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What’s The Driving Force In China?

Courtesy of ZeroHedge View original post here.

Authored by Bill Blain via MorningPorridge.com,

“Some day, and that day may never come, I will call upon you to do a service for me..”

Understanding what is going on in China means understanding the politics – which should be very familiar to students of 1970’s and 80’s US films.

I was up in London yesterday and spent some time with colleagues and visiting clients. Some fascinating conversations – and lots of them revolved around WTF is happening in China. The situation looks increasingly unclear. The Evergrande bailout/rescue is confusing and unclear. Now the Energy companies have been told to secure power at any price. It’s possible to smell wobble in the air – something is happening, but we are not sure what it is.

China has been the big story in markets this year. We are all trying to fathom what successive government crackdown means. The purge of Jack Ma and other entrepreneurs, the regulatory assault against big tech and a host of other “reforms” have wrong footed markets. Now it’s clear the Government is struggling with energy security. Maybe the Middle Kingdom is in more trouble that we perceive?

Or, do we just need to think about China in a different way? To understand China today, you need a sense of its history. Imperial China ran from 221 BC till 1912. Empire, courts, bureaucracy and plots. I wonder how much has really changed?

Since the foundation of Communist China the Chinese Communist Party (CCP) has been highly factionalised – broadly divided into the Chinese Commmunist Youth League (CCYL) faction of “populists” and the Shanghai Gang of “elitists”.

There isn’t a simple way to characterise each side due to the links of patronage than characterise who-knows-who in China, but broadly the elitists tended to comprise the princelings (from families of party veterans and officials) and many of the richer entrepreneurial figures. The populists typically worked their way up the system. For many decades there was a form of “collective” balance between the factions at the top of the party with a rotation between the two as the tides of power balanced each other out.

Now there is a new faction in charge.

President Xi Jinping rose through the ranks of the princelings in the Shanghai gang, but has now consolidated own power around himself in the Xi Gang. His Gang now controls all the significant leadership posts in the CCP – eroding the power and significance of the Shanghai and CCYL gangs. He is de-facto Emperor.

If all the above reads a bit like a Mario Puzo “Godfather” Novel… spot on. Xi is now enforcing his power over the other families by removing their leaders in time-honoured style. To read it all in detail – let me suggest this primer: The Rise of the Xi Gang

Evergrande is an example of how it hits the economy and investment decisions: Evergrande’s founder Hui Ka Yan is a princeling from the Shanghai gang. He owes his connections and support as a client of former vice-President Zeng Qinghong, who in turn was the right-hand man of President Jiang Zemin. Xi came up through the Shanghai gang, but has now founded his own family/gang, thus the Zemin faction is his enemy.

Now that Hui Ka Yan is neutralised and broken, then the Government/Xi Clan can move on to protecting its clients across other property companies. You are with or against him. Simples.. Eh?

Much of the current unrest in China is about which side of the Jiang Zemim / Xi Jinping divide players stand on. At the moment, Emperor Xi is winning. When placing new bets on China one would be well advised to check who the patron is.


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