Mischief in China

If you have followed the blog for awhile you know that I have alluded to the fact that the Chinese economy is structurally unsound many times.  The reason is that its economy is not run for profitability, but for full employment.  If the single-party Communists couldn’t guarantee every Chinese a minimum standard of living via full employment then there would be no reason to stomach an oppressive, single-party, like the Chinese Communists.  Oh, and corruption as a practice is practically the invention of Communism.  China is rampant with dirty, nasty corruption.

So I have been watching for almost a decade now for signs of cracks.  Western investors in China will ultimately demand profits from their Chinese operations.  Chinese workers will ultimately demand that they are rewarded for their sacrifices to the Motherland.  Periodically there have been workers riots over the past decade, but they have never gained much momentum.  The Chinese government has stamped them out quickly and definitively.  But now the protests are getting more frequent and more intense.

My favorite source for international event analysis, Stratfor, reported last week that workers strikes that began in mid-May have continued.  Additionally, more workers strikes are popping up throughout China, especially in rural areas.  Most interesting is that Chinese workers are increasingly organizing themselves into protest rather than operating through Communist party channels.  This is a sea-change; one that should scare the heck out of the Chinese government.

Here is what Stratfor has to say about the situation:

“The labor concerns have also presented a problem for the central government. On one hand, Beijing is striving to restructure the society through policy. Part of this means encouraging provinces to raise minimum wages to put more income in workers’ pockets and boost household consumption. Along these lines, Beijing can tolerate more frequent worker demands for increased wages and sympathetic coverage in the state press as long as the strikers go through official channels. On the other hand, the collaboration between foreign companies, local governments and crony official unions is starting to drive workers to organize themselves, which is the exact opposite of what Beijing wants.”

For China’s economic miracle to continue it has to switch from a full-employment model to a max-profitability model.  Otherwise the Chinese will experience capital flight and an erosion of foreign investor confidence.  But this means that folks who have counted on a job for generations will lose their jobs.  This will lead to social unrest and upheaval.  This day of reckoning is coming as the Chinese switch from placating the labor population to placating the capitalists.  My feeling is that this is not going to be pretty for anyone involved: workers, politicians and capitalists (i.e. investors).  While it may not be about to happen – keep these irreconcilable tensions in the back of your mind if you are considering an investment in China.

Jason