China should accelerate its reforms, says Xi Jinping. This statement comes as more evidence emerges of the party chief's purge of vested interests, especially provincial officials linked to former paramount leader Jiang Zemin's top henchmen, i.e. the disgraced ex-security czar Zhou Yongkang.
The removal of Xinjiang party boss Zhang Chunxian in particular is a powerful confirmation that whatever nascent political opposition to Xi within the CPC may have flared up last spring has been crushed. Zhang famously defied Xi at the National People's Congress (NPC) in March, refusing to endorse the latter as the "core" of the new communist leadership - just days after underlings within his Xinjiang administration ill-advisedly reposted an "open letter" from disgruntled party members urging Xi's resignation which first appeared on a dissident website in America.
With Xi's own loyalists increasingly staffing both the central and provincial party posts, it's just a matter of time until residual resistance to his reforms in the day-to-day execution of policy is eliminated. Though that would still take a while, Xi has skillfully outmaneuvered his enemies in what's probably their last-ditch effort to block him. From here on out, it's likely to be a simple matter of taking out the trash.
As a reflection of his increased confidence and security in his unassailable position, we're likely to hear more bold pronouncements from Xi urging reforms to hurry up over the coming year-plus until the 19th Party Congress (November 2017). This will bolster global confidence in China's transition, especially as Xi is likely to emphasize microeconomic market-oriented liberalizations, i.e. rural land rights and intellectual property protection as mentioned in the above statement. And ironically, the more successful Xi is in applying his hard political capital to these measures, the more it strengthens the credibility of his only remaining potential rival, reformist premier Li Keqiang. In this way, the Xi-Li duo may reach a much-needed symbiotic equilibrium over its still probable second term (2018-2023).
All in all, the last year of Xi's first term at the party's helm isn't shaping up to be too shabby. And at a time when even a slowing China is increasingly recognized as the main anchor of global growth, the world will be thankful for it.
Wednesday, August 31, 2016
Tuesday, August 30, 2016
Why the Fed is right to give China no wiggle room
By reaffirming its commitment to normalizing US interest rates, the Fed has sent a clear message to China on the eve of its first ever G20 summit: get your act together now, because we're not giving you more wiggle room for cheesy monetary stimulus, especially (but not limited to) devaluation.
This attempts to kill two birds with one stone: appeasing American populist political sentiment in an election year and forcing accelerated economic restructuring in China. Just as PBOC has become the standard bearer for China's continued opening to the global economy, so the Fed has become PBOC's crucial external enforcer of sorts. In such a way, Chimerica maximizes its chances of leading the global economy out of its low-growth funk.
To see why the Fed is helping China and not hurting it by adopting a hawkish tone, consider that the dollar has already gained nearly 3 percent against the yuan in 2016 - on top of 4.6 percent last year, when PBOC's surprise August devaluation sent global markets into a tailspin. This has taken enough air out of the yuan to prevent a hard landing, but with the onshore RMB barely 1,200 pips (12 yuan-cents) from its post-crisis low of 6.8 to the dollar in 2009-10, PBOC is right to draw a line in the sand: 6.8 is a reasonable floor to defend, as it's informally declared in the wake of Brexit. Any dip lower than that would represent an unmistakable regression for China back to export-driven growth aback a weak currency, which simply no longer suits its middle-income status and high-income, i.e. high-consumption, aspirations.
The Fed is thus preempting China by compelling Beijing to confront additional depreciation pressure on the yuan now rather than later. Now, not later, is the time to ram through capacity cuts and organizational and managerial restructuring of the bloated SOEs; now, not later, is the time to comprehensively begin to tackle the corporate debt overhang associated with these inefficiencies with the help of more efficient capital markets. If progress isn't being made or made fast enough, it'd better not be for complacency or inertia - it should instead be a natural reflection both of vested-interest resistance and of prudent caution in avoiding systemic socioeconomic instability.
Or to return to Fed-speak: we remain committed to normalizing rates as soon as feasible and are confident that the economy is robust enough to withstand it, even if we have to move far slower than the original timetable to give the markets and the emerging economies the windows of grace they need to adjust to the monetary normalization.
As China is very much a barometer for global risk sentiment and market confidence as a whole - a painful lesson for many market participants and observers last August and this January - the Fed's go-slow-but-firm strategy with regards to East Chimerica can also be taken as an overall go-slow-but-firm strategy with regards to the global economy as a whole.
This attempts to kill two birds with one stone: appeasing American populist political sentiment in an election year and forcing accelerated economic restructuring in China. Just as PBOC has become the standard bearer for China's continued opening to the global economy, so the Fed has become PBOC's crucial external enforcer of sorts. In such a way, Chimerica maximizes its chances of leading the global economy out of its low-growth funk.
To see why the Fed is helping China and not hurting it by adopting a hawkish tone, consider that the dollar has already gained nearly 3 percent against the yuan in 2016 - on top of 4.6 percent last year, when PBOC's surprise August devaluation sent global markets into a tailspin. This has taken enough air out of the yuan to prevent a hard landing, but with the onshore RMB barely 1,200 pips (12 yuan-cents) from its post-crisis low of 6.8 to the dollar in 2009-10, PBOC is right to draw a line in the sand: 6.8 is a reasonable floor to defend, as it's informally declared in the wake of Brexit. Any dip lower than that would represent an unmistakable regression for China back to export-driven growth aback a weak currency, which simply no longer suits its middle-income status and high-income, i.e. high-consumption, aspirations.
The Fed is thus preempting China by compelling Beijing to confront additional depreciation pressure on the yuan now rather than later. Now, not later, is the time to ram through capacity cuts and organizational and managerial restructuring of the bloated SOEs; now, not later, is the time to comprehensively begin to tackle the corporate debt overhang associated with these inefficiencies with the help of more efficient capital markets. If progress isn't being made or made fast enough, it'd better not be for complacency or inertia - it should instead be a natural reflection both of vested-interest resistance and of prudent caution in avoiding systemic socioeconomic instability.
Or to return to Fed-speak: we remain committed to normalizing rates as soon as feasible and are confident that the economy is robust enough to withstand it, even if we have to move far slower than the original timetable to give the markets and the emerging economies the windows of grace they need to adjust to the monetary normalization.
As China is very much a barometer for global risk sentiment and market confidence as a whole - a painful lesson for many market participants and observers last August and this January - the Fed's go-slow-but-firm strategy with regards to East Chimerica can also be taken as an overall go-slow-but-firm strategy with regards to the global economy as a whole.
Monday, August 29, 2016
Why China's August data will be critical
China's August economic data, to be released starting this week, will be especially critical for the prospects and perceptions of the country's transition.
Beneath the yuan's stability of late, worries about the Chinese economy are rising, and central to the concern seems to be the crash in private fixed-asset investment (FAI) since late 2015: two consecutive year-on-year contractions in June and July have capped off a sharp plunge from about 10 percent growth to below zero since December.
The data are probably skewed, however: the government's heavy-handed intervention in the stock market since the mid-2015 crash - overall it has spent anywhere from $150 to $300 billion buying shares to prop up their prices - has caused many firms to be reclassified from "private" to "public" since H2 2015. And considering the market and currency woes which began 2016, heavy state ownership of stocks has persisted and isn't likely to substantially recede: indeed Chinese equities, especially the traditional industrials of the Shanghai Composite, for all practical purposes appear to be stuck on state support.
