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Musings Report #27 7-4-15 China's Leadership: Brilliant or Clueless?
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China's Leadership: Brilliant or Clueless?
I am often amused by the Western media's readiness to attribute godlike powers of long-term planning and Sun-Tzu-like strategic brilliance to China's leadership.
A well-known anecdote illustrates the point.
Zhou Enlai, Premier of China in the Mao era, who when asked by Henry Kissinger in 1972 about the French Revolution, is reputed to have replied, "It's too early to say."
This is generally taken to express the Chinese Long View, i.e. that the events of 1789 are still playing out.
But accounts of those present discount this interpretation. Zhou understood Kissinger's query as being about the 1968 general strike in France. That social revolution was still in play in the early 1970s, so Zhou's time frame was present-day, not the 18th century.
China's dramatic rise since Deng Xiaoping's reforms in the early 1980s has been nothing short of phenomenal. This remarkable success has to be attributed in some measure to the leadership's policies and decisions of the past three decades.
This success inspires those who see China's leadership as brilliant.
But the policies and decisions that worked so well in the boost phase of growth--what we might call the era of low-hanging fruit--do not necessarily work in the next phase, where growth has matured and all the costs that were ignored in the boost phase must now be addressed and paid.
If we look at the problems in China's economy, environment and foreign policy, it seems the leadership is making it up as they go along, with the one overriding goal being to maintain the domestic political control of the Communist Party.
On the economic front, China's leadership has actively pursued policies that expanded the shadow banking system and conventional banking system into a $28 trillion debt bubble. This explosive expansion of credit has fueled a real estate bubble of monumental proportions, and a $10 trillion stock market bubble that is now bursting (as all bubbles eventually do, despite claims that "this time it's different").
Rather than being brilliant, this policy is a disaster, as bubbles don't dissipate without profound systemic consequences.
Rather than deal with the crumbling of the real estate bubble, China's leaders have inflated a stock bubble that promises to bankrupt the tens of millions of households that placed bets in the casino with borrowed money (margin accounts).
On the foreign policy front, China has accomplished the near-impossible, i.e. driven all its neighbors into a united front as Vietnam, the Philippines, Korea and Japan are all being forced by Chinese belligerence and over-reaching territorial claims to set aside their differences and strengthen ties with the U.S.
Were someone to craft a foreign policy designed to unite all of China's potential enemies into a powerful alliance, this would be the top choice.
The Chinese leadership is acting for all the world as if it moves from strength to strength, when the reality is the opposite: the leadership moves from one catastrophically ill-planned misadventure to the next.
It is easy to predict the unraveling of the real estate and stock market bubbles and the subsequent collapse of China's multi-trillion dollar shadow banking system.
Having united all its potential enemies into one camp, China has undone decades of careful diplomacy and boxed itself into a diplomatic corner. Now that it has publicly issued extravagant territorial claims, China cannot back down without losing face; but if it continues to push its claims, it further alienates potential allies and pushes them to strengthen ties with the U.S. and other nations threatened by China's claims.
In the Great Game, one should never risk one's position before one has the means to defend that position. China is aggressively pursuing territorial claims that it cannot defend without isolating itself--a policy that would doom its export-and-resource dependent economy.
There are few if any historical precedents for China's leaders to follow. The boost phase of plucking low-hanging fruit is the easy part, the fun part, the exciting part. Dealing with the aftermath of burst credit/asset bubbles, environmental destruction, corruption, wealth inequality, global recession and China's aggressive claim to territory in the South China Sea is the hard part, the not-fun part, the part rife with the potential for catastrophic errors in policy and judgment.
What worked in the post-global financial meltdown era of 2008-2015 will not work the same magic in the next seven years, but there is little evidence that China's leadership (or indeed, the leadership of the U.S., Japan or the European Union) have a Plan B that will replace strategies that are yielding diminishing returns and raising the risks of a systemic failure.
Brilliant or clueless? As Zhou observed, it's too early to tell.
Summary of the Blog This Past Week
What Choice Do We Have? 7/3/15
The Coming Era of Pension Poverty 7/2/15
Our Spoiled-Brat Economy 7/1/15
The Global Template for Collapse: The Enchanting Charms of Cheap, Easy Credit 6/30/15
Greece, Democracy and Magical Thinking 6/29/15
Best Thing That Happened To Me This Week
Fresh salmon (a rare treat) and stir-fried zucchini from the garden.
Market Musings: A Skittish Market
The CPC and CPCE put/call indicators are useful gauges of fear/caution: when the CPC spikes, it reflects participants buying puts, options that hedge against declines in equities.
When the CPC spikes down, it reflects complacency--few participants feel the need to protect their portfolios against downside moves by buying puts.
Recently, relatively modest declines in stocks have driven huge spikes in the CPC. In my view, this reflects rising skittishness: as soon as the market declines 2% - 3%, participants fear a rout and rush to buy puts.
What do we make of a market that is this skittish, so fearful of a massive decline? Is this a "wall of worry" that presages more upside, or do the participants buying puts at the first sign of weakness know something we don't know?
It sure feels like a market in which everyone in the know is nervously eyeing the exits.
From Left Field
32 Maps That Will Teach You Something New About the World (via G.F.B.)
Lily is the world's first throw-and-shoot camera (drone). It lets anyone create cinematic
footage previously reserved for professional filmmakers. (via Steve K.)
The end of middle management? (via Joel M.) -- more on automation/software eating the world...
The dystopian lake filled by the world’s tech lust (via Joel M.) -- sobering waste dump in remote Mongolia....
For and Against Machines: Beyond the New Jetsonism
Why We Should Listen to Frank Lloyd Wright
Properly harnessed, industrial production can reduce exploitation and increase leisure time. -- anti-handcraft screed...
If Greece Defaults, Imagine Argentina, but Much Worse (via Joel M.) -- worst case scenario, but I wonder if this considers the resilience of the cash-economy and the cash coming in from tourism...
Homeless Florida Man's Beautiful Piano Performance Might Earn Him a Job -- or cash in the under-the-table economy...?
"I love philanthropy but I wouldn't say that it is the solution to wealth distribution." Bill Gates talks about philanthropy, tax systems and wealth (8 min video)
The Waterloo They Remembered (via Joel M.) -- essay by author Bernard Cornwall--worth a read...
Myanmar fisherman goes home after 22 years as a slave (via C.N.F.) -- slavery is not yet dead...
Who Wants a Dream American Home? The Chinese, Of Course (via Maoxian)
"Judge a man by his questions rather than his answers." Voltaire
Thanks for reading--
charles |
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