Minsky’s real risk in China may be political

The late economist Hyman Minsky is famous for developing the theory that long periods of steady investment gains can foster complacency and thus encourage excessive risk-taking, ultimately leading to a crisis: what was later called the “Minsky Moment”. In other words, stability breeds instability. Minsky’s work has grown in influence, particularly since the global financial crisis. Perhaps he also deserves some attention in the political realm, especially when it comes to China.

A comparison is instructive. It is the season of party conferences on both sides of the world. In the UK, the ruling Tories have staged the ruthless and messy nature of Democratic politics, forcing their new leader, Liz Truss, into a political U-turn that casts doubt on her survival as Prime Minister for just weeks. after taking office. . In Beijing, a very different conclave is about to take place, a much more scripted, quiet and secret conclave: the 20th Congress of the Chinese Communist Party.

For a meeting of such significance to the global economy and geopolitics, we don’t know much about it. The main outcome is not in doubt: Xi Jinping will be confirmed for a third term as leader, breaking the conventions established by Deng Xiaoping in the 1980s. Beyond that, much is smoke and mirrors. Key decisions are made behind closed doors. China watchers speculate on the extent to which Xi, as supreme leader, may be limited in his power by who is selected to rule alongside him on the Politburo standing committee. Even that, however, is largely a matter of guesswork. Essentially, the event will be a coronation, affirming Xi’s status as the most powerful leader since Mao Zedong, founding leader of the People’s Republic of China.

There is a lot to be said for order and stability, especially when weighed against the disarray and market volatility that can accompany leadership transitions in liberal democracies such as Britain. China refers to its system as “integral people’s democracy” (although it can sometimes be difficult to discern the democratic aspects of it) and contrasts it favorably with what it sees as the short-term electoral orientation, the capture elites and the monetary influence of what he calls “bourgeois democracy”, or sometimes simply “false democracy”.

One-party rule has served China well over the past four decades, at least from an economic development perspective. The country became the world’s second-largest economy (surpassing the United Kingdom, among others), with gross domestic product increasing more than 100 times between 1978 and 2021, after Deng launched the “reform and opening-up” period. On the centenary of the Communist Party last year, Xi said China had achieved its goal of building a “moderately prosperous society”.

According to the fund manager’s disclaimer, past performance is no guarantee of future returns.

Xi seems to have drawn exactly the wrong conclusions from China’s rise, attributing it to the supremacy and historical correctness of the party rather than the increased role of markets, which has unleashed the entrepreneurial energy of the people. Chinese. It has reasserted the primacy of the unproductive state sector and intruded on the private economy with ad hoc, poorly explained regulations that have erased hundreds of billions of dollars of value from tech companies alone. These interventions, along with Xi’s rigid insistence on a zero Covid policy, have done demonstrable damage to China’s growth prospects and tarnished its image in the eyes of international investors. Even longtime believers in China, such as former Morgan Stanley chief economist Stephen Roach, have lost faith.

At the same time, Xi has sought to reintegrate the party into all facets of life in China, after decades of backsliding. He built an overblown security state, hollowed out civil society, reduced space for dissent, and oversaw repression in Xinjiang and Hong Kong. In foreign relations, Xi’s China has adopted a more bellicose stance – including a “limitless” partnership with Russia’s Vladimir Putin – which has contributed to a dramatic decline in the country’s popularity abroad.

Much speculation has centered on the possibility of an economic course correction after this month’s congress. According to the theory, having consolidated his power, Xi will be more inclined to soften some of his signature campaigns and return to the pragmatism that has served China so well. Such hopes may turn out to be in vain. Even if an economically liberal candidate such as Vice Premier Hu Chunhua becomes prime minister, there is no reason to believe that Xi will be more restrained. As Fraser Howie, author of Red Capitalism: The Fragile Financial Foundation of China’s Extraordinary Rise points out, figures such as Premier Li Keqiang and Xi’s top adviser Liu He are economically liberal but have had no real influence. “I don’t see any silver lining,” Howie says.

Here, it’s worth coming back to Brittany. What’s remarkable, especially for this recent returnee to the UK after three decades in Hong Kong and China, is how far the Tory controversy has come to light. There is merit in the Chinese critique that going to the polls once every four years does not equate to democracy, but it ignores the panoply of supporting infrastructure that is at the heart of liberal political systems – including transparency and freedom of expression. In Britain, Truss and his finance minister, Kwasi Kwarteng, appeared in a series of media interviews where they were questioned combatively about the quickly reversed decision to cut the top tax rate on Income. “This is surely the worst start of any prime minister,” Sky News’ political editor told Truss.

The fall of the pound and the government’s swift reversal have led some to argue that the UK has sunk to the level of an emerging market. From another perspective, however, the episode is also an example of the speed and responsiveness of the Democratic feedback loop, as a public outcry saw Tory MPs fear losing their seats to rebel . Beneath the apparent chaos, there is an established process at work. Part of the reason this sounds chaotic is because more of the system’s plumbing is outdoors.

There are no such signs of instability at the highest levels of government in China, where leaders rarely show up for interviews and where the job of the media is to support the party and guide opinion anyway. public. The Communist Party’s grip on Chinese society is firmer than it has been in decades, and Xi in turn has a greater grip on power than his predecessors. This stiffness plating can mask deeper cracks.

A single individual who has amassed such power in a closed Leninist system and who is convinced of his historical mission may be impervious to conflicting evidence, piling up problems that eventually become too deep to solve. Uncontested power can breed pride and encourage leaders to exclude opposing voices. China has already experienced this syndrome. The last time this happened, Communist Party elders had to wait until Mao died before reversing the political purges and economic disasters that had scarred and impoverished Chinese society.

It’s much more an all-or-nothing bet than a multi-party democracy. As long as Xi is on the right track, there is nothing to worry about. What if he isn’t? Minsky might have an answer.

Bloomberg

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