We Need To Talk About China

Ah, China. And Chinese economics... I have been obsessed with China, and in particular its uniquely lunatic economy, for the past few years. Why? Because Chinese economic policy has been the biggest elephant in the global economic livingroom since 1989, lumbering around breaking things while the West says "Elephant? I don't see any elephant. Owch, my foot."

A charming and self-explanatory graph, courtesy of The Daily Reckoning, Australia

I’ve come up with, and abandoned, half a dozen plots for satirical stories about the Chinese economy, I’ve written draft after draft of a satirical BBC radio play about the Chinese economy, I’ve read and researched obsessively on the subject. And, every year or so, for the past five years, I have opened up a new file in Scrivener, and started, with furious energy, to write an over-long and over-complicated blog post about China, and how its mysteriously placid economic surface masks a series of catastrophic Communist Party decisions, over the past thirty years, which will lead at some point to China’s implosion, economically and socially… Each time, the post becomes book-length, and I abandon it… Well, here we go again.

Here’s my take on China, boiled down.

In 1989, the Berlin Wall fell; democratic protests swept China; and the Party panicked. They murdered unarmed protesters across the country (including the students in Tiananmen Square), arrested four million people across the country in the following weeks, and then tried to pretend nothing had happened.

Party leaders were determined that China would not collapse like Soviet Russia. So they abandoned Soviet-style economics, and built a gigantic new national financial system, modelled loosely on the Western financial system; but with the state performing every function. As Carl E. Walter and Fraser J. T. Howie put it (in their excellent book Red Capitalism: The Fragile Financial Foundation of China’s Extraordinary Rise), “The state is involved at every stage of the market as the regulator, the policymaker, the investor, the parent company, the listed company, the broker, the bank and the banker.”

And the state decided that 8% economic growth was the target; and the entire economy was configured to hit this target… Well, if you only look at the GDP figures, the Party succeeded. Western free-market economies go up and down like yo-yos, but China has not had a recession since 1976. Even more ridiculous, it's not had so much as a single year of low growth since 1990.

But those reassuring figures mask the roaring balls-up the Communist Party has made of the real economy, particularly in the past decade. Pre-2005, although growth was horribly lop-sided and manipulated, much of it was at least real: the cities that needed connecting were being connected by road and rail; ports and airports were being built in places that needed them; financial reforms were being pushed through; etc, etc.

In 2005, the financial reform program ended, when the leading reformers were ousted (like Zhu Rongji) or died (Vice Premier Huang Ju)– China’s GDP growth figures have been, increasingly, bullshit, driven by terrible lending by the state banks to state industries, massive malinvestment in ever-more-useless infrastructure, and a huge property bubble that has built entire cities and airports in the wrong places.

China’s banks have gone bust once every decade since the seventies, but each time the government managed to recapitalise them, or roll over the bad loans, without writing down the debts. It can’t write them down, because it owes itself the money; to cut the value of the non-performing loans is to say the state can’t pay its debts. It’s trapped. Every bank collapse is a sovereign debt default: and so there can be no bank collapses. But at this point, in my opinion, they’ve finally run out of road. Total debt in China has exploded to unprecedented levels in the past five years.

China, now, is essentially a multi-trillion dollar Lehman Brothers, circa 2007, but with a billion employees. It looks OK, but it is totally hollow; it’s massively leveraged, it’s out of capital, a shit-ton of the assets on its books are in fact worth nothing, and people are starting to believe it’s not good for its promises.

And so China isn’t going to collapse like Soviet Russia; it’s going to collapse like Lehman Brothers.

A giant, weird, slow-motion Lehmans, because it owes the money to itself. So, it will take some time for the collapse to take place. It can print money, roll over debt, do all the things it’s been doing for decades. But, in propping up the fake economy of 8% growth forever, they’ve broken the real economy.

