Thursday, April 19, 2012

Will China's System Be Shaken to It's Core

Tim Staermose explains why this might just happen, and happen now, because of the developing economic crisis:

Reporting From: Hong Kong

One of the defining characteristics of EVERY boom is the presence of a small elite seeking to enrich itself through graft, corruption, and unethical behavior.

When the music stops and the boom busts, these same people are frequently put to the sword of public opinion.  Think Bernie Madoff, Ken Lay, and Silvio Berlusconi.

The Chinese economic "miracle" of the past three decades will prove to be NO EXCEPTION. 

I'm convinced that history will one day show that corrupt Communist party officials, in cahoots with shady developers and construction moguls, systematically plundered the Chinese economy, getting rich off the hard work and savings of the average person.

It's been happening on an unimaginable scale... and the fuse for the whole rotten mess to explode may have just been lit with this Bo Xilai scandal. To review, briefly:

- Bo Xilai, the former mayor of China's largest city of Chongqing, was once one of the rising stars of the Communist party and being groomed for a top spot in the Politburo.

- Wang Lijun was his police chief and right hand man.

- Together, Bo and Wang waged a high profile campaign to stamp out organized crime in the region, jailing and even executing supposed underworld bosses and corrupt businessmen.

(As it appears now, they may have simply been eliminating their competition.)

- The two had an apparent falling out, allegedly over evidence that Bo's wife was involved in the death of British expat Neil Heywood.

- Heywood had been a longtime confidant of the Bo family. His death late last year was originally ruled as a heart attack, however there is now so much conflicting evidence that many are suggesting Heywood was going to come forward with extensive records of Bo's shady business dealings.

- After being stripped of his rank by Bo, Wang went to both the US consulate and British High Commission seeking asylum in exchange for information about Bo's impropriety. He was politely rejected.

- Bo has now been relieved of his powers amid a flurry of evidence and allegations that he and Wang siphoned off hundreds of millions of dollars from Chongqing's economic boom and secreted the funds out of the country.

- Meanwhile Bo's wife is under arrest for suspicion of murdering Mr. Heywood. Mr. Wang is also in the custody of Chinese authorities.

- Bo's son, a lavish partier who attends $90,000/year graduate school and drives around campus in European supercars, is hiding out in the United States.

The top echelons of the communist party are now working overtime to snuff out the scandal lest their own financial dealings and personal dirty linen be aired in public.

But, they're fighting an uphill battle.  The rapid spread in China of micro-blogging services (like Twitter) mean that the party's censors have a real battle on their hands.

Sordid details have already emerged of an affair between Gu Kailai and Heywood, and the word is that Bo had him poisoned with cyanide.  There are also allegations that the Bo family has siphoned hundreds of millions of dollars out of China into a web of companies controlled via offshore tax havens.

Blocking the use of the names of key figures in the scandal was one thing the censors tried.  It didn't work.  The bloggers are always one step ahead, and they simply devised code names for all the key figures involved.

All this serves to illustrate what is widely known but never openly talked about: in China, just as in most countries, there are two distinct sets of rules.  One for the powerful elite, and one for everyone else. It's a delicate balance that always works... until it doesn't.

This affair has real potential to widely expose just how greedy, corrupt, and colossally abusive China's elite has been for years. That it comes at a time when China's economy is slowing will probably multiply the effect.

If a self-immolating Tunisian fruit merchant had the power to spark a wave of revolution across the Middle East, it certainly stands to reason that this scandal may create similar indignation for the ruling class in China... and thus shake the system to its core.

Tim Staermose, Chief Investment Strategist at Sovereign Man.  Sign up for their newsletter here.

1 comment:

  1. There is a saying in Chinese about governance, the powerful will have their policies and the little people will have their counter tactics. It is culturally acknowledged that government, bureaucratic policies, and the legal system are part of a corrupt game to be played. A little scandal like this will not create a huge shift in popular opinion. The popular opinion is already highly cynical and tilted against the ruling elite.

    Food inflation and housing bubbles, however, are nothing to belittle.