Stratfor reports that top officials in Hebei province are being purged as part of the anti-corruption campaign, noting that this is most likely a political purge to eliminate resistance to industrial downsizing, which will disproportionately impact the province.
Accounting for nearly a quarter of total Chinese steel output, Hebei in fact would be the second-biggest steel producer in the world - ahead of Japan - if counted as a separate country. Its heavy industry's quality and productivity remain embarrassingly poor, with many factories still using several decades-old equipment and methodologies. The result: Beijing's notorious pollution, a whole decade after a big initiative was announced to close obsolete plants ringing the capital municipality.
The purge, if it succeeds in placing loyal henchmen of Xi Jinping in charge of Hebei, would be a boost to his frustratingly slow reform agenda. It indicates that chronic stalling and foot-dragging on overcapacity cuts by local officials and SOEs have been traced all the way up to the provincial administration, whose grace period to get with the program prescribed by the central government has now expired.
We see here a classic example of just what the anti-corruption campaign was meant to accomplish: it was never about eradicating graft by punishing it evenly, but wielding the threat of discipline to get a wayward bureaucracy back in line with the center.
The change in Hebei is especially significant because it facilitates Beijing's ambitious scheme for "J3", or "Jing-Jin-Ji", a new mass metroplex area encompassing Beijing (Jing), Tianjin (Jin), and Hebei province (Ji) that some have dubbed as the world's biggest megacity (with 130 million inhabitants, more than the entire population of Japan).
Xi Jinping has gotten another little-noted boost lately in the form of rising stress in the corporate bond market. This is a crucial sign that at least some market discipline is being introduced into the financial system as more Chinese firms swap their bank loans for debt securities, and increases the central government's leverage over recalcitrant SOEs which continue to resist restructuring. A similar approach is likely in the young but already significant municipal bond market, which would enable Zhongnanhai to rein in noncompliant local governments.
Ironically, the very fastidiousness and fickleness of foreign investors in particular is especially useful here, and explains why Beijing recently opened up its bond market to outsiders. In time, once state companies and local administrations are exposed to international capital flows, their market and fiscal risks, respectively, will be priced more accurately. In the long term, this is the only effective way to govern them. Even if the central government continues some protectionist support to shield its favored entities from the full brunt of global financial forces to maintain ultimate control of markets, the foreign participation will send powerful independent price signals that domestic market players will also heed, and even Beijing's golden geese won't want the stigma of "poor rich kids."
At the moment, China's recovery is as much another mini-boom of speculation and policy front-running as it is anything more fundamental, so unfortunately we're headed for trouble again before long. But it's encouraging that Beijing appears to understand that just because it's bought some more time, doesn't mean it can delay confronting deeper systemic challenges.
Monday, April 25, 2016
Saturday, April 23, 2016
China's debt bubble is a corruption bubble
The Financial Times offers what's probably the most bullish defense of the heavily indebted Chinese financial system in recent memory, essentially arguing that China can still grow its way out of its debt pile given its relative poverty, and also that the debt isn't nearly as prone to cascading systemic risk as in the Western financial system in 2007-08 because it's still largely in the form of traditional bank loans, not investment securities (to include exotic leveraged derivatives).
But even beyond this, as I've argued before, the Chinese financial system enjoys a massive guaranteed backstop that its Western counterpart can hardly dream of: it's still essentially an arm of the communist dictatorship.
That is to say, if it ultimately comes down to it, Beijing can relatively easily extinguish vast sums of bad debt by forcing creditors - itself, ultimately - to write it down, eat losses, and accept huge reductions or "haircuts" on what assets are in fact recoverable. Given that all state banks are ultimately under central party control, the top communist leadership effectively dictates just who within the financial system gets a handout and who gets thrown under the bus. If you don't like it, you have little recourse to complain: especially since you can be charged with far worse than mere negligence in managing state funding, you'd probably feel lucky simply to avoid prosecution in any case involving large sums of lost money.
Even more significantly, all this can happen with enough speed and efficiency that it won't have much negative consequence for the country's overall fiscal or credit standing. Debt is, after all, merely paper or electrons: for an autocracy that has a sufficient handle on its social consequences (or regains it if it somehow slips away), it's as easy to make it disappear as it is to create it in the first place.
Of course, there are unavoidable short-term disruptions to any kind or degree of deleveraging. Asset and collateral valuations may be drastically reassessed, triggering volatility in certain market segments. Unproductive "zombie" capital or even whole firms may have to be liquidated with no assurance that the process will be smooth with no unforeseen stumbling blocks. Likewise there may be heavy cleanup costs to dismantling unsound end-product investments, i.e. real estate or infrastructure. All these challenges, however, are to get the real economy on a sounder footing by redirecting labor and capital away from overly saturated sectors and locales to those that warrant more attention as quickly as possible. And in fact it's merely the natural byproduct of solving the real problem of the bad debt settlement: establishing responsibility both for the original misallocation of resources and also for the corrective reallocation.
It should come as little surprise, then, that the anti-corruption campaign has become such a permanent and defining feature of the Xi Jinping administration: China's debt bubble is, at the end of the day, essentially a corruption bubble. Little surprise, too, that the whole effort is led and masterminded by former Beijing party secretary Wang Qishan, a former banker who first rose to national prominence during the Asian crisis in 1998 by fixing the biggest bank failure in mainland China to date (in Guangdong province).
So to conclude: the real focus of those concerned with Chinese financial stability should be the integrity of communist party rule, i.e. just how secure is it? Despite persistent rumors and speculation to the contrary, few in China or outside it can even conceive of a credible challenge to it, let alone organize one. This hardly means the regime's longevity is assured - but it means it hasn't made enough uncorrected mistakes yet for its opponents to capitalize on (even assuming its opponents are just as adept), and if China's history since reform and opening is any guide, don't count on it either.
But even beyond this, as I've argued before, the Chinese financial system enjoys a massive guaranteed backstop that its Western counterpart can hardly dream of: it's still essentially an arm of the communist dictatorship.
That is to say, if it ultimately comes down to it, Beijing can relatively easily extinguish vast sums of bad debt by forcing creditors - itself, ultimately - to write it down, eat losses, and accept huge reductions or "haircuts" on what assets are in fact recoverable. Given that all state banks are ultimately under central party control, the top communist leadership effectively dictates just who within the financial system gets a handout and who gets thrown under the bus. If you don't like it, you have little recourse to complain: especially since you can be charged with far worse than mere negligence in managing state funding, you'd probably feel lucky simply to avoid prosecution in any case involving large sums of lost money.
Even more significantly, all this can happen with enough speed and efficiency that it won't have much negative consequence for the country's overall fiscal or credit standing. Debt is, after all, merely paper or electrons: for an autocracy that has a sufficient handle on its social consequences (or regains it if it somehow slips away), it's as easy to make it disappear as it is to create it in the first place.
Of course, there are unavoidable short-term disruptions to any kind or degree of deleveraging. Asset and collateral valuations may be drastically reassessed, triggering volatility in certain market segments. Unproductive "zombie" capital or even whole firms may have to be liquidated with no assurance that the process will be smooth with no unforeseen stumbling blocks. Likewise there may be heavy cleanup costs to dismantling unsound end-product investments, i.e. real estate or infrastructure. All these challenges, however, are to get the real economy on a sounder footing by redirecting labor and capital away from overly saturated sectors and locales to those that warrant more attention as quickly as possible. And in fact it's merely the natural byproduct of solving the real problem of the bad debt settlement: establishing responsibility both for the original misallocation of resources and also for the corrective reallocation.
It should come as little surprise, then, that the anti-corruption campaign has become such a permanent and defining feature of the Xi Jinping administration: China's debt bubble is, at the end of the day, essentially a corruption bubble. Little surprise, too, that the whole effort is led and masterminded by former Beijing party secretary Wang Qishan, a former banker who first rose to national prominence during the Asian crisis in 1998 by fixing the biggest bank failure in mainland China to date (in Guangdong province).
So to conclude: the real focus of those concerned with Chinese financial stability should be the integrity of communist party rule, i.e. just how secure is it? Despite persistent rumors and speculation to the contrary, few in China or outside it can even conceive of a credible challenge to it, let alone organize one. This hardly means the regime's longevity is assured - but it means it hasn't made enough uncorrected mistakes yet for its opponents to capitalize on (even assuming its opponents are just as adept), and if China's history since reform and opening is any guide, don't count on it either.
Friday, April 22, 2016
China approaches yet another critical juncture, and the world is hostage
There can be no denying it: China is approaching yet another critical juncture, and unlike in the past, the entire world appears hostage now to how Beijing feels out the stones in the ever-deeper mid-breadth of the modernization stream it's attempting to cross via "socialism with Chinese characteristics."
The economy's apparent semi-recovery of late has quelled fears of an imminent collapse, but the question hanging over the entire post-post-Cold War global order as we enter mid-2016 is, Just how much of this is for real, as opposed to a mere spurt of positive sentiment caused by both actual and expected global monetary accommodativeness?
Take George Soros. In his latest warning, even as he makes yet another comparison between China today and the US on the eve of the 2008 crash, he's actually backed off on his earlier statement in January that, "I'm not predicting it [a Chinese hard landing]; I'm observing it." But even more, he also makes the following more sanguine observations (my emphasis):
By contrast, more committed China "permabears" like Gordon Chang, Jim Chanos, and Anne Stevenson-Yang of J Capital Research remain far too devoted to what's effectively an ideology of a permanently declining communist system to see little other than ever darker machinations and deceptions behind any glimmer of light that perhaps China's not about to go bang after all.
In her latest tirade against official Chinese statistics, Ms. Stevenson-Yang effectively paints as pure fabrications not only the foreign reserve figures from PBOC and GDP figures from the National Bureau of Statistics (NBS), but also recent evidence of pickups in construction and car sales. Of course, having published a mid-March Wall Street Journal editorial, "China's Looming Currency Crisis", she's a little anxious for validation. Last week, she again gave China a dire timetable of just 9 months until a 15 percent currency devaluation.
Even so, this is also a retraction: last year she forecast that China's economy would soon be a full one-third smaller in US dollar terms, implying a massive 33 percent collapse of the yuan (as I remember on US conservative talk radio). But that was before all the global market turmoil in the first six weeks of the year (in the wake of the Fed's December rate hike) and the stellar US Q1 growth of 0.1 percent (0.3 percent in the latest revision) exposed the fiction that America will blast off as China comes apart.
China bulls, on the other hand, have by now long since abandoned their notions that the good old days of rapid credit-fueled growth can come back in any sustainable fashion. We're crossing our fingers that should something have to give, it will be the headline GDP figure before the currency - that would indicate Xi Jinping's "new normal" has teeth, i.e. that the vested interests of the SOEs have been reined in.
In fact, comparing apples to apples by using the US quarter-on-quarter GDP metric instead of China's year-on-year, we're already there. At barely 1.1 percent quarter-on-quarter growth in Q1, annualized Chinese GDP was less than 4.5 percent: the aforementioned US equivalent was 0.3 percent. That's a much smaller differential than 6.7 to 0.3 percent, but it squares well with other spreads like the paltry 1+ percentage point yield premium of the Chinese sovereign 10-year bond over the 10-year US Treasury. International investors can now expect no more than 200-250 basis points gain from reasonably safe yuan-denominated instruments (i.e. big corporate or local government bonds) in return for at least some residual currency risk regardless of increasingly coordinated global monetary policy.
Yet both US and Chinese growth were hampered by the sheer financial volatility in January and February, and it's likely that the horrid Chinese industrial production figures before Lunar New Year (February 8) in tandem with low oil prices (which rebounded February 11) contributed directly to the likewise horrid US consumption stats in March. The cumulative result has been to make it a foregone conclusion that the Fed will keep an accommodative monetary environment (i.e. looser global dollar supply) for everyone well into 2017, so there's reason to expect a Q2 rebound on both sides of the Pacific.
