S.M.A. said:
The Chinese model is nearing its end
The country is now going through a crisis of transition, unparalleled since Deng Xiaoping
George Magnus
August 21, 2015
The writer is an associate at Oxford university’s China Centre and a senior adviser to UBS.
August in China has been anything but the quiet month of myth. Developments in the equity and foreign exchange markets and even the appalling industrial accident in Tianjin might seem mere bad luck when considered individually. Together, however, they symbolise a slow-motion denouement of China’s economic and political model. The country is now going through a crisis of transition, unparalleled since Deng Xiaoping set out to put clear water between China’s future and the Mao era.
The signs are that it is not going so well. Rebooting the authority and primacy of the Communist party, the pursuit of often contentious reforms, financial liberalisation and rebalancing the economy while trying to sustain an unrealistic rate of growth are complex and mutually incompatible goals.
Deng’s task in a pre-industrial society without a middle class and social media was, in many ways, easier. Determined to avoid the concentration of power in one individual, he empowered government bodies and ministers, especially the State Council and the prime minister, and encouraged openness and a consensus-driven political model. This worked well enough until the 21st century, but gradually tended towards atrophy. The party succumbed to corruption and paid scant attention to citizens’ concerns about social, environmental and product safety. The economy built up high levels of debt, overcapacity and an addiction to misallocated and credit-fuelled investment.
To address these serious problems, President Xi Jinping has turned the clock back. He has accumulated more power than any leader since Mao and consistently emphasised the Leninist need for “party purity” to avoid the fate of the Soviet Communist party. Among his first policies was an extralegal anti-corruption campaign that continues to this day. He has usurped the authority of government institutions by establishing party bodies, known as “small leading groups”, that are more numerous than ministries and hold sway over the most important functions of the state.
There was doubtless a strong case for some re-centralisation of power in China, especially to implement the party’s ambitious reforms. Yet while some reforms have made progress, many important ones affecting the role of the state in the economy and the introduction of market mechanisms have suffered from dilution and the opposition of vested interests. The clampdown on civil society, media, legal and non-governmental institutions has not helped. A strong central authority, perversely, has stifled important reforms, removed authority and accountability from those institutions responsible for carrying them out and produced conflicted decision-making.
That is why August’s events matter. Encouragement of the stock market was supposed to be a weathervane for market mechanisms and a more efficient allocation of capital. But equities suffered a relapse, following extraordinary support measures estimated at more than $150bn. The indices are still flirting with the nadir reached in early July. Caught between its roles as cheerleader and regulator, the government has shown a lack of trust in the very market forces it sought to introduce.
This month’s mini-devaluation of the renminbi was explained officially as an incremental change to China’s financial liberalisation, designed to help the currency’s admission later this year to the International Monetary Funds’s accounting unit, the Special Drawing Right. Yet the action was communicated poorly at best. Again, the authorities have been conflicted, torn between a strong renminbi policy to help rebalance the economy, and a softer one to respond to weakening growth. Economic statistics this summer, especially for exports, manufacturing and investment, were disappointing, underscoring that weaker performance for the past four years has become impervious to stimulus measures, which this year already add up to more than 1 per cent of gross domestic product.
A central part of the challenge for China will be its ability to manage employment, a more politically sensitive indicator than GDP. The official unemployment rate, supposedly about 4 per cent over many years, is fiction. Current developments in investment and labour-intensive construction, the low registration for unemployment benefits among those without urban registration status, the weakness of the benefit system and the difficulties of finding suitable work for 7m graduates a year are among many reasons to believe that the jobless rate may not only be higher than the 6.3 per cent estimated by the International Labour Organisation but rising.
China’s economic transition was always going to be difficult, but developments this year suggest that things are not going according to plan. The centralisation of power is proving to be a double-edged sword for reform, the anti-corruption campaign is choking off initiative and growth and the economy cannot be kept on an unrealistic expansionary path by unending stimulus.
The time for accepting a permanently lower growth rate is drawing closer. It will test the legitimacy and reform appetite of China’s leaders in ways that will determine the country’s prospects for years to come.
Why Chinese economic worries look overdone
Despite financial nervousness, rebalancing continues
Aug 21st 2015 | China
WITH investors already in a febrile state of mind about China’s slowdown, the latest bits of gloomy news only seemed to confirm their worst fears. A survey showed that its manufacturing sector is on track in August for its weakest month since the dark days of the global financial crisis more than six years ago. Adding to the sense of panic, Chinese stocks plunged another 4% on Friday, closing off one of their worst weeks in years. The sell-off, which has already scorched emerging markets, enveloped developed markets as well; European, Japanese and Australian stocks all fell. Investors, though, are hardly known for taking measured views when markets get topsy-turvy. There is good reason to be anxious about China, but the pessimism is almost certainly overdone.
