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.

Not a hard or soft landing, but a long one

China is going to have neither a hard nor a soft landing, but rather a long one.

The country's rebalancing, it now appears, will have barely even gotten off the ground by the end of Xi Jinping's first term as party chief at next fall's 19th party congress; it will then likely require the entirety of his second term (2017-2022) to truly take off.

In the near term, low-hanging fruit will be picked. Mega-mergers of large and modern national SOEs, like the much-anticipated union of Shanghai Baosteel with Wuhan Steel, should reduce some overcapacity and, more importantly, position a handful of strategic state firms to eventually gobble up or drive out of business the dozens or even hundreds of redundant local SOEs that have been zombified by years of protectionist measures and evergreen lending from local governments and their financing entities. The millions of layoffs that this rationalization of the heavy industrial sector will cause will be cushioned in part by transitioning workers to low-skill but tech-enabled services, as is already happening en masse with former coal and steel workers becoming drivers for China's Uber, Didi Chuxing.

Ongoing financial sector reforms over the next couple of years, including gradual opening of the capital account and capital markets to international investment, will assist in improving the allocation of funds to sectors and companies based on real growth prospects. In this light, restraining dodgy subprime debt - as in the case of a renewed crackdown on wealth management products (WMPs) - will also be crucial to corporate profitability (as well as financial stability).

The central government must be prepared to use its considerable fiscal and monetary firepower - undergirded by a far stronger balance of payments than its local counterparts - to mop up the inevitable wreckage that any number of local SOEs and administrations are likely to become as the latest round of credit stimulus likely wears off in 2017 and 2018 and losses build up again. Bailouts are inevitable to prevent propagation of systemic risk, but Beijing must be as frugal as possible: it must seize these opportunities to further downsize redundant firms and local industries (including by merging into the big national champions), slash bloated local bureaucracies, accelerate any delayed or stalled social reforms (like hukou liberalization), and better integrate local finances with national and international capital markets.

Needless to say, this means Xi Jinping and co. will have their plates full of intraparty political battles, especially with local CPC bosses, over the next few years; there's good reason to believe, though, that they're well prepared for them.

These macro-measures will help provide a stable backdrop for the Chinese economy so that it can tackle its true medium to long-term challenge: increasing total factor productivity (TFP).

Without a significant recovery in TFP, which has flatlined or even contracted in recent years, China may well be doomed to the middle-income trap.

McKinsey optimistically assesses that productivity increases can add $5.6 trillion to China's GDP by 2030. The Chinese government has itself made innovation-based entrepreneurship a key pillar of the country's economic rebalancing; it's also relatively clear that "innovation" in the Chinese context isn't so much inventing entirely new technologies as would be the case in the rich world, but primarily adopting and adapting existing advances which are breakthroughs for what's still a developing country.

Even so, as always the communist authorities have already gotten ahead of themselves: all across the country, local government administrations have poured or earmarked billions into questionable "innovation centers" that are awfully reminiscent of previous waves of construction booms that tended to be massive new "financial centers" or exclusive luxury towns.

In fact, not only are the biggest gains on the innovation and entrepreneurship front likely to have little to do with direct government initiatives to promote them, but it's even arguable that the whole focus is skewed: boosting productivity must come as much from superior personnel and management technique as from upgraded capital investment and technology; these are so much less sexy than "whiz-bang" new equipment and tools, for sure, but they potentially have an even deeper and broader societal and cultural effect.

That being said, China has beaten the odds before, and it stands a pretty decent shot at doing so again. There will be both winners and losers, for sure - and the greatest strides in coming years will probably be the fruit of lessons that can only be learned from failure. So long as Beijing remains committed to the long, hard slog - and persistent in its refusal to take shortcuts (like currency devaluation) - it's probably only a question of just how long the Chinese landing will be, and that in itself makes it a soft one.

Stabilizing industrial profits shows stimulus is working

Industrial profits jumped 5.1 percent year-on-year in June, capping off a first-half year-on-year increase of 6.2 percent for large (presumably primarily state-owned) firms. While even the National Bureau of Statistics (NBS) acknowledges that this doesn't mean China's out of the woods yet, it offers compelling evidence that the massive 1Q stimulus is working to stabilize the real economy.

Plus, given the sheer size of the package, as well as ongoing liquidity injections by PBOC which are more narrowly and prudently tailored (if even still uncomfortably large in absolute terms), when combined with global monetary easing led by a slow-to-hike Fed, there's little reason not to expect further stabilization or "L-shaped" recovery in the remainder of 2016.

That being said, early indications point to a weak July and yet more evidence that China remains at significant risk of runaway credit growth.

