Why China won't crash in 2016

Respected former Deutsche Bank analyst JP Smith has become the latest to forecast a China crash:

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.

But as with similar prognostications going back to the 1990s, everything is premised on this faulty assessment:

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.