A year ago, the global financial world held its breath as the Chinese stock market and currency nosedived to open the 2016 trading year's first two weeks, triggering the second round of China-induced multi-trillion dollar liquidations worldwide in less than six months. As George Soros quipped, "I'm not predicting a Chinese hard landing, I'm observing it," a general consensus emerged in the ensuing weeks that Beijing was basically on its last legs fighting off a general financial crisis, which could only end in a massive devaluation of the yuan to bail out a debt deflation-trapped banking sector. Longtime China-bashing "permabears" like Jim Chanos and Gordon Chang gleefully trumpeted their prescience all along that the communist regime had built nothing more than a Potemkin village, confidently predicting that this time - at long last - Beijing simply couldn't stop a complete meltdown no matter what it tried.
It turns out, of course, that they were badly wrong for what could well be the last time: China not only didn't collapse, it managed to bounce back and stabilize in such a way that, by the closing months of 2016, it no longer appeared so particularly vulnerable in a global neoliberal economic system whose very heart - the Anglo-American-dominated West - was undergoing significant convulsions of uncertainty and volatility which were calling to question the integrity of its very foundations.
Against this backdrop, even as Beijing bleeds capital at the rate of $50 to $100 billion a month while watching the yuan slide towards the psychological threshold of 7 per dollar, it appears to be indisputably in charge of China's destiny. This is in no small part because it has comprehensively and holistically confronted the fundamental structural problem it faces: how to carve out a greater global space for its brand of centrally planned economic development, with greater international use of its newly designated reserve currency as the linchpin of such a strategy.
Even before the surprise election of protectionist Donald Trump, it was painfully clear to China that its future prosperity and strength as an independent sovereign power would necessarily wean it off the quarter-century model of export-driven surpluses with the West which it recycled into Western reserve currencies to keep the cycle flowing. Much as this whole scheme had begun to foster greater disenchantment with trade and globalization in Western countries in recent years, it had also begun to badly sputter as a source of income and profits for China itself.
The investment-heavy Chinese economy increasingly needs to shift gears: its producers must climb the value chain from cheap assembly to advanced component fabrication, even as the consumer society must expand healthily along with the service sector. Such a profound transformation amidst declining demographics and sluggish growth both domestically and globally has forced Beijing's hand in the realm of fiat credit long utterly dominated by the West and particularly the US: now more than ever, China must develop and boost confidence in its indigenous financial system, starting with the RMB itself.
Looking back on 2016, it was a watershed year for the communist superpower's domestic credit development. Trillions of yuan of new locally denominated debt were issued to corporations, local governments, and increasingly even consumers to keep the domestic economy - especially the real estate and industrial sectors - afloat with cheap cash at a time of highly pronounced global dollar scarcity and illiquidity. Skeptics will of course lambast Chinese officials and bankers for creating so much new credit out of thin air which in the long term might only further saddle Chinese economic agents with unpayable debts; but thus far, since the massive first-quarter stimulus of last year, Beijing's monetary and fiscal easing has succeeded in reversing the deflationary tide that had Mr. Soros and like-minded speculators so certain the middle kingdom would flatly crash.
This offered a propitious background against which the yuan was finally officially added to the IMF's Special Drawing Right (SDR) basket of elite reserve currencies (alongside the dollar, euro, pound sterling, and yen). Whereas 2016 saw a decline in the offshore RMB's total usage beyond the mainland - mainly as a result of capital controls imposed to stop a run on the currency - this should be understood as a stopgap pullback and not a permanent resealing of the capital account. The yuan simply wasn't ready for anything close to prime time in 2015 and 2016 - not when domestic Chinese firms' and individuals' faith in it hadn't yet been tested vis-à-vis their ironclad trust in King Dollar. Going forward, as local usage of the local tender for bond and debt issuance increases - it has already ballooned dramatically only since 2014 - this gap of credibility and confidence should steadily narrow. (And needless to say, this is a prerequisite for medium to long-term Chinese aspirations for a Sinocentric Eurasian economic architecture, where the yuan is a legitimate trading and reserve currency for developing countries along Beijing's "One Belt One Road" scheme.)
Which of course leads to the underlying and underpinning question at hand: just how stable is the communist regime and system under Xi Jinping? It is on this matter that perhaps the most resounding proofs have emerged in the past year - however open-ended or inconclusive they yet remain.
There's little doubt that the financial and economic travails of 2015 and early 2016 badly bruised the Xi-Li (Keqiang) administration which had taken power with such an ambitious reform agenda in 2012-13; the attendant fallout of this prolonged episode, however, has also exposed the fundamental stability of the one-party state with a single powerful center that none of the subordinate parts can effectively directly challenge, however much they may continue to disobey or defy its edicts - mainly through sheer inertia.
