[Opinion] A Pessimistic View of China in the Intermediate Run

1. I am going to stick my neck out and express a pessimistic view of China in the intermediate run: Politically, China will take a sharp left-turn.

This blogpost is occasioned by two things:

(a) my recent re-reading of Ray Huang's China: A Macro History (1990), and

(b) the recent large-scale selling of assets by Li Ka-shing in both Hong Kong and mainland China.


2. In economics, the time horizon for analysis is not defined by actual time, but by a hypothetical framework that considers the variability of the factors of production.

"Short-run" is the time frame in which all factors of production are assumed to be fixed.

"Intermediate-run" is the time frame in which some factors of production are assumed to be variable and some to be fixed.

"Long-run" is the time frame in which all factors of production are assumed to be variable.


3. This blogpost will consider two macro factors: politics and economics.

My view is that economics is a variable factor in any analysis of China and politics a fixed factor.

As time passes, the variable factor will suffer diminishing marginal return relative to the fixed factor.

One reason is because the advantage of the variable factor relative to the fixed factor is being used up.

Similarly, in China the advantage of (a variable) economic reform relative to a (fixed) totalitarian Communist government is being used up.

My instinct is that the recent large-scale selling of assets by Li Ka-shing signals the onset of diminishing marginal return of the economic reform relative to the political system in China.

And if China does not reform its political system (and I do not see any signs of it doing so), then it will not be able to handle all the problems that have been arising from a free market economy.

And if that is so, the only way it can maintain stability is to take a sharp left-turn.

I expect that will happen in the intermediate-run (however long that turns out to be).


4. The economic reform in China since 1978 has been very impressive.

The rate of change might even have been unprecedented in human history.

The same cannot be said of China's political reform.

The Communist Party has always puts it own interest above the national interest of China.

In the first 30 years of economic reform, there has been a happy coincidence between the two; that is, the economic interest of the Communist Party and that of the national interest of China coincided.

But the signs of divergence between the two have become more and more prominent.

And as we have learned from Milton Freidman (1962), a market economy is only compatible with certain political forms.

A country that adopts a market economy with its consumer sovereignty will inevitably put pressure on the government to become freer.

A reason being that to maintain a free market a government must adopt policies in response to its consumers, be that government democratically elected or totalitarian.

With its totalitarian instinct, the Communist Party of China has been resisting political reform.

Although democracy is the best known political form to express freedom, I will not equate freedom with democracy.

But there are signs that the current Chinese experiment with a free economic sphere coupled with a controlled political sphere is faltering.


References:

"Capitalism and Freedom", Wikipedia - The Free Encyclopedia,
http://en.wikipedia.org/wiki/Capitalism_and_Freedom
(accessed 2013-10-16).

"Consumer sovereignty", Wikipedia - The Free Encyclopedia,
http://en.wikipedia.org/wiki/Consumer_sovereignty
(accessed 2013-10-16).

"Diminishing returns", Wikipedia - The Free Encyclopedia,
http://en.wikipedia.org/wiki/Diminishing_returns
(accessed 2013-10-16).

"Li Ka-shing", Wikipedia - The Free Encyclopedia,
http://en.wikipedia.org/wiki/Li_Ka-shing
(accessed 2013-10-16).

"Ray Huang", Wikipedia - The Free Encyclopedia,
http://en.wikipedia.org/wiki/Ray_Huang
(accessed 2013-10-16).

Freidman, Milton. 1962. Capitalism and Freedom. Chicago, Illinois: University of Chicago Press.

Huang, Ray. 1990. China: A Macro History. Armonk, New York: M.E. Sharpe, Inc.

End.