HANGZHOU, CHINA – SEPTEMBER 10: Alibaba founder Jack Ma speaks during Alibaba 20th Anniversary Party … [+]
Between 2016 and 2017 a number of Chinese billionaires went missing. Some never re-appeared – it is suspected that wives, lovers or business rivals had a hand in their disappearance. Others however, reappeared, stating that they were ‘helping the authorities’. This period coincided with China’s anti-corruption drive and stuck in my head when I heard that Jack Ma’s Alibaba
Some weeks before the investigation, ahead of a potential IPO of Ant, Ma had pronounced that China’s regulators harbour a “pawnshop mentality”, having previously held that if the ‘banks won’t change, we will change the banks’. This affront was obviously too much for the Chinese authorities, and Ma’s colleagues at Ant are now ‘helping the authorities’ with a remake of Ant.
Ant in trouble
In the US and Europe, the regulatory assault on Alibaba was greeted by the likes of Jim Cramer as proof that communist China is a menace to free enterprise. This kind of reaction betrays a lack of willingness to take China seriously and to try to understand what is happening there.
It is much more likely that two interlinked factors are at work. Xi Jinping’s China is one where there is little room for high profile voices who might contradict the President. Indeed, the singularity of Xi’s position will become a much more significant issue in Beijing in coming years, especially so within the Communist Party about whose internal deliberations and rivalries we in the West know relatively little.
Secondly, the rationale in clipping the wings of Ant is to reduce leverage in the financial system, and arguably make the Chinese economy more sustainable. This is where Xi’s future and that of China are intertwined – he needs to sustain a prosperous economy in order to fulfil his vision and safeguard his position.
Chain’s Dream
Xi talked about the ‘China Dream’ long before (March 2013) Trump was elected with the help of the catchphrase, Make America Great Again. This Dream is rooted in a desire to regain the place China enjoyed centuries ago when its economy was the dominant one.
China’s system, viewed from outside, involves a pact or contract, where people will sacrifice their liberty in return for order, prosperity and national prestige. The state is very much in control. It is not something that Europeans or Americans are used to. China’s system has worked very well so far – though the biggest risk it faces is a period of high unemployment, that breaks the contract between people and the Communist Party.
Lost decade
To this end, China and Xi cannot suffer the economy to be derailed by the kind of imbalances that, for example led to the euro-zone crisis. In particular they do not want a lost decade(s) akin that that suffered by Japan – note that last week the Nikkei regained the 27000 level for the first time in 29 years.
This interpretation of what is happening in Beijing is reinforced by the fact that it is behaving like a well run capitalist economy. Consider that the Chinese central bank is not engaged in quantitative easing, bankrupt companies and property vehicles (though not yet state owned enterprises) are allowed to default and restructure.
Sisyphus
Contrast this with Europe and the US, where markets and economies are held together by central bank liquidity provision, where tech monopolies (Apple, Amazon, Facebook, Google) thrive and where zombie companies persist. Europe sadly, does have a tech or fintech sector to match its rivals.
In a recent note, Dec 5, ‘What can possibly go wrong?’
I wrote of the ‘Sisyphean economy’ where governments and central banks try to push activity upwards by injecting liquidity into economies, only to see it relapse. Of the major regions only China appears to understand the relevance of this, and is doing its utmost to pare back the risks of a costly ‘reckoning’. Given the extent of indebtedness in China, this is wise. Given the threat to President Xi’s popularity and that of the Communist Party, no-one and nothing can get in the way of the China Dream