Like their counterparts in the West, China's own elite "ruling class" - in this case the communist party bosses at the heads of local governments and state-owned enterprises (SOEs) - have been demonstrated to be highly reluctant to compromise their long-enjoyed prerogatives at the apex of the socioeconomic food chain within the global neoliberal architecture. Having contributed so much to China's development and prosperity for the preceding quarter-century, they understandably felt a sense of entitlement - again closely mirroring their Western peers - to a disproportionate share of the common goods even as the overall pie stopped growing or even shrank. Though they'd already been admonished by the central government that downsizing their debt-ridden and overcapacity-bloated industries would be nothing short of "slashing one's wrists", they used various shenanigans to put off the day of reckoning, with near-disastrous consequences for the entire country.
This is what became strikingly apparent in the second half of 2015, when the double whammy of the Chinese stock market crash and yuan devaluation coincided with the Fed's first interest rate hike in nearly a decade to create a perfect storm that culminated in the virtual panic at the outset of 2016.
Initially, the economic slowdown in early 2015 - in spite of repeated central bank easing through a series of interest rate and reserve requirement ratio (RRR) cuts - was greatly exacerbated by deliberate intransigence of local officials to adapt to a stricter financing environment, specifically the new prohibition on local government financing vehicles (LGFVs) for the purposes of curbing corruption in line with Xi Jinping's much vaunted and increasingly feared and hated (among officialdom) campaign.
Where they should have responded with circumspection in the form of production and capacity cutbacks - this was just the environment that would have demanded their delayed compliance with central mandates to do so - the ensconced managers of local state firms instead fired up their lines in the hope of decimating lesser (including private) competitors. A mutually destructive race to the bottom ensued, pitting factories and plants both regionally and nationally against each other in pursuit of shrinking profits. The systemic distortions were multiplied by the various forms and channels of illegal "shadow" lending and credit which moved into the funding gaps of less privileged market players to sustain their tooth-and-nail efforts to stay alive.
By the time the central authorities stepped in to loosen the politically tautened local fiscal levers, it was too late to stop or even moderate this free-for-all: the final two quarters of 2015 saw ham-fisted efforts by Beijing to wring out what legitimate stimulus they could from provincial and local administrators without returning to the good old days of LGFV extravagance, coupled with far less restrained industrial expansion by provincial and local firms to meet the only incrementally improving aggregate demand. The result: by December, the producer price index (PPI) had been mired at close to negative 6 percent for the second straight month - which when coupled with the benchmark interest rate of over 4 percent meant a deflationary hell for industry of real borrowing costs in the double digits. Unless drastic action was taken quickly, Beijing would be utterly humiliated by its ill-wishers in the Western China-bashing and China-shorting community.
And so the LGFVs had to be reinstated, at first by degrees and eventually virtually wholesale: there was as yet realistically no other way to pull off the scale of fiscal stimulus that the overall economy now demanded to keep from abruptly depressurizing. As soon as this decision was made, unleashing an over $1 trillion spending package, the Chinese recovery was both swift and broad, almost overnight spiking global commodity prices.
The double-edged word, of course, was that this short-term provisional lifesaver greatly emboldened the party bosses of the local government and SOE worlds: they now felt vindicated in resisting Beijing's downsizing program from the get-go. To them, it was a moral as well as political victory over Xi's party-mandated austerity, which by now they saw as really a naked power grab by the most insatiable personality-cult strongman since Mao himself. When push came to shove, they had managed to extract a massive concession from Li's government to all but veto Xi, which, for a brief moment, seemed to do the impossible: create an actual rift at the very top of the party-state structure in the paramount Politburo Standing Committee.
It was at this juncture - on the occasion of the annual "Two Sessions" of the rubber-stamp Chinese parliament early last March - that the anti-austerity, status-quo faction of the party struck: an anonymous "open letter" purportedly from disenchanted party officials appeared on the internet, first overseas and then republished by the Xinjiang provincial government - headed by one of Xi's known enemies (a crony of anti-corruption-disgraced security czar Zhou Yongkang) - calling for nothing short of the general secretary's resignation.
The Xi administration's response was predictably immediate and furious, but by now more was being exposed: even the Politburo Standing Committee wasn't fully in line with Xi's increasingly personal brand of authoritarian rule by one-man diktat - or at least, not as much as it should have been. In an embarrassing flub, the propaganda ministry headed by standing committee member Liu Yunshan summarily executed the online presence of outspoken liberal party stalwart Ren Zhiqiang, unleashing such a firestorm of negativity towards Master Xi himself that it had to be investigated by the anti-corruption watchdog. Thus were even Xi's purported loyalists unwittingly destabilizing the delicate internal balance of the party - serving their leader with a zealous loyalty that could barely conceal ulterior ambition, they wound up damaging his reputation at just the moment when it was already bruised.
