Written by Jim Welsh
Macro Tides Monthly Report Sept 2019
This report was submitted on 02 Sept 2019 but due to administrative error is being published now.
Of the 30 countries covered by the J.P. Morgan Global Manufacturing PMI, 19 countries’ Purchasing Managers Index (PMI) were below 50.0 in July, which indicates a contraction. The countries with a sub-50 PMI’s included China, Japan, Germany, South Korea, Taiwan, France, the UK, Italy and Brazil. The PMI for the U.S. was 50.4 marginally above 50.
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Manufacturing has absorbed the brunt of the Trade War as international trade volumes contracted for the eleventh month in a row and to the greatest extent since October 2012. This has led companies all over the world to curtail business investment as the slowdown created excess capacity. This trend is unlikely to change, which means more weakness is coming, until there is more clarity about the Trade War which appears elusive.
According to the Duke survey of CFO’s in August the majority of CFO’s are expecting a recession to develop by the end of 2020 for every geographic area around the world. This type of concern explains why business investment has been curtailed, but could also lead to a reduction in hiring if the U.S. and global economy show more signs of slowing.
The uncertain outlook is even affecting small businesses. The July survey by the National Federation of Independent Business indicates that small business capital spending plans have turned negative from the year ago level. This is the first time this has occurred since 2010. Actual capital spending has followed the trend of spending intentions with a 2 quarter lag. This suggests that capital spending by small business may contract for the rest of 2019.
Historically such weakness in manufacturing almost always led to a recession in the U.S. and in countries heavily dependent on manufacturing. There are a number of reasons why a recession is not likely. Since 1970, manufacturing as a percent of GDP has declined significantly not only in the U.S., but in every developed country. In the U.S. manufacturing now represents just 11% of GDP, half of its contribution in 1970.
Germany’s manufacturing sector is still significant at 22% but is down from 32% in 1970, while Japan’s has shrunk from 35% to 20%. China may be the manufacturer for the world but its manufacturing contribution has fallen from 40% in 1980 to 30% in 2019. A growing middle class in China has demanded more services, especially after China joined the WTO in 2001 and growth accelerated.
The weakness in manufacturing in 2019 has not been caused by central banks increasing interest rates or restricting the availability of credit. Prior contractions in manufacturing were preceded by higher interest rates and banks tightening lending standards, which not only squeezed manufacturers but companies in the service sector as well.
Prior to the recessions in 2001 and 2008 recessions, U.S. banks cut back on lending for many months and well before the onset of those recessions. The Federal Reserve’s July 2019 Senior Lending Survey shows that banks have yet to restrict the availability of credit. This is important since there is a built in lag time between when credit conditions tighten and when economic growth slows. This suggests that credit availability will help offset some of the coming drag from tariffs.
Goldman Sachs estimates that tariffs will shave at least 0.6% off U.S. GDP growth over the next twelve months. That projection may prove optimistic since it is extremely difficult to model how businesses and consumers will respond as the impact from higher tariffs takes hold and affects more sectors of the economy.
The other great worry is the inversion of the yield curve. On August 27 one well known economist was interviewed on CNBC noting that the 3 month Treasury bill yield and 10-year Treasury bond yield had been inverted for more than 3 months. He pointed out that a recession had developed in the U.S. economy 100% of the time this has occurred since World War II. He is correct about the history, but may be reading too much into the current inversion. First let me interject a comment. At some point a recession will take hold and you can be sure that this economist and others will point to the yield curve inversion signal in August 2019 as having again been prescient, even if the recession doesn’t hit until 2021 or 2022.
As discussed recently in the June Macro Tides the yield curve is an effective tool but it has some limitations. The biggest short fall is the amount of the lead time. In the 7 recessions since 1960 a recession began 19 months on average after the yield curve inverted. If the current inversion follows the historic average, a recession would start in February 2021. That’s a long time in today’s world since so much can change in a matter of months. The Leading Economic Indicator (LEI) is timelier, since the average time lag is only 12 months. It is potentially more reliable since it is comprised of 10 separate economic indicators.
