China Is At the Forefront of a Global Economic Reverse

China Is At the Forefront of a Global Economic Reverse
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It was a crossroads for modern China. As its de facto leader since 1978, Deng Xiaoping had introduced serious reforms. These had begun to sputter toward the later 1980’s. Then came Tiananmen Square and a growing crackdown. Authoritarian politics was overtaking economic liberalism, a constant danger for progress everywhere.

Deng had been only “first among equals” out of the revolutionary class left to rule China when Mao Zedong died in 1976. One of those was Chen Yun, a master politician who by all accounts was taken to be a clear reformer in the early days of the Communist reign. Chen would come to represent the Marxist counterbalance to what much later reforms would propose, a sign of how much things were changing. Being called the godfather of Chinese central planning, he was a so-called hardliner.

The natural tension wasn’t settled in the eighties, as both sides knew that China needed to modernize but worried about where that could all lead.  The central point of contention in practical terms were the Special Economic Zones (SEZ). These were initially small parts of the country, specific cities or regions which were declared open for almost free market commerce, including, importantly, foreign investment and participation. Four were originally designated in August 1979, concentrating mostly around the Pearl River Delta.

They had proven fantastically successful, another fourteen of them along China’s coast added in 1984. While the Chinese economy began to expand and became truly modern, it was, however, localized only around these parts.

Chen Yun was famously, or infamously depending upon your perspective, much in favor of what he called the “bird cage economy.”  The market system should be caged by Maoist belief, else the bird would fly away. But the cage also shouldn’t be too small, lest the animal atrophy and suffocate. Some balance above all, but where to set the equilibrium?

Over the next few years after the massacre at Tiananmen Square, it seemed as if the hardliners had won the argument. Deng’s SEZ’s had gone too far, they believed, and though Chen was semi-retired by 1987 he was still active, his followers holding all the chief economic positions. China’s economic rebirth stalled, a natural consequence to the general crackdown.

In January 1992, Deng, growing tired and restless, left Beijing and his constant squabbles with Chen and the others. He never fully broke with them on governmental matters, a committed Maoist to the end, he just saw China’s priorities differently. For the Chinese Communists, the choice was really one of survival, how the Revolution might continue in a very different modern era. These were the same questions being asked of other Communist Revolutionaries who were thankfully being extinguished during those very same years.

Departing China’s capital, its weakened leader headed south first toward Wuhan in central China. Originally Deng had invited Chen to accompany him on what was to be a prolonged journey but his rival refused. Initially, state media made little or no mention of the sojourn. Attention was focused elsewhere, only the Hong Kong press enthusiastically broadcasting Deng’s increasingly forceful awakening.

It came to be known as nanxun, or “Imperial Tour of the South.” While there had been much progress along the eastern coastline, little had touched the vast interior and south where life was still like it was a hundred, two hundred years earlier. Not only was there vast amounts of human economic suffering, the untapped potential was equally as enormous.

At every chance, Deng Xiaoping would say, “open up!”, or kai fang. Emboldened, as more of China began paying attention, he would put the hardliners on notice. Anyone who “did not support reform must step down.”

Some did, others fell in line. Economic liberalism was back on track, amplified even. Chen Yun died in 1995 only really having disagreed with Deng Xiaoping about the dimensions of the bird’s cage. Deng would pass away in 1997, still convinced that true socialism not only could be strengthened by reform, the real goal of economic progress was in fact to strengthen socialism.

The year he died, Deng’s theory was enshrined by the 15thCommunist Party Congress. Liberalization would continue, ownership rules pertaining to state-owned firms and local collectives were relaxed, permitting private capitalization (often management buyouts) in the sector. The 16th Party Congress, held in 2002, ratified Jiang Zemin’s Three Represents philosophy, taking it a step further.

According to Jiang, these were how the Party must represent: “advanced social productive forces” (economic progress); “the progressive course of China’s advanced culture”; and, “the fundamental interests of the majority.” While Deng had shown the way on the first one, and Mao ruthlessly established a baseline for the second, that last one was tricky. It was also the one every high official worried most about.

Especially given the way in which Jiang rose to become China’s supreme leader. Though he succeeded Deng Xiaoping he was not meant to be Deng’s successor. In fact, Jiang had been little more than mayor of Shanghai. The city was a base of power for the Communists, to be sure, but Jiang had little national support of his own and wasn’t really highly regarded certainly not in the role of either reformer or hardliner.

