China Update Part 1

“I think this move is a sign of weakness and will only increase the likelihood that the winds of change from the Arab spring will reach China. The Chinese middle class, while enjoying their new wealth, will eventually demand the freedoms other middle classes expect and enjoy. Attempts to move the country in the direction of North Korea are bound to fail and hasten the regime’s end.” – Bill Witherell, Chief Global Economist, Cumberland Advisors

Hidden in the clamor of Iowa caucuses and the forthcoming primaries to take place in New Hampshire and South Carolina, a news item slipped through nearly unobserved by the American media. It is important and deserves some discussion.

A January 3rd official news release from China by Xinhua News Service described changes that will take place in Chinese television programming. KGS NightWatch, one of the thought-provoking research sources on such significant but obscure news items, reproduced the text of the Xinhua release. The English translation, according to NightWatch, reads as follows:

“A recently implemented rule has effectively curbed the ‘excessive entertainment’ trend as two-thirds of the entertainment programs on China’s 34 satellite channels have been cut, according to the country’s top broadcasting watchdog. ‘The total number of entertainment shows airing during primetime every week has been reduced to 38 from 126 at the end of 2011, marking a 69 percent plunge as the new rule came into effect on Jan. 1,’ said a statement issued Tuesday (3 January) by the State Administration of Radio, Film and Television (SARFT).

“According to an SARFT directive last October, each of the country’s satellite channels would be limited to broadcasting two entertainment programs each week and a maximum of 90 minutes of content defined as entertainment every day during primetime — 7:30 p.m. to 10 p.m. The directive also required channels to broadcast at least two hours of news programming. Between 6 p.m. and 11:30 p.m., they must each broadcast at least two 30-minute news programs.

“The restricted programs on the SARFT list include dating shows, talent contests, talk shows as well as emotional stories that were deemed ‘excessive entertainment’ and of ‘low taste.’ However, popular dating shows like ‘If You Are the One,’ produced by Jiangsu Satellite TV, and soap operas, such as ‘Li Yuan Chun,’ presented by Henan Satellite TV, will still be aired during weekend primetime hours, according to the statement.

“It said that the satellite channels have started to broadcast programs that promote traditional virtues and socialist core values. The newly-added programs among the satellites’ revised broadcasting schedules are documentaries as well as cultural and educational programs, it added. The SARFT believes that the move to cut entertainment programming is crucial in improving cultural services for the public by offering high quality programming.”

Source: Xinhua News Service, 3 January 2012, as reported by NightWatch

The NightWatch analysis is alarming. They suggest that these changes portend “more restrictions on freedom of speech and social activity” in China. They point out that China does not have guarantees of freedom of speech as it is a “Communist country,” and that American notions of what basic rights are cannot be effectively applied to China.

NightWatch continues to discuss these policy issues. They emphasize how China is concerned with intrusions from Western culture and how the strength of those intrusions has reached a point where Chinese leaders must rein them back.

This is an interesting sequence of events, taking place in the world’s second largest economy. It occurs in an economy where the government and central bank aspire to emerge as a world reserve currency. It happens on the heels of a capital market transaction between Japan and China in which Japanese reserves will begin to be deployed in Chinese currency-denominated debt obligations. It is also happening at a time when China’s activities around the world are influencing the demand for commodity prices and altering the behavior of numerous countries and regions.

At Cumberland, we discussed the Chinese news release and the implications for the markets in detail. Of course, we do not know what is going to happen; but we do know that an official news release by China, citing Chinese leadership and translated into English, must be taken seriously.

One possibility is that China is heading towards a more restrictive and oppressive regime. This essentially suggests that in response to the infiltration of the culture by Western ideas, Chinese leadership is pulling back and will tighten restrictions. That leads to speculation that the Chinese citizenry will respond negatively. Will we see more demonstrations? Will we see civil unrest in China? Is turmoil in China one of the possible surprises for 2012?

It appears that this time China has escaped the radar screen of Western media and markets. That is very understandable. Europe is focused on its internal turmoil and is the daily lead headline in American and certainly in European media. At the same time, European countries such as France are going through political processes that add to the turmoil, as candidates who are more extreme advance their positions in threatening ways. We see isolationism rising in France; we see isolationism articulated in the United States during our primary season. Isolationism, military threats, and blustering cultural shocks – all are disconcerting to markets and to those who look at global enterprises and suggest that globalism, integration, and worldwide trade expansion will continue unabated. That is the nature of the beast in 2012.

Cumberland will offer this update on China in two parts. These opening comments call attention to the news release and invite readers to dig a little deeper into the evolution of the events in China, even as we are distracted by the American political process that tends to be an all-consuming media show. Bill Witherell, my colleague and Cumberland’s Chief Global Economist, will follow with a second commentary. In China Update Part 2, he will examine the markets in China, how we see them, how we structure our investment weightings, and how we are using ETFs in a diversified way to position in China. He will also give his own outlook on the political developments in China and tell us where he believes things will go.

Our travel itinerary for January includes another lengthy plane ride. In a week, we will leave for Chile, a fascinating country and one I have visited on numerous occasions. Here is an example of conversion of a society from an extreme and harsh dictatorship to a functioning democracy with entrepreneurial spirit and a growing economic base. The period of Allende morphed into the period of Pinochet. During the Pinochet regime, the introduction of entrepreneurial and profit-sensitive individualism evolved in Chile.

This type of transition triggers a question. Does it take a dictator to create the opening for democratic institutions and meaningful material economic advancement? It seems as if that may be the case. Strong regimes, led by those who see the need to move their countries towards opening up freedoms and expanding individual rights and entrepreneurial spirit, have evidenced their success in notable ways. We saw this in Chile and in Singapore. We started to see this in China, first under Deng Xiaoping. China has been opening up since Deng’s initial effort.

The same strong regimes are also threatened by the very act of introducing freedoms and entrepreneurial spirit. On the one hand, they fear the change; on the other hand, they recognize its inevitability.

Chile is an example of success. The country is growing. The economy has shown its resilience when faced with tragedies like tsunamis and volcanic eruptions. Chile has a young, vibrant population. It manages its debt well. It has introduced social services in inventive ways. It is a growing success story in economic terms. Long-term financial-market benefits have come to Chilean investors.

When you visit Chile now, you see growing investment and trade relationships with Asia, even as the Chilean currency continues to be managed by the central bank in a relationship that compares it to the US dollar as a standard. So, here we have Chile, in our American hemisphere, with growing trade and an economic interface with China, yet focused on continuing its evolutionary path as a Western democracy with entrepreneurial spirit. Contrast that with the new China policy of “closing up” instead of “opening up.”

We will leave the second part of this update to Bill Witherell. We will return from Chile after a week’s time. We hope along the way a friendly trout will give this fisherman a pulse increase and rise for a dry fly on the Rio Puelo. Barbless hooks will ensure that the trout will be released in case someone desires to visit in the future.

• Become A Funded Futures Trader