The Breakdown - Xi and the Shift From Economics to Ideology

Starting point is 00:00:00 Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. The breakdown is sponsored by nexo.io, Circle, and FtX, and produced and distributed by CoinDesk. What's going on, guys? It is Saturday, October 29th. That means it's time for the weekly recap. Now, before we get into the weekly recap, there are two ways to listen to the breakdown. You can find us on the Coin Desk podcast. network, which comes out every afternoon, and which also features other great coin desk shows, or you can hear it on the breakdown only feed, which comes out a few hours later in the evening.

Starting point is 00:00:43 Wherever you are listening, I would so appreciate it if you would take the time to leave a rating or a review, it makes a big difference. Also, a disclosure, as always, in addition to them being a sponsor of the show, I also work with FTX. All right, folks, happy Saturday. As you probably know if you've listened to any shows this week, I am currently on my way down to South America with the family. And so for this weekly recap, I wanted to use this chance to talk about a fairly big geopolitical topic in China, specifically what's been going on in terms of the power dynamics inside of China. Now, the normal caveats extra apply here. I am not a China expert by any stretch of the imagination, and so even more than usual, will not be embedding tons of my own op-ed or opinions here.

Starting point is 00:01:26 Also, apologies in advance for what I can only assume will be rampant mispronunciation. So last week, saw the end of the 20th Party Congress for the Chinese Communist Party. The culmination was that President Xi Jinping was elected to a third five-year term as head of state. She's election is being viewed broadly as a massive consolidation of power, the likes of which we haven't seen for many, many years. A small but substantive example is that party rules that were established in 1982 were abandoned to enable Xi to remain in power. The party formally removed a two-term limit in 2018 and is ignoring a long-standing retirement age of 65.

Starting point is 00:02:02 Entering the party Congress, the stakes could not have been higher for President Xi. China has been struggling economically and socially for the last year. The COVID-0 policies championed by Xi have caused massive economic disruption and some of the most vocal popular dissent in decades. On this show alone, we've covered banking troubles, housing and real estate issues, battles around semiconductors and chips, and of course an ongoing foreign policy realignment. China analysts widely viewed the likely outcome of the Congress as being installation of she as president for life and the consolidation of the personality cult which is formed around the insular leader. Now, there were some ominous echoes from history surrounding the CCP's 20th meeting. The equivalent meeting for the USSR Politburo,

Starting point is 00:02:46 the centralized governing committee of the former Soviet communist state, was held in 1956. It was the first to be held after the death of Joseph Stalin and featured a firebrand speech from his successor, Nikita Khrushchev. He called on the party to eradicate the cult of personality which had been a key characteristic of Stalin's rule, warning of the harmful consequences of elevating a leader to such heights that they take on, quote, supernatural characteristics akin to those of a god. In making their decision to appoint Xi to continue in power this month, the members of the CCP would have been all too familiar with Khrushchev's warning. Now, alongside Xi's re-election as head of the Communist Party, senior ranks of the Politburo were stacked with loyal

Starting point is 00:03:24 deputies, consolidating power around Xi. This involved removing several long-standing bureaucrats with some measure of reasonable standing in the international community, and replacing them with less experienced officials whose primary feature is in fact fealty to Xi as unquestioned leader. Many China watchers are concerned that this consolidation of power will mean that there are no longer any dissenting voices in Beijing at all, to the extent that there were before. Victor Shi, Associate Professor of Political Science at the University of California San Diego, said, quote, these are all officials who got to the highest level of power by agreeing with Xi on everything and by siding with him constantly. They will not start to chat.

