Politics, et Cetera
A publication from The Political Forum, LLC
Tuesday, September 23, 2014
They Said It:
Revolutions are not always brought about by a gradual decline from bad to worse. Nations that have endured patiently and almost unconsciously the most overwhelming oppression, often burst into rebellion against the yoke the moment it begins to grow lighter. The regime which is destroyed by a revolution is almost always an improvement on its immediate predecessor, and experience teaches that the most critical moment for bad governments is the one which witnesses their first steps toward reform. A sovereign who seeks to relieve his subjects after a long period of oppression is lost, unless he be a man of great genius.
Alexis de Tocqueville, The Old Regime and the Revolution, 1856.
ALIBABA? CAVEAT EMPTOR.
Like most of you, we watched with fascination the results of the initial public offering for China’s behemoth e-commerce company Alibaba. And like most of you, we were quite impressed with the results: a jump of more than 30% in the stock’s price right off the bat, over 100 million shares sold, and an estimated company valuation of more than $230 billion, investors clawing to get in on a piece of the action. All things said, it was quite a day for Alibaba and its co-founder Jack Ma. It was also quite a day for the company’s underwriters, for the NYSE, and for the government of China.
We can’t help but wonder, though, if it was really an especially great day for investors, particularly those who bought the company heavily.
As always, when it comes to China and its economic and market offerings, we count ourselves among the skeptics. We don’t have anything against foreign companies using the American exchanges to raise money. Indeed, we think that’s great. Nor do have anything against American investors getting in on a good foreign deal and making themselves and their clients rich – or richer, as the case may be. That too is great. We just happen not to trust the Chinese government, its ability to keep its hands off the proverbial goose that lays the golden eggs, or, most importantly, its prospects for long-term stability.
As we read, watched, and listened to the commentary on Alibaba, we couldn’t help but think that some people – many people, most people – were far too cavalier in their attitudes about the company and the government under whose beneficence it is permitted to exist. The following, which is an exchange from the PBS “Newshour” on Friday, was, we fear, all too typical:
HARI SREENIVASAN: To give you some sense of the company’s size, Alibaba earned more last year than Amazon and eBay combined. The company was founded 15 years ago and is often described as combining elements of Google, Amazon and eBay into one Web operation.
The firm, co-founded by a former teacher, Jack Ma, is now valued at more than $230 billion. Shares opened with a frenzy today and closed at nearly $94 each. Yet, for all of that, Alibaba is hardly a household name in the U.S.
To help fill in the picture, I’m joined by David Kirkpatrick, a technology writer and founder of Techonomy, an annual conference looking how technology is changing business. He’s also author of “The Facebook Effect.”
So we have heard a little bit about Alibaba. But why was it so significant an opening today?
DAVID KIRKPATRICK, Founder, Techonomy: Well, I think the company was brilliantly market in the IPO process.
And it’s the first time a major Chinese Internet company has gone public in the United States. And it’s the most important Chinese Internet company, although there’s a lot of competition for that. . . .
HARI SREENIVASAN: Is this in some ways a proxy bet on the Chinese economy?
DAVID KIRKPATRICK: Yes, I think that’s a really good way to think about it. It’s a really positive way to think about it, that, in effect, by so many Westerners buying this stock at such a high price, they’re saying, China is our friend. We believe in the future of the Chinese economy. We believe in the future of, in effect, the Chinese government, because let’s face it, the way business works in China, if the government doesn’t want it to happen, it doesn’t.
So there’s a much tighter bond between the government and business in China. And even Jack Ma today said, you know, the whole way he has operated his company throughout its history is, be in love with the government, but don’t marry it. Try to do what the government wants.
HARI SREENIVASAN: So, live by the government, die by the government.
DAVID KIRKPATRICK: Apparently.
HARI SREENIVASAN: What are the sort of downsides on if Chinese government policy changes that could have a ripple effect on the share price today?
DAVID KIRKPATRICK: There’s certainly a potential downside there.
But I think the Chinese government appreciates so much what Alibaba is doing economically, and also even today what it’s done for the image of China. I think you’re not going to see them coming down hard on Alibaba anytime soon. But, theoretically, you have never seen such an important company be so wedded to one government’s policies.
