Why Go After Hong Kong?

There may yet be bitter irony in the fact that China’s nascent embrace of capitalism in the late eighties allowed it to survive the wave of failed socialist states which fell all throughout the world at the time. While the Berlin Wall came down, the Eastern bloc nearly disappeared, and even the Soviet Union dissolved, the Chinese would stand almost alone as whatever was left of the Communist dream.

But while Beijing had come through in the nineties and transformed China into a modern industrial powerhouse by the middle 2000s, in late 2008 questions arose as to whether it could survive the Global Financial Crisis (GFC). The one thing the socialists had going for them, what kept the natural unrest associated with strict authoritarianism at bay, was this promise for a glittering future. Not just a promise, one that was being fulfilled in front of the world’s eyes.

The wealth of new China became a deeply rooted expectation. The Chinese people accepted the way things were; a roughshod government in exchange for a middle-class lifestyle if not for them then definitely for their children.

As the GFC “unexpectedly” deepened in late 2007 and early 2008, many came to expect that a robust China would stand firm in the global economy. An anchor of sorts from which the damage might be mitigated (decoupling). It was two problems in one – China’s mighty economy had to save the world and itself.

Those hopes turned to danger after Lehman (really AIG). By November 2008, there was no longer any doubt. Decoupling was dead and serious unrest was unleashed particularly in the areas where the economic miracle had been strongest. Places like Guangdong and the rest of “the Delta.”

In recent months, evaporating export demand had already forced thousands of factories to close in the Pearl River Delta of Southern China. Tens of thousands of jobs have disappeared, leading to protests by unemployed workers demanding back pay.

During the month of November 2008, Chinese exports would contract for the first time and Industrial Production would slow to an unthinkably low 5.4% annual rate. It had been taken for granted that all of China’s industry would grow consistently at rates between 15% and 20% maybe forever. Even in March 2008, as Bear Stearns met its effective demise in the stricken “American” system, production had still increased by nearly 18% on the other side of the Pacific.

The Fall of 2008 didn’t prove to be the fall of China’s Communists, but they aren’t out of the woods just yet. Then-Prime Minister Wen Jiabao recognized the danger. He more than anyone began to consider how the government might better de-link China’s economy from the rest of the world.

Even today it seems an insane idea – globalization is like an inevitable force for good, economic and otherwise. The path everyone was following and still wishes to follow had made the world more interconnected, not less.

But Wen sensed the vulnerability. By depending upon the world to buy what China produced, because of the grand economic bargain with its people the security of the Chinese government’s system would effectively be outsourced to that global economy.

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Disclosure: This material has been distributed for informational purposes only. It is the opinion of the author and should not be considered as investment advice or a recommendation of any ...

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