But his middle-of-the-road approach was exactly the qualities that fit the times. There had been protests in Shanghai, too, just like there were in Beijing. Jiang met these forcefully but peacefully; that is, non-violently, closing press offices and destroying publications sympathetic to the protestors.

By contrast, Zhao Ziyang, who was Deng’s long-time protégé, confidant, and star in the central political circle, openly met with the Chinese activists even after they had been violently suppressed. Zhao told them, “we are already old, we do not matter anymore.” He had gone too far, even Deng had to disavow the man responsible for carrying out his liberalized vision.

With milquetoast Jiang taking his place, everyone seemed to expect from the new guy nothing more than a caretaker; a temporary technocrat of sorts keeping the seat warm until the internal struggles were more fully resolved leaving a new consensus, and star, to take over.

When Deng finally died in 1997, Jiang and his “Shanghai clique” set to purging leadership positions of those he mistrusted. These were not Stalinist in the blatant murder of thousands, merely the removal of hundreds perhaps thousands of government officials including many Deng Xiaoping loyalists. Those he couldn’t remove, Jiang craftily wooed and courted, displaying surprising political skill. The central positions of power were ceded to his office, so that though the man he replaced may have been first among equals but Jiang Zemin would have no equal.

The order of operation in China is by no accident. The Three Represents are being conducted in the same order they are given: economy, culture, politics. In that sense, the hardliners won the intermediate battle. Out of the global Communist turbulence of the late eighties and early nineties, China’s would survive almost alone. The very birthplace of Socialist Revolution, the Soviet Empire by contrast, had fallen.

Dreams of a global workers paradise had turned to ashes. It was once believed that a worldwide leftist revolt was inevitable, instead the product of their vision being completely rewritten by harsh reality: economic growth cannot be sacrificed to political idealism. As an economic system, Socialism doesn’t even convince Socialists.

Once the Berlin Wall came down and then the Eastern Bloc dismantled from the inside, a wave of freedom touching China itself, authorities with the blessing of both Jiang and Deng, even hardliners like Chun, traveled into the old Soviet Union to figure out what went wrong. They had suspicions, of course, but if Mao’s Revolution was going to continue it behooved the Chinese Communists to study and nail down the mistakes of Lenin’s successors.

Like all Socialist “paradises”, China is not stable politically nor socially. Authorities must act authoritarian, maintaining a tight grip on power. Jiang, the reformer, ironically proved that better than most. The only way to correct this defect is, as the third of the Three Represents, move in the direction of the majority. Or, move the majority in your direction.

Thus, China’s researchers in the nineties declared the Russians’ biggest mistake was attempting to reform in all three spheres at the same time (or, more accurately, letting loose of every control). The Soviet Union indeed all the Communist countries in its orbit allowed varying measures of liberalization in economy, culture, and politics. They removed their entire national systems from Chen’s cage, proving that once let free from repression birds will indeed fly away.

You have to give them a reason to stick around.

The Chinese Communists would do it differently – and therefore survive. Deng Xiaoping was an economic reformer but he was by no means a pluralist. To him, you were a Communist or you were nothing. As noted above, any means for strengthening China’s economy was in consideration of strengthening China’s socialist structure. Economic growth was one means, the key means to a political end.

China would grow rich, maintain its cultural identity, and then the majority would enthusiastically welcome Communism with Chinese Characteristics in every one of its forms, dissatisfaction melting away into the prosperous landscape. The people, and not just in China, would come to appreciate and admire the genius of mixing Deng with Chen; both men agreed there had to be a birdcage, and through the efforts of Jiang they would further recognize the technocratic Chinese structure as the best way to decide its proportions.

Socialism would be best by harnessing free markets for its own ends. A wealthy, modern China could therefore maintain its socialist principles in a far more stable political setting.

This has been the driving doctrine behind the country’s efforts for nearly three decades. For a very long time, many believed it was working and working well by voluntary choice. What the Chinese have accomplished in that span is honestly remarkable. Never before in human history has any nation been renovated in such breathtaking fashion at breakneck speed. Hundreds of millions have been lifted out of abject, subsistence-level poverty and been given a chance at a true middle-class life.

Then 2008.

At first it had seemed China would survive the Global Financial Crisis with its economy mostly if not fully intact. The second strike in 2011, however, changed everything.

Hu Jinto, who replaced Jiang Zemin in 2002, brought with him his ideas for China’s “harmonious society”, the one that would fulfill the mandates of the Three Represents. As the Chinese economy grew and grew in the middle 2000’s, the leadership began to believe the time was close for that third, most tricky Represent. But instead, the global economic situation turned everything on its ear.

