URSABLOG: Waiting For Stimulation
There has been so much difficult economic news coming out of China of late that one might be forgiven for thinking that change, some massive change, is imminent. “The longer it goes on,” said a good friend of mine whose opinion and knowledge I deeply respect, “the more imperative it is for China to have to do something.” Action is needed, and soon. And indeed the news is far from encouraging, as a quick dip into my folder where I store such articles, reveals: deflation, Evergrande filing for bankruptcy protection in the US, the failure of the Zhongzhi group – one of the biggest players in the shadow financing market – to make payments, the decision no longer report levels of youth unemployment as it spirals out of control, falling property prices, local government finance vehicles struggling to raise cash and manage debt, property developer Country Garden suspending bond trading, rapid declines in the values of exports and imports. It all looks pretty grim.
The temptation to think that a stimulus is coming, because something has to be done, is understandable and forgivable. But, as regular readers know, I am deeply sceptical that anything substantial is forthcoming any time soon, because it misreads what China’s, and in particular the Chinese Communist Party’s intentions really are. It is tempting to hail the reduction of the one year medium-term lending facility rate by 15 basis points to 2.5%, following a cut in June by 10 basis points, and now at its lowest level since it was launched in 2014, as the start of something more meaningful in terms of a monetary response. But as far as I see it, this is just another tweak in the financial machinery, following on from a whole load of other tweaks, aimed at maintaining liquidity as well as showing the markets that the PBoC is awake and paying attention. Stimulus it aint.
China is so big, and so important to the world, economically, politically, geographically – not to mention to the shipping industry – that when I read commentary and opinions on what could or should happen next, it is almost as if the writers take it personally that China is not taking their advice. Being a shipbroker, and long used to having my opinion if not ignored but at least minimised to the appropriate size, I can be more sanguine. I know what I think about something will not change anything, and I know how the world behaves is out of my control. I just have to think about my place in it, and act accordingly. Maybe I am overly cynical, but long experience has taught me that being right is a reward in itself, and that is just as well as it’s probably the only one I will get.
I have become increasingly interested in China over recent years, and in particular the political workings of the state and the Party, and I have come to believe that any view of China has to include a deeper understanding of what China thinks of itself, not just what China should be doing now to sort itself out in relation to the rest of the world. In fact saying and thinking what China should do from our point of view will probably lead to error, as it – unconsciously perhaps – feeds into a kind of superiority of the ‘developed’ world advising a misguided but powerful novice on how to behave properly in the grown up world, an attitude that irritates the Chinese intensely. China considers itself to have grown up a long time ago, millennia in fact, and is only just now reasserting its own sense of itself after long periods – centuries – of humiliation at the hands of western upstarts. Chinese characteristics are taken very seriously by the Chinese; they are not just a label slapped on the latest western innovation to make sure copyright is not infringed. And how China moves forward now is not a kneejerk reaction to maintain stability in this election cycle (there are no election cycles to speak of), it is part of a plan where the end game is decades ahead.
China’s growth as an economic and geopolitical power has been rapid, but it had reached the limits of what is achievable on its current trajectory, what George Magnus in his book Red Flags calls ‘the end of extrapolation’. It had to find a new way to grow further, in power, in influence and in wealth even as it bumped up against the competing interests of other parts of the world. The Belt and Road Initiative (BRI), Made in China 2025, the stated aim to become world leader in AI and other new technologies, are serious ways to try and make a place for China in a world dominated by ‘decadent’ Western thinking.
The make-up of personnel in the Politburo is shifting away from the the influence of economic and state planners: four newcomers are proven scientists who have learned politics after succeeding in careers in academia, research and development. Scientific and military interests are being combined, in the name of national interest and security. Technological transfer happened a long time ago: China is developing its own, in many areas to the envy – and fear – of the rest of the world. China wants to secure its place as a world power, and increasingly Chinese characteristics mean CCP characteristics and control.