Not to put too fine a point on it, but this is insane. China is our friend? We believe in the future of the Chinese economy and the Chinese government? The threat comes from the government “coming down hard on Alibaba?” We suppose that this description is an accurate one, at least where many investors are concerned. But it’s also, like we said, insane. The threats from the Chinese government have almost nothing to do with how hard it “comes down” on Alibaba and almost everything to do with how much it wants from Alibaba, how much it has already taken from Alibaba, how much of Alibaba exists independent from the government. Likewise, the notion that anyone anywhere should trust in the future of the Chinese government has to be taken as evidence of some sort of psychosis. The madness of crowds, perhaps? We don’t know. But madness it is.
For years, we have used these pages to express our view that China and its government are a threat to business – not just to Chinese business, mind you – but to global business. Indeed, almost two decades ago in an article entitled “Guanxi, Schmanxi . . . Enough Already,” we cautioned investors that China’s accession to the World Trade Organization (WTO) would hardly be an unalloyed good. Indeed, we believed then – and continue to believe now – that the corruption endemic in the Chinese system, from the Politburo on down, would be far more likely to corrupt the previously transparent and reasonably honest West, than for the dynamic to work in the opposite direction, as most of China’s boosters insisted. Among others, we cited Thomas Duesterberg, the now-retired President and CEO of The Manufacturers Alliance and a former Assistant Secretary for International Economic Policy at the Commerce Department, who put it this way in a Wall Street Journal op-ed:
Starting with a core group of like-minded nations, the WTO has grown, in terms both of the commerce covered by its agreements and of the proportion of the world’s population voluntarily abiding by its rules. The U.S. has remained an acknowledged champion of that system, despite domestic political pressures to stray. Frequently, it has been a lonely champion patiently lobbying both its allies and potential members of the GATT-WTO system to be more rigorous in abiding by the agreed rules. Thus the U.S. has for years sought to reduce the prevalence of bribery, high-handed government influence and unfair commercial practices as means to win international business. . . .
If a large rogue nation like China becomes a part of the WTO before it is ready or willing to abide by its rules, the ability of all its members to impose the politically difficult disciplines in their own countries will be seriously compromised. The new WTO has trouble enough mustering the will to enforce standards like those covering intellectual property and government procurement, and has yet to adopt strong rules on bribery. Brazen disregard of the agreements from a new member like China would serve as a tempting example for other wavering nations to follow, especially if the U.S. doesn’t insist on strict adherence by the Chinese.
For most of the 1990s and the 2000s, when we wrote about China, we wrote about its manifest corruption and the inevitability of the regime’s collapse. The adoption of a more market-oriented economy was, we argued, a good first step. But it was only just that, a first step. The maintenance and expansion of political corruption, coupled with a near-caste system, in which those with connections to power made out like bandits, while those without said connections remained as poor and as oppressed as they had ever been, was, we said, a recipe for eventual disaster.
Over the last couple of years, China’s corruption has been so obvious and so clearly destructive that even the Chinese government has been unable to turn its usual blind eye. So, with the high-profile prosecutions of foreign – many American – banks and pharmaceutical companies, the Chinese sent a very strong message fit for both global and domestic consumption, i.e., quit being so obvious about the cheating . . . or else!
The anti-corruption endeavor has hit Chinese government officials quite hard as well, with the national government attempting to clean up its image by aggressively, if unevenly, prosecuting the petty bribery and graft that has been a major part of the Chinese business environment since time immemorial. President Xi Jingping has made the fight against corruption the hallmark of his presidency, trying desperately to make his nation and his country appear more palatable to investors as China’s business needs evolve. Zhou Yonkang, the now-retired head of Chinese government security and the onetime third-most-powerful man in China, is currently under investigation for corruption, presumably demonstrating that China’s efforts to amend its global image is a serious one, with investigators willing to scrutinize any suspect possibly incriminated by the evidence.
Of course, what this anti-corruption effort on the part of the Chinese government misses – intentionally, naturally – is the fact that while graft and corruption on the part of government officials in China is a big problem, it is not the country’s biggest corruption problem. The corruption, deception, and dishonesty on the part of the entire government, rather than individual officials, is the bigger problem, the one that should be of greater concern to investors.
