Guest Post: Is The Iron Fist Control Of China’s Central Government Coming Unhinged?

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Guest Post from History Squared

Is the Iron Fist Control of China’s Central Government Coming Unhinged?

First, what is China’s Central government trying to do? Second, is it working?

The PBOC is worried about asset priced inflation so they’ve attempted
to reign in the credit tsunami they initiated in response to the 2008
economic crises. The outside perception is that if the Chinese
government orders banks to lend, they lend. So if that’s the case, if
the PBOC orders banks to reign in lending out of fear of overheating and
future non performing loans, the banks should stop lending. For the
past few years, the PBOC has established official loan quotas on banks,
but the banks have exceeded the official thresholds each year.
Unofficially, the problem is much worse, as banks have hidden another
30% or so of their loans in off balance sheet transactions, according to
Fitch. Recently, the PBOC officially dropped the loan quota and decided
to focus on the reserve ratio. The loan quotas failed and were not
being obeyed, so issuing guidelines that are inevitably violated would
merely highlight PBOC weakness.

Last week, immediately before President Hsu’s visit to the US, photos
of a Chinese Stealth fighter were released. The timing was viewed as a
way for China to flex its muscles and set the tone for the Obama
meeting. That may have been the case, but on whose orders? Secretary of
Defense Gates spoke with Hsu, who said he knew nothing of the photos.
This sparked alarm from the administration that the leaders of the
Chinese central government do not have control over the military. This
is not the first allegation of lack of oversight. It also shows the
hostility of China’s military leadership towards the US.

Food costs account for 40% of disposable income in China. To control
prices, the central government has placed limits on the number of
purchases on such things as cooking oil. There are rumors the central
government is releasing stockpiles, yet prices continue to rise. China
has 20% of the world’s population, but just 6% of the farmable land. If
the central government begins to implement price controls, shortages are
inevitable. A recent reported from World Economic Forum warned that
shortages could “cause social and political instability, geopolitical
conflict, and irreparable environmental damage.” The central government
seems to have few options to control food inflation without causing a
major disruption in the rest of the economy.

Chinese soldiers and their families are mostly from rural China, the
majority of whom have not benefited from China’s rising economy, with
600 million still earning less than $6 a day. Indeed, in many aspects,
quality of life has deteriorated for those without connections, a
prerequisite for wealth in the eyes of most Chinese according to polls.
Many do not view competition for material goods as healthy, pollution
and waste have worsened exponentially, housing prices have skyrocketed,
and now food prices surging. Businessweek
reported that ordinary Chinese are increasingly yearning for a return
to Mao style communism – “a more equal” society, with Conqing Party Boss
Bo Xilia gaining support and pushing for membership to the inner
circle.

To summarize, banks have ignored PBOC orders, the military is doing
their own thing, and food prices are surging with few solutions
available to the central government. They have a fixed asset bubble, a
likely onslaught of bad loans in the offing, and millions of jobs tied
to construction. Many Chinese are worse off and the military is more
sympathetic to ordinary Chinese than the noveau riche. Inflation is
nearing levels associated with social unrest. The situation is a
powderkeg.