Chinese Communist Party Instructs Media To Stress “Superiority of China’s System”

WASHINGTONThe Financial Times reports that the Chinese Communist Party gave detailed directives to all Chinese media about how they will have to report economic news.

Bright future 

Here is the story they must tell, in the aftermath of the Shanghai stock market crash and other bad developments, regarding the overall economic slow down in China: “The focus for the month of September will be strengthening economic propaganda and…promoting the discourse on China’s bright economic future and the superiority of China’s system”.

Manipulation 

Got that? A dramatic loss of momentum becomes “China’s bright economic future”. A mercantilist model that run its course is in fact “a superior economic system”.

Look, these efforts to manipulate the message are not shocking revelations. The Communist Party runs China and in a broad sense it “owns” the economy. There is no question that a large part of the party’s prestige and overall legitimacy rests on its reputation as competent economic steward.

Therefore, it is no surprise that, confronted with a sustained bad economic trend, the party orders all media to publish only “happy news”. The point is to preserve the party’s image. Negative news hurt politically. They tarnish the party’s prestige.

Most official data is fake 

That said, all this active effort at manipulation tell us at least one thing. Most likely, the real situation in the Chinese economy, (data about growth, unemployment, and bad debt), is worse than what we think. Based on this revelation, we can count on the facts that all official statistics are routinely doctored, so that things will appear far better than they are.

Again, nothing too surprising here. With all its years of reforms and partial liberalization, China remains an autocracy. Those in power must be depicted as capable and wise. They make no mistakes. They steer the country in the right direction, and at the appropriate speed.

We bought the story 

The problem is that Western policy-makers and media bought this fake story. They swallowed this propaganda as if it were legitimate news. They bought the exaggerated growth statistics.

So, what do we make of all this? Even if we discount the fluff created by the “happy news” ordered by the authorities, in the end, China is not a disaster. Far from it. We are talking about a loss of momentum, not about an economic collapse. With its immense cash reserves, China will pull through.

The glitter is gone 

However, the glitter is gone. A debt-driven growth model based on ever-growing exports, and a never-ending construction boom, has run its course. Most likely for good. China still has impressive resources. It will continue to grow, probably at a respectable 4% to 5% rate.

But it will soon become clear to the entire world that China’s leaders did not invent “a superior economic system”. Far from it. And, in the long run, this fall to earth will hurt them politically. They built themselves up as invincible economic geniuses. It turns out they are not.

Defensive battle

Yes, the party propaganda machine will do its best to force Chinese media to tell a different story. But this is a defensive battle, damage limitation.

Again, the glitter is gone.




China’s Economy “Worse Than You Think”

WASHINGTON – A few years ago, Jim Chanos of Kynicos Associates made news because he had the temerity to call a spade a spade by telling the world that China’s construction-driven economic growth was in fact a big bubble.

A bubble economy 

Chanos argument was that China’s construction frenzy was not led by real demand. Soon enough this enormous property boom driven by speculation, and by the political need to show consistent GDP growth, would cause huge problems.

And he argued that the crunch would be felt first among the international companies that supply the raw materials that feed the Chinese construction industry. He argued that the Australians, the Brazilians and other commodities exporters would get hit first.

Impossible 

At the time Chanos looked like a really odd character who really did not understand China. China was doing very well, fueling the almost universal expectation that its super successful “New Economic Growth Model” would allow it to surpass America, thereby affirming that there is indeed something better than capitalism.

Indeed.

Now we see 

Well, fast forward to today, and it is quite a different story. Now Chanos looks like a prophet.

Indeed, with all the bad news about China’s economic slow down, smaller exports, lower industrial production, huge over capacity funded by mountains of debt, the Shanghai Stock Exchange implosion, and –yes– the real estate disaster, it is hard to challenge his negative forecasts.

When Chanos speaks, now people listen to him. So, how bad is the Chinese economy? “It’s worse than you think”, replied Chanos in a CNBC interview. “Whatever you might think, it’s worse”.

Got that? It is bad beyond imagination. Well, this assessment is certainly not very detailed. But you get the idea. Underneath a relatively calm, in fact almost airbrushed, surface, there is a badly mismanaged country.

Clueless 

But how is this possible? We thought that the Chinese meritocracy only promoted the super smart. We were told that China is run by carefully trained technocrats.

Well, may be not. “People are beginning to realize the Chinese government is not omnipotent and omniscient,” Chanos said to CNBC. “In fact, like many of us, sometimes they don’t have a clue.”

There you go: “Clueless China”. 




China Is Not A Market Economy

WASHINGTON – The Chinese government’s reaction to the recent Shanghai and Shenzhen stock market crashes and ensuing panic provides a welcome reminder of what China really is. No, China is not a capitalistic market economy. And —no—  there is no clear indication that the Chinese leaders are really working on a real transition from state control to open markets.

Panic

The stock market crash is the result of a frenzy propelled by small investors who, lacking other opportunities, thought that stocks could be reliable investments. Well, too many people had the same idea at the same time and this resulted in absurdly high valuations.

When the sell off started, the Chinese Government panicked. Instead of allowing the market to find its bottom, even though this would have caused huge losses for retail investors, the Government decided that a major crash would be a political embarrassment. And so it stopped it, with non market means. The cost of this artificial support? $ 200 billion. Yes, this is a lot of money. This is more than double the amount of the latest, gigantic EU funded rescue package for Greece.

Rescue

Other measures, combined with this massive injections of funds used to buy stocks, stopped the decline. Public authorities halted trading in most stocks. They ordered certain classes of shareholders to hold on to stocks. They forced brokers to buy stocks; and they ordered banks to lend money so that purchases could be executed.

