The Independent Market Observer

The China Syndrome

Posted by Brad McMillan, CFA®, CFP®

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This entry was posted on Sep 11, 2012 1:02:17 PM

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One story consistently made the front pages this morning: where is China’s presumptive new leader? “Mystery as China’s leader-in-waiting vanishes” in the Financial Times (FT), “Communist Leader’s Absence Sets Off Rumor Mills in China” in the New York Times (NYT), and “China Mystery: Where is Xi Jinping” in the Wall Street Journal (WSJ) all report the same speculation, but no one has any facts. Imagine, not all that long before inauguration, the vanishing of a U.S. president-elect. Problems? Quite possibly.

As well as China has done economically, it is clear that the political system does not operate at the same level of sophistication. Most predictions of continued Chinese economic success hinge on the ability of the government to manage the economy; to my mind, this type of story calls that ability into serious question. The FT has a good overview article, “The Ascent of the Bureaucrat” (p. 7), which discusses some of the issues associated with the current system. Given those issues, the downfall of Bo Xilai and his wife, and the current absence of Xi Jinping, you have to wonder what is happening at the top levels of Chinese politics and what that will mean for the economy, not to mention for the people.

The Chinese economy also needs help. Beyond the leadership headlines, the WSJ has “China Sees Demand Drying Up” (p. A7), the NYT has “Trade Data Confirms Economic Slowdown in China” (p. B8), and the FT has “Stalling China chills Japan and South Korea” (p. 3). You can read the rising tensions in the East and South China Seas as an attempt by the Chinese government to refocus public attention on noneconomic issues. “Beijing attacks deal to buy disputed Senkaku islands” (FT, p. 3) and “Japan Plans to Buy Islands in Dispute” (WSJ, p. A7) show that issue still in play. I believe China remains an unappreciated risk to the global economy.

The other front-page story for the U.S. papers is the Chicago teachers’ strike. The NYT has “Teachers’ Strike in Chicago Tests Mayor and Union,” and the WSJ has “Chicago Teachers Go on Strike.” Even the FT has the story on page 6, suggesting it is of more than just domestic interest. This strike can be viewed from a political perspective and from an economic perspective. First, the political subtext—Obama is from Chicago, and the mayor, Rahm Emanuel, is a political ally. The fact that a mayor who is both a Democrat and an ally of the president would take on a powerful union, especially a teachers’ union, shows that times have indeed changed, and that old allies are not necessarily friends in the present. From the economic perspective, this kind of change typically only happens when the pain of the status quo exceeds the pain of change—which suggests that the pain of the status quo must be really, really bad. The NYT makes that point in another front-page article, “In Standoff, Latest Sign of Unions Under Siege.” Arrangements made between governments and the population in better times have to change when times get worse. This is a preview of the battles to come over entitlement programs.

Quick hits

  • Libor is coming back to the headlines, with “Companies fear chaos if Libor is reformed too fast and too radically” on page 13 of the FT and “Before Scandal, Clash Over Control of Libor” on the front page of the WSJ.
  • Resource scarcity is driving previously unthinkable changes, per “Russian Farm, Chinese Farmer” on page B1 of the WSJ.
  • Financial repression (per Bill Gross of PIMCO) is becoming headline news, with “As Low Rates Depress Savers, Government Reaps the Benefits.” Keep an eye on this one!

That’s it for today. I am out of the office tomorrow, so my next post may be delayed. I am giving an interview with Carrie Coghill, one of our top advisors, on I will link to it if I can in a later post.

Have a great day!

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