Beyond this, however, Beijing has merely gained a longer window of opportunity to actually carry out reforms and restructuring - a proposition that, even if one optimistically thinks the Xi administration remains fully committed to in theory, can only continue to play out gradually and haltingly in practice, if only because local governments still bear the grunt work of policy execution. Echoing previous iterations of Chinese reform, Xi and co. at the central government level can only hope to be able to adapt or promote measures that, after being successfully piloted in some part of the country, might work elsewhere too. Extraordinarily difficult, to say the least.
As unsettling as this might be, not buckling the status quo is far worse: better that the world finds itself hostage to a China that stumbles forward than shrinks back.
The economy's apparent semi-recovery of late has quelled fears of an imminent collapse, but the question hanging over the entire post-post-Cold War global order as we enter mid-2016 is, Just how much of this is for real, as opposed to a mere spurt of positive sentiment caused by both actual and expected global monetary accommodativeness?
Take George Soros. In his latest warning, even as he makes yet another comparison between China today and the US on the eve of the 2008 crash, he's actually backed off on his earlier statement in January that, "I'm not predicting it [a Chinese hard landing]; I'm observing it." But even more, he also makes the following more sanguine observations (my emphasis):
This gives him just enough wiggle room to quietly slip off his bear mask and don the bull one back on which has been stashed away in his closet. This is what makes him a legendary speculator - he always keeps every option open to himself.Soros was more positive about China’s foreign-exchange policy, saying efforts to link the yuan to a broad basket of currencies rather than just the dollar are a healthy development, and that the threat of competitive devaluation is greatly diminished.He also cited growing cooperation between the U.S. and China as a reason for calming markets after the turmoil at the start of the year. Soros said China’s service industry is gaining momentum but that productivity increases are harder to come by than in manufacturing.
By contrast, more committed China "permabears" like Gordon Chang, Jim Chanos, and Anne Stevenson-Yang of J Capital Research remain far too devoted to what's effectively an ideology of a permanently declining communist system to see little other than ever darker machinations and deceptions behind any glimmer of light that perhaps China's not about to go bang after all.
In her latest tirade against official Chinese statistics, Ms. Stevenson-Yang effectively paints as pure fabrications not only the foreign reserve figures from PBOC and GDP figures from the National Bureau of Statistics (NBS), but also recent evidence of pickups in construction and car sales. Of course, having published a mid-March Wall Street Journal editorial, "China's Looming Currency Crisis", she's a little anxious for validation. Last week, she again gave China a dire timetable of just 9 months until a 15 percent currency devaluation.
Even so, this is also a retraction: last year she forecast that China's economy would soon be a full one-third smaller in US dollar terms, implying a massive 33 percent collapse of the yuan (as I remember on US conservative talk radio). But that was before all the global market turmoil in the first six weeks of the year (in the wake of the Fed's December rate hike) and the stellar US Q1 growth of 0.1 percent (0.3 percent in the latest revision) exposed the fiction that America will blast off as China comes apart.
China bulls, on the other hand, have by now long since abandoned their notions that the good old days of rapid credit-fueled growth can come back in any sustainable fashion. We're crossing our fingers that should something have to give, it will be the headline GDP figure before the currency - that would indicate Xi Jinping's "new normal" has teeth, i.e. that the vested interests of the SOEs have been reined in.
In fact, comparing apples to apples by using the US quarter-on-quarter GDP metric instead of China's year-on-year, we're already there. At barely 1.1 percent quarter-on-quarter growth in Q1, annualized Chinese GDP was less than 4.5 percent: the aforementioned US equivalent was 0.3 percent. That's a much smaller differential than 6.7 to 0.3 percent, but it squares well with other spreads like the paltry 1+ percentage point yield premium of the Chinese sovereign 10-year bond over the 10-year US Treasury. International investors can now expect no more than 200-250 basis points gain from reasonably safe yuan-denominated instruments (i.e. big corporate or local government bonds) in return for at least some residual currency risk regardless of increasingly coordinated global monetary policy.
Yet both US and Chinese growth were hampered by the sheer financial volatility in January and February, and it's likely that the horrid Chinese industrial production figures before Lunar New Year (February 8) in tandem with low oil prices (which rebounded February 11) contributed directly to the likewise horrid US consumption stats in March. The cumulative result has been to make it a foregone conclusion that the Fed will keep an accommodative monetary environment (i.e. looser global dollar supply) for everyone well into 2017, so there's reason to expect a Q2 rebound on both sides of the Pacific.
Beyond this, however, Beijing has merely gained a longer window of opportunity to actually carry out reforms and restructuring - a proposition that, even if one optimistically thinks the Xi administration remains fully committed to in theory, can only continue to play out gradually and haltingly in practice, if only because local governments still bear the grunt work of policy execution. Echoing previous iterations of Chinese reform, Xi and co. at the central government level can only hope to be able to adapt or promote measures that, after being successfully piloted in some part of the country, might work elsewhere too. Extraordinarily difficult, to say the least.
As unsettling as this might be, not buckling the status quo is far worse: better that the world finds itself hostage to a China that stumbles forward than shrinks back.
Wednesday, April 20, 2016
Why the US doesn't really fear China's rise
The US doesn't really fear China's rise, despite all appearances to the contrary. Against all conventional wisdom in policy circles, it's rather glaring that in fact Americans not only have no qualms about an ascendant China, but in fact welcome it - even with ever growing proof that such a China will be as assertively un-Westernized as ever. There are fewer and fewer pretenses of trying to change the venerable Oriental civilization in America's image, and little genuine interest in preserving traditional American hegemony in the Asia-Pacific. Rather, a lot of noise is being made by career officials and scholars who have simply failed - or refused - to keep up with the times.
They seem to assume we're still in 1970, where nations and individuals still live by essentially cold war or even world war-era values. Hence the continued obsession with the military balance, weapons systems, political repression, and the like: it's as if the world is still locked in an existential struggle between rival ideologies which command a mass devotion that in the last century was essentially the modern equivalent of proselytizing religious faith, threatening large swathes of human civilization with Apocalyptic holy warfare.
Any such discussion is increasingly ludicrous in the present context. Americans as a whole implicitly share the pragmatism of their elites when it comes to China. Their gut instinct tells them that a powerful China which maximizes its clout in the global system, even through manipulation and coercion where practicable, is actually far less dangerous than a China which is routinely thwarted by the status quo.
It's a given that all human individuals and societies tend to prize stability, familiarity and continuity over uncertainty and rupture. The epochal shift that occurred with the end of the Cold War is that, for the first time in recorded history, the balance of global realities shifted decisively in favor of general peace over general conflict. That's because, for the first time in recorded history, enough general prosperity was readily available or attainable to counterbalance the forces that traditionally seek to redress a perceived unacceptable deficit.
It's often suggested that trade and economic interdependence isn't enough to prevent war between China and the US any more than it was to prevent cataclysm between the great European powers a century ago; the only problem with this comparison is that it's utterly invalid. The wealthiest European elites 100 years ago didn't have the technology or medicine that are accessible to poor Chinese peasants today (if even barely affordable). Rich world miners and workers back then toiled in conditions that would be considered atrocious even in remote or underdeveloped parts of today's global economy. An influenza epidemic which racked up a genocidal toll in Europe won't be remotely rivaled by even the worst imaginable disease outbreak in sub-Saharan Africa.
So no, trade definitely hasn't sufficed to ensure peace, but the cumulative effects of it and of economic and technological development generally mean that its implications are vastly different from what they were 100, 50, or even 25 years ago. And it's hard to envision any scenario where these effects are rolled back - not even North Korea wants to stay in the stone age.
It's a truism that wars are merely the continuation of politics; it's equally a truism that politics are merely the mediation of economics. The ultimate backstop in the US-China relationship is that neither is a net absolute loser in their intercourse, even if China appears to be the net relative winner (in Donald Trump-speak). For its own interests, the US sees that a dominant China isn't really a threat because it's a satisfied China; conversely, for its own interests China will see that a "losing" US is in fact a threat because it's a hostile one, and will have every incentive to help it "win" again. On this last point, even if Beijing spars over what this would look like to Washington, sooner or later it must deliver tangible results: we just don't live in a world of abstractions.
Perhaps the great peace that could well define the 21st century will mark the end not of conflict, but of the stranglehold of rigid ideology over it. Judging from America's true attitudes about China's rise, that's already happened.
They seem to assume we're still in 1970, where nations and individuals still live by essentially cold war or even world war-era values. Hence the continued obsession with the military balance, weapons systems, political repression, and the like: it's as if the world is still locked in an existential struggle between rival ideologies which command a mass devotion that in the last century was essentially the modern equivalent of proselytizing religious faith, threatening large swathes of human civilization with Apocalyptic holy warfare.
Any such discussion is increasingly ludicrous in the present context. Americans as a whole implicitly share the pragmatism of their elites when it comes to China. Their gut instinct tells them that a powerful China which maximizes its clout in the global system, even through manipulation and coercion where practicable, is actually far less dangerous than a China which is routinely thwarted by the status quo.
It's a given that all human individuals and societies tend to prize stability, familiarity and continuity over uncertainty and rupture. The epochal shift that occurred with the end of the Cold War is that, for the first time in recorded history, the balance of global realities shifted decisively in favor of general peace over general conflict. That's because, for the first time in recorded history, enough general prosperity was readily available or attainable to counterbalance the forces that traditionally seek to redress a perceived unacceptable deficit.
It's often suggested that trade and economic interdependence isn't enough to prevent war between China and the US any more than it was to prevent cataclysm between the great European powers a century ago; the only problem with this comparison is that it's utterly invalid. The wealthiest European elites 100 years ago didn't have the technology or medicine that are accessible to poor Chinese peasants today (if even barely affordable). Rich world miners and workers back then toiled in conditions that would be considered atrocious even in remote or underdeveloped parts of today's global economy. An influenza epidemic which racked up a genocidal toll in Europe won't be remotely rivaled by even the worst imaginable disease outbreak in sub-Saharan Africa.
So no, trade definitely hasn't sufficed to ensure peace, but the cumulative effects of it and of economic and technological development generally mean that its implications are vastly different from what they were 100, 50, or even 25 years ago. And it's hard to envision any scenario where these effects are rolled back - not even North Korea wants to stay in the stone age.
It's a truism that wars are merely the continuation of politics; it's equally a truism that politics are merely the mediation of economics. The ultimate backstop in the US-China relationship is that neither is a net absolute loser in their intercourse, even if China appears to be the net relative winner (in Donald Trump-speak). For its own interests, the US sees that a dominant China isn't really a threat because it's a satisfied China; conversely, for its own interests China will see that a "losing" US is in fact a threat because it's a hostile one, and will have every incentive to help it "win" again. On this last point, even if Beijing spars over what this would look like to Washington, sooner or later it must deliver tangible results: we just don't live in a world of abstractions.
Perhaps the great peace that could well define the 21st century will mark the end not of conflict, but of the stranglehold of rigid ideology over it. Judging from America's true attitudes about China's rise, that's already happened.
Tuesday, April 19, 2016
The crux of China's big challenge
Unsurprisingly, in the wake of China's reported Q1 economic figures, fears have resurfaced that Beijing is growing itself into yet another investment and asset bubble.
As this credit versus GDP chart shows, China has suffered from chronic outstripping of GDP growth by credit growth since the onset of the Great Recession and global financial crisis (mid-to-late 2008):
Herein is the crux of China's great challenge: the longer the gap between leverage and output expansion rates persists, the more it's buying short-term growth at the expense of long-term economic balance, sustainability, and viability.
China's total debt already stands in the high-200s to low-300s percent of GDP, and one can only hope it will before long plateau and even start declining - the last thing anyone needs is for this to rise to a Japan-like 400 percent, but should China's transition fail, by the early 2020s that's exactly where it'll be.
To get an idea of how quickly the country has levered up, according to one China skeptic, Beijing is effectively a poster child for the global debt orgy which since the 2008 crisis has added $60 trillion of new debt to generate only $15 trillion of new GDP. Of these totals, China accounts for a full third, i.e. $21 trillion and $5 trillion respectively: debt has exploded fourfold post-crisis, from US $7 to $28 trillion, yet that's barely doubled GDP from $5 to $10 trillion; this translates quite neatly to 300 percent growth of debt versus only 100 percent for nominal GDP.
