic monetary policy - which hasn't so much given the SOEs a boost as simply prevented them from sinking even deeper into the deflationary trap.
As of 2016, though, the SOE reform odyssey is set for genuine takeoff forced by prevailing economic conditions. PPI has settled down close to minus-6 percent, with the situation particularly dire in the most overcapacity-plagued industries like coal and steel - these two have exhibited their first nominal output declines in decades in 2014 and 2015, respectively. China's industrial production figures now tell an unmistakable tale of divergence between real and nominal prices: while real production continues to expand around 6 percent on year, nominal output growth has plunged towards barely 1 percent. For a manufacturing country, this is the equivalent of oil dropping from $100 to $60 a barrel on the way to $40 and below.
On paper, the path out of the mess is quite clear, and China already seems on this road. The most bloated heavy industries are likely to suffer for maybe two more years with factory closings and mass layoffs, as many steel mills and coal mines are already experiencing. Mergers and consolidations of overcrowded industries, including shipbuilding, petrochemicals, energy, and heavy machinery, which began in earnest in 2015, will accelerate in 2016; at least in theory, this means that as early as 2017 these sectors will be leaner and meaner, and able to hold their own even in international markets with reduced state subsidies. Absent the possibility of outright privatization, private capital is being enticed to invest in SOEs nonetheless through joint ventures; different public-private partnership schemes are also in the cards to encourage greater input from and participation by non-state citizens and entities, to include possibly even management of enterprises. And overall, the central government seems to have a good handle on what needs to be done on a sector-by-sector basis: whilst some industries must radically shift towards profit-making, others (like healthcare and education) must cut costs and increase efficiency like nonprofits or NGOs.
But the real question which overhangs all these changes - and thus will determine whether they'll be deep and fundamental or merely superficial and cosmetic - is the nature of the state-run segment of the Chinese economy as a whole. Since it first established them in the 1950s, Beijing has relied on its sprawling state enterprises as the main levers of its practical day-to-day governance of the country. Even during reform and opening, it has only promoted profit-making and competition in the state sector as a means to facilitating such governance in a challenging new environment of global integration, never as an end in itself. Ultimately, because the state enterprises - from the massive centrally administered state banks to the local government-run factories and mines - are the principal means by which the communist party controls the nation's wealth and means of production, there are clear limits to what economic or even managerial reforms can achieve without political changes, as well.
In other words, in the final analysis it's hard to conceive of a central leadership in Beijing that's comfortable with relying more directly on the power of its citizenry - specifically, their enhanced purchasing power and greater capacity to supply tax revenues - than via the traditional intermediary of the state enterprise behemoth. The obvious implication of the reforms that Xi Jinping's regime has espoused is precisely this outcome, but thus far there is little of the overall substance of the execution of these reforms that points to a substantially lower profile for the state in the Chinese economy. Beijing clearly wants to have its cake and eat it, too - an impossibility in the long run.
And so, in all likelihood, we're about to witness another round of muddling through on China's part that could actually seem to work for a while - until the same underlying conundrum of the state sector resurfaces again, most likely in the form of yet another deflationary trap. China's per capita GDP could then be $15,000 as against today's $8,000. That level, in real terms, only elevates China to about the point where many economies have actually hit the dreaded "middle income trap": today it's at least 20 percent lower, indicating that China still has some relatively low-hanging fruit to pick in its economic journey that are likely to finally be exhausted over the coming decade of still relatively high investment and exports.
At that point, though, in perhaps the mid-2020s, Beijing will have a far more apparent choice between maintaining control at the risk of social stagnation vice loosening control at the risk of runaway social empowerment. We're not quite there yet, though we could actually reach that point far sooner if the global environment proves inhospitable to China's still heavily trade-dependent economy; either way, China's state enterprise conundrum is a chronic and recurring crisis that the communist regime may eventually find to be so intractable that playing it safe only increases its chances of becoming a long-term existential threat.
Cautious optimism is warranted at this time; the doom-and-gloom of the China bears is largely a reflection of their "free market fundamentalism" - that is, their deep skepticism of the communist political system. If one instead takes the view that this autocratic system is still essentially sound, then one can be considerably more sanguine about China's prospects in 2016 - even while allowing for repeated bouts of China-induced global market volatility throughout the year.
To begin with, China's present crisis was a long time in the making, and contrary to what the pessimists seem to suggest, it has not caught Beijing unprepared or by surprise. Today's unfolding troubles were quite clearly in view when the fifth-generation leadership of Xi Jinping and Li Keqiang assumed power in 2013. Xi's signature anti-corruption campaign has actually been a prelude to and preparation for the difficult reforms of the state-owned enterprise (SOE) sector that many expect to finally get off the ground this year and next, because the success of these reforms is primarily a matter of the central government's authority to bring to heel the party's vested interests in local governments and the SOE power hierarchy.
SOEs are at the heart of the Chinese industrial deflation that began quite some time ago - late 2011 and early 2012 - but that only became a major global risk in earnest in mid-2015. The present crisis has its roots in the early-2009, $586 billion stimulus package unveiled by Beijing to rescue China from the global financial meltdown: the bulk of this massive spending was in the form of ultra-cheap loans by state-owned banks to SOEs in the heavy, infrastructure-related industrial production sector. Over three years, 2009-2012, this made China the engine of the world economy: it accounted for nearly two-fifths of global GDP increase as its factories pumped out massive quantities of industrial commodities like steel, other industrial metals, cement, glass, plastics, chemicals, etc. in a frenzy to saturate the entire country with roads, railroads, ports, airports, telecom networks, energy and power systems, water and gas supply and management systems, skyscrapers, high-rises, apartment complexes, new homes, public transit systems, shopping malls and commercial centers, and so on.
This was a boom of an unprecedented combination of speed and scale - the largest Keynesian pump-priming operation in human history. Prior to the 2007-2009 financial crisis, China had already exhibited what many feared to be a rapid over-investment in commercial and residential real estate, which led to its stock market crash of late 2007 and early 2008; but the 2009 stimulus demonstrated that this was a mere warm-up for the true infrastructure and investment splurge driven by the seemingly bottomless pockets of the communist party state, which now became the savior of the global economy and especially the darling of commodity-producing countries, regions, and corporations, which now enjoyed unprecedented export volumes of their resources at elevated prices.
By late 2012, when Xi Jinping ascended to party leadership, it was clear that all was not as well as the torrid GDP growth figures made it seem. Images of "ghost cities" throughout the country now became emblematic of the obvious fact that a lot of money had been wasted on unprofitable, commercially unsound investments - even as more were still being made. The explosion in credit throughout the economy - that is, debt - had begun to spiral out of control with the alarming rise of a massive "shadow banking" sector of officially unauthorized, high-risk and high-interest financing entities. Real estate prices had vaulted into the stratosphere, especially in first-tier cities and regions, but in many second and third-tier areas the sticker prices were utterly unsupported by actual market demand, and there was now a glut of idle or badly underutilized infrastructure and construction in virtually every province, which cast a darkening cloud of overcapacity and deflation over the heavy industrial sector. As of early 2012, China's producer price index (PPI) had already slipped into negative territory - it has only sunk deeper in the red since.
