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China’s Deflationary Regime Change

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“The Party’s interests come first,” Mao.

I like China, the Chinese language, food and my Chinese friends. But as an investment, I won’t touch China because the current administration, Xi, is a true believer in the above quote from Mao. The simplest way of explaining everything Xi has done and will do is–does it benefit the Party?

This logic implies that in any trade-off between investors and the Party, investors lose, be that about shareholder rights or the integrity of information. As an investor, I don’t play when I have a structural disadvantage. The looming, unanswerable question is if Xi believes it is in the Party’s interests to attack Taiwan. One would think that after Ukraine the answer is unambiguously “no” but if, magically, a wand could be waved and Taiwan painlessly absorbed, that would clearly be in the Party’s interest. It’s all about how painful it might be.

China’s drift is evident in the pitter-patter of the news—be it about Chinese secret police operating in New York or joint US-Philippines military exercises. We’ve come a long way from the 2008 Olympics, where hopes of integrating China into the West soared. It’s difficult for regular folk like us to imagine what it looks like from President Xi’s rarified perspective. But it’s worth the effort.  

If you are Xi, you are one of the most powerful people in the world, with unrestrained power over 1.4 billion people. You trust no one. Of the roughly 250 emperors in China’s history (compared to just 46 US Presidents), about half of them have died “unnatural deaths.” Zhongnanhai (Beijing’s leadership compound) makes corporate office politics in the West look like amateur hour.  

Having studied the collapse of autocratic regimes ranging from the Soviet Union to North Africa, Xi’s behavior reflects a person who believes that to keep China intact rigid discipline is required. First, the corrupt were arrested by the tens of thousands. Then successful entrepreneurs were thrown off their perch. Now Xi is cutting salaries. Along the way, the pie gets smaller and China returns to something with more of a Maoist vibe, just as Putin has revived a Soviet vibe.  


In the West, politics doesn’t impact the economy or peoples’ lives very directly. My interaction with the US government is limited to renewing my driver’s license, paying taxes, and driving over bridges.  But in an emperor system, the person at the top has power that is simply incomprehensible in the West. 

With regard to the West, since the 1949 Revolution, China has had two modes—on and off. On is open toward the West and off is closed. The challenge for the Party is that the West means two things at once–wealth BUT also a threat to hierarchy, opacity, and power, particularly Party power.  

Deng Xiaoping was “on” and moved China rapidly away from Mao and toward the West. My favorite Deng quote: “it doesn’t matter if the cat is black or white, as long as it catches mice.” While cryptic to me, locals read it as a green light to switch from Maoist Communism to robber-baron-style Capitalism. Growth boomed and Chinese production upended the world. Inequality also boomed, but everyone was richer. 

Off is Mao and now Xi. “We must strengthen our sense of hardship…be prepared for danger in times of peace, prepare for a rainy day, and be ready to withstand major tests of high winds and high waves,” Xi said last year. Translation—it’s a scary world out there, the West trying to hurt China and it will take lower living standards to endure such a threat. There is no room for debate. The vote on Xi’s abrogation of term limits and unlimited rule: 2952 to zero.

It’s important to put “Xi Jinping thought” into a broader perspective. His ideas are the latest iteration of a theme. Soviet Union 1.0, circa 1917, was authoritarian and anti-capitalist. This produced food shortages. Soviet Union 2.0 is authoritarian with capitalism, meaning China circa 1980s. This produced corruption. Now Xi is trying to create Soviet Union 3.0, authoritarian combined with authoritarian capitalism. This is where any successful innovation is taken by the Party.

A poem is circulating in China now. The characters are:


It is a play on words of a slogan and now reads:

Make (my) determination/Ignore (your) sacrifice/(You) get rid of all the problems/To win (my) victory.

It basically means regular people take the risk and the Party takes the reward.

Psychological Scars

Why is Xi like this? No one knows. In emperor-led systems, entire industries are created out of guessing the leader’s psychological motivations.   

Like many Chinese, I suspect he is deeply traumatized by the Cultural Revolution.  Xi comes from Chinese royalty, his father was a Mao colleague and Central Committee member. That did not spare either the father or Xi from Maoist purges. Xi Jinping himself evidently fled his work camp and made it back to his mother who refused to take him in, fearing she herself would be arrested. What did such experiences do to him?

My Chinese contacts do not reference psychology. This may be cultural. If you look at a list of the subjects that Chinese studied when Deng opened up, physics, math and engineering were on the list. Psychology was not. But Chinese are just like everyone else, pain is pain.  

Many elite Chinese who lived through the cultural revolution reacted with some version of “never again.”  But Xi’s attitude was to stick with the orthodoxy, which has created today’s widespread fear. Of my old contacts, the only ones I can talk with freely are “outside”—meaning they have fled to Singapore or New York. The fear is palpable.

Xi’s takeaway from the Cultural Revolution seems to be that, yes, chaos is bad but the way to prevent more chaos is through total Party control of society.  How is this working out?

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