Streetwise Professor

December 27, 2019

China Syndrome–Or Socialism Syndrome?

Filed under: China,Climate Change,Economics,Politics — cpirrong @ 2:20 pm

China’s economy exhibits numerous symptoms of severe weakness that even its most world-class product–economic statistic manipulation–cannot conceal. One indicator of this is an increasing number of bond defaults (more on this in a bit). But there are others. Such as imposing the death penalty on the CEO of a large bank, pour encourager les autres, presumably.

Perhaps the best indicator is the palpable indication of nervousness at the highest echelons of the political (i.e., CCP) leadership. For example:

As China struggles to deal with the slowdown of the world’s second-largest economy, it has embarked on a new strategy of placing financial experts in provinces to manage risks and rebuild regional economies.

Since 2018, President Xi Jinping has put 12 former executives at state-run financial institutions or regulators in top posts across China’s 31 provinces,regions and municipalities, including some who have grappled with banking and debt difficulties that have raised fears of financial meltdown.

Only two top provincial officials had such financial background before the last big leadership reshuffle in 2012, according to Reuters research.

This is utterly futile. Although it reflects a realization by Xi and his minions that there is a problem, it also reflects that they have no idea what the cause of the problem is. Indeed, it shows that they are completely captured by their worldview, which believes that China will achieve wealth–and world domination–via the wise guidance of the Party and its enlightened leadership. (This worldview is not limited to Chinese Party cadres–the likes of Tom Friedman and Naomi Oreskes* and numerous other bon savants in the West share it.)

Their solution is a symptom of the problem. China’s current incipient crisis is a direct result of its economic model, which relies on state-directed investment to meet growth targets. No, there is not a granular, proscriptive investment program a la Stalin’s USSR. But provinces and local governments face strong incentives to meet growth targets that are most readily met via massive investment in infrastructure and housing: that these kinds of projects create corruption opportunities is just part of the incentive structure. Further, the financial system, with its repression of consumption and flip-side of subsidized credit, has provided further incentives to indulge the edifice complex.

This has resulted in massive malinvestment. The financial straits of these government entities, and the financial entities that have funded them, are merely a manifestation of the malinvestment: the investments have not generated returns sufficient to cover the costs of financing them. This is pretty amazing, given the magnitude of the direct and indirect subsidies.

Appointing managers with more “expertise” to exercise control at the sub-national level is not going to fix the fundamental fault in the system. The fundamental fault inheres in the socialist, centralized, Party-dominated, investment/credit-driven model.

The USSR showed that a centrally planned system can generate glittering results in terms of official statistics. For a while. But this largely reflects the flaws in national income accounting, especially in highly state-centric economies. Investment is a cost–a use of resources–but counts as contribution to national income. Pile up the costs at an insane rate for years, and you can show totally awesome GDP growth rates!

But eventually, the chickens come home to roost. If the investments are ill-advised, they do not generate a stream of consumption (and remember that consumption is the point of production, and investment) than can recoup the costs. Honest accounting would require writing down of these “investments,” causing a drop in measured national income. But this is never done.

The Soviet Union went through this “yeah we have problems but we just need better managers” phase. And it was a phase. The next phase was a slide into economic collapse. The phase after that was . . . outright economic collapse.

The Chinese and Soviet systems are not the same. But they share essential similarities, the most notable being that they are/were investment-driven and centrally directed, and horribly misprice credit. The means of direction are quite different, but the ultimate trajectories are quite similar. Investment-driven models that focus on achieving national income growth targets are prone to eventual collapse because of massively perverse incentives that lead to horrible misallocations of resources.

This has interesting short-run and long-run implications for the US (and the West generally). (“Interesting” being the most fraught word in the English language.) In the short run, it provides the US with considerable leverage over China with regards to trade: serendipitous developments, such as Asian swine flu increase this leverage. In the longer run, the fundamental flaws in the socialist model with Chinese characteristics will sharply reduce the Chinese geopolitical threat.

The problem is the interval between the short-run and the long-run. Big powers facing decline or economic crisis are inherently a source of instability. This problem is exacerbated in China, where the personalized, de-institutionalized nature of government under Xi also creates internal sources of instability. Xi is mortal, and has grandiose ambitions: as he sees the time to achieve those ambitions shrink, his incentive to take risk increases. Further, such systems are inherently unstable when the leader dies or becomes incapacitated because of succession crises–crises that are exacerbated by the fact that the ruler has a strong incentive to crush potential successors, rather than cultivate them.

Thus, there is likely to be a period of substantial internal turbulence in China, and this could have dire implications for the US and the world, especially given the changes that Xi has wrought in recent years.

In sum, China is entering the “we need better managers” phase of its development. This is a symptom of socialism, and a sign on the road to severe economic decline. A socialism syndrome, if you will. As an avowedly socialist country, China is not immune. Indeed, methinks it is particularly susceptible, especially given the neo-Maoism of Xi. This bodes well for no one.

*Oreskes is a Harvard “historian of science” who is primarily responsible for manufacturing the factoid (or should I say fiction?) that 97 percent of scientists believe in the threat of anthropomorphic climate change. Per the linked article: Oreskes believes in “change, owing perhaps to a sensible program of environmental regulation under Communism, and vindicating ‘the necessity of centralized government.'”