In January 2013, the city of Beijing was walloped by an "Airpocalypse" of catastrophic smog which revealed the extent of the wasteful overproduction plaguing its surrounding coal-burning industrial enterprises. This was followed in June by a credit crunch engineered by Chinese authorities in response to the US Federal Reserve's announcement that it would end quantitative easing (QE) to support the US economy, which triggered a so-called "taper tantrum" in emerging markets worldwide; owing to their disproportionate share of financing from the banking sector, the SOEs were heavily impacted. Then in July, Xi Jinping began his anti-corruption campaign that has already lasted far longer than most observers expected, and this put local governments and SOEs squarely in the target sights of the newly empowered graft-busting bureaucrats.
Thus, by the time Xi unveiled his ambitious economic policy agenda in November 2013, a new era had already begun for the bloated state-owned enterprise sector: as the officially approved SOE reform goals indicated, they would still be central to the Chinese economy, but now had to respond to market demand, i.e. they could no longer do their "business as usual" of sucking up vast sums of cheap financing from state banks to pour into large investments which typically prioritize the self-enrichment and self-empowerment of their own ensconced power and patronage structures over the wider public good.
It is thus incorrect to say that simply because virtually no SOEs have been outright allowed to fail, there has been no progress whatsoever on their reform. In the first place, Western-favored privatization has never been a realistic outcome for what remain essential pillars of the communist system; the real issue in China - ever since reform and opening began in the 1980s - has always been how to maximize efficiency and minimize waste in the state-controlled foundation of the economy whose priority will never purport to be innovation or dynamism, anyway. As such, the best route for Beijing is the one it has already embarked on: mild "supply-side" reforms focused on consolidation of redundant enterprises and capacity, which of course strikes Western market fundamentalists as monopoly promotion, but which actually closely mirrors the actual (as opposed to idealized) situation of oligopoly that exists in various industries even in developed OECD markets.
In the more strictly economic sense, the SOEs have already been largely contained, even if they haven't been downsized. With crushing deflation taking hold from 2013 on, their real cost of borrowing remained high because the People's Bank of China (PBOC) was initially stingy with interest rate and reserve requirement ratio (RRR) cuts that would ease their steadily increasing liquidity strains. It wasn't until the second half of 2014, when the yuan shot up in tandem with the dollar against other currencies (a turn spurred by a combination of crashing oil prices and the end of QE in the US economy), that the central bank aggressively eased domestic monetary policy - which hasn't so much given the SOEs a boost as simply prevented them from sinking even deeper into the deflationary trap.
As of 2016, though, the SOE reform odyssey is set for genuine takeoff forced by prevailing economic conditions. PPI has settled down close to minus-6 percent, with the situation particularly dire in the most overcapacity-plagued industries like coal and steel - these two have exhibited their first nominal output declines in decades in 2014 and 2015, respectively. China's industrial production figures now tell an unmistakable tale of divergence between real and nominal prices: while real production continues to expand around 6 percent on year, nominal output growth has plunged towards barely 1 percent. For a manufacturing country, this is the equivalent of oil dropping from $100 to $60 a barrel on the way to $40 and below.
On paper, the path out of the mess is quite clear, and China already seems on this road. The most bloated heavy industries are likely to suffer for maybe two more years with factory closings and mass layoffs, as many steel mills and coal mines are already experiencing. Mergers and consolidations of overcrowded industries, including shipbuilding, petrochemicals, energy, and heavy machinery, which began in earnest in 2015, will accelerate in 2016; at least in theory, this means that as early as 2017 these sectors will be leaner and meaner, and able to hold their own even in international markets with reduced state subsidies. Absent the possibility of outright privatization, private capital is being enticed to invest in SOEs nonetheless through joint ventures; different public-private partnership schemes are also in the cards to encourage greater input from and participation by non-state citizens and entities, to include possibly even management of enterprises. And overall, the central government seems to have a good handle on what needs to be done on a sector-by-sector basis: whilst some industries must radically shift towards profit-making, others (like healthcare and education) must cut costs and increase efficiency like nonprofits or NGOs.
But the real question which overhangs all these changes - and thus will determine whether they'll be deep and fundamental or merely superficial and cosmetic - is the nature of the state-run segment of the Chinese economy as a whole. Since it first established them in the 1950s, Beijing has relied on its sprawling state enterprises as the main levers of its practical day-to-day governance of the country. Even during reform and opening, it has only promoted profit-making and competition in the state sector as a means to facilitating such governance in a challenging new environment of global integration, never as an end in itself. Ultimately, because the state enterprises - from the massive centrally administered state banks to the local government-run factories and mines - are the principal means by which the communist party controls the nation's wealth and means of production, there are clear limits to what economic or even managerial reforms can achieve without political changes, as well.
In other words, in the final analysis it's hard to conceive of a central leadership in Beijing that's comfortable with relying more directly on the power of its citizenry - specifically, their enhanced purchasing power and greater capacity to supply tax revenues - than via the traditional intermediary of the state enterprise behemoth. The obvious implication of the reforms that Xi Jinping's regime has espoused is precisely this outcome, but thus far there is little of the overall substance of the execution of these reforms that points to a substantially lower profile for the state in the Chinese economy. Beijing clearly wants to have its cake and eat it, too - an impossibility in the long run.
And so, in all likelihood, we're about to witness another round of muddling through on China's part that could actually seem to work for a while - until the same underlying conundrum of the state sector resurfaces again, most likely in the form of yet another deflationary trap. China's per capita GDP could then be $15,000 as against today's $8,000. That level, in real terms, only elevates China to about the point where many economies have actually hit the dreaded "middle income trap": today it's at least 20 percent lower, indicating that China still has some relatively low-hanging fruit to pick in its economic journey that are likely to finally be exhausted over the coming decade of still relatively high investment and exports.
At that point, though, in perhaps the mid-2020s, Beijing will have a far more apparent choice between maintaining control at the risk of social stagnation vice loosening control at the risk of runaway social empowerment. We're not quite there yet, though we could actually reach that point far sooner if the global environment proves inhospitable to China's still heavily trade-dependent economy; either way, China's state enterprise conundrum is a chronic and recurring crisis that the communist regime may eventually find to be so intractable that playing it safe only increases its chances of becoming a long-term existential threat.
Tuesday, January 19, 2016
Breaking down the latest GDP figures just a bit
Gordon Chang is at it again - he who claimed China would utterly collapse in the early 2000s is now pretty much saying that Beijing has managed to fudge a whopping $600 billion of economic growth out of thin air over the course of 2015, i.e. 1 percent GDP growth in FY 2015 as opposed to the reported 6.9 percent, on top of a roughly $10 trillion economy in 2014. Now that would be quite a feat, even for a communist dictatorship.
The basis of the "1 percent growth" argument is the following falsehood:
The contraction in heavy industrial electric consumption isn't such a bad thing, either: it reflects long-overdue efforts to cut down on overcapacity and inefficient production in this bloated sector that's become the biggest drag to the Chinese economy - not to mention the main culprit behind the Apocalyptic levels of pollution (coal power).
