Platt Perspective on Business and Technology

China and its transition imperatives 43: thinking through Xi Jinping’s current realities in a larger context 1

Posted in macroeconomics by Timothy Platt on March 10, 2017

This is my 51st installment, counting supplemental additions, to this ongoing and even open-ended series on China. Basically, what I am doing here is to trace how China has changed under the rule of Xi Jinping, with this series narrative starting approximately one year after he first took leadership of their Politburo Standing Committee, and through that of their entire Communist Party of China and of China as a whole (see Part 1, as written to first go live on this blog on February 8, 2014.)

I begin this posting by acknowledging an error in calculation, and certainly one of presentation that I offered recently that in retrospect reflected undue conservatism on my part. I wrote in Part 33 of this series that:

• “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.”

And I knew that as written, this reflected a very significant underestimation of the actual numbers involved there; I was thinking in terms of hundreds of billions of US dollars and their equivalent, flowing out of the People’s Republic of China, and certainly since their open white market economy began to significantly collapse, as was more publically exemplified by how their stock market did – with that slide only significantly slowing when emergency government support was provided to prop it up. (I posted that this was imminently about to happen on June 16, 2015, just over a week before it did. See Part 19.5: China’s expanding economic bubble and a prediction for the coming year.) And I add here parenthetically that since then, the government of China has at a conservative minimum, expended well over the equivalent of one trillion US dollars from their reserves to prop all of this up – and with much of that literally coming from their US dollar and other hard-earned foreign reserves. But that is another story that deserves separate consideration.)

My primary focus of attention here is on the level of privately held wealth fleeing the country, and particularly as it became impossible to ignore China’s profound structural economic weakness. I was too cautious in my earlier published estimation and in how I presented it; I was confident enough to publish that their economy was in such peril, but my deeper thoughts as to the actual levels of privately held wealth flowing out of China seemed so difficult to swallow that I toned it down when I offered my more specific order of magnitude assessments of what was transpiring there. But I want to update that now, and I have developed an evidence base that would support what should be the completely outrageous in this. My current assessment, and with this stated in terms of what I would consider actually, prudently conservative too is that the equivalent of more than one trillion dollars of personal wealth has flowed out of China just since June, 2015 and that this flow had most probably already been on the rise leading up to that, as those more in the know in China – and who held this wealth there, saw prudent value to move it to more secure sites. And I would argue that the overall privately held wealth of China’s political and economic elite that has been moved out of country has to total into the several trillions of US dollars for its overall value, and certainly when both government and Communist Party, and more private, non-government, non-Party wealth are included and when wealth transfers from before Xi Jinping’s rise to power are included. And that is just over the course of the past few years.

I am not going to discuss the full details of how I arrived at this, any more than I did when predicting the economic collapse that China saw open up in mid-2015 when I first offered a prediction of that happening – at least not here in this posting. It is going to be long enough for one series installment anyway. But I will at least begin to flesh out a few of the details in this posting, as the points I would raise in that analysis, that have direct bearing on future discussion that is essentially certain to come.

Let me begin with two points of interest: a recent, as of this writing news story that came out in the New York Times and that confirmed an assumption that I had already reached from research through more direct, if spotty sources, and China’s position along the scale of a basic macroeconomic metric: the Gini coefficient – that directly measures and charts measures of wealth inequality in an economy and the society that contains it. First the Times article:

Chinese Lawmakers’ Wallets Have Grown Along With Xi’s Power.

Just considering the wealthiest members of China’s parliament – that one governmental body: their National People’s Congress, their top percentage holders of personal wealth collectively hold some $500 billion dollars among them. Amplify that out to include the rest of their parliament alone and beyond that, the rest of their powerfully placed political elite as distributed throughout the higher ranks of their government and Party – with all of their opportunity and capability for amassing personal wealth too. And add in their still small but increasingly significant private sector wealth too (with its gray area connections to government and Party wealth) and this brings me to the second of the two points of interest that I would raise here: China’s Gini coefficient.

