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The Chinese political system

30/08/2015

Last week I wrote several stories for Businessdesk as an intern there. The big news early in the week was the hit which the NZX took following disappointing economic data coming out of China on manufacturing the previous week.

The report (see here) showed a decrease in the number of new orders, export orders and output. Overall the index was at a more than six year low.

The first story I wrote (with much help in editing from the highly skilled Businessdesk team) quoted a fund manager expecting declines to follow in Asian markets. Subsequently, the benchmark Shanghai composite fell 8.5 percent on Monday and then a further 7.6 percent on Tuesday. This means the Shanghai composite has fallen 40 percent from its peak in June.

The challenge for China, having experienced astronomical rates of economic growth from a low base on the back of a low wage export driven economy, is how to shift from this model toward a more domestic consumption based economy.

Here is the Economist on how China could reform the system to keep the economy growing and the problem with that:

A range of reforms could help China tap new sources of growth: allowing private companies to compete properly with state firms; fostering the rule of law to give entrepreneurs more confidence to invest; and relaxing residency controls that stunt the free flow of its people. For the time being, however, these run against the Communist Party’s reflexive need for control.

That comes from a longer piece analysing China’s stockmarket plunge but ultimately expressing an optimistic tone given the recovery of the Chinese property market where there is much more stress.

In their book, Why Nations Fail, Daron Acemoglu and James A. Robinson maligned the Chinese system as one of “growth under extractive institutions”. When I read the book, I thought this oversimplified the more complicated model of market socialism at play where a high degree of economic freedom is permitted (albeit with a large role for State Owned Enterprises) sat awkwardly juxtaposed with tight political control. The CCP has maintained it’s legitimacy through a perception of competence where a highly meritocratic mandarin technocracy is tasked with maintaining economic growth.

This technically skilled and efficient government stands juxtaposed against the highly polarised and inefficient western system of democratic government lurching from electoral cycle to electoral cycle where politicians write cheques for entitlements tomorrow to be funded by future generations.

Francis Fukuyama has also referred to the Chinese system as one of “responsive authoritarianism” because of the CCP’s close observance of public sentiment and policy adjustments to ameliorate public concerns. Environmental policy seems to me an example of this. Yet all the while it takes place within a paradigm of CCP authority which cannot be questioned.

The durability of any political system, though, can only be shown when it is put under stress. A chinese recession would put the CCP under pressure as their presumed legitimacy arising from competence in economic management could no longer be claimed.

Recently there has been much speculation about the viability of the Chinese system but nobody really knows when a fall could come, if there would be political fallout and what it would all look like. While the “growth under extractive institutions” still seems slightly lacking to me, the fragility of the Chinese system could be starting to show.

Extra material:

Another piece by the Economist on the collapse of the Shanghai composite.

Nassim Taleb and Gregory Treverton on why volatility actually signals stability.

This piece draws on Taleb’s Anti fragile argument advocating for systems which gain from disorder. That is a book on my must read list.

Eric Xi Li Ted talk compares the meritocratic Chinese political system with western democratic systems

More informed commentary from Tyler Cowen on China

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