In 2012, Hu was set to turn over to Xi Jinping. He had previously planned to do so extrapolating economic growth along the same line as in the middle 2000’s – China absolutely certain to become wealthy enough to start working on bringing the majority into the political Communist center.

In March 2012, with the economy’s first stark slowdown emerging, Premier Wen Jiaboa was like Deng pointing to the south of China. Only, in Wukan an open election was held for the first time the year before and the Communist Chairman of the village had been overwhelmingly rejected by voters. Wen would warn of a possible backlash to the backlash:

“Mistakes like the Cultural Revolution may happen again. Any government official or party member with a sense of responsibility should recognize this.”

Later that same year, just two months before Hu was to be succeeded by Xi, China’s lame duck leader added:

“Economic growth is facing notable downward pressure, some small and medium enterprises are facing a hard time and exporters are facing more difficulties. We have an arduous task of creating jobs for new entrants to the labor force.”

China has reached another crossroads, only this one being nothing like the one reached in the early nineties. The same natural tensions are creeping up, only now each are going the wrong way: economic growth or political authority. For more than a quarter century, it had been left as a matter of faith you could have both. Chinese Communists would just open up their markets and this would lead the way to the long-sought harmonious socialist majority. What Marx or Lenin (or Mao) would’ve thought of this transformation, who cares?

When Hu warned about “notable downward pressure” Chinese Industrial Production was growing by 10%, down substantially from 15% in 2011 the year before. During the worst parts of China’s experience of the Great “Recession” IP had averaged at least 8.1% in early 2009. The lowest month at that time came in November 2008, just a 5.4% rate of expansion.

According to the latest figures compiled by China’s National Bureau of Statistics, Industrial Production during the January-February 2019 period (the first two months of each year are combined to eliminate, mostly, skews due to the weeklong Golden Week New Year holiday) rose by just 5.3% over January-February 2018. It was the worst month(s) since January-February 2002.

By 6-month average, IP is growing by just 5.6%. That’s a tick worse than the lowest point during the 2015-16 downturn, and this one appears to be just getting started. That makes it already the worst in the history of the series (dating back to 1998).

Take away the growth, what happens to the majority? October 2017’s 19th Party Congress, the first held exclusively under Xi Jinping, spelled out this very track. Hu’s harmonious society has been reached earlier than believed, the transformation of China via rapid economic growth completed ahead of schedule. This is what they’d have you believe.

Instead, China has spent the last several years (going back 2014) preparing for what isn’t quite so measured. While Western Economists couldn’t talk enough about globally synchronized growth, the new Communist leadership ignored the shallow narrative. The 19th Congress instead paved the way for a renewed authoritarian grip. When last February Xi was “given” an open path for essentially a lifelong term on top, the New York Times wrote:

“President Xi Jinping’s efforts to indefinitely extend his rule as China’s leader, announced on Sunday, raised fresh fears in China of a resurgence of strongman politics — and fears abroad of a new era of hostility and gridlock… Many have watched warily as Mr. Xi has used his power to imprison scores of dissidents, stifle free speech and tighten oversight of the economy, the world’s second largest.”

Many were shocked, mostly the same people who keep saying the global economy was and remains awesome. They are blind to the motivation. Clearly, something is very wrong here. China is going backwards in all three phases.

The implications are profound. When the country last went through such an identity crisis, it was an interesting but fringe global player. An unstable Asian giant now looms, adding to those uncertainties currently plaguing nearly all political regions.

The “majority” had very modest expectations in 1992 when Deng toured his south. Having transformed the lives of hundreds of millions of Chinese since, after watching their neighbors and family members moved off into the glittering modern cities, the hundreds of millions left behind still waiting for their golden ticket might not take kindly to being told, “we’re done.”

Again, ask yourself what motivates Xi, why now?

Nearly three decades later, growth all but vanished, the global economy which came to depend upon China’s first Represent will no longer be able to. The results already show, the world in 2019 going backwards again with the Chinese economy at the forefront of another reverse.

It’s hostile each and every way you look at it, the bird cage closing in on more than just China’s stranded throngs. Economic liberalism isn’t very popular these days anywhere. But to many people, there’s nothing wrong with the global economy. It can’t possibly be better.

Jeffrey Snider is the Chief Investment Strategist of Alhambra Investment Partners, a registered investment advisor. 

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