Platt Perspective on Business and Technology

China and its transition imperatives 33: rethinking China’s emerging trends in challenges faced and responses made, and in how each reinforces the other 2

Posted in macroeconomics by Timothy Platt on June 3, 2016

I began discussing a series of current events puzzle pieces in Part 32 of this series, that when assembled and thought through and both for their individual significance, and for how they fit together, reveal a great deal about China’s current economy and its governmental and Communist Party decision making. And I added when writing that, that I would offer a continuation piece in a few weeks in which I would add more pieces to that puzzle. I wrote Part 32 to go live on May 13, 2016 and I continue from it here, writing this posting on May 25, to go live on this blog on June 3. And following the same basic pattern that I set out in Part 32, I begin here with some explicitly economic-systems puzzle pieces.

A vast number of citizens in China and certainly among their wealthier socioeconomic strata, feel deeply concerned about the strength and stability of their currency: the Renminbi, and for good reason. I have been discussing a series of long-developing reasons for that throughout most of this series, and in fact from near the beginning of this blog. And many of their largest privately held businesses share those same concerns, and certainly since China’s economic bubble began to burst with their initial stock market collapse (see, for example: Part 19.5 and Part 20.5). What would I offer as new puzzle piece indicators as updates to this? I at least begin by citing some relevant recent news stories, going back to February of this year, and with their basis in fact going back farther than that:

Chinese Start to Lose Confidence in Their Currency

China’s government officially limits the amount of currency that its citizens can legally move out of their country to the equivalent of approximately $50,000 per year. But a growing number of China’s wealthy elite, including highly positioned members of their “top 1% counterpart” Crown Prince Party have been actively bypassing that limit to move what is collectively a vast amount of wealth offshore: the equivalent of many billions of US dollars in total.

For the simply well to do this can mean actively enlisting others, and even what amounts to significant groups of money movers who individually help transfer out funds within those limits, but who collectively move out millions. But that mechanism of capital flight, as noted in the above-linked new story, only begins to address this overall news story, as the complexities and risks of setting up and running that type of operation and at any significant scale, set fundamental limitations on how much currency any one individual or family can move offshore in this way. The truly wealthy in China can and do send much larger amounts of their wealth offshore by other means, including means that can only work with government and Party official collusion and support. I will return to this point a bit later in this posting when I address who is taking part in this among China’s elite.

But to continue this narrative, that first puzzle piece meshes with a second, closely related one that I would offer next:

China’s Exodus of Capital.

A growing exodus of capital has been taking place, as just noted, in which companies and individuals are moving money out of China. There has been an ongoing lower level flow of income out of China for essentially as long as there has been a Communist China and certainly for as long as it has been possible to enter into contact with the outside world from there. So for example middle class Chinese have been moving unreported pre-tax income out of Mainland China and into Hong Kong, and into countries such as Vietnam and beyond for as long as there has been a Chinese middle class to do this. They have been doing this and continue to do so in order to evade income taxes, and frequently do so while traveling outside Mainland China, and through the purchase of luxury items and by making smaller scale investments there. And there has been a matching pattern in which Chinese private sector businesses have found ways for themselves to do what is essentially the same thing in order to diversify their reserves – as well as for tax avoidance purposes. But that outflow of capital: always significant in aggregate but generally more limited in overall scope, has now turned into an outflowing torrent. And that torrent has turned into a real flood and particularly over the past year and more. And this by-now hemorrhaging drain on the overall liquidity in China’s internal economy has reached a point where it is casting doubt on the nation’s economic prospects as a whole, in and of itself. And yes, China’s government and Party have become more and more active in their efforts to stem this tide. And in a way I note that detail here as a point of irony.

That is because this brings me to the Panama Papers: a collection of over eleven and a half million documents that detail the until-recently secret financial, and related attorney-client dealings of more than 214,000 offshore entities: including the cash transfer activities of many of the wealthiest and most powerful people in China. And the wave of disclosures that have come forth as a result of the leaking and publication of Panama Papers documents, has swept up members of the families of some of the most powerful people in China including close family members of Xi Jinping himself: their head of state and supreme Party leader. In that regard, see this news piece from The Economist:

The Panama Papers Embarrass China’s Leaders.

This highlights how leaked Panama Papers documents about offshore companies name family members of the country’s president, propaganda chief and vice premier, along with a vast number of other well to do senior Party members and Party-favored in China. And also see this International Consortium of Investigative Journalists’ piece:

The Panama Papers

That is the organization that initially published documents from this trove and it is the organization that began to name names of those involved in all of this offshore activity. And see this puzzle piece:

Panama Papers Tie More of China’s Elite to Secret Accounts.

A full list of who is involved in these offshore accounts will take a long time to determine, if it ever actually can be. That is because a full discovery of who holds ownership shares in these offshore investment entities would require successfully identifying and working through mazes of shell companies with their dummy ownership claims, as set up in jurisdictions that pride themselves on preserving anonymity, and with shell companies involved owned by still other shell companies … that are only indirectly owned on record by the real shareholders and owners of this wealth. But for a very incomplete but already telling partial list of shareholders who have been clearly identified in this leak so far, see this:

List of People Named in the Panama Papers .

I have to assume that this list will get a lot longer as more and more shareholder names are identified and verified and added to it.

• What does all of this tell us?

One obvious point is that the level of fundamental lack of faith in China’s currency and in its economy that is reflected in this flight of wealth out of that country, goes all the way to the top and for both government and Party leadership.

• What does this series of revelations portend, for China’s future?

China’s Golden Shield Project has added a new set of red flagged online search terms and web content words and phrases, that they actively look for now to block access to. So access to online content that includes the phrase “Panama Project” is now actively blocked as are a great many other terms that might be considered connected to that information source and its revelations. But the country name: “Panama” is also being blocked too and even when it appears in completely unrelated contexts. So a great deal of effort is being made to catch and block this news story and it attendant scandals from reaching the Chinese public. As an example news reference to this, see:

China Steps Up Panama Papers Censorship after Leaders’ Relatives Named

But China’s real problem in all of this is that the rest of the world is coming to know of this scandal and of China’s role in it. And that rest of the world has to include those in trade negotiations positions in countries that China does business with, and whose favorable trade decisions are essential if China is to bring in needed foreign currency to their economy, as well as essential raw materials and goods. How would a growing perception on the part of the people who do this business with China be affected, if those people began to see China’s economy and its capacity to carry out their side of those deals to be faltering?

I will end this posting with one more puzzle piece: an interview with Minxin Pei that was recently offered through Sinosphere:

Q. and A.: Minxin Pei on the Future of Communist Rule in China.

Professor Pei has concluded on the basis of his study and research, that China’ communist government is unsustainable and likely to fail, leading to fundamental collapse and to change in the type of government that a recovering China follows. I reach that same conclusion in general, and find myself concluding that it is likely that Xi Jinping will be known in history as China’ last communist emperor. And I see the unfolding succession of news stories that I discuss in this series, as bread crumb trail evidence, of how China’s communist government is proving itself in detail to be unsustainable long-term.

I am currently planning on adding another installment to this series in approximately a month, though I already have a number of new stories and puzzle pieces that I am at least considering adding to this narrative. 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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