Monday, August 12, 2019

China’s Existential Dilemma

By Roy C. Smith


The US-China trade dispute should have been resolved a year ago, enabling both countries to get on with their growth agendas and avoid a lot of unnecessary market disruption and investment uncertainty.

Early negotiating sessions suggested that China would yield to some US demands and increase agricultural purchases to avoid any new tariffs. But Mr. Trump apparently wanted more and negotiations slid off into the political arena where both Trump and Xi Jinping risk losing face for crumbling before an adversary, which made things worse.  Now both sides are in territory in which blows may have to be struck and the time until an agreement is achieved has been delayed further. Even if the blows are more symbolic than forceful, their effect will be on slowing the growth rates in both countries and several others.

China’s official growth rate was 6.2% in the second quarter of 2019, the lowest in 27 years, and is predicted to slow further even without the trade dispute. According to local economists, China’s true growth rate is probably well less than 6% and many indicators show the turmoil over tariffs and the slowing of long-term foreign direct investment will bring it down further.

That will put pressure on China to address political dissatisfaction throughout the country that has already begun to develop over future job growth, opportunity for upward mobility, and the adequacy of pensions and health care services for an aging population.  For years China watchers have said that a minimum growth rate had to be achieved for the people to continue to allow the Chinese Communist Party to rule without elections. That assumed rate used to be around 8%. Xi Jinping knew this when he came to office, and he acted quickly to consolidate his personal power, and then to distract attention from growth to pride in China’s long history, rising global influence and power, as seen in its South China Sea activity and in expensive demonstration projects like the “Road and Belt” initiative. But the decline in growth has led to bankruptcies, increased layoffs, unemployment and public protests and demonstrations. So far, these protests have not been very disruptive, but In January 2019, Xi warned fellow party members of the rising dangers of public dissent.

Dissent has now broken out in Hongkong, where for ten consecutive weeks, more than 2 million protesters have taken to the streets and violence erupted on several occasions. The resistance is to increased grasp by China of local political power. Hongkong is much more than a returned autonomous colonial territory – it is a vital business center for the country (affecting  about 25% of China’s GDP) and key to the financial markets of Southeast Asia. Bottling up Hongkong with political and maybe military strife could be disastrous to the Chinese economy, and could include a capital flight (which may already have begun) that China would be unable to prevent without draconian measures, which could precipitate a financial crisis such as occurred in Japan 1989 and ended that country’s ambitions to being an economic superpower.

Financial crises are like avalanches, you never know in advance where they are coming from or when.  A large part of China’s securities and bank credit market activity is presently provided by non-Chinese investors that can change their minds in a flash. China is now sitting on a record level of debt (300% debt to GDP), about 60% of which is not federal, but of more unsteady corporate and municipal entities.  Declining economic conditions have caused defaults to rise, credit ratings to fall and access to credit to be constrained.  Avalanches in credit instruments begin under circumstances like theses, then accelerate and broaden to include all securities, pushing  market values well below their true value, and, because of mark-to-market accounting, requiring massive loss taking (and bailouts) within the financial system. This happened in New York in 2008, in the Euro-era in 2010. +In both cases, the velocity of market movements greatly exceeded governments ability to halt them.

China can survive a financial crash, though at great cost to the economy. But economic distress can open the doors to political risk that protests such as are occurring now in Hongkong could spread to nearby Guangzhou, Shenzhen and even to Shanghai, autonomous industrial cities in the South, distant from Beijing, where millions of migrant workers with few economic rights would be subject to a sudden increase in layoffs and economic difficulty unassisted by social safety nets.  

This could be an existential moment for Mr. Xi and his Communist Party colleagues in Beijing. It could get out of hand and require violent repression to settle, which  like Tiananmen Square in 1989, was deemed the only way to save party rule.

These circumstances give Mr. Trump the advantages in negotiating with China that he has claimed from the beginning (“We can win a trade war...”).  He may be prepared to face a Chinese existential crisis, though it would not be in the US’ interest to have one. Mr. Xi , on the other hand, may believe that Mr. Trump cannot sustain a trade war with China through an election year, and China can wait him out. Maybe, but Trump is unpredictable, changeable and seemingly very confident in his political base to support him in the election.  This could end up in a very dangerous game of "chicken." with disproportionate consequences. China would be well advised to find a way to settle the trade issues soon, even at some loss of face, to slow the growth decline but, more important, to preserve political stability. This should be obvious, but all politics are domestic in the end, making some obvious things hard to do.

