The following is excerpted from Bronte Capital: The Macroeconomics of Chinese kleptocracy.
China is a kleptocracy of a scale never seen before in human history…
China has huge underlying economic growth from moving peasants into the modern economy
Every economy that has moved peasants to an export-orientated manufacturing economy has had rapid economic growth…
This fast economic growth – which would happen in a more open economy – is creating the fuel for the Chinese kleptocracy.
The one-child policy drives massive savings rates
The other key fuel for kleptocracy is a copious supply of domestic savings to loot…
Longevity in China is increasing rapidly and the one-child policy results in a grandchild potentially having four grandparents to look after. The “four grandparent policy” means the elderly cannot expect to be looked after in old age. Four grandparents, one grand-kid makes abandoning the old-folk looks easy and near certain.
Nor can the elderly rely on a welfare state to look after them. There is no welfare state.
So the Chinese save…
Low and middle income Chinese have very limited savings options
The Chinese lower income and middle class people have extremely limited savings options…
What Chinese are left with is bank deposits, life insurance accounts and (maybe) apartments.
Negative returns on bank deposits and the Chinese kleptocracy
Most Chinese savings however are not invested in see-through apartment buildings. Bank deposits still dominate…
And those deposits are mostly lent to State Owned enterprises.
The SOEs are the center of the Chinese kleptocracy…
Monetary threats to the Chinese establishment
The Chinese kleptocracy – and indeed several major trends in the global economy – depend on copious quantities of savings at negative expected rates of return by middle and lower income Chinese…
Inflation (widely discussed) is known to produce riots and demonstrations in China – and is considered by Westerners to be bad news for the Chinese establishment. And there are good reasons why the Chinese riot with inflation – the poor who save because they are going to starve – get their savings taken away from them.
But ultimately the Chinese establishment like inflation – it is what enables their thievery to be financed.
The more serious threat is deflation – or even inflation at rates of 1-3 percent. If inflation is too low then the SOEs – the center of the Chinese kleptocratic establishment will not generate enough real profit to sustain the level of looting…
The real threat to the Chinese establishment is that the inflation rate is falling – getting very near to the 1-3 percent range…
The SOEs will not be able to pay positive real returns to support that new division of spoils. The peasants can only receive positive real returns if the SOEs can pay them – and paying them is inconsistent with looting.
If the SOEs cannot pay then the banks are in deep trouble too.
All because the inflation rate is dropping. Maybe they can stop it dropping. The Chinese establishment has a vested interest in getting the inflation rate up in China. Because if they don’t all hell will break loose.
Unless the Chinese can get the inflation rate up expect a revolution.
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