The China Question: Great Power or Great Crash?
The Black Swan, by Nassim Nicholas Taleb, is a parable for unanticipated risk: the possibility of 'unknown unknown' events that no-one sees coming.
In a new essay, The Calm Before the Storm, Taleb further posits that perceptions of risk are distorted by “fragile stability.” Some countries (eg. Saudi Arabia) are inherently more vulnerable to exploding one day in spite of – or likely because of – their continuity, concentration and monolithism. The flip-side of this concept, less intuitively, is that “anti-fragility” can be borne out of the very experience of crisis. The likes of Italy may be resilient precisely because they continually face chaos and flux.
Taleb's idea isn't a new one – the economist Hyman Minsky noted “the instability of stability” decades ago – but his anecdotal depth and topical understanding of current affairs makes the essay a riveting read.
Even to the formidable Taleb, though, one country is sui generis and escapes easy identification. At the very end of the essay, he acknowledges “the China puzzle.”
Another superbrain, historian Niall Ferguson, also concedes that “China is the country hardest to categorize” as a political-economic risk. China is difficult for Westerners to understand because its singular pursuit of economic development tempts excesses and imbalances. Yet the farther, faster and longer it gallops, when a bust would typically loom more probable, China looks ever more invincible and assured. As Ferguson admits, “there is unlikely to be a Lehman moment.”
China may end up with something different, however: a prolonged correction.
Japan in the 1980s was also a robust, healthily growing country with a dominating political system and abundant domestic savings. Few would have characterised Japan then as endangered, but its unwillingness to confront its economic excesses haunted it for 20 years and left Japan today “moderately fragile” (in Taleb's definition) because of soaring leverage. Some of Japan's blights have become worryingly apparent in China: zombie companies supported by zombie local governments often hiding local debt and propping up their own land markets.
It is often joked that there are no communists in China, and that Japan and North Korea are the only communist regimes remaining in Asia. But one commonality between China and Japan is their distaste for social disruption from the capitalistic purges of bankruptcy.
This is where Chinese see things differently from Americans. Chinese officially viewed the 2008 financial crisis, America's “Lehman moment,” as an unmitigated failure of the US system and a mistake to be avoided at all costs. They proclaimed their “superior system advantage” as they poured on the stimulus. “The Chinese lost a lot of respect for the West,” a car company executive famously commented. “When you've seen a multinational exec on his knees begging for help, you are not so intimidated by him after that.”
But a funny thing happened on the way to America's decline. Its stock market has tripled from its 2009 bottom; employment and growth have recovered. Americans of a certain persuasion would argue that it is the boom and bust cycle that undergirds their system, that the elixir of progress is the creative destruction of crisis that moves capitalism forward.