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China, or How To Live in Interesting Times

Politics / China May 05, 2012 - 05:54 PM GMT

By: Ashvin_Pandurangi

Politics

Best Financial Markets Analysis ArticleOver the past few weeks I've read an absolute avalanche of articles on China, but because of all the traveling we were doing never got around to turning the information into stories for TAE. By the way, we're on the Sunshine Coast, an hour north of Brisbane, for a week or two right now, staying with friends and trying to catch our breath. It's where the Australasia tour started 11 weeks ago, so it feels kind of fitting. We’ll move over to Europe on May 15, and we will be available for lectures over there. We’re also looking for a place to stay for a month or so by the way, to do some catching up.


But back to China. It's been a while since BHP Billiton warned that its steel sales to China were plateauing, and that may be a good starting point. All the talk about hard landing vs soft landing is funny at times, but not much more than that. The BHP report was at least real. Of course we also all know the reports on Chinese ghost cities, but they have probably seemed a little abstract until now.

I was also thinking about China with regards to for instance Peak Oil. Whereas it's very clear today that petrol and/or gasoline consumption in the US and Europe has dropped significantly, I see people claim all the time that demand in India and China rises so fast, there's still so little oil to spare that prices must of necessity rise on account of that. I think not. If the Chinese steel industry (a major part of both the economy and the boom in it) has stagnated, I simply don't see how oil usage could rise enormously.

If you ask me, there's a real chance that what is happening is that oil producers, because they sell less, are trying to push up prices just to make the same amount of money. That will work for a while, and then it won't. Which will be a grave danger to Saudi Arabia and all other oil states that need the revenues just to keep a restless young and unemployed generation satisfied enough not to start burning down the house.

Supply and demand will start to work again in the field, though, and at that point producing all you can, and more, will be the only way to keep those revenues from plunging. Could be interesting. Sure, China could fill some reserves. So could others. More tankers could be left floating fully loaded for weeks or months.

But the game is on, and China doesn't look capable of boosting its demand, and double digit GDP growth - any time soon, if ever. The Chinese government has issued a warning on growth numbers, and premier Wen Jiabao added a stern warning on the need for economic reforms.

There are obviously different views on China's future prospects; in investors circles, Jim Rogers is a bull while Jim Chanos is an endangered bear species. Then we have voices such as Michael Pettis and Patrick Chovanec, academic feet on the ground, who've sounded some pretty strong alarm bells on where China is going, and where it's really at right now, which is far worse than government stats would suggest. Hugh Hendry isn't thinking China is Nirvana either.

In October China will see its "5th Generation" leadership change. The government of Hu Jintao and Wen Jiabao will have to leave after 10 years. And the jockeying for position has started for real, not just among individuals, but also between two main ideological factions: one that wants to stay with, or return to if you like, Maoist ideas, and another (among others the current rulers) that seeks to "reform" the economy.

Now economic reform is a term we read all the time these days: every western nation needs to reform its economy, say the leaders of the IMF et al, as well as political honchos everywhere. It always means the same thing: giving international finance increased access to your economy. And cut security and benefits for your people. The disaster doctrine.

This can lead to situations that are obviously not beneficial to a society, as in the case of Greece where much of the domestic infrastructure is being sold off for pennies on the dollar. In New Zealand, the government even wants to sell off huge chunks of its hydro power generation, the one thing that could keep the country alight once other sources start failing. In Venezuela, Argentina and Bolivia, on the other hand, leaders are now trying to turn back previously closed sales to foreigners of essential resources.

In China, economic reform represents an earlier state of this same game. Even though it will be very attractive for those leaders who can personally profit from it to sell off important infrastructure. But no matter how you want to define it all, I think Jim Rogers was way off when he said recently that the - political - power change to the 5th Generation would not change much at all: there are big potential differences in policies between reforms (disaster doctrine) and continued domestic control over the economy.

This just in. Blind activist. Chen Guangcheng. The whole thing looks staged; a blind activist, aided from the US by a Chinese American business man, escapes his house arrest (all his guards were asleep?!) and travels hundreds of miles to the US embassy in Beijing, only to arrive there just in time for Hillary Clinton's planned visit.

If staged, by whom? By his allies and friends, or by the US itself, or perhaps by China, which very much likes the fact that the western press doesn't talk about Bo Xilai anymore? Hard to tell. Still, the blind activist case is nowhere near as interesting (except perhaps for himself and his family) as that of Bo, even if it's very convenient for distracting media focus away from other matters.