Americans need to remember that the US struggled for more than 20 years to manage trade disputes with Japan, a country we wanted as an ally but many Americans believed exploited US benevolence. Then we spent another 20 years dealing with China’s rise as the next Japan. But China is not a democracy, and though it has said it has opened its markets to link with the capitalist system, it has joined the capitalist system only in part, while preserving Deng Xiaoping’s notions of “socialism with Chinese characteristics,” or capitalism with exceptions.

The Chinese characteristics, however, are seen by Mr. Trump, and many others, to include many anti-competitive measures prohibited by the World Trade Organization, such as providing large subsidies to state-owned enterprises that make up a large portion of the Chinese economy. Trump sees these as exploitative, Xi sees them as essential to keep large, unprofitable state companies from collapsing.

These issues are difficult but not unresolvable. To resolve them, both sides will have to swallow stuff they don’t want -- but  can be renegotiated in the future. That's what politicians in capitalist countries do,  Failing to do so will bring back some Cold War intransigence that we would be better off to avoid.


9 comments:

  1. Bharat CSP Agents are those individuals who acts as an agent of the bank at places where it is not possible to open branch of the bank.

    Apply CSP
    CSP registration
    CSP provider
    bank CSP
    CSP kisok
    kisok banking

    ReplyDelete
  2. Oxigen BC Private Limited Company is India's Largest CSP Provider, which works in all the states of India to open customer service point of all banks. Such as - sbi, boi, bob, pnb etc.

    CSP Apply
    CSP Online Application
    Online CSP Apply
    CSP Registration
    CSP Online Application
    CSP Provider

    ReplyDelete
  3. A large number of people, particularly the migrant laborers and factory workers do not have a saving account and even not able to open an account due to lack of valid address and ID proof. As a result they face difficulties to save their earnings in a safe place and look out for solution to send money to their families.

    CSP Apply
    CSP Online Application
    Apply for CSP
    Top CSP Provider in India
    Apply Online For Bank CSP

    ReplyDelete
  4. Tula's International School is the best Dehradun boarding schools for girls & boys. It is one of the top schools in Dehradun.The school is affiliated to CBSE which offers holistic education to students.

    Tula's International School Best Boarding School in Dehradun

    Tula's International School Best Boarding School in Dehradun

    Tula's International School Co-ed Boarding School in Dehradun

    Tula's International School Best Residential School in Dehradun

    Tula's International School Dehradun Boarding School Fee structure

    Tula's International School Top Girls Boarding School India

    Tula's International School Best CBSE Schools in Uttarakhand

    Tula's International School Top Boarding Schools in India

    Tula's International School Best Boarding School in Dehradun

    Tula's International School Top Boarding Schools in Dehradun

    ReplyDelete
  5. I like your blog,I sincerely hope that your blog a rapid increase in
    traffic density,which help promote your blog and we hope that your blog is being updated.
    ออนไลน์ ได้เงินจริง คาสิโน uplay365

    ReplyDelete
  6. Thanks for sharing wonderfull artical. To explore more please toch link below Can you link our website to your website? :
    Online CSP Registation services in india
    Top csp provider in india

    ReplyDelete
  7. BC Bank Mitra aims to serve its valued customers in the best possible way. We provide banking services to people living in remote areas, especially the
    lower-income group without a bank account. CSP provider offers mini bank facilities to people.
    We have tie-ups with almost all major banks such as State Bank, Central Bank, Allahabad Bank, Indian Bank, Yes Bank, PNB and many more.
    CSP Apply
    CSP Provider
    CSP Registration

    ReplyDelete
  8. I am really getting prepared to over this data, is exceptionally useful my companion. Likewise extraordinary blog here with the majority of the significant data you have. I am sharing related topic which is most important on
    wordpress
    ufa88kh.blogspot
    youtube
    SA GAMING

    ReplyDelete