China is likely to suffer a significant political change in the coming 12-18 months. In June of last year, I predicted a 70% decline for the Chinese stock market by Sept 1. I was wrong. The peak of the market was 6 weeks later. The Chinese stock market is currently down 25% from that high.
Like most closed economic and political systems, stability is easy to maintain in the face of distributed economic growth. Closed systems do not respond to distributed economic shocks well. Central planning is good for point disasters but not distributed issues. A point disaster is an earthquake, flood etc. a single point of failure that can be identified and overcome. A distributed problem involves policy insight and thought. The communist mindset of centralized control does not allow for rational response to economic crisis.
China has put a cap on fuel prices. Many policies such as the natural gas policy are linked to this price. Basically, the Chinese are still trying to control the economy. Problems will arise as shortages accelerate as a natural response to these policies.
From a relatively small statistical sample most closed economic and closed political system regimes last between 30-40 years on average. This would put a probability of 2-3.33% chance of failure in any given year with a bias towards failure with age. As the system ages and an internal political or economic shock looms, the chances increase significantly of a systemic collapse or regime change. The change may or may not be a systemic revolution, ie. capitalism to communism. For example, in China, the gang of 4 had a brief period but the old guard stepped in. China has changed in the 20th century about 5 times, once every 20 years (5% probability /year). Current internal economic policy has been widespread for about 15 years.
I would put the odds at 70% that China undergoes a significant political and economic change in the next 18 months (500 days). Tibet will most likely not be the cause of this as it is an external threat. Internal motivations are more likely to accelerate significant change. The outcome of the change is impossible to ascertain. Tighter fascism or a move to democratic open society is impossible to predict. Without evidence, I would estimate this to involve an economic contraction of 7-15% for over 2 years. If anyone has research on this please forward it.
The Iron Rice bowl cracks.
It is important to remember that the inherent contract between the PLA (people liberation army) and the Chinese people was the promise of food and stability in exchange for power. The Iron Rice bowl could crack this year. Among other stressors, Rice stocks are at 25 year lows globally.
The current regime instituted broad economic opening in the late 80's and 90's. Using Gott's theorom and a 12 year estimate for the broad phenomonan, we find there is a 25% the regime will shift in the next 7.2 years. That is a 3.5% chance of change in a given year. Given current economic potentials the 1:28 odds are low. I consider the need to tighten inflationary policy and the negative economic & social feedback loops, I am bringing the probability up to 60% for the coming 12 months.
Ask your china fund manager what odds they give of regime change in China, most likely they will guffaw and say 1 in a million. Change managers.
