SCIENCE FICTION OVER DIM SUM

EDU DDA July 23, 2024

Summary: China’s PBOC came out with a surprise rate cut to begin this week because the government’s Third Plenum went over like a lead balloon. The real story behind it is a troubled power attempting to do what no other socialist system has ever been able to, all because the monetary challenge was too big for them to tackle. This is a measure of the degree of difficulty for China and simultaneously a commentary on what the whole world is facing.

China’s PBOC surprised the markets to start this week with an unexpected rate cut it hadn’t foreshadowed beforehand, as is standard practice. Chinese banks followed immediately with cuts to both loan prime rates (LPR). Most people straight away understood their transparent purpose, to throw the markets a small bone after the utter disappointment of the Third Plenum.

Rather than release concrete steps to alleviate the economy’s many problems, authorities issued instead another “plan” long in platitudes and short of any specifics. It was the same thing Xi Jinping’s government has been saying and doing for over a decade. Basically, just trust us in our vision.

Even if that vision never quite seems to leap from the mountains of text produced to describe it.

The result of China’s Third Plenum should not have been in doubt. Though many observers had hoped the CCP might author and release a comprehensive blueprint for what the government plans to do about China’s situation, the simple fact of the matter is they don’t actually know. They have a vague idea of where they want to go, what it could look like once they get there, believing somehow they will figure out how to do it on the way.

It's the pliability of Socialism with Chinese Characteristics.

That’s already a red flag, no pun intended. Socialism with Chinese Characteristics emphasizes China more than socialism or even Socialism. Under the cover of Marxism, Maoism tends more to the nationalistic. This isn’t to say there aren’t doctrinaire Communists in the CCP, there obviously are. Yet the goal of this strain isn’t worldwide communist revolution, it is global domination by China first and foremost. If it happens to be socialist, or a flavor of it, fine.

Deng Xiaoping realized a half century ago the only way at that time to get there was to abandon the foolish, frankly stupid economic “transformations” begun under Mao Zedong. The Great Leap Forward was a plan put together by a literal madman. Deng at least recognized how China’s ambitions could never again be left to that kind of fragility, should the top guy turn out to be well on the spectrum of crazy.

He also understood very well what the Soviets did not; that those who intend to lead the Socialist revolution are least qualified to be in a leadership position up until the moment when the country is finally “ready” for it. Recall that Marx had warned from the very beginning how the socialist transformation should never be attempted in a pre-industrial society.

Yet, every single “revolution” has taken place in exactly those. And each time it is undertaken by revolutionaries who imagine they can shepherd the transformation only to prove time and again they are the last you would ever choose for such a task.

Mao like Lenin then Stalin before him arrogantly believed he could transform China from its primitive roots into an industrial powerhouse through nothing more than his strength of will (pushed forward by the cult of his god-like personality, which by all accounts Mao himself bought right into). It created one of the worst disasters in the entirety of the human existence.

The Soviets then tried to literally pilfer their way to their end goal. Deng was smarter. He realized if you can beat capitalists at their own game, and you can’t, then buy them off with promises of vast future business. If the Chinese communists and Communists couldn’t finish the industrialization of China, then they’d let the capitalists do it for them – turning Socialism with Chinese Characteristics into what at the time appeared to be capitalism-like (many were horrified by what they thought as socialism-lite, until they saw its results).

That’s the thing with the phrase; it becomes whatever it needs to be at any moment in time. What Deng thought China needed in order for China to have any chance of becoming the worldwide envy was a lot less socialism at least in economic matters, so that’s what Chinese socialism became.

The idea of China taking its place at the top of the international order is what drives its leadership and they don’t necessarily care how to get there. Communism as practiced by the CCP is less about the journey as it is managing the process. If the top officials thought they could propel China to the forefront using other means, then so be it; socialism is really the just ideological cover for tight control however the system is arranged on the way to final victory.

Through a combination of good fortune (pun intended, for those who understand the reference to Stock and Watson) and great timing, Deng’s reforms worked and then some. China grew like gangbusters riding the eurodollar wave partway to genuine prosperity.

As an aside, India did largely the same just around the same time though on a slower trajectory than China, at least until more recently. Instead of reforming the means to achieve a socialist transformation following the Chinese model, India actually shed its installed elements of communist (sadly, so many African nations which like India had originally turned to socialism straight away in their post-colonial stage failed to learn from these examples) leanings in a far more radical reformation which have already paid off in it being the most populous nation, a real though as anywhere imperfect democracy, and before not a whole lot longer the second largest economy in the world likely surpassing China - unless Xi gets this right.

