By: David A. Smith
In life there are technocrats and there are politicians, and in political situations the former usually work for the latter – and are fired by the latter where their usefulness is over. As reported in the Wall Street Journal (November 7, 2016):
BEIJING—China removed its high-profile, reformist finance minister Lou Jiwei from the post in a shuffle that comes as President Xi Jinping positions trusted allies in key roles and Beijing prioritizes short-term growth over major overhauls.
Nobody’s asked me for any quotes about this
Bad move, I thought. Guaranteed bad move.
Of the changes announced Monday, Mr. Lou’s departure was the surprise.
It shouldn’t have been. To see why, one need only rearrange events into time sequence, starting with the Journal’s helpful time-line inset box (buff blue font), then extract relevant bits.
Enter the technocrat:
Bring it on, whatever it is
September 2007 to March 2013 Lou Jiwei runs China’s sovereign-wealth fund, China Investment Corp., turning it into a major player in global markets.
That made Mr. Lou the rare technocrat who both makes money and delivers political benefits – a man to capture, reward, and use.
In August, 2012, I posted a six-part Theory of China’s Cities and Housing, that included this condensed summary.
I’ve been a China bear for some time … eventually I’ll be right (won’t I?)
Lou Jiwei was an outspoken Communist Party veteran picked for the job for his competence rather than a close relationship with Mr. Xi in the early days of the Xi administration.
‘Outspoken’ is a journalist’s signaling word. It’s meant to foreshadow demise, because if you talk straight and are rising, you’re courageous or principled, but if you talk straight and you fall, then you were outspoken.
I know – I’m occasionally called outspoken.
March 2013 Mr. Lou is named finance minister in the new government of President Xi Jinping with an aim to overhaul the fiscal system and tax code.
He was hired to clean up a big dirty problem: tax shenanigans.
At a time when local governments in China had racked up hundreds of billions of dollars in debt from big-ticket infrastructure projects, the new administration needed a tough official to put China’s financial house back in order, the officials said.
Indeed; Beijing need a man who (a) could find where the money was buried, (b) could establish how much of it could be repatriated to the capital, and how, and (c) would actually do what he was tasked to do and not get bamboozled, bullied, or captured by the locals.
Special prize for avoiding bamboozlement
To give some context, I’ll interleave a story from my past, using a suitable sepia font:
Long, long ago, where I was a mere sprat in business terms, I was the recently-added junior executive on a syndication with a developer client who’d been a steady and reliable customer of our firm for many years. The developer was one of the firm’s largest sources of deal flow. All of that developer’s properties had done just fine: he had the development and financing process down to a science, the rents compared favorably with the market, and the company was financially strong. Yet the deal terms were out of the market. They’d always been favorable to the developer – no contractual guarantees, no net worth commitment, splits of cash flow residuals pro-developer – and in the intervening years, the market had shifted the investors’ way so what once had been end-of-range was now, factually, out-of-range. The sales people were (correctly) questioning how they could sell this investment, and I’d been added to the deal term to negotiate terms that were within market norms.
For Mr. Xi’s stated purpose, Mr. Lou was ideal.
Me? You’re picking me?
Mr. Xi, who had set out to give market forces a bigger role in China’s economy, [chose Mr. Lou] largely because of his expertise on the country’s convoluted tax and fiscal system, according to the party officials with knowledge of the matter.
Because competence is no guarantee of survival, Mr. Lou made an unusual request:
Shortly before his appointment, according to people with knowledge of the matter, Mr. Lou expressed a wish to Premier Li Keqiang to allow him to serve his full five-year term.
Presumably he’d seen what happens to reformers who aren’t given enough time to complete their reforms, including implementation.
Mr. Lou’s pitch, these people said, was that he had a plan to overhaul the country’s creaky fiscal system and tax code and needed time to carry it out.
Because political opposition happens before political implementation, the reformer must invest by taking all the political flak up front, with the payoff of having got the reforms through a slower-maturing political yield. Being ejected early is all pain for no gain.
Fortunately, we have cures for early ejection
The chat with Mr. Li helped launch him as a major voice for market-oriented changes in China.
‘Market-oriented’ is another journalist’s signal. It’s meant to foreshadow that Chinse elected officials say they want something, but as they don’t know the actual political price of achieving it, they secretly reserve the right to decide they don’t want it that badly.
October 2014 Mr. Lou’s Finance Ministry issues rules aimed at curbing local-government borrowing.
Ah, I thought. That explains why he’s gone now.
Working with the developer’s CFO and in-house/ out-house counsel, using evidence and logical argument, I set about persuading these two executives that we needed better terms. I was heard out – thirty years later, I think they did so with amused patience, knowing that they held the hidden ace – and secured some modest improvements on lesser issues.
The mountains are high and the emperor is far away, and as I’ve documented at length dating back to July, 2013 and earlier), China’s corrupt money train is out of control and the leadership is looking for someone to blame.
Posted in July, 2013, shortly after Mr. Lou was appointed
Behind Mr. Lou’s removal, the party officials briefed on the change said, is his spearheading of tough measures including attempts to rein in local-government borrowing, which have had the effect of squeezing short-term growth.
‘Growth’? Or spending masquerading as growth?
Gleefully running up local-government debts for a decade
Just as finance ipso facto will never fix a solvency problem, spending is not ipso facto growth, because value can be destroyed through misallocation or misuse of capital.
In October 2014, Mr. Lou’s Finance Ministry issued a policy intended to prevent financing companies sponsored by local governments from taking on new debt.
Spending is one of very few things local officials and managers can do that creates immediate activity (and consequently a short-term jobs blip), so naturally, everybody was doing it – that is, until Mr. Lou turned off the money spigot.
Local officials soon complained the policy made it hard to make any planned investments.
Momma told me they’d complain like this
Knowing that curtailing money profligacy would pinch local officials, Mr. Lou undoubtedly discounted their complaints, secure in the beliefs that he was doing what the nation needed, that Mr. Xi wanted, and that Mr. Xi had assured him he would have time to complete.
As I had been so told and was so sure:
When it came to the major points, however, we could not reach agreement.
Of course, there are complaints and then there are complaints, and some complaints are more important to the leadership than others.
[Continued tomorrow in Part 2.]