So the apparent crash in private investment isn't all it's cracked out to be: it's not as unequivocally indicative of a general loss of business confidence as first meets the eye. And considering that the distortion caused by the aforementioned redesignation of firms only started in July last year, we can expect to see some rebound in private FAI going forward. But if the August FAI figures are likewise moribund, it would raise serious questions about Beijing's hopes of withholding further stimulus until the Q1 2016 one works its way through the real economy.
If FAI doesn't recover or even continues to decline, that would put tremendous pressure on other data points, especially consumption and services growth and PPI. The former can only be expected to decline, too, but hopefully not as precipitously because the Chinese economy will be even more dependent on it; the latter must be seen to further normalize towards zero (having already improved from deep negative territory, -5.9 to -1.7 percent YTD) as an indication that less FAI eases the overcapacity situation. With both investment and consumption growth slowing further, however, that also reshines the spotlight on net exports: they've been lousy since H2 2014 but this has been compensated by a persistently strong internal investment and consumption backdrop (if even also decelerating). Now that things are slowing domestically, China needs more of a boost (and more persistently) from trade. It has helped that although exports have been flat or declining, imports have suffered even more: that's helped the net export contribution to GDP, but it's unlikely to be boosted enough to counter the looming domestic investment and consumption shortfalls.
That means PBOC and Xi Jinping may have to make the difficult choice between more stimulus and missing the GDP target for H2 2016. Doubtless Xi will also seek to accelerate stalled reforms in the most troubled regions, especially pertaining to touchy social issues like migrant workers' urban residency rights, which are hampering real economic activity; but this will be a function of the state of party politics and Xi's confidence that he can ram through tough changes that steamroller vested interests.
The ironic thing about China's present juncture is that both greater control and greater freedom are needed simultaneously - and both increasingly urgently, especially if the August data undershoots as the July data did. The central government needs to be able to turn off the credit taps to unproductive state firms and regional administrations as quickly and efficiently as possible, and the central party leadership needs to assert control of provincial and local parties as efficaciously as possible to force streamlining and restructuring of their local economies on a macro, top-down basis. The net effect of such reform, paradoxically, will be to free up individual economic agents and actors on a micro, bottom-up basis, be it migrant workers finally gaining access to urban education and healthcare, or farmers finally gaining commercial sale rights over their land, or more broadly private consumers and businesses everywhere experiencing everyday tax and regulatory relief along with easier credit (within reasonable bounds).
In any event, with the G-20 in Hangzhou coming at virtually the same time (September 4-5) as the August economic data, the stakes couldn't be higher for China either to deliver on performance expectations or better communicate the nuance of its reported metrics. Most likely a combination of both.
Beneath the yuan's stability of late, worries about the Chinese economy are rising, and central to the concern seems to be the crash in private fixed-asset investment (FAI) since late 2015: two consecutive year-on-year contractions in June and July have capped off a sharp plunge from about 10 percent growth to below zero since December.
The data are probably skewed, however: the government's heavy-handed intervention in the stock market since the mid-2015 crash - overall it has spent anywhere from $150 to $300 billion buying shares to prop up their prices - has caused many firms to be reclassified from "private" to "public" since H2 2015. And considering the market and currency woes which began 2016, heavy state ownership of stocks has persisted and isn't likely to substantially recede: indeed Chinese equities, especially the traditional industrials of the Shanghai Composite, for all practical purposes appear to be stuck on state support.
So the apparent crash in private investment isn't all it's cracked out to be: it's not as unequivocally indicative of a general loss of business confidence as first meets the eye. And considering that the distortion caused by the aforementioned redesignation of firms only started in July last year, we can expect to see some rebound in private FAI going forward. But if the August FAI figures are likewise moribund, it would raise serious questions about Beijing's hopes of withholding further stimulus until the Q1 2016 one works its way through the real economy.
If FAI doesn't recover or even continues to decline, that would put tremendous pressure on other data points, especially consumption and services growth and PPI. The former can only be expected to decline, too, but hopefully not as precipitously because the Chinese economy will be even more dependent on it; the latter must be seen to further normalize towards zero (having already improved from deep negative territory, -5.9 to -1.7 percent YTD) as an indication that less FAI eases the overcapacity situation. With both investment and consumption growth slowing further, however, that also reshines the spotlight on net exports: they've been lousy since H2 2014 but this has been compensated by a persistently strong internal investment and consumption backdrop (if even also decelerating). Now that things are slowing domestically, China needs more of a boost (and more persistently) from trade. It has helped that although exports have been flat or declining, imports have suffered even more: that's helped the net export contribution to GDP, but it's unlikely to be boosted enough to counter the looming domestic investment and consumption shortfalls.
That means PBOC and Xi Jinping may have to make the difficult choice between more stimulus and missing the GDP target for H2 2016. Doubtless Xi will also seek to accelerate stalled reforms in the most troubled regions, especially pertaining to touchy social issues like migrant workers' urban residency rights, which are hampering real economic activity; but this will be a function of the state of party politics and Xi's confidence that he can ram through tough changes that steamroller vested interests.
The ironic thing about China's present juncture is that both greater control and greater freedom are needed simultaneously - and both increasingly urgently, especially if the August data undershoots as the July data did. The central government needs to be able to turn off the credit taps to unproductive state firms and regional administrations as quickly and efficiently as possible, and the central party leadership needs to assert control of provincial and local parties as efficaciously as possible to force streamlining and restructuring of their local economies on a macro, top-down basis. The net effect of such reform, paradoxically, will be to free up individual economic agents and actors on a micro, bottom-up basis, be it migrant workers finally gaining access to urban education and healthcare, or farmers finally gaining commercial sale rights over their land, or more broadly private consumers and businesses everywhere experiencing everyday tax and regulatory relief along with easier credit (within reasonable bounds).
In any event, with the G-20 in Hangzhou coming at virtually the same time (September 4-5) as the August economic data, the stakes couldn't be higher for China either to deliver on performance expectations or better communicate the nuance of its reported metrics. Most likely a combination of both.
Saturday, August 27, 2016
Why China could dominate next-generation manufacturing, too
Size and scale don't really matter anymore when it comes to next-generation manufacturing with highly automated and roboticized production lines. Or so claims one expert who dismissively writes China off as doomed to be an also-ran to a resurgent US manufacturing sector in the coming decades.
It's true that a shrinking, more expensive workforce has eroded China's longstanding labor cost advantage in low-to-medium end manufacturing which has propelled it to economic superpowerdom in 30 years, even as a shortage of high-skilled technical talent and managerial expertise calls to question its ability to broadly and comprehensively climb the value chain. To contemptuously brand Beijing's "Made in China 2025" initiative as little more than a communist Potemkin village, however - as if the US can simply count on its vaunted "free market", without highly deliberate and targeted government support, to keep or regain its productive edge in the 21st-century global economy - reeks of the very kind of elitist arrogance and ignorance that has millions of middle and working-class Americans up in arms this election year.
With the right policies, openness to global investment and competition, and willingness to learn from mistakes, China could well end up dominating next-generation manufacturing, too.
Size and scale will always matter in manufacturing, whatever the degree of automation or use of robotics. And China has every intention and ability to retain its advantages in this regard.
