The psychology of grand gestures

These days many people approach China through the lens of superlatives - massive buildings and infrastructure, dynamic fast paced growth and grand government visions.  Local press Caixin had a photo series of some of the more opulent government offices which had been built in recent years in some of the more deserted parts of China.  This correspondent can recall travelling to Shanghai in the late 1990s and being impressed by the opulence of the central square and museum and the comparative poverty of the shopping mall below - which no doubt has long since been renovated.  Perhaps, as suggested by the Independent newspaper it is easy to misinterpret what is going on in China simply by being an outsider.  Nevertheless there does seem to be some insight from reviewing what will be termed the "grand gestures" being made by the Chinese in administration (and their possible view of events through this perspective).

To start with the US however, many have argued that the Chinese administration places great weight in its actions by what is happening in the US and arguably much of China's recent policy is seen to have been calibrated with big shifts in US policy.  Hence many analysts point to the US-led financial crisis in 2008 as having caused a pivot in Chinese fiscal policy - when the administration not only decided to embark on the massive stimulus in 2009 and 2010 which saw more money lent out by the state-directed banking system than delivered by the US administration in the TARP (troubled asset relief program) which preceded the recapitalisation of the US banking system.  More particularly, those analysts note that in addition to the decision that was made at the time, it was also a time in which the top of China's government interpreted that the US economic model itself was defunct - that no serious government would let its banking system collapse and that China was wasting its time trying to emulate the US (as it had been doing for many years since its own banks had been cleaned up in the 2000s).

Of course, such an interpretation fundamentally misunderstands capitalism, and it has been noted that in seeking to construct a capitalist economy China still hasn't taken to heart the idea that businesses need to fail (such that, although pain in the solar industry, one of the worst performers is being delayed, at some point the domestic debt market will have its first default and certain poorly performing big enterprises will go bankrupt).  Nevertheless until a day of reckoning, the Chinese are doubling down on their existing policies and no doubt continuing the status quo (or trying to).  

Free China love zone
And hence the suggestion that China is drawing the same conclusions as to US decline.  As the US government went into lockdown with the impasse over the debt ceiling, reports of frustrated Chinese tourists in Washington corresponded with the response in China itself - decrying the "ugly side of partisan politics" (here). And, as per the headline, the Chinese presidential administration was responding with one grand gesture - Chinese president Xi Jinping undertaking a charm offensive to South East Asia (as Obama's trip was cancelled).  The linked article didn't touch on the delicate nature of China's relations with South East Asia following disputes in the South East China Sea, which no doubt complicate the picture.

Likewise on the economic front, China's opening of a free trade zone in Shanghai (immediately offering customs and warehousing facilities but with the suggestion of financial reform) was launched with uncertainty as regulations were still being drawn up, while many commentators, including the Economist concluded the measures were likely to disappoint (and a damp squib in fact).  For this author the significance of the recent zone opening is more in the gesture than the outcome - many other cities around China are seeking to open free trade zones which may do brisker trade than Shanghai (including Dongjiang which is seeking to become a major aviation leasing and offshore centre) and more significantly the step is being promoted as a new track of reform mirroring the opening of the Special Economic Zones in the 1980s.

The success of the zones will remain to be seen but it is unclear whether they constitute the reforms China needs.  As a gesture though, the announcement of the Shanghai zone has had an impact and that may be enough to keep positive news going for now.  On the other hand the gesture seemed to highlight current problems rather than hide them - property prices in Shanghai around the proposed zone have risen dramatically on the opening even as the included activities were not announced and there was no indication it will be successful.

If the real problems - property boom and collapse and strain in the banking sector do flare up then as a guide we must expect significant actions such as the credit squeeze of June 2013 - of which there will undoubtedly be more significant gestures to reassure confidence as real measures.  

