Platt Perspective on Business and Technology

China and its transition imperatives 7: Xi Jinping’s challenge 2

Posted in macroeconomics by Timothy Platt on April 18, 2014

This is my seventh installment to a new series on China and its recent Party and government leadership transition, looking back over the past year since that formally and officially took place and to now and China’s current situation, and forward (see Macroeconomics and Business, postings 154 and loosely following for Parts 1-6.)

I begin this posting by noting a quote from Lewis Carroll and his work Through the Looking-Glass, that I find running through my mind:

• “Now, here, you see, it takes all the running you can do, to keep in the same place. If you want to get somewhere else, you must run at least twice as fast as that!”

When the Red Queen said that, she could just as easily have been speaking in anticipation of the People’s Republic of China in its current economic and sociopolitical predicament. On the face of it and as generally publically acknowledged, China holds a vast reserve of foreign capital as well as of its own renmimbi. But as already noted in this series, any such holdings are balanced off by at least matching debt and with that coming in large part from disorganized and problematical local and provincial, and I add national Party and government sponsored and mandated development – that does not necessarily meet China’s current or developing needs.

China has been repeatedly and consistently accused by its international trading partners of manipulating the value of its currency as measured against that of other nations, to more favorably tilt the international trade playing field in favor of its businesses and its overall balances of trade with those nations. Basically, China and its economy rest on the top of a bubble, and they need to keep their economy growing as fast as they can simply to stay where they are now, as far as maintaining overall economic stability is concerned. And with this, I would offer what could be called a modest proposal, using that term with the irony of Jonathan Swift’s essay by that name in mind.

• I noted toward the end of Part 6 of this series that as much as Deng Xiaoping is revered in today’s China for the change that he was able to bring, he was still in the longer run a failure for trimming a little at the edges of a corrupt and dysfunctional system while leaving the rot at its core untouched. He was never able to even begin to address the stranglehold of China’s all powerful if sclerotic one Party system with its excesses and its inefficiencies.
• And I stated there that if his currently in power successor: Xi Jinping is to go beyond the cosmetic changes that Deng enacted, to address his country’s fundamental underlying challenges, he has to find a way to directly challenge the absolute control over all of that one Party which he now leads as General Secretary of the Communist Party of China. And this brings me to my modest proposal.
• China’s overall economy is due for what in market terms would be called a major course correction. This would impact upon every facet and level of Party and government, as well as on its fledgling private sector economy, which is still largely Party and government controlled and even when nominally in more strictly private sector hands. I noted in anticipation of this posting at the end of Part 6 that I would bring their military into this discussion.
• China has been flexing its military muscle recently, and particularly over the past year, claiming hegemony over vast tracts of the South China Sea and particularly over atolls and uninhabited islands long-claimed by Japan and other nations that are located near key shipping lanes and undersea natural resource concentrations. Part of this muscle flexing, I suspect, has stemmed from Xi’s campaign to claim full control over the Military and to solidify his leadership over the full range of Party and its power bases by proving his support for their agendas. But especially where potential undersea wealth enters into this, a big part of his Military’s outreach has to be economically driven too, and directly so. This is also part of running as fast as you can simply to stay in place. China’s military is currently seeing a 12% plus year over year growth in overall budget, and just for those portions of its overall budget that are publically visible and stated. Xi and the Communist Party that he leads are attempting to use this growing Military and its still embryonic and growing deep water naval capability in support of economic ends and to maintain ongoing economic stability in the face of pressures that would lead to a real and significant economic downturn.
• Xi’s best chance for enacting real, fundamental change is only going to be possible if China has to go through that massive course correction with the perhaps steep economic downturn that would define it. It is not an accident that Mao Zedong’s Hundred Flowers Campaign failed when the Party it would challenge was all-powerfully in control and when that same Party would see any deviation from its one, true vision as an existential threat to its overarching authority.
• Xi was able to end his country’s one child policy because it so overtly and long-term disastrously failed. The only way that he or anyone else will ever be able to challenge the monolith of one Party rule in China is if its cracks and flaws are allowed to show too; that is my modest proposal, that China’s economy and its supporting systems be brought back in line with an underlying global reality that has been ignored, and with the costs of that simply accumulating for when they are called due. If Xi wants to bring about effective change and bring China more stably into the 21st century as a major power he has to let it undergo the painful reorganizing that it needs if it is to build from a more stable foundation.

And this brings me back to a point that I have already briefly touched upon in other contexts where I have written about the importance of holding to a of rule of law rather than a rule of man. Ultimately, the problem that China faces is more fundamental than simply one of single political party approach versus taking a two or more party approach with greater diversity of political voice allowed. I am going to step back in my next series installment to consider this set of issues as representing a deeper level analysis of China and its current situation and needs. Meanwhile, you can find this and related postings at Macroeconomics and Business.

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