Its market, for one, is simply unrivaled: it already consumes around a quarter of the world's industrial robots, and yet its robot density is an order of magnitude below that of Japan or South Korea. This gap will close as thousands upon thousands of Chinese factories replace human workers with robots in the coming decade to trim labor expenditure; one can foresee one-third or even up to a full half of robots worldwide being consumed in China by the mid-2020s, and an increasing proportion of these will roll off local robot-making assembly lines, even if they're owned and operated by foreign companies.
The resultant economy of scale - especially if supported by longstanding government initiatives like land grants and other subsidies - will be tough for any competitor nation, including the US, to match. That's doubly so because industrial materials sourcing across the entire periodic table of the elements is utterly dominated by China, which thereby effectively sets global prices for inputs into anything and everything that's assembled or fabricated. That's not even taking into account that factories themselves have to be built, supplied, and maintained: unbeatable Chinese prices for steel, cement, copper, and the like guarantee that both the plants and their supporting transport and power infrastructure will continue to enjoy immensely superior turnover cycles over alternative production locales, nullifying the premium from export shipping over much of their lifespan.
And it sure won't help America's cause that confiscatory tax rates and a crushing regulatory burden by an entire host of federal and state agencies are likely to be complemented in coming years by import tariffs borne of a neo-protectionism that both political parties are finding necessary to appease. If Washington prioritizes its steel industry's preservation of local market share in the face of cutthroat Chinese competition, to take just one example, that absolutely doesn't serve the US auto industry's efforts to keep local car production costs down.
The present Chinese manufacturing crisis is already largely being misinterpreted. It's already removing with little mercy the inefficiency and waste in lower-end, more labor-intensive industrial and manufacturing sectors, even as it's compelled the most competitive state and privately owned firms alike to streamline or upgrade their operations, consolidating or expanding market share while also investing more effectively in productivity-enhancing modernizing equipment and processes. A select minority of firms are already foraying into higher-end, higher value-added manufacturing, including of components which have traditionally been imported for final assembly in China.
That's not to say "Made in China 2025" or more generally the country's whole transition up the production chain are sure bets - they most definitely are not. But to write off the potential of the monumental shift plainly out of hand - as if present problems and deficiencies are static in their permanence - is just downright silly.
Already, Chinese appliance giant Midea's high-profile bid to acquire German industrial robot maker Kuka is just one of a host of upgrades by mainland firms via partnership with rich-world innovation leaders. This of course will trigger accusations that China simply can't innovate on its own, but that's missing the point.
China's dominance in next-generation manufacturing will be in essence the same as its dominance in traditional manufacturing: its unique ability and capacity to create massive economies of scale and thereby crash prices worldwide. Just as the iPhone wasn't invented in China but only became a global consumer commodity through vast Chinese assembly lines and hordes of cheap Chinese labor, so tomorrow's disruptive products up and down the global economy will likely become commodities available to the general population through a vast array of automated, smart, and connected Chinese factories and supply-chain networks.
Size and scale not only still matter - they arguably will matter more than ever in the industry, manufacturing, and construction of the future. Beijing seems to envision the sheer magnitude of what it's eventually shooting for. Someday, entire cities will be 3D printed just like 3D printing of earthquake-proof mansions is being pioneered in China today. This isn't a country content to be an also-ran, but rather one that knows full well the untold billions or even trillions that must be invested to establish a 21st-century industrial base and economic infrastructure. One might even wonder these days whether the same can be said of a politically dysfunctional US.
It's true that a shrinking, more expensive workforce has eroded China's longstanding labor cost advantage in low-to-medium end manufacturing which has propelled it to economic superpowerdom in 30 years, even as a shortage of high-skilled technical talent and managerial expertise calls to question its ability to broadly and comprehensively climb the value chain. To contemptuously brand Beijing's "Made in China 2025" initiative as little more than a communist Potemkin village, however - as if the US can simply count on its vaunted "free market", without highly deliberate and targeted government support, to keep or regain its productive edge in the 21st-century global economy - reeks of the very kind of elitist arrogance and ignorance that has millions of middle and working-class Americans up in arms this election year.
With the right policies, openness to global investment and competition, and willingness to learn from mistakes, China could well end up dominating next-generation manufacturing, too.
Size and scale will always matter in manufacturing, whatever the degree of automation or use of robotics. And China has every intention and ability to retain its advantages in this regard.
Its market, for one, is simply unrivaled: it already consumes around a quarter of the world's industrial robots, and yet its robot density is an order of magnitude below that of Japan or South Korea. This gap will close as thousands upon thousands of Chinese factories replace human workers with robots in the coming decade to trim labor expenditure; one can foresee one-third or even up to a full half of robots worldwide being consumed in China by the mid-2020s, and an increasing proportion of these will roll off local robot-making assembly lines, even if they're owned and operated by foreign companies.
The resultant economy of scale - especially if supported by longstanding government initiatives like land grants and other subsidies - will be tough for any competitor nation, including the US, to match. That's doubly so because industrial materials sourcing across the entire periodic table of the elements is utterly dominated by China, which thereby effectively sets global prices for inputs into anything and everything that's assembled or fabricated. That's not even taking into account that factories themselves have to be built, supplied, and maintained: unbeatable Chinese prices for steel, cement, copper, and the like guarantee that both the plants and their supporting transport and power infrastructure will continue to enjoy immensely superior turnover cycles over alternative production locales, nullifying the premium from export shipping over much of their lifespan.
And it sure won't help America's cause that confiscatory tax rates and a crushing regulatory burden by an entire host of federal and state agencies are likely to be complemented in coming years by import tariffs borne of a neo-protectionism that both political parties are finding necessary to appease. If Washington prioritizes its steel industry's preservation of local market share in the face of cutthroat Chinese competition, to take just one example, that absolutely doesn't serve the US auto industry's efforts to keep local car production costs down.
The present Chinese manufacturing crisis is already largely being misinterpreted. It's already removing with little mercy the inefficiency and waste in lower-end, more labor-intensive industrial and manufacturing sectors, even as it's compelled the most competitive state and privately owned firms alike to streamline or upgrade their operations, consolidating or expanding market share while also investing more effectively in productivity-enhancing modernizing equipment and processes. A select minority of firms are already foraying into higher-end, higher value-added manufacturing, including of components which have traditionally been imported for final assembly in China.
That's not to say "Made in China 2025" or more generally the country's whole transition up the production chain are sure bets - they most definitely are not. But to write off the potential of the monumental shift plainly out of hand - as if present problems and deficiencies are static in their permanence - is just downright silly.
Already, Chinese appliance giant Midea's high-profile bid to acquire German industrial robot maker Kuka is just one of a host of upgrades by mainland firms via partnership with rich-world innovation leaders. This of course will trigger accusations that China simply can't innovate on its own, but that's missing the point.
China's dominance in next-generation manufacturing will be in essence the same as its dominance in traditional manufacturing: its unique ability and capacity to create massive economies of scale and thereby crash prices worldwide. Just as the iPhone wasn't invented in China but only became a global consumer commodity through vast Chinese assembly lines and hordes of cheap Chinese labor, so tomorrow's disruptive products up and down the global economy will likely become commodities available to the general population through a vast array of automated, smart, and connected Chinese factories and supply-chain networks.