No one doubts that China’s factories are struggling. Industrial growth was 6% year-on-year in July, well below the double-digit rates of the not-too-distant past. The manufacturing survey published on Friday suggests that it is likely to slow yet further. New orders, exports and production are all down in August. One-off factors might have added to the troubles: last week’s deadly explosion in Tianjin wreaked havoc at one of the world’s busiest ports and, on top of that, thousands of factories are winding down their operations, ordered to close for a major military parade next month. But the malaise runs far deeper than these problems. Excess capacity built up over years weighs on manufacturers of everything from solar panels to office chairs. Private companies have started to deleverage but state-owned firms are only going deeper into debt.
In other areas, though, things are—shock, horror—looking up. For the past two years, the main fears about China have centred on its property market, the heart of its economy. In recent months, prices have stabilised across much of the country and started to rebound in major cities. Developers have vast backlogs of unsold homes, so new housing starts are still falling and a big upturn in construction seems improbable. Exporters of commodities thus have little to cheer. But the bigger concern about the housing downturn was that it would undermine China’s financial stability and, in that respect, the recovery in property sales is welcome.
What’s more, China is not just about heavy industry. At the same time as growth is slowing, the structure of the economy is also changing. The services sector supplanted manufacturing a couple of years ago as the biggest part of China’s economy, and that trend has only accelerated this year. The alarm on Friday stemmed from an unexpected fall in the purchasing managers’ index (PMI) for manufacturing sponsored by Caixin, a respected Chinese financial magazine. That gauge has been lilting southward for a while. By contrast, Caixin’s PMI for the services sector jumped to an 11-month high in July.
Brazilian iron-ore producers or Indonesian coal miners can take little solace from this. Whether the services are provided by accountants or restaurants, they consume far less energy and raw materials than heavy construction. But for China as a whole, there is more to the country than the building of highways and skyscrapers.
The Great Fall of China
Fear about China’s economy can be overdone. But investors are right to be nervous
Aug 29th 2015 | From the print edition
ONCE the soundtrack to a financial meltdown was the yelling of traders on the floor of a financial exchange. Now it is more likely to be the wordless hum of servers in data centres, as algorithms try to match buyers with sellers. But every big sell-off is gripped by the same rampant, visceral fear. The urge to sell overwhelms the advice to stand firm.
Stomachs are churning again after China’s stockmarket endured its biggest one-day fall since 2007; even Chinese state media called August 24th “Black Monday”. From the rand to the ringgit, emerging-market currencies slumped. Commodity prices fell into territory not seen since 1999. The contagion infected Western markets, too. Germany’s DAX index fell to more than 20% below its peak. American stocks whipsawed: General Electric was at one point down by more than 20%.
Rich-world markets have regained some of their poise. But three fears remain: that China’s economy is in deep trouble; that emerging markets are vulnerable to a full-blown crisis; and that the long rally in rich-world markets is over. Some aspects of these worries are overplayed and others are misplaced. Even so, this week’s panic contains the unnerving message that the malaise in the world economy is real.
Scoot first, ask questions later
China, where share prices continued to plunge, is the source of the contagion (see article). Around $5 trillion has been wiped off global equity markets since the yuan devalued earlier this month. That shift, allied to a string of bad economic numbers and a botched official attempt to halt the slide in Chinese bourses, has fuelled fears that the world’s second-largest economy is heading for a hard landing. Exports have been falling. The stockmarket has lost more than 40% since peaking in June, a bigger drop than the dotcom bust.
Yet the doomsters go too far. The property market is far more important to China’s economy than the equity market is. Property fuels up to a quarter of GDP and its value underpins the banking system; in the past few months prices and transactions have both been healthier. China’s future lies with its shoppers, not its exporters, and services, incomes and consumption are resilient. If the worst happens, the central bank has plenty of room to loosen policy. After a cut in interest rates this week, the one-year rate still stands at 4.6%. The economy is slowing, but even 5% growth this year, the low end of reasonable estimates, would add more to world output than the 14% expansion China posted in 2007.
China is not in crisis. However, its ability to evolve smoothly from a command to a market economy is in question as never before. China’s policymakers used to bask in a reputation for competence that put clay-footed Western bureaucrats to shame. This has suffered in the wake of their botched—and sporadic—efforts to stop shares from sagging. Worse, plans for reform may fall victim to the government’s fear of giving markets free rein. The party wants to make state-owned firms more efficient, but not to expose them to the full blast of competition. It would like to give the yuan more freedom, but frets that a weakening currency will spur capital flight. It thinks local governments should be more disciplined but, motivated by the need for growth, funnels credit their way.
