At China’s annual National People’s Congress in March, the general secretary of China’s ruling Communist Party, President Xi Jinping, appeared to have found his sweet spot. But it did not last.

Two and a half years into his leadership of the party and two years into his presidency he had signed off on the purge of a key factional enemy, Zhou Yongkang, the highest-ranking official to have been rubbed out from the Party since Deng Xiaoping put party leader Zhao Ziyang under house arrest. His main party factional brawls appeared over.

China was well on the way to its triumph of the creation of the Asian Infrastructure Investment Bank, bringing in pretty much everyone except the Unites States. This combination of economic self-interest or desperate display of FOMO showed once again that in international diplomacy, mammon remains a portent force. China also convinced plenty of biddable economists that some sort of low-level targeted fiscal stimulus could somehow best intractable problems such as rising debt, a funds-starved private sector, the continuing phantom of the domestic consumption boom, a major property crisis, stalled economic reforms, malingering overcapacity, soaring business costs for exports amid falling demand, to name more than a few.

But confidence remained in the doldrums, and then the sharemarket came tumbling down. China’s latest sharemarket bubble burst in July, and pop!, there went another 10% or so last week. To add to the confidence deficit, and create a significant new problem for Beijing, the leadership’s efforts to halt the slide (you have got to love the way China is embracing the market economy) have made stockbrokers richer and the public purse billions of dollars poorer. Big picture: the money is a drop in the South China Sea, but it needs quite a bit of healthcare. The myth of Beijing’s economic managers as being somehow clever has finally been laid to rest. The elephant in the room remains the $4 trillion in local government debt (and it could be worse; the real figure is not known) and company debt, and the hit to household balance sheets courtesy of the property bust.

There have been some efforts to collateralise this, create bad banks and generally ameliorate it with financial wizardry, but the only real fix is write-offs and de-leveraging. The main message for those that don’t really get authoritarian dictatorships was that the Communist Party simply cannot let go of its control of anything much at all, and this bodes very, very badly for the other reforms promised by Xi Jinping.

There’s more in China’s stepped-up brinkmanship in the South China Sea with its illegal island-building, and this is why the estimable regimes in North Korea, Cambodia and Myanmar are likely to remain its only strategic allies of any sort.

And then there’s the still-unfolding disaster in Tianjin. It’s a microcosm of problems that are even more fundamental than a half-pregnant economy that has, in the blink of an eye, slipped from Beijing’s grasp. A warehouse full of sodium cyanide exploded, killing as many a 200 people, including dozens of firefighters who remain on the “missing” list.

For Australia this is as deeply concerning, as no other nation one Earth relies so heavily on China. It is our largest two-way trading partner. And it has such strong links with other countries in the Asia-Pacific that a receding Chinese tide beaches all boats.

The clearly ill-informed mantra as chanted by successive Australian governments, “The Chinese are great economic managers, we have complete faith in them,” reveals Australian treasurers have not read beyond their Treasury briefing pares and notes supplied by the Chinese government on the country economy.

The Communist Party’s end is not around the very next corner. But its last compelling story, releasing pent-up demand gussied up as sound long-term management, has had a sudden unsatisfactory ending, and there is no playbook for part two. So folks, wake up, smell the over-brewed Chinese coffee and fasten your seatbelts.

Peter Fray

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