Size and scale not only still matter - they arguably will matter more than ever in the industry, manufacturing, and construction of the future. Beijing seems to envision the sheer magnitude of what it's eventually shooting for. Someday, entire cities will be 3D printed just like 3D printing of earthquake-proof mansions is being pioneered in China today. This isn't a country content to be an also-ran, but rather one that knows full well the untold billions or even trillions that must be invested to establish a 21st-century industrial base and economic infrastructure. One might even wonder these days whether the same can be said of a politically dysfunctional US.
Friday, August 26, 2016
The real reason China's growing at just 4 percent
Earlier this year, legendary bond king Bill Gross remarked that the world will soon realize that China isn't growing at 6+ percent. In one sense, he's dead on: taking into account the sliding yuan, China's GDP is rising at only 3.9 percent year-on-year in US dollar terms, far below the reported 6.7 percent in local currency terms.
Worse, should the yuan slide to just 6.75 per dollar by year-end, that brings dollar GDP growth down to barely 2.6 percent for 2016; should it hit Beijing's stated floor of 6.8 for the rest of the year, it'd be a paltry 1.9 percent. Unfortunately for American investors, such a subpar figure is likely for 2017 and part of 2018 as well, as the yuan is likely to continue a gentle depreciation into the low 7's to support Beijing's desired "L-shaped" recovery. Things can't look much better for European investors, either: the Chinese central bank clearly wants to devalue against the euro, pound, and other western European currencies as well, inasmuch as it can get away with it in the uncertain post-Brexit environment.
So 3 to 4 percent growth is presently more accurate for China, or just half the headline-reported 6 to 7 percent. And that's assuming a relatively firm yuan going forward. It's no wonder that the impressive official GDP figure coming from Beijing doesn't square with Western investor sentiment. And it also explains why the contrast now is so great from 2011-13, when the yuan appreciated 12 percent against the greenback: in those years, China's high-single-digit GDP growth was amplified to as much as 13-14 percent in dollar terms.
On the bright side, by the dollar-converted GDP metric, it's probable that China's already hit rock-bottom last year: 2015 year-on-year GDP in dollar terms was a catastrophic 1.6 percent. Considering that the 2014 figure was about 4.7 percent whereas 2013 was still double digits, we see that the Chinese economy unmistakably slammed the ground over 2013-15, as far as international investors (and thus commentators) are concerned.
With all that being said, considering the dramatic tightening of global dollar liquidity which began in 2013-14 with the Fed's winding down of quantitative easing (QE), no other outcome was possible for China, and in fact the nation's fared far better than other emerging markets, especially commodity exporters, who have over the course of the last three-plus years seen large dollar-denominated GDP contractions, in some cases two or even three such waves.
Worse, should the yuan slide to just 6.75 per dollar by year-end, that brings dollar GDP growth down to barely 2.6 percent for 2016; should it hit Beijing's stated floor of 6.8 for the rest of the year, it'd be a paltry 1.9 percent. Unfortunately for American investors, such a subpar figure is likely for 2017 and part of 2018 as well, as the yuan is likely to continue a gentle depreciation into the low 7's to support Beijing's desired "L-shaped" recovery. Things can't look much better for European investors, either: the Chinese central bank clearly wants to devalue against the euro, pound, and other western European currencies as well, inasmuch as it can get away with it in the uncertain post-Brexit environment.
So 3 to 4 percent growth is presently more accurate for China, or just half the headline-reported 6 to 7 percent. And that's assuming a relatively firm yuan going forward. It's no wonder that the impressive official GDP figure coming from Beijing doesn't square with Western investor sentiment. And it also explains why the contrast now is so great from 2011-13, when the yuan appreciated 12 percent against the greenback: in those years, China's high-single-digit GDP growth was amplified to as much as 13-14 percent in dollar terms.
On the bright side, by the dollar-converted GDP metric, it's probable that China's already hit rock-bottom last year: 2015 year-on-year GDP in dollar terms was a catastrophic 1.6 percent. Considering that the 2014 figure was about 4.7 percent whereas 2013 was still double digits, we see that the Chinese economy unmistakably slammed the ground over 2013-15, as far as international investors (and thus commentators) are concerned.
With all that being said, considering the dramatic tightening of global dollar liquidity which began in 2013-14 with the Fed's winding down of quantitative easing (QE), no other outcome was possible for China, and in fact the nation's fared far better than other emerging markets, especially commodity exporters, who have over the course of the last three-plus years seen large dollar-denominated GDP contractions, in some cases two or even three such waves.
Thursday, August 25, 2016
Low-key yuan devaluation proceeding apace
The canary in the coalmine for the apparently stabilized yuan is that offshore RMB deposits have significantly shrunk in 2016 YTD, indicating a low confidence that the currency has bottomed.
Though the yuan's share of international usage according to SWIFT has recently rebounded, at less than 2 percent it remains well below the high of about 3 percent it reached before last year's devaluation.
Recently, the yuan has firmed up somewhat against the dollar, but only by weakening to all-time lows against the alternate 13-currency basket used by CFETS since December. This convenient duality of quasi-pegs has allowed PBOC to avoid tightening monetary conditions in times of RMB strength against the greenback, even as it's also given an effective global cover for further weakness against it. The result has been a substantial roughly 7 percent depreciation against both the dollar and the broader basket - dominated by the other crucial tenders of euro, yen, and sterling - without driving global markets over a cliff, as appeared to be imminent last August and January. Few who understand this mechanism are failing to be gradually impressed by its efficacy and cleverness.
PBOC is thus apparently achieving its goal: engineering a gradual, low-key devaluation of the yuan without triggering undue domestic and international uncertainty over the Chinese financial system and real economy. This has bought time and altitude for the communist authorities in Beijing to attempt the gradual surgical restructuring of the latter, as if a plunging plane with sputtering engines has gotten just enough of a jolt from firing them again, steadying it to a level descent, with sufficient airspeed, that enables it to stay airborne long enough to reach a suitable runway.
PBOC Governor Zhou Xiaochuan is the unsung star of the global economy, and will be much sought after at the coming G-20 in Hangzhou: his prominence in Chinese policy not only reassures the world of Xi Jinping's commitment to reform, but more broadly bolsters global confidence in central banks and bankers as a whole.
Though the yuan's share of international usage according to SWIFT has recently rebounded, at less than 2 percent it remains well below the high of about 3 percent it reached before last year's devaluation.
Recently, the yuan has firmed up somewhat against the dollar, but only by weakening to all-time lows against the alternate 13-currency basket used by CFETS since December. This convenient duality of quasi-pegs has allowed PBOC to avoid tightening monetary conditions in times of RMB strength against the greenback, even as it's also given an effective global cover for further weakness against it. The result has been a substantial roughly 7 percent depreciation against both the dollar and the broader basket - dominated by the other crucial tenders of euro, yen, and sterling - without driving global markets over a cliff, as appeared to be imminent last August and January. Few who understand this mechanism are failing to be gradually impressed by its efficacy and cleverness.
PBOC is thus apparently achieving its goal: engineering a gradual, low-key devaluation of the yuan without triggering undue domestic and international uncertainty over the Chinese financial system and real economy. This has bought time and altitude for the communist authorities in Beijing to attempt the gradual surgical restructuring of the latter, as if a plunging plane with sputtering engines has gotten just enough of a jolt from firing them again, steadying it to a level descent, with sufficient airspeed, that enables it to stay airborne long enough to reach a suitable runway.
PBOC Governor Zhou Xiaochuan is the unsung star of the global economy, and will be much sought after at the coming G-20 in Hangzhou: his prominence in Chinese policy not only reassures the world of Xi Jinping's commitment to reform, but more broadly bolsters global confidence in central banks and bankers as a whole.