When China finally gets its recession, it's going to be so godawful that it will almost certainly destroy the legitimacy of the Communist Party, which, after 70 years in power, is essentially an incompetent, wildly corrupt, third-generation mafia. Sure, there are some good people in there, but the system itself is totally corrupt, and corrupting, with no mechanism to reform it; and all the alternatives to the Communist Party have been annihilated. Plus, the concentration of power, wealth and influence at the top of the Party has made the leadership of China essentially hereditary, with all the incompetence that entails. (For western examples, think King George III and IV of England, or Presidents George W. Bush I and II, of the former colonies.)

OK, a prediction isn’t a prediction if it isn’t specific. A vague “bad things will happen… somewhere… sometime…” doesn’t count. So here goes.

• The recession will come within the next three years, and will be extremely deep: the Chinese economy will shrink, for the first time in nearly 40 years (and that’ll feel horrendous, from 8% growth to negative growth).
• Many State Owned Enterprises will go bust; the Chinese banking system will collapse; the enormous shadow banking system will collapse; the Chinese stock market will collapse (well, that’s been happening while I wrote and edited this, over the past week or two, so no credit for that prediction).
• How this collapse of the financial system plays out is hard to predict, as it’s all the Chinese state owing itself money, and printing money to pay itself. But that pressure should break the renminbi, which is a joke currency anyway. And pretending to fix the banks won’t work, if nobody believes in them as a safe place to store assets any more.
• In the real world there will be massive unemployment across China (over 15% officially but far more in reality).
• Social unrest will get out of control, with huge street protests and riots in the cities and in the countryside; uncontrolled population movement (something the Party has always feared and tried to control through the hukou residency permit system, which will break down); and anger expressed through violence against anything associated with the Party. (You’ll see a lot of police stations on fire.)
• I believe the Party will lose legitimacy; will lose control of the country; and that, within the next decade, China will break up: Neither Tibet nor the Muslim, Turkic-speaking Uighur territories in Western China can be held without a functioning Party and Army to enforce their occupation.

That’ll do for now.

So why didn't I finish writing and editing all my previous China blog posts, and put them up? Well, the story was so big, and I kept trying to say everything in a single post. But you can't. (And there was always fresh information, new knowledge.) And it was always so much easier to just post a link, or make a sarcastic remark, on Twitter. Sigh. Twitter has ruined my ability to blog. And, five years ago, I felt that if I said "China will collapse", it was probably too soon. I figured China's leadership would be able put it off for another few years.

But now I don't think they can put it off much longer. They will try; but this time I think it's over. I suspect the shadow banking system has already begun to collapse (along with the housing market and the stock market), and with it the Party leadership's control over events.

Anyway, my greatest regret, as a (former) blogger, is in not posting my thoughts about China. (Every few weeks, for about three or four years now, I’ve woken in the night groaning, why didn’t I blog about China six months ago?) So, over the next few months, I'm going to try and put down a few years' worth of thoughts. It's too late for me to get credit for the prediction, but it's not too late to be part of the conversation. And we're going to be talking a lot about China over the next 5 years.

Let us now praise J. G. Ballard

I just made one of the world's shortest movies. Fourteen seconds, one shot. It's called Flesh Frame, and it's a brief and oblique tribute to J. G. Ballard. Filmed on one of the earliest camera-phones, if it were any lower-fi, it would be a single blinking pixel.

I won't tell you anything else about the movie, because its only function is to evoke a mood (or, in English, give you a feeling). And nothing wrecks a mood-film like an explanation of what you tried to do and exactly how you did it.

I'll tell you a little about Ballard, though. (Some of you will know all this already: fair play to you. Go get an icecream and I'll see you later.)

J. G. Ballard is one of the few great British writers of the past century.

 You could also call him one of the most original and radical British visual artists of the past century. His "novels" are often a series of astonishing images, hypnotically encoded in words.

He spent much of his childhood interned (along with his parents) by the Imperial Japanese Army, in a Shanghai prisoner camp.

After Ballard's wife died (very suddenly and very young), he wrote much of his most extreme fiction in short bursts at the kitchen table, between sandwich-making and soccer practice, while bringing up three children. 

