China's True Minsky Risk May Be Political
China's True Minsky Risk May Be Political
The late economist Hyman Minsky is famous for developing the theory that long periods of steady investment gains can foster complacency and thus encourage excessive risk-taking, leading eventually to a crisis: what was later termed the “Minsky Moment.” In other words, stability breeds instability. Minsky's work has gained influence, particularly since the global financial crisis. Perhaps it also deserves some attention in the political realm, particularly where China is concerned.
A comparison is instructive. It’s party conference season on opposite sides of the world. In the UK, the ruling Conservatives staged a display of the ruthless, messy nature of democratic politics, forcing their newly enshrined leader, Liz Truss, into a policy U-turn that casts doubt on her survival as prime minister only weeks after she took office. Over in Beijing, a very different conclave is about to take place, one that is far more scripted, sedate and secretive: the 20th congress of China’s Communist Party.
For a meeting of such importance to the global economy and geopolitics, we don’t know much about it. The principal outcome isn’t in doubt: Xi Jinping will be confirmed for a third leadership term, breaking the conventions established by Deng Xiaoping in the 1980s. Beyond this, much is smoke and mirrors. The key decisions are made behind closed doors. China watchers speculate on the extent to which Xi, as supreme leader, may be restrained in his power by the choice of candidates selected to rule alongside him on the Politburo standing committee. Even this, though, is largely a matter of conjecture. In essence, the event will be a coronation, affirming Xi’s status as the most powerful ruler since Mao Zedong, founding leader of the People’s Republic of China.
There is much to be said for order and stability, particularly when contrasted with the disarray and market volatility that can accompany leadership transitions in liberal democracies such as Britain. China refers to its system as “whole-process people’s democracy” (though it can sometimes be difficult to discern the democratic aspects), and contrasts it favorably with what it sees as the short-term election focus, elite capture and money influence of what it calls “bourgeois democracy,” or sometimes simply “fake democracy.”
One-party rule served China well in the past four decades, at least from the point of view of economic development. The country became the world’s second-largest economy (overtaking the UK, among others), with gross domestic product rising more than 100-fold between 1978 and 2021, after Deng launched the “reform and opening up” period.
Xi appears to have drawn exactly the wrong conclusions from China’s rise, attributing it to the supremacy and historical rightness of the party rather than to the increased role of markets, which enabled the entrepreneurial energy of the Chinese people to be released. He has reaffirmed the primacy of the unproductive state sector and interfered in the private economy with ad hoc and ill-explained regulations that have wiped hundreds of billions of dollars off the value of technology companies alone. Even longtime China believers such as former Morgan Stanley Chief Economist Stephen Roach have been losing faith.
At the same time, Xi has sought to reinsert the party into every facet of life in China, after decades of retreat. He has built an overweening security state, hollowed out civil society, shrunk the space for dissent. In foreign relations, Xi’s China has adopted an attitude that has contributed to a dramatic decline in the country’s popularity overseas.
Much speculation has focused on the possibility of an economic course correction after this month’s congress. Having consolidated power, the theory goes, Xi will be more inclined to soften some of his signature campaigns and return to the pragmatism that has served China so well.
There are no such signs of instability at the top echelons of government in China, where leaders rarely present themselves for interviews and the job of media in any case is to support the party and guide public opinion.
Unchallenged power can breed hubris and encourage leaders to shut out opposing voices. China has seen this syndrome before.
It’s much more of an all-or-nothing bet than a multiparty democracy. As long as Xi is on the right path, there’s nothing to worry about. What, though, if he isn’t? Minsky might have an answer.