As you well know, the biggest economic news of the last couple of weeks was that which revealed that China’s economy remains unstable and is slowing “unexpectedly.” We use scare quotes here because no one can really know what to expect from the Chinese economy because no one can really know what the Chinese masters of the universe will decide behind the closed doors in Beijing. No one can know what the government will manipulate or when. No one can know how the Chinese will present what they’ve done to the global community. And no one can possibly know what any of it will mean, either in the short or the long term. Participation in the global economy notwithstanding, the Chinese government continues – as predicted – to play by its own rules and to do as it sees fit with respect to its presentation of economic data.
Likewise, no one really knows what the problems with China’s economy are, how severe they might be, or how they will be resolved. In very general terms, the Chinese real estate sector, which comprises 15% of the economy, is drastically overbuilt, largely because the government has encouraged unnecessary and excessive building over the last several years in order to maintain economic production. The real estate boom has more or less been financed by the country’s “shadow banking system” which has injected tons of credit into the economy, more often than not to borrowers who are less than ideal (to put it mildly). As the real estate sector underperforms, though, and as the government tries to stimulate the economy by injecting funds into the official banking system, there is the risk of further inflating the credit bubble, as those funds trickle down to the shadow banks. All of which is to say that the government is, as they say, damned if it does, damned if it doesn’t. No stimulus means greater risk of a so-called “Lehman Brothers moment.” But further stimulus means that the economy will be propped up by an already massive bubble which feeds a shadowy credit system and props up imaginary growth in an overbuilt sector, thereby merely prolonging the inevitable and making the risk even greater.
Under these conditions, what is the Chinese government to do? What does it want to do? We’ll be damned if we know. And we are hardly alone.
Now does all of this mean that the Chinese economy is on the verge of collapse and that investors should pull out immediately for fear of this so-called Lehman Brothers moment? Of course not. Such a moment may never come. And if/when it does, it will undoubtedly affect the Chinese economy differently than the original did the American economy.
What it does mean, though, is that investors should be aware that the semblance of stability in China is vastly overstated. China and its semi-Communist regime are a hybrid, half modern, half ancient. And this hybrid tends to wobble as it moves along, suggesting that its fate is as unpredictable as it is important.
In our estimation, the near-term future of the Chinese regime rests on a very small handful of factors and the effectiveness of the government’s response to them. Of course, even if the government does everything right, that is no guarantee that things will turn out well – for it, for the Chinese people, or for the rest of the world. Some of China’s troubles have been decades in the making, the result of the corrupt, brutal, and bloodthirsty nature of the regime, which is to say that they are possibly – if not likely – beyond the powers of any man or group of men to control.
For starters, the Chinese regime will have to be very careful about how it handles any economic slowdown. As we have noted repeatedly in these pages, countless historians, philosophers, and political observers – including Robert Merton, Emile Durkheim, and most notably, Alexis de Tocqueville – have warned that “bad” regimes almost always find themselves in trouble when their carefully laid plans begin to go awry and their “reforms’ are recognized by the populace as signs of weakness and fear. When it comes to considering the possibility of political upheaval and even revolution, we have always favored the work of the historian and political scientist Ted Robert Gurr, who is best known for his “Perceived Relative Deprivation” theory, which posits that civil unrest and revolution tend, on the whole, to be the result of frustrated expectations. That is, that a population tends to grow restive when it is denied the benefits that it believes it should receive as a matter of personal, economic, and technical advancement.
In short, slowing economic growth poses a serious and unique risk to authoritarian and totalitarian regimes, China included.
It is important to remember, we think, that while the Chinese government has professed to changing its ways – first on the idea of markets and capitalist economics in general and more recently on the need to police corruption in government and business – a totalitarian regime cannot simply become something else. It cannot morph into a genuine and free republic conceived in Liberty, and dedicated to the proposition that all men are created equal (to coin a phrase). They are what they are, and that carries with it a certain set of problems.
