The Chinese Wobble - Part 1 by Lt Gen P R Shankar (R)

 Part 1- The Preamble to the Wobble

Last year China was seen to be displacing USA as the undisputed global power.  It was the only large economy booming during the pandemic. It had declared victory over the Virus.  Militarily it was threatening against India and assertive in the South China Sea was. Hong Kong was swallowed into One China. Chinese Wolf Warriors were baying from all capitals. The Yuan was staking to be the reserve currency of Mother Earth. Xi Jinping was stridently proclaiming preponement of all timelines for ‘Rejuvenation of the Chinese Dream’ aka ‘Superpower Status’. The world seemed to be a Chinese oyster. We prepared to live with Super Power China as USA seemed to be declining. In the past Xi Jinping wore a suit and tie as against the Mao coat he is seen wearing these days. His talks are all about ‘Common Prosperity’ offlate. The news is all about Chinese crackdown/bailouts  on Fin Tech, Ed Tech, Real Estate, Entertainment , Gaming, Banking and Ride Hailing icons and their losing value and earnings. The table below indicates an extent of loss. The overall extent of wealth destruction is in the region of 2.5 – 3 trillion dollars. More might be enroute. How does a nation become a superpower with destruction of so much wealth? Did someone not say – it’s the economy stupid? There is a huge contradiction which confuses people. What is going on in China?  How does  the Chinese wobble affect the world and specifically India? A difficult question at the best of times. However it needs to be examined and answered periodically. 

 

Valuation of Chinese Firms
Firm	Before	After	Difference
Tencent	$930Bn	$560Bn	-40%
Alibaba	$740Bn	$540Bn	-30%
Meituan	$330Bn	$170Bn	-50%
Baidu	$280Bn	$60Bn	-80%
PinDuoDuo	$260Bn	$110Bn	-60%
$1,100Bn of value gone, Big 5 is halved.

 

An analysis from first principles might give some answers. The Chinese society is a highly ordered monolith, of Hans, with minorities on the fringes. In China , extreme inequality between the poverty stricken peasants and the rich elite is historic. This yawning inequality   was the corner stone of change in the last century. The Chinese Communist Party (CCP) came into power promising equality and prosperity for all and synergising it with Han nationalism.  It killed all other forms of political competition. To continue to stay in power, the CCP now needs to constantly convince that it is people-centric and better than all other forms of government. Most importantly no alternative system can be allowed to grow. Resultantly, the politics of staying in power is predominant. Every action by the Chinese government has this deep political motive.  The  economy, geopolitics and all aspects of Chinese life are therefore guided by deeply rooted domestic political compulsions of the CCP. In any analysis, the idea is to look for the political angle. Otherwise one will miss the woods for the trees. 

 

Mao started the ‘Common prosperity’ drive which in an earlier era was known as the dictatorship of the proletariat. Mao’s common prosperity methods and his great leap forward unfortunately lead to common poverty. Later, Deng Xiaoping, opened up China to the world with the thought that allowing some people and regions to become rich first would fast-track growth. The trickle-down effect,  in turn , would enable poverty alleviation and bring prosperity to people. To a large extent that was achieved. An authoritarian Chinese government adopted  the path of a capitalist society with socialist principles  like a duck takes to water. However as China grew rich and developed, inequalities have not only crept in but widened. It is not a matter of Rich vs Poor inequality only. It extends to Han vs non-Han, Urban vs Rural, Coastal vs Inland , State vs Non-State and many more imperceptible inequalities. It is not a matter of inequalities alone but there is a huge duality in the Chinese structure. Where it is good, it is very good. When it is bad it is very  bad. The subsurface polarisation of the society seems to be threatening the CCP monolith. That is probably why a change of course is being undertaken. As China stands at the portals of ‘Rejuvenation of the Chinese Dream’ it has taken recourse back to ‘Common Prosperity’. Add into this mix, the persona  of Xi Jinping – a man of extreme ambition who wants to be a leader for life and be treated at par with or higher than Mao and Deng in Chinese history. What does he have to do to achieve that? Combine capitalism with common prosperity for the people of China? Rejuvenate the China Dream with the greatest military? Expand the Chinese footprint into the entire South China Sea and Trans Himalayan Region? Achieve China-centric globalisation through BRI? Make Yuan the reserve currency of the world digitally? Dominate and dictate actions of international institutions like UN, WHO and World Bank to establish a Chinese led global order? Tighten the grip of the CCP through overcentralisation? What we have seen is many moving parts, in sync with each other for over four decades. However, off late, some of them have started working at cross purposes to each other. To forecast the future one has to get back to 2012.             