Fears over China are feeding the second worry—that emerging markets could be about to suffer a rerun of the Asian financial crisis of 1997-98. Similarities exist: notably an exodus of capital out of emerging markets because of the prospect of tighter monetary policy in America. But the lessons of the Asian crisis were well learned. Many currencies are no longer tethered but float freely. Most countries in Asia sit on large foreign-exchange reserves and current-account surpluses. Their banking systems rely less on foreign creditors than they did.
If that concern is exaggerated, others are not. A slowing China has dragged down emerging markets, like Brazil, Indonesia and Zambia, that came to depend on shovelling iron ore, coal and copper its way (agricultural exporters are in better shape). From now on, more of the demand that China creates will come from services—and be satisfied at home. The supply glut will weigh on commodity prices for other reasons, too. Oil’s descent, for instance, also reflects the extra output of Saudi Arabia and the resilience of American shale producers. Sliding currencies are adding to the burden on emerging-market firms with local-currency revenues and dollar-denominated debt. More fundamentally, emerging-market growth has been slowing since 2010. Countries from Brazil and Russia have squandered the chance to enact productivity-enhancing reforms and are suffering. So has India, which could yet pay a high price.
The rich world has the least to fear from a Chinese slowdown. American exports to China accounted for less than 1% of GDP last year. But it is hardly immune. Germany, the European Union’s economic engine, exports more to China than any other member state does. Share prices are vulnerable because the biggest firms are global: of the S&P 500’s sales in 2014, 48% were abroad, and the dollar is rising against trading-partner currencies. In addition, the bull market has lasted since 2009 and price-earnings ratios exceed long-run averages. A savage fall in shares would spill into the real economy.
Ageing bull
Were that to happen, this week has underlined how little room Western policymakers have to stimulate their economies. The Federal Reserve would be wrong to raise rates in September, as it has unwisely led markets to expect. Other central banks have responsibilities, too. Money sloshing out of emerging markets may try to find its way to American consumers, leading to rising household borrowing and dangerous—and familiar—distortions in the economy. So Europe and Japan should loosen further to stimulate demand.
Monetary policy is just the start. The harder task, in the West and beyond, is to raise productivity. Plentiful credit and relentless Chinese expansion kept the world ticking over for years. Now growth depends on governments taking hard decisions on everything from financial reforms to infrastructure spending. That is the harsh lesson from China’s panic.
From the print edition: Leaders
China: Credibility on the line
The Beijing leadership’s efforts to control the stock market turmoil have dealt a serious setback to plans for economic reform
Jamil Anderlini
August 28, 2015
As Chinese stocks plummeted on “Black Monday”, triggering waves of panicked selling around the globe, China’s leaders seemed strangely unperturbed.
Premier Li Keqiang was quoted in state media calling for development of China’s 3D printing industry. President Xi Jinping attended a Communist party meeting, where he vowed to crush followers of the Dalai Lama and urged Tibetans to absorb “Marxist values”.
In the days that followed, under strict orders from the Communist party’s propaganda department, the country’s heavily censored media was no longer dwelling on the global sell-off or China’s role in it. In the rare reports on the worst multi-day Chinese equity rout since 1996, they admonished “global financial markets [that] have overreacted like a burnt child fearing fire”.
In a way they were right.
Behind the global headlines declaring the “great fall of China” nothing actually changed in the country’s “real” economy, which has been slowing for years but is still growing in line with the government’s target of around 7 per cent — at least according to official figures.
But what did change this week is the perception, pushed by many on Wall Street and in the City of London, that China’s authoritarian leaders were the world’s most competent technocrats.
The mishandling of a bursting stock bubble — and especially the decision on August 11 to break a two-decade taboo and devalue the renminbi — have badly shaken global faith in the Chinese model of market authoritarianism.
“Many of the market’s substantive worries (economic collapse, financial collapse, competitive devaluation) are overblown,” says Arthur Kroeber, head of research at Gavekal Dragonomics. “But markets trade as much on policy signals as on economic reality, and there has clearly been a breakdown of communication between Beijing and the rest of the world.”
The problem is not just one of public relations or global perception, however. Many of the actions the authorities have taken since late last year now appear badly mistaken. More recently, the moves have smacked of panic.
Not only have global investors lost faith in China’s mandarins but within China itself the reform-minded officials who have overseen the turmoil have also been widely discredited, their plans for market-oriented economic reforms now in tatters.
