China’s Deepening Capitalism: Mushrooming Self Development Facilities

Self help or self development books, seminars and conferences have been mushrooming over China. Capitalism has been gaining the upper hand.

Reports the BBC

Not long ago, capitalism was a dirty word in communist China - it was impossible to start your own business or think about getting rich.

But all that changed with a series of economic reforms launched three decades ago that unleashed a wave of entrepreneurial spirit.

Many Chinese people now spend much of their free time thinking, reading and learning about how to get ahead.

They turn to seminars, self-help books and novels in search of inspiration and to help them understand the rules of this new game.

One firm looking to help - and cash in - on this thirst for knowledge is Hengtaidatong Gold, which tries to persuade people to invest in this precious metal.

Every few weeks it organises glitzy gatherings for Beijing's well-heeled residents to teach them how to make money from this valuable commodity.

Read the rest here

The blooming force of entrepreneurship has also been evident by her growing influence or clout on the political sphere.

China Calls the Stimulus Bluff

Through their press agency, China's government called the bluff.

Rumored stimulus has not been true. Maybe not yet.

From Bloomberg, (bold highlights added)

China has no plan to introduce stimulus measures to support growth on the scale unleashed during the depths of the global credit crisis in 2008 according to the nation’s state-run Xinhua News Agency.

“The Chinese government’s intention is very clear: It will not roll out another massive stimulus plan to seek high economic growth,” Xinhua said yesterday in the seventh paragraph of an article on economic policy, without attributing the information. “Current efforts for stabilizing growth will not repeat the old way of three years ago.” In 2008, policy makers unveiled a fiscal stimulus of 4 trillion yuan ($586 billion at the time).

Any restraint on stimulus this time may reflect concern the record lending boom that helped China weather a contraction in trade in 2008-2009 raised the risk of a bad-loan crisis. While Premier Wen Jiabao’s call last week for a greater focus on growth was endorsed by the State Council, or cabinet, it left out his recommendation to expand credit.

“The State Council is introducing a measured but still significant set of stimulus measures, which should begin to affect growth in August-September,” Standard Chartered Plc economists led by Stephen Green in Hong Kong wrote in a note to clients this week. Concern that a surge in credit would lead to faster inflation and higher property prices will be reflected in “a much more controlled pace of bank lending,” they wrote.

Yesterday’s Xinhua article made no mention of central bank tools including interest rates and the reserve-requirement ratio, previously used to bolster growth. It carried the byline of two reporters and wasn’t labeled as opinion or commentary.

‘Not Sustainable’

Pumping in government money to achieve growth targets is “not sustainable” and China will instead focus on encouraging private investments in railways, infrastructure, energy, telecommunications, health care and education, the story said.

As I pointed out yesterday

Rumors are one thing. Real actions are more important.

If there any lesson to glean from this event, such represents as manifestations of financial market’s deeply seated addiction to government steroids.

Yet the above developments partly or partially validates my suspicions about China’s evolving political spectrum: note "encouraging private investments".

Here is what I wrote last Sunday,

The bottom line is that should this be the case where there will not be material interventions, then economic uncertainty will be exacerbated by political uncertainty which increases the probability of further deterioration of China’s bubble economy.

Yet while the PBoC may likely engage in policies similar to her Western central bankers peers where inflationism has signified as an enshrined creed, it is unclear up to what degree the PBoC will be willing get exposed. That’s because China has made public her plans to make her currency, the yuan, compete with the US dollar as the world’s foreign currency reserve, which is why she has been taking steps to liberalize her capital markets and China has also taken a direct bilateral financing trade route with Japan, which seems to have been designed as insurance against burgeoning currency risks and from the risks of trade dislocations from potential bank runs. It is important to point out that the US has some exposure on major European nations.

Further speculations and rumors have it that China covertly plans to even issue a Gold backed currency as part of her quest to attain a foreign currency reserve status.

In short, the path towards foreign currency reserve status means having to embrace a deeper market economy (laissez faire capitalism) from which boom bust policies runs to the contrary.

Events are turning out to be very fluid. Rumors may turn out to be false. Denials can become real events. Anything can or might happen.

Today’s big surge could be tomorrow’s slump. There has been NO clarity yet on geopolitics (China, EU or the US) and of policy directions mostly by central bankers. This is a period characterized by high uncertainty.

Be very careful out there.

Rumored Stimulus for China Boosts Asian Markets

Rumors about another massive ‘stimulus’ from China has reportedly bolstered the Asian markets.