Quietly, for example, while the entire world is focused on the resurgence of Islamic violence in the Middle East, China’s government has its own version of the “war on terror.” Which is to say that it is killing, arresting, and “disappearing” anyone in its Muslim western provinces who is not particularly keen to get with the program. Last week, the Washington Post explained:
The month of Ramadan should have been a time of fasting, charity and prayer in China’s Muslim west. But here, in many of the towns and villages of southern Xinjiang, it was a time of fear, repression, and violence. China’s campaign against separatism and terrorism in its mainly Muslim west has now become an all-out war on conservative Islam, residents here say.
Throughout Ramadan,police intensified a campaign of house-to-house searches, looking for books or clothing that betray “conservative” religious belief among the region’s ethnic Uighurs: women wearing veils were widely detained, and many young men arrested on the slightest pretext, residents say. Students and civil servants were forced to eat instead of fasting, and work or attend classes instead of attending Friday prayers.
The religious repression has bred resentment, and, at times, deadly protests. Reports have emerged of police firing on angry crowds in recent weeks in the towns of Elishku, and Alaqagha; since then, Chinese authorities have imposed a complete blackout on reporting from both locations, even more intense than that already in place across most of Xinjiang.
A Washington Post team was turned away at the one of several checkpoints around Elishku, as army trucks rumbled past, and was subsequently detained for several hours by informers, police and Communist Party officials for reporting from villages in the surrounding district of Shache county; the following day, the team was again detained in Alaqagha in Kuqa county, and ultimately deported from the region from the nearest airport.
Across Shache county, the Internet has been cut, and text messaging services disabled, while foreigners have been barred. . . .
On July 18, hundreds of people gathered outside a government building in the town of Alaqagha, angry about the arrest of two dozen girls and women who had refused to remove their headscarves, according to a report on Washington-based Radio Free Asia (RFA). Protesters threw stones, bottles and bricks at the building; the police opened fire, killing at least two people, and wounding several more.
Then, on July 28, the last day of Ramadan, a protest in Elishku was met with an even more violent response, RFA reported. Hundreds of Uighurs attacked a police station with knives, axes and sticks; again, the police opened fire, mowing down scores of people.
China’s official Xinhua news agency said police killed 59 Uighur “terrorists” in the incident, although other reports suggest the death toll could have been significantly higher.
None of this should surprise anyone, of course. This is what the Chinese government does. This is what it has always done. Unhappiness leads to unrest. Unrest leads to provocative action. Provocative action leads to mass murder and then to the restoration of order – or at least the attempted restoration of order. Same as it ever was.
Of course, the totalitarian nature of the Chinese regime will not affect only domestic “enemies.” Over the years, another one of our hobby horses with respect to China has been the inevitable impact of its “one-child” policy. Citing the likes of the Harvard/American Enterprise Institute economist and demographer Nicholas Eberstadt, we have long warned that the one-child policy and the Chinese preference for boy babies over girls babies would combine to create a dangerous and deadly mess. In a previous piece, we quote Eberstadt on this subject as follows:
In China’s 1953 and 1964 censuses, unexceptional infant sex ratios (104 [boys to girls] to 105 for babies under 1 year of age) were reported. In the 1982 census, however, a sex ratio of almost 108 was recorded — and subsequently it became clear that this apparent anomaly was not a temporary aberration. In the subsequent national population counts, China’s reported sex ratio at birth rose inexorably — to almost 112 in 1990, then nearly 116 in 1995, and most recently to just under 118 in the November 2000 census . . .
Thanks to China’s tilt below replacement fertility in the early 1990s, from about 2010 onward each cohort of women in their early 20s will be smaller than the one before. Between 2010 and 2025, this cohort will in fact shrink appreciably — by almost one-fourth, according to [United Nations Population Division] projections. (Not much guesswork is involved here, incidentally. Nearly all of the women in question have already been born.) The prospect of steadily diminishing absolute numbers of women of marriageable age, in conjunction with a steadily increasing surfeit of young men in each new class of prospective bachelors, sets the stage for an historically unprecedented “marriage squeeze” China in the decades immediately ahead. Simple, back-of-the-envelope arithmetic suggests that some very large proportion of tomorrow’s young Chinese men — certainly over 10 percent, perhaps 15 percent or more — may find themselves essentially “unmarriageable” on the mainland in the coming decades.