That being said, it does seem odd that industrial production can have grown 6.2 percent on year given that industrial electricity use - heavy and light industry together - declined by 1.4 percent. The easy explanation for this at a high level is that light industry, comprising predominantly finished manufactured goods, is still growing at a healthy clip even as heavy industry, dominated by bulk commodity products (steel, cement, glass, etc.) is crushed by production cutbacks, large inventories to draw down, and deflation. The former needs only a fraction of the energy input of the latter to generate the same monetary value of output. A reasonable guess is that heavy industrial output grew about 1.5 percent as electricity consumption fell by the reported 1.9 percent, whilst light industry grew 8 or 9 percent as electricity consumption grew the reported 1.3 percent.
This would be in keeping with China's significant gains in energy efficiency, with energy intensity per unit of GDP steadily declining for years; a 2 or even 5 percent decline in electricity consumption need not be mostly attributed to production declines. Granted, China still has a long way to go to reach the energy efficiency of advanced OECD economies (the recent "airpocalypses" in Beijing, Shanghai, Hangzhou, and at least 20 other major cities were embarrassing reminders) - but this is precisely what should be kept in mind as we see further stagnation or decline in secondary industry's power consumption that belies its continued output growth.
Interestingly, as a bellwether for the intersection of heavy and light industry, the automotive industry saw an appropriately in-betweenish 3.3 percent output increase in 2015, to include a bullish 5.8 percent increase in the dominant, consumer-driven passenger vehicle sub-segment.
More detailed breakdown analysis of FY 2015 and 4Q GDP will be forthcoming in the coming days, but it's already clear from this exercise that China bears keep their criticisms of official Chinese data's inconsistencies too general and high-level to be taken at their word.
The basis of the "1 percent growth" argument is the following falsehood:
The usage of electricity remains the most reliable single indicator of Chinese economic activity. In the first 11 months of 2015, electricity consumption increased 0.7%.Of course, Gordon didn't bother breaking down this figure, which is in fact an even worse 0.5 percent increase reported for FY 2015. But the breakdown is highly illuminating: the slow growth is entirely due to a minus-1.9 percent contraction in electric usage by heavy industry, which still accounts for nearly 60 percent of all consumption. Robust growth in residential consumption (5.0 percent) and tertiary industry (i.e. services, 7.5 percent) is entirely consistent with China's rebalancing that now has more than half of all national output contributed by the services sector.
The contraction in heavy industrial electric consumption isn't such a bad thing, either: it reflects long-overdue efforts to cut down on overcapacity and inefficient production in this bloated sector that's become the biggest drag to the Chinese economy - not to mention the main culprit behind the Apocalyptic levels of pollution (coal power).
That being said, it does seem odd that industrial production can have grown 6.2 percent on year given that industrial electricity use - heavy and light industry together - declined by 1.4 percent. The easy explanation for this at a high level is that light industry, comprising predominantly finished manufactured goods, is still growing at a healthy clip even as heavy industry, dominated by bulk commodity products (steel, cement, glass, etc.) is crushed by production cutbacks, large inventories to draw down, and deflation. The former needs only a fraction of the energy input of the latter to generate the same monetary value of output. A reasonable guess is that heavy industrial output grew about 1.5 percent as electricity consumption fell by the reported 1.9 percent, whilst light industry grew 8 or 9 percent as electricity consumption grew the reported 1.3 percent.
This would be in keeping with China's significant gains in energy efficiency, with energy intensity per unit of GDP steadily declining for years; a 2 or even 5 percent decline in electricity consumption need not be mostly attributed to production declines. Granted, China still has a long way to go to reach the energy efficiency of advanced OECD economies (the recent "airpocalypses" in Beijing, Shanghai, Hangzhou, and at least 20 other major cities were embarrassing reminders) - but this is precisely what should be kept in mind as we see further stagnation or decline in secondary industry's power consumption that belies its continued output growth.
Interestingly, as a bellwether for the intersection of heavy and light industry, the automotive industry saw an appropriately in-betweenish 3.3 percent output increase in 2015, to include a bullish 5.8 percent increase in the dominant, consumer-driven passenger vehicle sub-segment.
More detailed breakdown analysis of FY 2015 and 4Q GDP will be forthcoming in the coming days, but it's already clear from this exercise that China bears keep their criticisms of official Chinese data's inconsistencies too general and high-level to be taken at their word.
Friday, January 15, 2016
Communist China's huge experiment with capitalism reaches a critical point
The communist party led by Xi Jinping has spent the first two weeks of 2016 demonstrating that it's not ready to let free markets run away from their control. Surprise, surprise!
The Economist has joined the chorus of observers and analysts arguing that China's least bad option now is to close up its capital account again, at least for the time being - until it fixes its financial mess. It also highlights what it calls a crisis of faith apparently hampering Beijing's decisiveness in tackling its extraordinarily difficult and complex transition.
Yes, the PRC's mammoth experiment with capitalism while remaining a communist state has reached a critical point: Xi himself admitted as much in his new year's address to the nation, though that was just before the latest market meltdown. It's unlikely that his or the party leadership's confidence in continued gradual reform and opening has been fundamentally shaken, but they'd better realize that there's now a big gap between shattered international perceptions of China and their own still relatively sanguine attitude, and that this gap is itself becoming a bigger risk to both the Chinese and global economies.
To address this gap demands improved messaging - whether or not it's accompanied by improved transparency. The world at large needs some reassurance from China that its slow-but-steady approach is still the best one. It needs to hear from Beijing itself that the slowdown or even contraction in secondary industry is actually deliberate policy, and that things would already be a lot more dire if tertiary industry weren't in fact growing robustly - despite the fuzziness of services sector GDP statistics.
Then again, perhaps even such cool-headed and balanced Western observers like the Economist are overreacting by betraying their fundamental dogma that the state and the private economy are simply doomed to clash in such a way that one or the other must give, and China's transition has reached a crossroads where this ingrained Western assumption is itself up for grabs - or perhaps exposed as being only partly true, anyway.
So we have a clash of worldviews shaping up with potentially Apocalyptic undertones: the one thing this guarantees is more market volatility.
The Economist has joined the chorus of observers and analysts arguing that China's least bad option now is to close up its capital account again, at least for the time being - until it fixes its financial mess. It also highlights what it calls a crisis of faith apparently hampering Beijing's decisiveness in tackling its extraordinarily difficult and complex transition.
Yes, the PRC's mammoth experiment with capitalism while remaining a communist state has reached a critical point: Xi himself admitted as much in his new year's address to the nation, though that was just before the latest market meltdown. It's unlikely that his or the party leadership's confidence in continued gradual reform and opening has been fundamentally shaken, but they'd better realize that there's now a big gap between shattered international perceptions of China and their own still relatively sanguine attitude, and that this gap is itself becoming a bigger risk to both the Chinese and global economies.
To address this gap demands improved messaging - whether or not it's accompanied by improved transparency. The world at large needs some reassurance from China that its slow-but-steady approach is still the best one. It needs to hear from Beijing itself that the slowdown or even contraction in secondary industry is actually deliberate policy, and that things would already be a lot more dire if tertiary industry weren't in fact growing robustly - despite the fuzziness of services sector GDP statistics.