Reports the Marketwatch.com,

China is set to ramp up stimulus spending to help stabilize the economy, with a program of interest-rate cuts and infrastructure-related spending being planned, according to analysts, who caution the program won’t be big enough to bring about a rapid turnaround in the slowing mainland economy.

In a research note Monday, Credit Suisse said the new policy emerged from a meeting by the State Council, or China’s cabinet, last week when Premier Wen Jiabao urged “greater emphasis on growth.”

“We believe that government has started a new round of fiscal stimulus,” Credit Suisse analyst Dong Tao wrote in a note to investors.

Last week, the central government unveiled a 2 trillion yuan ($316 billion) credit line to the Ministry of Railways, 170 billion yuan in subsidies to environmental projects and about 78 billion yuan in support to social-housing projects, according to Credit Suisse.

Local governments were also encouraged to submit infrastructure project proposals for approval before the end of June, with the government promising to speed up funding support, according to Credit Suisse.

“All of these moves seem to suggest that the Chinese government has become more active in dealing with growth downturn,” Tao said.

Rumors are one thing. Real actions are more important.

Considering that the euro and China’s markets have been oversold, rumors may indeed provide rationalization to an oversold bounce.

Let me repeat what I wrote last Sunday on China,

Again, developments in China will MAINLY be hinged on the response by political authorities on the unfolding economic events.

I’d prefer to see the Chinese government make good on such a rumor before making my move.

The risk is that official actions may be less than the expected stimulus which may incite another intense downdraft.

A report suggested that political consensus over more stimulus remains uncertain. According to an Op Ed at the Sydney Morning Herald

Commentary in China, though, is far from unanimous that Beijing's leadership is ready - and able - to kick the economy up a gear.

A senior Chinese economic official, indeed, has said that the country is unlikely to start another round of massive stimulus package to spur growth.

And like Pavlov’s Dogs, this should be added proof of the intense addiction to steroids by global financial markets which means sharply volatile days ahead, again in both directions.

And this also represents further evidence that China's economy, mainly dependent on Keynesian policies, has been a ballooning bubble.

Be careful out there.

More Signs of Big Trouble in Big China as Loans Sharply Contract

Oops. More signs of big trouble in China as demand for credit substantially shrink.

From Bloomberg,

China’s biggest banks may fall short of loan targets for the first time in at least seven years as an economic slowdown crimps demand for credit, three bank officials with knowledge of the matter said.

A decline in lending in April and May means it’s likely the banks’ total new loans for 2012 will be about 7 trillion yuan ($1.1 trillion), less than the government goal of 8 trillion yuan to 8.5 trillion yuan, said one of the officials, declining to be identified because the person isn’t authorized to speak publicly. Banks are relying on small- and mid-sized companies for loan growth after demand from the biggest state-owned borrowers dropped, the people said.

The drying up of loan demand attests to the severity of China’s slowdown and may add pressure on Premier Wen Jiabao to cut interest rates and expand stimulus measures. The economy may grow in 2012 at its slowest pace in 13 years, a Bloomberg News survey showed last week, as Europe’s debt crisis curbs exports, manufacturing shrinks and demand for new homes wanes.

Press officials at the People’s Bank of China and the three largest lenders -- Industrial & Commercial Bank of China Ltd., China Construction Bank Corp. (939) and Bank of China Ltd. (3988) -- declined to comment. Press officials at Agricultural Bank of China Ltd. (601288) weren’t immediately available.

New bank loans last month dropped 33 percent from March to 681.8 billion yuan, missing the 780 billion yuan median forecast of economists surveyed by Bloomberg News. A third of April’s new credit was also so-called discounted bills, or short-term loans often used by banks to pad the total figure.

Worsening Situation

This month may be worse. The four biggest banks -- which account for about 40 percent of lending -- had advanced only 34 billion yuan as of May 20, Liu Yuhui, a director at the government-backed Chinese Academy of Social Sciences, said in an interview this week, without saying where he got the data. The lenders may rush to boost credit in the last few days, mainly through short-term notes, he said.

China hasn’t officially announced the quotas set for each bank or the total loan target for 2012.

In the past three episodes where China’s credit growth materially shrank during the last 3 years, the Shanghai index, on a time lag, experienced severe downside contractions.

While history may not repeat, however if the marked sluggishness in China’s credit markets are indeed manifestations of a deepening slowdown (or worst a bubble bust) then we can’t discount the same pattern from happening again—liquidations from bad loans, which may spillover to the equity markets, will mean higher demand for cash.

Again, reports like these, along with China’s considerable reduced demand for commodities and a sharp slump in the recent factory activities, have prompted many to anchor their hopes on a on a massive scale of stimulus from the Chinese government.

