2014-04-24

Pettis Says China Has 2 Years to Adjust; Xi Must Consolidate Power

«China has two more years left to adjust»
Recently there have been some minor defaults. Will a crisis be triggered by the banking system?
We won’t have a banking crisis in China. The government controls the banking system. And the only way ordinary Chinese can save financially is in the banking system. They can’t take the money out of the country, the stock market is terrible, and the bond market is tiny. What else can they do? Online banking is growing quickly, but it is still small. If it gets big, the regulator will have to stop it. So ordinary Chinese leave their money in the banks. So you can’t have a bank run like on Northern Rock in England. We are not going to have a financial crisis.

Why do many economists expect a financial crisis in China then?
Many people think that you can only have two possibilities: growth forever or a financial crisis. This is not true. Japan did not have a financial crisis, but for 20 years grew at 0,5%. Japan has the same problem that China does, but the China version is probably more extreme. But Japan never had a financial crisis.

What is the difference to Europe and the USA?
The US and Europe had banking crises because the system is very different. Economists have this big debate about what is better. Economically the best thing is to have a crisis and write everything down because then you start growing again. But socially this is very difficult. The Japanese never had a crisis and never wrote the debt down, so they had 20 years of almost zero growth. That is the trade off: a rapid adjustment which is economically much better in the long term but socially very difficult in the short term, or a very slow adjustment, which is socially easier in the short term, but economically much worse in the long term.

The Chinese government will try to avoid social unrest.
All governments do.

What is most important for China in the near future?
What really matters is whether President Xi can consolidate power quickly enough. If he can consolidate power, he can force the adjustments in spite of the opposition of the elites. That is the most important question. The Soviet Union had similar problems and they had to make their adjustments in the Seventies. But the Soviet Union’s power was much more dispersed and the adjustments failed. This is something China absolutely does not want. Their interpretation, which I think is correct, is that they have to consolidate power much more so they can force through the adjustments.

Are there historical precedents?
There are only two types of countries that adjusted successfully: democracies and highly centralized autocracies. Decentralized autocracies almost never adjust successfully. What we need is Xi Jinping to centralize power and that is what he has been doing for the last two years.

How about the corruption cases that are brought to court?
Every three weeks some important official has to go to jail. But this is not because they are corrupt – everybody in leading positions in China is corrupt – but because they are on the wrong side of the fighting groups, they are resisting the changes.

I highlight that quote from Pettis about consolidating power. Even before the disasters in Egypt, Libya, Ukraine, et al, it was clear that those calling for democracy and political reform in China have no idea the challenges China faces. Right now the best thing for China is for power to concentrate in the leadership so it can pursue the reform agenda. Even if political reform is the ultimate goal (whatever form that reform may take), it's never going to happen without economic reforms coming first.

I have covered the politics here:

The Battle For China Continues On All Fronts
More Turf Battles in China As Reformers Expand Reach
Political Battle Behind the Scenes Still Ongoing in China; Economic Reform Isn't Solely Economic Reform
Socionomics Watch—The battle for China
Leadership succession battle in China goes public as Wen slams Bo Xilai on Wednesday; Communist party fires Bo Xilai on Thursday
Wen Jiabao's revenge
Major financial reforms begin in China
China's New Age of Reform
Political reform in China taking place through economic channels

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