Well, guess what, as most investors could not sell, while others were ordered to buy, share prices stopped falling. In fact, aware that the government is actively supporting share prices, some investors went back and bought. As a result of all these massive interventions, the market rebounded, somewhat. But it is obvious to all that current share prices have nothing to do with market values. Bottom line, China does not have real stock markets.

The Chinese economy is a hybrid 

What does this tell us? Very simple. China is and probably will remain for an indefinite future a peculiar hybrid of socialism and capitalism. It will continue to be a centrally controlled society, with state ownership of strategic economic assets, (steel, insurance, banking, telecoms and more), and routine state interventions, (such as this one to prevent a real stock market crash), blended with a relatively new and in some cases quite impressive private sector.

This model does not work any more 

The fact is that this peculiar mix, while it launched and sustained the unprecedented 30 year economic boom, does not work very well any more. The export-led boom featuring thousands of manufacturers fueled by ultra cheap labor is over. Going forward, China needs a flexible, decentralized, innovative economy with market-driven free movements of capital and human resources.

And this implies real capital markets in which investors determine share prices on the basis of an assessment of where value is. But you cannot have a reasonably good allocation of scarce private capital when markets are manipulated, while critical sectors of the economy are closed to the private sector, let alone foreign investors.

Likewise, you cannot have optimal allocation of capital, when state-owned enterprises –even if unproductive and poorly managed– will always get bail outs in the form of easy credit from state-owned banks.

Political control

But why is China not completing its conversion to real capitalism? After all, it is clear that their system is inefficient. Very simple. The Chinese hybrid is indeed inefficient. But, for the time being, state ownership of critical economic assets provides a very good instrument to retain political control over a gigantic nation of over 1.2 billion people.

At the end of the day, the main objective of the Chinese leadership is self-preservation, and not optimal allocation of resources in order to maximize economic growth. If the price of political self-preservation is economic inefficiency, so be it.

From Beijing’s perspective it is better to have an inefficient state controlled steel conglomerate whose party-appointed leaders will do as they are told, than an efficient conglomerate run by private investors who will not take orders.




China Facing Population Decline

WASHINGTON – It looks totally implausible, but China is facing the real danger of a declining population. Yes, with 1, 355 billion people, China is the most populous country on earth. But the demographic trends indicates decline. With an average of 1.55 children per woman, China is well below “replacement level”. This means that slowly the population will decline, because the number of children born will not outpace the number of people who die every year.

Relaxing the one child policy

While the fertility of Chinese women is not as low as what we observe in most of Europe, Korea or Japan, (with lows of only 1,23 children per woman in South Korea), it is bad enough to have prompted the Chinese Government to relax the one child policy that has been strictly enforced for over 30 years. (Sadly, the policy includes forced abortions).

Few Chinese couples want a second child

But it turns out that very few couples that could be eligible to have a second child exercise this option. (Only 5% in Shanghai). Hard to say exactly why. In some instances it is about the cost of a larger family. In others it is about the difficulties that working women would experience trying to balance employment and motherhood.

This being the current scenario, unless Chinese women have a lot more children, China’s enormous population will start declining, while the average Chinese in a few decades will be quite old. This will have negative economic repercussions, because there will be fewer young workers and an increasing population of elderly retirees.

This is how the Chinese publication Caixin describes the so far unsuccessful efforts undertaken by Shanghai’s officials to encourage couples to have a second child:

“Shanghai Official Urges More Couples to Have Second Child”

January 28, 2015

“(Beijing) – A Shanghai health official has urged qualified couples to have a second baby because only a few had taken advantage of changes the government made a year ago to ease its one-child policy.

Only 5 percent of women eligible to have a second child have applied to do so, Fan Hua, an official in Shanghai’s health and family planning commission, said on January 25.

The high cost of raising a child and women’s career pursuits were to blame for the lack of interest in having children, Fan said. The average age for a Shanghai woman to get pregnant is 28, Fan said, and many dropped the idea of having a second child as their careers took off in their early 30s.

A survey by the Shanghai Academy of Social Sciences and Shanghai Women’s Federation in 2011 found that half of the surveyed 2,000 parents who had a child under 12 years old said they would not have a second baby.”

“Qualified couples should have a second child because two children provided a family with the proper stability and social development, Fan said.

The ruling Communist Party started easing the one-child policy in 2013, more than three decades after it was implemented. The changes allowed couples in which either parent was an only child to have a second baby. Local governments across the country started implementing the changes last year.

Shanghai’s call for couples to take advantage of the changes shows the city government is worried about its population, said Huang Wenzheng, a biostatistics expert at Johns Hopkins University. Shanghai has the lowest fertility rate of any large city in the country, he said.”

“The eastern city has an aging and shrinking population. Shanghai had 3.87 million people over age 60 at the end of 2013, more than one-quarter of its population. Some 105,200 babies were born that year in the city, which recorded 116,500 deaths. [bold added]

All couples should be encouraged to have a second child, Huang said, but Shanghai would have to wait for the central government to announce a policy allowing that.

About 1 million couples around the country applied to have second children by the end of 2014, Mao Qun’an, a spokesman for the National Health and Family Planning Commission, said on January 12.

The government had predicted the figure would be 2 million every year. Mao said the shortfall may be due to couples taking time to apply, and he said more may seek permission this year.

Huang said government data showed that application figures were declining every month, and reversing the trend is impossible”. [bold added]