In fact, as I personally recall, China's nominal GDP didn't hit $5 trillion until 2010 when it overtook Japan for the no. 2 spot; using a late-2008 base GDP of $4.2 trillion, that translates to a more favorable 138 percent nominal GDP growth to the present versus 300 percent for debt. Better, but still clearly unsustainable.
From this, applying a y-root of 7.5 years (September 2008-March 2016), and with the total GDP growth multiple of 2.38 (238 percent of base, i.e $10 trillion divided by $4.2 trillion), we calculate an average annual GDP growth of 12.2 percent; the same y-root of 7.5 years as against total debt growth multiple of 4.0 (400 percent of base, i.e. $28 trillion divided by $7 trillion) yields average annual debt growth of 20.3 percent.
This squares well with the above chart: since the crisis average credit growth has outstripped average GDP growth nearly by a factor of 2-to-1, and indeed the disparity was especially acute after early 2012, when the global post-crisis recovery fizzled out and slid into a long deceleration that seems destined to only continue. On the eve of Xi Jinping's accession to power in 2012 (given the chart's three-quarter lag), Chinese authorities responded to this new threat by embarking on another mini-credit expansion which, in failing to bring growth back higher over the following year, plunged the country into the deeper deflationary slowdown it's trying to break out of now (nearly half the country's total capital investment in 2013, according to this study, was wasted on uneconomical projects).
It would appear that the sheer waste in 2013 enabled Xi to effectively enshrine his "new normal" of slower growth when he unveiled his economic rebalancing agenda that fall: this was simply an acknowledgement of hard realities which even the all-powerful communist party planners and managers can't escape indefinitely. Thus credit growth, which had already fallen back from its 2012 mini-stimulus peak of 20+ percent, trimmed further to eventually bottom out in the low single digits in Q2 2015 (again, per chart's three-quarter lag). Indeed, all the so-called "stimulus" of interest rate and reserve requirement ratio (RRR) cuts by PBOC since late 2014 have merely been to ease the irrevocable downshift which was now greatly exacerbated by the end of QE in the US and the Fed's subsequent rate normalization program.
Last summer's stock market crash and currency devaluation effectively ended this relentless softening of credit intensity, as Beijing turned up the spigots again to ward off the dreaded hard landing. Interestingly, while Q1 2016's real growth of 6.7 percent was below Q4 2015's 6.8 percent, the chart shows a substantial pickup of nominal growth from Q4's low-6 percent to what appears to be at least 7 percent in Q1. In this nominal sense, then, Q1 was actually a better quarter and could be interpreted as the start of a mini-recovery fueled by the mid-2015 reversal of credit deceleration. Similarly, Q1's own massive credit jump of 15.8 percent - yet again, a reaction to stock and currency turmoil - should work its way through the economy later in H2 this year.
Beijing may appear sanguine about a continued 2-to-1 ratio of credit to GDP growth, but time is running out to bring this down. Should credit growth average 13-14 percent during the 13th five-year plan (2016-2020) while GDP growth averages the targeted 6.5-7 percent, by 2021 the Chinese economy will be only $14 trillion versus a total debt pile between $55 and $60 trillion! In other words, the dreaded Japanese debt-to-GDP ratio of about 400 percent.
Even should that come to pass, it's debatable how much trouble the communist regime will perceive itself to be in: it will be up to its eyeballs in its SOE and government (local and national) debt even more than today, but it will be in very good company. After all, the rich OECD countries will still be even worse off, if current trends continue and they ward off another financial crisis (i.e. with IMF bailout of their central banks). In fact, the US national debt is already far greater than the oft-cited 100+ percent of GDP when counting unfunded liabilities (primarily Social Security and Medicare), at anywhere from $65 trillion to a mind-boggling $210 trillion (351 and 1,135 percent of current GDP, respectively!). That's only public federal debt, by the way: it doesn't even include state or municipal, let alone private corporate or household liabilities, which presently add up to about another 150 percent of GDP! So in other words, we're likely already at least a full 100 percentage points worse off (~500 to 400) in debt-to-GDP than China will be in five years.
This all leads to an inevitable conclusion: at some point likely in the early 2020s, once the world's debt masters have no other options, they'll reintroduce the gold standard with the metal repriced at no less than $10,000 an ounce (roughly eight-fold increase from today). China, needless to say, plans to have a prime seat at the table: it launched its yuan-denominated Shanghai gold fix overnight.
As this credit versus GDP chart shows, China has suffered from chronic outstripping of GDP growth by credit growth since the onset of the Great Recession and global financial crisis (mid-to-late 2008):
Herein is the crux of China's great challenge: the longer the gap between leverage and output expansion rates persists, the more it's buying short-term growth at the expense of long-term economic balance, sustainability, and viability.
China's total debt already stands in the high-200s to low-300s percent of GDP, and one can only hope it will before long plateau and even start declining - the last thing anyone needs is for this to rise to a Japan-like 400 percent, but should China's transition fail, by the early 2020s that's exactly where it'll be.
To get an idea of how quickly the country has levered up, according to one China skeptic, Beijing is effectively a poster child for the global debt orgy which since the 2008 crisis has added $60 trillion of new debt to generate only $15 trillion of new GDP. Of these totals, China accounts for a full third, i.e. $21 trillion and $5 trillion respectively: debt has exploded fourfold post-crisis, from US $7 to $28 trillion, yet that's barely doubled GDP from $5 to $10 trillion; this translates quite neatly to 300 percent growth of debt versus only 100 percent for nominal GDP.
In fact, as I personally recall, China's nominal GDP didn't hit $5 trillion until 2010 when it overtook Japan for the no. 2 spot; using a late-2008 base GDP of $4.2 trillion, that translates to a more favorable 138 percent nominal GDP growth to the present versus 300 percent for debt. Better, but still clearly unsustainable.
From this, applying a y-root of 7.5 years (September 2008-March 2016), and with the total GDP growth multiple of 2.38 (238 percent of base, i.e $10 trillion divided by $4.2 trillion), we calculate an average annual GDP growth of 12.2 percent; the same y-root of 7.5 years as against total debt growth multiple of 4.0 (400 percent of base, i.e. $28 trillion divided by $7 trillion) yields average annual debt growth of 20.3 percent.
This squares well with the above chart: since the crisis average credit growth has outstripped average GDP growth nearly by a factor of 2-to-1, and indeed the disparity was especially acute after early 2012, when the global post-crisis recovery fizzled out and slid into a long deceleration that seems destined to only continue. On the eve of Xi Jinping's accession to power in 2012 (given the chart's three-quarter lag), Chinese authorities responded to this new threat by embarking on another mini-credit expansion which, in failing to bring growth back higher over the following year, plunged the country into the deeper deflationary slowdown it's trying to break out of now (nearly half the country's total capital investment in 2013, according to this study, was wasted on uneconomical projects).
It would appear that the sheer waste in 2013 enabled Xi to effectively enshrine his "new normal" of slower growth when he unveiled his economic rebalancing agenda that fall: this was simply an acknowledgement of hard realities which even the all-powerful communist party planners and managers can't escape indefinitely. Thus credit growth, which had already fallen back from its 2012 mini-stimulus peak of 20+ percent, trimmed further to eventually bottom out in the low single digits in Q2 2015 (again, per chart's three-quarter lag). Indeed, all the so-called "stimulus" of interest rate and reserve requirement ratio (RRR) cuts by PBOC since late 2014 have merely been to ease the irrevocable downshift which was now greatly exacerbated by the end of QE in the US and the Fed's subsequent rate normalization program.
Last summer's stock market crash and currency devaluation effectively ended this relentless softening of credit intensity, as Beijing turned up the spigots again to ward off the dreaded hard landing. Interestingly, while Q1 2016's real growth of 6.7 percent was below Q4 2015's 6.8 percent, the chart shows a substantial pickup of nominal growth from Q4's low-6 percent to what appears to be at least 7 percent in Q1. In this nominal sense, then, Q1 was actually a better quarter and could be interpreted as the start of a mini-recovery fueled by the mid-2015 reversal of credit deceleration. Similarly, Q1's own massive credit jump of 15.8 percent - yet again, a reaction to stock and currency turmoil - should work its way through the economy later in H2 this year.
Beijing may appear sanguine about a continued 2-to-1 ratio of credit to GDP growth, but time is running out to bring this down. Should credit growth average 13-14 percent during the 13th five-year plan (2016-2020) while GDP growth averages the targeted 6.5-7 percent, by 2021 the Chinese economy will be only $14 trillion versus a total debt pile between $55 and $60 trillion! In other words, the dreaded Japanese debt-to-GDP ratio of about 400 percent.
Even should that come to pass, it's debatable how much trouble the communist regime will perceive itself to be in: it will be up to its eyeballs in its SOE and government (local and national) debt even more than today, but it will be in very good company. After all, the rich OECD countries will still be even worse off, if current trends continue and they ward off another financial crisis (i.e. with IMF bailout of their central banks). In fact, the US national debt is already far greater than the oft-cited 100+ percent of GDP when counting unfunded liabilities (primarily Social Security and Medicare), at anywhere from $65 trillion to a mind-boggling $210 trillion (351 and 1,135 percent of current GDP, respectively!). That's only public federal debt, by the way: it doesn't even include state or municipal, let alone private corporate or household liabilities, which presently add up to about another 150 percent of GDP! So in other words, we're likely already at least a full 100 percentage points worse off (~500 to 400) in debt-to-GDP than China will be in five years.
This all leads to an inevitable conclusion: at some point likely in the early 2020s, once the world's debt masters have no other options, they'll reintroduce the gold standard with the metal repriced at no less than $10,000 an ounce (roughly eight-fold increase from today). China, needless to say, plans to have a prime seat at the table: it launched its yuan-denominated Shanghai gold fix overnight.
Friday, April 15, 2016
Strong finish to Q1 includes tentative industrial recovery that must now be stabilized
China's Q1 growth of 6.7 percent was a big relief given how poorly the year started with the first five weeks before Lunar New Year; March's biggest surprise was a tentative but resounding industrial recovery.
On the other hand, the debt jamboree continues: total social financing (TSF) increased by an eye-popping $1 trillion in Q1 (a new record), as money supply (M2) continues to outstrip GDP by 2-to-1 (13.4 versus 6.7 percent growth). That wasn't sustainable in 2012, and it definitely isn't in 2016.
The world will find out in 2016 and 2017 whether or not China is in fact such an "overinvestment" bubble as it's cracked out to be: its per capita GDP of about $8,000 is much lower in real terms than Japan's in the early 1990s, so it could still be too early to make such a direct comparison with the debt deflation that overtook the latter and doomed it to a lost generation. China's clearly malinvested heavily - on a scale never seen before in human history ($6.9 trillion by one unofficial 2014 study) - but ironically this leaves massive demand for actual sound investment unmet in prime sectors and geographic areas (i.e megacities and their environs need more attention relative to second and third-tier cities which must plateau or downsize). One would hope that that's the impetus for the continued heavy investment and delayed deleveraging.
Of course, China remains at the mercy of prevailing global conditions and US monetary policy. Global dollar liquidity - dictated largely by oil and commodity prices - is still too brittle for anyone to be sanguine about an easy recovery. The Fed must weigh its desire to keep global dollar funding conditions accommodative, i.e. delay its rate hike schedule, against its imperative to enforce the discipline of more balanced capital allocation by international economic participants, of which Chinese industry is perhaps the single most important.
In a nutshell, the Fed has given Beijing a reprieve but the latter must now make good on its own end of the bargain: it must stabilize the nascent industrial recovery by pressing ahead with downsizing and restructuring where it's needed, and not allow zombie SOEs to capitalize on the breathing space to perpetuate their bottom-feeding, value-destructive ways. The jury's out on this one until later this year, when the present relative calm in oil and commodity markets will have faded or even dissipated altogether: difficult Chinese decisions now, or conversely more foot-dragging, will cushion or amplify the next wave in the lineage of August-September 2015 and January-February of this year.
