An obviously worried Chinese Prime Minister Wen Jiabao wants assurances that China’s $696 billion investment in US treasuries is safe. But dissidents inside the Chinese Communist Party are urging the leadership to focus elsewhere. “If we cannot resolve the acute political crisis this nation is facing today, the entire foreign reserves portfolio will have to be revamped anyway,” a Beijing University economics professor told journalists on the sidelines of a meeting of a high-level legislative advisory body last week.
In fact, since Mr. Wen is not going to get his concerns addressed by Washington, he is best advised to instruct his investment advisors to access the credit default swap market for risk coverage; what that will do to CSD spreads (last at 100 basis points) on US treasuries is a foregone conclusion. In the interim, the Chinese Communist Party needs to resolve the ideological dilemma which threatens to pit party cadres against party bureaucrats in an ongoing struggle for the soul of the Chinese Revolution.
More than 20 million migrant workers have been rendered jobless since the start of this global credit crunch. Beijing’s land reform programmes are creating a new class of landless peasants. Productivity in the agrarian sector, which provides for almost 750 million Chinese, is at a standstill. Consumer demand in the urban centres has dropped sharply in recent months, with no signs whatsoever of a turnaround. Thousands of factories have shut down due to evaporating export orders. Delinquency in credit card and housing continue to rise. And government spending apart, zero or negative growth is clearly on the cards through 2010.
Beijing’s stimulus plans, which have apparently resulted in a boost for equities worldwide last week, are severely constrained by harsh realities. On the one hand, there already is a substantial backlog of incomplete or partially-abandoned infrastructure projects. On the other hand, the land question is generating serious underlying tensions between farmers whose land needs to be acquired for highways, railroads and dams and provincial authorities (often corrupt) who are unable to equitably reconcile land usage certificates with public development schemes. “Before we proceed any further, we need to finalize the outstanding issue of private property rights, both in the farmlands and in the cities,” a communist dissident from Kunming stated in a web posting late last year. “We must decide if we are in capitalist or communist mode?”
The dissident was taken in for interrogation in early January and his family has not heard from him since. But the question he posed remains relevant and is in the public domain. As long as the booming coastal regions continued recording phenomenal year-on-year export growth, China’s state capitalism model was rarely the subject of critical debate. Today, in circumstances where even official estimates of 2009 unemployment are in the 11-13% range, the resolution of the “capitalism or communism” question will determine the fate of the Chinese economy well beyond the next decade. (If true measures of underemployment in the countryside are duly considered, the key “jobless” number, similar to the SGS Alternative in the US, may well be in excess of 25%).
Prime Minister Wen predicts that “better times” for the global economy are ahead in 2010. And, to partially offset the risk of deterioration in US government risk, Mr. Wen’s advisors have been grabbing supposedly “undervalued” assets (mining, energy and agriculture) in Central Asia, Africa and South America in order to diversify China’s foreign holdings. But he along with his colleagues in the National People’s Congress are simply gambling on the fact that hundreds of billions of dollars of stimulus funds will neutralize the risk of mass unrest triggered by unemployment, poverty, failing health care services and land forfeitures. Better times, if and when they arrive, are not going to re-establish China’s once dominant ability to produce cheaper, if not better.
Policy czars in the Chinese Communist Party are not expected to retreat from the ideology of state capitalism; there is nothing “communist” about those who are in control over China’s affairs. Also, without doubt, Beijing’s ruthless law enforcement machinery is capable of containing worker and farmer protests, at least in the foreseeable future. So, for our present purposes, the challenge is to determine whether China will now stumble into (1) a broad-based recovery based on both internal and external stimulus spending or (2) a classic third-world economic mess caused by the failure to resolve the key questions of land usage and property rights.
This writer is convinced that state capitalism is fundamentally incapable of creating any sustainable value for private equity. For that reason alone, this writer cautions against any long positions on China despite the hype which will flow from Beijing and Hong Kong on a regular basis; on the contrary, sharp rallies on the back of such hype should be regarded as opportunities to sell. (This strategic perspective holds good for other state capitalism examples, like Russia).
Disclosure: no positions