Then again, perhaps even such cool-headed and balanced Western observers like the Economist are overreacting by betraying their fundamental dogma that the state and the private economy are simply doomed to clash in such a way that one or the other must give, and China's transition has reached a crossroads where this ingrained Western assumption is itself up for grabs - or perhaps exposed as being only partly true, anyway.
So we have a clash of worldviews shaping up with potentially Apocalyptic undertones: the one thing this guarantees is more market volatility.
Thursday, January 14, 2016
FDI figures don't show an economy on verge of collapse
China's foreign direct investment (FDI) attained another all-time high in FY 2015, rising 6.4 percent to $126.7 billion, from $119.562 billion in FY 2014. Thus, even as concerns mount over capital flight triggered by the yuan's devaluation, this isn't an economy on the verge of losing the world's confidence.
That being said, it is worth pointing out that China has seen a long-term decline of the ratio of FDI to GDP - an indication of domestic economic maturation. In 2001, on the cusp of entering the WTO, this was about 1 to 25; by 2008, the year of the financial crisis, it had dropped to around 1 to 40; as of 2015, it stands at barely 1 to 79.
To put it in other terms: from 2001 to now, a GDP increase of 8.61 times required an FDI increase of only 2.76 times; from 2008 to now, the GDP increase of 2.67 times required an FDI increase of just 1.38 times.
(My rough figures for these calculations: GDP: 2001 - $1.161T, 2008 - $3.75T, 2015 - $10T; FDI: 2001 - $46B, 2008 - $92.5B, 2015 - $127B)
This is the natural course of a well-run, healthily growing economy moving from lower to lower-middle income levels. From here on out, to move further up into higher-middle and then genuinely higher income levels, China should continue to see a drop in the FDI/GDP ratio, meaning FDI should grow flatly as GDP also exhibits a more subdued ascent.
Next week's FY 2015 GDP figure will likely show 6.9 percent yoy growth and, more significantly in light of the markets, no substantial slowdown in 4Q, which would also be a relief considering the troubling initial 4Q assessment of China Beige Book in mid-December.
That being said, it is worth pointing out that China has seen a long-term decline of the ratio of FDI to GDP - an indication of domestic economic maturation. In 2001, on the cusp of entering the WTO, this was about 1 to 25; by 2008, the year of the financial crisis, it had dropped to around 1 to 40; as of 2015, it stands at barely 1 to 79.
To put it in other terms: from 2001 to now, a GDP increase of 8.61 times required an FDI increase of only 2.76 times; from 2008 to now, the GDP increase of 2.67 times required an FDI increase of just 1.38 times.
(My rough figures for these calculations: GDP: 2001 - $1.161T, 2008 - $3.75T, 2015 - $10T; FDI: 2001 - $46B, 2008 - $92.5B, 2015 - $127B)
This is the natural course of a well-run, healthily growing economy moving from lower to lower-middle income levels. From here on out, to move further up into higher-middle and then genuinely higher income levels, China should continue to see a drop in the FDI/GDP ratio, meaning FDI should grow flatly as GDP also exhibits a more subdued ascent.
Next week's FY 2015 GDP figure will likely show 6.9 percent yoy growth and, more significantly in light of the markets, no substantial slowdown in 4Q, which would also be a relief considering the troubling initial 4Q assessment of China Beige Book in mid-December.
Tuesday, January 12, 2016
No, China isn't "Japanizing"
Fears of "Japanization" of China are resurfacing in earnest. At this point it's a bit stale, because the counterarguments are increasingly well-established. And more to the point, the recent stock market woes are an indication that China is decidedly not "Japanizing."
Lost amidst the hysteria over the stock market is that it is actually proof that Beijing is serious about reform. The hard landing in secondary industry - only 1.2 percent growth in 3Q - is an indication that it truly is scaling back on waste, with high-unemployment rust belts already coming back in a way not seen since the late 1990s, as the worst of the state-owned enterprises, like these Manchurian coal mines, are systematically dismantled. Of course the central government wants to ease the pain and ensure the stock market doesn't melt down altogether on fears the hard landing isn't contained: to Western market fundamentalists, this is cheating, but it's necessary only because Beijing is for real on restructuring and reform.
Xi Jinping is committed to overhauling the SOE sector; if he doesn't act, it will be because of bureaucratic inertia and not because he's content to keep zombie companies running just like they have for years. Some bankruptcies appear inevitable this year and next. But the preferred methodology of consolidations and mergers will be more common for the bloated SOEs. Again, to Western market fundamentalists, this amounts to cheating; but even advanced economies are now in "the age of the torporation", meaning amalgamation may in fact be the best way to cut the inefficiencies of big firms.
And it's totally incorrect to say that growth in tertiary industry, i.e. services and high-tech, hasn't been promoted, because without these new drivers, things would look a lot worse already.
Finally, as I have previously commented, it's still too early to make direct comparisons between 1990s Japan and contemporary China, because the latter is still much poorer, i.e. its internal market is not nearly as saturated. As hard as it may be to believe, much of China still needs basic infrastructure investments. And even with the deflationary threat of a flatlining population, in China's case the existing population is still much too poor to not generate a large demand for additional goods and services.
So in conclusion, all these criticisms of China and Xi Jinping's leadership serve the purpose of confirming that they're generally on the right track.
Lost amidst the hysteria over the stock market is that it is actually proof that Beijing is serious about reform. The hard landing in secondary industry - only 1.2 percent growth in 3Q - is an indication that it truly is scaling back on waste, with high-unemployment rust belts already coming back in a way not seen since the late 1990s, as the worst of the state-owned enterprises, like these Manchurian coal mines, are systematically dismantled. Of course the central government wants to ease the pain and ensure the stock market doesn't melt down altogether on fears the hard landing isn't contained: to Western market fundamentalists, this is cheating, but it's necessary only because Beijing is for real on restructuring and reform.
Xi Jinping is committed to overhauling the SOE sector; if he doesn't act, it will be because of bureaucratic inertia and not because he's content to keep zombie companies running just like they have for years. Some bankruptcies appear inevitable this year and next. But the preferred methodology of consolidations and mergers will be more common for the bloated SOEs. Again, to Western market fundamentalists, this amounts to cheating; but even advanced economies are now in "the age of the torporation", meaning amalgamation may in fact be the best way to cut the inefficiencies of big firms.
And it's totally incorrect to say that growth in tertiary industry, i.e. services and high-tech, hasn't been promoted, because without these new drivers, things would look a lot worse already.
Finally, as I have previously commented, it's still too early to make direct comparisons between 1990s Japan and contemporary China, because the latter is still much poorer, i.e. its internal market is not nearly as saturated. As hard as it may be to believe, much of China still needs basic infrastructure investments. And even with the deflationary threat of a flatlining population, in China's case the existing population is still much too poor to not generate a large demand for additional goods and services.
So in conclusion, all these criticisms of China and Xi Jinping's leadership serve the purpose of confirming that they're generally on the right track.
