The market gyrations have continued for a couple weeks, and it seems like we keep coming back to China. At least with Greece, there were clear deadlines with the crisis: the referendum vote, the all night discussions with Eurozone leaders, the first missed IMF repayments, and so on. The China story has gone on for weeks. Is there any end in sight?
Short answer? No. This could go on for a long time.
With China, the oligarchy in power has the ability to obfuscate truth for years. State control of information, multiple levels of bookkeeping, and a required adherence to the accepted narrative instead of the data fundamental means they can’t solve problems. How can you solve a problem if you’re not even allowed to address it?
Moreover, the political structure does not allow any internal mechanisms for reform or criticism. Finally, they have the spare cash reserves to keep spinning out infrastructure projects or backstopping the local stock exchanges for a long time. There doesn’t have to be any grand reckoning of the Chinese economy. The incentives for the Communist party to mete out small scale reforms are going to outweigh any grand liberalization of their economic fundamentals, like private ownership, global market integration, ending protectionism, industrial privatization, judiciary reform, and so on. A lack of the ability to adjust in the name of consistency looks like a short term solution for stability, but in the long term, it’s a recipe for stagnation or worse. I’m reminded of JFK’s prescient quote, “those who make peaceful revolution impossible make violent revolution inevitable.”
That may be a worst case scenario. The situation on the ground is depressing for China, but certainly not that dire. In the short term, I think we can expect a China which will still grow for the time being, albeit more slowly than they should. In the future, without greater evolution, they’ll be looking at a long slog, particularly if their regional peers can embrace reforms more quickly.