Again this will be an issue of available private sector real savings to draw from, the scale and timing of any forthcoming stimulus and of the markets response to these.

In reality, what ‘stimulus’ can do will be to temporarily mask the underlying imbalances and to defer on the day of reckoning. However short term benefits will always have long term costs: accrued imbalances worsen overtime. This should translate to a bigger intensity of a crisis when it inevitably arrives. [I am not saying this is happening today, as this has yet to be established, and vastly depends on the abovementioned conditions]

We must remember that inflation is a policy that will not last. Either the Chinese government accepts this fact or if not eventually suffer from a monetary crisis. Yet considering that China has been building up massive gold reserves and has taken steps to make her currency, the yuan, a foreign reserve currency, the latter seems less likely the option.

Also China’s slowing economy comes amidst the seething Euro crisis and the seemingly diffident (for now) US Federal Reserve, whose Operation Twist comes to an end in June which means a lot of uncertainty on the global financial markets which has been highly dependent on central banking steroids.

Like it or not, fact is, we are navigating in treacherous waters

Sharp Slowdown in China’s Factory Activity Amplifies the China Uncertainty Factor

A sharp decline in China’s factory indicator last month amplifies the uncertainty over China’s economic (as well as political) conditions. The larger than expected slowdown has coincided with the recent slump of China’s demand for commodities and thus signals an adverse development.

The Reuters reports,

China's factories took a hit in May as export orders fell sharply, a private sector survey showed on Thursday, suggesting surprise weakness in April's hard economic data persists even as policymakers seek to shore up growth.

The HSBC Flash Purchasing Managers Index, the earliest indicator of China's industrial activity, retreated to 48.7 in May from a final reading of 49.3 in April. It marked the seventh consecutive month that the HSBC PMI has been below 50, indicating contraction.

A sub-index measuring output rose to a seven-month high, following a rebound in new orders in April. But other figures in May's figures were less rosy.

The new orders sub-index fell in May, reflecting an even sharper fall in the new export orders sub-index to 47.8 from April's final figure of 50.2 - pushing it back to within a whisker of March's 47.7 - data from Markit Economics Research, which publishes the index, showed.

Unexpectedly weak economic data for April released earlier this month was followed quickly by the central bank's third cut since November in the amount of cash that banks must keep in reserve, to allow more credit to flow into the economy.

This week Beijing has signalled its biggest push since joining the World Trade Organisation to boost private investment into areas previously reserved for the state sector, like rail, hospitals and energy transmission.

It also intends to fast track infrastructure investment to combat the slowdown, state media reported.

So the China’s markets await actions from the Chinese government: one, through liberalization of some formerly restricted sectors (which should be something to cheer about) and from more stimulus (which is likely to offset any gains from liberalization).

The liberalization aspect of reforms accentuates the growing influence of entrepreneurs on China’s politics as earlier discussed.

Yet the slowdown of China’s factory index highlights risks of what the mainstream has been ignoring: an imploding bubble or a financial crisis. Professor Patrick Chovanec of Tsinghua University takes into perspective such risks (hat tip Bob Wenzel) [bold emphasis mine]

In early April, Caixin magazine ran an article titled “Fool’s Gold Behind Beijing Loan Guarantees”, which documented the silent implosion of Zhongdan Investment Credit Guarantee Co. Ltd., based in China’s capital. “What’s a credit guarantee company?” you might ask — and ask you should, because these companies and the risks they potentially pose are one of the least understood aspects of China’s “shadow banking” system. If the risky trust products and wealth funds that Caixin documented last July are China’s equivalent to CDOs, then credit guarantee companies are China’s version of AIG.

As I understand it, credit guarantee companies were originally created to help Small and Medium Enterprises (SMEs) get access to bank loans. State-run banks are often reluctant to lend to private companies that do not have the hard assets (such as land) or implicit government backing that State-Owned Enterprises (SOEs) enjoy. Local governments encouraged the formation of a new kind of financial entity, which would charge prospective borrowers a fee and, in exchange, serve as a guarantor to the bank, pledging to pay for any losses in the event of a default. Having transferred the risk onto someone else’s shoulders, the bank could rest easy and issue the loan (which it otherwise would have been reluctant to make). In effect, the “credit guarantee” company had sold insurance — otherwise known as a credit default swap (CDS) — to the bank for a risky loan, with the borrower forking over the premium.

