Platt Perspective on Business and Technology

China and its transition imperatives 20.5: China’s expanding economic bubble and a prediction for the coming year, part 2

Posted in macroeconomics by Timothy Platt on July 12, 2015

On June 15, 2015 I wrote a quick supplemental installment to this series on China and on how Xi Jinping has taken power since his election to supreme leadership in their Communist Party. And that posting went live the next day on June 16.

I only rarely write postings to go live essentially immediately; right now I am almost precisely two months ahead in my blog writing, having just finished a posting that is set to go live on September 9, 2015. But I chose to do this, as I saw a correlation of events and underlying forces coming together that indicated to me at least, that China’s economic bubble was on the imminent verge of bursting. So I wrote and uploaded that posting, and it went live on June 16. And I wrote that day to a colleague who has worked in areas relevant to this, of my new and sudden posting on what I saw as this soon to break news story. And then a matter of a few days later the bubble did in fact begin to at least significantly sag.

What I had expected to be my last installment to this series, which I had already completed and uploaded, went live on July 3: Part 20: Xi Jinping’s emerging China, and the challenge of his country’s emerging future 3. And every day saw fresh news stories about China’s economy and of how its main stock markets were dropping and dropping, how their government has put a complete halt on all new IPOs, and on how the Chinese government was buying up stock shares in an attempt to stop this slide as their middle class investors began seeing all of their new wealth evaporate before their eyes. The government of China has in fact attempted a wide ranging set of measures intended to stop this at least partial collapse of their overall economy.

Both China’s private sector enterprises and their government owned and run businesses and industries have taken a tremendous hit here, and by my estimation the Chinese government has already pumped the equivalent of more than one half of a trillion US dollars into their effort to regain a more stable balance again and with restored confidence – and just in their public stock markets alone. This is all tremendously serious for China, within their country. If they cannot contain this, lack of confidence in their economy could very easily translate into lack of confidence in their centrally managed economic system and in their government and Party leaders who have made the decisions that have led their country to this impasse. I have even seen a few news stories coming out in the West that suggest that this is already happening, though I suspect that that assessment is still premature at best. We will all know with absolute certainty if the general public in China, to any significant measure begins to publically show distrust in their government or in their one true Party.

And now it is July 11, 2015 and I find myself writing another last minute supplemental posting to go live the next day on this blog. And I do so with some fundamental issues and questions in mind, that bear need for what I see to be immediate consideration.

• So far at least, essentially all of this economic downturn has been contained within China itself, as the businesses and investors that have seen their valuation and wealth start to collapse have primarily all been in China.
• And for many if not most of those companies involved, even if they are publically traded, that has primarily been carried out strictly within China itself and through China’s own stock exchanges.
• True, this series of events does raise a significant risk of impacting on the global money market valuation of their currency, and this has to have impact on the global perception of the valuation of Chinese publically traded businesses whose shares are more actively traded on a more global range of stock exchanges. And this will impact on international trade with China. But the real impact of much of this would be delayed at least for now, and in principle would be minimal if China’s current emerging economic challenges could be rapidly reined in.
• But that assessment is misleading. Referring back to my Part 19.5 supplemental installment, I point out that the problems emerging now are in fact only symptoms, and to much more widespread underlying long-term structural problems and challenges. And those arise from how the Chinese economy is centrally managed under their one Party system.
• I am convinced that one of China’s principle reasons for so forcefully claiming hegemony over the South and East China Seas, and their off-shore wealth is that their government and Party leaders have seen this coming. To put this bluntly, and to cite the evidence that I have been presenting in this blog in this series and in earlier ones – China’s entire economy is in effect a house of cards. If I were to put this less charitably I would state that it is in effect run as if a nation-wide Ponzi scheme, and I cite the way that their government has leveraged its foreign currency holdings to “manage” the international valuation of their own currency: their Renminbi as just one working example of how this has been done.
• I have also come to believe that long-term concern as to their overall economic strength is a core reason as to why the Chinese government has so actively worked to build their new Asian Infrastructure Investment Bank and to bring in so many charter member nations.

Will China pull out of this economic slump? Can they? I would answer both with a “very likely yes.” I would answer that way for now, and certainly if they can manage to keep their problems so much inside their own country. If their economic downturn begins to spill out more globally and in ways that other national economies and the global private sector cannot deny, then any answers to these questions become a lot less certain. Will they recover? Yes, they probably will. But what impact will this have on China, its people and their system of one Party power and governance? I note in that regard that over the past few weeks I have seen another increase in the level of state sponsored repression against any who might in any way question or challenge their one Party system, and on any level and even just indirectly or by implication. We are still just witnessing the beginning of all of this. Much more will follow.

You can find this series and all of its postings at Macroeconomics and Business as postings 154 and loosely following for Parts 1-12 and for a supplemental posting: Part 12.5. And see Page 2 to that directory for a second, continuation supplement Part 12.6 and for Parts 13-19, and for here-cited Part 19.5 and Part 20. And you can find other, China-related postings and series at those directory pages, and at Ubiquitous Computing and Communications – everywhere all the time too. And contrary to my initial planning, I will almost certainly renew writing to this series again, as events in China continue to unfold.

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