Generation game

Solar flare up
Since the last post there have been moves to further consolidation and government control of the solar industry as two of the largest players, LDK and Suntech are facing increased state involvement and even takeover.  Amidst global oversupply, plummeting prices and possible trade law sanctions, a couple of themes are present (i) use of bankruptcy is not prevalent yet (with rollovers of debt preferred) and (ii) increasing state involvement.  An excellent article by Tim Worstall in Forbes had a headline which summed up the situation - "China still hasn't got the hang of this capitalism thing", namely the importance of unprofitable enterprises going bankrupt.  It would seem fairly obvious that there are plenty of impediments to swift and orderly wind-down of institutions - loss of face, bureaucratic interference, vested local government interests and the like.

But it wasn't supposed to be like this - the article refers to an official who pronounced that the government intended the industry to consolidate - i.e. a large number of enterprises close or merge - intentions which were complicated by unwillingness of banks and local governments to toe the line.    And what a contrast from the fanfare in a previous Forbes article announcing the launch of the new US style bankruptcy regime China in 2007 - the predictions of a "high level of sophistication" and "determination to build a sound legal system" seem over-enthusiastic statements now.  Possibly due to the need to promote stability ahead of the leadership change next month, officials seem to be falling back to tried and tested methods of state interventionism, which will only continue to propagate distortions in the current financial system.

It's a family affair
At the time of writing there has been an overwhelming response to the New York Times' investigation into the wealth and connections of Chinese Premier Wen Jiabao's family.  It is not just that the Chinese administration has blocked access to the Times' website (as it did with Bloomberg and the Brookings Institution when they released similar findings regarding incoming Xi Jinping and Li Keqiang), responded with what the Financial Times referred to as a "hatchet job" piece in the People's Daily, or that unusually the administration has instructed lawyers to deny and  look at pursuing legal redress (which members of the legal community thought were poorly thought out) With the Guardian comparing it to the Pentagon Papers as the most "direct challenge to a sitting government", it is clear that the investigation has ruffled feathers at a sensitive time.

It is not clear yet if there will be a lasting impact from these revelations about China's leaders - the Economist which has a special report covering the upcoming Party Congress, concludes that all the disclosures strengthen the case for reform.  Like many similar autocracies the connected elite of China have had an entrenched position for a long time in China and it seems unlikely that this will change after the handover beyond certain personnel changes (which was the conclusion of Katherine Hille in the FT).  But could tensions between ruling factions and their connected others spillover after the transition?

Factional tension was suggested by Hille (noting rumours on Chinese social media that information in the New York Times had been provided by factional opponents of Wen) and more broadly the Wen revelations have opened a greater discussion on corruption in China, which as the FT Alphaville blog noted that perceptions of corruption were reaching levels where they could be destabilising.  Cue then a closed door lecture from a Chinese (or Hong Kong-based) academic arguing that China is in fact nearly bankrupt and a warning from permanent China bear Gordon Chang warning that there is now a "stampede" of money and even officials are now fleeing China and all does not seem well.

A light-hearted piece in the Daily Mail might suggest otherwise (with news of a marriage of the niece of president-in-waiting Xi Jinping to a young unknown British businessman, Daniel Foa) but there is a very deep family tension involved in this year's leadership trauma.  Forming part of a highly recommendable podcast of experts (comprising Chovanec, Garnaut and Anderlini) was a real insight into the the deep inter-generational enmity between Jinping and Xilai (and their factions in the Party), which had arisen between their fathers, Xi Zhongxun and Bo Yibo, during the cultural revolution.  Garnaut in particular has been in explosive form revealing casualties of the factional struggles for position in both the military and political leadership. Add to this interventions of factions led by Hu Jintao/Wen Jiabao and Jiang Zemin and things look set for an explosive mix.

An Englishman called Daniel Foa holds a book (c) ImageChina

As has been noted China's new leaders are likely to signal a clear directional change in policy very soon after the handover (as has been customary).  Whether they retain a princeling dominance and an absolute autocracy or opt for a more compromising approach (such as a management focussed Singaporean model) will remain to be seen.