China's Economic Struggles Are Representative of Global Struggles
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Communist regimes will always feature a fair amount of palace intrigue, a feature not a bug. To be fair, democratic societies aren’t free from the same, it is just done somewhat differently (in case you hadn’t noticed). Top-level shuffles aren’t always random or driven entirely by ideology. Sometimes, they are as much about practicalities, even expedience.

There was Yuri Andropov the KGB chief who succeeded Brezhnev in November 1982 instead of Konstantin Chernenko. Andropov realized the Soviet state was in serious decay though did not believe it terminal. A committed Socialist, he wished to invigorate the ancient Leninist experiment with a rekindled romance for the Soviet Ideal.

But then in 1984, Andropov died only to be followed by Chernenko instead of Mikhail Gorbachev who Andropov had championed. The former’s reforms hadn’t gone well, especially an anti-alcohol campaign which only made the government’s fiscal position worse. Modest economic reforms were sensible enough though doomed to fail given the USSR’s incurable decline by that point.

Chernenko was the politburo’s modestly reactionary response. The aging bureaucrats weren’t convinced Leninism was entirely dead, and after giving Andropov a chance to produce, when he couldn’t the pendulum swung back – if only a little.

Gorbachev was, however, installed as the so-called Second General Secretary since Chernenko literally didn’t have much time left. Perhaps the politburo saw, too, the writing on the wall, the days of Soviet-style Communism growing as short as those for the then-First General Secretary.

There was no saving what was left after a couple entire generations had passed without ever coming close to having fulfilled that original 1917 Revolutionary Promise (the one Karl Marx had warned everyone not to make). They did not complete the Socialist Transformation so by the eighties all that was left was an inefficient, corrupt, thoroughly authoritarian husk without any real purpose except to try to keep existing.

Turning to Gorbachev was little more than a desperate last gasp.

This was not how it was supposed to go. The Vanguard takes over by every means necessary from brute force to torture even genocide, the Communists don’t care. Overrun the pigs, take charge and transform into paradise. Simple. Straightforward. Theoretical. Reality is a huge problem; as Marx cautioned, you can’t make paradise if you haven’t developed the necessary tools first.

That was the job of the capitalists, only Russia hadn’t really had much experience with them. Thus, Leninism was an experiment defying Marx where the Vanguard would try some capitalism itself if only to complete the “transformation.” Once done, then they would yield to the True Socialist Revolution when all the workers voluntarily, happily embrace all aspects of Marxism.  

Unsurprisingly, Communists turn out to be terrible capitalists.

No better example of that than next door in China where Mao Zedong tried it himself only to starve a truly staggering proportion of his own population (not that Mao cared; he never seemed to mind having to break a few tens of millions of eggs for his omelet with Chinese characteristics). Fortunately for China, or unfortunately, depending on how you look at it, the leadership which came immediately after him recognized the dangers in no small part by having a close look at what was going wrong right then with their Soviet rivals.

The Chinese Socialists didn’t so much become Chinese Capitalists as outsource genuine wealth-building to Westerners only too happy to oblige (and fool themselves while doing so). Dozens of Special Economic Zones and a Southern Tour later, China ends up in 2008 as what might’ve seemed decades before a damn miracle.

Except, it wasn’t. China’s transformation was predicated on several key factors though first among them was the embrace of the monetary system, the eurodollar. Not only did the Chinese become proficient in its ways and means, they eurodollar-ized their own domestic monetary system (as many had done and still do).

The miracle was therefore tied to the fate of that external system. And this time the capitalists failed the Socialists.

You’ve heard part of the story by now, I mean it’s been a decade and a half. Something about subprime mortgages. Once the eurodollars ran out, suddenly China found itself with extremely limited internal economic growth opportunities. After a decade of stagnation following the 2008 global “recession”, in many key ways the situation in China today more closely resembles Russia circa 1982.

To be fair, the Chinese are light years ahead of the Soviets where it comes to an advanced economy. In the end, however, all that might mean is Xi Jinping has a lot more margin for error and some additional time. Neither are endless.

China’s coronavirus only made the situation worse, perhaps eating away quite a lot more of that margin than authorities were anticipating. Global reaction to the pandemic did the same thing everywhere, no one was spared the overbearing stupidity of government officials and their various plans and rescues. We’re all far worse off for both the virus and how it was treated.

In terms of the economy, China’s response was largely dictated by Liu He (Uncle He) and to an extent Yi Gang, the head of the People’s Bank of China (PBOC). Every once in a while, Li Keqiang, Xi Jinping’s nominal Number Two, would pop up though it was always uncertain just how much Xi trusted his former rival. No matter what, the group has remained consistent with Xi Jinping Thought, formal economic doctrine developed from recognition of China’s post-2008 eurodollar predicament.

Right at the top, this meant only modest official efforts unlike previously when the government responded to economic setbacks (such as 2009) like full-throated Keynesians (because the Keynesians told them to). In 2020, enduring a full-blown worldwide crisis, China’s Communist were practically invisible especially when compared to their “capitalist” counterparts dumping themselves all over everywhere.

