China’s Likely Path When its ‘Lehman Brothers Moment’ Arrives

After years of pretending the Chinese Communist Party (CCP) was immune to market forces, there is a serious possibility of a Chinese “Lehman Brothers moment” – a major financial bankruptcy potentially triggering a cascade of defaults -- creating an economic hard landing.  If giant real estate developer Evergrande does default on its $300 billion debt, then there is a real possibility of China experiencing its first severe recession in over 30 years.  This dangerous possibility is happening just one year after the CCP’s mismanagement caused a worldwide pandemic and will likely further degrade the CCP’s political standing. 

So, what options are available to the CCP and how will this impact Xi Jinping’s ambitions?

A realistic assessment requires an understanding of both the CCP’s current standing and motivation as well as an evaluation of how previous economic disasters have impacted totalitarian states.  Despite some projections, a single major economic setback is unlikely to dislodge the CCP from power.  Crisis events in Venezuela, Cuba, Iran, and even Maoist China, demonstrate dictatorships are very resilient to being overthrown from within. 

The next consideration is the acknowledgment that the motivation of the CCP is not wealth and prosperity for China but the continued acquisition of wealth and power for the Party itself.  When one accepts that the CCP uses China like it uses everything else as a tool for power, then one will understand how the CCP will likely react in the wake of a major economic shock.

Since Deng Xiaoping’s era, the CCP became more flexible in both ideology and management -- as a means to strengthen its control, not to liberalize the country.  True liberalization would benefit China but at the cost of the CCP’s power, which is an intolerable concept to the Party’s inner circle. 

The Party’s greedy desire to prioritize itself over the nation it controls vividly showed itself during the Tiananmen Square Massacre in 1989.  The student demonstrations scared the regime enough to stop all further political reforms that started in the early 1980s and never resumed. This means that the CCP is more likely to prefer the choice of ruling over a weaker China with diminished global status than fixing China’s economy at the cost of diminishing the Party’s power.  The oft-quoted John Milton statement of “Better to reign in Hell than serve in Heaven” is the perfect motto for the Politburo Standing Committee. 

So, what will likely happen in China if Evergrande triggers a default cascade resulting in a 2008 style crisis?  The CCP already gave some indications before the Evergrande revelations.  First, President Xi Jinping announced new restrictions for private tutoring in the name of wealth redistribution, which is a fancy way of justifying a state power grab of the private education industry.  Next, Xi decried the excess profits and rogue behavior of China’s technology and IT sectors.  He then instituted more state controls under the guise of creating more social equity.  Xi then focused on more control over social activities such as playing video games or dictating social portrayals in media.  These actions are all efforts to re-centralize more state control over key sectors that could threaten the CCP’s grip on China.

But why now?

Recent actions by Xi Jinping appear to indicate the CCP was expecting major financial difficulties within the Chinese real estate market and knew there was a serious risk that the Party might not contain the financial damage.  The CCP targeted specifically any and all industries that convey information, spread news, or perceptions of events to the Chinese population.  If this is the case, then the CCP is defaulting to the standard choice of totalitarians.  Rather than risk the loss of political power through economic reforms, these earlier policy actions indicate the CCP will instead tighten the reins to ensure no major political repercussions result from an economic disaster. 

Some may believe the CCP will not bail out Evergrande to genuinely allow the housing market to self-correct and reduce the wealth gap in the country.  Other more cynical observers believe the CCP’s recently stated priority of wealth redistribution is the new excuse to convince its subjugated population the Party is the savior during a potential economic crisis, not the cause.  The CCP will then blame the private sector while increasing state control.

The CCP’s recent actions indicate it’s willing to revert to older Maoist era policies and reimpose a more directed economy with more indoctrination in the name of protecting the Party from insurrection.  If this happens, then these policies will unlikely be canceled even after the fiscal crisis ends. 

Many forget Xi Jinping’s love of micromanagement and state interference in the economy goes back to his first term as General Secretary.  During that time, Xi implemented a series of reforms to re-galvanize China’s state-owned enterprises and increase the amount of ideological indoctrination in daily life.  So, what makes the CCP, especially Xi, so afraid they are willing to risk crippling economic growth that is the center of their global ambitions by stifling innovation with more state control?

The key lies in the Chinese cultural concept of the loss of public dignity or “face.”  The CCP must keep its public dignity well maintained to retain political legitimacy.  Actions that embarrass the Party or its members risk losing authority in the eyes of its subjects.  Consequently, the CCP must not just consider practical fiscal considerations but also take social expectations into account when making decisions. 

No matter what the Chinese state propaganda apparatus or its Western collaborators may say, the CCP lost domestic face and reputation after the COVID disaster in Wuhan.  Whether it was an accident or not, the CCP demonstrated incompetence as the contagion spread beyond provincial and national borders.  An economic disaster one year after a medical disaster could potentially cripple the CCP.  A crippled CCP is vulnerable to a future uprising, so the Party will do everything to prevent this possibility, even if it means the end of the globalist economic miracle of massive growth. 

The final complication in the CCP’s calculations is the internal factional rivalry within the Party itself.  The internal machinations of CCP politics are well hidden but enough is known that at least one faction led by former leader Jiang Zemin wants to depose Xi Jinping.  Multiple disasters expose Xi to political vulnerabilities, so greater central control helps Xi prevent factional rivals from maneuvering against him.  With all these considerations, the CCP will likely revert to more Maoist policies rather than reform to preserve its power because China is not as important as the Party.  The CCP will very likely survive the turmoil, but Xi Jinping’s rule and China’s global ambitions might come to an end if the Party miscalculates.

Aaron Hirschi served in the US Army and formerly worked in the Pentagon, now works in a non-descript Federal building somewhere in Washington DC.

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