Victory Parade and Chinese politics

Most recently, China had a Victory parade to celebrate the 70th anniversary of war against Japan. As part of this parade, China rolled out its latest ballistic missiles, cruise missiles, armored vehicles, UAVs, helicopters, fighter jets and special missions aircraft. All of the displayed weapon systems are believed to be in service. For the first time, China publicly displayed DF-21D and DF-26, which are the ballistic missiles designed for attacking moving targets like a carrier. Certainly, I have posted numerous blog entries in the past regarding China’s ASBM program and the challenges around it, so this has always been an area of interest for PLA followers. We have now seen these ASBM missiles on display and know that it is in active service. What we don’t know is how good China is at finding a fast moving carrier group in the middle of the Pacific Ocean, tracking it and then engaging it. Certainly for a missile DF-26 which will have longer range and higher re-entry speed than DF-21D, the engineering challenge of finding carrier upon re-entry and maneuvering to hit something that can move at greater than 30 knots is very daunting task. They also displayed DF-5B, which is China’s first public display of an ICBM with multiple nuclear warheads. The parade also displayed the DF-10A LACM (land based version of KD-20 LACM) and various other short and medium ranged ballistic missiles. The second artillery certainly had a field day at this military parade. Comparing this to the pictures from China’s military parade in 1984, it was quite interesting how backward they were back then. It still had the same nationalistic tone and show of strength from all the Chinese leaders.

Behind all of this, it’s a time of uncertainty and worry for the current Chinese leadership. China’s major leaders of past and present were all there (even ones I didn’t realize was still alive) to present a united front. By this point, most people have seen the crash of Chinese stock market. The Chinese economy has also slowed down a lot by this point. Nobody can predicate what will happen there or anywhere else, but these parades are used to show the power and accomplishments of the communist party and distract people from the worries of economic and other problems. I’ve read numerous articles on the politics of recent events. While I’m not sure about their accuracy, it does paint a picture where the younger generation of leaders is still battling the older generation in their efforts to carry out reforms. China’s previous paramount leader Hu Jintao was quite limited in his power due to the continued influence of his predecessor Jiang Zemin. It seemed like the leadership of Xi Jinping and Li Keqiang would get more freedom in their efforts to bring a more market based economy to China since taking control 2 years ago. Reading about their pilot free trade zone in Shanghai, the attempted deleveraging of the credit bubble and wider trading band of RMB, I have gotten the feeling that Li Keqiang has some pretty good ideas about resolving some of the problems in the Chinese economy. In the past couple of month with the worsening stock market and rapidly slowing economy, you can really see a lot of his moves getting reversed. (If you listened to any of Donald Trump’s speech recently, you would hear about the greatest one-day devaluation of RMB of 2%.) To clear up certain misconceptions before we continue: China does have its own foreign exchange market similar to EBS, which allows RMB to be freely traded within the 2% daily band for entities inside China. It just has capital control preventing money from easily flowing outside the country (like Brazil, Korea, India and numerous other nations), so does not appear free-floating to outsiders.

Throughout PRC’s history, elderly members of the politburo have been more reluctant toward reform efforts. Even when the all-powerful Deng Xiaoping was pushing his reforms in the 80s, other party elders like Chen Yun and Li Xiannian limited Deng’s efforts as soon as troubles started. The most reform minded Chinese leaders of their day Hu Yaobang and Zhao Ziyang were pushed out and humiliated after the student protests of 1987 and then the infamous 1989 TianAnMen Square protests. In a functional economy, we have the boom and bust cycle where credit expand during the boom and contract during bust causing problems in the economy. The bust part of cycle allows the inefficiencies and ailments of the economy to be removed. It is natural for any reform and deleveraging economic efforts to cause a period of economic and social problems. The last time China really allowed the bust to happen is during the Asian economic crisis of 1997 and 1998 when the inefficient state owned enterprises were allowed to fail. At the time, unemployment rate, early retirement and crime rate skyrocketed in the country. The FaLanGong movement arose during this period. Since then, China enjoyed 10 years of good economic growth, a slowdown in 2008 and another 6 years of economic growth. While this was happening, it has been accumulating unsustainable amount of debt and credit creation.

In May of 1989, Zhao Ziyang, who was nominally China’s president at the time, told the visiting Soviet leader Gorbachev that he was not really in charge of China in real decision-making. After taking over in 1987 from Hu, Zhao needed to survive 10 years against the pressures of the conservatives inside the politburo, but lasted less than 2 years after refusing to participate in crushing the student movement. Since then, most of the reform efforts have been economically related and is badly needed in China right now. If reform minded leaders inside the day-to-day leadership get pushed every time there is a setback and become blamed by the elders for economic problems, it’s hard for me to see how this new generation of leaders can get anything done while Jiang Zemin and Li Peng are alive and functioning. Looking beyond China’s display of military power in this parade, China’s biggest threat to the world is an economic crash that slows down its major trade partners and vacation destinations.