Monday, January 11, 2016
A gathering yuan-induced global financial crisis? Still unlikely
After a tumultuous first trading week of 2016 that saw the falling yuan at the epicenter of a massive stock selloff worldwide, US finance behemoths Goldman Sachs and JP Morgan expect China to be able to engineer a gradual depreciation for the remainder of the year.
Meanwhile, a Bloomberg report reiterates the unlikelihood of a genuine financial panic or crash in light of China's tightly controlled financial system. Reminiscent of the same such arguments over the last couple of years, the validity of this thinking promises to be tested with perhaps ever greater frequency now after two bouts of yuan devaluation scares since August.
The underlying problem has been underscored again today with a deflation-induced selloff in Chinese stocks. "Old China" of so-called secondary industry - manufacturing and construction - is already in a hard landing and the great danger is that it will blunt the ascent of tertiary industry - services and consumer spending - by stagnating income growth.
This is somewhat debatable. What's effectively happening is a massive transfer of wealth from the old economy to the new: as jobs disappear and wages freeze in the former, jobs are created and wages rise in the latter. Of course there are winners and losers: if the winners are individual consumers and the losers are massively indebted state corporations, that's exactly how it should be. The big question is how comprehensively secondary industry's decline can be absorbed by tertiary industry's growth: if it turns out that there's just not enough new demand in the services sector to make up for the contraction in manufacturing and construction, the latter two must still be boosted - and already, it seems the only effective option left for manufacturing is currency devaluation.
Either way, there is no question now that the yuan is coming down in a big way over the next two to three years, because even should the transition to Xi Jinping's "new normal" largely succeed, a more open capital account means that Beijing wants much, much more Chinese capital to be invested overseas anyway - simply because the returns are better. So JP Morgan is right that potential capital outflows are becoming "boundless".
Meanwhile, a Bloomberg report reiterates the unlikelihood of a genuine financial panic or crash in light of China's tightly controlled financial system. Reminiscent of the same such arguments over the last couple of years, the validity of this thinking promises to be tested with perhaps ever greater frequency now after two bouts of yuan devaluation scares since August.
The underlying problem has been underscored again today with a deflation-induced selloff in Chinese stocks. "Old China" of so-called secondary industry - manufacturing and construction - is already in a hard landing and the great danger is that it will blunt the ascent of tertiary industry - services and consumer spending - by stagnating income growth.
This is somewhat debatable. What's effectively happening is a massive transfer of wealth from the old economy to the new: as jobs disappear and wages freeze in the former, jobs are created and wages rise in the latter. Of course there are winners and losers: if the winners are individual consumers and the losers are massively indebted state corporations, that's exactly how it should be. The big question is how comprehensively secondary industry's decline can be absorbed by tertiary industry's growth: if it turns out that there's just not enough new demand in the services sector to make up for the contraction in manufacturing and construction, the latter two must still be boosted - and already, it seems the only effective option left for manufacturing is currency devaluation.
Either way, there is no question now that the yuan is coming down in a big way over the next two to three years, because even should the transition to Xi Jinping's "new normal" largely succeed, a more open capital account means that Beijing wants much, much more Chinese capital to be invested overseas anyway - simply because the returns are better. So JP Morgan is right that potential capital outflows are becoming "boundless".
Tuesday, January 5, 2016
Is nationalism crimping China's growth? No, it's nationalizing it
An analyst floats the possibility that China's economic slowdown is a deliberate effect of rising nationalism under Xi Jinping. How credible is this fear?
Nationalism has certainly increased under Xi Jinping, and China is no longer hiding its strength or biding its time, as before the financial crisis, which Beijing still views as being a fundamental shift in the balance of power between East and West.
And there's also little doubt that between party state stability and rapid growth, Mr. Xi's powerfully centralized administration will sacrifice the latter for the former.
But there's little incentive for China to shut itself off from the rest of the world at a time when it can increasingly set the terms of its own engagement with it. Is China really throwing in its lot with supposed economic pariahs like Russia and Hungary? (It's arguable how much these are outcasts, anyway; Russia, for instance, had better stock performance in 2015 than China.) Hardly. It has enormously greater leverage with the G-7, as it continues to be the low-cost manufacturer for their multinationals, and has every intention of continuing to use that leverage to dictate favorable terms of economic engagement - a luxury that militaristic Russia, which is essentially another superfluous commodity supplier, does not enjoy.
What does seem undeniable, however, is that the world at large is more adversely impacted by China's transition from investment and trade to services and consumption than is the domestic Chinese economy: while the Chinese spender logs high single-digit to low double-digit growth from a low base, the global economy must deal with persistent double-digit declines in Chinese imports from a high base. Unless you buy the Gordon Chang standard explanation that the growth in services GDP is essentially fabricated, this is quite a proof of Chinese power: Beijing makes its own people richer while leaving the world at its mercy.
This interview with Bank of America/Merrill Lynch chief European economist supports the view that China's intended transition is working, after all: government stimulus is in fact shoring up consumption even as manufacturing and manufacturing-feeding imports continue their declines.
So nationalism isn't actually crimping China's growth as it is nationalizing it - transferring it from external trade towards internal living standard boosting. Not exactly the narrative many Westerners are getting.
Nationalism has certainly increased under Xi Jinping, and China is no longer hiding its strength or biding its time, as before the financial crisis, which Beijing still views as being a fundamental shift in the balance of power between East and West.
And there's also little doubt that between party state stability and rapid growth, Mr. Xi's powerfully centralized administration will sacrifice the latter for the former.
But there's little incentive for China to shut itself off from the rest of the world at a time when it can increasingly set the terms of its own engagement with it. Is China really throwing in its lot with supposed economic pariahs like Russia and Hungary? (It's arguable how much these are outcasts, anyway; Russia, for instance, had better stock performance in 2015 than China.) Hardly. It has enormously greater leverage with the G-7, as it continues to be the low-cost manufacturer for their multinationals, and has every intention of continuing to use that leverage to dictate favorable terms of economic engagement - a luxury that militaristic Russia, which is essentially another superfluous commodity supplier, does not enjoy.
What does seem undeniable, however, is that the world at large is more adversely impacted by China's transition from investment and trade to services and consumption than is the domestic Chinese economy: while the Chinese spender logs high single-digit to low double-digit growth from a low base, the global economy must deal with persistent double-digit declines in Chinese imports from a high base. Unless you buy the Gordon Chang standard explanation that the growth in services GDP is essentially fabricated, this is quite a proof of Chinese power: Beijing makes its own people richer while leaving the world at its mercy.
This interview with Bank of America/Merrill Lynch chief European economist supports the view that China's intended transition is working, after all: government stimulus is in fact shoring up consumption even as manufacturing and manufacturing-feeding imports continue their declines.
So nationalism isn't actually crimping China's growth as it is nationalizing it - transferring it from external trade towards internal living standard boosting. Not exactly the narrative many Westerners are getting.