Wednesday, August 24, 2016
One year later, China-induced crash increasingly farfetched
A year ago today, the Dow Jones crashed over 1,000 points to kick off the trading session, as fears of a large and uncontrolled devaluation of the Chinese yuan which had built up since PBOC's surprise reset of the currency on August 11, 2015 finally came to a head in US markets; beginning August 24, when the Dow eventually ended down nearly 600 points, some $5 trillion of equity was liquidated from US bourses over the course of a mere three weeks.
The same horror show of a China-induced global correction was replayed in January and February. The overwhelming effect of these two episodes within just five months of each other was to create a popular narrative in much of the world that it was just a matter of time until the entire global economy would reset on back of a China debt crisis-induced crash that would trigger a universal deflationary shock via a large one-off yuan devaluation.
Now, however, as China prepares to host its first ever G-20 summit in Hangzhou on September 4-5, the dark clouds over the global economy are undeniably still present, but don't seem particularly China-centered anymore.
The problem with most bearish analysis of China is that it tends to focus on eye-catching headline figures - especially pertaining to its high debt levels - which gives the impression that radical and immediate reform is needed from Beijing or else everything by default just goes to hell. This makes it easy to overlook low-key, unspectacular changes in the Chinese economy, like trimming of corrupt SOE executive salaries and nascent bank recapitalizations, that have already prevented the worst-case scenario from materializing thus far.
So one year later, a China-induced global crash looks increasingly farfetched. It can happen, for sure, but even the pessimists now tend to push its timetable further out, if they haven't settled for a prolonged Japan-style stagnation as China's more likely fate.
The same horror show of a China-induced global correction was replayed in January and February. The overwhelming effect of these two episodes within just five months of each other was to create a popular narrative in much of the world that it was just a matter of time until the entire global economy would reset on back of a China debt crisis-induced crash that would trigger a universal deflationary shock via a large one-off yuan devaluation.
Now, however, as China prepares to host its first ever G-20 summit in Hangzhou on September 4-5, the dark clouds over the global economy are undeniably still present, but don't seem particularly China-centered anymore.
The problem with most bearish analysis of China is that it tends to focus on eye-catching headline figures - especially pertaining to its high debt levels - which gives the impression that radical and immediate reform is needed from Beijing or else everything by default just goes to hell. This makes it easy to overlook low-key, unspectacular changes in the Chinese economy, like trimming of corrupt SOE executive salaries and nascent bank recapitalizations, that have already prevented the worst-case scenario from materializing thus far.
So one year later, a China-induced global crash looks increasingly farfetched. It can happen, for sure, but even the pessimists now tend to push its timetable further out, if they haven't settled for a prolonged Japan-style stagnation as China's more likely fate.
Tuesday, August 23, 2016
3 key reasons the gloomy outlook on China is overdone
The gloomy outlook on China's economy is overdone, if one considers what solutions to the country's intractable economic and financial problems are already being achieved in more than a few isolated cases of bad debt cleanup.
Granted, it will take time for these turnarounds to become the overall tone of the economy, and the overall problem of bad debt could still outpace the resolution, but those who have written off a broad crisis or hard landing as inevitable and have staked their reputations or boatloads of money on this inevitability are likely to be frustrated, as some doubtless already have been.
There are several fundamental erroneous assessments that China bears, especially the gloomiest permabears, are making in arriving at their prognosis; in each case, the accusations are crudely overgeneralized and don't stand up to even a little extra scrutiny.
1. Beijing has backtracked on reform.
This view has become popular given the slow pace of SOE downsizing and restructuring, which has resulted in far less overcapacity reduction than the communist central planners have promised. In reality, this only reflects an age-old Chinese reality that even a leader as powerful as Xi Jinping can only gradually alter: the emperor lives in his palace and the mountains are high and far away. Beijing is fully aware of the lagging timetable of capacity cuts; the miracle, relatively speaking, is that they're even proceeding to some appreciable degree at all. Indeed, should the country stay on the current pace and hit 65 and 80 percent of its 2016 coal and steel reduction target, respectively, by year-end, that would be a stunning achievement considering that both sectors were first mandated by the central government to cut capacity a full decade ago (when they were only a fraction of their eventual peak); this indication of increased efficacy of the central government is an unsung testament to the sheer strength of Xi's party leadership - more is bound to come, and that's a very encouraging sign.
Additionally, it's a standard complaint that just because Xi has repeatedly stressed that SOEs should become bigger and stronger and play an even more central role in the economy, that this means he actually wants to double down on the inefficiency and malinvestment that's plagued China for the past few years. Yet that's reducing Mr. Xi to a Maoist bumpkin: quite the contrary, Xi knows that bigger and stronger SOEs also means fewer SOEs in total, and leaner ones at that. If anything, this will be a decisive reversal of China's age-old tendency of economic sectarianism which Mao himself also promoted when he saw fit; perhaps for the first time in its long history, China is about to develop a truly national economy with well-integrated regions, whereby each individual province or even county or municipality will no longer need to subsidize its own pet steel mills and coal plants, or peddle its own urbanization vanity projects with little regard for broader regional synthesis.
2. It would be a sheer disaster for GDP growth to dip below target.
Not anymore, says at least one reputable Western expert: China can manage fine with just 3-4 percent growth. Some would say it's already only growing at that clip - and the strains, while substantial and increasing, are by no means unmanageable yet. As both foreign and domestic observers and stakeholders pay closer attention to the quality as opposed to quantity of Chinese growth, undershooting the raw targets shouldn't have as detrimental an impact on confidence as they would have earlier.
That's not least because the employment situation is well under control as the labor force itself is shrinking: the same pressure to rapidly create so many new jobs has significantly eased, leaving an increasing number of companies with the opposite problem of too few workers to fill their posts (and spurring importation of immigrant workers in some cases). Even less than 5 percent GDP growth can easily absorb the labor pool now, giving a cushy margin to miss the planned 6.5.
That leads to the final fallacy of the China "doom and gloom" crowd: a coarse assumption that growth is vastly overstated.
3. The country's statistics are highly untrustworthy, if not still essentially fabricated, and paint an overly rosy picture.
This longstanding accusation always rears its ugly head in times of uncertainty and shakiness in the Chinese economy. It would be far more credible, though, if its proponents themselves were better at basic arithmetic. The smell of confirmation bias is no less present with China bears as with China bulls: it leads to such egregious errors as double-counting Chinese bonds in aggregating debt figures, even by reputable experts.
Apart from misinterpreting divergent data sets or habitual errors, inconsistencies, or holes in their own statistical reconciliations, China skeptics also mistakenly assume that Beijing blithely downplays bad or troubling data and as a rule covers it up or embellishes it. In fact, while this may often be the case in the short term, over the long term it simply can't work. For years Beijing has been aware of its provinces' and localities' tendency to overstate GDP growth; to suggest that it hasn't been making its own adjustments as needed, or at least smoothing out the effects of bad data over time to provide a generally accurate picture, is to suggest that the country's economy is smaller on the order of trillions of dollars. Just maybe this could be true - though more likely, if anything Chinese GDP remains significantly undercounted.
Yes, the scale of Chinese financial and economic problems is officially understated; but you'd expect for instance much more debt (especially "shadow" debt) than formally reckoned if there's indeed much more economic activity than formally reckoned as well.