For the record, that piece was published on April 25, 2005, 9 ½ years ago – meaning that today is one of “the coming decades” that the article foresees. And sure enough, China’s sex imbalance is creating problems. In a piece last July for the New Republic, for example, Elizabeth Winkler suggested that some of the effects of the one-child policy are already being felt, manifesting as political and social instability. To wit:
The most troublesome consequence of the gender imbalance is the increase in China’s violent crimes. [The authors] are building off existing research, which confirms that China’s crime rate has doubled over the last 20 years and that incidents of social unrest have risen from about 40,000 in 2001 to over 90,000 in 2009.
China’s imbalanced sex ratio is likely a leading cause: A 2008 study by the Institute for the Study of Labor found that a 1 percent increase in the sex ratio leads to a 5 percent increase in the crime rate. And regions with the most male-biased sex ratios also have more gambling, alcohol and drug abuse, prostitution, rape, bride abduction, and human trafficking.
We’d disagree with Ms. Winkler only on one point, that this is “the most troublesome consequence of the gender imbalance.” It may be a troublesome consequence, but there are others, some with the potential to be far more troublesome.
As you may recall, for most of last year and much of this year, China and Japan have been feuding over the disputed Diaoyu/Senkaku islands. Additionally, China has run into recent trouble with many of its other neighbors, including the Vietnamese, the Filipinos, the Australians, and heaven knows who else. A recent poll published by Genron NPO and China Daily, showed that a majority of Chinese (53%) believe that war with Japan in the near future is all but inevitable. Two weeks ago, Philip Cunningham, who has worked in television and film in China and Japan since 1986, explained in part why this might be the case:
The government has ordered TV stations to increase the airing of “patriotic” shows, of which anti-Japan dramas are exhibit No. 1. On Aug. 15, the anniversary of Japan’s surrender, a headline in the Global Times, a party newspaper, said, “Prime time TV to be more anti-fascist.”
China has a long tradition of producing war movies for propaganda purposes, mostly good-versus-evil dramas drawn from the all-too-real and brutal war against Japan. The classic of the genre is “Tunnel Warfare,” produced in the 1960s and seen by billions of Chinese, which depicts resourceful Chinese insurgents outsmarting Japanese invaders by digging a network of tunnels.
In recent years, such government-sanctioned dramas have taken off, fueled by increasing tensions between China and Japan, and Beijing’s strategy of stirring up nationalism for domestic political purposes.
As any schoolboy knows, excessive celebrations of nationalism, up to and including war, are among the most tried and true techniques employed by governments dealing with restive and potentially unhappy populations. Better to turn the aggression outward, the theory goes, than to allow it to be turned inward. And with the front-end of China’s government-induced baby-bust beginning to reach maturity, the population is indeed restive, and the government is indeed looking to channel that restiveness into non-revolutionary pursuits. Add in the fact that men without women tend to turn toward recklessness and violence, and you have all the makings of a very strong possibility that China’s government will continue to move more and more toward violence, aggression, and imperialism as a foreign policy.
All of which will lead to greater national, regional, and even global instability and, presumably, economic and/or military penalties imposed against China.
We could go on, we suppose. China has enough problems these days to fill several books. But we suppose you get the point.
We don’t pretend to be stock pickers. That’s not what we do. We discuss global political and social phenomena and allow you, gentle reader, to make up your mind about how that might affect the stocks you pick.
In this case, we are, as always, bearish on China, given the host of problems that it faces and that appear to be growing more and more acute. Does this mean that Alibaba is a loser of a stock? Of course not. It means merely that the government that hosts Alibaba and whose policies will determine the company’s prospects is a corrupt, mendacious, vicious, homicidal, unstable authoritarian regime that is beset by potential social, economic, religious, and demographic catastrophes, and is therefore likely to destabilize the world economic order either wittingly or unwittingly.
It is up to you, in short, to determine what you think about Chinese companies and their stock offerings. We don’t know what to tell you to do about that. We do know, though, to tell you to be worried about the Chinese government. Contra PBS, the Chinese government is not your friend. It cannot be trusted. Buyer beware.