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China's Xi Is Fretting

Posted September 10, 2019

Xi Jinping is General Secretary of the Communist Party of China, Head of the Armed Forces, and President for Life.

He has things to worry about. 

Xi is the “princeling” son of a Revolution hero who was sent down to the farm during Mao’s Cultural Revolution but made his way back...

The president picked up a degree in chemistry and went on to get a PhD. He has read all the classics on how to govern effectively. These include Emperor’s Norms by Li Shimin and the Comprehensive Mirror in Aid of Governance by Sima Guang. He demands loyalty of the Army and his party.

Xi will have to put that knowledge to use because his world is falling apart and his enemies are circling.

Trade Wars

According to the South China Morning Post, the trade war with Trump is starting to bite. Exports fell in August.

China’s exports fell unexpectedly in August as the trade war with the United States continued to hit the world’s second-largest economy.

Shipments fell by 1 per cent in the month after growing 3.3 per cent in July in dollar terms, and below the 2.1 per cent growth expected by analysts in a Bloomberg poll. Imports in the month dropped by 5.6 per cent, leaving a trade surplus of US$34.84 billion, according to China’s General Administration of Customs.

July’s expansion now seems like an anomaly, likely driven by front-loading as new tariffs of 15 per cent on about US$110 billion of Chinese goods that took effect on September 1. American buyers of Chinese goods subject to the new tariffs were likely to have filled their inventories as much as possible before the goods became more expensive to import.

This decline in exports happened despite a 3.8% depreciation of the yuan.

This is a new situation and a sharp reversal from the 30-year run of 10% growth in the Chinese export machine, and China is in no way geared for a slowdown.

The central bank on Friday said it would cut the amount of cash banks must hold as reserves to the lowest level since 2007 in a bid to inject liquidity into the economy and stimulate demand.

It won’t work. Chinese consumers have been holding back despite stimulus, and big-ticket items like cars are getting hit.

A recession would mean big trouble. Already, the state is running Xinjiang re-education camps to quash any rebellion by the Uyghur Muslims. Some estimate that there are 3 million people in such camps.  

In addition, Xi must worry about the popular uprising in Hong Kong, the financial gateway to China — which, as an aside, was just downgraded. Protesters waving American flags must be particularly infuriating.

Tightening the Belt and Road

Meanwhile, Xi’s big “Belt and Road” initiative, which sought to build a new Silk Road through Asia and into Africa and Europe, has run into huge expenses and a host of failures. For example, a $10 billion Chinese-built railroad across Kenya has stopped in the wilderness due to vast sums of cash disappearing. 

China had been giving loans of about $170 billion a year for African infrastructure as part of Xi’s pet project.

Chinese growth is the lowest in 27 years, and the cost of servicing its enormous debt is at the tipping point. There is a lot of hidden debt, but Reuters reported that total debt — corporate, household, and government — passed 300% of GDP last month.

Xi’s Enemies

President Xi got to where he is by being ruthless. Five years ago, he set about purging his competition through an anti-corruption campaign. CNN writes:

The exact number of "tigers" toppled by Xi's anti-corruption campaign -- in other words, officials who were once part of the designated elite whose jobs had to be cleared through the Party's central personnel system -- is not easy to calculate. The best estimates put it around 300 to 400, including scores of generals. The officials who have been prosecuted and jailed include members of the Politburo, ministers, vice-ministers, the heads of state-owned enterprises, provincial party leaders and governors, and mayors.

The next party Congress is in 2022. It should be an exciting one.

For years, the deal between the peasants and the party was that they would put up with lots of corruption, inequality, and despotism as long as they got economic growth and their lives got better. And it’s worked.  

I fear for China and the rest of the global economy when it no longer does.

All the best,

Christian DeHaemer Signature

Christian DeHaemer

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Since 1995, Christian DeHaemer has specialized in frontier market opportunities. He has traveled extensively and invested in places as varied as Cuba, Mongolia, and Kenya. Chris believes the best way to make money is to get there first with the most. Christian is the founder of Bull and Bust Report and an editor at Energy and Capital. For more on Christian, see his editor's page.

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