Optimistically, these concerns will take two or three quarters to clear up, but clear up they will - there's no reason to pessimistically assume that new credit is predominantly going to the same old zombie firms. A lot probably still is, but then there wouldn't be default cases like Dongbei Special Steel group which are clearly a result of the loss of the traditional liquidity backstops for large SOEs. To point out that SOE reform on the ground has been slow isn't the same as saying no progress is being made at all: it's more a reflection of the stabilizing overall economic situation and yet more verification that SOEs contribute to that stability via employment and policy utilization, not profits.

Indeed, with private investment at lows that weren't touched even in the depths of the financial crisis, who knows how bad the Chinese economy would be if state firms haven't stepped up to the plate. And just because they're doing so doesn't mean they're doomed to be just as wasteful and inefficient as they've been before.

More importantly for both the real economy and by extension the country's debt burden, quiet, unspectacular productivity and efficiency improvements are underway in the industrial and manufacturing sector: to survive and prosper, firms must do more with less, and such a process steadily weeds out losers from winners. This especially appears to be the case with lighter industries downstream from the still-depressed industrial commodity manufacturers: electronics and electrical equipment, for instance, have seen a profit tear of late, contributing disproportionately to overall industrial profit growth.

China also intends to make the most of the robot revolution, which makes perfect sense for it now that its labor force is entering a long, steady decline.

The stimulus is working. Any surprises in the remainder of 2016 are likely to be on the upside, not the downside: Chinese growth has a fairly good shot of bottoming out by year-end, as even though the same problems and headwinds will persist well into 2017, they're increasingly likely to be outweighed by productivity gains in the real economy. Even more guardedly, if one argues that far too many local governments and SOEs still aren't changing their ways (or fast enough), that means growth will still fall in 2017, but doesn't change the overarching theme of macro stabilization in a rough "L" shape (which its purveyor himself acknowledged could take up to two years).

Crisis is deepening, but so is Xi's grip on it

The dark side of China averting a hard landing in 2016? Not surprisingly at all, more ghost towns - in other words, a reflated property bubble that's as dangerously unsustainable as ever.

The sheer scale of the small and medium-sized urban area expansion being put on the cards by local officials truly makes the 2016 stimulus seem like the next iteration of the 2009 stimulus - with potential devastating effects down the line for the real economy. China's deep structural crisis hasn't abated but deepened.

But Xi Jinping isn't unprepared for the trouble ahead. It's precisely this scale of returning to old ways of goosing short-term GDP that he was alarmed enough about back in May to openly voice discord against Li Keqiang's management of the economy - a discord that has apparently resurfaced as of early July in their conflicting signals over SOE reform.

In fact, Xi must know as well as Li that given the circumstances both domestically and internationally, a new massive wave of credit expansion was really the only way to prevent a full-blown loss of confidence in the Chinese economy. But the aforementioned figure - new urban areas for an estimated 3.4 billion people - absolutely blows out of the water any economic or commercial sense and makes his public rebuke seem quite necessary.

It's as if Xi were warning provincial leaders and their favored SOEs: "Yes, we need to give you all this cheap money now to prop up growth, but when the going gets tough again - and before long it will - don't expect the same implicit guarantees of backstops against failure."

Ideally, local governments should already know that "this time is different": they shouldn't need additional reminders that their credit-fueled expansion is merely meant to buy time to transfer wealth and income from the bloated state sector to the household sector.

In reality, of course, for most of them the stimulus has been just the vindication they were looking for that Beijing, yet again, couldn't possibly put them out to dry: instead of crafting better policies to clear through their existing housing gluts and boosting social services support for non-urban residents (thereby urbanizing them), they've instinctively poured hoards of cash into their same old crony sweetheart companies.

But this time truly is different: in a decelerating growth environment, poor investments now take far less time to go sour, and the seize-up of monetary velocity which has already all but stalled private investment is increasingly putting pressure on public investment, as well. Before long, those zombie SOEs which have yet again resisted downsizing will be deeper in the red than they've ever been, and at that point they'll be at the mercy of a stronger central party leadership under Xi Jinping's personal direction.

Since the annual "Two Sessions" back in March, provincial and local party bosses have obviously sought Li Keqiang's political cover as a shield against more aggressive streamlining of their economic activities by Xi, especially as Li could plausibly plead for easing on their behalf as necessary for economic and financial stability. But when push eventually comes to shove, that protection won't be enough against the hammer of austerity from the party headquarters of Zhongnanhai.

That's because party chief Xi has complete and ever-tightening control of the military, the security apparatus, and perhaps most significantly, the press. He hasn't forgotten the embarrassing flab of dissent which leaked out around the Two Sessions, and can only be expected to be even less tolerant of any disobedience within the party ranks - likely silencing any of it before it can possibly be expressed to the public - next time it surfaces.