Now putting aside what happened at Zhongdan for a moment, let’s just consider what this means. Like any insurance scheme, this arrangement only “works” if the risks are not correlated. If you insure 100 people in 100 different towns against a tornado striking, you collect premiums and then, when a tornado strikes one of those towns, you make the payout to one claimant and the premiums from the rest cover it. If you insure 100 people in the same town against a tornado, you collect premiums for a while at no cost — it looks like a fantastic business. But if a tornado finally does strike that one town, you have to pay everybody at once and you’re wiped out. That’s exactly what happened to AIG when it sold credit default swaps on mortgage-backed CDOs. As long as the housing market didn’t collapse, all they did was collect premiums. When it did collapse, they went under. Or rather, they had to be bailed out so that all the banks and other customers who had bought insurance from them — who thought they were insured — wouldn’t go bust when AIG couldn’t pay up.

The concern in China is that — like that tornado — a drop in the local property market, or a decline in exports, could hit all borrowers at once, overwhelming the local credit guarantee company and leaving the banks high and dry. The risk is exacerbated by the fact that many credit guarantee companies were capitalized with loans from the same banks whose other loans they are guaranteeing. In effect, banks are insuring themselves, or each other, and would still end up holding the bag on loan losses that are supposedly insured. (It would be interesting to know how such “guaranteed” loans are treated when regulators perform their much-vaunted stress tests on Chinese banks. I suspect these loans are considered loss-proof, because they are “insured.”)

In laying out plans for action, the Chinese government has only been engaging in “signaling channel'”, viz., talk up the markets, to boost the market’s confidence.

But with the scale of the slowdown becoming more apparent, many are expecting huge moves from the Chinese government. Yet, from the political perspective, this would seem unclear.

This means that until concrete actions will be taken, the China uncertainty factor seems like the proverbial sword of Damocles hanging over the head of the global financial markets. Caveat emptor.

China’s Road to Capitalism Lacks the Knowledge Revolution

A narrative of China’s path to progress according to Nobel laureate Professor Ronald Coase and Professor Ning Wang at the Wall Street Journal,

China's road to capitalism was forged by two movements. One was orchestrated by Beijing; its self-proclaimed goal being to turn China into a "modern, powerful socialist country." The other, more important, one was the gross product of what we like to call "marginal revolutions." It involved a concatenation of grass-roots movements and local initiatives.

While the state-led reform focused on enhancing the incentives of state-owned enterprises, the marginal revolutions brought private entrepreneurship and market forces back to China. Private farming, for example, was secretly engaged in by starving peasants when it was still banned by Beijing. Rural industrialization was spearheaded by township and village enterprises that operated outside state control. Private sectors emerged in cities when self-employment was allowed to cope with rising unemployment. Foreign direct investment and labor markets were first confined to Special Economic Zones.

Well, China’s road to capitalism has been half baked as it requires a very important factor that has been amiss: allowing ideas to have sex as Matt Ridley would call it.

Professors Coase and Wang adds,

In the years to come, China will continue to forge its own path, but it needs to address its lack of a marketplace for ideas if it hopes to continue to prosper. An unrestricted flow of ideas is a precondition for the growth of knowledge, the most critical factor in any innovative and sustainable economy. "Made in China" is now found everywhere in the world. But few Western consumers remember any Chinese brand names. The British Industrial Revolution two centuries ago introduced many new products and created new industries. China's industrial revolution is far less innovative.

The active exchange of thoughts and information also offers an indispensable foundation for social harmony. It is not a panacea; nothing can free us once and for all from ignorance and falsehood. But the free flow of ideas engenders repeated criticism and continuous improvement. It also cultivates respect and tolerance, which are effective antidotes to the bigotry and false doctrines that can threaten the foundation of any society.

When China started reforming itself more than three decades ago, Deng rightly stressed the "emancipation of the mind" as a prerequisite. But that has yet to happen. It's time for China to embrace not just the market, but the marketplace of ideas. This will help not just China reach its full potential, but the world as well.

China’s fundamental problems emanates from the still top-down command and control political system which has been running a head on collision course with the snowballing forces of ‘marginal revolutions’ or grassroots economic movement via entrepreneurs.

A knowledge revolution would be incompatible with the incumbent centralized structure of governance, which has underpinned the continued restrictive policies on “free flow of ideas”.

A communist society depends on the conformity of behavior, ideas and actions with those of the political authorities, mainly enforced through coercion and indoctrination, whereas a knowledge revolution will democratize and produce diversity of ideas, opinions and actions channeled through a market economy.

And a society founded on a knowledge revolution would, thus, undermine the privileges of those currently in power.

Yet having to unleash the forces of capitalism would mean substantial changes to China’s political system.

