If I uttered the word plenum, you might think I was a surgeon or arcane barrister, and not a casual observer of Chinese politics. The ‘Plenum’ is held seven times during the five yearly policy making cycle that aims to set the long-term direction of the development of China by the Communist Party.

Amidst the generalised chaos of Western politics in recent weeks, China held its most recent plenum (July 15-19), and this was the third plenum of this policy cycle, which typically focuses on economic policy. Though the outcome appeared to have been something of a damp squib, it is worth reflecting on .

To many international observers (note that China is becoming much less transparent in its policy process and in the availability of detailed macro data), there are three recurring threads.

The first is to ‘make China more like Denmark’(my words not the CCP’s), in other words to deepen its social welfare net and to limit inequalities. This has long been a goal of the CCP. In 2018, in the last chapter of the Levelling we wrote that ‘Another approach is to develop social infrastructure that encompasses many of the elements of intangible infrastructure, such as health-care spending, education, pension plans, and broader financial services. ……Motivation for building social infrastructure in China may come from stress points uncovered during China’s next recession. As such, it would be a logical chapter in China’s path to development, and not at all unlike Franklin D. Roosevelt’s New Deal. The New Deal was a watershed in the United States in many respects, one of which was that it marked the full evolution of the United States from an emerging to a developed nation.

The building out of a social infrastructure in China remains a significant project, as does the flattening out of Chinese society. Granted that I wrote the above paragraph in 2017/18, it is striking that a number of basic reforms are still missing – there is very little reform of the hukou system (household registration system that allows internal migrants to work in cities) and children of migrant workers to cities do not receive the same social benefits and education as children of city parents do. In addition, little accommodation has been made for the fact that the ageing of the population will strain the social safety network. In that regard China looks a little like France!

So, like the US under Roosevelt, the creation of a formal ‘new deal’ type social infrastructure, if it happens, could be a (positive) turning point for China.

The second challenge is to make China more like Silicon Valley. The plenum underlined the importance of maintaining a laser-like focus on ‘high quality development’, which translates as the need to make China the leader in new, strategic technologies. In this respect it is conceptually like the EU’s idea of strategic autonomy, but far far more serious in implementation.

In addition, the wording of the plenum drafts references ‘fierce international competition’, which ultimately points to intense competition with European car manufacturers, and in the telecoms and AI sectors. In recent years the number of directives from the CCP on topics that fall under the ‘Strategic Innovation’ umbrella, has multiplied and state aid for sectors like AI and semiconductors is now burgeoning into the trillions of dollars.

The third element that bears flagging is the ongoing focus on ‘reform’, and to my limited experience there is a ‘lost in translation’ element where quite harsh Chinese policies end up being translated as positive, innocuous Western ones. As an example, I recall in the 2010’s a very senior Chinese trade diplomat explaining that ‘rule of law’ did not equate to a Western sense of adherence to established laws, but rather the imposition of the rule of the CCP on business, politics and society. In that context, the idea of ‘reform’ means the fitting of Chinese society to the will of CCP, and specifically Xi Jinping ‘thought’.  

My interpretation of all of this is that Xi is shaping China in the form of a more closed state (which again to the tone of my recent note on globalization, makes for a less open world), that curbs the will of those inside, adopts a singularly selfish approach to those outside, and relies on several great strides in technological industrialisation for the prolongation of the ‘China Dream’.

The contradiction here, and specifically between the three strands to emerge from the plenum, is that in its policy making (social infrastructure) and economy (high quality development) China needs innovation but is creating a socio-political system that smothers it. This is the fallacy of authoritarian systems.

In this respect, the third plenum missed a trick in not outlining a Keynesian style stimulus for the economy (or even longer-run structural one). The property market is slowing, entrepreneurs are very cautious and the risks associated with local government debt are rising. 

I am beginning to wonder if, in the carefully choreography world of Chinese policy making, they need to plan for an ‘emergency plenum’.

In a topsy-turvy world marked by high drama political events such as the recent French election, the turmoil in American politics and the promise of the new government in the UK, not to mention the spectacle of the Olympics, only one event really matters – the onset of the holiday season.

My next-door neighbour, as she packed her bags, asked for a few book recommendations, which I had started to provide by text, but as that got overly lengthy, have written them down here instead (with apologies for the focus on finance and economics).

Regular readers will know that in last week’s note I tackled American politics, and specifically JD Vance, and would recommend his book ‘Hillbily Elegy’ as a text that will help us better help us understand him, and America.

As mentioned, if I were to recommend two books to him – as he ambitiously thinks of the vice presidency, I would highlight Chris Whipple’s ‘The GateKeepers‘ which explains how seventeen chiefs of staff to American presidents have marshalled their leaders, as well as Robert Reich’s ‘Locked in the Cabinet’ which is a wonderful, humorous study of how power really works in Washington. Two other books on American politics have been recommended to me, and as I trust the judgment of the friends who have highlighted them I want to pass on ‘When the Clock Broke’ by John Ganz, and ‘An American Dreamer’ by David Finkel.

