China is a black box

China has been front and center over the last few months.

During this time, investors have been mostly concerned about the impacts of currency devaluation and the Shanghai Composite’s dramatic moves.

However, at a conference hosted by Lombard Street Research on Wednesday, China-watchers emphasised something different: politics.

They all mentioned that it’s nearly impossible to tell what’s happening in Beijing’s inner political circle. And, since politics and economics in the world’s second largest economy are so intertwined, that makes it that much more difficult to tell what is happening, and what will happen, in the country.

“There’s a general perception that in China both the economy and politics are a black box. I can say, with a degree of certainty, that the economy doesn’t seem so much of a black box to me. … But what I do feel is a black box is the politics,” said Diana Choyleva, Lombard Street Research’s chief economist and head of research.

With “the ‘black box’ of the politics, we just don’t know how [China] will react if faced with these very challenging things,” she added, referring to the financial obstacles that have already transpired or that could come to be.

The analysts reiterated that everyone’s pretty much aware of the vague outline of China’s political order. Namely, that Xi Jinping is the big guy in town, and he has installed his own guys in state-owned enterprises.

But beyond that, not so much.

“The opaque, nontransparent palace politics … I don’t think anybody understands really what is going on. You have all sorts of rumours. But, no, we don’t understand it,” political analyst and China specialist Tak-Lung Tsim explained.

Going a step forward, that makes analysts more uncertain about what might happen should China’s economy start to shake.

“The difficulty in China is that politics and economics are so intertwined that … A crisis in the economy [would be connected to] politics … and then you get to Xi Jinping — does he get thrown out? There’s, you know, tremendous volatility there,” added Fraser Howie, who was most recently an MD at CLSA, and coauthor several books on China.

“It’s China. So therefore … whatever it says on the bottle, is not what the contents are,” he added, referring to China’s bond market.

In sum, it’s hard to tell what’s going on behind the scenes in China’s political circle. And that adds a degree of risk.

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