Indeed, as the above CNBC article from last year notes, China is grappling with whether to update its accounting methodology to better capture true services and higher value-added activity like R&D. Beijing thus has a trump card: should it be forced to abandon its 6.5 percent GDP target, it will most likely be in the context of increasing base GDP according to the newest UN methodology. In fact, early this year China had already switched to an upgraded system of periodic economic data collection by the IMF, and it's likely this is helping it smooth out to the upside otherwise lower actual GDP growth (i.e. from an already higher base).
That being said, China still has a ways to go. Its stockmarkets remain primitive and far too many publicly traded companies remain far more opaque in their corporate governance and financial reporting than even their emerging-market counterparts that are heavily dependent on Chinese growth. This capital market reform - of equities in particular, as some appreciable progress has already been achieved in liberalizing and opening the bond markets - will without doubt be a central reform item for 2017. If successful (even haltingly so), it would be an indication that far from backsliding into Maoism, Xi's administration is determined to reform after all - and that would vindicate his consolidation of power which increasingly has Western observers up in arms, so much so that they've come up with a "repression index" to yet again tie China's prospects with immediate Western-style liberalization.
Well, that's disinformation and propaganda, pure and simple: Xi's repression has a very specific deliberate method to its madness, and the West is blindsiding itself to assume otherwise, as its elites are so clearly blindsiding themselves on the populist backlash in their own midst which has wrested the initiative for globalization from their hands into China's. It's truly up to China now to not squander the opportunity.
Granted, it will take time for these turnarounds to become the overall tone of the economy, and the overall problem of bad debt could still outpace the resolution, but those who have written off a broad crisis or hard landing as inevitable and have staked their reputations or boatloads of money on this inevitability are likely to be frustrated, as some doubtless already have been.
There are several fundamental erroneous assessments that China bears, especially the gloomiest permabears, are making in arriving at their prognosis; in each case, the accusations are crudely overgeneralized and don't stand up to even a little extra scrutiny.
1. Beijing has backtracked on reform.
This view has become popular given the slow pace of SOE downsizing and restructuring, which has resulted in far less overcapacity reduction than the communist central planners have promised. In reality, this only reflects an age-old Chinese reality that even a leader as powerful as Xi Jinping can only gradually alter: the emperor lives in his palace and the mountains are high and far away. Beijing is fully aware of the lagging timetable of capacity cuts; the miracle, relatively speaking, is that they're even proceeding to some appreciable degree at all. Indeed, should the country stay on the current pace and hit 65 and 80 percent of its 2016 coal and steel reduction target, respectively, by year-end, that would be a stunning achievement considering that both sectors were first mandated by the central government to cut capacity a full decade ago (when they were only a fraction of their eventual peak); this indication of increased efficacy of the central government is an unsung testament to the sheer strength of Xi's party leadership - more is bound to come, and that's a very encouraging sign.
Additionally, it's a standard complaint that just because Xi has repeatedly stressed that SOEs should become bigger and stronger and play an even more central role in the economy, that this means he actually wants to double down on the inefficiency and malinvestment that's plagued China for the past few years. Yet that's reducing Mr. Xi to a Maoist bumpkin: quite the contrary, Xi knows that bigger and stronger SOEs also means fewer SOEs in total, and leaner ones at that. If anything, this will be a decisive reversal of China's age-old tendency of economic sectarianism which Mao himself also promoted when he saw fit; perhaps for the first time in its long history, China is about to develop a truly national economy with well-integrated regions, whereby each individual province or even county or municipality will no longer need to subsidize its own pet steel mills and coal plants, or peddle its own urbanization vanity projects with little regard for broader regional synthesis.
2. It would be a sheer disaster for GDP growth to dip below target.
Not anymore, says at least one reputable Western expert: China can manage fine with just 3-4 percent growth. Some would say it's already only growing at that clip - and the strains, while substantial and increasing, are by no means unmanageable yet. As both foreign and domestic observers and stakeholders pay closer attention to the quality as opposed to quantity of Chinese growth, undershooting the raw targets shouldn't have as detrimental an impact on confidence as they would have earlier.
That's not least because the employment situation is well under control as the labor force itself is shrinking: the same pressure to rapidly create so many new jobs has significantly eased, leaving an increasing number of companies with the opposite problem of too few workers to fill their posts (and spurring importation of immigrant workers in some cases). Even less than 5 percent GDP growth can easily absorb the labor pool now, giving a cushy margin to miss the planned 6.5.
That leads to the final fallacy of the China "doom and gloom" crowd: a coarse assumption that growth is vastly overstated.
3. The country's statistics are highly untrustworthy, if not still essentially fabricated, and paint an overly rosy picture.
This longstanding accusation always rears its ugly head in times of uncertainty and shakiness in the Chinese economy. It would be far more credible, though, if its proponents themselves were better at basic arithmetic. The smell of confirmation bias is no less present with China bears as with China bulls: it leads to such egregious errors as double-counting Chinese bonds in aggregating debt figures, even by reputable experts.
Apart from misinterpreting divergent data sets or habitual errors, inconsistencies, or holes in their own statistical reconciliations, China skeptics also mistakenly assume that Beijing blithely downplays bad or troubling data and as a rule covers it up or embellishes it. In fact, while this may often be the case in the short term, over the long term it simply can't work. For years Beijing has been aware of its provinces' and localities' tendency to overstate GDP growth; to suggest that it hasn't been making its own adjustments as needed, or at least smoothing out the effects of bad data over time to provide a generally accurate picture, is to suggest that the country's economy is smaller on the order of trillions of dollars. Just maybe this could be true - though more likely, if anything Chinese GDP remains significantly undercounted.
Yes, the scale of Chinese financial and economic problems is officially understated; but you'd expect for instance much more debt (especially "shadow" debt) than formally reckoned if there's indeed much more economic activity than formally reckoned as well.
Indeed, as the above CNBC article from last year notes, China is grappling with whether to update its accounting methodology to better capture true services and higher value-added activity like R&D. Beijing thus has a trump card: should it be forced to abandon its 6.5 percent GDP target, it will most likely be in the context of increasing base GDP according to the newest UN methodology. In fact, early this year China had already switched to an upgraded system of periodic economic data collection by the IMF, and it's likely this is helping it smooth out to the upside otherwise lower actual GDP growth (i.e. from an already higher base).
That being said, China still has a ways to go. Its stockmarkets remain primitive and far too many publicly traded companies remain far more opaque in their corporate governance and financial reporting than even their emerging-market counterparts that are heavily dependent on Chinese growth. This capital market reform - of equities in particular, as some appreciable progress has already been achieved in liberalizing and opening the bond markets - will without doubt be a central reform item for 2017. If successful (even haltingly so), it would be an indication that far from backsliding into Maoism, Xi's administration is determined to reform after all - and that would vindicate his consolidation of power which increasingly has Western observers up in arms, so much so that they've come up with a "repression index" to yet again tie China's prospects with immediate Western-style liberalization.
Well, that's disinformation and propaganda, pure and simple: Xi's repression has a very specific deliberate method to its madness, and the West is blindsiding itself to assume otherwise, as its elites are so clearly blindsiding themselves on the populist backlash in their own midst which has wrested the initiative for globalization from their hands into China's. It's truly up to China now to not squander the opportunity.