Sensible environmental regulation under Communism. LMFAO. Every Communist country is an environmental nightmare. I remember reading the official English-language Chinese paper when I was in China in the mid-2000s. It was a litany of environmental catastrophes. I truly shuddered when I thought that this was probably the sanitized view.

And has Naomi been to Beijing in January?

These are our better thans, people. FFS.

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  1. “Xi is mortal, and has grandiose ambitions: as he sees the time to achieve those ambitions shrink, his incentive to take risk increases. Further, such systems are inherently unstable when the leader dies or becomes incapacitated because of succession crises–crises that are exacerbated by the fact that the ruler has a strong incentive to crush potential successors, rather than cultivate them.

    Thus, there is likely to be a period of substantial internal turbulence in China, and this could have dire implications for the US and the world, especially given the changes that Xi has wrought in recent years.”

    The thumbnail version of China over, say, the last 3,000 years. Different causes, similar outcomes—chaos, internal warfare, strong man brings order, rinse and repeat.

    Comment by The Pilot — December 27, 2019 @ 2:57 pm

  2. Merry Christmas to you and yours. Thanks for another year of outstanding posts.

    Comment by The Oulot — December 27, 2019 @ 3:03 pm

  3. I started visiting China for work in ’98 and visited a few times. I had cause to visit a supplier in 3rd tier city a many times between 2005 and 2009. It was obvious the city had pretensions to be a 2nd or 1st tier city as there had obviously been massive investment in housing, which as we know means large blocks of rabbit hutches. Most of which stood empty, according to my hosts.

    I’ve felt for some time that China will be stable as long as the middle class see economic improvement year in year out, the same as elsewhere, the problem being they don’t have the automatic stabilisers when things start to stall – the ability to sack one lot of politicians and replace them with another lot.

    I also that that what’s happening with the Uighurs has some bearing as it appears to be a way to deal with the fallout from their idiotic one-child policy. Remove all the Uighur men in that region and send those young Han men without the chance of a spouse up there to help “police” the problem. A social and economic threat to the Party solved in one fell swoop.

    Comment by Bloke in North Dorset — December 27, 2019 @ 4:09 pm

  4. @The Oulot? LOL. You can’t fool me. I know who you are–you’re The Pilot 😉

    Comment by cpirrong — December 27, 2019 @ 6:42 pm

  5. @The Pilot–I agree, with one caveat. Imperial China had a standard monarchical succession system. Yes, it faced period succession crises, like any monarchy does. Rulers dying without issue, or with minor children as heirs. Rulers siring idiots. So on and so forth. Yet one could go long periods without such chaos and internal warfare.

    China has been relatively stable for a mere 70 years–a blink, in the context of its history–and only then if you ignore such things as the Cultural Revolution. (If that’s not chaos, I’d hate to see what it really is.) After Mao, the CCP tried to create a collective leadership structure with a scheduled leadership rotation to address the succession issue. But Xi has trashed that. And monarchical succession rules aren’t in place either. Meaning that the probability of chaos as he ages and then dies is even higher than at other times during the 3000 year span of China’s history.

    Russia is in a similar predicament. Putin is remarkably healthy for a 67 year old Russian male. But even if he is a demographic outlier, he will exit stage horizontal in time, and again with no successor or system of succession in place–which is by design.

    Apres eux, le deluge.

    Comment by cpirrong — December 27, 2019 @ 6:52 pm

  6. I hate touchpad typing! Next, I hate autocorrect except when I don’t.

    Comment by The Pilot — December 27, 2019 @ 9:52 pm

  7. Having a chuckle here at the idea that anyone could think that placing an executive of a regulatory agency in aa position of responsibility is a sound approach to problem identification, mitigation and resolution.

    However, to be fair, these executives will make sure that 1) papers will be moved efficiently and meticulously from one side of the desk to the other, and 2) any issues raised by junior staff for resolution will be efficiently and thoroughly swept under the carpet.

    Comment by Ex-Global Super-Regulator on Lunch Break — December 28, 2019 @ 6:07 am

  8. unfortunately, looking at LIzzie’s tax plan she is taking a book from the Chinese and people in the US don’t understand how. As a meme says, you can vote your way into socialism but you have to shoot your way out. The Chinese didn’t vote themselves in……

    Comment by Jeff — December 28, 2019 @ 11:59 am

  9. I once read that China had to grow at 5% plus just to be able to afford its future pollution clean-up costs. Is this still true, Professor?

    Comment by philip — December 28, 2019 @ 4:36 pm

  10. As Socrates wrote with a mind towards democracy “Hard times create strong men, Strong men create good times, Good times create weak men, Weak men create hard times.” Maybe for the CCP it should read “Hard times create a strong party, a strong party creates good BS figures, good BS figures create complacency then fear, fear creates a stronger party until the party fears the masses”.

    Socrates could have been writing about our millennials, most of whom have never experienced hard times. Based on their current performance on the climate hoax I shudder as to where the planet will head.

    Comment by Alessandro — December 28, 2019 @ 6:16 pm

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