The LEI Index derives its component data from manufacturing, the labor market, housing, financial markets, and consumer expectations. The LEI does include the yield curve, although it uses the federal funds rate, rather than the 3 month Treasury bill rate. More often than not, only a few basis points separate the federal funds rate and the 3 month T-bill rate.
Relying only on the Treasury yield curve to make a recession determination may be too narrow. Analyzing corporate bond yields to Treasury yields creates a spread that has been particularly helpful in confirming the validity of a Treasury yield curve inversion signal. When the risk of a recession is perceived to be rising, buyers of corporate bonds will often sell corporate bonds since the risk of default is higher during a recession. This causes the yield spread between Treasury yields and corporate yields to widen. The first chart below presents the spread between Treasury yields and BAA Investment Grade corporate bonds. The second chart is the spread between Treasury yields and High Yield corporate bonds.
Prior to the recession in 2001 and 2008, the spreads between Investment Grade and High Yield corporate bonds began to rise well in advance of the recession. The spread for the High Yield bonds rose more dramatically since the credit risk on a High Yield bond is notably higher than on an Investment Grade corporate bond. The spreads for both remain comfortably under the last peak in 4 December 2018. The corporate bond market is not confirming the Treasury yield curve inversion signal. The cause for concern will increase if and when these spreads climb above their December highs.
The Leading Economic Indicator reached a new high for the current business cycle in August. This also suggests that concern about the Treasury yield curve inversion is overdone. In addition, Consumer Confidence rebounded in August and is holding near 19 year highs. Consumer Confidence fell sharply in the months prior to the recessions in 1990, 2001, and 2008 which is obviously not the case now. (Chart compliments Doug Short of Advisor Perspectives)
The Duke survey of CFO’s in August found that the majority of CFO’s are expecting a recession to develop by the end of 2020 in the U.S. The August survey of Consumer Confidence indicates that consumers are still ebullient about the economy’s present situation and for the future.
This dichotomy between business sentiment and consumer sentiment is also evident around the world to a greater extent than at any time in the past 22 years. In 2010 business sentiment soared well above consumer sentiment, since businesses were experiencing the turnaround in the global economy. Most consumers were still feeling the chock of the deep recession, and unemployment rates didn’t start improving meaningfully until 2011 in the U.S. and not until after 2012 and in Europe.
In terms of the Treasury yield curve inversion, the elephant in the room is the $16.7 trillion of sovereign bonds sporting a yield below 0% concentrated in Europe and Japan. In a global economy the tug of global yields on U.S. Treasury bonds can’t be ignored. Since November the 10-year Treasury yield has plummeted from 3.25% to below 1.50% following the plunge in yields in Germany and Japan.
To infer the current yield curve inversion can be compared with prior inversions without acknowledging the role global bond yields are playing seems myopic. If it weren’t for the high correlation between global government bond markets, there is a high probability the Treasury yield curve might be relatively flat but not inverted.
The significant decline in Treasury yields is an economic stimulus. Mortgage rates are down and near the lowest level in decades. Refinancing activity has soared as rates have fallen which puts more money in home owner’s pockets, which should support consumer spending in coming months.
The high level of refinancing is likely to be maintained. According to Black Knight 49% of the 45 million homeowners have a mortgage with a rate above 4.25% and could benefit from refinancing their mortgage. Homeowners in aggregate have more than $6 trillion in equity they could tap into. The reason homeowners have so much equity is because home prices have been rising at an average annual rate of 5% since 2013. This has created a problem since the average home price has appreciated by 54% since 2013 according to the Case Shiller National Home Index. Wages on the other hand are up less than 12% over the same period. This has caused home affordability to worsen for the majority of potential home buyers and is why Existing and New Home sales have languished despite the large decline in mortgage rates. (Charts compliments of Doug Short and Advisor Perspectives)
Some of the weakness in housing activity, and slowing home price appreciation, is due to the Tax Law change which limited the deductibility of real estate taxes in a number of states whose home prices are well above the national average.
While the Treasury yield-curve inversion recession signal is not as valid as in the past, it does not mean the economy will not slow further in coming months. In July the ISM manufacturing index fell to 51.2 in July from 51.7 in June.
The slowdown in Export Orders and New Orders, which are leading indicators, suggest the ISM Manufacturing Index is likely to drop below 50 in coming months. In July Export Orders fell to 48.1 while New Orders barely held above 50 at 50.8.