Yet the jury is out on how China’s politicians will deal with such monumental adjustment process, which I expect to be turbulent, along with the response of the average Chinese. And such transition will be accompanied by a national financial and economic crisis as ramification to the recent marco (top-down) economic policies, the impact of which would also diffuse into politics.

Current events have already been manifesting signs of such tempestuous adjustment process.

Interesting times indeed.

China Deepens Liberalization of Capital Markets

I have pointed out that the ongoing tensions in the political spectrum in China may have been ideologically based.

Entrepreneurs in China may have grown enough political clout enough to challenge to the degenerative command and control political structure of the old China order.

And it seems as if the forces of decentralization seem to be getting the upper hand, as China undertakes further liberalization of their capital markets.

From the Bloomberg,

China accelerated the opening of its capital markets by more than doubling the amount foreigners can invest in stocks, bonds and bank deposits as the government shifts its growth model to domestic consumption from exports.

The China Securities Regulatory Commission increased the quotas for qualified foreign institutional investors to $80 billion from $30 billion, according to a statement on its website yesterday. Offshore investors will also be allowed to pump an extra 50 billion yuan ($7.95 billion) of local currency into the country, up from 20 billion yuan

China, the world’s second-biggest economy, has pledged this year to free up control of the yuan and liberalize interest rates as the government deepens reforms to revive growth and offset slowing exports and a cooling housing market. China needs to rely more on markets and the private sector as its export- oriented model isn’t sustainable, World Bank President Robert Zoellick said in February.

Here’s more

The regulator had granted a total of $24.6 billion in quotas to 129 overseas companies since the program first started in 2003 through the end of March. About 75 percent of assets were invested in Chinese stocks, with the rest in bonds and deposits, according to the statement.

The CSRC accelerated the program last month, granting a record $2.1 billion of quotas to 15 companies. It was more than the $1.9 billion in 2011 as a whole.

“The QFII program enhances our experience of monitoring and regulating cross-board investment and capital flows,” the CSRC said in the statement. “It is a positive experiment to further open up the market and achieve the yuan convertibility under the capital account.”

Premier Wen Jiabao is seeking to attract international investment as economic growth cools, prompting the benchmark Shanghai Composite Index to slump 24 percent in the past year. The country posted its largest trade deficit since at least 1989 in February as Europe’s sovereign-debt turmoil damped exports.

China needs to break a banking “monopoly” of a few big lenders that makes easy profits, Wen told private company executives in Fujian province yesterday, as cited by China National Radio.

Breaking up a privileged banking monopoly essentially transfers resources to the productive sector which should serve China well, as well as, serves as welcome and enriching news for Asia and the rest of the world.

And by liberalization of their capital markets, China will become more integrated with the world, and thus diffusing risks of brinkmanship geopolitics, or the risks of military confrontations.

Again such development adds evidence to my theory that the Spratlys tensions may have just been about political leverage or about helping promote indirectly the US arms sales.

Nevertheless, China has yet to face the harmful unintended consequences of her past and present Keynesian bubble policies.

However the long term is key, or far more important. The kind of reforms matters most.

And reforms that deepen economic freedom or laissez faire capitalism (away from state capitalism) in China and the attendant development of capital markets could likely mean that the rest of Asia may follow suit. The implication is that regional and domestic capital will less likely be recycled to the West, and instead would find more productive use at home or a ‘home bias’ for Asian investors.

Moreover, the crumbling welfare states of the west would mean more capital flows into the Asia as savings seek refuge from sustained policies of inflationism.

All these should accentuate my wealth convergence theory.

Of course, China’s strategy to liberalize her capital markets may also represent a move to challenge the US dollar standard.

Recently BRICs officials slammed US and Euro’s monetary “tsunami” policies and in the process has been contemplating to put up their version of a World Bank—joint development bank.

While these gripes have been valid, the latter’s action has little substance. What the other ex-China BRICs should to do is to mimic China’s path to rapidly liberalize their economy and their capital markets.

That’s because societal integration functions as a natural force when commercial activities or economic freedom intensifies.

As the great Ludwig von Mises wrote about the social effects of the division of labor,

Social cooperation means the division of labor.

The various members, the various individuals, in a society do not live their own lives without any reference or connection with other individuals. Thanks to the division of labor, we are connected with others by working for them and by receiving and consuming what others have produced for us. As a result, we have an exchange economy which consists in the cooperation of many individuals. Everybody produces, not only for himself alone, but for other people in the expectation that these other people will produce for him. This system requires acts of exchange.

