Chinese Don’t Talk about Debt over the Dinner Table

It is the month of global institutions to shine. Over the week, the IMF generated great sensation by red-flagging China’s ballooning corporate debt. Also, the MSCI is also back in focus with its pending decision on whether to include China’s A-shares in its Emerging Market equity indices. This is a key decision that can draw billions to China’s A-shares listings — or prevent it for another year.

While media professionals and analysts busied themselves with these two pieces of news, I was having dinner with some family friends. Sometimes, conversations over the dinner table are the best. Since everybody at the dinner table was Chinese, with investment interests in China, it was inevitable for us to discuss it.

Contrary to what you might think, we didn’t once touch on China’s credit quality and growing debt issues. You see, Chinese tend to look at very different indicators than IMF economists. We mainly focus on China’s social dissent, business conditions, and the political climate.

During this particular dinner, our focus was on giving a score to Xi Jinping. I remember when I was interviewing Chinese CEOs two years ago. Everybody was still waiting to see how Xi’s term would turn out. Now we are four years in, and it’s time to give some preliminary marks to his current term.

Xi currently receives a very poor mark from the population at large. At first, the crackdown on corruption was a positive sign for citizens. Many were hopeful that Xi would be different in manoeuvring China out of a very difficult economic situation. But now it is plain to see that the crackdown was just a smokescreen to cover up a party-wide cleansing of opposition to Xi.

He has largely been successful in concentrating power from administrative to military control over the party. The crackdown likely made him many enemies. His tactical design has become much more visible as he extends tougher control inside and outside the party. The ‘illusion’ of crackdown was also a disappointing factor to ordinary people, as they now feel a strong sense of disappointment.

On the subject of economic reform, the assessment was the same: poor. Most now view Xi’s political reach to be interfering with effective economic management. For example, Xi handles many of the premier’s work. Li Keqiang, the premier, is a technocrat whose role is overshadowed by the direct political presence of Xi.

More deeply, many believe that Xi has modelled himself after Mao. Or perhaps he wants to create a legacy that more or less reflects the approaches of Mao, which was a strong-handed one. Xi’s direct influence inside the party through anti-corruption drives, and outside the party through cyberspace and media control, is clear to see.

The indicator that is widely adopted to analyse dissent is the speed it takes for the government to take down socially and politically sensitive articles, and media from social media apps such as WeChat and Weibo. Although the speed for taking down such items normally range from 30 minutes to one hour, that window is believed to be allowed by Xi’s oppositions working at the lower level.

Of course, it is unfair to pin everything on the government, but the wide-ranging and deep-rooted environmental, social and legal problems leave the party with little room to run.

What do you need to look at? Credit quality and banking system stability are important things to care about, but China is a political-control-centric country. It has been operating under this model for thousands of years, and will not change in the near future. You need to look at Beijing, you need to look at Xi Jinping, and you need to look at China’s politics. Because those are the things that really matter.

Everything comes down to Xi and the degree of political struggle inside the party. Social, environmental and economic problems exert external pressure on the government, and increase infighting. As a response, there is likely to be more heavy-handed control over individuals, groups and society as a whole. Of course, that is a negative feedback loop in itself, and it will end badly if not managed properly.

Credit quality and financial market reform (inclusion in the MSCI index) fall under the banner of ‘economic reform’. It is one of the metrics people use to measure the effectiveness of the leadership. Beijing doesn’t have to deliver fully on market liberalisation (as it has promised to the West) to win the hearts of its own people. What it is more concerned with is (massive) unemployment, falling wealth and social instability.


Ken Wangdong,
Analyst, Emerging Trends Trader

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