Is China Working At All?

Let's Talk China For A (Minsky) Moment

For over a decade now, there's been this talk about China being too indebted, and how its economy was built around real estate speculation, and how the property bubble was going to burst, and once that happened the entire Chinese economy was going to come down like a house of cards. For over ten years, I've been writing about how the wealth disparity, the education disparity, the income disparity, opaque and misleading government datas on its economy, and so on would eventually bring about a crisis. If the solution was evermore debt, there had to be a moment when China, with all its misapplied industrial might and ghost cities and multi-generational mortgages for unbuilt housing, and all the excess of their developers, would have to have its Minsky moment. 

I blogged about it a lot. And then some. In 2016 the share market bubble in China burst. Somehow the CCP government managed to stave off the inevitable once again and quarantined the fallout from bursting the property bubble. Nobody talks about it, but that's what they did. Otherwise world markets would have felt it. It worked so well and smoothly it made us all look like idiots for calling the China Bubble as having burst. And for over ten years, that Minsky moment that collapses debt-fuelled bubbles never seemed to arrive. Until earlier this year when over 300 regional banks faced bank runs. 

Now that it has, we've all got to be wondering the same thing: will Xi Jinping reverse course and let the free money flow? Because that's what they had done for most of the last decade; and after all, that's what they always do. It is possible they won't do so, and they let the whole shebang go? But then the social turmoil that would follow would become revolutionary. So if they want to stave off a revolution, they need to going back to delivering economic growth for everybody. 

Will they or won't they? Does anybody care? The weird thing is they look to be in policy paralysis when it comes to the economy. 

Not Your Daddy's China Now

The world needs a massive readjustment to China. Some parts of the world are re-orienting their stance faster than others. Certainly any time that Paul Keating pops his head up to tell us Asia is our future and China is our friend, he looks well and truly out of date. He was right between 1978 and 2012. Even with the Tiananmen Massacre of 1989, we all collectively held our noses at the the Chinese Communist Party's predilection for violent control and did business with the Chinese because it was so clearly the greater good (if by 'greater good' you mean globalised greater profits). Somehow China went from a nation where everybody was wearing heir strange national uniforms to a country where designer goods and luxury items are consumed by a fully modernised populace. We languidly thought if everybody in China became consumers, democracy would follow. I don't know why we chose to tell ourselves that, but that's exactly what we did and we couldn't have been more wrong. 

All the same, China could be counted on to be a good participant in the global trade stakes, and it behaved like an economy-first developing nation. You could charge China as having been an economic animal under  Jiang Zemin and Hu Jintao, forever seeking export markets and flooding the world with cheap goods. Across that time they exported so much deflation, it allowed Central Banks around the world to run low interest rate regimes. China plugged itself into global markets for the first time in history - I don't say this lightly - and reaped the tremendous benefits of globalisation like no other nation. 

And having succeeded in doing so, Xi's China has decided it wants to be a political animal instead. In the last decade under Xi Jinping, Chinese labour has gone up. It has started to prosecute territorial claims aggressively. It has devised a strange policy of 'wolf warrior diplomacy" where their diplomats say undiplomatic things. It has left a lot of people wondering if they are even friendly. The most you could say about Xi's China is perhaps John Lennon's refrain about revolutions, "but when you go carrying pictures of Chairman Mao, you ain't gonna make it with anyone anyhow". Xi Jinping's China is a very different animal to the China that existed before his leadership. 

Back To The Future?

The world is taking stock right now in the wake of Xi Jinping being made the lifetime dictator of China. Arguably, this was not supposed to happen. The rising living standards of China were supposed to bring about a gradual change where China would transition from a military Junta of communists towards a democracy. Of course this kind of transition happened in Taiwan, but Taiwan is not shackled with the curse of considering itself a great power. Just as Russia failed in its transition from the Politburo to democracy and ended up with Vladimir Putin, China too has utterly failed to make a transition out of its Politburo system. Laughably the CCP even argued the Politburo was democratic and therefor China had its own version of democracy - which just goes to show how little they understand of democracy. 

The strangeness of our times is such that we now have a leader of Russia with a view to turn back borders to 1955, paired with a Chinese leader who wants to go back to the leadership style of 1955. With both countries using their resources as bargaining chips, it's strange to watch these leaders try to bargain their way back to an imaginary glory in the past. The uneasy alliance between Russia and China certainly looks like a re-run of the uneasy alliance between Stalin and Mao. I imagine there are a lot of people waking up to a world with a cold war and belligerent Maoists, and feeling a bit of deja vu.  

The future of China led by Xi is distinctly unappealing. You wouldn't want to invest more capital there, and you wouldn't want to hire the labour there with its rapidly rising cost. The sovereign risk is no joke. The demographics are aligned in the direction of an ageing population with shrinking economy so it's not like there's much scope for the domestic demand to take over. The country is sliding towards an awkward 20th Century style of nationalism that may well get them into armed conflict with its neighbours and it's still a country with over a billion people with 37% food security. Now is not the time to ignore economics for their leadership, but here we are witnessing how they ditch economics in favour of nationalist ideology. 

It does make you wonder.