Wednesday, August 17, 2016
Excellent Goldman Sachs analysis debunks China bears
Goldman Sachs debunks the bearish notion that China's transition depends on significantly reducing the investment to GDP ratio (i.e. boosting consumption to GDP). At barely $8,000 per capita, China's income level is far too low for this to happen.
Instead, China must move up the global value chain by refocusing its exports away from commodity industrial products and mass assembly of cheap consumer goods, and towards higher-end, larger and more complex end-products; as well as making inroads into sophisticated parts and components production. In the coming decade, the country should become a leading exporter of everything from cars to planes to robots and semiconductors. Its vast domestic market should make this shift relatively easy to pull off with large new investments by rich countries.
As noted before on this blog, China's long, hard slog is to raise total factor productivity (TFP) by getting more value-added output from less labor and capital input. Already there are encouraging signs that this is starting to happen.
Goldman also puts to well-deserved rest the fallacy - still peddled by the likes of Jim Chanos and Gordon Chang - that the "Li Keqiang index" (concocted way back in 2007) of rail freight, electricity consumption, and bank loans is a more reliable gauge of economic activity than supposedly fabricated GDP statistics:
China, no less than the US, is undergoing huge structural economic shifts of the sort that play out over years, even decades: it's not merely that Western rules don't apply to China - they don't really apply to the West anymore, either.
Instead, China must move up the global value chain by refocusing its exports away from commodity industrial products and mass assembly of cheap consumer goods, and towards higher-end, larger and more complex end-products; as well as making inroads into sophisticated parts and components production. In the coming decade, the country should become a leading exporter of everything from cars to planes to robots and semiconductors. Its vast domestic market should make this shift relatively easy to pull off with large new investments by rich countries.
As noted before on this blog, China's long, hard slog is to raise total factor productivity (TFP) by getting more value-added output from less labor and capital input. Already there are encouraging signs that this is starting to happen.
Goldman also puts to well-deserved rest the fallacy - still peddled by the likes of Jim Chanos and Gordon Chang - that the "Li Keqiang index" (concocted way back in 2007) of rail freight, electricity consumption, and bank loans is a more reliable gauge of economic activity than supposedly fabricated GDP statistics:
"Railway passenger traffic has been outpacing railway freight volume, electricity consumed by tertiary industries and households have been rising faster than electricity consumed by primary and secondary industries, and equity and bond markets have become increasingly important in providing credit flows relative to bank lending."In fact, throughout the past year of tumult and uncertainty for the Chinese economy, these nuances have been noted by bullish analysis and commentary (including on this blog); as Chinese growth stabilizes and the much-anticipated hard landing fails to materialize, this knowledge will finally seep more into the mainstream and eventually drown the cacophony of doomsayers who have thrived on selective interpretation and mass mental laziness.
China, no less than the US, is undergoing huge structural economic shifts of the sort that play out over years, even decades: it's not merely that Western rules don't apply to China - they don't really apply to the West anymore, either.
Tuesday, August 16, 2016
Supply-side reform beginning to take hold, but Beijing faces tradeoff
The steady decline of industrial deflation in China is bound to have major consequences for the global economy, mostly positive. The continued uptick of the still-negative producer price index (PPI), now at -1.7 percent after bottoming out at -5.9 percent in the final two months of 2015, is the most reliable indicator that coal, steel, and other industrial and mining overcapacity is easing thanks to supply-side structural reform or "Xiconomics." Should PPI hit zero by year-end, it could mark 2016 as a major turnaround for the Chinese economy and herald the beginning of its most monumental transition since reform and opening itself began in the late seventies.
Tellingly, conventional Western analysis has been slow to draw the connection between recovering inflation and weakening growth - or more specifically, how the former is both a direct consequence of and a cushion to the latter. Even where it does, like here, it tends to overlook the positive sign even as it acknowledges that the slowdown has been deliberate:
Of course, it may well be that growth is heading lower than the official minimum target of 6.5 percent in the second half, and this would present Beijing with a difficult decision: either it unleash another flood of cheap credit or it must manage drastically reduced (by its standards) growth expectations. The latter choice would be far more palatable to both domestic and international investors should it be accompanied by more evidence of supply-side restructuring, including especially the further recovery of factory-gate industrial prices. A stable yuan and balance of payments would also be big mitigators: the country will gain credibility as it resists devaluation pressure to firmly put to rest the notion that it can export its way to better growth, whilst a continued favorable balance of trade will serve as an indication that it's moving up the global value chain as befits a middle-income nation aspiring to join the ranks of the rich.
More to the point from a practical perspective, slower growth in the low-6's would send a signal that the threat of mass unemployment and social unrest is small, i.e. that there's enough new jobs to be done in the services sector to absorb (if even with lower pay and benefits) the millions of redundant industrial workers until such time as the overall economy is more robust and healthily mixed between primary, secondary, and tertiary sectors. This would boost domestic and international confidence alike in China's stability and resilience as a medium to long-term investment, thereby fueling another virtuous cycle of global intercourse and integration for it.
Optimistically, Xi Jinping is both willing and politically strong enough to sacrifice some GDP for some supply-side reform driven by industrial downsizing and restructuring; more realistically, he'll proceed cautiously and incrementally, in keeping faithful to the priority of verifying the integrity of each stone in the river crossing with extra care before committing to transfer one's full weight onto it. However things go from here on out, Beijing faces a fundamental tradeoff of quantity versus quality of growth which can only become harder to avoid.
Tellingly, conventional Western analysis has been slow to draw the connection between recovering inflation and weakening growth - or more specifically, how the former is both a direct consequence of and a cushion to the latter. Even where it does, like here, it tends to overlook the positive sign even as it acknowledges that the slowdown has been deliberate:
A lot of China watchers knew this would happen eventually. In April, Chinese state media quoted an "authoritative figure" who warned that the government would not use unfettered credit growth to try to inflate the economy out of a slowdown. The economic reforms that China has been promising for years now, they assured readers, are still coming.Rather than applaud tentative initial evidence that some supply-side shift is finally underway, the bearish focus is now on the declining growth: it's as if the sky's falling that fixed-asset investment is growing at just 8.1 percent instead of 8.8 percent, while consumer spending is up barely 10.2 percent instead of the projected 10.5 percent. These are quite stellar figures, to be sure, but what's more significant given China's specific set of problems is that unexpected dips in investment growth shouldn't be taken so negatively anymore, anyway: with private investment still in the doldrums (if even showing tentative signs of bottoming), one can just as easily spin the more consequential decline in public investment as an indication that local governments aren't simply building more roads and bridges to nowhere.
Of course, it may well be that growth is heading lower than the official minimum target of 6.5 percent in the second half, and this would present Beijing with a difficult decision: either it unleash another flood of cheap credit or it must manage drastically reduced (by its standards) growth expectations. The latter choice would be far more palatable to both domestic and international investors should it be accompanied by more evidence of supply-side restructuring, including especially the further recovery of factory-gate industrial prices. A stable yuan and balance of payments would also be big mitigators: the country will gain credibility as it resists devaluation pressure to firmly put to rest the notion that it can export its way to better growth, whilst a continued favorable balance of trade will serve as an indication that it's moving up the global value chain as befits a middle-income nation aspiring to join the ranks of the rich.