The peaceful cooperation, the peaceful achievements of men, are effected on the market. Cooperation necessarily means that people are exchanging services and goods, the products of services. These exchanges bring about the market. The market is precisely the freedom of people to produce, to consume, to determine what has to be produced, in whatever quantity, in whatever quality, and to whomever these products are to go. Such a free system without a market is impossible; such a free system is the market.

China’s Coup Rumors: Signs of the Twilight of Centralized Government?

China’s political system has shown increasing signs of fracturing.

Writes the Wall Street Journal Editorial,

Rumors of a coup in Beijing ricocheted around the Chinese Internet on Tuesday and even caused the cost of credit default swaps on Chinese debt to rise slightly. That's remarkable considering there wasn't one iota of evidence that shots were fired at the Diaoyutai State Guest House or tanks were taking to the streets, as viral microblog posts had it.

But then consider that a month ago, Wang Lijun, an official of vice ministerial rank, sought asylum in the U.S. Consulate in Chengdu. Last week, his boss Bo Xilai, the popular party secretary of Chongqing, was dismissed from his post six months before a national leadership transition. In these strange days, it's easy to see why Chinese citizens may believe reports of a coup.

China is supposed to have "institutionalized" its leadership transitions so that such an upheaval could never happen. The outgoing Politburo Standing Committee hands over power to the anointed party general secretary and premier and picks the rest of the new Politburo. The Standing Committee also selects the two slightly younger men who will take over the top jobs 10 years down the road.

I have previously noted that like Europe, China’s top down politics has had a fragile and unsustainable relationship with snowballing forces of decentralization inspired by the growing political power of entrepreneurs, which eventually will lead to a head-on collision that would translate to a political upheaval.

We are seeing more signs of these developments.

Again from the same article, (bold emphasis mine)

The party has been able to keep internal strife under control by avoiding ideological struggle over the last 20 years. The factions have competed for important posts and the spoils of power, but they ruled by consensus. The public was simply told to believe in the myth of a monolithic party and ignore the men squabbling behind the curtain.

This technocratic pragmatism may now be breaking down. For instance, Bo Xilai appealed to leftists' disgust with bourgeois individualism and public unhappiness with income inequality, a tactic that alarmed some leaders. Since his dismissal, leftist websites and commentators have also been silenced.

But there are plenty of other voices on the "right" advocating liberal political reform. Ten years ago, the prospect of achieving middle-class incomes made most intellectuals unwilling to rock the boat. Now they feel secure enough to demand more rights. The party sees this as evidence of Western infiltration, and it is tightening control over the media and launching new campaigns to promote the spirit of self-sacrifice.

Entrepreneurs are indeed becoming a political force.

Either China's politics harmonize with the dynamics of the economy through decentralization, or China’s politics would regress to the Mao Zedong model which would close their doors to the world. My bet is in the former.

Yet any crisis or recession will likely accelerate this turbulent transitional process.

And as I earlier posted

Entrepreneurship will be the hallmark of the information age.

Interesting times indeed

Widening Political Cracks in China’s Political Economy

More signs of the simmering tension between China’s political top-bottom leadership and bottom up forces (average Chinese)

In what appears to signal China’s prospective political actions, China has recently awarded the new Confucius Peace Prize to Russia’s autocratic leader Vladmir Putin.

Why Putin? The Wall Street Journal Editorial explains

A 16-member committee of Chinese scholars announced on Sunday that this year's winner is Vladimir Putin. To most of the world, the Russian prime minister may inspire many adjectives, but man of peace isn't one of them. The image he likes to project is that of the tough-guy Russian nationalist.

Which is precisely why the Chinese say they chose him. The Confucius committee cited in particular "his iron hand and toughness" and "large-scale military action" during the 1999 war in Chechnya. The committee cited as well "his teenage dream," subsequently realized, to join the Soviet secret police and his opposition this year to NATO's bombing campaign in Libya. Apparently Moammar Gadhafi, since deposed and now dead, wasn't eligible.

China created the Confucius Prize last year, in its fury that the Nobel Peace Prize was awarded to dissident Liu Xiaobo. It's a kind of anti-Nobel, and in that sense it is meant to flatter both Mr. Putin and China's government. China's Communist Party sees a kindred soul in a man who has stayed in power in Moscow for 12 years and has designs on at least 12 more.

China's other great fear is that ethnic nationalists in Tibet or Xinjiang, like democrats in Taiwan, might succeed in governing themselves. Thus does Mr. Putin, who razed the small province of Chechnya and who invaded Georgia in 2008 to teach an imperial lesson, became a hero to Chinese rulers.

