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China is the world economy's elephant in the room. We can't possibly ignore it, yet many try anyway. Admitting China's influence forces us to admit the world is changing—and we all must change with it.
This year, China is in the headlines because President Trump wants better trade terms. That's important, but it's only one piece of a much larger Chinese story that has been unfolding slowly for decades. Periodically, I check in on the latest developments. Today, we'll see where we are, with the help of my trusted sources.
First, I hope you saw the announcement we are ending Outside the Box after next week. This is one step in the ongoing reorganization of my research efforts. I greatly enjoyed sending you those mid-week stories and I know you liked them, too. Rest assured, we will soon offer something even better. I have more info in a short video you can watch here.
One of the great pleasures of my life is reading Gavekal's outstanding economic research. I can do this thanks only to a long friendship with the firm's three founders: Charles Gave, Louis Gave, and Anatole Kaletsky. Otherwise, it's available only to their clients, and the cost is beyond my normal research budget.
One thing I appreciate about the Gavekal analysts and writers is that they are all independent and free to disagree with each other. Even the founders Charles, Louis, and Anatole often differ significantly—both in public and private messages that I get to read. Frankly, that is often when I learn the most.
Last week, Arthur Kroeber of Gavekal Dragonomics sent around a fascinating presentation about US-China strategic rivalry. It broadly matches my own thinking, but also gave me some “a-ha” moments. This is how I learn, by the way. My mind is a big blender into which I toss info from multiple sources. It whirs and rearranges the ingredients into something new, such as the following thoughts on China. They're a mix of me, Gavekal, and my many other China contacts (I must hat tip Leland Miller and the China Beige Book). I should point out that any wrong conclusions are my own and should not be blamed on my sources. I am perfectly capable of making my own mistakes, thank you very much…
The first point to recognize: Xi Jinping is firmly in charge. You probably heard about the constitutional amendment that makes him effectively president for life. It doesn't mean Xi is invulnerable or can do whatever he wants. He has constraints, as all national leaders do. But he doesn't have to worry about reelection, or rivals trying to shift the agenda, or getting congress to approve his policies and budgets. Xi sets the agenda. Everyone else follows it.
I pointed out about two years into Xi's presidency that it was clear that he was the most important Chinese leader since Deng Xiaoping. That is no longer the case. He is the most important figure in modern Chinese history since Mao and possibly Sun Yat-sen. From my viewpoint, Mao was a disaster for the Chinese people. Millions died under his disastrous economic policies. Since Deng and subsequent Chinese leadership and continuing with Xi, there has been a remarkable turnaround.
Yes, much of China still lives in deep poverty, but the fact that it moved 250 million+ people from subsistence farming into urban middle-class lifestyles, in less than two generations, is an unprecedented economic miracle. The breathtaking picture at the top of this letter is of Shenzhen, whose population went from 30,000 in 1979 to now 10,000,000+. Sixteen Chinese cities have a population over ten million. These are staggering growth stories most Westerners have never heard. The US has only two metro areas of comparable size.
Say what you will, historians will look back 100 years from now and marvel. And Xi seems determined to make life better for those still in poverty.
Arthur pointed out another, less noticed constitutional change that may help. It extended party discipline down to local officials, for both what they do and what they might fail to do. This gives Beijing a more effective enforcement mechanism and should result in more consistent policies.
My first thought on this was that even more centralized control may not be such a wonderful thing for China. It hasn't worked so well elsewhere. Arthur agrees China could face problems down the road, but for the next few years thinks the new measures will be a net positive. He expects 6.5% GDP growth this year, as does Beijing (which of course gets what it wants). Last year's shadow banking crackdown has somewhat contained excess leverage, at least for now.