In the August 6 You Tube video below I discussed why I thought the weakness in manufacturing was likely to spread to the Non-manufacturing Service Sector as the Trade War dragged on and additional tariffs were announced.
In July the ISM’s Nonmanufacturing Index fell to 53.7 in July from 55.1 in June, the second monthly decline in a row and the Index’s lowest level since August 2016. This modest downward trend is expected to continue.
One of the labor market indicators in the Leading Economic Indicators is the number of weekly claims for unemployment insurance, since they typically begin to rise before the unemployment rate turns higher. The four week average of claims turned higher prior to the last three recessions. So far claims are still hovering near multi-year lows so there is no reason for concern yet.
However, as I have discussed in the Weekly Technical Review, there are a number of labor market data points that weaken before job growth slows and unemployment claims rise. There is a natural progression that employers’ follow when business slows or when faced with a high level of uncertainty: hiring of new employees slows, overtime hours are lowered or eliminated, and hours for existing employees are reduced. These steps enable an employer to lower labor costs and delay when they are forced to lay off a good employee. Monitoring this process provides an early warning of when a more serious deterioration in the labor market is likely to commence.
Nonfarm payroll growth has slowed from an annual rate of 1.83% to 1.50, as the six month average of new jobs has slowed from 210,000 per month in July 2018 to 141,000 in July 2019.
Since the third quarter of 2018 total hours worked has fallen from an annual rate of 2.25% to 0.75%. The impact on the 140 million private sector employees is a big deal, since it means the average workers’ paycheck is not increasing as it was in 2018. In aggregate the decline in total hours worked offsets most of the 3.2% increase in average hourly wages. It’s great to get a 3.2% increase in your hourly wage, but that can easily be erased if you’re working 1 hour less each week.
A year ago the average manufacturing employee was getting 10 hours a week of overtime which generated a nice fat paycheck. In July they were lucky if they got 1 hour of overtime, so many workers in manufacturing have experienced a meaningful reduction in pay. Although the number of manufacturing jobs is small compared to the total labor force, this is still another hit that will gradually show up in consumer spending if it persists which seems likely.
These early warning signs suggest job growth will continue to slow in coming months, as employers cut back on hiring until they can see the light at the end of the Trade War tunnel. Until there a larger decline in total hours worked, unemployment claims are unlikely to rise much in coming months. The high level of trade and economic uncertainly confronting businesses is also a significant challenge for the FOMC. Every meeting in coming months will require a difficult decision.
Federal Reserve
The FOMC lowered the funds rate at the July meeting as insurance to offset a slowing in the U.S. economy. The problem is that the benefit from the insurance rate cut will be marginal at best, since lower rates can’t address the affliction. The concentrated weakness in manufacturing and business investment has dragged growth down globally and in the U.S.
This slowing was not caused by monetary policy, but by a Trade War. The FOMC can prescribe a rate cut but that’s like applying a band aid on a patients arm when they have an infection. When the FOMC meets on September 11 this will be one facet of the discussion and whether another insurance rate cut is appropriate. Lowering the funds rate again will not lower the level of Trade War uncertainty and will not prompt businesses to suddenly decide to increase business investment.
In the July 29 Weekly Technical Review I explained why two members of the FOMC were likely to vote against lowering the funds rate at the July meeting, even though the FOMC would give the markets what they were expecting:
“President of the Boston Fed Eric Rosengren expressed a number of good reasons why a rate cut at the July 31 meeting is not warranted in a CNBC interview on July 19. I think there is 3 or 4 other district Presidents who agree for the most part with Rosengren. This will result in a lengthy discussion by FOMC members, as they discuss the various pros and cons. At the end of the day the FOMC will lower the funds rate by 0.25% in part because markets would be surprised, disappointed, and upset if the FOMC didn’t. I would not be surprised if Rosengren or Esther George, who likely shares his view, will vote against the decision to lower the funds rate.”
Rosengren and George did vote against lowering the funds rate and the minutes of the meeting indicate that almost half of the 12 District presidents shared their view.
Based on comments made by a number of District presidents at the Jackson Hole annual confab on August 23, it will be another long discussion about the value of lowering the funds rate at the September 11 meeting.