On the other hand, the debt jamboree continues: total social financing (TSF) increased by an eye-popping $1 trillion in Q1 (a new record), as money supply (M2) continues to outstrip GDP by 2-to-1 (13.4 versus 6.7 percent growth). That wasn't sustainable in 2012, and it definitely isn't in 2016.
The world will find out in 2016 and 2017 whether or not China is in fact such an "overinvestment" bubble as it's cracked out to be: its per capita GDP of about $8,000 is much lower in real terms than Japan's in the early 1990s, so it could still be too early to make such a direct comparison with the debt deflation that overtook the latter and doomed it to a lost generation. China's clearly malinvested heavily - on a scale never seen before in human history ($6.9 trillion by one unofficial 2014 study) - but ironically this leaves massive demand for actual sound investment unmet in prime sectors and geographic areas (i.e megacities and their environs need more attention relative to second and third-tier cities which must plateau or downsize). One would hope that that's the impetus for the continued heavy investment and delayed deleveraging.
Of course, China remains at the mercy of prevailing global conditions and US monetary policy. Global dollar liquidity - dictated largely by oil and commodity prices - is still too brittle for anyone to be sanguine about an easy recovery. The Fed must weigh its desire to keep global dollar funding conditions accommodative, i.e. delay its rate hike schedule, against its imperative to enforce the discipline of more balanced capital allocation by international economic participants, of which Chinese industry is perhaps the single most important.
In a nutshell, the Fed has given Beijing a reprieve but the latter must now make good on its own end of the bargain: it must stabilize the nascent industrial recovery by pressing ahead with downsizing and restructuring where it's needed, and not allow zombie SOEs to capitalize on the breathing space to perpetuate their bottom-feeding, value-destructive ways. The jury's out on this one until later this year, when the present relative calm in oil and commodity markets will have faded or even dissipated altogether: difficult Chinese decisions now, or conversely more foot-dragging, will cushion or amplify the next wave in the lineage of August-September 2015 and January-February of this year.
Wednesday, April 13, 2016
Trade stats point to another tentative reprieve
Exports surged 11.5 percent on year in March as imports moderated their decline to 7.6 percent (only 1.7 percent in RMB terms), giving China and the global economy another tentative reprieve from the doom and gloom of the opening weeks of 2016.
Some other headlines:
The optimist view right now is that even despite some releveraging to kickstart growth, China's no longer propping up zombie firms and has instead shifted up the value chain. The pessimist or skeptic's view would be that too many defunct companies are still being kept on life support by more debt and the trade improvement was a blip caused by seasonal factors (like the unusually low base figures from March 2015) and especially a weak dollar (i.e. firming commodity input prices). My own take? As usual, some combination of both - subsequent months' data will show just how much of each is actually at play.
Japan could already be intervening to reverse the yen's rise as of this week on back of the improved Chinese data: if the yen manages to slide back to the 110 to 115 range and stay there over the remainder of this month, that would signal confidence in Tokyo that global dollar liquidity has been sufficiently salvaged from further unwarranted constriction, enabling it to get back on its own easing track. Likewise Europe: the euro should soon drop below $1.10 and settle as low as $1.07-1.08 in 2Q to get the Eurozone back on a stable footing of very low growth that will forestall further sinking into negative interest rate territory.
That the IMF has raised its growth forecast for China to 6.5 from 6.3 percent is significant; that it did so even as it downgraded (again) global growth from 3.4 to 3.2 percent is quite an endorsement of both Beijing's importance and its commitment to reform. While there's some great traction coming from India, given its considerably larger GDP and trade volume, it'd be even better news for China to get its act together again. And the main reason to be cautiously optimistic of this? The communist regime may have already cleared a dangerous hurdle to its stability, meaning we could finally see some cohesive policy implementation from the central government down to the provinces and localities, notably on SOE restructuring (and the attendant debt cleanup/deleveraging).
Tuesday, April 12, 2016
Important week for Chinese data signals prolonged accommodative global monetary conditions
Car sales were up nearly 10 percent in March and 6.8 percent for 1Q, as total vehicle sales rose 8.8 percent on year last month. Steel has also rebounded on back of better profitability and accelerated construction and infrastructure spending. The yuan and stock market have firmed up lately, as well.
Much is now riding on Beijing hitting 6.7 percent GDP growth for 1Q and posting a decelerated decline in trade for March - to be reported later this week - on top of an easing of industrial deflation last month (to PPI -4.3 percent) and the first improvement in corporate profits and forex reserves since 3Q and 4Q 2015, respectively.
While this is doubtless thanks in part to the Fed's dovishness since February, it could also indicate the reaping of some low-hanging fruit in the consolidation of inefficient SOEs in key sectors like coal and steel.
As well, the yuan's continued strength is crucial: it has improved general market and economic sentiment that advocates of large devaluation, while continuing to voice their dissent, have effectively lost the debate in Beijing, at least for the time being.
Probably more important, though, the US is simply not such a compelling growth story right now for Chinese capital to fly to, nor is any part of the global economy looking particularly robust as an alternative to China. Even if the reported 6.5+ percent growth is in fact no more than 4 percent, that's much better than the latest estimate of our own 1Q growth of barely 0.1 percent.
That's the real heart of the matter: it seems not even the US can afford such tight dollar financing conditions that would allow the Fed to raise rates going forward on anything remotely approaching its original timetable.
We may soon learn just how sustainable - i.e. necessary - is the current dollar weakness that some have attributed to a secret "Shanghai accord" at the G-20 back in late February. On one level, it's obvious now that no such accord was needed anyway: our own financial and economic conditions simply dictated a debased greenback no less than the more serious conditions overseas. And since the "Eurodollar" (offshore dollar) remains the de facto standard for international finance, it follows that not just the US, but the entire global economy, badly needed a forestalling of further tightening (i.e. effective further easing) of dollar liquidity. As global monetary authorities scrambled to stabilize their markets and ward off panic in early-to-mid February, they naturally found that what everyone needed was a falling dollar atop rising oil prices coupled with a rising euro and yen - and by extension of course, a stabilizing yuan.
And so, here we are again in the post-crisis "new normal" where bad news is effectively good news: the more bad or even checkered news and data we get, especially from China or the US, the less likely the Fed's normalization timetable won't continue to slide - i.e. the less chance we'll ever get back to "normal" economics or capitalism again.
Much is now riding on Beijing hitting 6.7 percent GDP growth for 1Q and posting a decelerated decline in trade for March - to be reported later this week - on top of an easing of industrial deflation last month (to PPI -4.3 percent) and the first improvement in corporate profits and forex reserves since 3Q and 4Q 2015, respectively.
While this is doubtless thanks in part to the Fed's dovishness since February, it could also indicate the reaping of some low-hanging fruit in the consolidation of inefficient SOEs in key sectors like coal and steel.
As well, the yuan's continued strength is crucial: it has improved general market and economic sentiment that advocates of large devaluation, while continuing to voice their dissent, have effectively lost the debate in Beijing, at least for the time being.
Probably more important, though, the US is simply not such a compelling growth story right now for Chinese capital to fly to, nor is any part of the global economy looking particularly robust as an alternative to China. Even if the reported 6.5+ percent growth is in fact no more than 4 percent, that's much better than the latest estimate of our own 1Q growth of barely 0.1 percent.
That's the real heart of the matter: it seems not even the US can afford such tight dollar financing conditions that would allow the Fed to raise rates going forward on anything remotely approaching its original timetable.
We may soon learn just how sustainable - i.e. necessary - is the current dollar weakness that some have attributed to a secret "Shanghai accord" at the G-20 back in late February. On one level, it's obvious now that no such accord was needed anyway: our own financial and economic conditions simply dictated a debased greenback no less than the more serious conditions overseas. And since the "Eurodollar" (offshore dollar) remains the de facto standard for international finance, it follows that not just the US, but the entire global economy, badly needed a forestalling of further tightening (i.e. effective further easing) of dollar liquidity. As global monetary authorities scrambled to stabilize their markets and ward off panic in early-to-mid February, they naturally found that what everyone needed was a falling dollar atop rising oil prices coupled with a rising euro and yen - and by extension of course, a stabilizing yuan.
And so, here we are again in the post-crisis "new normal" where bad news is effectively good news: the more bad or even checkered news and data we get, especially from China or the US, the less likely the Fed's normalization timetable won't continue to slide - i.e. the less chance we'll ever get back to "normal" economics or capitalism again.
Monday, April 11, 2016
How the CPC may have already averted disaster in early 2016
Wang Qishan, powerful head of the Central Commission for Discipline Inspection (CCDI), China's anti-corruption and internal party policing watchdog, is probably the most important man in China right now. Since early this year, he may well have steered the ship of the administration of Xi Jinping safely away from what could have been a fatal impact with an iceberg that, like the one which doomed the Titanic, packed a far deadlier punch lurking below the waterline than was visible above it.
The CCDI's internal polemic, "A single honest official is worth more than a thousand 'yes' men", remains visible on the heavily censored Chinese Internet six weeks after its initial publication, which shows that Wang isn't merely fully supportive of it, but may even have had a hand in its creation.
This leaves China watchers with two tantalizing possibilities: either Xi Jinping has lost control over Wang and the CCDI, who have now gotten away with what's widely seen as an attack on his authoritarian overreach, or in fact Xi himself thought his sycophants in the party and especially its propaganda apparatus took his cult of personality too far - and thus needed a public, though intraparty, rebuke.
Both scenarios point to some degree of party strife at very high levels of the central government - in other words, nothing less than an existential threat to the survival of communist rule. The second one, however, would draw a decidedly unconventional conclusion: that the CPC has already avoided the aforementioned collision and is heading into safety, notwithstanding all outward appearances to the contrary.
Without doubt, the regime's liberal critics have hoped for the first possibility: a spat between Wang and Xi. After all, the context of the CCDI essay was the ugly row over the fate of Ren Zhiqiang, the outspoken party property tycoon who was swiftly silenced for questioning Xi's public demand of absolute obedience by state media to the will of the party's central leadership.
As Ren is a close friend of Wang himself, his apparently lenient punishment in late February seemed to be a defeat not only for Xi's neo-Maoist hardliner henchmen, but none less than Xi himself. Speculation stirred in overseas Chinese and foreign media that some power struggle was going on in Zhongnanhai, whereby Wang had succeeded in wresting enough Politburo and Central Committee support from Xi to effectively thwart him.
But six weeks later, this whole theory seems to be little more than wishful thinking - thanks to none other than the very "open letter" of party dissenters in early March that initially seemed to shake Xi's supposedly fragile administration to its core.
In the wake of that letter (and a follow-up one not so publicized), there have been absolutely no signs of deepening party elite discord - specifically, virtually no indications that Wang Qishan (or Li Keqiang for that matter) are actually gaining power at Xi's expense. There has been no association whatsoever of Wang with the still-phantom party dissenters: instead, whatever discontent may have actually existed has been broadly and thoroughly muzzled.
While this could be a temporary truce or stalemate instead of any conclusive resolution at the apex of Chinese politics, the increasingly plausible scenario is the aforementioned second one: that Xi and Wang were never in fundamental disagreement, and have actually coordinated to outflank their real enemies - those elements within the party that want to set up Mr. Xi for total and exclusive blame for China's massive problems.
In this account, Xi never wanted undue focus on his own personality, even though he firmly believed that absolute obedience to his "core" leadership was becoming imperative to China's successful transition. He needed to get the message out to both the party and the nation's citizenry that he knew exactly what policies China had to adopt, and that he himself, at least, was doing the utmost to ensure that these policies would be carried out by the inertia-inclined bureaucracy.
Unsurprisingly, though, other powerful party interests saw an opportunity to increase Xi's vulnerability to criticism: they knew that, very conveniently, liberal elements within both party and society at large would foment a backlash against the perceived concentration of power in a single individual's hands; they thus had every motive to magnify the increasingly personalized aspects of Xi's rule, even as Xi's own focus was very much on the actual implementation of central policy.