The Great not-Recession was the world’s watershed event. Its monetary system broke down and the economy has been dragged toward stagnation and deglobalization. When the rising tide which used to lift all boats is no longer rising, it devolves into every nation for itself.

Deng’s version of Socialism with Chinese Characteristics was no longer viable, though it took a few years for that to finally sink in. Over the interim, Keynesianism dictated the “socialist” response to the 2008 and 2009 setback, planting the enormous seeds of the real estate bubble in the process. Like the interest rate theory I’ve covered in the past few DDAs, aggregate demand theory (as discussed in Friday’s) sounds plausible and even quite reasonable.

But only if the private economy recovers. Should it not, then you end up with tons of debt but without the recovered economy you require to be able to service the debt while keeping the whole thing pushing forward. China quickly grew indebted across all parts all the while the economic system slowed and slowed - and slowed some more (especially post-2012 just when Xi came to power).

Fifteen years since have proven beyond any shred of every doubt Socialism with Chinese Characteristics is due for an update. But in what way? Many have said China is ripe for overtaking the eurodollar and replacing it with their own. No. Authorities starting with Xi took the other option.

The Deng model that had relied on the eurodollar way of globalization. Chinese Economists and some politicians like former Premier Li Keqiang (RIP) urged instead a transformation to an internal-based, consumer-focused system rather than heavy investment and industry making stuff for export to everywhere else. They called it “rebalancing” and it never took off despite subsequent efforts to “stimulate” it into existence because of what many people call the “middle income trap.”

With only more debt and ever-slowing consumption to show for it, an already-skeptical Xi pulled the plug using the 19th Party Congress in 2017 to make it all official. Using words like “rejuvenation”, what Xi has really meant is a Deng-level radical change, to completely shift Socialism with Chinese Characteristics so that China can restart on its path to Number One.

Xi inaugurated that path at the Congress in 2017, saying, “With decades of hard work, socialism with Chinese characteristics has crossed the threshold into a new era.”

Sure, but what was this new era?

Xi talked about “quality” growth which was more than an admission “quantity” targets were no longer tenable. In fact, as early as 2013’s Third Plenum the leadership had laid out the general idea of what the government wanted to happen.

Oddly enough, Western sources looked on the results of that gathering as a renewed commitment by China to reform in the neo-liberal tradition. The BBC was one of those in 2013:

The Communist Party leaders said markets would be allowed to play a leading role. State ownership would remain a pillar of the economy.

"The core issue is to straighten out the relationship between government and the market, allowing the market to play a decisive role in allocating resources and improving the government's role," the statement said, Reuters news agency reports.

That’s what it looked like from the outside. The true agenda was instead contained in this description: “Our correspondent says the party is vowing to carry out deep reforms across the economy and the government to reach a ‘new stage of development’.”

China would use its relatively stable position to relaunch its economic model by leading a Fourth Industrial Revolution, except this time the innovations would spring from Chinese “market” minds and processes. The country would invest heavily in new industries and methods, innovation and inventions which would launch the Chinese economy out from under the prior eurodollar connection. It would no longer simply be the world’s manufacturer; it would invent the future tech the future world required and therefore be at the cutting edge from the forefront rather than as Deng had it picking up the grunt work from the developed world which kept developing.

The socialists were going to try again to be capitalists.

In the ten now eleven years since 2013, China has seen its economic and financial cushion disappear because nothing has been achieved over the prolonged interim. There was a lot of remaining runway from the early years of the Silent Depression, rather than make good on those promises the government has instead spent most of its time trying to manage the decline of the old model. Even Xi misjudged the seriousness of the post-2008 setbacks which have created one financial and economic “distraction” after another.

Especially Euro$ #3, the final nail.

The self-inflicted wound of the pandemic merely sped up the clock. What little margin for error the Chinese had by 2019 was used up in 2020. Here, too, Xi miscalculated; he thought 2021 and its price illusion had instead extended the runway for this transformation rather than realizing it was a false one. The CCP leaned into shifting the financial sector, undercutting real estate and development (the “red lines”) thinking the sudden burst of global supply shock activity would give the leadership more economic margin to work with.

They could kill off the last parts of the property bubble and not suffer too much for it because the 2021 global economy was on fire and surely it would continue.

Three years on, it seems plainly stupid, the sort of mistake Mao might make.

And that’s where Xi has brought China, to another similar crossroads. This isn’t to say he’s as openly imprudent as Mao had been, though he has boxed the Chinese into a similar corner. To get where he wants to go means going directly against what Socialism with Chinese Characteristics cannot be.

Deng knew that communists or the Chinese nationalists masquerading as such cannot duplicate let alone outdo capitalists. He sought instead to harness them for China’s national needs with results that were and, in many ways, still are simply astounding. The process just got interrupted long before it was done.