To revere “iron hand and toughness” in a time where many Chinese reportedly have been deeply dissatisfied with their government seems to serve as admonition to political malcontents.

On the other hand, symbolisms like the above may also signify symptoms of veiled apprehensions by China’s political leaders.

Here’s why. From another Wall Street Journal Editorial,

Chinese lost faith in local-level officials a long time ago, but until recently they continued to believe in their national leaders. They also largely accepted the post-1989 social contract in which the Party provided rising living standards in return for not questioning its monopoly on power.

This is changing as a result of two trends. The first is a growing awareness among the bottom strata of society that it is policy made at higher levels, not merely the incompetence or corruption of local officials, that is responsible for their woes. The second is the interest of the wealthy and the intellectuals in reform after two decades of being bought off by the Communist Party.

The first trend is typified by the willingness of about 100 people across the country to risk their freedom and put themselves forward as independent candidates in elections for local People's Congresses. Some are professionals, but most seem to be ordinary workers. These government bodies have traditionally rubber-stamped Party decisions, but their members theoretically have the power to supervise officials.

Most Chinese won't to be so bold unless they are mobilized from above, which is why new activism among the educated minority is so significant. Beijing intellectuals are making pilgrimages to the remote Shandong town of Linyi where blind legal activist Chen Guangcheng is under house arrest. Since the tax authorities last week presented the dissident artist Ai Weiwei with a $2.4 million bill for fines and back taxes, a movement has sprung up to donate money, both electronically and in paper airplanes delivered to his house, to keep him out of prison. Anger over the government's concealment of air pollution levels, even as the leaders in Beijing install air purifiers to protect their own health, has spawned another ad hoc campaign.

What seems to be turning the tide toward political activism is a realization that unless one is a member of the Party elite, upward mobility is limited and hard-won advancement can be taken away without due process. Since universities expanded enrollments in the early 2000s, many families have borrowed heavily to pay tuition for their children. But graduates without political connections have trouble getting on the career ladder, ending up joining the "ant tribe," slang for educated young people living in slums. Meanwhile, the children of elites can street-race their Ferraris without fear of arrest.

Faith in the competence of the central government is also declining because of a lack of accountability. After the July crash of two trains in Wenzhou, the media exposed problems in the trophy high-speed rail program. Yet the Railways Ministry continues to receive massive amounts of new capital to finance rail lines that probably can't recoup the investment. New parents are obsessed with obtaining imported baby formula because they don't trust domestic brands.

State-owned industries increasingly prosper at the expense of private companies and households. In order to tackle high inflation the central bank tightened credit, but state companies continue to get bank loans while entrepreneurs are going bankrupt. Property developers are forced to sell inventory to stay afloat, so the price of real estate, one of the main stores of savings for the rich, is falling nationally, destroying wealth.

As I recently wrote,

China’s top-down political system and her attempt to bottom-up the economic system looks rife for a head-on collision course.

And it’s just a matter of time.

And that’s why the Chinese government will keep on inflating their economy to delay an inevitable economic bust that could spark a widespread revolt that risks toppling her government, which Chinese authorities seem to fear.

Nonetheless China’s political system would either have to reform to dovetail with the current economic conditions or revert back to an “iron-fisted” led closed economy which implies economic atavism.

No wonder many wealthy Chinese seem to be emigrating.

Are Emigrating Wealthy Chinese Afraid of a Coming Political Tempest?

Recently I blogged about an increasing number of Chinese elites who are emigrating or considering to emigrate, which contrary to conventional thinking, does not augur well or reflect sanguine signs of a “China Century”

I even alluded to snowballing risks of a political crisis

Perhaps many of these Chinese millionaires may be sensing trouble ahead (see bold highlights above), not only from a bubble bust, but also from the growing fragile state of China’s unsustainable capitalist-communist political economy.

Well, I guess my hunches seem to be getting some confirmation.

This from Financial Times/CNBC

In private conversations, many of the people who supposedly make up the ruling elite of China express serious misgivings about the direction and future stability of the country, while admitting that they feel largely powerless to affect meaningful change.

“There is a sense that we are approaching an inevitable breaking point, when the pressures in society will boil over and consume the rulers,” says one Chinese banker with close ties to a number of powerful political families.

“Almost all of the elements are in place for an uprising like we saw in 1989 – corruption is worse today than it was then, people feel they can’t get ahead without political connections, the wealth gap is much bigger and growing and there has been virtually no political reform at all. The only missing ingredient now is a domestic economic crisis.”