This tension erupted into the open with Ren Zhiqiang. Tellingly, Ren's gripe with Xi's public demand of loyalty from state media outlets was focused not on Xi personally but on the party: his attack was leveled against the implication that the party and the people - not that Xi and the party - were one and inseparable. In the prevailing climate, however, this was exactly what Xi's true rivals - of which Ren is in fact no more so than Wang Qishan - wanted: an opportunity to further conflate the party as a whole with Xi's own person, thereby making Xi himself more directly susceptible to a wider pushback.
From Xi's perspective, it would have been sufficient to deal with Ren's apparent insubordination on social media in the standard censorship methodology: simply scrub his controversial remarks from further online discussion, or perhaps even use the opportunity to "clarify" that the true party line emanating from the top was not at all suggesting absolutely blind obedience; but from the vantage point of the true hardliners and vested party interests, it was imperative to demonstrate that in the new Xi Jinping era, not even a hint of dissent would be tolerated. This somewhat echoes the kind of opportunistic extremism that always tends to follow closely on the heels of strongmen: like Mao's Gang of Four, Hitler's SA stormtroopers, and numerous other historical instances, the jackals always get carried away and ruthlessly seize every chance they get to sharpen their teeth with fresh blood, so as to ingratiate themselves further with their master tiger, even at the risk of exposing their ultimate ambition to tear the latter to pieces himself.
And so, Ren was not merely censored, but completely banished from cyberspace by the highest central propaganda authorities - effectively a premeditated preemptive strike by the world's most sophisticated information suppression machine in what it hoped would be an opening salvo of Cultural Revolution lite.
With this, Xi's campaign to discipline the party with a deepening propaganda purge, which he had intended to pursue with a measured yet determined persistence, suddenly and dangerously slipped out of his own hands. The whole party and nation - indeed, the whole world - instantly and automatically assumed that such a severe crackdown on inconvenient expression could only have been his personal order; if anything could tarnish his national and international image and confirm suspicions of his megalomania, this was it. But even apart from this, internal party politics meant there was simply no way for him to disown the abrupt gag on Ren: it may have been excessive, but it was very much in the spirit of zero tolerance for resistance in the ranks that he had been pushing for months. It wasn't merely that the propaganda ministry headed by fellow Politburo Standing Committee member Liu Yunshan was so crucial to Xi's grip on power: far more significantly, this was just the kind of tough crackdown that, if backtracked on, would only unleash the floodgates of further criticism of the central party leadership that was now anathema. Thus was Xi caught between the proverbial "rock and a hard place": the rock of having his credibility undermined by the very ones acting in his name, and the hard place of loss of wider party cohesion in case he personally appeared to vacillate.
In hindsight, it was at this juncture of real crisis that he would have turned to his most trusted friend, confidant, and mentor of sorts: once more, at Xi's behest, Wang Qishan stepped into the thick of the gathering storm to defuse a rapidly ticking time bomb with the stakes now bigger than ever - not just for China, but for the world. Wang had to roll back the excess severity of the suppression to salvage Xi's reputation, yet simultaneously minimize the inevitable fallout from such an obvious countermeasure to what Xi himself had, in the world's eyes, supposedly done. This naturally would have left him no recourse except to the kind of indirect, historical anecdotal and polemical plea which the February 29 CCDI memo turned out to be.
In centering its thesis on the well-known story of a common man giving prescient warning to an atypically discreet emperor, the CCDI piece first legitimizes authoritarian rule as not at all inherently evil in and of itself: the implication being that such tremendous power has its own prior justification to have even been acquired to begin with, yet in order to maintain such power, even the greatest ruler must himself be governed by a keen sense of his own fallibility and presumption. This would send exactly the proper message inasmuch as Xi's administration was concerned. By posing Xi as an enlightened autocrat who had absolutely no use for flatterers, it both struck back at the unruly propaganda machine which had damaged the regime's public image, even as it simultaneously underscored the autocrat's unquestioned prerogative to govern by his own fiat: in essence, claiming that precisely because the ruler is so open to unpleasant truth, that's why opposition to him constitutes such a diabolical treachery.
However, in any dictatorship there tends to be far more stupid, incoherent, even downright suicidal resistance to absolute power than there is carefully calculated and coordinated opposition. The former is based on undisciplined impulse and thus exposes itself to being wiped out instantly - in sharp contrast to the latter, which is so good at disguising its subversion with a facade of obedience that it's typically too late to stop it by the time it's finally recognized as a legitimate threat.
As such, the March 4 open letter first published on an overseas dissident site before somehow appearing on a state-run mainland one was clearly an instance of the first kind of internal rebellion: a pitifully pathetic putsch even by putsch standards. Of course, it's hardly surprising that any political party with so many operatives even in its upper echelons would have its fair share of practical political imbeciles who have no clue how power actually works in their rigidly hierarchical system. A month later, it's all but apparent that the letter's authors walked right into a trap which Xi and Wang set for them.
In other words, the CCDI memo which can only have been masterminded by Wang was badly misinterpreted as a green light to attack Xi, when in fact, as we have reasoned, it was a subtle and thereby particularly efficacious defense of the dictator. True, the discordant authors were also emboldened by the fact that Ren Zhiqiang had apparently gotten off with a lenient sentence - most likely with Wang vouching for his friend. Could the would-be coup plotters have been so silly as to think Wang would somehow cover them, too, in what would be (to them) a logical next move to undermine Xi just as the annual Two Sessions was getting underway? Unfortunately for Xi's perennial detractors whether Chinese or Western, the subsequent weeks are increasingly exposing the probability that his enemies are a bunch of simplistic nitwits.
Well, that is his acknowledged enemies (who in this case remain as yet unnamed). Xi and Wang, being anything but not extremely shrewd politicians far outclassing practically all their peers and subordinates, have probably long since known that it's their hidden enemies - hidden from those who don't have such thorough understanding either of the party's true inner workings or of the traditional subtleties of Chinese statecraft - which pose a far greater danger, and indeed the only credible one that can in fact derail their program for China's transition.
Who are they? Liu Yunshan? Remnants of Jiang Zemin's "Shanghai clique" or even former henchmen of the Hu Jintao/Wen Jiabo fourth generation leadership? Ironically, it's precisely those that, from the outside looking in, seem most fervently or faithfully in support of Xi's unquestioned authority that warrant the greatest caution and concern from his administration.
For this reason - that is, that Xi and Wang have now signaled to the party that they're on notice about potential wolves disguised as lambs - we might just about conclude that the CPC has already dodged one killer iceberg as it enters the most critical segment of its overhaul course. They have, it would appear, thoroughly robbed their enemies of the element of surprise and deception - a process that actually began long before the travails of early 2016. While nothing can be said with certainty, it's a good bet that a bet against fundamentally effective party rule in China will continue to be a poor one going forward.
The CCDI's internal polemic, "A single honest official is worth more than a thousand 'yes' men", remains visible on the heavily censored Chinese Internet six weeks after its initial publication, which shows that Wang isn't merely fully supportive of it, but may even have had a hand in its creation.
This leaves China watchers with two tantalizing possibilities: either Xi Jinping has lost control over Wang and the CCDI, who have now gotten away with what's widely seen as an attack on his authoritarian overreach, or in fact Xi himself thought his sycophants in the party and especially its propaganda apparatus took his cult of personality too far - and thus needed a public, though intraparty, rebuke.
Both scenarios point to some degree of party strife at very high levels of the central government - in other words, nothing less than an existential threat to the survival of communist rule. The second one, however, would draw a decidedly unconventional conclusion: that the CPC has already avoided the aforementioned collision and is heading into safety, notwithstanding all outward appearances to the contrary.
Without doubt, the regime's liberal critics have hoped for the first possibility: a spat between Wang and Xi. After all, the context of the CCDI essay was the ugly row over the fate of Ren Zhiqiang, the outspoken party property tycoon who was swiftly silenced for questioning Xi's public demand of absolute obedience by state media to the will of the party's central leadership.
As Ren is a close friend of Wang himself, his apparently lenient punishment in late February seemed to be a defeat not only for Xi's neo-Maoist hardliner henchmen, but none less than Xi himself. Speculation stirred in overseas Chinese and foreign media that some power struggle was going on in Zhongnanhai, whereby Wang had succeeded in wresting enough Politburo and Central Committee support from Xi to effectively thwart him.
But six weeks later, this whole theory seems to be little more than wishful thinking - thanks to none other than the very "open letter" of party dissenters in early March that initially seemed to shake Xi's supposedly fragile administration to its core.
In the wake of that letter (and a follow-up one not so publicized), there have been absolutely no signs of deepening party elite discord - specifically, virtually no indications that Wang Qishan (or Li Keqiang for that matter) are actually gaining power at Xi's expense. There has been no association whatsoever of Wang with the still-phantom party dissenters: instead, whatever discontent may have actually existed has been broadly and thoroughly muzzled.
While this could be a temporary truce or stalemate instead of any conclusive resolution at the apex of Chinese politics, the increasingly plausible scenario is the aforementioned second one: that Xi and Wang were never in fundamental disagreement, and have actually coordinated to outflank their real enemies - those elements within the party that want to set up Mr. Xi for total and exclusive blame for China's massive problems.
In this account, Xi never wanted undue focus on his own personality, even though he firmly believed that absolute obedience to his "core" leadership was becoming imperative to China's successful transition. He needed to get the message out to both the party and the nation's citizenry that he knew exactly what policies China had to adopt, and that he himself, at least, was doing the utmost to ensure that these policies would be carried out by the inertia-inclined bureaucracy.
Unsurprisingly, though, other powerful party interests saw an opportunity to increase Xi's vulnerability to criticism: they knew that, very conveniently, liberal elements within both party and society at large would foment a backlash against the perceived concentration of power in a single individual's hands; they thus had every motive to magnify the increasingly personalized aspects of Xi's rule, even as Xi's own focus was very much on the actual implementation of central policy.
This tension erupted into the open with Ren Zhiqiang. Tellingly, Ren's gripe with Xi's public demand of loyalty from state media outlets was focused not on Xi personally but on the party: his attack was leveled against the implication that the party and the people - not that Xi and the party - were one and inseparable. In the prevailing climate, however, this was exactly what Xi's true rivals - of which Ren is in fact no more so than Wang Qishan - wanted: an opportunity to further conflate the party as a whole with Xi's own person, thereby making Xi himself more directly susceptible to a wider pushback.
From Xi's perspective, it would have been sufficient to deal with Ren's apparent insubordination on social media in the standard censorship methodology: simply scrub his controversial remarks from further online discussion, or perhaps even use the opportunity to "clarify" that the true party line emanating from the top was not at all suggesting absolutely blind obedience; but from the vantage point of the true hardliners and vested party interests, it was imperative to demonstrate that in the new Xi Jinping era, not even a hint of dissent would be tolerated. This somewhat echoes the kind of opportunistic extremism that always tends to follow closely on the heels of strongmen: like Mao's Gang of Four, Hitler's SA stormtroopers, and numerous other historical instances, the jackals always get carried away and ruthlessly seize every chance they get to sharpen their teeth with fresh blood, so as to ingratiate themselves further with their master tiger, even at the risk of exposing their ultimate ambition to tear the latter to pieces himself.
And so, Ren was not merely censored, but completely banished from cyberspace by the highest central propaganda authorities - effectively a premeditated preemptive strike by the world's most sophisticated information suppression machine in what it hoped would be an opening salvo of Cultural Revolution lite.