Xi is now throwing that out, embracing as Mao did the nationalistic madness somehow socialists will suddenly be able to do the one thing they have never been able to do in any setting. China’s top-down authorities intend to complete the industrial/economic transformation themselves.

They just have no idea how.

What the Third Plenum reinforced is only that intent. Socialism with Chinese Characteristics now means pulling resources from the “Deng” parts of the economy that have already developed and had been successful, redirecting them (read: throwing gobs of money at) toward armies of scientists (managed by even more bureaucrats) who will just invent waves of new technology we can’t even describe right now.

China is going to first lead the world in AI and “renewable” energy by simply being the biggest player in them. Those are only the first waves, more important is the second and third which go so far beyond it is basically science fiction. The Chinese aren’t just going to lead the world in the second half of the 21st Century (Plan 2050) they are going to build it from the ground up in their own image.

Or, Xi’s image.

The summary breakdown issued by the CCP from the Third Plenum says it all, without saying anything:

At the session, the Central Committee gave a highly positive assessment of the success and achievements we have made in comprehensively deepening reform since the beginning of the new era and studied the issue of further deepening reform comprehensively to advance Chinese modernization. It was stated that the present and the near future constitute a critical period for our endeavor to build a great country and move toward national rejuvenation on all fronts through Chinese modernization. Chinese modernization has been advanced continuously through reform and opening up, and it will surely embrace broader horizons through further reform and opening up. We must purposefully give more prominence to reform and further deepen reform comprehensively with a view to advancing Chinese modernization in order to better deal with the complex developments both at home and abroad, adapt to the new round of scientific and technological revolution and industrial transformation, and live up to the new expectations of our people.

Translation:

-We are going to build a harmonious and prosperous socialist society, reforming the economy for the new era!

-OK, but how?

-We’ll get back to you in a decade or maybe more after we’ve done it to let you know what specifically we did.

It’s that pathology which resembles Mao. Lots of platitudes and little else. Just figure it out as they go. Meanwhile, the changes are actively being instituted anyway. Wing it because, at this point, what other choice is there?

To be perfectly honest, none. The so-called capitalists are themselves stuck in the same eurodollar doom loop as China and they show absolutely no sign of doing anything different. QEs and all that.

Resetting the monetary system is only on the agenda for crypto enthusiasts, and most of them are off in their own corner marveling over Bitcoin’s latest price surge which, as I showed in my Bitcoin presentation (in the DDA “conversations” section), is the opposite of monetary progress. And the fewer who do understand the needs of making a competing payment network, they are so far from scale, reach, and reliability their timetable is actually similar to China’s “new era.”

Quite simply, I cannot fault why Xi Jinping is doing what he is doing. He may be a dictator, yet he’s also proven to be a far better judge of the economy than nearly every PhD out there.

In the end, though, his version of Socialism with Chinese Characteristics has closed off the only other and more realistic option China may have pursued. If the cause of the world’s woes largely (though not entirely) spring from the broken eurodollar, then like stablecoins why didn’t the Chinese seek to replace it? Either on their own or in some combination?

The truth is, they did try (admittedly it was a halfhearted effort) but ran into three impenetrable roadblocks. First, the geopolitical reality suspicious of any currency reform. No one in authority outside China would even countenance a yuan-led world currency (nor should they have).

Second, the Chinese proved to be their own biggest enemy. Creating a parallel euro-yuan necessarily meant giving up tight control, something the CCP never seriously considered especially after the trial run offshore in Hong Kong. The CNH market was meant to be more than the testbed for it to challenge the eurodollar system. There were dim sum bonds, too, what was supposed to rival Eurobonds.

More than those, however, a reserve currency requires enormous resources and heavy investment (as digital currency projects show, and those are just to obtain minimal results at this stage). Above all, a massive amount of patience.

In other words, a hugely expensive process fraught with enormous uncertainties with no guarantee of paying off in the end. While that statement also perfectly describes Xi’s “new era”, it is therefore quite telling that China chose to pursue the sci-fi strategy instead!

That’s how difficult international money is. The Chinese, backs against the wall, facing a very dangerous transformation, desperately needing to come up with a long shot, are betting on doing something no Socialists have ever been able to pull off rather than try to tackle the world’s money.

Maybe they never had a realistic chance, the fact they didn’t really ever try is not nothing.

 

FOR MORE INFORMATION ON EDU’S DEEP DIVE ANALYSIS, CLICK/TAP HERE

Previous
Previous

AGGREGATE MALINVESTMENT

Next
Next

A CRITICAL START SIGNAL IN THE MIDDLE