China, the Ghosts of Tiananmen, and the Hard Landing
China, the Ghosts of Tiananmen, and the Hard Landing
Twenty-three years ago, the struggles in China to implement market-based reforms begun the '70s culminated in the Tiananmen Square protests that led to army opening fire on civilians on this date, June 4. The massacre still resonates strongly in China.
Flash-forward to today and China is trying to transform its economy again.
In the years since Tiananmen, China's Communist party has engineered one of the great economic transformations of modern times. But today China's economy is in a critical state. Its economy is slowing and might be heading for a dreaded hard landing.
The trick for China's leadership is to avoid having that boom go bust, at all costs, because for China's communists, economic growth has become the glue that holds their grip on power together.
The Chinese are trying to transform their economy from one reliant on exports and massive internal investment into one supported by consumer spending. They're trying to do this amid rampant signs the economy is slowing down, and at the same time as they complete a once-a-decade transfer of leadership within the Communist Party. The last thing they want is focus on something like Tiananmen.
It's proving impossible. The Chinese are buzzing over todays' 64.89 point drop in the Shanghai Composite Index. In China, 64 is like 9/11 in the U.S., because June 4, 1989, is the date of the Tiananmen Square massacre. It also happens to be today's date.
The Chinese responded predictably, banning any online searches or references to the Shanghai, or to Tiananmen or the massacre. No matter. The people found ways around the ban, quoting a 9th Century poet, for example, or arranging candles in a 6 and 4. Or just writing "say nothing," as one person did. "Everyone understands."
The issues of human rights, freedom, and crashing economies aren't new, but they aren't usually all found within the world's second-largest economy, and how China deals with them will have quite an effect on the rest of the world. Mike Casey, author of The Unfair Trade, came on the Markets Hub this morning to discuss China's balance of power.
The data out of China (despite its questionable reliability) points to a clear downturn. J.P. Morgan cut its 2012 GDP estimate to 7.7%. That's getting into hard-landing territory, and the 7% mark is something of a line in the sand for the Chinese, GeoStrat's Robert Hardy said in an interview. Less than 7% growth means jobs aren't being created, he said. That's unacceptable for the government, for political even more so than economic reasons.
For the Communist Party, economic growth has been the lever through which they have maintained the consent of the governed; in many ways, in fact, the Communists have become captive to economic growth; they know they can't live without it.
"They rule by the consent of the people not because of Communist ideology, but on the back of economic success that has been spread throughout the nation as a whole; and there is no going back," GeoStrat's Robert Hardy wrote in his weekly note.
So even though the Party last week threw cold water on the idea of a big stimulus program like the one from 2009, Hardy believes they will take some measures to boost the economy. They don't have a choice. The Chinese will build new steel mills, even if the demand isn't there. They will build cities, dams, roads. (Ironically, the Journal's "A-hed" story today focuses on one Chinese company that has failed miserably at a big road project in Poland.)
Some day, the Chinese will have to deal with the ramifications of their political and economic control. "Command economies just don't work in the end," Hardy said.
When that day will be, of course, is the big question.