China is jeopardizing the very economic model that propelled it to become the world’s second-largest economy by removing incentives for further economic gains, silencing its most successful business innovators, or in some cases, owning and shutting them down. imprisoning them, while exercising state control over what once were independent entities.
This crackdown on Alibaba, Tencent and Ant Group, and the removal of the profit potential of education and tutoring companies, could lead to a massive outflow of foreign funds from China. It could also destroy the confidence of domestic consumers in a model that has lifted tens of millions of people out of poverty in at least the past 40 years.
With ever-increasing restrictions on free speech, human rights, capital investment, and individual freedoms, China quickly moved away from Deng Xiaoping’s maxim that it didn’t matter what type of system. economical that it used, as long as this system worked.
To quote Deng more directly: It doesn’t matter if it’s a white cat or a black cat; if he can catch mice, he’s a good cat.
Deng’s economic reforms are now threatened with a complete setback that could well have far-reaching consequences for Beijing’s economy and markets.
Chinese leader Xi Jinping’s efforts to put power and the party ahead of profits or future prosperity are a potentially fatal blow to the nation’s status as a leading economy.
The various Chinese markets are among the worst performers in a world where most stock markets are up double digits.
Shanghai shares are down 1.8% year-to-date on Wednesday, while China-H shares – i.e. mainland Chinese stocks that trade on the Hong Kong Stock Exchange – are down 12.3%. Hong Kong is down 3.3%, compared to sizable gains in most major markets.
Only Turkey is down by a similar amount, down 6% in 2021.
China’s untenable positions may well isolate its economy.
The United States, Japan, Australia, South Korea, Taiwan and the EU may be forced to take steps to neutralize China’s external projections of strength, many of which may mask serious internal weaknesses.
The magazine “Foreign Affairs” recently recounted many of these weaknesses, from the lack of planning for Xi’s successor, a situation reminiscent of instability after Mao’s death, to the fear of foreign direct investment by China through its latest crackdown on big business. .
Beijing recently met with business leaders to allay their concerns, hence the rebound in Chinese stocks traded in the United States on Wednesday.
That said, China may be “today’s enigma, shrouded in mystery, within enigma,” as Churchill once described Cold War Russia.
While the military engagement between East and West remains an unlikely event, China could face an economic war that will reduce its access to the West, and with it an implosion of the global economy, in which China and its people will suffer the most.
Since George HW Bush articulated a policy of “constructive engagement” with China, solidified by Bill Clinton’s decision to invite the country into the economic family of nations ruled by the World Trade Organization, Beijing has not followed the global rules.
Hopes that these memberships would encourage China to embrace all manner of freedoms, from free markets to free speech to free dissent, appear to be all but faded.
It is true that the miracle of Chinese growth has been a tide that has lifted many boats, but as the country’s global position has strengthened, its economic and geopolitical policies have become increasingly belligerent, more focused. on regional hegemony, to the detriment of potential. allies, and so confrontational that a new cold war with a more nuclear-weaponized China may have already arrived.
As the Wall Street Journal’s Jason Zweig recently reminded us on Twitter, over a decade ago, he highlighted how China has attempted to liberalize its economy and open up to the West countless times since. the 19e century.
Every effort ended badly.
I fear the results will be the same today and in the future. China may not be worthy of your investment dollars anymore.
From a global perspective, the United States is probably the beneficiary of our modern black ships that drift away from the mainland in search of more welcoming shores.
—Ron Insana is a CNBC Contributor and Senior Advisor at Schroders.