China's unresolved crisis, with its looming outburst of real financial and economic trouble somewhere down the road, is better understood by Xi and his small central party leadership team than anyone else in the country (or the world) - possibly by far.

Where Western and liberal Chinese observers and analysts see contradiction and confusion in his stated intent to rein in credit growth on the one hand, yet strengthen the power and role of SOEs on the other, Xi himself is perfectly clear as to the paradox of the present juncture of China's reform and opening: the "market" is demanding consolidation of many disparate state firms scattered across myriad provinces and regions into just a handful of larger but leaner outfits which would be more responsive to central party and government edicts.

Xi has always known that further pro-market reforms are impossible on a nationwide basis except for a reconsolidation and recentralization of party and state authority back into Beijing's hands; three years of wrangling with the party's vested provincial and local interests have now only emphatically underscored what he always knew to be the case.

He can't stop most of the country - most of the party - from hitting the brick wall of yet another sputtered credit boom. If he had his way, he wouldn't have had to concentrate ever more absolute authority into his own hands. But as he sees it, the die is now cast: the raft is now barreling down to a treacherous turn of the rapids with no chance left of course correction, leaving preparation for shock the only alternative. He's tightening his grip because it's time to brace for impact: few cautions can be too excessive.

China has altered not just the global economy, but economics itself

China's transition is working. Such confidence that Beijing has again averted a hard landing is increasingly easy to declare with gutso: the confirmation will be in the remainder of 2016, as the private sector follows the public sector's lead in ramping up investment.

Sure, the global economy may be stagnant, but thanks largely to China, it's also become more stable than ever. Amidst all the concerns about deflation, debt, and growth collapse, a far more momentous structural shift is being missed by Western market fundamentalists: China has effectively put a cap or ceiling on prices of virtually every industrial commodity and manufactured good. This is huge: it's effectively a permanent bulwark against out-of-control inflation on a wide global scale. It's as if the problem of world hunger has been solved by vast and cheap new food production capacity.

Years and decades from now, this will likely be remembered as China's and the increasingly China-driven global economy's finest hour: for the first time in the modern epoch, the economic balance has tilted to a parity between East and West which has deeply stabilized the entire body of human commercial activity - in the process utterly confounding traditional Western notions and assumptions of standard "boom-bust" business cycles.

Before China came along and crashed worldwide prices for everything from clothing to shipping, downturns were far harder to prevent from spiraling into outright contractions. That's because Western firms simply can't operate with the same tolerance for extended losses as their Chinese counterparts. Price wars translated far more quickly - and sometimes ruthlessly - into capacity and job cuts that in turn ratchet into a wider systemic seizure of credit and liquidity for businesses and consumers.

Since the 2008-09 financial crisis, however, China has fervently captured ever greater market share across the entire gamut of sectors and industries in the global economy to such an extent that even in downturns, gluts have become a bigger problem than shortages. Conventional Western wisdom sees nothing short of calamity in this change - i.e. the self-correcting nature of "efficient" and "free" markets has been usurped by insidious scheming central bankers and other global central planners. The more sanguine view, however - available only to minds that break out of the market fundamentalist box - is that "socialism with Chinese characteristics" has cushioned the blow to investors and consumers alike that would otherwise have been more severe if it also operated according to Western principles.

In fact, given the precipitous slowdown in China's private secondary industrial sector since 2014, one can argue that its SOEs - so widely reviled for their inefficiency and credit drain - have literally held up asset values and goods prices worldwide for over two years. Only because so many of them could still churn out goods and products even as they slid further into loss territory has overall growth - both within China and internationally - not fallen off a cliff. That's because they still paid their workers' wages and pensions, without which the wider consumer economy would've taken a hit, negatively impacting the dynamic private sector, as well. In a real sense, Chinese SOEs have been a shadow force for global stability - a contribution to the global economy that probably won't be recognized in the West for years.

That's not to say SOE reform isn't badly and urgently needed: far from it. But it's to say that Keynesian pump-priming - some would argue on steroids, in China's case - has served an important purpose that's easy to overlook because it's so ideologically despised in the distorted neoliberal orthodoxy of the post-cold war era.

It means that China has altered not just the global economy, but economics itself: both Keynes and Friedman now have a permanent place in the pantheon of macroeconomic theory and practice, with neither able to exclude the other. Indeed, that's how Friedman himself always viewed Keynes, contrary to so many of his most partisan devotees: he never saw supply-side theory as supplanting the famous Oxford sage from the Depression and world war era, but mainly supplementing it.

With China now, the yin-and-yang of Keynes and Friedman seems intriguingly suggestive of a broader yin-and-yang of capitalism and socialism themselves; as with any yin-yang pair, each member's excesses and deficiencies point to the other's equities and strengths. History is the only reliable witness and proof of such primeval realities, and at this pivotal moment of global crisis, it inexorably points to the eventual realization of not a Chinese century, nor a second American century, but indeed a Chimerican century.