With this, Xi's campaign to discipline the party with a deepening propaganda purge, which he had intended to pursue with a measured yet determined persistence, suddenly and dangerously slipped out of his own hands. The whole party and nation - indeed, the whole world - instantly and automatically assumed that such a severe crackdown on inconvenient expression could only have been his personal order; if anything could tarnish his national and international image and confirm suspicions of his megalomania, this was it. But even apart from this, internal party politics meant there was simply no way for him to disown the abrupt gag on Ren: it may have been excessive, but it was very much in the spirit of zero tolerance for resistance in the ranks that he had been pushing for months. It wasn't merely that the propaganda ministry headed by fellow Politburo Standing Committee member Liu Yunshan was so crucial to Xi's grip on power: far more significantly, this was just the kind of tough crackdown that, if backtracked on, would only unleash the floodgates of further criticism of the central party leadership that was now anathema. Thus was Xi caught between the proverbial "rock and a hard place": the rock of having his credibility undermined by the very ones acting in his name, and the hard place of loss of wider party cohesion in case he personally appeared to vacillate.
In hindsight, it was at this juncture of real crisis that he would have turned to his most trusted friend, confidant, and mentor of sorts: once more, at Xi's behest, Wang Qishan stepped into the thick of the gathering storm to defuse a rapidly ticking time bomb with the stakes now bigger than ever - not just for China, but for the world. Wang had to roll back the excess severity of the suppression to salvage Xi's reputation, yet simultaneously minimize the inevitable fallout from such an obvious countermeasure to what Xi himself had, in the world's eyes, supposedly done. This naturally would have left him no recourse except to the kind of indirect, historical anecdotal and polemical plea which the February 29 CCDI memo turned out to be.
In centering its thesis on the well-known story of a common man giving prescient warning to an atypically discreet emperor, the CCDI piece first legitimizes authoritarian rule as not at all inherently evil in and of itself: the implication being that such tremendous power has its own prior justification to have even been acquired to begin with, yet in order to maintain such power, even the greatest ruler must himself be governed by a keen sense of his own fallibility and presumption. This would send exactly the proper message inasmuch as Xi's administration was concerned. By posing Xi as an enlightened autocrat who had absolutely no use for flatterers, it both struck back at the unruly propaganda machine which had damaged the regime's public image, even as it simultaneously underscored the autocrat's unquestioned prerogative to govern by his own fiat: in essence, claiming that precisely because the ruler is so open to unpleasant truth, that's why opposition to him constitutes such a diabolical treachery.
However, in any dictatorship there tends to be far more stupid, incoherent, even downright suicidal resistance to absolute power than there is carefully calculated and coordinated opposition. The former is based on undisciplined impulse and thus exposes itself to being wiped out instantly - in sharp contrast to the latter, which is so good at disguising its subversion with a facade of obedience that it's typically too late to stop it by the time it's finally recognized as a legitimate threat.
As such, the March 4 open letter first published on an overseas dissident site before somehow appearing on a state-run mainland one was clearly an instance of the first kind of internal rebellion: a pitifully pathetic putsch even by putsch standards. Of course, it's hardly surprising that any political party with so many operatives even in its upper echelons would have its fair share of practical political imbeciles who have no clue how power actually works in their rigidly hierarchical system. A month later, it's all but apparent that the letter's authors walked right into a trap which Xi and Wang set for them.
In other words, the CCDI memo which can only have been masterminded by Wang was badly misinterpreted as a green light to attack Xi, when in fact, as we have reasoned, it was a subtle and thereby particularly efficacious defense of the dictator. True, the discordant authors were also emboldened by the fact that Ren Zhiqiang had apparently gotten off with a lenient sentence - most likely with Wang vouching for his friend. Could the would-be coup plotters have been so silly as to think Wang would somehow cover them, too, in what would be (to them) a logical next move to undermine Xi just as the annual Two Sessions was getting underway? Unfortunately for Xi's perennial detractors whether Chinese or Western, the subsequent weeks are increasingly exposing the probability that his enemies are a bunch of simplistic nitwits.
Well, that is his acknowledged enemies (who in this case remain as yet unnamed). Xi and Wang, being anything but not extremely shrewd politicians far outclassing practically all their peers and subordinates, have probably long since known that it's their hidden enemies - hidden from those who don't have such thorough understanding either of the party's true inner workings or of the traditional subtleties of Chinese statecraft - which pose a far greater danger, and indeed the only credible one that can in fact derail their program for China's transition.
Who are they? Liu Yunshan? Remnants of Jiang Zemin's "Shanghai clique" or even former henchmen of the Hu Jintao/Wen Jiabo fourth generation leadership? Ironically, it's precisely those that, from the outside looking in, seem most fervently or faithfully in support of Xi's unquestioned authority that warrant the greatest caution and concern from his administration.
For this reason - that is, that Xi and Wang have now signaled to the party that they're on notice about potential wolves disguised as lambs - we might just about conclude that the CPC has already dodged one killer iceberg as it enters the most critical segment of its overhaul course. They have, it would appear, thoroughly robbed their enemies of the element of surprise and deception - a process that actually began long before the travails of early 2016. While nothing can be said with certainty, it's a good bet that a bet against fundamentally effective party rule in China will continue to be a poor one going forward.
Saturday, April 9, 2016
The emperor has no clothes: US has absolutely no strategy to stop China
Should reports of Chinese reclamation of Scarborough Shoal prove true in the coming weeks, it would mark a major turning point in the balance of power in the South China Sea and possibly a watershed strategic milestone in the Western Pacific.
Granted, Beijing must now have every reason to expect a stepped-up US military presence in the South China Sea, including probably the regular or even permanent stationing of an entire US carrier battle group in the Philippines within the next two or three years, on top of what promises to be unprecedented joint defense posturing in the area between Washington and all its regional partners, especially Japan (which itself just sent a sub to the Philippines) and Australia (soon to host US bombers and send in its own ships and subs on patrol), but also probably South Korea and, for good measure, India (even short of a full-fledged defense partnership). Not to mention dramatically beefed up military spending and deployments by Vietnam and of course the Philippines itself.
But in the grand scheme of things, the US has absolutely no effective strategy to stop China. That's because this whole standoff isn't primarily military - it's economic.
As the saying goes, generals are always well prepared to fight the last war. Even despite China's recent military buildup, few doubt (and the Chinese themselves don't) that US military superiority in the region remains impeccable. But that's irrelevant. Unless Washington and its allies are willing to cut off their economic relationship with Beijing, it hardly matters how many "freedom of navigation" patrols or even more muscular exercises they conduct to flaunt the specious boundaries of China's artificial islands; when it comes down to it, they must be willing to enforce a blockade that would entail violence against Chinese maritime assets - that is, launch a trade war which will quickly escalate into the financial equivalent of nuclear Armageddon.
In short, if Beijing manages to reclaim Scarborough Shoal in 2016, it will be the end of the US-dominated global order as we know it. With both conventional and nuclear military might orders of magnitude smaller, it will have reduced Washington to an also-ran in the crucial Asia-Pacific region.
That's not to say America will have been supplanted by China, only that the true nature of 21st-century American power will have to be honestly reassessed. I for one firmly believe America will still lead China in the 21st century and not the other way around. But our illusions will have to disappear first. A little atoll 140 miles off the coast of Luzon could soon be the place where the world's only superpower is exposed as an emperor without clothes.
Granted, Beijing must now have every reason to expect a stepped-up US military presence in the South China Sea, including probably the regular or even permanent stationing of an entire US carrier battle group in the Philippines within the next two or three years, on top of what promises to be unprecedented joint defense posturing in the area between Washington and all its regional partners, especially Japan (which itself just sent a sub to the Philippines) and Australia (soon to host US bombers and send in its own ships and subs on patrol), but also probably South Korea and, for good measure, India (even short of a full-fledged defense partnership). Not to mention dramatically beefed up military spending and deployments by Vietnam and of course the Philippines itself.
But in the grand scheme of things, the US has absolutely no effective strategy to stop China. That's because this whole standoff isn't primarily military - it's economic.
As the saying goes, generals are always well prepared to fight the last war. Even despite China's recent military buildup, few doubt (and the Chinese themselves don't) that US military superiority in the region remains impeccable. But that's irrelevant. Unless Washington and its allies are willing to cut off their economic relationship with Beijing, it hardly matters how many "freedom of navigation" patrols or even more muscular exercises they conduct to flaunt the specious boundaries of China's artificial islands; when it comes down to it, they must be willing to enforce a blockade that would entail violence against Chinese maritime assets - that is, launch a trade war which will quickly escalate into the financial equivalent of nuclear Armageddon.
In short, if Beijing manages to reclaim Scarborough Shoal in 2016, it will be the end of the US-dominated global order as we know it. With both conventional and nuclear military might orders of magnitude smaller, it will have reduced Washington to an also-ran in the crucial Asia-Pacific region.
That's not to say America will have been supplanted by China, only that the true nature of 21st-century American power will have to be honestly reassessed. I for one firmly believe America will still lead China in the 21st century and not the other way around. But our illusions will have to disappear first. A little atoll 140 miles off the coast of Luzon could soon be the place where the world's only superpower is exposed as an emperor without clothes.
Thursday, April 7, 2016
China's transition gets a (temporary) boost: a faltering US
China's massive capital outflows apparently reversed in March, a much-needed respite for the yuan and for general sentiment concerning the country's prospects. The big boost? A faltering US.
It turns out that the whole notion that China was about to collapse, pushed by the likes of Gordon Chang, was dependent on another story: that things were decisively turning around on the other side of the Pacific. Obviously that no longer appears to be true. While China's situation remains dire, for now at least, it's clear just how misguided were any perceptions that things were looking up for investment returns in the US as the Fed began to "normalize" interest rates. Longtime Fed naysayers like Zero Hedge and Alhambra Partners have been right all along.
In fact, the markets began to price in no more than two Fed rate hikes this year vice the originally intended four as soon as the Fed coordinated with the ECB and BOE to rescue stocks (especially bank stocks) from total collapse on February 11; in hindsight, it appears the global central banking cartel then deliberately vacillated between hawkishness and dovishness for over a month afterwards, so that when Janet Yellen finally did officially acknowledge a longer rate normalization timetable on March 16-17, it gave the markets an additional sugar high. Needless to say, the global economy has long since become more about optics than fundamentals - where perception of reality matters much more than reality itself.
Additionally, currency expert Jim Rickards has conjectured from global financial developments that a "Shanghai accord" was secretly reached at February's G-20 whereby the central bankers of the US, Europe, Japan and China agreed to shore up the yuan by stealthily weakening the dollar via unexpected Fed dovishness in concert with unexpected ECB and BOJ hawkishness. In other words, what was pursued was a weaker dollar versus a stronger euro and yen, which shores up the yuan against the greenback, against which it was widely feared to plunge badly at some point in the not-so-distant future, while weakening it against the euro and yen, against which it was still elevated despite devaluation pressure since summer 2015, as it had earlier risen in tandem with the dollar from mid-2014 into 2015 (both on the back of sliding oil and commodity prices).
This theory is highly plausible, but Rickards doesn't make a compelling case for his argument - in fact, none at all - that this amounts to China benefiting at the expense of the other currency regions. In fact, this is simply an acknowledgement and reflection of intractable global realities. The world simply can't handle a weak RMB or a Chinese hard landing, as I posted recently about its outsize global impact.
Whether or not some understanding actually took place between a secretive financier monopoly has little bearing on the fundamental underlying fact: the yuan is the last line of defense for the global economy which, if it fails to hold, could drag everyone down into a deflationary spiral from which there won't be an easy escape, let alone recovery.
And even so, whatever the global monetary authorities work out individually or collectively, they're only buying some time - possibly a year or two - for badly needed structural reforms to be undertaken by the politicians that have badly underwhelmed to date.
So China's gotten a much-needed short-term boost, but if all that means is that its debt bubble will keep outstripping GDP growth, the jury's out on just how much better Beijing can do in the remainder of 2016 (and into 2017) in cushioning further globally destabilizing growth shocks than it did last summer and at the start of the year.
It turns out that the whole notion that China was about to collapse, pushed by the likes of Gordon Chang, was dependent on another story: that things were decisively turning around on the other side of the Pacific. Obviously that no longer appears to be true. While China's situation remains dire, for now at least, it's clear just how misguided were any perceptions that things were looking up for investment returns in the US as the Fed began to "normalize" interest rates. Longtime Fed naysayers like Zero Hedge and Alhambra Partners have been right all along.