The culmination of the intrigue came in late April and early May, when the palpably widening split between Xi and Li finally came to a visible head. The critical occasion for this was the fizzling out of the initial energizing effects of the trillion-dollar stimulus: redundant steel and coal capacity which had without authorization been brought back online to meet stimulus demand (after being slated for rationalization) now had to be shut down again absent yet another injection of bailout cash. While the public posturing gave Xi's detractors and critics hope - they were thrilled to see state media broadcast Li meeting and greeting his power base at the communist youth league (CYL) - the behind-the-scenes power play was characteristically one-sided: Xi loyalists quietly began executing plans to permanently sideline the CYL as a patronage base for future top leaders, and the recalcitrant party secretary of steel-producing Hebei province right outside Beijing was purged from his post for failing to curb "zombie" plants which had once more come back from the dead.
Then in May, an official "expert" essay on the economy appeared with fanfare which blasted the old means of economic development through massive debt expansion as inherently flawed and potentially very dangerous; virtually simultaneously a previously private statement by Xi to provincial party chiefs was publicized that conveyed how the general secretary was basically losing patience with his underlings for their chronic foot-dragging on painful restructuring. By the time these reiterations of paramount leadership's officially sanctioned stances were disclosed, the internal power struggle they indicated had been decisively concluded: Xi had utterly crushed the ill-conceived and completely uncoordinated revolt against him stillborn.
Through all these developments, the standout fact which emerged was the party central leadership's creeping consolidation of control over the provincial party hierarchies and its steadily encroaching overriding influence over the actual organs of state. Since spring 2016, as the Chinese economy has further stabilized, a sense of normalcy has returned politically as well: Xi has further consolidated his unchallenged position as the "core" of the party's fifth-generation leadership. He has warded off whatever trouble may have arisen from subordinates in the party-state latching onto an alternate lead figure, i.e. Li Keqiang, as a channel for passive dissent or resistance; Li for his part has also demonstrated the political prudence to shy away from rivalry with Xi, even at the price of exposure to risk of a forced early retirement at the coming 19th party congress, for the discretion of doing the best visible job he can executing Xi's economic initiatives.
In this light, the most critical single development in China in the past tumultuous year - and the single greatest comfort that its optimists can take - is the admonition published last April on the official website of the Central Committee for Discipline Inspection (CCDI), the party's self-policing agency in charge of the graft-busting crusade, titled: "A single truth teller is better than a thousand yes-men."
Since it appeared so hot on the heels of the hostile open letter demanding Xi's resignation - the key grievance of which was the party chief's seemingly unabashed self-promotion of a personality cult - this party-approved exposition, which can only have been published with express permission from CCDI head Wang Qishan, was at the time widely seen as indicative that even this stalwart anti-corruption firebrand had finally turned against old friend and ally Xi, the disgraced young red princeling he had first bonded with in the Cultural Revolution some 50 years earlier.
Alas for those wishing communist China ill, the CCDI article was not scrubbed off like any online content clearly not in line with Xi's leadership, and thus turned out to be an unequivocal if oblique expression of support for the current administration. It sent a powerful message that Xi - through trusted confidante Wang - was fully conscious of the risks coming from both ends of the spectrum: he was appropriately wary of the temptation of absolute power even as he rightly wouldn't tolerate malicious dissent within the ranks. In other words, the man charged with leading the party - and thereby an empire of 1.4 billion and a $10 trillion economy, the world's second-largest and still a pivotal engine of globalization - was highly competent because he was at heart a humble servant of the nation and its citizenry.
Obviously, the ultimate success of China's monumental transition is anything but assured at this admittedly incipient stage: it could yet derail in unforeseen ways, and if anything, it's the sense of calm and the lack of trouble or drama which ironically could breed the very complacency that most reliably allows imbalances and distortions to build up until they reach a breaking point. If there's anything Beijing's policymakers and Xi himself should have learned since 2014, it's that they're actually better off in a constant state of concern or even worry - this is precisely what keeps them on their toes, alert to subtle threats to systemic stability which in fatter times could easily slip past unnoticed.
To conclude, a year after apparent near collapse, Xi's China finds itself on a belated road to eventual stability. It doesn't seem anymore like it was ever much more than a fool's know-nothing fantasy that the rising superpower's implosion was already a foregone conclusion.
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