State Capitalism and Western Society (Part Four)

Does China Have What it Takes to Continue its Growth Spurt?

 China-economy-infographic

A mostly inward looking political system has difficulty in attracting and retaining talent from abroad —like in present day China. The attraction/retention of talent is an indispensable element in achieving technological parity and leadership relative to other countries. If China truly aspires to become not only the largest economy in the world, but also one of the wealthiest per capita, this is a factor that inevitably has to be overcome in the future. Otherwise, the end of the economic miracle will be near (as discussed in Part Three of this series).

Among others, there are some extremely important ongoing processes that are excellent indicators of the capability that the Chinese political system has in continuing its (so far) essentially successful adaptation to global norms, principles, and practices:

  • One of them is the inevitable free convertibility of the yuan to any foreign currency, in a similar fashion to the Western standard. It’s simply inconceivable that a nation of the size and potential of China is still operating without a fully convertible currency. In doing so, however, the People’s Bank of China —China’s central bank— will have to get used to very infrequent and rather limited interventions, like all fully convertible currencies in the world operate, from the Dollar and Euro, to the Mexican Peso.

  • Another very interesting and crucial barometer of a successful evolution of the Chinese economic system towards a more conventional one is the development of the municipal bond market. Beijing seems to be determined in that direction. Despite its limitations, mankind has not been able to devise a more practical mechanism of discipline and reward/punishment for bond issuers than the financial markets. Beijing seems to have a crystal clear understanding of the multiple advantages that agile markets have over rigid regulations.

However laudable this change will be, it is already encountering heavy resistance with local authorities when trying to comply with the international practice of full disclosure of financial statements and alike. Without a reasonable compliance level with transparency practices, reputable international rating agencies will either rate the bond issue very poorly, or quite possibly, won’t even dare to rate it at all, thereby jeopardizing any potential placement of new debt through the bond market.

On the last week of 2013, China’s state auditor reported a local government total debt  outstanding of 17.9 trillion yuan (US$2.96 trillion) as of the end of june of that year, including liabilities and debt guarantees. That is a whopping 67% increase versus 2011. Although China’s total debt levels seem to be lower than that of  fiscally troubled Japan or Greece, the speed of change is of great concern. Of utmost importance, there has not been a proper disclosure of bad loans. How big are they?

In the New Year’s message on the bank’s website, the Governor of The People’s Bank of China, Zhou Xiaochuan declared: “We will vigorously promote financial reform, accelerate financial innovation to maintain financial stability, improve financial services and management to support the economic development, and adjust the economic structure.”

  • And finally, the political evolution of Hong Kong will also be a crucial factor in the (hopefully) successful integration of China to the current world order. Internal pressures from Hong Kong citizens asking Beijing’s non-interference in the selection of candidates for office will not disappear.

Curiously enough, Hong Kong is the cradle of the most advanced and thriving version of Western capitalism. For historical and very legitimate reasons Great  Britain returned Hong Kong to China in 1997, in a peaceful and orderly manner. To his credit, Beijing has been adroitly managing the “One country, two systems” spirit since the transfer took place.

Hong Kong is an invaluable asset for the mainland, a beacon of prosperity and learning for mankind; it would be most unfortunate not to protect it and nurture it, for the benefit of the mainland and the world at large.

 If you want to see capitalism in action, go to Hong Kong. 

–Milton Friedman

Authoritarian regimes have been the norm in the world up to relatively recent times; moreover, there is not a single developed —or developing— nation on earth without an authoritarian past. Thus, based on its earlier universal omnipresence, authoritarianism can be conceived as a painful, yet unavoidable process in the history of mankind.

The French revolution was a misguided effort against the French authoritarian Monarchy, in no small measure inspired by the then recent and extremely successful independence of the US — a military struggle against the British authoritarian regime of the time.

In fact, the constitution of the US as a sovereign nation was the first large-scale materialization of a new way of thinking, centered more on the citizen, in a drastic departure from authoritarianism. The formation of the US was, indeed, a major breakthrough of unmeasurable social and political virtuous consequences not only for that new nation, but for the world at large. The year 1776 can be considered as the origin of contemporary Western political systems. Until now, there has not been any other political event remotely close to it.

If the Chinese economic miracle has proven anything, it’s that, on the average, Beijing has been an excellent student of the Western capitalist model; otherwise, the implementation of the dramatic changes made from 1979 and onwards wouldn’t have been as successful as they have been. Thus, in principle, there shouldn’t be any particular difficulty that cannot be overcome by the Chinese leadership towards the continuation of a successful insertion of the Chinese socio-economic system into the new world economic order.  Moreover, if this paramount process is appropriately done, China can truly aspire not only to become the largest economy on earth —volume wise—, but a few decades down the road also become a truly developed nation, with an according GDP per capita level. Chinese leadership should bear in mind that it is significantly more difficult to transit from good to excellent than from bad to good.

Some relatively recent former-authoritarian regimes, like Singapore, Poland, the Baltic Republics, and Chile have made remarkable progress towards a more typical Western-society-like political structure and practice. Hence, virtuous evolution from authoritarianism can, should, and must be done. That’s the only time-tested path for high-quality, self-sustainable, and reasonably balanced progress the world known so far.

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About Martin Marmolejo

Global Investment Manager | Founder & Managing Director at MMA Global Investment Management | Proud husband and father | Follow me @globalmarmolejo.

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