Blog: You, us, everyone

Every nation aims at providing its population the best possible framework so that citizen can prosper and generate welfare. There is synergistic, give and take, relationship between the government and its population as well as among citizen. This concept has best performed in liberal nations where a) social respect and recognition are valued, b) powers of the executive branch and the judiciary are kept separate, c) multi democracy is exercised, education, health care and pension plans are part of national priority, d) where labor is remunerated according to education, skills and effort provided by employees, and e) where individual initiatives is valued. In contrast, in more community orientated societies, equal treatment for all has the tendency to create a lower level of welfare for the mass. More, the difference between the rich and the poor tends to be more importantly as the social ascension is impossible.

The foundations of today’s economic cycle were laid a few decades ago. In the late seventieth, Jimmy Carter, Ronald Reagan, and Margaret Thatcher were economic soul mates, right-wing warriors who initiated and promulgated today’s DM economic systems. In contrast, in EM there were Deng Xiaoping and Michail Gorbachev who started reforms with the aim to improve the country’s overall status.

At the outset, the reforms initiated under Deng aimed at opening the country to foreign investors and to improve the population’s well-being over time. The reforms undertaken by Mikhail Gorbachev were twofold, a) glasnost, i.e., creating openness and transparency, and b) perestroika was meant to restructure the economy. In a perfect world, both would go hand in hand, but the reality is often different. The Russian collapse occurred on the back of fast progress in glasnost while little has happened in perestroika. For the last 30 or so years, the opposite observation can be made in China. The successive administration of Deng Xiaoping (Jiang Zemin, Hu-Weng, and Xi-Li) all focused on making economic progress while at the same time they consolidated the political power to few. These non-parallel advances created some misshapes over time to the extent that China is having a rough time today with its economic reforms.

It is fact that China has generated 41% of the world’s growth in the past 10 years, almost double the 22% contribution from the US, and way ahead of the contribution (9%) from the euro area. This ratio provides a high level of self-esteem while at the same time the rate of progress made over the last 20 or so years is not sustainable. And here comes the catch 22. The growth rate in China is slowing above average, its property market is a bubble state (the Real Estate sector accounts for about 25 % of the country’s GDP), consumption is slowing, FDI are negative, unemployment is rising, particularly among young people, and its government is unable to reinitiate economic growth through bold measures, Actually, given the lacking glasnost, the government is able to support measures other than a piecemeal.

The present disequilibrium reflects the fact that China has failed to transit from its status as the world’s boiler room to a self-sufficient society.

More, the present concern come with some deep structural evidences. The headlong rush forward of its economy came with the unconditional support of DM which was aiming at higher economic efficiency. But things have changed ever since the Trump administration. Then there was the accident of Evergreen in the Suez Canal and China’s late opening following Covid-19. Both highlighted DM dependency on China and the resulting supply chain bottlenecks.

What has been happening this year so far, the weakness of the currency, falling exports while prices are adjusted to lower levels, the financial stress in the housing sector, battered stock market indices, a $3 trillion shadow banking sector, rising unemployment, discussions about the potential introduction of stringent capital export control, among others, are all signs of a deeper malaise that the ruling Communist party will need to address at some point. There is one common denominator to improve structurally the economic situation. Changes will require a less rigid political system. Provided the Xi administration is not converging towards more economic and social liberty, as well as democracy, China will most likely to face the same kind of collapse as Russia, but for the opposite reason.

This view may sound hasty and implausible. One may argue that China is well integrated into global trade and DM could not afford missing out on Chinese based products. Perhaps!

Systemic changes at government level occur rarely on external impetus but rather on a number of internal and rampant variations. Some statistics suggest that Chinese people and Chinese companies are increasingly fearful of losing access to their assets and are therefore prioritising short-term liquidity over longer terms capital appreciation through investment such as real estate. These fears have accelerated ever since the severity and unstoppable nature of China’s lockdown.

China, apart having built an economy on wolfing DM based IP, hasn’t impacted the global policy agenda. If there is change in China, it will be slow as the base will be more and more reluctant to adhere to the official agenda. Remember, history also suggests that self-declared regimes can hold on to power for longer than expected, irrelevant of the underlying economic conditions. Progressive change would probably be better than turmoil, but with the former, once done, the economy could kick-start.

Up to the reader to imagine which scenario would be better in the long-run.