In brief and even cartoonish terms, the Gini coefficient is a metric that ranges from .00 to 1.00 in possible value with the lowest possible score representing absolute wealth equality across an entire population and with everyone holding exactly the same there, and a score of 1.00 representing a situation in which one individual holds everything, and everyone else nothing. A score of .40 or higher is generally considered to represent extreme wealth distribution inequality, and I cite the World Bank as just one organization that uses that valuation as its demarcation line for this. Officially, China’s Gini coefficient reached 0.491 in 2012 and it has been falling since then, though it is still rated as being over that .40 cut-off for extreme wealth inequality and has remained so consistently. But I would argue that this drop-off is in fact an artifact of the limitations of data availability. China, as I have discussed in at least some detail, has three economies:

• Their open white market economy that is overtly visible and that is addressed in these official and semi-official determinations, and
• A black market economy that is at least nominally entirely illegal and that serves as the economy for all of their extra-legal businesses (such as their extra-legal but vast rare earth metals mining industry with all of its government official and Party functionary support (see my series: The China Conundrum and its Implications for International Cyber-Security, as can be found at Ubiquitous Computing and Communications – everywhere all the time as postings 69 and loosely following, where I raise the issues of rare earth mining as a working example from its Part 1 on.) And perhaps most importantly for purposes of this posting and its discussion, illegal here also includes off the books income and wealth that are not reported as required by law for taxation and related purposes. Otherwise legitimate types of business activity that are carried out, outside of China’s legal system of reporting and accountability are illegal too, just as more overtly criminal business activities are – at least as a matter of legal principle.
• And this brings us to China’s vast gray market economy that among other things serves as a bridge between the first two, where large areas of China’s industrial base and overall economy are black market, or at least have black market aspects – essential commodities development only counting as a part of that.

And as China’s economy has become more and more unstable and unreliable as a safe haven for personal wealth, more and more of the wealth actually held has been effectively taken off-books and has been moved into their gray and black economies – and from there out of country where taxation and other issues would not arise and from any step of that process. The official Gini coefficient calculations as to China’s wealth distribution have become less and less accurate and for this and for a variety of related, connected reasons as well. And a true evaluation here that was based on a larger and more inclusive data set would all but certainly be at least as high as the 2008 peak of 0.491. And I expect that it would in fact exceed .50, putting it in nose bleed territory for the potential impact on societal stability that this might suggest.

Let’s consider another puzzle piece to this narrative here:

China Income Inequality Among World’s Worst.

The top 1% of China’s wealthiest hold approximately 25% of their nation’s wealth – and just when their more openly visible economy is considered, and their bottom 25% collectively hold just 1% of their wealth – and with no need or ability to in any way hide any significant amount of that. Adding in gray and black economy wealth to these calculations would only skew these numbers even more than they are more openly listed at now. (And as a point of possible clarification here, I first wrote about China’s black market rare earth mining in a cyber-security context is because I first approached this complex of issues from the perspective of how the Chinese government so actively seeks to keep knowledge of this type from their general population – as they do for many types of information that might challenge their official self-supportive narrative.)

The one piece to this puzzle that I have not delved into here but that is essential to my scratch pad calculations that would lead to my wealth flow totals, is that of what percentage, overall of this wealth has been shipped out of country. That percentage obviously cannot included fixed assets that would of necessity stay in place, in China. It would not include business and personal property and other large-scale physical assets held either, and it would also not include significant levels of personal wealth including significant levels of liquid wealth – cash wealth – and certainly where that was openly visible in their white economy. But it would include openly held white market economy wealth that was being moved out of the country as openly visible foreign investment, and in real estate, business acquisition and more. And it would include any less visible assets moved off-shore, and for black market economy assets, all of those so moved. This represents the rough outline categorical breakdown of what would be considered in this type of calculation. Then it is a matter of estimating proportions of the actual, overall economy represented by these general categories, and how wealth would be expected to flow out of them. I will hold off on delving into that and into how I arrived at my numbers for another occasion. I will simply say that I am still taking a conservative approach there.