In April, as investors were questioning whether China’s benchmark Shanghai Composite Index was approaching a bubble after doubling in less than a year, the Communist party’s main mouthpiece, the People’s Daily, ran a prominent editorial dismissing those fears and declaring the start of a long-term bull market. “The capital markets can be a true reflection of the ‘China dream’,” the paper crowed. “As carriers of the ‘China dream’ [the markets] hold enormous opportunities for investors.”
Encouraged by what appeared to be an apparent ironclad guarantee from the ruling party, small investors poured money into already overpriced stocks.
The benchmark index peaked on June 12 then began to slide, accelerating as the government watched helplessly, until July 8 when a plan approved by Premier Li and vice-premier Ma Kai was rolled out to save the market.
China’s stock exchanges, set up in the early 1990s, have been through several booms and busts, and every time they have peaked the government has halfheartedly tried to prop up share prices before giving up and allowing them to fall. But this time Beijing went all-out: banning short sellers, encouraging margin trading, halting initial public offerings, prohibiting share sales by all major investors and ordering state-owned funds and investors to buy up shares on a massive scale.
This unorthodox intervention convinced many Chinese punters to pile back in. But the moves were viewed with deep scepticism by investors abroad, especially after Beijing effectively criminalised large share sales.
“The Chinese authorities’ instinctive reaction to everything is control and retribution,” says a Hong Kong-based partner at a large hedge fund. “Global investors look at the witch-hunt going on in the equity market and they ask what the hell is going on?”
Currency intervention
The biggest shock was still to come. Just before China’s markets opened on August 11, the People’s Bank of China announced it would devalue the currency by around 2 per cent against the dollar in a “one-off” move.
The central bank also said this devaluation, the first by China since 1994, would be accompanied by a new “market-oriented” mechanism for setting the daily benchmark from which the currency can rise or fall by up to 2 per cent on a given day. This effective de-pegging of the renminbi from the dollar led to two more days of devaluation before the central bank decided to halt the slide by buying the Chinese currency and selling US dollars.
In a hastily called — and extremely rare — press conference two days later, the PBoC vowed to intervene in the market whenever Beijing saw the need, reversing the earlier decision to allow the market to set exchange rates.
The PBoC has since spent roughly $200bn in the onshore and offshore currency markets to keep the renminbi from devaluing further, begging the question of why it decided to de-peg its currency to begin with.
“Before they announced this reform they had a credible peg to the US dollar and they hardly needed to intervene in the [foreign exchange] markets, but now they are having to spend huge amounts just to achieve the same effect,” says a person with ties to the PBoC. “It’s like they decided to cross the river because it looked nice and calm but then they slipped and got dragged downstream, and now they are having to use all their strength to get back to the shallow water they were in before.”
At the end of July, China’s foreign exchange reserves stood at $3.65tn, the largest in the world. If the PBoC were to keep intervening in the currency markets at the current rate (and no other cash flowed in) those reserves could be gone within a year.
The apparent mishandling of what could have been an important step towards a freely floating currency — a key part of becoming a rival currency to the dollar, a cherished policy objective — has left reform-minded officials within the regime deeply discredited.
“The government clearly has the right intentions to proceed with reforms but is fumbling the communication and implementation of those reforms,” says Eswar Prasad, former China head at the IMF. “Internal support for market reforms is eroded every time they see big volatility and that is why we have seen this whipsawing between liberalisation and control.”
Contradictory policy
That same tension can be seen in the attempts to prop up the stock market.
State-owned entities have spent more than $200bn buying stocks to reverse the stock market crash, say people familiar with the matter. Monday’s crash, when Chinese stocks fell 8.5 per cent in their worst day since February 2007, appears to be largely due to the Chinese government’s decision to cut its losses and stop buying shares to prop up the index.
The fall was also blamed on the fact the government did not cut interest rates or inject cash into the banking system over the weekend, as many investors had expected. The PBoC did both on Tuesday, after the benchmark index had already fallen by more than a quarter in just one week.
There was more support to come. A group of state-owned stock investors known as the “national team” poured back in to buy shares in the last hour of trading on Thursday and lifted the index from a small loss to close up more than 5 per cent. The market closed up another 4.8 per cent yesterday, but the total market value wiped out since the peak in early June is around $4.5tn — more than the entire German economy.
The main reason for renewed state intervention late this week was a directive from top party leaders to provide a backdrop of rising markets when Beijing hosts a huge military parade next Thursday to commemorate the 70th anniversary of the “Victory of the Chinese People’s War of Resistance Against Japanese Aggression”, according to market participants and people familiar with the matter.
In private, some officials say the incoherent and contradictory policy reversals of recent weeks have much to do with the planning and preparation of the parade.