Starting point is 00:04:00 his decisions, regardless of the merits of those decisions. The bombast of the move was best highlighted by the apparent removal of former President Hu Jujentau from the Congress chambers during the closing session. Wily shared on Twitter, the video was suppressed from Chinese social media. Party officials explained that who was feeling unwelled, but the video appeared to show him being forcibly removed. President Xi, who was seated next to who, refused to acknowledge whose attempt to discuss the situation. Who later returned to address the Congress and vote, making the entire episode extremely puzzling? The strangeness was mostly notable for the lack of respect paid to a senior figure in the nation's history, and the uncharacteristic break in the typically extremely well-staged

Starting point is 00:04:40 public image of the CCP. To some extent, this could be people seeing what they want to see, and reading too much into what could have been an innocent occurrence. But it's hard to deny that the optics were of a dignified former leader being manhandled past a calmly seated she. In Bremer, the president of the Eurasia group wrote, Hugh Gentow, reluctantly escorted out as Xi watches on. Extraordinary moment. Bremer also discussed the appointment of officials more broadly, saying, The most problematic takeaway from China's Party Congress is the promotion of Shi loyalists

Starting point is 00:05:12 over experience and competence. For the last 40 years, Chinese Communist Party promotion was mostly meritocratic. The latest group is a turn in Russia's direction. Kyle Bass, the CIO at Hayman Capital Management, who pulls no punches on these top, which you can hear if you go listen to my episode with him from, I don't know, probably a year ago at this point. Anyway, Kyle wrote, She's wartime cabinet is in place. His 20th party Congress purge not only installed loyalists, but two spy chiefs and military leaders responsible for China's reunification with Taiwan. He sacked the only three men with markets experience, the head

Starting point is 00:05:44 of the PBOC, the CSRC, and finance minister. She also added the Ministry of State Security head to the Politburo and the Central Committee. These moves send a clear message to the world that conflict and great struggle, quote-unquote, are coming soon. Not since Mao has a Chinese leader stacked his cabinet with men, all men, no women, no blacks, no Hispanics, or anyone else but Han Chinese, with aerospace, weapons, surveillance, and military experience. Conflict with Taiwan is now around the corner. The great Chinese liquidation of public and private equity is in full swing. Today's 10 to 20 percent crash in Chinese shares is just the beginning of the destruction of Western capital invested in Chinese companies. It appears that Xi's great struggle is also meant to

Starting point is 00:06:23 inflict maximum pain to those who believed reform and opening. Now, even taking it down a notch from Kyle's take, this sentiment was pretty widely shared. Bank of America economists, including Helen Chow, wrote on Monday that the new leadership structure implies solidarity at the highest level, and, quote, may lead to more effective policy execution and little political resistance against bolder reforms or changes to existing policy stances. Duncan Rigley, the chief China economist at Pantheon macroeconomics, said, the more centralized power becomes, the more the risk of overzealous politics, implementation based on directives from the top. Drew Thompson, visiting senior research fellow

Starting point is 00:06:58 at the School of Public Policy at the National University of Singapore, said, Xi Jinping is surrounded by people who are intensely loyal to him, is a metaphor for the maniacal approach to the party's objectives where almost any means justify the ends. Want to keep more profits when trading? Get the best possible prices and trade with 50% lower fees on Nexo Pro. The new Spot and Futures trading platform uses aggregated liquidity of over 3,000 order books collected from multiple sources. Utilizing the complete nexo suite allows you to earn interest and borrow funds as you wait for the next trade setup. Visit pro.nexo.io. That's p.r.0.9.0.0. and sign up today. This episode is brought to you by Circle, the sole issuer of

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Starting point is 00:09:04 And to do so, let's look at the speech he made one week earlier at the opening of the Congress. She vowed that China wouldn't change course even as it faces, quote, dangerous storms in a world that has grown more hostile to their ambitions. First on tech. With the semiconductor industry in the spotlight, following the crippling sanctions announced earlier that week by the Biden administration, which, if you'll remember, barred U.S. citizens from working in the critical Chinese industry, Chairman Xi expressed a steadfast commitment to continue the development of strategically important tech domestically. We will focus on national strategic needs, gather strength to carry out indigenous and leading scientific and technological research, and resolutely win the battle in key core