Sunday, January 3, 2016
Why China won't crash in 2016
Respected former Deutsche Bank analyst JP Smith has become the latest to forecast a China crash:
Should it really need to, Beijing can easily rein in capital flight - the only thing it really has to do to prevent a wider financial and economic crisis. It can simply start enforcing existing rules more severely. But in fact the party probably doesn't care anyway about ordinary citizens who find various ways to exceed the limit of US $50,000 per year in currency exchange, i.e. a bunch of relatives each contributing this limit in separate wire transfers overseas to be combined for a home purchase. It's far more concerned about illegal capital flight by wealthy entrepreneurs and financial executives and professionals - which is an unspoken reason for the anti-corruption campaign's recent targeting of such individuals. Bankers, brokers, fund managers, etc. probably have to think long and hard now about skirting capital controls - the prospect of disappearing for weeks on end isn't terribly appealing; likewise private business leaders, who have been put on notice that they're easy prey with the recent ordeal of Fosun's Guo Guangchang.
Even Gordon Chang has, in recent years, talked less about outright collapse than Japan-like stagnation. To continue to talk of the collapse as a likely outcome is to betray a fundamental ignorance of the continued stranglehold on the economy by the communist party state.
But as with similar prognostications going back to the 1990s, everything is premised on this faulty assessment:China faces a "sudden stop" in its economy in 2016, as the government loses its ability to prop up state-subsidized industries and capital flight prompts a significant devaluation of the country's yuan, according to the analyst who accurately forecast Russia's stock-market crash in 1998.JP Smith, who worked at Deutsche Bank before leaving last year to startindependent research firm Ecstrat, says conditions in China look as ominous as those in the U.S. on the eve of the 2008 financial crisis, and in Korea just before the 1997 Asian crisis. As a result, Chinese stocks face greater downside potential than those of any other global market, he wrote in a Dec. 17 report.
Market forces probably will trump Chinese authorities' ability to control the economy and capital flows through official dictates, according to Smith.If anything, in 2015 we learned that China retains a vise-like grip on its financial markets even as it has tinkered with gradually opening the capital account. Towards the end of the year, Xi Jinping's anti-corruption crackdown has focused on the big banks and investment firms, ostensibly to punish those who cheated during the summer stock market crash, but it has also opened the door to a more general constriction of the entire financial sector.
Should it really need to, Beijing can easily rein in capital flight - the only thing it really has to do to prevent a wider financial and economic crisis. It can simply start enforcing existing rules more severely. But in fact the party probably doesn't care anyway about ordinary citizens who find various ways to exceed the limit of US $50,000 per year in currency exchange, i.e. a bunch of relatives each contributing this limit in separate wire transfers overseas to be combined for a home purchase. It's far more concerned about illegal capital flight by wealthy entrepreneurs and financial executives and professionals - which is an unspoken reason for the anti-corruption campaign's recent targeting of such individuals. Bankers, brokers, fund managers, etc. probably have to think long and hard now about skirting capital controls - the prospect of disappearing for weeks on end isn't terribly appealing; likewise private business leaders, who have been put on notice that they're easy prey with the recent ordeal of Fosun's Guo Guangchang.
Even Gordon Chang has, in recent years, talked less about outright collapse than Japan-like stagnation. To continue to talk of the collapse as a likely outcome is to betray a fundamental ignorance of the continued stranglehold on the economy by the communist party state.
Friday, January 1, 2016
2016: the year democracy triumphs or collapses?
2015 was a momentous year. If 2014 is to be remembered as the year the post-Cold War era ended with Russia's annexation of Crimea and proxy invasion of eastern Ukraine, 2015 is likely to be remembered as the year that the new, post-post-Cold War era really set in. And that means that 2016 - with its critical US presidential election - could well be the year that democracy triumphs or collapses.
For starters, it's "post-post-Cold War" for lack of a more definitive term: at this early stage, all we know with relative certainty is that a quarter century of world order underpinned by the unchallenged superpower status of the United States is behind us. We are already, in certain key respects, in a multipolar as opposed to unipolar world, even if it will be some years yet before this acquires a more or less stable and definitive form. But we can already delineate the likely main contours of this new order based on the events of 2015 as follows.
First and foremost, by outward appearances, the US remains far and away at the top of the pecking order. At the end of 2015, the Federal Reserve has raised interest rates for the first time since 2006 - the height of the pre-financial crisis, housing-fueled credit boom. This not only signals the start of a new global monetary cycle, but underscores that it is the mighty dollar which still reigns supreme. True, China's yuan has now joined the IMF's elite basket of reserve currencies that comprise the dollar, euro, yen, and pound sterling; but few serious analysts doubt that it has done so as a fourth auxiliary to the premier greenback, or that this is primarily a reflection of China's importance to global asset prices as the world's factory floor and big builder. In other words, Washington and Wall Street still very much call the big shots: Beijing follows their lead, though it is clearly staking out a bigger piece of the pie for itself and is increasingly the one junior partner who can tweak Uncle Sam's beak without fear of reprisal, but only inasmuch as it doesn't appear inordinately hostile to broader Yankee leadership.
This must be kept in mind when looking at the South China Sea dispute: to those who have seriously considered the facts, it should be a foregone conclusion that stopping Chinese dominance of this crucial body of water promises to become only somewhat easier than stopping American dominance of the Gulf of Mexico was in about 1900; what's really at stake isn't the question of legal sovereignty per the international system - it's the question of who's the big boss that can set the rules in a given part of the world as he sees fit because, well, he's the big boss there. And that in itself doesn't mean he seeks to supplant the even bigger boss that he continues to acknowledge elsewhere - not least in the latter's own hemisphere. Can Washington live with a Chinese-dominated Asia? You bet - especially since Asia itself can live with it. Evidence? Even the plucky, bully-defying Philippines has joined Beijing's new Asian Infrastructure Investment Bank (AIIB), which leaves Japan: of course the mandarins in Tokyo aren't excited at being relegated to junior status in the Oriental hierarchy again, but there's little to suggest their overall China policy is now changing from one of all but enabling China's rise to one of constraining it.
The Sino-US relationship, which has been dubbed "G-2" or even "Chimerica", has effectively matured to such a co-dependence that every other piece and aspect of the post-post-Cold War order can be framed around it. Ideologically and philosophically, it represents the rivalry and dichotomy between the modern Western concept of individual freedom and the ancient tradition of Oriental despotism. Whichever way you cut it, the post-post-Cold War era seems to be defined by a protracted contest between the two: Russia's nabbing of Crimea in early 2014 marked the end of the post-Cold War era in the sense that it was the first major authoritarian territorial expansion at the free world's expense since 1989. Yes, kleptocratic Ukraine was in many respects a sham democracy as much in Moscow's orbit as in the West's, but the outright dismembering of territory from it in Donbas as well as Crimea was a shocking blow for the "end of history" nonetheless.