Because President Xi Jinping is preoccupied with making this display of military might and “national rejuvenation” a success, he has left the economic response to other leaders, these people say. But since taking power in 2012, Mr Xi has concentrated decision-making power in his own hands to such an extent that his weakened underlings are unable to make firm decisions and stick with them.
“People are finally starting to realise the Chinese government is not omnipotent and omniscient,” said Jim Chanos, the hedge fund manager and long-term bear on China, in an interview with CNBC. “The way they handled the run up in their stock market, the panicked responses, the devaluation, the non-devaluation, the various different mixed signals coming out of the various different ministries, I think has started to give investors pause [and realise] that in fact, like many of us, sometimes they don’t have a clue.”
Additional Reporting by Christian Shepherd
Who will march with China at Xi’s parade?
CHARLES BURTON
Special to The Globe and Mail
Published Tuesday, Sep. 01, 2015
On Thursday in Beijing, a massive military pageant will course through Tiananmen Square. For hours, thousands of crisply trained troops will march in formation as line after line of tanks, missiles and every other instrument of destruction, more than 500 in all, puts on a display meant to shock and awe.
Nobody will rain on this parade. To achieve a “military parade blue sky” on the day, the government has been restricting the use of vehicles and temporarily closed polluting industries for miles around. They also imposed new software on China’s Great Firewall to enhance Internet censorship, which the Communist Party newspaper called an “upgrade for cyberspace sovereignty.”
These steps, combined with the usual roundup of outspoken lawyers and human-rights proponents, attest to the importance that the party has placed on this show of its military might. To further mark the occasion, a large number of prisoners who served in the Communist military before their life of crime will be granted clemency and released from jail.
The pretext is the 70th anniversary of “victory of the war of resistance against Japanese aggression and the world’s anti-fascist war” – also known as the Second World War. Of course, the huge contribution of Allied forces, the Chinese Nationalist Kuomintang (now in exile in Taiwan) and the U.S. atomic bombs to defeat the Japanese has been slighted in a new revisionist narrative that buttresses China’s increasingly assertive expansionist strategy.
Many world leaders have been invited to watch from the Gate of Heavenly Peace overlooking the Tiananmen Square. The Ministry of Foreign Affairs formally announced the list of China’s “true friends” who will view the parade alongside the Communist leadership.
In a sign of China’s spiralling dominance in East Asia, the President of South Korea will be a prominent participant. In sharp contrast, North Korea – whose Workers’ Party had previously been characterized “as close as lips to teeth” to the Chinese Communist Party – is sending just a member of its Politburo. This startling gesture raises the question of how much longer South Korea will allow U.S. troops to be stationed there. Vietnam’s President will also attend, but not leaders of Malaysia, the Philippines or other parties to the South China Sea territorial dispute.
The guest list comprises 30 state leaders, including Russia’s Vladimir Putin, Jacob Zuma of South Africa and Pakistan’s Mamnoon Hussain. But no leaders are attending from the United States, Japan, Germany or Canada.
With its invitation to the parade, Beijing is essentially asking countries: “Whose side are you on?” South Korea’s and Vietnam’s responses suggest how they see the future of the Sino-American power balance. On the other hand, the attendance by the President of the Czech Republic forms the sole exception to the European Union’s reluctance to show up and symbolically affirm China’s continuing rise in the global order.
This all comes at a time when the Communist Party is feeling less secure about its rule, given that China’s economic institutions remain in serious, unprecedented crisis, and there have been surprising expressions of public anger over tragedies such as the Tianjin chemical explosion and even fundamentals such as food safety.
President Xi Jinping has responded with a crackdown on “Western influences,” a consolidation of power for his office and an intense anti-corruption purge incarcerating and harshly interrogating more than 100,000 Communist officials, most associated with factions in China’s security apparatus or military, or with loyalty to previous party strongmen Hu Jintao and Jiang Zemin. However, the ferocity of this latest oppression has caught public attention, prompting a rare and intriguing admission in China’s state media that “the scale of the resistance” to Mr. Xi’s new policies “is beyond what could have been imagined.”
This does not bode well, but don’t expect the party to court the citizenry by moving toward democratic political institutions, a free press or an independent judiciary. Any shortcomings of China’s governance will continue to be ascribed to the foreign-inspired moral failings of corrupted individual officials, not to any deficiencies in the political and economic system itself.
Over time, the regime’s response will most certainly be more sabre-rattling assertions of nationalism, to rally the public behind Mr. Xi’s leadership. Thursday’s parade could be just the beginning of a new era in Chinese Communist militarism.
