China’s Strongman Shows Real Weakness

Posted: Mar 01, 2018 9:38 AM

China’s Xi Jinping wants to become emperor. Or failing that, king. And if that doesn’t work, he’ll settle for life-time title of Party Chairman. Apparently his current titles of General Secretary of the Communist Party of China, President of the People's Republic of China, and Chairman of the Central Military Commission just aren’t enough for him.

This desire of Xi’s should make most rational investors re-think their desire for outsized gains that Chinese financial markets promise. It should also make most US diplomats re-think their desire for outsized gains that Chinese cooperation promises.

Over the weekend Xi put it to the 52 ChiCom party deputies to scrap a number of reforms made by China in the last twenty years—reforms which have allowed the country’s incredible economic growth rate.

While the response in the West has been muted, some Chinese are speaking out.

"He [Xi] is trying to restore monarchy, which is absolutely intolerable,” wrote former China Youth Daily's newspaper editor Li Datong. “The Constitution concerns the interest of every citizen. This is the reversal to the monarchy and a return to the Mao era."

And while the changes proposed by China are not the death of Chinese capital markets, one day, five years from hence, we may recognize them as the beginning of the death rattle.

For sure, Xi Jinping’s reach for supreme rule in China has to feel more evolutionary than revolutionary in nature. But for a country that aims to go toe-to-toe in providing competitive leadership to Europe and America, Xi’s going in the wrong direction.

Because what leaders like Xi have not figured out is that the sum of the mass of money, people and resources of a given country don’t make for real wealth. It is rather the free exchange of ideas and capital that combine to make wealth.

They might have found that out had they been listening. But drowning out all but applause is the new party line. This is a move made by China out of weakness, not out of strength.  I don’t know exactly why China now wants it that way, but I suspect that there is more trouble brewing in China socially and economically than many in the West reckon.

And Xi’s proposed coronation is just another step in China’s squelching of both types of trouble.

Other media have detailed the restrictions on internet access and the press that the government has been instituting slowly for over one year—restrictions that really amount to an embargo on ideas from other countries, ideas that are both commercial and social in nature.

Just six months ago China was suffering from capital outflows that had been going on for a year in a half. These outflows were only stopped by government fiat, not renewed confidence in Chinese markets.

In short, investors were getting nervous about their investments in China. And to stop the outflows, China basically said that capital, once invested in China, can never leave. Wang Tao, the chief Chinese economist for UBS says that China will not lift the restrictions on outgoing capital for “the next couple of years.”

For investors, the “next couple of years” should mean the same thing as “never.”

For some reason, few in the West have connected the new restrictions placed on the inflow of ideas and the outflow of capital.

For investors, both trends should be worrisome.

Amongst all the risks that investors need to quantify, political and military risk are the most difficult to gauge, and some of the most devastating to markets when affected.

The political risk of a one-man dictatorship in China-- with its inherent instability and unpredictability-- certainly should give investors who would otherwise see China as attractive, pause.

And while China’s military gambits seem to have cooled down a bit over the last year, historically speaking, consolidation of power into the hands of one man usually does not lead to peace. It will either be war at home or war abroad, and maybe both.

“As Chinese censors worked overtime to block social media dissent at Xi Jinping's move to scrap presidential term limit,” writes the Sydney Morning Herald, “a number of intellectuals have tried to circulate an open letter calling for the proposal to be voted down.”

And while there is little chance that China’s National Congress of People’s Deputies will vote no on the proposal to make Xi dictator of the Greater Chinese Co-Prosperity sphere just as Vladimir Putin is the Emperor of All Big and Little Russia, foreign investors should begin to reject investment in China outright.

The risks have slowly become far too great.