My reason for addressing all of this here as a start to this posting, has been to set up a discussion of an emerging dynamic that China and their government and Party, and that Xi Jinping in particular have to understand and deal with: the sudden and still expanding range of uncertainty and risk that is now coming out of the West, and certainly with the 2016 election of Donald Trump as the president of the United States. China is inextricably connected to the West and to the United States in particular as a major trading partner. And the United States and its economy, with its strong US dollar has become a gold standard for many in China, as they seek out best outside investment and personal asset protection options.

• China’s wealthy elite’s own economy at home is fragile and weak and from deep underlying structural causes that cannot readily be addressed and certainly on anything short of a very long-term basis, and regardless of what measures are attempted from the top and regardless of the fact that China has a largely government and Party controlled command economy (command economies, actually. And the Wikipedia piece that the article behind this link points to, addresses them as a more strictly Soviet Union phenomenon but the People’s Republic of China has refined this approach to a whole new level now.)
• The members of this elite group see greater stability in the West than they do in China, and in the countries of Western Europe, and in emerging opportunity in some of the African nations, and elsewhere – and in the United States economy and as a major wealth relocation and protection base.
• But they now face growing uncertainties there too – and with vast levels of their wealth tied up in the United States and its globally reaching businesses, and in ways that would be difficult at best to unwind if need be.
• And I add to this set of details that one of the clearest and most easily discerned strategic process and policy decision that China’s government and policy leadership has made – coming from Xi Jinping as much as from anyone else, is that China must expand its reach and its larger regional and global strength if it is to survive – and certainly as anything like the type of officially Communist state that it is now.

And this has led to China taking some at least apparently widely divergent approaches and simultaneously, where for example:

• They have actively sought hegemony over the South and East China Seas and that large region’s collective assets – creating conflicts with their nation neighbors there and with the world as a whole too – and increasing tensions and uncertainties with the West and with the United States and that nation’s policies and interests as a result.
• And at the same time their wealthiest have been more and more actively moving their wealth into those countries – and with the United States and its economy definitely included there, further tightening the bonds that connect and further making any reactive response from China’s government to US push-back that much more risky.

And this brings me to the last puzzle piece that I would address here, and it is one that I have been foretelling for almost as long as I have been writing about Xi Jinping here at all – and very directly for several years now. He sees himself in the image of a nation defining ruler in the manner that Mao Zedong achieved – and that none of his successors have come close to, at least (perhaps) until now. And it is likely that Xi will both actively seek out and achieve an up to now disallowed third term as supreme leader of government, military and Party in China and regardless of term limit and age limit restrictions that have come to be seen as basic to their system now. For a current in the news piece that very publically addresses this possibility, see:

China Income Inequality Among World’s WorstXi Jinping, Seeking to Extend Power, May Bend Retirement Rules,

though evidence in support of this type of development, and of conclusions reached as to what it means, has been available and visibly developing for a long time now – and not just as offered in my postings.

Xi Jinping seeks out personal power and he wants to hold onto and expand it, as long and as far as he can. And equally important for this, he sees himself as the one and only person: the one and only true leader of China who can successfully lead his nation through its current and emerging challenges, and certainly now and through any foreseeable future. He sees himself as the absolutely indispensible man if his party and government and nation as a whole are to endure and certainly essentially as-is and long term. And with that I state one perspective on China’s and Xi Jinping’s current realities, and in at least something of a larger context that he would make this decision in.

Once again, I am going to continue this series and its narrative in a next installment that at least as of this writing, will probably go live to this blog in approximately one month. 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. (And as a time stamp, I wrote this as a single draft on March 5, 2017.)

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