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Tuesday, 27 November 2012

Lost century?

Back to work
Following a relatively smooth 18th party congress, China Inc has got back to work, albeit with a slightly different vision for more balanced growth.  There was not so much to take away from the various press showpieces, especially since (as is usual), many of the real decisions had been made in the final days leading up to the summit.  A post mortem piece in the Chicago Tribune highlighted the role of retired senior figures still play in the party - there must have been plenty of non-Chinese wondering what Jiang Zemin was doing centre stage at the conference.  The Wen family saga  rolled on, with a second instalment from the New York Times examining the very profitable stake held in insurance blue chip Ping An insurance by Wen's family and the lobbying to Wen on behalf of Ping An in 1999.  Wen's response included being asked to be forgotten.


In the swansong atmosphere it seemed likely that press would look around for an identifiable theme and many outlets settled on comparisons with Japan at its zenith.  One comparison, in a fairly high level of detail for the BBC was quite simply titled "Will China fall flat on its face"!  One of the most concerning points of comparison, which has been noted elsewhere, was the different developmental stage between China and Japan - thanks to its one child policy and it starting form a much lower income base, China has rapidly accelerated the aging of its population to now approaching Japanese levels (though getting a dividend along the way with a relative boost of young workers which is now decelerating) and consequently may grow old before it grows rich. 

More worrying in the immediate term was the surprisingly candid, though balanced piece by Charles Dumas of Lombard Street Research who nicely brought together all of the strands of the Chinese economy which are of concern - debt, stimulus, defaults.  What is particularly worrying is the ease with which, in 2 places, Charles can lead to a conclusion of the occurrence of banking crises - as a matter of course, as inevitable as a policy setting! - without policy change (debt reduction) and with trend growth shifting down to 5 per cent, "a plague of banking crises" could be a result, as could occur if financial liberalisation proceeds.  This is not the story spun by the large financial institutions promoting use of the Chinese currency (the Yuan/Renminbi) in trade settlement and with greater convertibility.

But these two things combined paint a worrying picture.  If China has all of the preconditions of a Japanese style financial collapse - sufficient to bring about the slow burning decline of a "lost decade" or "lost generation" (a term in vogue even in the West as it pushes through austerity, or in the case of the European Union, can-kicking), then could the less favourable demographics, level of social cohesion or uncertain environment make the impact for China worse than Japan?  As it happens there are deep social divisions in China with assertive foreign policy in areas like the South China Sea stirring tensions amongst the population and with reports of inequality and division within Chinese society attracting increasing concern and attention.  The task of the Chinese Communist Party to reinvent itself for slower growth and newer ideologies also complicates things.  Added sleaze and corruption scandals make for grim prospects.

Underlying the resurgence of nationalism is a sense of continuity with the period from the mid-19th century until the mid-20th century, when the sovereignty of the Chinese empire and state was subjugated to foreign powers and influence, starting with the First Opium War until the expulsion of foreigners after the Second World War (the Century of Humiliation).  As commentators have noted, the current administration perpetuates the focus on restoration of international profile and prestige while skipping over the Party's failures. Inability for self-criticism may come to harm the Party and the nation in years to come, and should the effects of China's boom be felt across one or more generations, Chinese may have to face up to another century of lost potential in many years to come.

Cracks appear in the China bull market (c) Caixin


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