In this light, whereas Russia's intervention in Ukraine in 2014 was essentially reactive, its intervention in Syria in the last quarter of 2015 has been the first great active check by the authoritarian camp against the democratic camp. The brutal Syrian dictatorship now looks secure against the ill-wishing Western democracies, even if it remains nowhere close to actually liquidating its internal insurrectionists. 2015 will be remembered as the year that the whole idea of "regime change" finally died a well-deserved death. The West generally, and even the US specifically, has all but admitted that just because a government isn't nice and pretty doesn't mean it can simply be disposed of like a dirty rag. Fundamentally, the Syrian conflict has retaught the whole world, but most pointedly the liberal West, that the whole purpose of a state is the monopolization of violence within a geographic area: it may derive legitimacy from popular sovereignty in the form of free elections and the like, but the only real test of viability is its ability to maintain security, even if that means curtailing freedom to a harshly repressive degree. In such diverse societies as Syria and Iraq that were cobbled together by Western colonialism - indeed, even in more homogeneous ones like Libya - the brutal stability maintained by dictators isn't easily replaced by a democratic consensus which in itself simply lacks the muscle to contain latent sectarian strife (religious, ethnic, tribal, etc.) that can boil over after decades of dormancy. Regime change requires culture change - if imposed by external force, it demands far more blood and treasure than comfortable Western democracies are willing to expend.
That being said, the post-post-Cold War era is marked by the end of the inevitable ascent of a mushy kind of universal liberalism - or conversely, liberal universalism - and the strong reemergence of primitive cultural and even racial identity assertion. Even the West is now discovering that an open and progressive society depends on a preexisting spirit of inclusion that is enshrined by the rule of law, but that this spirit obviously isn't evenly distributed across different cultural traditions; such a society can't be built the other way around, i.e. upon an artificially constructed rule of law that purports to somehow engender a spirit of inclusion by essentially altering the fundamental character of less open cultural traditions.
This is really at the heart of the rise of Donald Trump and the nationalist politicians of Western Europe like Marine Le Pen. Western elites, such as the Republican party's professional politicians and their corporate sponsors, have yet to confront this foundational cause of the rise of neo-nativist, neo-isolationist insurgents among them - both Trump and Le Pen, for instance, advocate friendship with Putin - but the crucial US presidential election this year may just force an honest discussion: the prevailing worldview that essentially assumes that non-Westerners are just as freedom-loving as Westerners, which thus means that open borders are a great thing, is also the worldview that assumes that the autocratic leaderships of non-Western societies are inherently bad and should be undermined or even changed. Over and against this Western triumphalist-globalist mentality that has bound most of the right and the left together in a dominant political mainstream since the Cold War - promoted as it has been by the very deep pockets of the business and financial elite, especially through the corporate media (liberal or "conservative") - the rising tide of anti-globalist, populist anger appears to be going increasingly global itself. Mr. Trump's well-publicized late-year bromance with Mr. Putin could be a harbinger: American Tea partiers, including Texas secessionists, are finding natural bedfellows in Russian neo-fascists that the Kremlin has wielded as foils to make itself seem moderate. Angered by the constant activity of the "fifth column" of pro-minority, pro-feminist, and pro-gay progressives in its midst, the Russian state is now looking at anti-minority, anti-feminist, and anti-gay reactionaries in the West as its own potential fifth columnists against the US-EU-NATO nexus.
And so, a polarization has occurred between East and West, i.e. between despotic and democratic nations and societies, leaving dissenters on both sides increasingly marginalized by their ruling classes: reformers and proponents of openness are hounded and harassed in the authoritarian camp led by the Sino-Russian axis, even as nativists and cultural conservatives are character-assassinated in the "free" world led by a United States that now exhibits an absurd kind of virtually coercive political correctness. The future development and trajectory of this dichotomy is not very difficult to surmise.
So here goes nothing: my forecast for 2016 (and beyond).
Unless a deep and genuine revitalization and revival of Western democracy takes place, the authoritarian camp will make further apparent gains against the democratic camp, simply because it enjoys an internal unity - what dissidents still speak or act promise to be relatively muted - that the free world appears unlikely to recover in the near or even medium term. Free elections, free press, and rule of law in the West seem to have become, unfortunately, a convenient cover for the most boorish and childish partisanship imaginable, to such an extent that the political center appears increasingly irrelevant, if it still even exists substantially - it has certainly been uncomfortably quiet. Even if the reactionary right is being amplified by the Republican US presidential campaign, in which the most intolerant and uncompromising tends to be the loudest faction, the long-term deterioration of the cultural and demographic trends against the conservative cause is probably already too advanced to reverse, and likewise the hostility between the GOP's globalist elites and populist base. This in itself spells doom for the American project both at home and abroad - and hence of the Western liberal democratic cause more generally.
What America desperately needs is a presidential election characterized by unity-building and conciliatory language, but nobody can force this outcome on a free society. If, left to their own "freedom", America's partisan factions freely choose the path of mutually assured enmity - and hence slavery - then democracy itself will have failed. If "Black Lives Matter" and the Tea Party don't get on talking terms with each other, the trouble is that their own wider communities aren't organizing sufficiently to marginalize them from within. This is how extremism devours a once-thriving mainstream center: the toxic brew of sectarianism among a minority with the apathy of the majority.
In conclusion, this viral video of Ukraine's prime minister getting picked up by his crotch by a fellow legislator, triggering a parliamentary session barroom brawl, shows what's at stake. Though Ukraine is the front line in the East-West confrontation, the most critical battle will be within free society itself: what's scary is that our own politics these days don't look much more civil than this video incident. Though appearances are often deceiving, we seem to be living in an era where men underestimate their own propensity for evil - a time when the one thing that unites the extremes of the political spectrum is their celebration of arrogance and concomitant contempt for humility.
2016, then, could be the year that democracy triumphs or collapses - in either case, both as never before.
For starters, it's "post-post-Cold War" for lack of a more definitive term: at this early stage, all we know with relative certainty is that a quarter century of world order underpinned by the unchallenged superpower status of the United States is behind us. We are already, in certain key respects, in a multipolar as opposed to unipolar world, even if it will be some years yet before this acquires a more or less stable and definitive form. But we can already delineate the likely main contours of this new order based on the events of 2015 as follows.
First and foremost, by outward appearances, the US remains far and away at the top of the pecking order. At the end of 2015, the Federal Reserve has raised interest rates for the first time since 2006 - the height of the pre-financial crisis, housing-fueled credit boom. This not only signals the start of a new global monetary cycle, but underscores that it is the mighty dollar which still reigns supreme. True, China's yuan has now joined the IMF's elite basket of reserve currencies that comprise the dollar, euro, yen, and pound sterling; but few serious analysts doubt that it has done so as a fourth auxiliary to the premier greenback, or that this is primarily a reflection of China's importance to global asset prices as the world's factory floor and big builder. In other words, Washington and Wall Street still very much call the big shots: Beijing follows their lead, though it is clearly staking out a bigger piece of the pie for itself and is increasingly the one junior partner who can tweak Uncle Sam's beak without fear of reprisal, but only inasmuch as it doesn't appear inordinately hostile to broader Yankee leadership.
This must be kept in mind when looking at the South China Sea dispute: to those who have seriously considered the facts, it should be a foregone conclusion that stopping Chinese dominance of this crucial body of water promises to become only somewhat easier than stopping American dominance of the Gulf of Mexico was in about 1900; what's really at stake isn't the question of legal sovereignty per the international system - it's the question of who's the big boss that can set the rules in a given part of the world as he sees fit because, well, he's the big boss there. And that in itself doesn't mean he seeks to supplant the even bigger boss that he continues to acknowledge elsewhere - not least in the latter's own hemisphere. Can Washington live with a Chinese-dominated Asia? You bet - especially since Asia itself can live with it. Evidence? Even the plucky, bully-defying Philippines has joined Beijing's new Asian Infrastructure Investment Bank (AIIB), which leaves Japan: of course the mandarins in Tokyo aren't excited at being relegated to junior status in the Oriental hierarchy again, but there's little to suggest their overall China policy is now changing from one of all but enabling China's rise to one of constraining it.