The most recent example of a hasty kneejerk reaction to current events – the reopening of the country following stringent COVID related lockdown rules, so rapid that it caught many, including myself, by surprise – was seen by many as a reaction to a faltering economy that needed the stimulus of consumer demand. This was not the case, as the fizzling out of the consumer economy has shown. It was because there was widespread and low-level dissatisfaction across the whole country that was affecting the legitimacy of the Party, leading to protests that ultimately found a focus in complaints against censorship and free speech. It was getting out of control – even the Great Firewall could not keep it completely under wraps – as photos of people holding up blank sheets of paper reached us. The country ended lock down, abruptly, and life went back to normal very quickly, and COVID and its discontents was quickly forgotten, like most of the rest of the world.
But the problems that China faces today existed before COVID broke out of Wuhan. The things – generally agreed on by the rest of the world by the way – that China needed to change were already in the pipeline: a shift towards a more technologically driven consumer and serviced based economy, a restructuring of debt and reform of the financial system, a lessening of the huge inequality between the rich and poor, an end of corruption and bureaucratic inefficiency. They have just become more Party and top down driven.
Back in 2009, faced with a global financial crisis, China responded in the only way it knew and, at that time, could. The central government encouraged local authorities to use off-balance sheet borrowing to fund a tsunami of public works projects. That would have been fine if it had been a one-off response and stopped there, but instead it institutionalised fiscal irresponsibility on a huge scale. Almost fifteen years later, off-balance sheet lending is even bigger relative to the economy – which has grown significantly since – than it was then, and the state is still trying to rein it in.
The world, and China, changed in 2012. The previous administration led by Hu Jintao, a product of Deng Xiaoping’s opening up and orderly succession of country and Party leaders (Deng was never President by the way) was replaced by Xi Jinping. It was widely recognised at the time, in both east and west, that China needed to change course, and much has changed since, but Hu’s legacy has largely been discredited as Xi has centralised control and power around himself, his thoughts now enshrined into the constitution. Subject to health and other unknowable factors as yet unseen, Xi can be President for life. Xi’s anti-corruption campaign against “tigers and flies” removed a great many big beasts from the top levels of the Party, and for now he is unchallenged. In a telling coda to this transition, Hu himself was forcibly removed “for health reasons” from the 20th National Congress of the CCP last October. It was astounding to see, but should underline the fact that Xi does not think much of the loose years of 2002-2012.
China has enough problems managing the legacy of the previous ‘bazooka’ stimulus of 2009 to embark on anything similar any time soon. The problems with Evergrande, Country Garden, shadow banking and local government finance vehicles are symptoms of that time. Reforms intermittently attempted, particularly since another mini-stimulus in 2016-2017 resolved the problem of faltering economic growth whilst increasing structural financial instability, continue. So, the current Politburo would be very unwise to suggest to General Secretary Xi that he should use the economic toolbox of a discredited period of Party governance to fix the problems caused by them. Xi thinks differently, and the Party will have to fix things using Xi Jinping thought.
Economic growth is no longer the metric that China uses to measure progress. The problems it has to fix to secure the legacy and the legitimacy of the Party itself are existential, and I doubt they pay much attention to the commentariat and analysts of western thinktanks, media and financial institutions. The shipping boom of 2003-2012 – interrupted by the financial crisis – largely caught the shipping industry by surprise; if we had seen it coming, more ships would have been ordered in advance, and the boom would not have happened so spectacularly as it did.
In my view, a very small and inexpert view admittedly, is that positioning ourselves for a Chinese stimulus driven boom is misguided. There are bigger fish to fry in the meantime, as the world adjusts to all the consequences of China’s continued rise, and everything else. We should remind ourselves that past performance – economically, behaviourally, politically – is no predictor of future performance. Or to mangle Heraclitus: no one can stimulate the same economy twice: it’s not the same economy, and it’s not the same stimulus. Expect something else, and that will most likely be the unexpected.