Sticking with politics, there are a few ‘tomes’ worth noting for the really serious aficionados’ Robert Caro’s books on Lyndon Johnson could take a long time to read, and Ron Chernow’s ‘Hamilton’, which I would class as a must-read. Crossing the Atlantic, in a more gossipy sense, I often recommend Chip Channon’s ‘Diaries’, and Alan Clark’s ‘Diaries’ is a more tawdry follow up. In a more modern setting, Rory Stewart’s ‘Politics on the Edge’ is decent.

In my experience, the world of finance has been badly neglected by writers – fiction and non-fiction, and it might be that very few people with a literary bent are tempted by finance, and of course, fewer bankers can write well. There are a few exceptions – William Cohan (I enjoyed his book on Lazard, ‘The Last Tycoons’)), Michael Lewis (e.g. Liar’s Poker), Amor Towles – who spent most of his career in investment management but emerged sane enough to produce the exquisite ‘Gentleman in Moscow’, ‘Rules of Civility’ and his latest book, ‘Table for Two’; which I have bought and squirrelled away for later in August.

Another writer in this rarefied group is Irish writer Aifric Campbell, who worked in a very senior role in the City, and has produced a number of books – of which ‘The Lovemakers’ is a must read for anyone with an interest in understanding how AI driven robots will interact with humans.

Some of the more interesting books on finance relate to deal making in corporate finance and private equity – ‘Barbarians at the Gate’ was perhaps the first blockbuster here, and my private equity friends have also flagged ‘King of Capital’ (David Carey and John Morris) which sketches the rise of Blackstone and the private equity industry.

Another asset class that is captivating is art, and here Don Thompson’s – The $12 Million Stuffed Shark – The Curious Economics of Contemporary Art’ is fun.  

There is a useful set of books that link the economy to changes in society, and vice versa and notable recent books here are ‘Finance and the Good Society’ by Robert Shiller, and ‘Ultra-Processed People’ by Chris van Tulleken. In this field, James Scott, a highly accomplished social scientist, died last week and of the books of his I have read ‘Seeing Like a State’ is a very good illustration of the collision of state institutions with social complexity. A not unrelated and more entertaining take on this is William Newman’s ‘Things are so bad they can’t get worse’, the story of the institutional collapse of Venezuela.

Finally, I am stashing a few books away for the holidays, Yoko Tawada’s ‘Memoirs of a Polar Bear’, ‘Le Barman du Ritz’ by Philippe Colin, I have pre-ordered Marietje Schaake’s ‘The Tech Coup’ and for old times sake a few Agatha Christie novels. In addition, my wife tells me that Francois Mauriac recommends the biography of Leon Trotsky, which the Marxist society has helpfully put online here.

Have a great week ahead,

Mike 

It is holiday season in France, and not wanting to miss out, we have headed down to Aix en Provence for a long weekend. But, it’s not all fun and games, as there is the excellent ‘Rencontres Économiques’ to attend. The Rencontres is where the French establishment come to discuss the state of the political economic world, in the sun (think of it as Roland Garros for economists). For their troubles, the French have to listen me preach to them on democracy, which is timely to say the least.

The weather was too good and the company so interesting that it would be unfair to define the mood as ‘fin de regime’, but with the second round of the election happening on Sunday 7^th, the sense is all about ‘rupture’, and it is hard to believe that there can be a positive scenario for France in the next year or so. As a quick aside the two major pre-occupations of the speakers were the manipulation of social media content (by Russia and other actors) and a sense of frustration with the phrase ‘America innovates, China copies and Europe regulates’.

In this week’s Irish Times, I wrote on the implications for Europe of Emmanuel Macron’s demise. I believe that he is finished as a political force, and the implications of this will ripple across Europe.

Macron as a ‘lame duck’ will no longer carry as much sway as he did in Europe, and from the point of view of countries like the US, may no longer be regarded as the prime mover in EU politics – in that respect Tusk, von der Leyen, Kallas and Meloni are relative winners. The other risk is that Germany in particular finds it hard to cooperate with a RN led government if that transpires, and this will also change the dynamic in EU politics.

Domestically, Macron has twice remade the French political landscape, first creating and energising (but not rooting) a new centre, and then recently, destroying that centre. France now faces an illiberal form of democracy, perched on the very unstable pillars of the far-left and far-right.

The upshot is that the Rassemblement National will be the largest party in the Assemblée, menacingly close to a majority, and now part of the political establishment. On the other side, stepping over the bodies of the few remaining members of the parties of the centre, is an inchoate far-left grouping, with few realistic ideas as to how to improve France’s economy or mend its society.

As such, the likely outcome of this Sunday’s election is a technocratic government in the context of a constitutional crisis. In recent times, France has had three cohabitations (Mitterand-Chirac, Mitterand-Balladur, Chirac-Jospin) but never had to assemble a technocratic government, in the same way that Italy has managed for example (Mario Monti and Enrico Letta were interesting speakers at Aix).

French media is now increasingly featuring constitutional experts opining on how the constitution might steer the formation of a technocratic government, and in some cases, also speaking on the future of the president in the context of this unprecedented political crisis.