San Francisco Fed President Mary Daly:
“I don’t think we’re headed towards a recession right now. When I look at the data coming in, I see solid domestic momentum that points to a continued economic expansion. The labor market is strong, consumer confidence is high, and consumer spending is healthy.”
Boston Fed President Eric Rosengren:
“We’re likely to have a second half of the year that’s much closer to 2% growth. When we have a low unemployment rate, a relatively low inflation, unless that changes – and it may change – I don’t see a lot of need to take action.”
Cleveland Fed President Loretta Mester:
“At this point, if the economy continues where it is, I would probably say we should keep things the way they are.”
Philadelphia Fed President Patrick Harker:
“No. Not right now. I think we should stay here for a while and see how things play out.”
Kansas City Fed President Esther George:
“Cutting interest rates is not likely to resolve trade uncertainty. With this very low unemployment rate, with wages rising, with the inflation rate staying close to the Fed’s target, I think we’re in a good place relative to the mandates that we are asked to achieve.”
Dallas Fed President Robert Kaplan:
“From a risk management point of view, if I see continued weakness, I’m at least going to be open-minded.”
On August 30 the Commerce Department revised its second estimate for second quarter GDP to 2.0% from 2.1%. Most estimates for third quarter GDP are above 2.0%, which means growth in the Q2 and Q3 could remain above the FOMC’s long term estimate of GDP growth of 1.8%. For a number of FOMC members the urgency to lower the funds rate is low as long as growth is above the FOMC’s long term trend estimate.
In July the core Personal Consumption Expenditure (PCE) Index was 1.6%, unchanged from June and still below the FOMC’s inflation target of 2.0%, according to the Bureau of Economic Analysis. In recent months a number of district presidents have mentioned that they are also paying attention to the Dallas Fed Trimmed Mean Inflation Rate. In July the 12-month Trimmed Mean Inflation rate was 2.0%, holding near the same level it’s been since February 2019.
For some FOMC members the stability in both the core PCE and Trimmed Mean inflation measures suggests inflation is stable, even if it’s not exactly at the FOMC’s inflation target based on the preferred core PCE metric
If the FOMC does lower the funds rate at the September 11 meeting, Chair Powell will use the press conference to emphasize the uncertainty surrounding the Trade War, the slowdown in global growth which may spill over into the U.S. economy, and concern about the inverted yield curve. The FOMC can’t do anything to address Trade War anxiety or impact the global economy. But the FOMC can narrow the amount of the yield curve inversion by lowering the funds rate to 1.87% from 2.12%.
To say many members of the FOMC are data dependent would be an understatement and, given current circumstances, it is appropriate. The August ISM PMI report will be released on Tuesday September 3 and the August Employment report comes out on Friday September 6. Given the concerns about global growth, FOMC members will also be keeping an eye on global data.
Markets are expecting the FOMC to lower the funds rate at the September 11 meeting and possibly twice more by the end of 2019.
Virtually no one is expecting the FOMC to hold rates steady, and will be looking for reassurance during Chair Powell’s press conference that the FOMC is committed to lowering rates more before the end of 2019.
Given the high expectations for the FOMC to provide what the market wants, the opportunity for disappointment is high. The stock market has been dictating what monetary policy should be, which contributed to the FOMC’s decision to lower rates in July. At some point the FOMC needs to show that it is not only independent of President Tweeter in Chief, but also willing to not cave in to market expectations, even if it means the stock market throws a tantrum and drops 10%. Whether the FOMC will make a stand at the September meeting, well, that depends on the data.
President Tweeter in Chief
Throughout its history the Federal Reserve has tightened policy too much leading to every recession since World War II, and since 2001 kept the funds rate too low for too long spurring greater wealth inequality. I have criticized the FOMC for their role in the housing bubble and their lack of supervision of financial institutions leading up to the crisis. I find their obsession with their 2% inflation target to be misguided, misplaced, and unattainable in the current global economy. If the FOMC succeeded in reaching its 2% inflation target during the next 72 years, the cost of living would quadruple. Only a central banker could with a straight face declare success after prices had risen fourfold.
