The Yin & Yang of 2015

Even now that China is showing distinct signs of economic slowdown it remains one of the most dynamic economies on the planet. Now ranked the largest economy in the world by the International Monetary Fund when adjusted for purchasing power parity that ability to morph before our eyes has even more far-reaching implications than in the past.

I have read countless predictions from old China hands and analysts about what will or will not happen in 2015, soon to be the Year of the Sheep. They all have one thing in common – nothing.

The simple fact is that nobody knows what will happen in China in the next year.

China does face some big challenges, with environmental degradation at the top of the list. At least 40% of the arable land in China has been degraded in some form. And if the air pollution now enveloping many major cities in China is not abated, some of those cities will simply become uninhabitable.

The good news is that the air quality can be fixed as was so clearly demonstrated when Beijing hosted the APEC Forum in October, 2014. It is simply a matter of resolve and money.

But the government of President Xi Jinping has shown it has an abundance of resolve and the largest currency reserve in the world at its disposal. The problem won’t be solved in one year but I believe APEC blue will ultimately be the norm, not the exception.

And it will get help from an unexpected source – the sharp drop in the price of oil and, ultimately, natural gas. While one might conclude that cheap oil will simply lead to more driving and less effort to reduce industrial usage, China’s air quality problems stem from two primary sources – coal and low quality standards on gasoline.

China has a lot of coal. But it’s not high quality coal. An energy scientist friend of mine familiar with the situation refers to it as ‘high-energy dirt’ rather than true coal. But it’s cheap and the manufacturers and electric utilities that use it have thus been reluctant to change.

But cheaper natural gas and oil will change that paradigm.

And while the government, I believe, has been reluctant to upgrade gasoline standards due to the potential impact on prices and blowback from the consumer, falling oil prices provide some wiggle room. It’s a lot easier to reduce prices at a slower pace than to increase prices.

Falling energy prices will also have a favorable impact on many industrial companies that serve the domestic economy, generating a combination of better profits, more taxes, and better wages. And, most importantly, it will reduce the incentive for Chinese companies to continue to add capacity in industries that already have too much of it as the only way to drive profit growth.

For this to happen, however, the government will have to introduce major reforms to the energy sector. Government price controls on energy have allowed some drop in gasoline prices but the price of natural gas hasn’t budged, presumably so as not to discourage natural gas producers from developing further supply.

The government has previously committed to price reforms that would tie the cost of natural gas to the price of oil, however, and assuming the price of oil doesn’t race back to $100 per barrel, which no one seems to think it will, there will have to be some reduction in natural gas prices in 2015.

In the end, I predict that lower energy prices, along with the rural land reforms already scheduled to be implemented in 2015, as well as the support of a strengthening U.S. economy, will lead to stronger economic growth in the second half of 2015 than anyone is expecting. If may not show up in the GDP, just as the current softness in the economy isn’t showing up in the GDP, but it will have a fairly dramatic impact on the average Chinese and their quality of life.

On the geo-political front I believe it will be a fairly calm year in Southeast Asia. China will most assuredly reign in North Korea, although they will do it entirely behind the scenes.

And the China government has been astutely cutting trade deals with its neighbors that said neighbors will be very reluctant to put at risk over disputed shoals in the South China Sea.

Frictions will remain high with Japan but I predict any major confrontation will be averted. China clearly demonstrated in 2014 that it is the de facto power in the region and I believe the U.S. will ultimately realize that it’s ‘Pivot to Asia’ is both impractical and a poor investment.

As an American I want our government to spend more time worrying about terrorist threats out of the Middle East than China’s growing influence in Asia. And I believe most Americans would agree with that and the politicians in Washington will ultimately get the message.

Hong Kong will not get the independence its students seek. If they push too hard, in fact, I have no doubt that Beijing has the resolve to tighten its grip even further.

The attack on corruption will continue unabated and the government will get much more cooperation from foreign governments in repatriating corrupt officials who fled there. That’s simply one of the benefits of power. People listen to your requests.

There will be no political reform in China. The people don’t want it and the Communist Party of China will remain fully and absolutely in control.

If anything, the strong approval rating of the current government will allow it to accelerate its reform agenda. And this, in turn, will accelerate both China’s economic development as well as its leadership role on the world stage.

The Internet and the commerce done through it will continue to explode in China. No country on earth may be better suited for the game-changing innovation that the Internet offers.

Its reach, however, will become increasingly internalized. Outside access to the people of China will continue to be tightened and the use of the Internet to promote civil unrest will be severely restricted. And few within China will complain.

Remember that the Chinese are much more holistic in their worldview than the deductively minded West. While we take strong positions on individual ideals such as freedom of the press and civil liberties, the Chinese take equally strong positions on societal advancement and the preservation of Chinese culture. If censorship is necessary to keep everyone focused on those over-riding goals, the Chinese will accept it.

Individual sacrifice is well understood in China and, with a few notable exceptions, strongly supported.

So, in total, I predict a year of yin and yang; opposing forces; opposing ideals; all seeking equilibrium and balance. In the end, a pretty good year for the Chinese people I think.

The Sunrise Oriental Hotel on Yan Xi/ Yanqi Lake, host to the 2014 APEC Forum.  In time 'APEC blue' will become the norm rather than the exception.  It will take both resolve and money but this government has plenty of both.
The Sunrise Oriental Hotel on Yan Xi/ Yanqi Lake, host to the 2014 APEC Forum. In time ‘APEC blue’ will become the norm rather than the exception. It will take both resolve and money, but this government has plenty of both.

Note: The author also writes novels under the pen name of Avam Hale. You can find them in the Amazon Kindle store and they can be read on any mobile device loaded with the free Kindle App, available for all operating systemsCopyright © 2015 Glassmaker in China

Notice:  The views expressed in this post are strictly those of the writer acting in a personal capacity.  They are not in any way endorsed or sanctioned by his employer or any other individual with which he may be personally or professionally affiliated.