In fact, the markets began to price in no more than two Fed rate hikes this year vice the originally intended four as soon as the Fed coordinated with the ECB and BOE to rescue stocks (especially bank stocks) from total collapse on February 11; in hindsight, it appears the global central banking cartel then deliberately vacillated between hawkishness and dovishness for over a month afterwards, so that when Janet Yellen finally did officially acknowledge a longer rate normalization timetable on March 16-17, it gave the markets an additional sugar high. Needless to say, the global economy has long since become more about optics than fundamentals - where perception of reality matters much more than reality itself.
Additionally, currency expert Jim Rickards has conjectured from global financial developments that a "Shanghai accord" was secretly reached at February's G-20 whereby the central bankers of the US, Europe, Japan and China agreed to shore up the yuan by stealthily weakening the dollar via unexpected Fed dovishness in concert with unexpected ECB and BOJ hawkishness. In other words, what was pursued was a weaker dollar versus a stronger euro and yen, which shores up the yuan against the greenback, against which it was widely feared to plunge badly at some point in the not-so-distant future, while weakening it against the euro and yen, against which it was still elevated despite devaluation pressure since summer 2015, as it had earlier risen in tandem with the dollar from mid-2014 into 2015 (both on the back of sliding oil and commodity prices).
This theory is highly plausible, but Rickards doesn't make a compelling case for his argument - in fact, none at all - that this amounts to China benefiting at the expense of the other currency regions. In fact, this is simply an acknowledgement and reflection of intractable global realities. The world simply can't handle a weak RMB or a Chinese hard landing, as I posted recently about its outsize global impact.
Whether or not some understanding actually took place between a secretive financier monopoly has little bearing on the fundamental underlying fact: the yuan is the last line of defense for the global economy which, if it fails to hold, could drag everyone down into a deflationary spiral from which there won't be an easy escape, let alone recovery.
And even so, whatever the global monetary authorities work out individually or collectively, they're only buying some time - possibly a year or two - for badly needed structural reforms to be undertaken by the politicians that have badly underwhelmed to date.
So China's gotten a much-needed short-term boost, but if all that means is that its debt bubble will keep outstripping GDP growth, the jury's out on just how much better Beijing can do in the remainder of 2016 (and into 2017) in cushioning further globally destabilizing growth shocks than it did last summer and at the start of the year.
Wednesday, April 6, 2016
Xi's authoritarianism was entirely predictable from his "China dream"
The Economist ran a cover story about Xi's cult of personality, betraying the deepening Western concern over the decidedly un-Western (even anti-Western) direction that China is taking under its new strongman.
It's not that Xi's about to establish a neo-Maoist totalitarian dictatorship - The Economist simultaneously ran another article which assesses his limits - but the unspoken subtext of all the worry is that he's taking China off the free market-based path of development and prosperity at just the moment when the world at large can ill afford such a retrenchment. For one, global stock markets are now more exposed than ever to the Chinese slowdown and need persistent confidence-building communication from Beijing's communist policymakers; even a hint of throwback to the voodoo ideology-driven management of Mao in this context is intolerable.
But Xi's authoritarianism was entirely predictable from his own vision for China - the "China dream" - which he formulated upon taking power in late 2012. That's because the "China dream" is the aspiration of the Chinese state and empire, not of its individual people - who are all but assumed to yearn for nothing other than a share of such resurgent civilizational greatness.
It should be clear by now that when he earlier spoke of "rule of law" and of giving markets a "decisive role" in the economy, Xi never meant to say that these are worthy end goals in and of themselves - they're merely potential tools to achieve more optimal governance by the all-powerful party-state. As such, these reforms have been applied piecemeal at best if not shelved altogether - they're simply not what the party-state really needs now, in Xi's view.
And given that the "China dream" envisions a future in which the party is still glorified over the state and the state is still glorified over society, it's also probable that the kind of "democratic" China Xi wants in 2049 looks far more like Putin's Russia, Erdogan's Turkey, or (quite a stretch) Orban's Hungary - that is, effective majoritarian tyrannies - than the US or UK.
The trouble is, Xi's apparently betting that much of the Chinese population does in fact share his populist, "historical inevitability" view of the long-term resurgence of the Chinese empire, summed up nicely in this comment to the aforementioned Economist cover story (probably posted via a Great Firewall-evading VPN):
It's not that Xi's about to establish a neo-Maoist totalitarian dictatorship - The Economist simultaneously ran another article which assesses his limits - but the unspoken subtext of all the worry is that he's taking China off the free market-based path of development and prosperity at just the moment when the world at large can ill afford such a retrenchment. For one, global stock markets are now more exposed than ever to the Chinese slowdown and need persistent confidence-building communication from Beijing's communist policymakers; even a hint of throwback to the voodoo ideology-driven management of Mao in this context is intolerable.
But Xi's authoritarianism was entirely predictable from his own vision for China - the "China dream" - which he formulated upon taking power in late 2012. That's because the "China dream" is the aspiration of the Chinese state and empire, not of its individual people - who are all but assumed to yearn for nothing other than a share of such resurgent civilizational greatness.
It should be clear by now that when he earlier spoke of "rule of law" and of giving markets a "decisive role" in the economy, Xi never meant to say that these are worthy end goals in and of themselves - they're merely potential tools to achieve more optimal governance by the all-powerful party-state. As such, these reforms have been applied piecemeal at best if not shelved altogether - they're simply not what the party-state really needs now, in Xi's view.
And given that the "China dream" envisions a future in which the party is still glorified over the state and the state is still glorified over society, it's also probable that the kind of "democratic" China Xi wants in 2049 looks far more like Putin's Russia, Erdogan's Turkey, or (quite a stretch) Orban's Hungary - that is, effective majoritarian tyrannies - than the US or UK.
The trouble is, Xi's apparently betting that much of the Chinese population does in fact share his populist, "historical inevitability" view of the long-term resurgence of the Chinese empire, summed up nicely in this comment to the aforementioned Economist cover story (probably posted via a Great Firewall-evading VPN):
First, as a normal Chinese citizen, this report gave me a new perspective of Xi, thank you.
Second, as a normal Chinese citizen, I think I'm in the center of the storm, I would like to share some of my perspectives to you.
# As we all know Xi's cult of power, now he is the most powerful president since Mao,but I think special time need special leader, the era of President Hu almost reach the edge of collapse since premier Wen is the real controller and under his control the country is full of corruption and the economy is full of bubble,so when President Xi get on the stage, the best way to lead the country to a healthy path is to get control of the country first, then lead the country to find the healthy path.
# Under this special economy background, China need to have patient to find the right path. If let the economy bubble keep growing would be a huge risk in the future, but if you stop the bubble growing the economy of China may face economy collapse of the whole country, only God know the right path without even trying, I believe President Xi is not God, he need time and he need to make some mistakes to find the path.
# When you want to know a people, you need to listen what he said, but you need to pay more attention on what he did. After three years and Half, even though China still have a lot problems, even though still a lot citizens are angering about the country, but I have to see that as a 27 years old young man, I have more hope than before, I can feel our government is trying to improve the govern system, and I believe President Xi would not only be the person to the cult of power, but also a person to the cult of creating history.
Monday, April 4, 2016
Corruption linked to Xi Jinping: what actually matters?
Even if the content in the Panama Papers which is specifically linked to Xi Jinping (among other top Chinese leaders) were freely discussable within China, what would actually matter?
For starters, Xi's brother-in-law in question was already known to be fabulously wealthy, and his newly disclosed offshore shell companies would have been a run-of-the-mill shenanigan for such a well-connected individual. Since Xi apparently had the political acumen to ensure they ceased operation as he rose to power in 2012, there's little actual new or current substance which could be posed as a "smoking gun" against the integrity of his present administration.
However, for a powerful leader who has cultivated a populist image as a big graft-buster, it inevitably fuels suspicions that party discipline is anything but impartial or apolitical. It opens up a debate that neither Xi nor the party wants China to have out in the open.
In the end, though, this is all inconsequential. Whether it's China or the US (or anywhere), corruption per se isn't the real issue; neither even is the lack or weakness of checks on it. Rather, the fundamental problem is that all economic development tends to produce a small minority of short-term winners versus a large majority of short-term losers in relative terms, even if it more rarely does so in absolute terms. A corrupt elite which habitually gets away with tremendous malfeasance during booms will quickly find that it can't get away even with much smaller misdeeds during busts. Of course, owing to the lack of electoral and independent civic mechanisms, the stakes are always higher for authoritarian systems.
It matters far less, then, that Xi's relatives and close associates have probably gotten away with effective murder (in financial terms) in the past without having to answer for it; what makes or breaks the regime today is if and to what extent even they are restricted now compared to the earlier go-go years (i.e. the height of the post-crisis stimulus era, 2009-12, the period in which Xi's brother-in-law's aforementioned shell companies were active).
For starters, Xi's brother-in-law in question was already known to be fabulously wealthy, and his newly disclosed offshore shell companies would have been a run-of-the-mill shenanigan for such a well-connected individual. Since Xi apparently had the political acumen to ensure they ceased operation as he rose to power in 2012, there's little actual new or current substance which could be posed as a "smoking gun" against the integrity of his present administration.
However, for a powerful leader who has cultivated a populist image as a big graft-buster, it inevitably fuels suspicions that party discipline is anything but impartial or apolitical. It opens up a debate that neither Xi nor the party wants China to have out in the open.
In the end, though, this is all inconsequential. Whether it's China or the US (or anywhere), corruption per se isn't the real issue; neither even is the lack or weakness of checks on it. Rather, the fundamental problem is that all economic development tends to produce a small minority of short-term winners versus a large majority of short-term losers in relative terms, even if it more rarely does so in absolute terms. A corrupt elite which habitually gets away with tremendous malfeasance during booms will quickly find that it can't get away even with much smaller misdeeds during busts. Of course, owing to the lack of electoral and independent civic mechanisms, the stakes are always higher for authoritarian systems.
It matters far less, then, that Xi's relatives and close associates have probably gotten away with effective murder (in financial terms) in the past without having to answer for it; what makes or breaks the regime today is if and to what extent even they are restricted now compared to the earlier go-go years (i.e. the height of the post-crisis stimulus era, 2009-12, the period in which Xi's brother-in-law's aforementioned shell companies were active).
Friday, April 1, 2016
Even if authentic, party dissent against Xi is flawed
The fallout from "Xi open letter-gate" continues. The second such petition, signed by 171 "loyal party members", has been published in an overseas Chinese blog; it has not generated much publicity to date, though on the surface it's not less implausible than the original one in early March.
Unfortunately, just as these developments have been censored in mainland Chinese media, there has also been typically little critical assessment of the validity of the claims in the Western and overseas Chinese media - not surprising, given that the Western media is effectively a propaganda mill in its own right (especially judging by how the conservative and liberal outlets constantly accuse each other - very compellingly - of deliberate distortion and omission to promote their partisan agendas), and the overseas Chinese media has always been closely associated with liberal and dissident sympathies, which tend to view anything communist party-related as suspect and illegitimate.
However, it's absolutely crucial to dissect the claims of these purported loyal party dissenters that the cracks which have appeared in the Chinese edifice over the last year are Xi's fault; while it's true that as supreme leader, Xi bears ultimate responsibility for whatever happens in China, the crux of the demands for his resignation goes much further to suggest that he himself has personally caused the present predicaments. The fundamental truth or falsehood of this charge should be the analytical focus of anyone truly concerned with China's future.
The two letters contain similar though not identical lists of accusations. Both are premised on alarm over Xi's increasingly authoritarian bent. On this point, there's little to debate: Xi is a dictator more in the lineage of Mao than Jiang, Hu, and even Deng.
The thing is, it's clearly not the authoritarianism itself that the authors are primarily concerned with: it's the actual societal and economic problems that have intensified in recent months. Xi's personality cult and usurpation of national policy and economic management didn't start in 2015 or 2016: where were these party dissenters when the first danger signs were clearly visible in 2013, when it would've been a whole lot easier to stop him in his tracks (i.e. before he consolidated control of the military and security apparatus)?
