Blain’s Morning Porridge – September 7th 2021: What China can teach the west about Equality…..
“In waking a tiger, use a long stick.”
This morning: China’s clampdown on big tech is painted as the Party’s programme to engineer a more socially-equal economy. This puts China way ahead of the West where the consequences of monetary distortion and the pernicious effects of social and wealth-inequality are well understood, but no one seems able to address them.
There are two great pieces on China this morning. The FT has The Chinese control revolution: the Maoist echoes of Xi’s power play while the excellent Matthew Brooker writes on BBerg – Xi Jinping May be Leading China into a Trap.
Both give different perspectives of the 180 degree shift in Beijing’s approach to market capitalism over the past 10 months. President Xi’s apparent hostility to markets and big business caught us all by surprise, destroying value in Chinese tech giants, starting with Alibaba. The ongoing purge is now impacting whole sectors of the economy and directly setting new rules on how commerce and the population interreact – including strict controls on when kids can play their X-boxes.
The buzz-words are “common prosperity”, spiced with “patriotic duty”, and “frugality”.
It’s easy for us in the West to characterise what’s occurring in China as another misguided, self-destructive cycle in convoluted communist politics – a pogrom to reinforce the power and primacy of the party. Under Stalin the Russians purged first the kulak merchant peasant class – creating famine, then the technocrats, then the military. Western commentators have tried to contextualise and rationalise Xi’s purge as an assault on markets – making assumptions the party is weaker than thought, or it’s Xi staging a power-play.
Brooker on BBerg makes an argument that China could be dooming itself to remaining a low income economy unless it unleashes the entrepreneurial flair firms like Alibaba and Tencent have demonstrated. Both articles are well worth a read.
In the madness there may be method….
The FT likens the current crackdown to Maoism – referencing the Cultural Revolution, which Xi was personally caught up in. Mao used the party’s youth wing to purge the bloated party and topple China’s overheavy bureaucracy with violence that was redolent of civil war.
Today’s China Business Revolution is very different – even though the party characterises it as “a return of power from capitalist cliques to the people”. It’s all sounds very “Wave the Red Banner” in terms of its overtones, and the stated ambitions to level society and address inequalities. The FT notes how Xi has tied the program to addressing income inequality, drawing popular support from the resentment many citizens feel against the enormous wealth of a tiny cadre of business titans. A cultural revolution part 2?
The clampdown has even spawned its own revolutionary backlash as state commentators claimed: “the cultural market will no longer be a paradise for sissy-boy stars and will no longer worship western culture.” These don’t sound terribly woke sentiments.
This Business Revolution is clearly significant and creates massive value issues for anyone invested in China. (It’s been my worst performing investment thesis this year – and many global investors have exited.)
However…. the clampdown doesn’t mean China is closed. Tencent and Alibaba may have had their wings clipped. Other companies have been disciplined, but there are still 1.4 billion Chinese consumers out there who will still be ride-hailing, buying stuff off the net, and looking for mortgages. China remains a growth economy.
And, here’s the rub.. What if China ends up a more stable, balanced and equal society as a result of the current purge of systemic inequality?
That is surely heresy…. It’s the West that is free… China is a repressive surveillance-dominated state hell-bent on global domination… Surely? We in the West have liberty, political freedom, justice.. and all that goes with these. To Western sensibilities, China is a deeply flawed nation – but try to imagine what they think of us…
Maybe we should be thinking more about what the Chinese Clampdown will achieve? Social equality? Is Chinese equality a good or bad thing? It clearly serves the purposes of the Party if the bulk of the population believes the Party has make their lives better and more equal.
Social and income inequality is not something we like to address in the West – it goes against our deeply held beliefs about capitalism, free markets, and the primacy of individual responsibility.
I’ve written about inequality many times. The largest postbag of furious complaints I ever got was in response to a Porridge I wrote on poverty in San Francisco and the way it was being ignored. If I was to suggest that workers earning a fraction of venal CEO’s are being mistreated, I can guarantee a mail-box full of abuse – just check out the comments on Zerohedge if this Morning Porridge is posted.
If I was to suggest the West’s failure to address chronic and increasing income inequality is likely to prove the biggest challenge to our economies, I will be accused of being in thrall to Bernie Saunders and Alexandria Ocasio-Cortez. Well… let me admit it. I think they might be on to something.
Economics is all about how wealth is transferred through the production and consumption of goods. The basic premise is we all benefit from that increasingly complex process. What if we don’t? What if most of us are losers? What happens when too much of the wealth flows into too few hands?
Why has income-inequality exploded in recent years?
It’s a consequence of monetary experimentation. Keeping interest rates too low has pushed up the value of stocks – making any successful entrepreneur rich as Croesus. By inflating the value of financial assets inflation has remained minimal, capping wage increases. While economists worry about deflation as a result of low rates changing economic motivations, the reality is the consequences of QE has been the rich getting richer while the poor have, at best, stayed still.
Not enough thinking is done about behavioural economics – and how the massive income imbalances across the system will affect the way people think and act as a result of the socio-environment they are caught in. History teaches us that dissatisfied populations become unpredictable – they used to rebel, but since we opened the vote to every adult, now they vote for populist demagogues who promise to make it better.
In recent weeks I’ve found myself being interviewed on podcasts and social media on why I’m so concerned all the inflation that’s been locked up in financial assets is now impacting the real economy. I usually start with housing. It’s a good example how unfair society has become.
30 years ago, we all bought our first flat in our 20s and jumped on the property escalator. Today, the soaring price of grubby little flats in London puts them well beyond the reach of 99% of youngsters. They have to rent – but rents are higher than mortgage payments meaning they are permanently trapped in a cycle of paying for someone else’s property appreciation. Which is why large investment firms like Blackrock are piling into acquiring rental properties, creating a massive class of workers unlikely to ever accumulate asset wealth.
Meanwhile these young millennial workers are finding high rents, rising inflation and the sheer stickiness of modern society, means they aren’t out there living their “best lives”, but surviving day-to-day, pay-check to pay-check. When the average London flat is £500k, banks want a 10% deposit for the mortgage, and salaries are £50k (not everyone is a first year Goldman analyst earning £125k), then even the Bank of Mum and Dad struggles to help.
In the US I recently learnt the average age of householders is now 47 – an age that has risen 8 years since 2008, highlighting the difficulties people have getting onto the housing ladder.
I got roundly assaulted last week when I highlighted the weekly £20 Universal Credit Benefit about to be withdrawn in the UK – what’s that go to do with markets, I was asked? Everything. Absolutely everything.
My thesis is simple: Income inequality makes populations resentful. It has become a massive consequence of the last 10 years of ultra-low rates. Not so, claim the right-wing. They believe inequality incentives smart ambitious people to get on the other side of the equation. Only a few can do so. Most of us will remain the wrong side. And that becomes dangerous.
I’m not predicting a bloody revolution on the streets of home-counties Basinggrad is imminent, but increasing dissatisfaction and populist politics will end up further destabilising the West while China pulls together.
Maybe, just maybe… the Chinese aren’t so stupid. They’ve spotted the rising instability in the West, are encouraging it, and are proactively addressing it internally. It’s relatively easy for a totalitarian party to do so. It will be far more difficult for our floundering political parties, and increasing political division, to enforce social and income equality in the West.
Five Things to Read This Morning
Out of time.. and back to the day job.
Strategist, Shard Capital