China

The Failure of State Sponsored Capitalism

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It is my assertion that over the last few decades since the fall of communism a lack of understanding of how markets actually work has become commonplace around the world. When it was capitalism vs. communism (or socialism, or even fascism), you generally knew where you stood. To wit:

  • Capitalism said that the free market would provide the best outcome for society, while communism / socialism felt that capitalism had to be tempered and / or that key assets should be owned by the state 
  • Capitalism said that government should be small, and stick to a few areas of logical focus such as security and foreign affairs, while socialism / communism celebrated government and government jobs as a way to employ the citizenry and achieve social goals

Subtly, the growing attraction of jobs that were primarily in the government sector (environmental jobs, education jobs, health care jobs, and outright government work) and the basic thought that you could build a nice, steady career there with assured benefits and pensions while “doing right for the world” became commonplace. These jobs were often seen as “nicer” and “better” than the ruthless corporate jobs that are continually vilified or parodied on television (such as “The Office” or virtually any thriller set in business).

On a parallel scale, the idea that “State Owned Enterprises” (SOE) could be a significant part of the world economy, and compete effectively with private sector companies, became widespread. Let’s leave aside the companies that fell into the US governments’ hands during 2008-9 like the banks and car companies; I am focusing on the world wide companies, often country “champions”, that are in our midst and whose performance has now been hit with the usual causes of failure of these sorts of entities, including:

  1. Politically motivated investment
  2. Forced government subsidies or protectionist behavior
  3. Corruption
The “poster child” for this negative outcome is Petrobras, the Brazilian oil company, which is 64% owned by the state.  Petrobras was briefly the 4th most valuable company in the world after their 2010 IPO; now it is barely in the top 100.  Petrobras hits all these typical failure points with a vengeance.  The government forced them to purchase goods and services from inefficient Brazilian suppliers, subsidized their citizens with Petrobras funds, pushed them to invest in deep offshore finds which were risky relative to the company’s capabilities, and finally just engaged in simple corruption to fund their political party candidates.  All of these actions weakened the company and now a downturn in oil prices and a heavy debt load put the company in a seriously bad state.

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Can China Liberalize in Time? Keep Your Eyes on Shandong

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This post was originally posted at The Scholars Stage on the 27th December, 2014. It has been re-posted here without alteration.

Shandong is the red one. 


Map by Uwe Dedering. Wikimedia.

Things are looking up for President Xi Jinping. Arthur Groeber sums things up well in a challenge he recently gave China File readers: “Name one world leader with a better record.” [1] Mr. Groeber has a point. All those who predicted that the Hong Kong umbrella movement would prove an impossible crisis for President Xi have been proven wrong. The protestors are gone, but Xi is still around, signing energy deals with Russia, launching new international development banks, and even shaking Shinzo Abe’s hand. He has restructured the Chinese Communist Party’s most important policy bodies, and if the recently concluded 4th Plenum Communique is anything to judge by, more reforms are coming.  One domestic rival and crooked official after another has fallen to his anti-corruption campaign, which having felled 200,000 “tigers and flies” is now tearing into the once unassailable PLA. To top things off, sometime this summer Xi Jinping’s countrymen began calling him “Big Daddy Xi.”[2] The term is a compliment: President Xi is now the most popular leader on the planet.

Aesop’s portrait of Xi Jinping

“The Frogs Who Desired a King”
Illustration by Milo Winter (1919). Wikimedia.

For all of these reasons and more Xi Jinping is considered to be the most powerful leader China has seen since the days of Deng Xiaoping. Yet the real test of Xi Jinping’s power isn’t found on the foreign arena or in struggles to cleanse the party of graft.  Grand standing on the international stage and stoking up nationalist feeling is not hard for any leader–especially in China. The attempt to centralize the Communist  Party of China and purge the corrupt from its ranks is a much more impressive display, but in many ways this entire campaign is more a means than it is an end. What end? An obvious answer is that the good President pursues power for power’s sake, as leaders the world over are wont to do. But there is more to it than this. This man did not attain his high position through will-power alone. He was selected to accomplish a job that needs doing. And while the frogs may regret crowning the stork to be their king, it is worth our while to ask why the frogs desired a king in the first place. [3] In China’s case the answer is fairly simple: If Beijing does not want to see its own Japan-style “lost decade” then economic reform is needed, and it is needed urgently. Xi Jinping has been trusted with the power to reshape the Party because that is the kind of power that is needed to defeat the vested interests that stand in the way of economic liberalization.