The authors are basically arguing - whether they realize it or not - that things were basically fine in both the party and China as a whole until Xi came along and screwed it up from 2013 to the present.
Valid criticisms of Xi notwithstanding, that's a gross oversimplification at best, a dangerous distortion at worst - not least for its purveyors.
In all likelihood, these party opposition figures have struck out only now precisely because they didn't smell an opportunity to undermine Xi before - and in this, they've likely badly miscalculated.
Regarding the most central crisis of China's economic slowdown, it was Xi himself who embraced it as the "new normal", and it seems that the party ranks grudgingly accepted it and gave him the benefit of the doubt - until last summer's stock market crash and surprise yuan devaluation sent the economy into a perceived tailspin.
Is Xi to blame for the stock market debacle? Being a business simpleton, it's clear he encouraged ordinary Chinese to invest in the market mainly to boost economic confidence, and not for sound commercial reasons. He hoped this would provide both funding and a positive environment for many large SOEs to restructure and downsize - wishful thinking, it turns out, but hardly malignant intent. When the market crashed, he demanded an ill-advised rescue effort against the basic laws of supply and demand: this indeed ended up causing more harm to investors and government credibility than the crash itself could have, but in his own mind it was to protect the masses of mom-and-pop small investors from the corrupt elite of speculators in both the public and private sectors who were in effect pocketing even more national savings for themselves.
What of the currency, which has lately rallied after apparently being threatened with a massive collapse? Here, it's rather interesting that Xi and co. are the very ones doing what the world - and specifically the West and the US - desperately want them to do: keep the yuan strong, even artificially so against the market, at great short-term monetary and domestic economic cost. On the contrary, it's Mr. Xi's enemies - the vested interests of export-reliant SOEs - who secretly (or not so secretly) want a cheaper yuan for both more easy money to roll over their massive debts and also to dump even more excess capacity abroad - to the kicks and screams of the same Western countries that bash Xi for keeping Chinese economic freedom on a leash.
Has Xi's personal dictatorship worsened the prospects for much-needed reform of the SOEs, including the closing of the infamous "zombie" companies in the bloated heavy industrial sectors? Interestingly, the first open letter is rather blunt that it opposes such reforms:
In that light, the most valid criticism against Xi on the SOE reform front is that he's deliberately consolidating party and state control of crucial economic sectors into fewer and bigger "national champions" immune to autonomous private influence; this could in fact represent a major setback for China's long-term dynamism, but the gamble Xi and his supporters seem to be making is that many such sectors - energy, finance, transportation, communications, healthcare, etc. - are primarily "public services" anyway, and their focus should be on stability and predictability rather than profit. More to the point at present, though, China's overcapacity problem since the post-financial crisis stimulus has clearly been caused by too much competition between too many largely disjointed and mutually redundant enterprises scattered across its provinces and regions - not too little competition among too few behemoths. You might pick on Xi for being brutally opportunistic - using sound short-term economic rationale to bolster long-term centralized political power - but it's hard to not think that his most determined internal party opposition, i.e. the SOEs and provincial governments, are more motivated by the desire to preserve their own fiefdoms than any alleged commitment to democracy (internal party that is, never mind popular sovereignty). Political fragmentation is no more equivalent to democracy per se than political centralization is to dictatorship: Xi's party enemies relish the "good old days" (pre-2013) ostensibly because they were more open and enlightened; more practically because their authority was less personally accountable from either top or bottom.
Other than blame for the economic slowdown and the lack of reforms - which we have now thoroughly addressed - the other charges of failure against Xi in the open letters are comparatively insubstantial if not purely opportunistic.
An aggressive foreign policy? Xi has merely harnessed an entire (post-Tiananmen) generation of increasingly strident nationalism that no party leader with any political ambition above village magistrate could possibly question. More relevantly, global realities have simply changed - a lot. China can't hide its strength anymore - not when the very industries Xi is trying to rein in from vested interests are triggering 300+ percent tariffs on Chinese exports and blackening Beijing's image from Brussels to Tokyo, from Delhi to Sao Paulo, from Washington to Canberra.
Demoralization of the military? Xi has merely exposed more completely what had long been widely suspected and even known: that the PLA is a cesspool of corruption and rent-seeking utterly incapable of the vital missions the party has long made its mandate - and established as key elements of the legitimacy of its own unelected power.
Is this piece an apologia for Mr. Xi's regime and all its actions? It can't help but come off as such to his most determined critics. But let's set the record straight: China's censorship doesn't confer automatic solidity to the claims it doesn't like. Upon further examination, these stirrings of internal party dissent are deeply, even fundamentally flawed. They're not useless or meaningless - in fact, it's exactly the exposure Xi and his henchmen need to stay on top of the party's inner workings and possible intrigues - but let's not be so naive to simply brush off its seemingly disproportionate crackdown as weakness on the regime's part.
Unfortunately, just as these developments have been censored in mainland Chinese media, there has also been typically little critical assessment of the validity of the claims in the Western and overseas Chinese media - not surprising, given that the Western media is effectively a propaganda mill in its own right (especially judging by how the conservative and liberal outlets constantly accuse each other - very compellingly - of deliberate distortion and omission to promote their partisan agendas), and the overseas Chinese media has always been closely associated with liberal and dissident sympathies, which tend to view anything communist party-related as suspect and illegitimate.
However, it's absolutely crucial to dissect the claims of these purported loyal party dissenters that the cracks which have appeared in the Chinese edifice over the last year are Xi's fault; while it's true that as supreme leader, Xi bears ultimate responsibility for whatever happens in China, the crux of the demands for his resignation goes much further to suggest that he himself has personally caused the present predicaments. The fundamental truth or falsehood of this charge should be the analytical focus of anyone truly concerned with China's future.
The two letters contain similar though not identical lists of accusations. Both are premised on alarm over Xi's increasingly authoritarian bent. On this point, there's little to debate: Xi is a dictator more in the lineage of Mao than Jiang, Hu, and even Deng.
The thing is, it's clearly not the authoritarianism itself that the authors are primarily concerned with: it's the actual societal and economic problems that have intensified in recent months. Xi's personality cult and usurpation of national policy and economic management didn't start in 2015 or 2016: where were these party dissenters when the first danger signs were clearly visible in 2013, when it would've been a whole lot easier to stop him in his tracks (i.e. before he consolidated control of the military and security apparatus)?
The authors are basically arguing - whether they realize it or not - that things were basically fine in both the party and China as a whole until Xi came along and screwed it up from 2013 to the present.
Valid criticisms of Xi notwithstanding, that's a gross oversimplification at best, a dangerous distortion at worst - not least for its purveyors.
In all likelihood, these party opposition figures have struck out only now precisely because they didn't smell an opportunity to undermine Xi before - and in this, they've likely badly miscalculated.
Regarding the most central crisis of China's economic slowdown, it was Xi himself who embraced it as the "new normal", and it seems that the party ranks grudgingly accepted it and gave him the benefit of the doubt - until last summer's stock market crash and surprise yuan devaluation sent the economy into a perceived tailspin.
Is Xi to blame for the stock market debacle? Being a business simpleton, it's clear he encouraged ordinary Chinese to invest in the market mainly to boost economic confidence, and not for sound commercial reasons. He hoped this would provide both funding and a positive environment for many large SOEs to restructure and downsize - wishful thinking, it turns out, but hardly malignant intent. When the market crashed, he demanded an ill-advised rescue effort against the basic laws of supply and demand: this indeed ended up causing more harm to investors and government credibility than the crash itself could have, but in his own mind it was to protect the masses of mom-and-pop small investors from the corrupt elite of speculators in both the public and private sectors who were in effect pocketing even more national savings for themselves.
What of the currency, which has lately rallied after apparently being threatened with a massive collapse? Here, it's rather interesting that Xi and co. are the very ones doing what the world - and specifically the West and the US - desperately want them to do: keep the yuan strong, even artificially so against the market, at great short-term monetary and domestic economic cost. On the contrary, it's Mr. Xi's enemies - the vested interests of export-reliant SOEs - who secretly (or not so secretly) want a cheaper yuan for both more easy money to roll over their massive debts and also to dump even more excess capacity abroad - to the kicks and screams of the same Western countries that bash Xi for keeping Chinese economic freedom on a leash.
Has Xi's personal dictatorship worsened the prospects for much-needed reform of the SOEs, including the closing of the infamous "zombie" companies in the bloated heavy industrial sectors? Interestingly, the first open letter is rather blunt that it opposes such reforms:
Supply side reforms and production capacity policies have resulted in large numbers of layoffs at state-owned firms; and the closing of private firms have also led to many layoffs.But even apart from this, some would argue just the opposite: if not for Xi's persistent heavy-handedness against the powerful vested interests which control these enterprises - including silencing any internal party dissent with severe disciplines - they'd have even less motivation to actually start market-oriented reforms they've been putting off for years. Granted, we'll need at least a quarter or two to see if the SOE restructuring actually takes off - if the zombies are actually killed, their debts resolved and redundant workers transitioned. However, it's important to note that all Western and pro-Western commentary on this process is inherently ideologically skewed - anything short of all-out privatization of defunct state entities is considered heresy in Western capitalism (despite the contention one could make that much of the Western "free market" is even more beset by regulation, oligopoly and cronyism than China). Yet China has learned since the 1990s that it's not private or public ownership that counts: it's competition (or lack thereof).
In that light, the most valid criticism against Xi on the SOE reform front is that he's deliberately consolidating party and state control of crucial economic sectors into fewer and bigger "national champions" immune to autonomous private influence; this could in fact represent a major setback for China's long-term dynamism, but the gamble Xi and his supporters seem to be making is that many such sectors - energy, finance, transportation, communications, healthcare, etc. - are primarily "public services" anyway, and their focus should be on stability and predictability rather than profit. More to the point at present, though, China's overcapacity problem since the post-financial crisis stimulus has clearly been caused by too much competition between too many largely disjointed and mutually redundant enterprises scattered across its provinces and regions - not too little competition among too few behemoths. You might pick on Xi for being brutally opportunistic - using sound short-term economic rationale to bolster long-term centralized political power - but it's hard to not think that his most determined internal party opposition, i.e. the SOEs and provincial governments, are more motivated by the desire to preserve their own fiefdoms than any alleged commitment to democracy (internal party that is, never mind popular sovereignty). Political fragmentation is no more equivalent to democracy per se than political centralization is to dictatorship: Xi's party enemies relish the "good old days" (pre-2013) ostensibly because they were more open and enlightened; more practically because their authority was less personally accountable from either top or bottom.
Other than blame for the economic slowdown and the lack of reforms - which we have now thoroughly addressed - the other charges of failure against Xi in the open letters are comparatively insubstantial if not purely opportunistic.
An aggressive foreign policy? Xi has merely harnessed an entire (post-Tiananmen) generation of increasingly strident nationalism that no party leader with any political ambition above village magistrate could possibly question. More relevantly, global realities have simply changed - a lot. China can't hide its strength anymore - not when the very industries Xi is trying to rein in from vested interests are triggering 300+ percent tariffs on Chinese exports and blackening Beijing's image from Brussels to Tokyo, from Delhi to Sao Paulo, from Washington to Canberra.
Demoralization of the military? Xi has merely exposed more completely what had long been widely suspected and even known: that the PLA is a cesspool of corruption and rent-seeking utterly incapable of the vital missions the party has long made its mandate - and established as key elements of the legitimacy of its own unelected power.
Is this piece an apologia for Mr. Xi's regime and all its actions? It can't help but come off as such to his most determined critics. But let's set the record straight: China's censorship doesn't confer automatic solidity to the claims it doesn't like. Upon further examination, these stirrings of internal party dissent are deeply, even fundamentally flawed. They're not useless or meaningless - in fact, it's exactly the exposure Xi and his henchmen need to stay on top of the party's inner workings and possible intrigues - but let's not be so naive to simply brush off its seemingly disproportionate crackdown as weakness on the regime's part.
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