China's Political Shift in Upcoming Decade to Affect Global Metals Business

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(This is Part One of a multi-part series. Read the intro here.)

In our series of posts looking at how China’s various internal dynamics will affect global industries, we’d be remiss if we didn’t begin by taking a gander at the political culture in China from what the Deng Dynasty meant, how it operated, to what it has engendered in China’s current leadership. Before we begin to delve into China’s demographics, economic trends or otherwise, we should create a basis on which to explore all of those factors. And that basis begins with the storied political system at work in China — at least since the 70s.

Matthew Gertken and Jennifer Richmond, writing for Stratfor Global Intelligence, recently outlined the seismic shifts under the feet of more than 1 billion citizens in the context of what former Chinese leader Deng Xiaoping envisioned and created. Essentially, although Deng and current president Hu Jintao represent different eras, they essentially operate the same. According to the article, Hu preferred to go the route of investment and exports to try and grow the economy after the 2008 debacle, which is what his predecessors did, but this only achieved limited results. Mainly, household consumption is down, further worrying the domestic administration as well as Western producers. This is vital to understand (and perhaps our sources or others currently operating in China can comment on this further), but it seems the country’s stay-the-course approach is truly at a crisis point.

Indeed, economically, inflation is China’s biggest bogeyman right now. China’s government is between a rock and a hard place, risking an overheating economy on one side and over-correction on the other, which is reflected in rather inconsistent policy-making, according to Gertken and Richmond. There’s a need to transform China’s entire economic model, and that looming threat of social unrest is the primary motive of the Communist Party to fix things before they blow up in their faces.

But essentially, this sounds like what the US had a hard time doing post-recession(s): using traditional consumption incentives to boost growth. But as we’re seeing, if purchasing power is stolen away from citizens having a hard time making ends meet in the US and in China — we have problems on our hands. So even though this means China is not immune to economic trouble either, it doesn’t necessarily bode well for the global picture.

Deng Xiaoping, as Stratfor lays out, had a hard time accelerating any true political reform, and Hu, as the last Chinese leader that Deng directly appointed, has not really had much success in this realm either (although some might say he hasn’t been trying all that hard). After all in the next Five Year Plan (2011-2015), Hu’s administration is “reemphasizing methods of traditional growth. The main method they’re using is expanding credit for big infrastructure projects and manufacturing-sector technology upgrades to keep their export-led economy afloat. Ultimately, the wealth is transferred from the depositors to state-owned firms and local governments. But, the conclusion is that reform must take place; otherwise, the population (especially the educated and upwardly mobile) will, in one form or another, revolt. Stratfor and many other sources cite that the “stark disparities in wealth and public services in China will cause watershed moments sooner rather than later:

“Arbitrary power, selective enforcement of the law, official and corporate corruption, and other ills have gnawed at public content, giving rise to more and more frequent incidents and outbursts. The social fabric has been torn, and leaders fear that it could ignite with widespread unrest. Simultaneously, rising education, incomes and new forms of social organization like non-governmental organizations and the Internet have given rise to greater demands and new means of coordination among dissidents or opposition movements.

Whether these new forms of organization, such as the Jasmine Uprisings (which we’ll delve into in an upcoming post), will cause any significant changes in how the government conducts is business remains to be seen, but if inflation continues as it has and shows no signs of abating to historical lows uprisings may just tear apart the existing “social fabric, so that it may one day be re-stitched in a new way.

Up next in the series: An in-depth look at inflation in China and what it means for the global industry, as well as a comparison between China and its large neighbor, India.

–Taras Berezowsky

Comments (2)

  1. Trevor says:

    I’d think economic factors, particularly the emergence of a middle class, are by far the most influential harbingers of political change in China. I liked this quote from a WSJ article I read earlier this year: “revolutions are made not by the poor but by upwardly mobile middle-class people who find their aspirations stymied…” For this reason, I am less concerned about the poor in China revolting than I am the ability of the Communist party to passive the hightened aspirations and appetites of the middle class. For the same reason, I am very skeptical that the Tunisia, Egypt, Syrian and Libyan upheavals will result in political systems that are necessarily more liberal/democratic than the ones they are attempting to replace. I think that the staying power of liberal democratic systems depends on the breadth and depth of the middle class. This would imply that China is on a path that makes political liberalization inevitable. You’ll never be able to put the proverbial genie back in the bottle in China – continued and bonafide political liberalization is, in my opinion, inevitable.

    To understand what really gives rise to political liberablization you have to begin not with ideology but with Maslow’s hierarchy of needs. The reason why a guy like Kim Jung Il has been able to cling to power for as long as he has in North Korea is that he keeps the majority of North Koreans so poor, ignorant and terrified that they are too preoccupied with feeding themselves to aspire to anything other than mere subsitence. I suspect that there are some in China’s government that may be welcoming of acclerated political liberalization but are equally convinced that only gradually relaxation of authoritarian means will allow that change to happen in a controlled and orderly way. Again, quoting form the WSJ article: “The fact is that authoritarianism in China is of a far higher quality than in the Middle East. Though not formally accountable to its people through elections, the Chinese government keeps careful track of popular discontents and often responds through appeasement rather than repression.” Contrasting the “cold turkey” approach of Russia and Poland and the slow/controlled thaw in China †it’s hard to argue which approach has been best (unless you’re on of the millions of dirt poor peasants living in Western China). Pure democracy is messy †and contrary to what most people think, we don’t practice that form of government here in the USA. From the WSJ: “Like the middle-class people of Tunisia and Egypt, those in China have no opportunities for political participation. But unlike their Middle Eastern counterparts, they have benefited from a dramatically improving economy and a government that has focused like a laser beam on creating employment for exactly this group.” If inflation spins out of control in China or unemployment increases, watch out. The bottom line is that metal price support depends on China’s sustained demand for metals. I agree that if inflation makes Chinese goods or real estate more inaccessible and/or unemployment rises, watch out. Irrespective of whether its just or not, one must admit that the Communist Party economic elites have managed (so far) to pull the right levers in order to keep the burgeoning middle class appeased. We’ll see if their luck holds out.

  2. tberezowsky says:

    Thanks for the response, Trevor; it’s hard not to agree with the points you’ve made, which I do. But to your point of mentioning that we don’t practice true democracy in the US (which you’re right, we certainly don’t), I would go further and say that here in the US, the government, the Fed and the private sector work together to achieve a very latent form of appeasement as well (and have been for four decades). Let’s call it the Wal-mart Effect. So many US citizens are able to attain middle-class status (or simply cling to their existing middle-class proclivities), because, bluntly, crap is cheap. (Thanks, China.) As long as it can buy gas and shirts and food cheaply, or worse, run up credit card and mortgage debt without (too) grave of a consequence, the US middle class won’t really raise a stink. Even if prices go up a little, the layman can still eat and have a roof over his head. That’s why I wouldn’t, therefore, go as far as saying that the poor/disenfranchised are not as well equipped to revolt. Sure, a systemic revolution cannot be well sustained by the dirt-poor, so middle classes (in the US and in China) may be better equipped to do it, but are they going to/would they take action and execute? Doubt it. A young, optimistic Chinese middle class could, sooner than we think, become much like its counterpart in the US: an old, jaded, immobilized one. The US federal government and the CPC may have more in common than we care to admit – and it’s not because people think Obama’s a socialist.

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