China's Two Problems

Why are central banks that use FAIT slow to raise the rate of inflation temporarily to deal with shocks?  Don’t we need new indicators like Treasury issuing a NGDP security and more intermediate-tenor TIPS? 

Another opinion about China’s problems: Japan’s recent Ambassador to China, Hideo Tarumi, is creating a ruckus with a just published memoir. He reports a *big change* in Xi Jinping, who in 2009 was “remarkably humble … displaying both humility and generosity” — but who by 2015 had transformed into a completely different person, “totally changed … unrecognizable”.

A senior international editor at a Japanese media organization who gave only the pseudonym Sato said they were shocked at the level of detail provided in Tarumi’s memoir…

It’s not available in English yet but here is a video report, and an article in Radio Free Asia, covering different parts of it.
 
So what’s the real problem in China? Is it structural or monetary?
My own opinion is worth little except to the extent it is informed by Douglas North, who got a Nobel for his work on how institutions influence economic development, and Stephen Kotkin, the definitive biographer of Stalin and top expert on Leninism and Russia.
North, in his book Violence and Social Orders (a *must read* for every Libertarian!) details among many other things a critical ‘quantitative requirement’ to develop a modern a first-world economy: a huge increase in the number of ‘organizations independent of the control of the central government.’ These may be local governments, businesses, unions, banks, non-profits, churches, schools and universities, social clubs, whatever. Their growth in number institutionalizes broad productive local economic and social activity, competition, innovation, finance, independent education, diverse thought, etc., all necessary for a first-tier productive economy. And their growing number brings with it the increased distribution of political power, driving the growth of democracy.
The numbers are striking. In 2000, nations with over $20,000 per capita income ($37,000 today) had 83% of the world’s total of such organizations against 17% of population … those with income from $5,000 to $20,000 had 10% versus 24% of population … those with income under $5,000 had 7% versus 59% of population.
 
Yet almost all states start authoritarian. They can grow their economies up to a point, but to continue past the $20,000 level the ruling regime must choose to liberalize their institutions. Some do, some don’t. See North and South Korea, which started out as sibling dictatorships. Moreover, regimes can choose to preserve their power by going backwards — see the 1930s (and more recent examples.) When regimes decide to become more authoritarian, the first thing they do is crack down on “independent” organizations — unions, businesses, schools, banks, all become “state…” Independent no more! Economic growth flatlines or reverses.
North didn’t consider China’s future in V&SO (in 2009), but it is clear that by the book’s logic China’s CCP regime would have a big decision to make at some point ahead of it. North said elsewhere that he was optimistic.
 
Kotkin, the authority on Leninism, was not optimistic. He said that while authoritarian regimes sometimes cede power for productive reforms, Leninist regimes never do. When the Czechs started reforming in 1968 and the Soviets invaded (I was there), Brezhnev said: “Reform is counter-revolution”.
Communist parties are brittle because they are *one* party states. If a “reform wing” starts to arise in the Party, that is an incipient second party – and an existential threat that must be purged. “Reform is counter-revolution”.
If increasing economic prosperity reaches the point of creating new independent “organizations” and social movements that may drain away political power from the Party, they will be crushed. (Jack Ma disappears, the private education industry is destroyed in a day, CCP members are appointed to corporate boards, the stock market falls $6.5 trillion…)
 
The great brittleness of the Leninist regime model of course is shown by the result of the one real attempt to reform it — Gorbachev’s, tried only when the economy was up against the wall, with immediate total collapse the result. Xi Jinping is totally fixated on never allowing that to happen in China. Kotkin’s books on the fall of the Soviet Union are taught at the CCP’s Central Party School. (They don’t pay him royalties — more IP theft!)
This also explains the CCP’s institutional fixation-addiction to “GDP by excessive capital investment”, never increasing the household share of GDP, which is a world-low.

“Our country does not have insufficient demand,” Xi said in a speech … Rather than giving priority to demand, he said, China should address “insufficient effective supply capacity” … Zhiwu Chen, a professor of finance at the University of Hong Kong, said China’s policy makers have long believed that diverting resources to the state sector can generate growth more quickly and more reliably than handing money to people. They see consumers as more fickle and less easy to control than state companies, he said… [WSJ]

Of course! Leninist regimes never want “the people” to have buying power – and the political power that goes with it. That’s why the Soviets put Cosmonauts into space before they had toilet paper, literally.
 
One more point: Kotkin shows that Stalin was not a paranoid sociopath murderer when he got the top job in the USSR. If he had been, he’d never have been given it by his peers. (On the way up he volunteered to resign several times, they all said “nyet, we need you!” each time.) He was not a terrible guy who happened to get the job, bad luck for Russia. He was a reasonable guy (by the standards of his peers) who became the historically terrible guy because of the requirements of the job. This squares exactly with what we see about Xi. In 2009 he was “humble and generous”, and at the time he got the top CCP job he was described as a moderate, compromise candidate. By 2015 he was “totally changed, unrecognizable”.   
 
So … “Is the real problem in China monetary or structural?”  Neither.   It’s the CCP.
IMHO, FWIW.