Seeking Alpha
Long/short equity, special situations, contrarian, research analyst
Profile| Send Message|
( followers)  

In his inaugural address, Chinese President Xi Jinping laid out his new aspirational proposal -- a Dream born from an accident of history. In the Middle Ages, China was the most advanced country in the world. The Chinese developed the compass and printed books well before their counterparts in the West. The gun that laid waste to Constantinople in 1453 and brought the Middle Ages to an end was ultimately based on Chinese gunpowder and cannon technology.

(click to enlarge)

The following 400 years of stagnation put the brakes on China's development and paved the way for "a century of humiliation" by the West. Xi is tapping into a well of cognitive dissonance and historical insecurity in a bid to re-unify the populace under a new Big Tent vision: the pursuit of happiness.

For a uniquely Chinese vision, Xi's "Chinese Dream" bears an awfully close resemblance to both Adam Smith's Invisible Hand --

Put simply, we need to leave to the market and society what they can do well, and on the part of the government we need to manage well those areas which fall into our purview.

-- and Roman law..

Law should have a sacred place in our society. No matter who you are, and what you intend to do, you should not step beyond the boundary of the law.

The Singapore Model

Back in August, I predicted that the Chinese would attempt to adopt a cherry picked version of the Singapore Model, suited to the CPC's temperament. Here are excerpts from what I wrote:

There is a reason that the Chinese apparatchiks have developed a new-found love for the Singapore Model: The economic tidal wave unleashed by Xiaoping's economic reforms is beginning to undermine the Communist Party of China's control. The rise of the merchant class along China's coast has fueled calls for a decentralization of power, and now the CPC is looking for a new political structure to adopt that will both placate China's burgeoning middle class and preserve its own power and prerogatives. Singapore has replaced the West as China's new economic role model.

However, it's important to draw a line between what Chinese officials perceive the Singapore Model to be and what the Singapore Model actually is:

In the minds of many a Politburo member, the example of Singapore is a ringing validation of state-directed capitalism. This interpretation of the Singapore Model is naturally self-serving and incomplete. Singaporeans have opposition parties, for example. They have basic civil rights and are allowed the right of conscience, even when it conflicts with malum prohibitum ("it's wrong because the law says it is".) The Singaporean government not only restricts the behavior of its populace, it heavily restricts the prerogatives of its officials.

In practice, it will be a difficult row to hoe:

What the intelligentsia of the CPC fail to grasp is just how corrupt Singapore isn't. Transparency International ranks Singapore as the fifth least corrupt country in the world. By Singaporean standards, Germany, Japan, the United Kingdom, France and the United States are hopelessly and inexcusably corrupt.

China, on the other hand, is the 75th most corrupt nation. That means that China is more corrupt than Italy, about par with Columbia, and only slightly less corrupt than Greece.

That's a long way to climb.

China Needs To Fix Its Image Problem First

The Xinhua News Agency, which is the official mouthpiece of the CPC, claims that The Chinese Dream is of global significance:

The "Chinese dream," put forth by Chinese President Xi Jinping, is to build a moderately prosperous society and realize national rejuvenation by sustaining growth through deepening reforms and transforming growth pattern. It is a dream of national strength and prosperity, and happiness of the people.

The most important concern at present is the epidemic of fraud in Chinese equity offerings that foreigners may easily purchase stock in. The proceeds of these ill gotten gains may fill the pockets of high ranking Party members' sons, but it has done nothing to encourage foreign investment in Chinese equities.

Take a look at Youku's (NYSE:YOKU) opaque corporate structure in the organizational diagram below. This would never fly in Singapore.

(click to enlarge)

(Source: SEC, Youku.com F1 Filing, 2010)

Redistribution

If the CPC's goal is to double per capita GDP and personal income by 2020, compared with 2010, while setting annual growth target at 7.5 percent over the next few years, it will need the same foreign investors that the Party's children have spent the last five years stealing from. The CPC is doing itself no favors by attempting to silence critics like Muddy Waters Research in this regard. Of all the stratagems, to know when to quit is the best.

As I've written elsewhere, Chinese disposable income is an important, yet deceptive measure of the nation's prosperity. The chart below would normally indicate both a steadily rising standard of living and the transition from an investment-oriented economic growth model to a consumption-based one.

Chinese Disposable Income Per Capita (In Renminbi ¥)

(click to enlarge)

(Source: National Bureau of Statistics)

However, calculations of this sort can be deceptive. Out of 31 provinces, only Chinese urbanites in Shanghai, Beijing, Zhejiang and Tianjin earn enough to qualify as "average" Chinese consumers. If Xi intends to make good on his promises, the CPC will have to spread the wealth around more evenly.

Conclusion

Looking forward to 2013/14, I predict that the Chinese will proceed swiftly to the high growth/high risk liberalization of the energy sector, and that to do so credibly will involve a significant minority stake by the multinational supermajors, namely Exxon (NYSE:XOM), BP (NYSE:BP), Chevron (NYSE:CVX) and Shell (NYSE:RDS.A), (NYSE:RDS.B). I also predict that the CPC will re-direct domestic investment to the overcrowded residential metropolitan districts like Shanghai by extending the Housing Settlement Project of 1987, rather than halt the building boom and hamstring the "New Middle-Propertied Stratum." The CPC still can't bring itself to say the words "middle class."

Source: China Has A Dream