The Sino-US relationship, which has been dubbed "G-2" or even "Chimerica", has effectively matured to such a co-dependence that every other piece and aspect of the post-post-Cold War order can be framed around it. Ideologically and philosophically, it represents the rivalry and dichotomy between the modern Western concept of individual freedom and the ancient tradition of Oriental despotism. Whichever way you cut it, the post-post-Cold War era seems to be defined by a protracted contest between the two: Russia's nabbing of Crimea in early 2014 marked the end of the post-Cold War era in the sense that it was the first major authoritarian territorial expansion at the free world's expense since 1989. Yes, kleptocratic Ukraine was in many respects a sham democracy as much in Moscow's orbit as in the West's, but the outright dismembering of territory from it in Donbas as well as Crimea was a shocking blow for the "end of history" nonetheless.
In this light, whereas Russia's intervention in Ukraine in 2014 was essentially reactive, its intervention in Syria in the last quarter of 2015 has been the first great active check by the authoritarian camp against the democratic camp. The brutal Syrian dictatorship now looks secure against the ill-wishing Western democracies, even if it remains nowhere close to actually liquidating its internal insurrectionists. 2015 will be remembered as the year that the whole idea of "regime change" finally died a well-deserved death. The West generally, and even the US specifically, has all but admitted that just because a government isn't nice and pretty doesn't mean it can simply be disposed of like a dirty rag. Fundamentally, the Syrian conflict has retaught the whole world, but most pointedly the liberal West, that the whole purpose of a state is the monopolization of violence within a geographic area: it may derive legitimacy from popular sovereignty in the form of free elections and the like, but the only real test of viability is its ability to maintain security, even if that means curtailing freedom to a harshly repressive degree. In such diverse societies as Syria and Iraq that were cobbled together by Western colonialism - indeed, even in more homogeneous ones like Libya - the brutal stability maintained by dictators isn't easily replaced by a democratic consensus which in itself simply lacks the muscle to contain latent sectarian strife (religious, ethnic, tribal, etc.) that can boil over after decades of dormancy. Regime change requires culture change - if imposed by external force, it demands far more blood and treasure than comfortable Western democracies are willing to expend.
That being said, the post-post-Cold War era is marked by the end of the inevitable ascent of a mushy kind of universal liberalism - or conversely, liberal universalism - and the strong reemergence of primitive cultural and even racial identity assertion. Even the West is now discovering that an open and progressive society depends on a preexisting spirit of inclusion that is enshrined by the rule of law, but that this spirit obviously isn't evenly distributed across different cultural traditions; such a society can't be built the other way around, i.e. upon an artificially constructed rule of law that purports to somehow engender a spirit of inclusion by essentially altering the fundamental character of less open cultural traditions.
This is really at the heart of the rise of Donald Trump and the nationalist politicians of Western Europe like Marine Le Pen. Western elites, such as the Republican party's professional politicians and their corporate sponsors, have yet to confront this foundational cause of the rise of neo-nativist, neo-isolationist insurgents among them - both Trump and Le Pen, for instance, advocate friendship with Putin - but the crucial US presidential election this year may just force an honest discussion: the prevailing worldview that essentially assumes that non-Westerners are just as freedom-loving as Westerners, which thus means that open borders are a great thing, is also the worldview that assumes that the autocratic leaderships of non-Western societies are inherently bad and should be undermined or even changed. Over and against this Western triumphalist-globalist mentality that has bound most of the right and the left together in a dominant political mainstream since the Cold War - promoted as it has been by the very deep pockets of the business and financial elite, especially through the corporate media (liberal or "conservative") - the rising tide of anti-globalist, populist anger appears to be going increasingly global itself. Mr. Trump's well-publicized late-year bromance with Mr. Putin could be a harbinger: American Tea partiers, including Texas secessionists, are finding natural bedfellows in Russian neo-fascists that the Kremlin has wielded as foils to make itself seem moderate. Angered by the constant activity of the "fifth column" of pro-minority, pro-feminist, and pro-gay progressives in its midst, the Russian state is now looking at anti-minority, anti-feminist, and anti-gay reactionaries in the West as its own potential fifth columnists against the US-EU-NATO nexus.
And so, a polarization has occurred between East and West, i.e. between despotic and democratic nations and societies, leaving dissenters on both sides increasingly marginalized by their ruling classes: reformers and proponents of openness are hounded and harassed in the authoritarian camp led by the Sino-Russian axis, even as nativists and cultural conservatives are character-assassinated in the "free" world led by a United States that now exhibits an absurd kind of virtually coercive political correctness. The future development and trajectory of this dichotomy is not very difficult to surmise.
So here goes nothing: my forecast for 2016 (and beyond).
Unless a deep and genuine revitalization and revival of Western democracy takes place, the authoritarian camp will make further apparent gains against the democratic camp, simply because it enjoys an internal unity - what dissidents still speak or act promise to be relatively muted - that the free world appears unlikely to recover in the near or even medium term. Free elections, free press, and rule of law in the West seem to have become, unfortunately, a convenient cover for the most boorish and childish partisanship imaginable, to such an extent that the political center appears increasingly irrelevant, if it still even exists substantially - it has certainly been uncomfortably quiet. Even if the reactionary right is being amplified by the Republican US presidential campaign, in which the most intolerant and uncompromising tends to be the loudest faction, the long-term deterioration of the cultural and demographic trends against the conservative cause is probably already too advanced to reverse, and likewise the hostility between the GOP's globalist elites and populist base. This in itself spells doom for the American project both at home and abroad - and hence of the Western liberal democratic cause more generally.
What America desperately needs is a presidential election characterized by unity-building and conciliatory language, but nobody can force this outcome on a free society. If, left to their own "freedom", America's partisan factions freely choose the path of mutually assured enmity - and hence slavery - then democracy itself will have failed. If "Black Lives Matter" and the Tea Party don't get on talking terms with each other, the trouble is that their own wider communities aren't organizing sufficiently to marginalize them from within. This is how extremism devours a once-thriving mainstream center: the toxic brew of sectarianism among a minority with the apathy of the majority.
In conclusion, this viral video of Ukraine's prime minister getting picked up by his crotch by a fellow legislator, triggering a parliamentary session barroom brawl, shows what's at stake. Though Ukraine is the front line in the East-West confrontation, the most critical battle will be within free society itself: what's scary is that our own politics these days don't look much more civil than this video incident. Though appearances are often deceiving, we seem to be living in an era where men underestimate their own propensity for evil - a time when the one thing that unites the extremes of the political spectrum is their celebration of arrogance and concomitant contempt for humility.
2016, then, could be the year that democracy triumphs or collapses - in either case, both as never before.
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