Archive for the ‘china’ Category

Not since Mao

March 24, 2018

China’s head honcho, Xi Jinping, can now theoretically remain in power for life, having successfully got rid of the constitution’s pesky maximum term limit of two years earlier this month. None of this, of course, is very good for China’s peculiar brand of Communist Party democracy. But it might augur slightly better for reform of financial markets.

Last year, Beijing announced plans to tackle the country’s vast mountain of debt (which could be as high as three times the size of the economy, according to some estimates), with a particular focus on reigning in shadow banking.

The task is huge, with some estimating the shadow banking economy to be worth as much as $8.5 trillion (the opaque nature of the sector means that precise figures are a little hard to come by).

That is why in recent speeches senior Party officials have conspicuously steered clear of any mention of GDP growth. They know that they have got to tackle the risks in the financial system – and they also know that, in order to do so, the spectacular growth that China has been enjoying over the past couple of decades will have to take a bit of a hit.

Now is a good time. With GDP growth hitting 6.2% in China last year – well above the UK’s measly 1.7%, the eurozone’s valiant 2.2% or the US’s even better 2.3% – Xi and his henchman know that they have a few basis points to play around with.

But the question has always been: how much GDP growth is Beijing willing to sacrifice on the altar of financial reform before saying enough is enough and back-peddling?

The concern from pundits is that the task is so vast that there still isn’t enough room for doing all that needs to be done. Just look at what happened to Japan when it attempted to do the same in the 1990s, following the implosion of its own credit bubble. The country has never been the same since.

The danger that some fear is Beijing may stop much-needed reforms right in the middle – once GDP growth falls too much.

That concern may have lessened slightly now that Xi has made it abundantly clear that he is the man in charge. As one industry source told me during my recent trip to China, “Xi may be willing to take a few more punches than he might have otherwise felt comfortable with”.

Whilst China has come a long way since the days of Mao Zedong, it is still very much run along Communist Party lines. It still has grandiose five year plans. They may not be quite in line with the ill-conceived and ultimately disastrous Great Leap Forward, but there are some similarities in how they are drafted. In particular, the goals they tend to set are often overly-simplistic and benchmarked against something that is easily measurable. GDP performance is a pretty good yardstick to use.

Thus China’s municipal governors have not in the past been rewarded for such mundane goals as stamping out human rights abuses or making sure that people can actually breathe air without becoming ill. They were rewarded for contributing to the economy. If they had to wreck the environment and trample on individual freedoms in order to do so then so be it. At least GDP continued to grow.

Things have just got more complicated – and such complexity needs a strong leader to make sure that things don’t get derailed.

But even that might not be enough.

There are two dangers.

One is that a strong leader can become increasingly autocratic. Look at what happened to Mao. He wasn’t the kind of leader you could just pick up the phone to and chew the ear off of. He might have you shot. That’s why no one told him his collective farming scheme or his Great Leap Forward were both daft ideas. Well they might have done. But then they’d have been shot and we’d never know about it.

There are positive signs from the market that the authorities are still in a listening mode – hungry for outside knowledge and eager to act on the advice that they receive. They should keep this up.

The second danger is that the Chinese authorities may have left things too late. It may be that the task is so vast that Xi, for all his present clout and his new ‘leader for life’ status, just can’t stick the distance. Or gets bored and wants to buy a Ferrari instead.

When I was in Beijing, the official air quality index was well over 200. I could barely see one block in front of me. My eyes were streaming and my throat was hoarse. That’s really unhealthy, man – and a clear reminder that, when it comes to reforms, there is still much that needs to be done.

The problem is the government has focused for so long on GDP growth that it may not know how to do anything else. With or without Strongman Xi at the helm.



April 19, 2016

I listened last week to two important people extol the many virtues of Hong Kong, and insist how the future success of this semi-autonomous enclave of China was guaranteed because of the tenacity and entrepreneurship of the people that live here, plus of course the robustness of the legal and financial system.

One of these people was John Tsang, Hong Kong’s financial secretary. The other was Stuart Gulliver, chief executive officer of HSBC.

They used phases such as “the highly-developed legal system and a heavy concentration of skilled professionals means that Hong Kong will be too far advanced… to be displaced [by China]” (Gulliver) and “Hong Kong’s success is built upon the rule of law [and] the persistence in upholding economic freedom, an extensive business network, sound financial infrastructure, a robust regulatory regime, [and] a well educated and resourceful workforce” (Tsang).

The problem was that such comments – which was what you would expect both of the parties to say – were overshadowed by the most eloquent speaker that went before them: Tsim Tak Luk, chairman of the Project Citizens Foundation, writer and intellectual.

This wasn’t helped by the fact that, to be honest, neither Tsang nor Gulliver proved to be particularly good speakers. Okay, I’ll accept that for Tsang English isn’t his first language. And, with the Sunday Times preparing to publish a story on Sunday about how Gulliver was for the chop in two years time, the HSBC CEO may have had other things on his mind.

But still they could have given a more robust defence against Luk’s invective.

Luk used such confrontational rhetoric as “Hong Kong is a city of broken promises, and the Hong Kong people is a people misruled” and “We have seen instead plenty of examples of mediocre people making dumb decisions for I don’t know whose benefit”.

Not perhaps the best choice of words when you are trying to introduce a member of the government that, in none too subtle a way, you are hell bent on criticising.

Luk pulled no punches when he spoke about Beijing: “Before 1997, the then sovereign, Her Majesty the Queen of England & the United Kingdom, was affectionately referred to as The Proprietress. After 1997, the new sovereign in Beijing is referred to, also affectionately, as The Grandfather. And the difference is this – the Proprietress left you alone to go about your business provided you made money for her, whereas the Grandfather loves to give orders and broaches no arguments.”

Grandfather does not always know best, said Luk, especially not high finance (the thought of making a reference about what happened to markets in China cannot have been far away from his mind).

The fear in Hong Kong is palpable – and Luk’s comments embodied perfectly the sentiments that I am hearing an increasing number of local Hong Kongers express: China needs to move carefully for the future success of Hong Kong to be guaranteed.

This fear didn’t go away as Hong Kong protestors closed their umbrellas at the end of 2014. It is still very much there, and with this being an election year, expect it to resurface in some form or another. Joshua Wong, the poster boy from the 2014 protests, has just launched his own political party.

I tend to see Beijing as largely pragmatic. I think many in the West do. If they’re making money they are happy, and they don’t want to derail Hong Kong’s success just for the sake of doing so.

But there is a danger here that many are increasingly sensing.

Luk concluded: “As we survey the current political landscape in Hong Kong, it is obvious that the politicization, polarization and radicalization of Hong Kong politics – and their relentless escalation – is the number one cause for concern… As Zhang Dejiang, Chairman of NPC said, the intelligent Hong Kong people will be able to find their own solution. If this is true, Hong Kong’s political risk goes down several notches, and our Financial Secretary Mr John Tsang’s bullish scenario may come to pass. But if the reverse is true, and Beijing chooses outright confrontation – the sledgehammer approach – then we are only one riot away from Hong Kong’s own June 4th  moment.”

This last was a reference to the terrible Tiananmen Square massacre of 1989. Which sounds bad to me. To be avoided at all costs.

Beijing has more sense these days.

One hopes.