The resulting classic of modern headwrecker fiction, The Atrocity Exhibition, was pulped a week before publication by his American publisher, Doubleday, after the head of the firm finally read it. (Doubleday were also my American publisher, for Juno & Juliet, which they loved.  When Doubleday rejected my follow-up, Jude, with horror - they particularly hated Level 3 - I knew I'd finally achieved something really exceptional.)

Three years later he wrote Crash, a novel about sex and car crashes that is still sending ripples through the culture. (The shudders of orgasm? Or death?) Finally published in 1973, in print ever since, and about as influential as a novel can be, the initial reader's report to his UK publisher was "This author is beyond psychiatric help. DO NOT PUBLISH."

 He is now seventy seven, and his prostate cancer has spread to his ribs and spine. He will be dead soon, and I would recommend that you read some of his work immediately, so that you can thank him by postcard while he is still alive. (He doesn't really do email or computers.) J.G. Ballard, Shepperton, England would probably get through to him at this stage. (Or just write care of his publisher: J. G. Ballard, c/o Fourth Estate, HarperCollins Publishers, 77-85 Fulham Palace Road, London  W6 8JB, England).

If you don't know where to begin (I don't blame you, he's written a lot of stuff), I'll give you a quick guided tour of my favourites...

Feck it, I'll include links to Amazon while I'm at it, and if you buy one they'll slip me a shiny thruppenny bit. (Well, thirty or forty pence probably.)

A warning: Don't start with Crash or The Atrocity Exhibition, unless you're feeling well hard. They will do serious damage to your head. (Either you will throw the book across the room, or the book will throw you across the room.) Work up to them.(Yes, I know some of you ARE well hard. Fair enough, OK, go for it.)

A lovely place to start, if you're feeling at all delicate, would be with the short story collection Vermilion Sands, set in a desert resort full of cloud-sculptors and singing orchids. (One of his gentlest books, it is one of his own favourites.)

His most accessible and successful book was the semi-autobiographical Empire of the Sun, the story of an English boy's childhood in a Japanese prison camp. (Filmed later by Spielberg, yes. And, as with all Spielberg films, it would be a pretty good movie if you could remove the final 25 minutes of slush, in which Spielberg keeps trying to end it happily, against the grain of the story. Spielberg's strangely desperate attempts to end, to leave Ballard's dream without being changed by it, grow ever more conventional and sentimental, with each botched ending damaging the film more and more... it's fascinating to watch. As with Saving Private Ryan years later, Spielberg starts by telling us something true, and hard to bear, and then spends the rest of the film denying and rejecting that truth ever more hysterically, walling it off behind comforting clichés. Oooh, I could write a book...)

 The followup to Empire of the Sun, The Kindness of Women, is a dreamy, wildly sensual classic.

The Crystal World is one of his early disaster trilogy, full of Max Ernst imagery. Crocodiles and jungle plants slowly turn to crystal. The world is dying beautifully. A man sails upriver, upriver, into the heart of lightness.

From his urban collapse period, Concrete Island is Robinson Crusoe on a huge traffic island, surrounded by lane after lane after lane of roaring cars. A man crashes there, and can't get off the island. Or doesn't want to. And then he finds a footprint... (I pay comic tribute to this in Jude: Level 2, when Jude spends weeks walking to London up the middle of a motorway's central reservation.)

 The Unlimited Dream Company brings a dreamlike, William Blake, visionary end-of-the-world to the English suburbs. Banyan trees burst up through the pavement in front of the supermarket. People, after a difficult day at work, learn to fly, and are soon copulating with birds, high over Shepperton. Nobody seems to mind. (Anthony Burgess picked this as one of his Ninety-Nine Novels: The Best in English since 1939.)

And if you'd prefer something a little closer to  a thriller, or detective fiction, there's Cocaine Nights. A death in a gated community. When all darkness and danger have been pushed outside the gates... is life still liveable, inside, as the sunshine bounces off the white concrete?

Those are my pick of the novels, but his short stories are among the best ever written. There's the Complete Short Stories (too heavy to hold in hardback, but sensible broken up into two volumes in the paperback.)  The original collections... well they're all good (and mostly out of print), but I remember The Terminal Beach, in this edition, very fondly.