But the current environment may be the most difficult one in decades for FOMC members to navigate. The FOMC didn’t start the Trade War and the uncertainty that it has fostered has led to a marked slowdown in global growth and retrenchment in business investment. The FOMC has no control over the policies of the European Central Bank or the Bank of Japan, but their policy of negative interest rates is creating an enormous mispricing of bond prices around the world.
And the bifurcation between manufacturing and the service sector in the U.S. is widest in memory, which only clouds the domestic economic outlook further. The Federal Reserve is not above criticism but this is a difficult situation and attempting to provide ‘forward guidance’ in such a fluid geopolitical environment is virtually impossible. I’m not a big fan of the Fed’s communication policy and believe that now less is more.
I believe the U.S. must address China’s trade tactics and pressure China to adhere to the principles of trade it agreed to when it joined the World Trade Organization in 2001, and stop the theft of intellectual property from all companies doing business in China. President Trump believes the FOMC should be a partner with him in pressuring China, which includes lowering interest rates to support the U.S. economy. Tweets urging the FOMC to cut rates, no matter how obnoxious, are understandable, even if the President doesn’t understand the concept of an independent central bank in a democracy.
However, I found the above Tweet disgusting and inappropriate since Chairman Xi is a thug and to compare him to Powell is pathetically weak.
European Central Bank – Stupid is as Stupid Does
The European Central Bank meets on September 12 and is expected to launch another round of stimulus, which will probably include lowering its policy rate from -0.40%. The bifurcation between manufacturing and services is clearly evident in the Eurozone, with the manufacturing PMI well below 50 while the service sector is comfortably above 50.
Germany has been particularly hit hard since Germany derives almost 50% of its GDP from exports and 22% of GDP from manufacturing. The ECB is facing a similar problem as the FOMC, since it can do little to alleviate the uncertainty from the Trade War or dependence on exports.
Banks in the Eurozone provide 70% of credit creation in the EU, far less than the 30% U.S. banks extend to borrowers. A strong healthy banking system in the EU is thus more critical to economic growth than in the U.S. The ECB’s negative interest rate policy was introduced in June 2014 when it set its policy rate at -0.10%. The negative rates were intended to discourage banks from parking cash with the ECB, rather than lending it out or investing it. However, European banks have transferred $24.2 billion in revenues to the ECB in the five years since negative interest rates were introduced, with $8.5 billion occurring in 2018.
German banks account for a third (33%) of all Eurozone deposit charges from 2016 to 2018. The ECB’s negative interest rate policy has had the unintended consequence of making banks in the EU weaker. The Eurozone Bank Index has lost 50% of its value since June 2014 when the ECB’s negative rate policy began.
The Eurozone Bank Index was down more than 60% before the ECB instituted negative rates 2014, in large part because European banks were slow to address the bad loans on their books and failed to increase their capital base. Banks in the U.S were aggressive in writing off their bad loans and fortifying their balance sheets. While the ECB’s negative rate policy isn’t to blame for all of the European bank woes, negative rates have only made the banks weaker. If the ECB’s goal is to make European banks even weaker, lowering the ECB’s policy rate further would be the right call, but also more bad policy.
After Mario Draghi pledged to do ‘Whatever it takes’ in July 2012 to reverse the sovereign debt crisis in the Eurozone, the ECB opened a window of opportunity for EU politicians to introduce and adopt structural economic changes. Italy and France needed to loosen the regulatory strait jacket that has throttled their labor markets for decades, so that employers could have more flexibility to hire and fire workers. France holds the dubious distinction of having twice as many companies with exactly 49 employees, compared to companies with 50 or more employees. When a company takes on a 50th employee, the company becomes subject to almost 3 dozen labor laws prescribed by France’s 3,200 page labor code. A 2012 study by the London School of Economics showed that the cost of additional rules for 50-plus companies in France added 5% to 10% to labor costs. The study concluded:
“There is a strong disincentive to grow.”
In recent years France made an effort to liberalize its labor laws but the pushback from unions thwarted any meaningful changes.