More to the point from a practical perspective, slower growth in the low-6's would send a signal that the threat of mass unemployment and social unrest is small, i.e. that there's enough new jobs to be done in the services sector to absorb (if even with lower pay and benefits) the millions of redundant industrial workers until such time as the overall economy is more robust and healthily mixed between primary, secondary, and tertiary sectors. This would boost domestic and international confidence alike in China's stability and resilience as a medium to long-term investment, thereby fueling another virtuous cycle of global intercourse and integration for it.
Optimistically, Xi Jinping is both willing and politically strong enough to sacrifice some GDP for some supply-side reform driven by industrial downsizing and restructuring; more realistically, he'll proceed cautiously and incrementally, in keeping faithful to the priority of verifying the integrity of each stone in the river crossing with extra care before committing to transfer one's full weight onto it. However things go from here on out, Beijing faces a fundamental tradeoff of quantity versus quality of growth which can only become harder to avoid.
Friday, August 5, 2016
Show trials of lawyers marks de-politicization of post-Tiananmen civil society
You wouldn't expect praise for Xi Jinping to come from someone being jailed by the communist regime, but at the announcing of his seven-year verdict for subversion, that's what controversial civil rights lawyer Zhou Shifeng supposedly did:
But they do reveal an undeniable reality: with Xi's anti-corruption campaign close to being permanently institutionalized, there's less and less left for independent lawyers to actually do in terms of policing the party and the state which the party and the state won't do on itself - eventually at least.
Though rarely acknowledged in Western media, in key ways the graft-busting crusade has been a remarkable success exceeding mainstream expectations. Its punitive measures have been so widespread and severe, even at the magisterial and ministerial levels, that the outwardly visible culture of corruption has been fundamentally altered. Officials have grown noticeably more cautious and frugal - often to a fault. The corruption remains, for sure, but it's become like the Italian mob in New York City under prosecutor Dewey, or even the Russian oligarchs under Putin: it's been forced to go low-key, at least for the time being. For any society, that's really about the best you can hope for.
That leaves China's post-Tiananmen civil society - more specifically, its most politicized segments - at a loss for relevance. Their whole raison d'être has been that they must police the state because the state (and party) can't police itself; but now that the party-state's internal watchdogs are actually exercising their teeth, they come off as more nuisance than help, even with those in the government who may have formerly seen their role as legitimate.
Post-Tiananmen civil society has thus effectively been de-politicized. Civil society still exists, but now only as an adjunct to absolute communist party authority. One could argue that it never really wanted to be political anyway, in that it never had any intention of challenging communist rule; this misses the point, which is that it always operated under the assumption that private citizens had legitimate constitutional rights to bring charges against officials and the state. It's this fundamental assumption which Xi Jinping's party has overruled: since the party and state can still discipline themselves to be more responsive to the people, that precludes the people acting autonomously in contravention of the political monopoly.
In other words, the party still knows what's best for China, and until such time as the country's socioeconomic transition really comes off the rails, its citizens had better accept it.
The court said he thanked late paramount Chinese leader Deng Xiaoping for reforms that made his "development" possible.
"The second person I would like to extend my gratitude to is Chairman Xi Jinping," it cited him as saying. "His national strategy to implement the rule of law has made China stronger."Of course, these statements should be taken with a heavy grain of salt: even if true, they can't be considered purely voluntary. The motives to sweet-talk Xi's administration are quite obvious for anyone in such a situation.
But they do reveal an undeniable reality: with Xi's anti-corruption campaign close to being permanently institutionalized, there's less and less left for independent lawyers to actually do in terms of policing the party and the state which the party and the state won't do on itself - eventually at least.
Though rarely acknowledged in Western media, in key ways the graft-busting crusade has been a remarkable success exceeding mainstream expectations. Its punitive measures have been so widespread and severe, even at the magisterial and ministerial levels, that the outwardly visible culture of corruption has been fundamentally altered. Officials have grown noticeably more cautious and frugal - often to a fault. The corruption remains, for sure, but it's become like the Italian mob in New York City under prosecutor Dewey, or even the Russian oligarchs under Putin: it's been forced to go low-key, at least for the time being. For any society, that's really about the best you can hope for.
That leaves China's post-Tiananmen civil society - more specifically, its most politicized segments - at a loss for relevance. Their whole raison d'être has been that they must police the state because the state (and party) can't police itself; but now that the party-state's internal watchdogs are actually exercising their teeth, they come off as more nuisance than help, even with those in the government who may have formerly seen their role as legitimate.
Post-Tiananmen civil society has thus effectively been de-politicized. Civil society still exists, but now only as an adjunct to absolute communist party authority. One could argue that it never really wanted to be political anyway, in that it never had any intention of challenging communist rule; this misses the point, which is that it always operated under the assumption that private citizens had legitimate constitutional rights to bring charges against officials and the state. It's this fundamental assumption which Xi Jinping's party has overruled: since the party and state can still discipline themselves to be more responsive to the people, that precludes the people acting autonomously in contravention of the political monopoly.
In other words, the party still knows what's best for China, and until such time as the country's socioeconomic transition really comes off the rails, its citizens had better accept it.
Thursday, August 4, 2016
Economy could get boost from political stabilization
An early-release agenda for the 6th plenum of the 18th party congress in October, along with a sweeping reorganization of the Communist Youth League (CYL), appear to be the latest signs of Xi Jinping's consolidation of power over the CPC.
Taken together, these latest developments suggest that Xi has more than neutralized the supposed threat to his rule from premier Li Keqiang, and is as indisputably in charge of China as ever before. In fact, it may even herald an acceleration of his growing authority between now and next fall's 19th party congress.
Such political stabilization would greatly help the economic transition. Ironically, now that Li seems to pose no danger to Xi, he might be given more breathing room to run the economy, which is going reasonably well; he can be expected to star at the G-20 summit in Hangzhou next month, reassuring global financial and economic leaders that there won't be any nasty surprises from China despite its persistent headwinds.
That would send a positive message to the world: Xi is concentrating power not for his own sake, but to make difficult reforms possible. He wants the world to be confident in China's commitment to rebalancing, and part of that means letting Li do his job as well as possible for as long as possible, even if the delicate national condition demands that the party's new "central leading groups" play more of a supervisory role, as well.
Li for his part seems to have little incentive to not throw in his lot with Xi - or more to the point now, little whatsoever to gain from Xi's loss of credibility, which if anything would hurt him more than Xi himself.
Taken together, these latest developments suggest that Xi has more than neutralized the supposed threat to his rule from premier Li Keqiang, and is as indisputably in charge of China as ever before. In fact, it may even herald an acceleration of his growing authority between now and next fall's 19th party congress.
Such political stabilization would greatly help the economic transition. Ironically, now that Li seems to pose no danger to Xi, he might be given more breathing room to run the economy, which is going reasonably well; he can be expected to star at the G-20 summit in Hangzhou next month, reassuring global financial and economic leaders that there won't be any nasty surprises from China despite its persistent headwinds.
That would send a positive message to the world: Xi is concentrating power not for his own sake, but to make difficult reforms possible. He wants the world to be confident in China's commitment to rebalancing, and part of that means letting Li do his job as well as possible for as long as possible, even if the delicate national condition demands that the party's new "central leading groups" play more of a supervisory role, as well.
Li for his part seems to have little incentive to not throw in his lot with Xi - or more to the point now, little whatsoever to gain from Xi's loss of credibility, which if anything would hurt him more than Xi himself.
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