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March 2, 2018 | China Takes Dictatorship To The Next Level. History Says It Won’t Work

John is author or co-author of five books, including of The Money Bubble, The Collapse of the Dollar and How to Profit From It, Clean Money: Picking Winners in the Green-Tech Boom and How to Profit from the Coming Real Estate Bust. A former Wall Street analyst and featured columnist with, he currently writes for CFA Magazine.

Every few decades a new “command and control” economy emerges, puts up awesome initial numbers, and convinces people prone to dictator-worship that they’ve seen the future and it works. Between the 1920s and the 1970s, for instance, lots of influential people thought the Soviet Union would overtake the West, forcing the “free world” to embrace top-down economic planning.

Then in the 1970s and 80s Japan’s bureaucratically driven export machine convinced many that having a Ministry of Trade and Investment tell private conglomerates what to make and sell was far superior to letting markets decide such things.

Neither of those countries ended up taking over the world, for an obvious reason: A modern economy is more complex than a central planner’s brain, which makes dictatorships inflexible. Diffuse, market-based systems are messy but tend to adapt more quickly and innovate more readily to a changing world, which is why Silicon Valley ended up in the US and not Moscow or Tokyo.

Which brings us to China, a quasi-dictatorship still run by something calling itself the communist party, in which the government exercises a strange mix of powers to direct investment while keeping markets and personal expression under tight control. Like Russia and Japan in their early days, it has put up some amazing numbers of late and is being hailed as the world’s next big thing.

And lately it’s been following the command-and-control script by taking off the velvet gloves and embracing its inner Stalin.

First, it removed the term limits which used to create the illusion of fluid leadership, enabling the guy currently in charge to rule for life.

‘Dictator for life’: Xi Jinping’s power grab condemned as step towards tyranny

(Guardian) – The news broke at three minutes to four on a chilly winter’s afternoon in a two-sentence bulletin.“The Communist party of China central committee proposed to remove the expression that the president and vice-president of the People’s Republic of China‘shall serve no more than two consecutive terms’ from the country’s constitution,” Xinhua, China’s official news wire, reported. “The proposal was made public Sunday.”

It was a typically dreary communique from the party-controlled propaganda agency. But to those who have spent their lives battling to decrypt the enigma that is elite Chinese politics, the text’s historic significance was unmissable.
“A bombshell,” said Susan Shirk, one of the United States’ foremost China specialists.

“I wasn’t anticipating such an open declaration of the new regime … I thought maybe he would stop short of this.”
“He” is China’s 64-year-old leader, Xi Jinping, a man who, after Sunday’s sensational and unexpected announcement, appears poised to lead the world’s second largest economy and one of its largest military forces well into next decade and quite possibly beyond.

“It means that for a long time into the future, China will continue to move forwards according to Xi’s thoughts, his route, his guiding principles and his absolute leadership,” said Shi Yinhong, an international relations professor from Beijing’s Renmin University.

Bill Bishop, the publisher of the Sinocism newsletter on Chinese politics, said the move confirmed Xi’s mutation into a species of “Putin-plus” – only Xi was “much more effective, much more powerful and, frankly, much more ambitious” than his Russian counterpart.

Shirk, who was US deputy assistant secretary of state under Bill Clinton, said: “What is going on here is that Xi Jinping is setting himself up to rule China as a strongman, a personalistic leader – I have no problem calling it a dictator – for life.”

This is kind of old school, understandable to anyone with a memory that predates Facebook. Dictators hate to give up power and refuse to do so whenever possible.

But China’s the next move is decidedly New Age authoritarian. Over the past couple of years it has taken the credit score concept that hypnotizes/tyrannizes Americans and raised it to a level that George Orwell would find completely plausible. Instead of just transactional information flowing into a database to form a picture of creditworthiness, in today’s China pretty much everything citizens do online – texting, buying and selling, charitable giving, political speech — is flowing into a database to produce a social ranking as defined by government preference. “Good” citizens get perks while bad ones get…very little. They can’t borrow money, travel first class, or get into top schools. The following is from a much longer look at this subject from Wired Magazine. Read the rest of it here:

Inside China’s vast new experiment in social ranking

In 2014 the Chinese government announced it was developing what it called a system of “social credit.” The State Council, China’s governing cabinet, publicly called for the establishment of a nationwide tracking system to rate the reputations of individuals, businesses, and even government officials. The aim is for every Chinese citizen to be trailed by a file compiling data from public and private sources by 2020, and for those files to be searchable by fingerprints and other biometric characteristics. The State Council calls it a “credit system that covers the whole society.”For the Chinese Communist Party, social credit is an attempt at a softer, more invisible authoritarianism. The goal is to nudge people toward behaviors ranging from energy conservation to obedience to the Party. Samantha Hoffman, a consultant with the International Institute for Strategic Studies in London who is researching social credit, says that the government wants to preempt instability that might threaten the Party. “That’s why social credit ideally requires both coercive aspects and nicer aspects, like providing social services and solving real problems. It’s all under the same Orwellian umbrella.”

In 2015 Ant Financial was one of eight tech companies granted approval from the People’s Bank of China to develop their own private credit scoring platforms. The service tracks your behavior on the app to arrive at a score between 350 and 950, and offers perks and rewards to those with good scores. The algorithm considers not only whether you repay your bills but also what you buy, what degrees you hold, and the scores of your friends.

The State Council has signaled that under the national social credit system people will be penalized for the crime of spreading online rumors, among other offenses, and that those deemed “seriously untrustworthy” can expect to receive substandard services. Ant Financial appears to be aiming for a society divided along moral lines as well. As Lucy Peng, the company’s chief executive, was quoted as saying in Ant Financial, Zhima Credit “will ensure that the bad people in society don’t have a place to go, while good people can move freely and without obstruction.”

Why is this a sign of weakness and harbinger of failure? Because innovation is inherently destructive. There’s a reason why Silicon Valley’s holy grail is “disruptive” tech – replacing today’s methods with tomorrow’s is hugely profitable. But only for the disruptor. Those on the other side of the divide tend to focus on the “destruction” part of creative destruction and oppose it strenuously.

In a market-based system innovation is a continuous process. But in a system where “disruptive” might not be synonymous with “good” for the powers that be, the impulse to replace old and inefficient with something better might be stifled. So to the extent that the Chinese government gets to decide “social” winners and losers, its economy will be bypassed and/or disrupted by market forces from outside.

Assuming, of course, there are any market-based systems left to do the disrupting.

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March 2nd, 2018

Posted In: Dollar

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