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When I opened up Bloomberg this morning (and, admittedly, last night), there was a lot of interesting stuff happening in the business/economic/finance-y world. But the boring-sounding but-actually-not article that I’d really like to highlight: “PBOC’s Zhou says slower growth needed for restructuring“. Which just goes to show how much of a nerd I have become when it comes to reading Bloomberg – because there is still a part of me that sighs deeply when it sees that kind of heading.

FYI: “PBOC” is the People’s Bank of China (or the Chinese Central Bank), Zhou Xiaochuan* is the governor of the PBOC, and the article is about China’s growth.

Why News about China’s Growth Should Be Interesting

If you’re worried that the topic sounds boring, I should forewarn you by saying that there are a lot of boring answers to that question, such as:

  • “China is the world’s economic engine, so a slowdown in China’s growth is a slowdown in the world’s growth”; or
  • “It gives an indication of what the monetary policy of the PBOC might be”.
Both are valid answers. But here’s why I think it should be interesting:
  1. China practices economic policy in an extremely unusual way. The People’s Party has isolated certain economic “free” zones where capitalism can take place (eg. Shenzhen), while the rest of China remains fully-fledged Communist.
  2. Basically, those free zones operate as isolated laboratories: where the Party can experiment with the impact of “free-market policies**” without having to subject the entire country to the radical shift from Communism to Capitalism.
  3. Which is a little bit awe-inspiring. I mean – just think of the kind of control needed to enact such a long-term project.
  4. Although it does beg the question “why” – because surely any form of Capitalism should be anathema to a Communist State?
  5. And the answer to that question is: “because Communist States that don’t permit some form of capitalist enterprise end up like the Soviet Union”.
  6. Most would accept that at least part of the reason the Soviet Union eventually collapsed is because it’s hard to watch your neighbour do better than you. That is, the Soviets on the edges of the USSR borders were watching their neighbours rapidly expanding under Capitalist policies – growing richer and becoming more consumerist – whilst they continued to stagnate. Which led to growing discontent and the eventual disintegration of the USSR.
  7. To summarise: a primary reason that Soviet Communism failed is because it could not deliver the growth offered by Western Capitalism.
  8. Which brings us to Communist China in the late 1980s under Deng Xiaoping.
  9. To paraphrase many historians: he saw what was happening in the USSR, and realised that in order for the Party to continue to hold power, some economic reform would have to take place.
  10. At which point, political observers began to talk about the “social compact” between the Party and the Chinese people: where the Party could continue to remain in power only if it could continue to deliver economic growth.

And that’s exactly what the Party has done – deliver incredibly high annual rates of growth for China’s 1.3 billion people (19% of the World’s population). I often quote this statistic because it’s crazy: the People’s Party has managed to lift 0.3 billion Chinese out of poverty. That is the equivalent of almost the entire population of the United States. #staggering.

But that does have certain implications: because what we have is a single highly-motivated political party attempting to deliver growth to almost one-fifth of the world’s population. And it’s not like China is taking on the world per se – China just deals with countries all much smaller than her, and with no united front between them. It’s why she’s winning the race for resources. And it’s why her policies come across as deeply protectionist to Chinese interests – because they are.

Which Brings Me To The Article

So in recent news, China has seen a slow-down in her rate of economic growth. People with much better-formed opinions than mine suggest that China needs a growth rate of at least 8% per annum in order to maintain the social compact. Currently, her growth is sitting at 7.7%. It may sound like a small difference – but you need to multiply that out by the size of GDP (7.3 trillion dollars), and apportion it between 1.3 billion people, to try and get a grasp of the social impact it could have. PBOC governor Zhou has said that this is just a temporary slow-down while the State restructures. And that certainly could be the case – China has been busy widening trading bans on the yuan, reshuffling ministries, semi-privatising state railways and allowing more financial freedom.

If it’s not temporary though, what we could live to see is the collapse of the Chinese Communist State, and the dissolution of the Chinese empire.

But honestly – I think that the Party has some time to go before that becomes a real possibility.

A Caveat

The People’s Republic of China is regularly vilified for her:

  • economic policies,
  • political policies,
  • environmental policies,
  • colonialism,
  • msg-laden food,
  • smog, and
  • being the leader in the race for resources.

If this is a long-term strategy to increase growth (and given the past long term vision and implementation of the Chinese, that’s likely to be exactly what it is), then we should expect to complain more about China winning the race for resources and ruining the environment. Because her raw materials need to come from somewhere… And you don’t see a lot of environmental reform in that State restructuring.

*You might be surprised to see the headline referring to Zhao Xioachuan as just “Zhao”. But in Mandarin, your surname comes first. Another example, Mao Tse-Dong is not referred to as “Mao” in the same way that we refer to Hilary Clinton as “Hilary”; but rather as we refer to Adolf Hitler as “Hitler”. I thought it was interesting.

**I should say “pseudo free-market policies” – because it’s all still under State control. The reality floats somewhere between “in practice” and “hypothetically-speaking”.