That exceptionally light touch continued throughout Xi’s Zero-COVID, too, even as the situation grew dire.

Yet, at last fall’s 20th Party Congress you could see the cracks forming. As China’s currency plummeted, no thanks to authorities including Pan Gongsheng, the PBOC’s Deputy Governor at the time who was in charge of SAFE, the country’s foreign exchange reserves and their use. Right when CNY was at its lowest, suddenly everything changed; they ditched Zero-COVID and put in its place Reopening©.

We never knew just who was responsible though I think we can now guess, various clues scattered around a sudden bout of palace intrigue.

Back in March, while the world was distracted by some US banks and one Swiss giant, Yi Gang was reappointed to his post atop the PBOC even though he had reached retirement age. Sure, Yi’s predecessor Zhou Xiaochuan lasted 15 years in office, long after he had aged to 65, yet Yi was no Zhou.

To start with, Zhou like his predecessor had been both leader of the PBOC as well as its top Communist official. Yi wasn’t; the latter role belonged to Guo Shuqing. It had suggested some distance between Yi and the Party, particularly Xi.

Yet, he was reappointed in March anyway in a move that was claimed to be “continuity.” Sure, but continuing what?

Reopening©, it seems.

Yi has consistently counseled patience on China’s recovery no matter what. Given what we know now, it seems reasonable he had been instrumental in the U-turn on Zero-COVID last year, likely, in my view, using the potential of reopening as it might set the Chinese economy back on track as the final argument (along with how that potential would rescue plummeting CNY).

It worked…for a short time.

While CNY turned around and surged, it only lasted until mid-January. The initial economic recovery may have wowed Western Economists, but they are wowed by anything China does at any time. Internally, officials knew it was at best a struggle.

Yi recommended persistence anyway and was given it in March…along with a length of political rope. The situation hasn’t gotten better, growing worse across every single metric and dimension. Most of all, CNY is right back where it had been at the lowest point of Zero-COVID only with no Reopening© plans anywhere to save it this time.

Instead, right at the end of June, the PBOC suddenly began to take a more proactive approach to yuan management, fixing the daily midpoint or central parity far “stronger” day after day throughout July attempting to coax the exchange rate higher. And to give the coaxing some tangible oomph, China’s big commercials have been regularly spotted supplying scarce dollars, relending to local and offshore participants what they can more easily borrow via eurodollar swaps.

Unlikely it is just coincidence that on July 1, just a few days after the currency tactic was introduced, Pan Gongsheng was himself introduced as the PBOC’s new Party boss. Then this week, Yi Gang was suddenly given his retirement, leaving Pan to hold both top jobs like Zhou had.

Pan’s claim to fame, so to speak, is having been a part of China’s 2016 response to, yep, yuan crisis. Though many like to say he “rescued” the currency, you have to wonder why they don’t mention CNY’s subsequent and more violent plunges in 2018, 2019, 2022 and now 2023. To put it mildly, CNY has become incredibly volatile and unstable no matter what.

That instability is little more than the eurodollar’s way of pricing big trouble in big China. Without its now-ancient eurodollar economy leading the way, the Chinese are among the dirtiest of all the world’s coronavirus, supply-shock-stained dirty shirts.

Xi Jinping, it does appear, has seen enough of Reopening© as a short-run recommended cure. Yi is out as a final acknowledgement of that after very little gained though more precious time squandered.

Pan replacing Yi, though like Andropov a long time ago you have to wonder for what? It isn’t to rescue the yuan or the Chinese economy because those are well beyond anyone’s capacities. Instead, Xi like the Soviet politburo in ’82 understands he has to try something else.

Turning over the PBOC to someone who has had quite the experience with money and macro instability, if little long run success, and isn’t willing like Yi to sit around patiently hoping it all just gets better if only by some miracle.

The PBOC isn’t the only department targeted by Xi’s recent, ongoing shuffle, of course. Foreign Minister Qin Gang just disappeared for a while only to resurface as a former Foreign Minister, too.

We can read this any of several ways, though the most reasonable and logical is that the Communists understand the dangers here. Just like the early eighties Soviets, China is not getting better economically and is only at risk being so far away from having achieved the Socialist Ideal. They may have gotten far closer than anyone, yet that is little comfort to the still top-heavy and isolated Vanguard.

Instability only adds to the risks – and the urgency.

But that’s not just a reflection on China. Whereas the Soviet economy was largely isolated even at its peak, the Chinese economy is a representation of global conditions even today; in fact, that’s the whole problem in a nutshell. This was once its miracle and now the curse. We aren’t doing well so China can’t do well.

Rather than just sit back and hope it all just somehow works out for the best, Xi is reshuffling some top posts if only to avoid for as long as possible someone changing the top post. Will it work for the economy? That’s neither likely nor the purpose. 

Jeff Snider is Chief Strategist for Atlas Financial and co-host of the popular Eurodollar University podcast. 

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