Monday, January 18

"China breaks cover" Gregory Copley's analysis of China's geostrategic moves under Xi

Gregory R. Copley, Editor-in-Chief of Defense & Foreign Affairs, packs a tremendous amount of information into his 19 minute conversation with John Batchelor on Friday night on China at the state level of action under Xi Jinping: where China's military is right now, where it's heading, China's expansion from a regional to global player, the New Silk Road and beyond -- and the almost blinding speed with which all this is happening.
He also reviews the most vexing problems requiring solution if China's bosses are to avert the urban unrest that plunged the country into revolution little more than a century ago. 

For readers who've ever wondered what a professional debriefing for a highest-level government official sounds like, that is Gregory's day job. So we are fortunate he's speaking outside a paywall and directly to the public. 

We're doubly fortunate because very few highest-level officials are as well-informed as John Batchelor, which means he asks Gregory questions that elicit very illuminating answers. 

Now what about things at the vernacular level in China?  Here's how they are:

"A woman reacts as she checks stock prices at a brokerage house in Fuyang in central China's Anhui province, Monday, Jan. 11, 2016.' (Chinatopix via AP)

The photo companies Matt O'Brien's January 11 piece for the Washington Post, How China could trigger a global crisis. If China is only sneezing right now, Matt thinks the globe will avoid crisis. If it turns out China has a real cold with sore throat and fever  -- well. 

The worst news I heard last week about China was from another John Batchelor Show guest, Aaron Back of the Wall Street Journal's Heard on the Street. Aaron is based in Hong Kong. The podcast of the conversation starts at the 19:27 minute mark.  

 Aaron and John's co-host for that evening, Gordon Chang, went back and forth about whether there's a real economic crisis in China right now, even though everyone agrees times are not good there. In Gordon's view the sky is falling right now in China, but the sky has been falling in China for the past two million years is what he really thinks, which Aaron doesn't agree with.

John broke in and asked Aaron whether he'd noticed anything unusual recently about the conduct of people on the Mainland.  

Aaron said yes. Ordinary Chinese are allowed on an annual basis to convert renminbi to US dollars up to $50,000. Since the new quota year began at the first of January. there have been long lines of Chinese at the banks with their renminbi, demanding $50K in exchange.  

Aaron added that he decided to run some numbers and found that during 2015, an estimated $750 billion had left the country. That's when my jaw dropped. Aaron noted that $750bn is a lot of money even for China. Well yeah.

He said that if Chinese really start losing confidence in their currency, there will be massive capital flight. Sounds to me as if a large number of Mainlanders have already lost confidence. 

Meanwhile, as Aaron pointed out, they're trapped in the stock market -- the ones who got market fever or were doing their patriotic duty by plugging their savings into the market. There's a government quota on how much stock they can sell within a six-month period, and the period has just been extended. 

Gordon noted a few weeks ago that any government that comes into your bedroom and tells you how many children you can have wouldn't be philosophical about the normal ups and downs in market-based economies. Yes. 

Yet everything the central planners have done to get control of China's unruly stock and currency markets has made things much worse. Aaron had good advice for China's economic planners but it's not attractive to them,  although they might be forced to accept it in the end -- "it" amounting to lots of breaks from ridiculously high taxes.  He said that the tax on cosmetics purchases alone is 35 percent. 

To return to Matt O'Brien:
Why was it inevitable that China's economy would shift down to a lower gear? Simple: its old growth model had run out. There are only so many people you can move from the farms to the factories -- especially when you only let them have one kid—and so much infrastructure you can build before you run out.
Now China hasn't quite reached that point, but it has gotten to the one where there aren't as many people moving to the cities as before. And that's enough. It not only makes it harder for the economy to grow as much, but also makes it harder for companies to export as much, now that without a steady stream of would-be workers holding down wages, they have to pay people more.
You can probably see where this is going. If workers are making more, they can spend more -- and that, rather than selling things to foreigners, can power the economy. But that's a lot harder than it sounds.
First, you need a stronger safety net so people feel more comfortable splurging. Then, you need to give them time for their habits to change. But most importantly, you need to keep adding higher-paying jobs. It's this last part that would force Beijing to do what it doesn't want to: give up at least some of its control over the economy
So it keeps coming back to control, which as you will learn from Gregory Copley's report China's bosses don't see the need to dial back now that the whole world is their oyster. 

As to my view, I explained it more than 10 years ago during my dialogues with Simon, a banking guy based then in Hong Kong. (See the Pundita sidebar.) It's not really about control, it's about getting things perfect. So while I know Gordon Chang doesn't want to hear this, China's central planners are a reflection of the deeply-held view that the quest for perfection is more important than freedom.

There is no solution to this thinking because it's not actually a problem; it's the way Chinese are. The problematical aspect comes from carrying any quest to extremes. 

For crying out loud, they couldn't even stop trying to perfect the tea ceremony. The cup for tea and the tea house and the surroundings got more and more elaborate. I wouldn't be surprised to learn Chinese tea masters were applying gold paint to flower stamens in the tea garden so they'd glow perfectly in the sun. They drove the Japanese tea masters nuts. That led to the famous revolt in Japan against the elaborate tea.
Where was I? The point is that Westernized Chinese activists like Gordon (who's American nationality) keep trying to pound the square peg of politics into the round hole of the human heart and despairing that nothing they do dislodges China's rulers. The rulers aren't the real issue. Going to extremes is. 

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