Next Weeks Elections

          Next weeks elections on November 8th promise to be exciting. It is unclear who will take the helm, but it will probably be Xi Jimping. Yes, election watchers, it’s time to break out the balloons and horns for the Chinese elections.

          China is our closest symbiotic trading partner. Our fates and fortunes are inexorably linked. So this is proving to be a historic election, the changing of the guard from old to new.

          This transition is fraught with anxiety, within the government and on the street. The new leaders will have to deal with larger and more complex problems than any of their predecessors. The people on the street are anxious because they don’t know much about their new leaders.

          They will doubtlessly be male, young, children of Party officials, highly educated within China rather than abroad, and have different sentiments and ambitions than their elders. All of these men thrived within the system. Analysts feel that because of their backgrounds, the new leadership will undertake as little reform as possible.

          Xi will probably head the Council of Seven. China doesn’t have a single leader at the top. Xi is the son of a Mao lieutenant and joined the Party in 1974.

          The main problem facing China is the erosion of the Deng Xioping Strategic Model, which has worked successfully for 30 years. This model has three planks:

1. Economic and export-centric reforms- Deng bet on demographics. He knew that China had millions of young unemployed people which he could move from the farms to the coast and put to work cheaply in factories. The social shift we took over a century to make, China made in a few decades, and experienced over 10% growth rate for the last 30 years. The major problems with this model is that most people have now moved to cities, so the cheap labor force is diminishing. The population shift is also straining urban infrastructures. In addition, standards of living are rising across China. Per capita income is over $4,000 annually, well above third world standards. The World Bank reports that China has brought 500 million people out of poverty since 1981. An additional source of tension inherent in the model is the creation of massive, profitable State-owned enterprises. Incomes for the average worker are not increasing and the gap between rich and poor is the highest since the Revolution, even greater than that of the US. China knows it needs a new economic direction, but it is unsure what that is.

 

2. Political technocracy- Decades ago, China was replete with cronyism. Deng’s vision was to create a merit and performance based society. While much of what roils beneath the surface is placidly hidden, it is clear that there is aggressive infighting and political maneuvering for power. That’s what concentration of power and big money will do. Perhaps the Chinese need to Occupy something in protest. Also evident is rampant, permeating corruption. The level of corruption in China has never been seen in modern capitalism, due to the amount of money involved. The new leaders will be challenged with getting the country through this phase of their economic development. Historically, many countries have successfully transitioned out of corruption. The post-war economies of Japan and Korea were very corrupt. The United States had rampant corruption at the turn of the 20th Century. What all these countries had that China doesn’t is the rule of law, a free judiciary and free press, and the ability for the people to throw corrupt politicians out of office.  China is also facing an expectations gap as their populace demands more and complains more. This gap is becoming very volatile and frustrating on the street.

3. Pro-Americanism- The third plank of Deng’s strategy is crumbling as anti-American sentiment currently permeates all strata of Chinese society. There is a deeply held belief that the US will attempt to contain China or limit the rise of Chinese emergence as a Superpower. Our politicians appear to be enhancing this perception. In the near future, expect many public protests and demonstrations against the United States. Bear in mind that such demonstrations not only express popular beliefs, but also are the only permissible and sanctioned expression for a frustrated population.

          China’s new leadership will have to chart a new course as their long held political strategies unravel. While the Chinese don’t have a viable ideology to rally around, there is tremendous pride in the Chinese nation and accomplishments. Expect the Chinese to rally around their flag when times are uncertain or difficult.