 I won’t get into a full discussion of why reform is so urgent here–if you are curious I strongly recommend Michael Pettis‘ September essay, “What Does a ‘Good’ Chinese Adjustment Look Like?” which lays out the essential points in detail. More important for our discussion is the pace and scale that these reforms take. The 2013 Third Plenum was devoted to this question;  financial analysts have been abuzz ever since discussing how well the Plenum’s directives are being implemented. Of particular concern are the financial happenings at the county, city, and provincial levels. It was infrastructure spending by these governments that rode China through the recession, and that effort has left many of these governments over leveraged and left others liable for a host of non-performing loans. Reforming this system is necessary. It is also difficult, for it means slaughtering the favorite cash cows of powerful men and forcing China’s wealthy and connected to face the risk inherit in their poor investments instead of shifting losses to the state.

Two views of China’s local debt, by province.

Taken from Gabriel Wildau, “Half of Chinese Provinces deserve junk ratings, S&P warns,”
 Financial Times (20 November 2014)


  Any attempt to liberalize markets and end China’s financial repression must start here. By extension, any attempt to assess the power Xi Jinping has over the Party must also start here. We will know that Xi Jinping has the level of control over his country that everyone says he does when local government finances see substantive reforms.

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On Russia and Ukraine

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For many years I’ve studied the Russian front during WW2, where the Germans and their allies battled the Russians (and their empire) in some of the largest and deadliest battles on earth. The war went far beyond the battlefield, with the Russians taking over the ancient German capital of Prussia, evicting / killing all the (remaining) citizens, and turning it into today’s Russian enclave of Kaliningrad. This is fair desserts; the Germans planned to turn Moscow into a reservoir. That war was about annihilation, a complete extermination and permanent subjugation of their foes.

In recent years I’ve tried to turn away from this focus, since I didn’t think that this conflict, ancient by modern standards, had much to teach us anymore, and just following along a well-worn narrative was teaching me nothing. And I did move on, reading about more modern conflicts, and today’s volunteer and high-tech military as opposed to the “old world” of conscripts, artillery, heavy armor, utter destruction of cities and the civilians trapped inside them, and political control superseding military objectives.

The Russian armed forces also seemed to be gliding towards irrelevance, other than their ubiquitous nuclear weapons. Their performance in Chechnya was poor until they basically razed (their own) cities into ruin with heavy artillery fire; to this day I don’t understand why this wasn’t called out as a giant atrocity. In Georgia they were able to beat a tiny, poorly armed adversary, but their motorized divisions seemed to be driving by compass and they did not cover themselves in military glory. Their military transitions from conscript forces with older weapons and tactics also seemed to be foundering in the face of objections from old-line military-industrial complexes.

When Ukraine slipped out of Russia’s orbit and the vast presidential compound of the ex-president was paraded on TV worldwide, Putin obviously viewed this as a direct threat to his authority. The Russians historically had been at odds with the Ukrainians over natural gas prices and on other topics, but it wasn’t obvious that this was going to move into a warlike situation. Ukraine is rich with agricultural resources but these resources aren’t prized by the Kremlin; they need easily extractable resources like oil, natural gas and various iron ores that they can pull out of the ground and sell for hard cash overseas. John McCain’s recurring joke that Russia isn’t much more than a gas station with nuclear weapons in fact has a lot of merit. Other than around Moscow, parts of St Petersburg, and in “showplace” locations like Sochi and Vladivostok Russia in fact was falling into ruin and shambles.

But something was happening; the Russian forces that invaded the Crimea (even though they were never formally identified as Russians) appeared to be well organized and well armed. It was not the “Keystone Cops” group that I might have expected. They handled themselves with relative distinction, fulfilling their objectives with limited civilian casualties and using discretion against the Ukrainian military forces they encountered. This was the complete opposite of the blundering incursions into Chechnya.

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The view from over here

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The lunchtime meeting today had been organized by the Henry Jackson Society, the Left’s particular bugbear, in the House of Commons (luckily in one of the committee rooms where the acoustics were good and the mikes worked). The guest was the eminent academic and commentator, Professor Walter Russell Mead and his topic was an obvious riff on a once highly influential book by Professor Francis Fukuyama: The Crisis in Europe: the Return of History and what to do about it.

As one would expect, Professor Mead gave a very cogent and exhilarating analysis of the many problems the world is facing today but, as a journalist from Die Welt pointed out, we have all heard a great many depressing talks and read a great many even more depressing articles of that kind recently. What did Professor Mead think were some of the answers?