And many wealthy Chinese seem to be flocking to the US, by investing in “US citizenship”

From the Wall Street Journal Blog

In 2011, 2,969 Chinese citizens applied for the program and 934 were approved, according to the Immigration Service. (Approval doesn’t mean they get citizenship, it just means they can start the program). Their numbers represented more than three quarters of the total number of applicants and approvals.

It’s also a huge increase from previous years. In 2007, only 270 Chinese citizens applied and only 161 were approved, accounting for only about a third of the totals.

Why the huge increase?

The obvious reason is that China has a lot more millionaires and billionaires.

But the other reason is that these newly rich want out – or at least an escape hatch and presence in another country in case they have to flee.

So speaking of voting with their feet, many wealthy Chinese seem to view the US as having a relatively better potential compared to their homeland. They could be right.

But they could also be wrong. Maybe these Chinese elites don’t realize that they risk jumping from the proverbial frying pan to the fire.

Wealthy Chinese Consider Emigration

Many say that the 21^st Century belongs to China.

While I certainly hope that China will, I am not entirely convinced, especially not if the Chinese themselves seem distrustful of their nation’s future.

This bleak news from the Wall Street Journal, (bold highlights mine)

More than half of China's millionaires are either considering emigrating or have already taken steps to do so, according to a survey that builds on similar findings earlier this year, highlighting worries among the business elite about their quality of life and financial prospects, despite the country's fast-paced growth.

The U.S. is the most popular emigration destination, according to the survey of 980 Chinese people with assets of more than 10 million yuan ($1.6 million) published on Saturday by Bank of China and wealth researcher Hurun Report.

While growth has slowed, China's economic performance is still the envy of the Western world: It registered annual gross domestic product growth of 9.1% in the third quarter, and the International Monetary Fund has forecast growth of 9.5% for all of 2011.

Concerns are mounting, however, that China's growth could be derailed by a raft of problems, including high inflation, a bubbly real-estate sector and a sharp slowdown in external demand.

Many Chinese who have profited most from the country's growth also express increasing concerns in private about social issues such as China's one-child policy, food safety, pollution, corruption, poor schooling, and a weak legal system.

Rupert Hoogewerf, the founder and publisher of Hurun Report, said the most common reason cited by respondents who were emigrating was their children's education, followed by a desire for better medical treatment, and the fear of pollution in China.

"There's also an element of insurance being taken out here," he said, citing concerns about the economic and political environment.

He cautioned, though, that it was unclear if the survey results signaled capital flight as many high-net-worth individuals who were emigrating also said they were keeping much of their money invested in China.

China maintains capital controls that make it hard for rich Chinese to move their money out of the country, but there are substantial loopholes in the system.

Some economists say they have detected signs of large capital outflows in recent months, likely driven by a decline in global risk appetite and expectations of slower yuan appreciation.

A research report from Bank of America Merrill Lynch's strategy team in Hong Kong last month cited "hot-money outflows" as one of four systemic risks that could lead to a hard landing for China's economy. It said that a sign of such outflows were record gambling revenue in the gambling enclave of Macau, a former Portuguese colony near Hong Kong, where many mainland Chinese go to gamble.

In another indication of the jittery mood among China's rich, several Western embassies have also noted a marked increase this year in the number of applications for investment visas, a category that allows people to immigrate if they invest a certain amount of money, according to diplomats.

There is evidence, too, of an uptick in the number of Chinese people buying high-end properties in major Western cities, especially London, Sydney and New York, according to property analysts.

The recent economic success experienced by China has mainly been due to her embrace of globalization.

However, deepening tensions brought upon by rapidly expanding bottom-up economic forces has apparently come into conflict with the rigid political priorities of the China’s government aimed at the preservation of the incumbent structure.

And because of the attendant fear of social disorder arising from an economic bust, which may upset the current political balance, China’s political authorities have careened towards adapting short sighted Keynesian policies that has resulted to an inflating bubble economy that risks a massive bust, possibly in the near future.

Perhaps many of these Chinese millionaires may be sensing trouble ahead (see bold highlights above), not only from a bubble bust, but also from the growing fragile state of China’s unsustainable capitalist-communist political economy.

Yet, a substantial exodus from many of China’s productive sectors will likely put further strain on such tenuous relationship.

This is not to say that a China Century may not be ahead, instead this is to say that China must ultimately depend on market forces to determine the economic direction than rely on temporary nostrums from political diktat that only hastens erosion of the current political economic framework.

Eventually China’s political leadership will have to decide either to cope up with the swift and material changes in her economy or to revert to the old China model of a closed society. The success or failure of the goal of a China Century, thus, depends on the political choices taken.