China's Stability Is at Risk

Christopher Whalen

Security, Asia

Offshore investors who have become enamored of the illusion of economic growth and political stability in China may want to recalibrate the reality gauge in 2019.

The western view of China’s political economy is driven partly by anecdote, partly by accepting Beijing’s propaganda/economic data as fact. Foreign investors have convinced themselves that the Chinese Communist Party (CCP) is superior in terms of economic management, this despite ample evidence to the contrary, thus accepting the official view is easy but also increasingly risky.

In a December 15 speech, Renmin University’s Xiang Songzuo warned that Chinese stock market conditions resemble those during the 1929 Wall Street Crash. He also suggested that the Chinese economy is actually shrinking. But this apostate view was quickly rejected by legions of captive western economists and investment analysts whose livelihood depends upon “selling China” to credulous foreign audiences.

Facts aside, the perception of China is what matters to global investors, part of a larger pathology of hope-based investment allocation that eschews those rare bits of hard data that disagree with the positive narrative. China growth, Tesla profitability, or the mystical blockchain are require more credulity than ever before.

For example, in the first half of 2016 global capital markets stopped due to fear of a Chinese recession. Credit spreads soared and deal flows disappeared. But was this really a surprise? In fact, the Chinese government had accelerated official stimulus in 2015 and 2016 to counter a possible slowdown and, particularly, ensure a quiet domestic scene as paramount leader Xi Jinping was enshrined into the Chinese constitution.

Today western audiences are again said to be concerned about China’s economy and this concern is justified, but perhaps not for the reasons touted in the financial media. The China Beige Book (CBB) fourth-quarter preview, released December 27, reports that sales volumes, output, domestic and export orders, investment, and hiring fell on a year-over-year and quarter-over-quarter basis. Headed by Leland Miller, CBB is a research service that surveys thousands of companies and bankers on the ground in China every quarter.