Of course, Chinese politics have always and notoriously been very dirty even by US standards (or just more openly so?!), and 2012 will not be an exception. And even if we need to take all news from Beijing with a pound or two of salt, the Bo Xilai case could be revealing inner secrets that can tell us a thing or two about what the stakes are going to be come October. These guys are all as corrupt as you imagine in your worst dreams: China’s few dozen politburo members reportedly have accumulated vastly more wealth between them than even the few hundred members of the US Congress and Senate combined, no beggars themselves, and often stored it offshore.

Bo Xilai is a "princeling", a child of - formerly - powerful party members, who was therefore himself destined for power. He made it all the way to the leadership of Chongqing, the perhaps largest city in the world with some 35 million inhabitants. And through a Politburo seat Bo seemed destined for more, perhaps much more.

But then his career fell to pieces; he was relieved of all his duties through this spring, after the "defection" of his police chief to the US consulate at Chengdu during Superbowl night. The police chief, unlike the blind activist, was made to leave the consulate within 24 hours, and surrendered to Chinese officials carrying papers incriminating Bo and his wife.

Bo's wife, Gu Kailai, is a lawyer. She once solved cases for Chinese companies in US courts. In China, she dealt a lot with British family friend Nick Heywood. There are pictures of a UK lovenest the two allegedly shared when Bo's son studied there. There are also stories about vast amounts of money Heywood helped the Bo family send overseas. And then there's Heywood's death in November 2011, for which Chinese authorities have now arrested Gu Kailai.

Gu is the youngest of 5 sisters. At least one of which, who's become a Hong Kong national, is worth at least $120 million. Bo has a few brothers, apparently in high banking circles, who are also worth a comparable amount.

But that may not be why he was brought down (they all do it). It may not even be his wife's alleged involvement in Nick Heywood's death. It may, however, be the again alleged wiretapping of high politburo officials that Bo is apparently accused of. Or his neo-Maoist ideas, which do not match the reform policies the outgoing government seems to desperately want.

Bo's downfall plays out against the backdrop of a potential plunge in Chinese economic fortunes. Michael Pettis has a bet going with The Economist that Chinese growth will be just 3.5% annually over the next decade. Now, that may look viable at first glance (like if you compare it with Europe), but it's like an ocean liner or a freight train that step on the breaks and fold like harmonicas: everything in the Chinese economy is geared towards much higher growth, say in the 8-10% range, and a sudden decrease could therefore have disastrous consequences.

So on the one hand Bo is emblematic of the infighting on the threshold of a leadership change, but on the other hand he's also a huge and glaring symbol of the corruption many Chinese have always suspected but until now never really seen proven beyond a reasonable doubt.

And that, the corruption, which I read somewhere took $2.74 trillion from the Chinese economy in the first decade of the millennium, is what may decide the fate of the nation as people see the economy decline and perhaps force a halt or even reversal in the largest human mass migration in history by far, that of country folk to the cities where the trinkets are made.

There is only on solution for the politburo, and it fleetingly escapes them wherever they look: raising internal consumption and getting the economy off the addiction to exports. The Chinese don't have enough faith in their leaders to spend their savings, and there's very little in sight that would make me believe that's going to change sometime soon. Certainly not now real estate prices are falling.

And Chinese people know how to protest: we like to think the French got that down, but they have nothing on China once the unrest starts spreading for real. They don't have 1.3 billion people either. Who don't even have a democracy. But who do have modern social media at their disposal, and a government which has an ever harder time to block the use of it, not in the least because the government itself used the internet to smear Bo Xilai.

So if the power change is accompanied by a struggling economy, and the debate between politicians gets ugly and heated, the Chinese people could well demand the vote they don't have, in massive and bitter protests. If the politburo attempts to quell such protests in the way it always has in the past (China still executes more people than all other countries combined), it may find that bloody repression doesn't work anymore in this day and age. The revolution may not be televised, but it could well be twittered. To hundreds of millions of people in China, and hundreds of milllions abroad, at the same time, all the time.

Ashvin Pandurangi, third year law student at George Mason University
Website: http://theautomaticearth.blogspot.com (provides unique analysis of economics, finance, politics and social dynamics in the context of Complexity Theory)

© 2012 Copyright Ashvin Pandurangi to - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


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