They'll hold you for now.

Seriously, pick one. Buy it. Read it. If you love it, tell him. He won't live forever.

A last warning: the reason J. G. Ballard doesn't sell like John Grisham is that Ballard's books knock you off balance and disturb you, annoy you. The language can be eerily flat. You can start to feel strange. Go with it. Get past it. It's worth it.

Good luck on your voyage.

Wow, That Was Quick

 

Wow, that was quick. Very gratifying.

On Friday, I predicted a massive multi-market meltdown as a direct result of the downgrading of the monolines. (Or, as I poetically put it, "if you ARE into economic meltdowns,  this is going to be the World Cup Final of economic meltdowns, and Brazil are about to walk out onto the pitch...") On the next trading day (today, Monday),  markets collapsed all over the world.

Or as the New York Times put it, with their usual blissful ignorance of what actually drives markets,

"Fears that the United States is in a recession reverberated around the world on Monday, sending stock markets from Bombay to Frankfurt into a tailspin and puncturing the hopes of many investors that Europe and Asia will be able to sidestep an American downturn. "

Isn't that beautiful? All the world's stock markets except the ones in the USA keel over (US markets are closed for Martin Luther King's birthday), and the New York Times report starts with the words "Fears that the United States..." and end with the words "...an American downturn." Everything has to be about them. Sigh...

Well, they captured about 40% of the truth (about the NYT average for any story that isn't about baseball or a quaint, family-owned deli that's celebrating its fiftieth anniversary by going out of business). Today's market collapses are, in certain respects, about the coming US recession. But they're more about the fact that on Friday, a ratings agency (Fitch) downgraded a monoline insurance company (Ambac) from AAA to AA, and put them on watch for further downgrades. For why that blew everything out of the water, see my previous post. 

Why would that shake world markets enough to cause an avalanche of panic? Because there's only roughly half-a-dozen decent-sized monolines, and between them they insure between three and four trillion dollars worth of bonds. Call it three and a half. That's $3,500,000,000,000. Count the zeroes... Ambac was the oldest monoline (born 1971) and the second biggest, and downgrading it automatically meant downgrading over 100,000 different bond issues, with a total value of roughly half a trillion dollars (or five hundred billion, if you're into mere billions.) Bonds issued to build libraries in Stuttgart, or a bridge in Seattle. Bonds issued to fund corporate buyouts in Tokyo. And, recently, bonds stuffed with dodgy mortgages from who knows where... Bonds owned by everyone from investment banks to your dad's pension fund.

 Ambac's  slogan? "Financial peace of mind". And what prestigious award did it win one month ago? Global Monoline of the Year. Ah, I love the modern world, but it makes life hard for satirists.

Let's have a quote from a respected market insider, so you don't think I'm exaggerating the carnage(God forbid). This is John Authers, the unflappable, seen-it-all Investment Editor of the splendid Financial Times:

"On days like Monday, there is little to do but wait for the casualty count at the end. Even with the US on holiday, the sell-off was the worst single day for global equity markets since the terrorist attacks of September 11 2001."

The Financial Times' coverage of this ongoing credit debacle has been superb, before and during. Sigh. It's so superior to the Wall Street Journal that the continued existence of the Wall Street Journal seems to me evidence that there is no God. Or that he just doesn't care.

 And the US markets open again tomorrow... That'll be interesting...

 

OK, my next prediction (these are going rather well): the collapse of the Chinese stock market, leading to widespread protests and social unrest in China. Timescale... Hmmm. Let me be conservative (I tend to be hasty and assume if something is obvious, it will happen right away). Well, over the next year and a half, almost definitely. But probably a lot (a LOT) sooner. 

 Much more than cut in half from its peak. Could go down to a third or even lower. There you go. More hostages to fortune...

Of course, a totalitarian state has powers of intervention undreamt of in the West, so it'll be interesting to see what the Chinese government will do in response to serious falls (which could well have begun, it's already slipped from its peak). 

What larks!