China looks remarkably well-governed now

The fallout from Brexit, the failed Turkish coup, the racial and anti-police violence and volatile presidential election in the US, and so on and so forth, all make China appear to be a remarkable island of relative sanity and comparatively good governance.

Long gone is the rumor-mongering about infighting within the communist party ranks that supposedly threatened Xi Jinping's grip on power which flared up in spring; in its place, Xi has had a quiet few months, while premier Li Keqiang has unspectacularly but steadily taken firmer reins of economic policy without appearing to be out of line with his boss.

The attempted coup in Turkey was doubtless concerning to Beijing: it's just the kind of usurpation of centralized authoritarian power that China and Russia automatically associate with Western or Western-sycophant meddling, so its rapid crushing by Ankara and massive wave of reprisals are as reassuring to Moscow and Beijing as it's troubling to Washington and Brussels.

The ongoing crisis also offers yet another vindication of the communist party's view that multi-party democracy simply isn't worth the trouble and risk - definitely not now and not yet. Ironically, the very suggestion that Erdogan staged the coup himself to consolidate power has done more than anything to expose his enemies both domestic and international who in fact do want him eliminated - including by violence if necessary. Indeed, it's difficult to see in the current situation how a country as complex and diverse as Turkey can be held intact except by such a sheer force of personality.

In the decadent West, however, the delicate balance between freedom and security has been taken for granted for decades, and now that it's cracking even a little, it's driving more than a few folks on both ends of the political spectrum nuts. Of course, we have a buffer of general prosperity and plenty that the non-Western world doesn't have, ensuring that our strife remains psychological except in the scattered (if even more frequent) bursts of physical unrest.

That's not to understate the genuine risk of overreach in a conservative regime or society's reactionary retrenchment: it's always contingent upon the leadership of such countries to forcefully lock down the immediate systemic threat only so such coercion can be relaxed - in careful and deliberate stages - as soon as possible.

That's what "crossing the river by feeling the stones" is all about: this brutally simple, common-sense approach that China has taken in nearly four decades of reform and opening will only continue to garner respect and practical interest as the post-post cold war world earnestly seeks a rectified path now that unbridled neoliberalism has reached its logical dead end.

China joins US in flouting international law

In the week since The Hague ruled against China in a long-awaited arbitration case on the territorial dispute with the Philippines in the South China Sea, virtually no facts have changed on the ground. As Beijing has announced another round of military exercises in the area - a day after buzzing a nuclear-capable H-6 bomber past the key islet in the case, Scarborough Shoal (itself after again turning away Filipino fishing boats from adjacent waters) - it looks like business as usual.

China-bashers the world over, but especially neocon imperialists here in the US, are likely to be beside themselves in the coming weeks and months, as the legal ruling recedes into the background and fades into virtual irrelevance. Any bilateral negotiations between Beijing and Manila concerning the actual situation within the latter's exclusive economic zone (EEZ) are likely to be conducted in strict secrecy, even as a continuous parade of PLAN and US Navy exercises and "freedom of navigation" patrols, respectively, rolls on by around the artificial Chinese islets.

In the end, probably the biggest achievement of the Philippines' arbitration case - doubtless inspired (at least in the minds of some) by a belief that Washington would come to its old ally's defense if push came to shove - will be a reaffirmation of an age-old truth: so-called "rule of law" has never not been, in reality, a naked "rule of the gun" (or "rule of the sword").

Laws and regulations are utterly meaningless without the means to enforce them: in the real world we inhabit, "moral" victory just doesn't cut it - no imperfect human individual or society can presume to enjoy any authority whatsoever to enforce the morality of another sovereign human individual or society. It would be one thing if the Philippines - not to mention the US - were perfectly content with the symbolic ruling and dispassionately refrained from expecting it to impact the situation on the ground; at least some elements of the Manila and Washington establishments, however, were most definitely hoping for a good deal more. Well, welcome to the real world.

True, China has effectively left the UN Convention on the Law of the Sea (UNCLOS) with its flagrant disregard of The Hague's ruling. But that puts it in good company with another big, heavily armed power which has never even bothered to sign it in the first place: the US!

Of course, Washington's apologists can protest all they want that the US has always abided by UNCLOS even if it hasn't signed it; just like they can continue to protest that invading Iraq, overthrowing Libya, and sponsoring a whole host of coups of non-compliant client states for more than a century were actually all in accordance with "international law."

Perhaps China's really made it to the bigs now: it can now indulge a bit in the kind of "rules don't apply to me" perks that can only be the exclusive domain of the most dominant empires - read: Uncle Sam.