Professor Mead’s main solution was (and, to be fair, we were coming to the end of the session but, to be equally fair, that was supposed to be part of the presentation) that the US should restore its interest in Europe and re-engage in a dialogue with its European partners. Or, in other words, as he said the Lone Ranger, having ridden away, should now return (no word of how Tonto might feel about that).

The European Union, Professor Mead explained, was American foreign policy’s greatest accomplishment; it had been one of the aims of the Marshall Plan (some stretching of history here), had been supported diplomatically and politically throughout its history but has, to some extent been left to its own devices in the last few years. The US underestimated the difficulties European weakness and lack of cohesion will cause to it. Having, as it thought, defeated the bad guys (twice, presumably), knocked all the European heads together, the US announced that it will do what the European had always said they wanted and that is leave them all alone. Apparently, that is not what the Europeans wanted deep down and it is time to recognize this fact.

We’ll be over, we’re coming over
And we won’t come back till it’s over, over there.

Well, that’s fine, except that it would appear that it is never going to be over, over here. We saw that when Yugoslavia disintegrated into a series of wars in the nineties, the EU though the egregious Jacques Poos announced that “this was Europe’s hour” only to plead with the Americans to come back and sort the mess out after all. It seems that they will have to come back again in the sense of taking greater interest in this pesky little continent and its pesky problems.

Is that really the answer? Obviously, as an Atlanticist and an Anglospherist I want to see a continuation of the existing links between certain European countries and the United States, adding Canada, Australia and New Zealand into that network. But would a greater involvement by the US in the EU’s problems really help anyone? Somehow, I doubt it.

I got a little carried away with my blogging and had to put up two posts on Your Freedom and Ours on the subject of Professor Mead’s presentation, the discussion and my own opinions. So here they are: Post 1 and Post 2.

Bargaining with the Dragon: Some Straight Talk on Hong Kong

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Originally posted at The Scholar’s Stage on 6 October 2014.

Note by the author: I cannot take credit for most of the ideas and observations I present below. The protests in Hong Kong are now in their eighth day. Since they began last week a great amount has been written about why these protests are happening and what their eventual outcome may be. It has been disappointing to see astute voices and analysis  drowned out by fairly insipid primers and listicles. This post aims to remedy the situation by blending the best insights from the best China hands into one essay. If you would like to explore the material that inspired this post (or follow this story more closely in the future), I invite you to consult the “Further Reading” section at the bottom.

At the time of this writing Hong Kong has returned to a semblance of normalcy. The protests may flare up again before the week is over, but we can take advantage of the present lull to assess what has been accomplished thus far and what hope the movement has of compelling the government to meet its demands in the future. The last eight days have been an emotional affair. Most of the discussions I have had about the protests have also been emotional affairs—especially when someone from the mainland or from Hong Kong is participating. This post is different. I am not interested in arguing about which side is right or wrong but in assessing the probability of either side forcing the other to cede to its demands.

 Lets start with the protestors.

 What are the protestor’s demands?

  1. When the protests began the protestors rallied around two demands:
    Hong Kong chief executive Leung Chun-ying (hereafter CY Leung) will step down.

    2. .

  2. Hong Kong will institute a democratic system where candidates for popular election are  chosen by voters, not a committee selected by the Communist Party of China.


 The original body of protestors who demanded these things were organized by two groups, the Hong Kong Federation of Students (香港專上學生聯會, abbrv. 香港學聯, or just 學聯), composed of Hong Kong university students, and Scholarism (學民思潮), headed by 17 year old Joshua Wong and mostly composed of youth about his age. The famous photos of umbrella clad youth being pepper sprayed as they charged government lines were of these folks.

They were joined by a third group, known as Occupy Central with Peace and Love, or Occupy Central for short (讓愛與和平佔領中環, abr.佔中), on the second day of the protest. Occupy is a different sort of beast than the other two organizations; it is run by seasoned political activists and university professors who have been planning a civil disobedience campaign to protest the 2017 election reforms since early 2013. They had planned to start the protest on October 1st (the PRC’s National Day, the closest equivalent China has to the 4th of July), but when the clashes between students and police escalated on Friday (Sept 26th) they decided to abandon their original plan and join the protestors. Had they been in charge of the show from the beginning I am not sure they would have made the same demands—at least in the beginning—that the students did. But they came late to the party and have to deal with what the students’ demands hath wrought.

There are two important things about these groups we must remember when assessing the protestors’ strategy and the government’s response to it:

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