The French constitution was never designed with this kind of exercise in mind, it was crafted to form majority governments. Therefore, forming a caretaker technocratic government is an experiment and I suspect that there will be a lot of behind the scenes debate as to who might be best to lead such a government – if that is to be the case.

Formally, the process is led by the president, but with Macron damaged by the detonation of his own political grenade, this now becomes more complicated. Indeed, it will be interesting to see how he can recover from this. France has a difficult year ahead, a constitutional crisis likely punctuated by unrest and the risk of an economic shock.

With a sense of calm and normalcy now finally returning to the UK on this momentous weekend, there is a sense that Macron has caught the ‘contagion of chaos’. He has made an ill-considered decision, in the manner of David Cameron or Rishi Sunak.

If France is having its ‘fin de siècle’ moment then the UK is turning the page. Thursday’s momentous election has swept the Tories out of power, led to a recovery in the Lib Dem vote, sanctioned the Scottish Nationalists and the unionists in Northern Ireland. A major positive was a rise in the number of female MPs (41% of parliament). While Labour only received a third of the vote, Keir Starmer has a huge stock of political capital in parliament.

Like many others I have caricatured him as steady and boring. My sense is that Labour will remain so for the foreseeable future, until they are familiar with the levers of power.

The striking, first task of Keir Starmer will be the NATO summit (July 9-11) where I expect that he will re-affirm the UK’s commitment to its existing military-security goals, especially on Ukraine (compared to the Tories the one area that may change is Israel/Palestine where there will be more emphasis from Starmer on finding a negotiated peace). Notably Starmer will have the luxury of being the most popular of the major NATO country leaders, and one with a fresh start.

From a foreign policy point of view, I expect him to stress better relations with the EU and Ireland specifically, but it is far too early to expect any initiative on trade. I also expect that the tenor of early policy announcements will be focused on the reform of ‘public life’ (House of Lords, corruption).

If he is really daring, he might visit France. 

Have a great week ahead,

Mike

It is an understatement to say that the weekend of the 5^th July will be a watershed for democracy and politics on both sides of the Channel. It seems that for once since Brexit, Labour might bring a dull calm to British public life, whilst the contagion of political chaos has spread to Paris.

But, as Britain moves left politically and France appears ready to shift rightwards, there is more at stake than politics. Both economies are burdened with huge debt loads, and the ways in which politicians navigate these will determine the geo-economic future of these two UN security council members, and serve as a lesson to other indebted nations.

The economic cases of Britain and France are worthy of attention in at least two respects. The first is their long, often shared economic history. This is the third time that debt levels in both countries have spiked to extreme levels – ominously the previous episodes were the aftermath of the world wars and the period after the Napoleonic Wars. Then, the actions, principally of Pitt the Younger in reforming the economy and financial system meant Britain leapt ahead of France as the power of the 19^th century.

The second is that unlike other high debt economies such as the USA, the French and British economies are barely growing, and appear to have lost the means to do so. Neither do they enjoy the exorbitant privilege that the dollar permits. To that end, the high debt challenge posed to London and Paris is a precarious one, with broad implications. At this stage, at least three of those are clear.

The first of these relates to the ways in which high deficits and debt loads will condition politics. Neither country has much fiscal space and this may well tilt the political debate further towards topics like identity, immigration and values. This has been the case in France (and Italy) for some time.

In Britain, it’s hard not to feel that the recent Labour manifesto is ‘boring, boring’ like Keir Starmer’s favourite football team, reflecting Labour’s desire to tiptoe around the fiscal risks facing Britain. Consistent with this, it would not be a surprise that a prospective Labour government could choose to kick-off its term in office with a focus on institutional reform (Houses of Commons and Lords) and accountability in public life.

The second challenge for new governments in Britain and France will be growth, and this is where the real policy lessons will be learnt. As neither country has the scope to enact a hefty fiscal stimulus, new growth must be endogenous to reforms in both economic systems. In this respect Labour, whose keenness to halt policy uncertainty and desire for foreign investment, are in a much easier place.

In France, the strong likelihood is that the aftermath of the July 7^th vote is accompanied by an economic shock, driven by the entire lack of transparency and credibility that the far-left and far-right bring to economic policy, as well as their antipathy to foreign investors and corporates.

The third question is who might help France and Britain soften the impact of their debt loads. In financial markets there is a growing view that central banks will need to be deployed to recycle the debt loads of the economies they oversee. This is effectively the case in Japan, though the Bank of England may be loath to be seen to cap gilt yields (especially after the Truss debacle) and the ECB’s Governing Council would be badly split on the issue of ‘rescuing’ France.

The more likely avenue is greater collaboration with private investors (private equity, very large pension funds and some sovereign wealth funds) where projects that would ordinarily be funded and run by the state, are instead jointly capitalized and managed by private institutional investors, and some corporations. This is a likely avenue for Britain on green infrastructure and could continue to be the case for France in sectors like artificial intelligence. 

As July approaches, investors are already starting to vote, gilts and the pound are calm, but there is a budding crisis in the French bond market.

Michael O’Sullivan is co-author of ‘L’Accord du Peuple’ (Calmann-Levy) and the BBC 4 radio documentary ‘Waking up to World Debt’.