 

In 2012, a joint study was carried out by World Bank and Development Research Center of the State Council of PRC. The report was titled China 2030, Building a Modern Harmonious and Creative Society. It delved into many aspects of China, identified problems and offered solutions. This is an illuminative study since it covers many bases. Very importantly, it has the Chinese stamp of acceptance on it. Even more importantly, this study was coincidental with Xi Jinping coming into power. It notes that China’s economic performance over the last three decades has been impressive. GDP growth averaged 10 % annually. Over 500 million people were lifted out of poverty. China grew to be the world second largest economy and largest exporter and manufacturer. China’s strengths were identified - high savings, increasingly plentiful skilled labour, and potential for further urbanization. Its opportunity was in continued globalization, and promising new technologies. The risks and challenges of China were also identified. It was analysed that  China was well prepared to deal with idiosyncratic risks, but it must anticipate the possibility of systemic risks and prepare appropriate responses. Very prophetically the report highlights the  importance of avoiding overconfidence and remaining vigilant against potential problems from social, economic, and natural causes. Of the identified challenges, the first was high inequality, which may have worsened. The secondchallenge was inefficiencies in social service delivery resulting from distorted incentives and market structures. The third challenge was rapid aging of the population. As the country ages and population declines, the labour force was expected to shrink after peaking in 2015, with dependency ratios rising rapidly thereafter. China was destined to grow old before growing rich.  The  fourth challenge was managing growing economic, social, and cultural diversity. It also noted that there were significant challenges of quality and efficiency in education,  health services , and in social security programs. A six point strategy was outlined . First, implement structural reforms to strengthen the foundations for a market- based economy.  Second, accelerate the pace of innovation and create an open innovation system.  Third, seize the opportunity to “go green”.  Fourth, expand opportunities and promote social security for all.  Fifth, strengthen the fiscal system. Sixth, seek mutually beneficial relations with the world. If the recommendations of this report were followed, China might have no other option to be a world leader and superpower. However life is never ideal. The compulsions of Chinese politics and the Xi Jinping thought seem to be taking China elsewhere.

  

Hands on government control and micromanagement works well in the initial  development cycle of any nation. The command style becomes restrictive as markets expand and economies become complex. When incomes rise, competition increases and inefficiency sets, development stagnates. To develop beyond a threshold at which it is, China needs systems with transparent rules, predictable policy, efficiency and innovation as recommended by the World Bank study team. A less intrusive government is a feature of all high income economies. These are mostly democratic, with stable institutions and a strong social security net. However in China loosening the party/state control is not in the communist scheme of things.  Politics override everything. Xi Jinping’s personal ambition and his drive to reassert core Communist Party values complicates issues. While the CCP has allowed market freedoms,  its supremacy cannot  be challenged beyond a point. Technology companies have been culled since the data with them is a direct threat to the Party control. It is now coming out that Alibaba was dismantled since it threatened the state monetary system. Ed Tech and coaching industry was perceived to be too costly for people  and has been destroyed. Gaming and  entertainment sectors have been clipped on moral grounds. Celebrities are simply being erased from the internet to curtail their popularity and influence on the youth and public. Common prosperity has been re-embarked upon to make the rich pay for the poor and thereby reduce inequality. Technology icons and corporations are being forced into making charitable donations through competitive coercion. Over and above this, many Chinese corporates are floundering due to corruption and bad debts. China has bailed out the ‘bad bank’ Huarong since it was too big to fail. Evergrande, the property giant with an order book of 1.2 million homes is on the verge of a collapse/bailout due to bad debt. The ripple effect of Evergrande failure or bailout will have far reaching consequences.  These could be the tip of an iceberg of the  famed debt bubble of China which might  burst. Both these are significant collapses since others could also follow in a wide ranging domino effect. It must be understood that banking and real estate are the backbone of an economy. Housing constitutes  60 % of household wealth. Most housing is based on loans. The overall sense is that, political expediency in China has ensured that most of the recommendations of the World Bank to undertake structural reforms have been  given a  go by. China remains  highly susceptible to systemic risks and shocks. Over and above this, the second order economic effects of the recent actions are yet to manifest. While this may be so, there is also a considered opinion in China which feels that the steps taken by the government are correct. Hence, despite all ill-logic there might be some logic which is escaping the outsiders. 

Part 2 - The Cobbles of the Wobble

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Part 3- The Hobblblees of the Wobble 

Click Here for Part 3