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Why we don't understand China -

Christopher Joye
10 January 2011

I am no China expert, but one thing I do know is that in the financial and economics community China gets very big wraps.

China is the world's second largest economy, and will soon be the biggest. With 1.3 billion residents, China is the world's most populace country. In numerical terms, it is, therefore, the world's deepest market. By some estimates, China is rapidly establishing a middle class as large as the US. Many of the world's most valuable companies are Chinese. Australia imports more goods from China than any country. Australia also exports more goods to China than any other partner. Indeed, our economy has, for the time being, become hinged to China's fortunes in an extraordinarily concentrated way. This looks like it will last for as long as China continues to urbanise and industrialise. But what does it mean for our stability? What are the implications of this unanticipated partnership for our economic volatility?

What financial markets appear not to appreciate is that China is controlled by an exceedingly secretive central authority known as the Chinese Communist Party. Companies that many in the West consider “private”, which are listed on exchanges around the world, are, in fact, controlled by The Party. All senior executives are appointed by The Party. The Board of Directors is determined by The Party. The Party has its own political committee inside every private company of consequence. And if The Party does not like your business strategy, you will change it.

Occasional glimpses of this dynamic are evinced when, for example, in recent years the CEOs of major banks and telecommunications concerns have been forced to resign and suddenly switch roles with their competitors. The Party unilaterally decided to cultivate empathy (I am not kidding)! For what it is worth, The Party's pervasive influence over all listed Chinese entities is not normally disclosed in public prospectuses.

These and many other fascinating insights are yielded by an outstanding new book called, The Party: The Secret World of China’s Communist Rulers. It has been published by a highly respected authority, Richard McGregor, the current deputy news editor of the Financial Times, who previously served as the long-time Beijing bureau chief.

Distilled down, we learn that in spite of its glossy appearance, China remains an incredibly autocratic, corrupt, and nationalistic regime that has no intention whatsoever of fostering Western democracy (or its related values). Indeed, the Chinese Communist Party perceives any external influence, and any notion of a free and open society, as a threat to its own chokehold on the country.

What I took away most from the book was a meme that I had already been writing about for some time now. In many ways, Australia's economic trajectory is more unknowable and subject to change than it ever has been before. That is the cost associated with capitalising on the Middle Kingdom's ascendancy.

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

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