Your Guide to the Latest Depressing News Out of China

On democracy in Hong Kong and economic reforms in Beijing

First, for fair-and-balanced purposes, if you'd like to start with some depressing trends out of the U.S., be sure to read “The punditry vs. the presidency,” by Michael Cohen in the NY Daily News. It is about the destructive, non-accountable pundit pressure on Barack Obama to prove his strength by “doing something” about the crises underway around the world. Ah, it brings the "why we hate the media" days back so vividly.

On to China.

1. Politics. Last night my wife and I heard the cheering news on (state-controlled) China Central TV that universal suffrage was coming to Hong Kong. Great! And, yes, we actually watch this channel a lot of the time.

Unfortunately, as everyone except the state-controlled Chinese media pointed out, the announcement was part of a deal that ensures that the right to vote won't really matter. The Hong Kong electorate will be able to cast its vote only for one of several Party-approved candidates. As an illustration of the contrast in coverage, reader Rick Jones sent this screen shot:

On the overall situation, here is a useful assessment by Richard Bush of Brookings. For instance:

China's 2012 promise [of universal suffrage by 2017 for Hong Kong] created hopes among the public that the chief executive would be picked through a truly democratic election. Those hopes have now been dashed, and it is likely that China has bought itself more instability, not less.

After the jump, an email from a long-time foreign resident in Hong Kong about some local reaction to the decision.

2. Economics. If you want the big picture on why the challenge now facing China’s economic leaders is different from, and even harder than, ones they have dealt with in the past three decades of rapid growth, you could start with Minxin Pei’s China’s Trapped Transition. It came out six years ago, and it foresaw a structural crisis for China's economy within six or seven years. Or, you could even read China Airborne, which is on this exact theme. For now I suggest that you start with two online postings by Michael Pettis, in Beijing.

One is a guide to the four stages of development the political-economic system has gone through, from the poverty of the 1970s to the mixed success-and-crisis situation of the country today. Here is what Pettis thinks a not-yet-realized fourth step would mean: 

What China needs now is another set of liberalizing reforms that cause a surge in social capital such that Chinese individuals and businesses have incentives to change their behavior in ways that generate greater productive activity from the same set of assets.

These must include changing the legal structure, predictably enforcing business law, changing the way capital is priced and allocated, and other factors that determined the incentives, so that Chinese are more heavily rewarded for activity that increases productivity and penalized, or at least less heavily rewarded, for rent seeking. 

But because this means almost by definition undermining the very policies that allow elite rent capturing (preferential access to cheap credit, most importantly), it was always likely to be strongly resisted until debt levels got high enough to create a sense of urgency. This resistance to reform over the past 7-10 years was the origin of the “vested interests” debate.

The other Pettis article is this new item on the very bad, and less bad, options for a Chinese fiscal/financial transition. 

3) Sociology. My friend Eric Liu points out in a WSJ essay (drawn from his very good new book A Chinaman's Chance) that China has practically no naturalized citizens: some 941, as of the 2000 census. No doubt there are more now, but by comparison the U.S. has somewhere in the vicinity of 18 million. Like Eric Liu, I view this as reason #1 that the long-term strategic assets of the United States vastly exceed those of China. Also, see the report from Frank Langfitt of NPR on a much-discussed recent episode in which a foreigner keeled over, unconscious, on a Shanghai subway and everyone on the train ran away rather than offering help.

4) Politics again. Our friend Minxin Pei is back to explain how outside-world hopes for “reform” in the Xi Jinping era should be assessed now. 

Sobering, all. Nonetheless, happy Labor Day. 

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A note from a foreign resident of Hong Kong:

As a [Westerner] based in Hong Kong for 20+ years, I think the Standing Committee has really misread its audience this time around.  

The Chief Executive position is relatively powerless - certainly less so than any mayor or party chief of a comparable city inside China.  There was very little to be lost, even if one of the super democrats had somehow been chosen.  And the chances of that were nil in the first place, as Hong Kongers know better than to mess with success.  

Which "foreign elements" are Beijing so worried about these days? Western governments have far less real economic influence than the large multinationals.  Those companies (of which my employer is one) have an enormous vested interest in quiet and calm access to the China market and protection of the many strands of their global supply chain that flow through Shenzhen and Guangzhou.  It is impossible to imagine [most US- or European-based companies] advocating for anyone remotely unacceptable to the Party.  Former success stories like Cisco have taken such a beating from the NSA scandal that they would have played along quietly with any scenario that kept things on an even keel.  

Now Beijing has issued what sounds from this end like a ham-fisted, poorly-thought-out edict.  How many tech company execs will now choose to live in Singapore?  How many banks will have another look at Tokyo as a regional center now that the hot money pouring into Hong Kong and Singapore property has put them nearly on par for cost-of-living? 

Nothing about the Central Government's current rhetoric or recent action indicates it will have sufficient subtlety to manage the situation that helps Hong Kong's position in the short term or the long term.  It won't take many days of traffic disruption or occasions of hammerhead pronouncements demanding "love of country" before that begins snowballing.  

Here was a risk-free for China to soothe Taiwan and the West and they blew it. At a time when the economy looks wobbly at best why would you want your professional class dusting off those pre-1997 Canadian passports?  

To mix cultural metaphors, China could have put on a kabuki show with an elected figurehead but a cowed or bought-off civil service and business class without a basis for complaint (hey, it works in Singapore). Instead multinationals will now put on the puppet show - maintaining paper headquarters in Hong  Kong while seeking stability and predictability elsewhere. 

As noted many times over the years (e.g. this and this), successive Chinese governments have shown very little interest in Western concepts of "soft power." The Chinese government would only gain rather than lose by being lenient with its imprisoned Nobel Peace prize winner Liu Xiaobo (and his wife). It would gain rather than lose by making it easier for international journalists to get into the country, since most people who get to know the place find more to like than dislike, and since the vast human reality of China is more diverse, vibrant, open, and appealing than the stern government postures would ever lead you to believe. It would even—according to me—gain rather than lose by easing up on Internet and press and academic censorship, allowing its universities to attract first-rate talent from around the world.

But all that is according to me, not according to them.