Starting point is 00:09:41 technologies. He articulated, in other words, a policy of, quote, technology self-reliance. Neil Thomas, a China analyst at Eurasia Group Limited, which is a political risk advisory firm, said, the focus on science was a, quote, reflection on just how much Xi Jinping is betting on innovation as a solution to China's economic problems and to its reliance on Western technology. That's super significant. It really shows his increasing priority that this is his big bet, basically for the future of China. On issues of COVID, contrary to many analyst predictions, she did not use the Congress as an opportunity to declare victory over COVID and the success of his policies, i.e. allow the country to move on from the frequent lockdowns which have hamstrung

Starting point is 00:10:20 the economy over the last year. Instead, he reaffirmed COVID-0 as a cornerstone policy goal. Quote, in response to the sudden attack of COVID-19, we put the people in their lives above all else and tenaciously pursued a dynamic zero-COVID policy. We have protected the people's health and safety to the greatest extent possible and made tremendously encouraging achievements in both epidemic response and economic and social development. He talked quite a bit about communist ideology, which is something we'll come back to in a few minutes. She said, Chinese modernization offers humanity a new choice for achieving modernization. We will steadfastly push for common prosperity. We will improve the system of income distribution. We will ensure more pay

Starting point is 00:10:59 for more work and encourage people to achieve prosperity through hard work. We will promote a quality of opportunity, increase the income of low-income earners, and expand the size of the middle-income group. We will keep income distribution and the means of accumulating wealth well regulated. Common prosperity has been the slogan behind major changes in China over the past few years, from big tech crackdowns to unraveling the property bubble. One might take away from the statement that China will start to pursue a slower but more broad growth model, abandoning the growth at any cost rationale from the previous decade, and instead aiming for what they call high-quality development.

Starting point is 00:11:33 Another quote from Xi, high-quality development is the top priority of building a socialist modern country in all aspects. Development is the party's top priority in governing. It's impossible to build a socialist, modern, strong country in all aspects without solid material and technology foundation. Now, of course, what many wanted to hear about was what Xi was going to say about Taiwan, he could not have made more clear how the CCP view its claim. We will continue to strive for peaceful reunification with the greatest sincerity and the utmost effort, but we will never promise to renounce the use of force, and we reserve the option of taking all measures necessary.

Starting point is 00:12:05 The wheels of history are rolling on towards China's reunification and the rejuvenation of the Chinese nation. The complete reunification of our country must be realized, and it can without a doubt be realized. She spelled out that China's threat to use force was, quote, directed solely at interference by external forces and a few separatists seeking Taiwan independence. So let's talk a little bit more about reactions over here on the U.S. side. Market reactions could only properly be characterized as a stampede out of Chinese assets. Palo Macro on Twitter, a macro analyst said to all the bots and bros who were talking how Hu was just not feeling well and had to be lifted out for his own good,

Starting point is 00:12:40 you go ahead and explain to me just how Western Capital shouldn't freak on this weekend. Please lay it out for me like a child. CNBC anchored Giuliana Tattlebaum said Chinese tech stocks getting absolutely pummeled as she cements around balance of power, making no concessions around balance of power nor any appointments of more reform market-friendly technocrats. Offshore yuan dropped by 0.4% on Monday, spiking above 7.3 yuan per dollar. The Hong Seng, an index of Chinese stocks listed in Hong Kong, fell by more than 5%. We're also beginning to see reporting of another round of capital flight from the nation's wealthy. As mentioned before, recent Chinese economic policy has been focused

Starting point is 00:13:16 on quote-unquote common prosperity, which it seems many wealthy Chinese elite are taking to mean that they have a target on their backs. David Lasparence, a Europe-based family lawyer who works with wealthy families in Hong Kong and China, told the Australian Financial Review this week that she extending his rule beyond two terms was the final straw for many of China's business elite. Quote, now that the chairman is firmly in place, I have already received three proceed instructions from various ultra-high net worth Chinese business families to execute their fire escape plans. In other words, while his clients had been working on escape plans and moving capital to safer jurisdictions for years, this was the trigger for them to make moves that could

Starting point is 00:13:50 not be reversed. Lasparin said, the family motto has always been, keep a fast junk in the harbor with gold bars and a second set of papers. The modern equivalent would be a private jet, a couple of passports, and foreign bank accounts. This is the world we are in. It is tough stuff. Don't say Bitcoin fixes this. Don't say Bitcoin fixes this. Anyways, it wasn't just a market reaction either. The comments on Taiwan were notable enough that they were addressed by the U.S. Secretary of State during an interview the following day. Secretary Blinken said that China had made a, quote, fundamental decision that the status quo was no longer acceptable, and that Beijing was determined to pursue reunification on a much faster timeline. Blinken also reiterated his view that China was

Starting point is 00:14:28 becoming more repressive at home and more aggressive abroad. Quote, if peaceful means didn't work, then it would employ coercive means, and possibly if coercive means don't work, then maybe forceful means to achieve its objectives. and that is what is profoundly disturbing the status quo and creating tremendous tensions. Ultimately, many see this as a seminal moment in the broader shift away from economic pragmatism and growth to ideology. Daisuke Wakabayashi, an Asia business correspondent at the New York Times, writes, under Xi Jinping, China continues to turn away from the free market pro-business reforms

Starting point is 00:15:00 that were credited with its economic assent. In its place, it is deepening involvement of the state in all facets of the economy. Rebecca Chun Wilkins, a China reporter at Bloomberg, said, she made a brief nod to just how challenging the next few years of slowing economic growth will be for his people. He's calling to promote the spirit of frugality across the entire society. Finally, Emily Fang, a China correspondent at NPR, wrote, Strong focus on ideology from Xi Jinping at Party Congress today. Quote,

Starting point is 00:15:25 Marxism is the fundamental guiding ideology upon which our party and the country are founded and thrive. Our experience has taught us that at the fundamental level we owe our success to the fact that Marxism works. Now, the big question to me is, is this actually, actually just an inevitability based on the fact that China as it is today simply cannot grow any longer the way it has been. And so to consolidate and keep power, the ruling apparatus needs ideology to replace market forces in society to continue to have legitimacy. Michael Pettis, a senior fellow at Carnegie Endowment, who just wrote a book about all this, tweeted little by little everyone seems to be moving toward a consensus that China's sustainable growth rate is

Starting point is 00:16:04 2 to 3 percent, and that once it can no longer prop up economic activity with non-productive investment and surging debt, it will settle to this rate. I agree, and in fact have argued this for many years, but I would also add that this expectation implicitly assumes that after adjusting, China can continue with the same rate of expansion of what Beijing calls high-quality growth. But that isn't obvious. A high investment growth model can be intensely pro-cyclical, and after many years of success, it can force business, financial, and political institutions to rearrange balance sheets in ways that implicitly bet on the continuation of the growth model. In any case, any major adjustment of the growth model can have unexpected systemic consequences. No country in the past following a similar

Starting point is 00:16:43 growth model has ever adjusted, without surprising on the downside, perhaps because analysts underestimated the systemic consequences. That means that for a few years, even two to three percent might be optimistic. So again, the point here, or perhaps the question, is what happens in a world where Chinese citizens have traded off some amount of freedom for hyper growth and no longer get that growth. It's not surprising at all to see ideology make a major comeback. Anyways, guys, that is the view from here. Like I said, this is not an expert's view. It's just an aggregation of sources that I've seen discussing what was an important event over the last couple of weeks.

Starting point is 00:17:23 Hopefully you feel a little bit more informed and can go out and follow some of the folks that I mentioned on this show to help get your own perspective on these issues. For now, I want to say thanks again to my sponsors, nexus.com, circle and FTX, and thanks to you guys for listening. Until tomorrow, be safe and take care of each other. Peace.

The Breakdown - Xi and the Shift From Economics to Ideology

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