Platt Perspective on Business and Technology

China and its transition imperatives 24: a September 12, 2015 update concerning China’s economy

Posted in macroeconomics by Timothy Platt on September 12, 2015

I recently posted a quick update note to this series, with a discussion of China’s Shanghai Stock Exchange and whether or not it actually functions as a legitimate stock exchange as would be generally, internationally understood (see China and its Transition Imperatives 23: a September 4, 2015 update concerning the explosions at Tianjin and their economic consequences. And at the end of that posting, I stated that I would offer a follow-up piece for live release to this blog on October 23, 2015 – to help put the progression of rapidly emerging news events that I have been addressing here into “fuller perspective, … as it becomes clearer how China is going to respond longer-term to what has recently been happening.”

I will do that, but note here that I also said that I might add in another interim, addendum posting first, as events are unfolding so quickly now and with such great portent, and certainly for China’s short-term stability if not for its long-term prospects. I have in fact decided to do that, and offer this brief note as such. And I begin this by repeating a set of four thought questions that I posed in Part 23, at least one of which I will directly address here:

• What does all of this unfolding news have to say about both the levels of local and provincial, and national corruption in place, and about China’s capability to safeguard its critical infrastructure?
• And what does all of that have to say about China’s capacity to recover its open marketplaces and its openly legal white economy, and in ways that can instill widespread confidence and credibility in their system?
• And what impact is this event likely to have on China as its leadership seeks to reestablish their own credibility as well as their country’s strength and standing?
• And what would happen to that if (when) a still larger percentage of what at least nominally would constitute its tax base income, were to divert into their country’s gray economy as off-the-books, unreported income and never reach their government coffers?

First of all, China has very actively stepped up its campaign of information suppression in an attempt to block any and all critical reporting or commentary as to its current and still unfolding economic challenges. And its government agencies have in fact stepped in to directly take control of what was nominally the economic private sector in their country, essentially entirely. For a Western publication reference on this development, I cite a September 9, 2015 news piece: China’s Response to Stock Plunge Rattles Traders. For a new news and information management reference to this I add that I have begun to hear of an increased number of events such as this: Caijing Journalist’s Shaming Signals China’s Growing Control Over News Media, and with essentially any and all even just potentially critical news coverage of China’s economy now actively suppressed.

I have always been at least somewhat reluctant to directly cite Chinese news or information sources in my writings, and I have become much more so in recent months. And with that stated, I turn to the fourth bullet pointed question that I have repeated into this posting, above. When I write about China’s economy and its recent and seemingly sudden downturn, I write about a lot more than just a precipitous drop in their stock market index.

• And what would happen to that if (when) a still larger percentage of what at least nominally would constitute its tax base income, were to divert into their country’s gray economy as off-the-books, unreported income and never reach their government coffers?

I have decided to cite here, an op-ed piece that appeared today, as of this writing, in the New York Times: How to Cheat on Taxes in China. This news and commentary piece in fact did originate in Beijing but I decided to cite it here anyway, as its author has already intentionally chosen to publish it in one of the West’s leading news publications. The take-home lesson from this published article is that everyone tax cheats in China now. That is their economic status quo, that absolutely everyone sees their government and its system to be so corrupt and self-serving and so inefficient and even when it actually does seek to promote the common good, that they would go to great lengths to avoid having to support any of this with their hard earned income.

China and its one Party and government cannot fix their open, official white economy in any fundamental and lasting way unless and until they can address their black market economy and their even larger gray economy. And they cannot even realistically hope to do any of that without making fundamental changes in their system of governance as a whole – which they cannot do and still remain in power, at least in the manner in which they are now.

When China made its choice to enter the world from its long largely self-imposed post-Communist revolution exile, and enter into an increasingly interconnected global economy, as a core part of that move they embraced a stark contradiction in terms: seeking to reconcile the mutually incompatible. They decided to remain tightly centrally controlled and with no real opportunity conferred to anyone without explicit and tightly limited and defined Party and government approval and oversight. And at the same time they began to at least nominally allow, and to event publically extol the virtues of an increasingly open and entrepreneurial business sector and economy that can only survive if it can be freed from this type of oversight and micromanaging control. The contradiction that arises between tightly centrally controlled censorship, and the need for a free flow of information in order to make personal and business economic decisions is important here, but it can at most be considered only one small part of the collision that this incompatibility sets up.

OK, this has turned into a full length posting anyway and not just a brief note. I am going to follow it as initially planned with an October 23 series installment. And in anticipation of that, I note here that I will discuss what might be seen as the unacknowledged 800 pound gorilla in the room: China’s People’s Liberation Army (PLA).

I made explicit note of the PLA, in two last minute supplemental postings that I added to this series and blog in response to the unfolding news coming out of Hong Kong, during the height of their anti-Beijing control protests that took place in 2014 (see Part 12.5: an inserted news update re Hong Kong and Part 12.6: an inserted news update re Hong Kong, act 2 .) People still carry those yellow umbrellas in protest over Beijing’s all too ham-handed an approach in claiming overall sovereignty there. And I wrote those postings from very genuine concern that the Beijing government might create a direct confrontation situation there, that could break down into becoming a repetition of the Tiananmen Square military crack-down of 1989.

That, fortunately, did not happen as cooler heads prevailed. I do not expect to see anything like tanks in the streets of Beijing out of today’s unfolding news – unless that is, the current government decides to hold another big patriotic parade to help drum up public support again. But the PLA is the largest single business owning, and even entire industry owning participant in the Chinese economy, and it is essentially certain that they have amassed a very sizable foreign currency reserve of their own, that is entirely separate from the reserves that are generally reported on as being held by Beijing. So as at least one thread of discussion, I expect to address the PLA’s role in China’s economy and its influence on China’s economic policy and practices, in my upcoming October posting.

Meanwhile, you can find this entire 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 subsequent main sequence and supplemental installments to this. You can also find other, China-related postings and series at those directory pages, and at Ubiquitous Computing and Communications – everywhere all the time too.

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