By Michael Feller
Several weeks ago, blogger Sell on News explored the connection between financial terminology and water (liquidity, droughts, flows, waves). Yet without wanting to make a meal of it, I’ve always found financial allegories with food to be just as interesting (risk appetites, plain vanilla, consumption, margin fat… pie charts).
Whether due to the almost totemic appeal of the long broker lunch or finance’s very roots in ancient produce markets – Babylonian contracts were based on grain, modern insurance was a by-product of the spice trade, Roman wages were paid in salt – the way to understanding a man’s wallet, after all, has always been through his stomach. Even money itself is known as bread, dough, or in German, Eier (eggs).
When trying to understand new economic dynamics then, perhaps new culinary terms can be useful. And while that’s already been done with expressions like ‘austerity diets’ in Europe and ‘sugar highs’ in America, I’m yet to see one to explain what’s going on in China.
I therefore propose the term ‘yum cha economics’. It’s unlikely to catch on, but it describes China’s very flexible form of totalitarianism that has allowed rampant capitalism to coexist with repressive communism for almost 30 years. This ‘socialism with Chinese characteristics’ – a menu description for an eclectic smorgasbord of ideological bubble and squeak – may lack the philosophical cogency that other phrases like ‘China model’ and ‘Beijing consensus’ seem to suggest, but it has nevertheless proven robust during an historical period that has otherwise seen the fall of the Soviet Union, several oil shocks, a series of regional economic crises, the decline of Japan, a dot-com bubble, a global financial crisis and now a possible (though unlikely) breakup of the European Union.
And indeed, whereas the fad diets of Western policy have precipitated crisis – ranging from the monetary Atkinism of Greenspan and Bernanke in America to the bread-and-water asceticism of Thatcher in Britain or the Bundesbank in Europe – China’s more omnivorous palate has allowed it to more or less grow fat and happy regardless of the prevailing climate.
Australian policymakers, stuck in the rigidities of yesteryear and seemingly unwilling to even sample such exotic morsels as currency intervention, sovereign wealth funds or wholesale banking reform, could perhaps learn from a more flexible approach. So too could other advanced economies that struggle to apply traditional policy tools to new and urgent problems. As Greer Meisels wrote recently in The Diplomat:
“The secret to China’s success is that there is no secret; rather the Chinese Communist Party has simply been much more adept and successful at tweaking the foundations on which its present day legitimacy is based… the CCP has been engaged in a continual learning process culminating in a type of policy-planning plasticity.”
Yet as all gourmands know, yum cha is never a healthy option in the long-term and no matter the quality of the cooking or service, there’s always the risk of food poisoning. As Michael Pettis wrote here yesterday, Beijing’s policy options look more exhausted by the day, amounting to little more than “goosing infrastructure”. And as Leith van Onselen wrote soon after, China will soon be facing the same demographic challenges as Japan has since the early 1990s. Extending the analogy, no matter how many anti-aging avocados or blueberries you eat, fancy vegetables won’t make you any younger.
And whereas a willingness to think beyond liberal economic orthodoxy earned China adaptability during the crash of 2008, in 2012 the imbalances seem to be coming from China itself, not from the US, which is now in recovery. China’s shadow banking system – made up of under-regulated wealth management firms, opaque trust companies, local government investment vehicles, commodity-collateralised loans and informal credit networks – hosts a huge amount of off-balance sheet debt, economist like Pettis affirm, and the rescuing of these liabilities by China’s government may eat up the resources that would otherwise be deployed to stimulus; a concern also expressed by Tsinghua professor Patrick Chovanec on Bloomberg television recently.
Further, China has challenges that Europe and America either don’t have or are already in the process of solving. China is a poor country with rich-world levels of resource dependency. China is also a relatively unequal economy with few social safety nets and a degree of environmental degradation that even Dickens or Blake would find difficulty in comprehending. Finally, its centralised and undemocratic political economy – for all its abilities to make quick decisions and generate rapid results – is vulnerable in an age of social media and globalised youth culture. As Japan found before Meiji or Russia before Glasnost, the Great Firewall of China cannot keep the world out or the Chinese in forever.
For as much as China has enjoyed economic policy flexibility, as Singapore-based academic Gang Chen has written, it suffers from social policy paralysis. And although optimists can point to a kind of reform by stealth – including attempts to devalue the Yuan or relax controls in the capital markets – China is still ultimately pursuing rescue rather than rebalance and for as long as one part of the policy dynamic remains rigid, flexibility in the other part will count for less. Small, trade-based economies like Singapore and South Korea may have been able to achieve this balancing act (though not without their share of crisis too), but it is unlikely that China will be able to do so forever.
With yum cha economics and plenty of liquidity to wash it down with, China is likely to stimulate where Europe and America fear to tread, meaning that growth in Asia will continue for at least another year. But like Monty Python’s Mr Creosote, the voluminous quantities of caviar, quails eggs, jugged hare, Chateau Latour and Grand Mariner may work for a while, but if offered a wafer-thin mint at just the wrong time, it could all blow up.
Michael Feller is an investment strategist for Macro Investor. In our upcoming edition we will be looking at China’s policy choices and likely market responses in closer detail.