Chinese economy weakening shakes faith in CCP leadership

Performers
from the Kunming Acrobatic Circus of China rehearse prior to the
troupe’s premiere in Bogota, Colombia, Friday, Sept. 14,
2012.
AP

• China’s leaders have spent years convincing the world
  that they’re ready to handle a slower growing, more volatile
  economy.
• But President Donald Trump’s trade war against the
  country is adding an unexpected, so-far uncontrollable level of
  difficulty for policymakers and uncertainty to the global
  financial community.
• That may set China’s economy up for the worst kind of
  crisis it could ever face — a crisis of faith.

With every day that passes it seems more likely the US and China
will not be able to avert a full-scale trade war.

On the US side, President Donald Trump recently announced his
willingness to put tariffs on all of China’s exports to the
United States by January. Meanwhile, in Beijing,
The South China Morning Post reports that think tanks are
struggling to have honest conversations with legislators about
how to proceed with trade negotiations, afraid that criticism of
the Chinese economic model or the government’s handling of trade
talks thus far may get them in trouble.

Frank communication, as things stand now, seem to be in short
supply all around. One day, Chinese President Xi Jinping and
Trump seem to be hashing it out; the next, the market is sliding
again.

This year was already turning into a difficult one for Chinese
economic policymakers. After a steady start to 2018 the country’s
economy started slowing dramatically in the second half of the
year — a long expected result of China’s financial-system reform,
an attempt to ween itself off of the debt gorge that kept its
economy growing through the Great Financial Crisis.

Analysts expected that particular kind of hiccup. Beijing has
been preparing the world for a more volatile, slower growing
Chinese economy for years now, and by and large they’ve convinced
the world that they can handle that.

What they did not expect, however, was how the added pressure of
a trade war — the drama of continued failed negotiations — would
exacerbate the situation.

“For China, signs of a further slide in growth and threats
of expanded tariffs from the U.S. are an unfortunate
combination,” noted Bloomberg chief economist Tom Orlik. “So far,
Beijing has managed to find policies that combine targeted
stimulus with steps toward reform. If demand continues to
deteriorate, threading that needle will get harder to do.”

Now China’s currency, the yuan, is falling to its lowest level
against the dollar in a decade, and Beijing is pledging to fight
to keep it afloat. China’s property market, the engine of
its economy, is flailing as housing sales fell 3.6% in September,
and property investment — half of the country’s overall
investment — is likely to follow. The stock market is crashing —
the Shanghai Composite is down over 21% year to date — and
warning signs in sectors like automobiles
and manufacturing are flashing.

This is a test for the brains behind China’s economy. Not since
the late 1990s/early 2000s has it been this weak in the face of a
potential disaster. How policymakers handle this could change the
way the entire global financial community thinks about their
ability to deal with crisis.

This could turn into a crisis of faith, challenging the most
important idea holding China’s economy together — I call it, the
“they’ve got this,” theory of Chinese economics.

Chinese
President Xi Jinping speaks during the during 2018 Beijing Summit
Of The Forum On China-Africa Cooperation – Joint Press Conference
at the Great Hall of the People at The Great Hall Of The People
on September 4, 2018 in Beijing, China.
Lintao Zhang/Pool/Getty Images

Chill, they’ve got this

The “they’ve got this” theory of Chinese economics goes like
this: While democratic capitalism is nice, authoritarian state
planning has its benefits — and one of those benefits is that the
smartest people with all the answers are running China’s economy.
They get to guide it as they please, and so far they have had the
correct policy mix in place to avert all of the little disasters
that have emanated from the economy since things started getting
really hairy in 2015.

And so in the event that something major happens don’t worry
y’all, “they’ve got this.” 

You hear this thesis in academic circles and at hedge fund
conferences and among the thinkers at certain think tanks. Even
famed investor Ray Dalio, founder of the world’s largest hedge
fund Bridgewater Associates, is a proponent of this notion. While
in China last February, he preferred to avoid direct questions
about the economy,
according to The Wall Street Journal, saying only that he was
“very bullish” on China and that the issue wasn’t the challenges
but the way they were handled.

And Beijing has the best handlers in the business, so the
theory goes.

On the other hand — and this post is very much about the
other hand — what if they don’t? This “they’ve got this” type
thinking, after all, was the reasoning behind why the USSR was
such an economic success until it very much wasn’t. So it may be
for China.

Now that an incredibly disruptive trade war has been thrown
into the mix with an already complicated reform agenda, the
prospect that Chinese policymakers lose the “they’ve got this”
benefit of the doubt is very much in play.

Over at the Center for Strategic and International Studies,
authors Logan Wright and Daniel Rosen examined the
slow creation (and potential destruction) of China’s “they’ve got
this” narrative in a paper called “Credit and Credibility; Risks
to China’s Resilience.”

They explain it like this: