China is a land of a thousand ‘wanna-be’ warlords, four categories of ‘dissidents,’ operating amongst dozens of ethnic groups and ‘city-states,’ in a society where guanxi rules, with 1300 million poor* and under-educated, where their ‘voting intentions’ would likely be based on who will give them their next meal or a material benefit. (*we define ‘poor’ as below middle class -see box below)

Add the ‘great game’ between the US and China, and the low risk of war between superpowers due to a nuclear MAD (mutually assured destruction) and all these factors means China’s biggest threat is not external powers but internal division.

President Xi Jinping’s actions against this internal threat are now impacting on Australia’s property market, and partly explains why non-bank lending has surged (see our conference link below)

Aus-China Non-Bank Lending Conference, 22 Sept 2016 | Westin, Grand Ballroom, Sydney Click here

NSW Strata Law Change -opportunities for site acquisitions from the 75% majority rule, when fairness meets fortunes, 28 Sept 2016, Sydney  Click here  

One ring to rule them all

From Xi’s viewpoint, as China’s president, he and his closest allies have to be the only central power in order to prevent China from sliding into disunity.

The ramifications of failure is immense given China’s past 150 years of history — see my article on China’s modern psyche

A thousand ‘wanna-be’ warlords, a recipe for division

China’s warlord era of the 1910s to 1940s is testament to the risk of ‘warlordism’, as are today’s powerful SOEs, provisional governments, and political factions within the CPC (Communist Party of China), each led by a ‘strongman.’

With China’s slowdown, the economic spoils are harder to divvy up, which is leading to the risk of ‘turf wars’ amongst factions and pre-emptive strikes to safeguard positions of power and privilege.

Hence the move by Xi to crackdown on corruption, alternative power bases and dissidents to prevent the rise of factionalism.

Suppressed warlords become dissidents

Not all dissidents come from the same mould.   Xi is likely to see four categories:

  1. Powerful CPC officials or business persons (who would have been a warlord in 1920s China) hurt by the anti-corruption crackdown, and now seeking to regain their power by using the ‘cloak of dissidents’
  2. Operatives of the ‘great game’ ie the USA, seeking to generate China’s greatest threat – internal division. The best way is to support local democratic movements drawn from Categories 1,3 or 4.  (see also democracy section below)
  3. “Patriotic’ activists concerned about China’s social and environmental direction, and fed up with real or perceived inaction by the CPC
  4. Artistic or intellectual ‘activists’ seeking celebrity recognition as a ‘dissident’ from the West to gain fame or boost the value of their work (but not going so far as to be hit with jail time…i.e ‘fake’ dissidents)

Category 1 is new (only since Xi’s comprehensive anti-corruption crackdown from late 2012) and the most dangerous particularly if they have a powerful ‘guanxi’ network and/or were to unite amongst themselves, and/or work with categories 2-4 to build strength.

Category 2 is part of the rivalry between superpowers for supremacy, particularly now that military action by either side is too costly (MAD) and that the successful creation of internal chaos in China will reduce the nation’s superpower ambitions.

Categories 3-4 have existed for some time and pose a less systemic risk unless they are used by category 1 and/or 2.

This viewpoint explains why Xi is cracking down on ‘dissidents,’ particularly those in category 1 & 2 above, although his problem is working out which is which.

Ethnic differences

Saying Han Chinese is one ethnic race is like saying Europeans are all the same.   Today, despite Mandarin being the national language, dialects are still spoken locally (eg Cantonese, Hokkien {Fukien}, Hakka, etc).

Meanwhile, the southerners poo-poo the northerners, and vice versa, and each major city or region think themselves as superior to the others.

This is usually of little consequence, EXCEPT when internal divisions are stirred up.

Guanxi Rules

Chinese society relies on guanxi (see again my Chinese psyche article) particularly when the rule of law has been weak.   A hierarchical network and loyalty to the one above, rather than the law, means the risk of building factions is far higher.

Guanxi is stronger in the 2nd and 3rd tier cities, towns and rural villages where the bulk of the population resides, compared to the more internationalised cities such as Shanghai and Shenzhen.   Obeying the rule of law is in the national interest, obeying guanxi is for one’s personal interest.

Democracy and voting intentions of the poverty stricken

One person one vote.  But when 90% of the population – an estimated 1300* million, are still poor, (below middle class), uneducated or under-educated,, and simply hunger for the next meal or a short term material benefit, then ‘democracy’ in China will not work, particularly when one adds:

  1. the culture of guanxi with obligations to a local ‘strongman’ and in turn a regional or provincial strongman
  2. corruption
  3. multiple dialects/regional affinities (China under the CPC is only 67 years old)
  4. weakness in the rule of law
  5. dissidents seeking change for personal or superpower interests

The likely result of democracy would be multiple ‘political’ parties verging on fiefdoms led by powerful ‘warlords’ (as happened in China in the 1920s-1940s), with 13 out of 14 voters easily ‘bought’, with the ensuing internal chaos weakening China.

Note India has a relatively successfully democracy as it has less of (1) and (5) above….and a better (4) as a result of its past British rule.

For (1) to (5) to be resolved, Chinese society needs to further develop its national ‘values and ethics’ …a topic which I will explore in subsequent newsletters

The ‘Poor’ in China

  • China has 109 million middle class – the largest in the world (Credit Suisse).
  • 70 million rural people in poverty and 160 million elderly and “left-behind” children surviving on their own (due to the rural child’s parents moving to cities to work)  (South China Morning Post 9 March 2016 citing China’s Civil Affairs Minister Li Liguo).
  • Therefore 1,300 million in poverty or are ‘poor,’ (below middle-class) out of a total population of 1,400+ million.

What it means for Australia and the West?

President Xi’s crackdown on both corruption and dissidents has reached a point of no –return.

He must see it through to the end, in order for himself and his closest relatives and allies to personally survive to old age.

That is, all ‘tigers’ need to be neutralized so that they cannot regain power and seek revenge once Xi has left office.

He may remain in office indefinitely (like Russia’s Putin) to see through his changes.

Best case scenario for Australia and the West is that Xi is a benevolent dictator (ie Xi Dada) and not a malevolent dictator.

Xi will also seek to:

  • keep the economy growing…whatever it takes, including postponing problems to later years, in order to grow the size of the middle class, and reduce the negative influence of 1-5 above.
  • improve the nation’s lifestyles (reduce pollution, improve health care, transport and accommodation, food safety) to reduce the number of category 3 dissidents and calls for democracy
  • improve and the rule of law and ethics in society (eg the government is now encouraging the teaching of Confucian values)

Unintended consequences and risks

The anti-corruption and dissident crackdown and the current weakness in the rule of law has created the unintended consequence of increasing anxiety in society, particularly amongst the middle class and wealthy.

For example, the government bureaucracy and corporate decision making have been frozen in many cases due to fears of being accused of corrupt actions.

Individuals who can afford a better lifestyle in the West are leaving or sending their children out (hedging their bets) although the lure of making more wealth still has many maintaining businesses in China.

Another risk is the ‘lack of competition’ in power (1-party state with a relatively centralised decision-making by a small group) with its resultant lack of robust & transparent debate and challenge, which can potentially lead to errors in decision making (a same group-think and an echo chamber)

The most important consequence for Australia’s investment market is the crackdown on taking money out of China (above the US$50,000 annual limit).

CT and I differ on our views about this.  CT thinks it’s temporary; as such crackdowns have occurred in the past and then faded away.  However, for the reasons I have outlined above, I believe the monetary crackdown is part of the crackdown on corruption, and is here to stay. A bigger reason is Xi’s plan to change China’s values.   I will expand on this in a future newsletter.

Another obvious consequence is the migration of wealthy Chinese to the West to escape the anxiety of life in China, or the safeguarding of their wealth by investing in property overseas.

Combining the off-the-plan apartment investments with the crackdown on money getting out of China is leading to a boom in financing, particularly in non-bank financing now that the Australian banks are shying from this sector.  Find out more at our non-bank financing conference

Read our news summary on the Aus-China property investment and financing space here

Aus-China Non-Bank Lending Conference, 22 Sept 2016 | Westin, Grand Ballroom, Sydney Click here

NSW Strata Law Change -opportunities for site acquisitions from the 75% majority rule, when fairness meets fortunes,28 Sept 2016, Sydney  Click here