If any country in the world needs structural change its Italy whose GDP is barely above its 2004 level. Italy has entrenched labor market rules that have protected older workers at the expense of younger workers. Any worker who loses their job can take the company to court, which can take up to 4 years to resolve. Since it is so difficult to fire older workers, Italy in the 1990’s encouraged companies to use short-term labor contracts (90 days). This allowed companies to hire and fire 12 employees without the normal restrictions. In 1998, 20% of workers younger than 25 were temporary workers, compared to 61.9% in 2017, according to Eurostat. For young Italians who receive a degree or finish a special training program the reward is not good.
The 2016 Global 50 Remuneration Planning Report ranked the average salaries paid for full-time, entry-level jobs for recent graduates or people who have recently finished specific training courses. Among the 15 western European nations ranked, Italy was last paying an average gross salary of $31,200 a year compared to top ranked Switzerland at $95,300. Entry-level workers in Spain can expect to take home $35,000 (14th) and $38,100 in France (13th). According to Eurostat, Italy has the highest number of economically inactive young people in Europe, classified as in Not-Employed, Education, or Training “NEETs”. The unemployment rate for those under-25 years old was 28.9% in July, and Italy’s overall unemployment rate was 9.9%. The inability to change labor laws intended to protect older workers and Italy’s reliance on short term labor contracts has effectively stifled any growth in productivity. Although the word stAbiLITY contains all the letters found in Italy, it has been one of the least stable governments in the world. Since 1946 Italy has had 62 governments or one every 1.2 years.
China – Hard Liners are in Charge
In the June 3 Macro Tides entitled ‘From Trade War to Cold War’ I offered this outlook:
“Neither China or President Trump seem willing to blink which suggests there will be a further escalation before talks are likely to resume. In 1962 the United States and Russia went to the brink of a nuclear war before negotiating a settlement that gave both sides a ‘win’. There is a good chance a similar trajectory will develop in coming months before the U.S. and China can agree on a deal. Mutually Assured Destruction has been replaced by Mutually Assured Disruption.”
A full-blown trade war between the two largest economies in the world is an economic version of MAD, which is why it was assumed by most that a trade deal had to occur. It appears that a majority of market participants continue to hold this view. However, throughout history the folly of man has provided many examples of self inflicted suffering on a scale seemed unimaginable prior to the cascading of events.
Most strategists expect President Trump to behave like a typical politician, which is odd since he is unlike any politician any of us has ever seen or read about. This has fostered the expectation that as the November 2020 election draws near President Trump will settle for a watered down deal so he can campaign with a win in his pocket.
A recent poll by Quinnipiac University found that more people think the economy is getting worse than better for the first time in Trump’s presidency. Given the fondness the media holds Trump one can expect to see more of these polls whenever possible on the Evening News and CNN.
I have expected China to play the long game, which is their cultural mindset and pursue a strategy to stretch the negotiations for as long as possible ideally well into 2020. This would allow time for the U.S. economy to slow further and build more political pressure on Trump. China certainly watches CNN and will conclude that time is on their side.
Trump may surprise China with his resolve since he believes that whichever country has the dominant technological edge will be the dominant country in coming 13 decades. Trump may be easy to dislike, and wrong on any number of issues, but he’s right about standing up to China.
Whether the current Trade War will morph into a lasting Cold War will be determined by the willingness of China to make adjustments, after 20 years of using almost any means to achieve growth, if Trump does hold his ground. (And whoever wins the 2020 election supports this policy.)
The People’s Republic of China was founded as a communist nation in 1949, so 2049 is the 100th anniversary. The hardliners set a course for China years ago to reestablish China as the dominant nation in the world by 2049 which holds great symbolism for China. China has become the second largest economy and integrated within the global economy to successfully resist any pressure to change. In a country that reveres the concept of saving face the hardliners believe no country has the right to tell China what it can or can’t do. On May 29 an editorial in the People’s Daily warned the U.S. not to underestimate China’s capacity to fight a trade war and used a specific phrase to emphasize the point. The phrase means “Don’t say I didn’t warn you.” This phrase was used in 1962 before China went to war with India and in 1979 before hostilities between China and Viet Nam began.
The Tiananmen Square protests were student led demonstrations in Beijing in the first half of 1989. The protests were forcibly suppressed by hard line leaders who ordered the military to enforce martial law in the country’s capital. The crackdown on June 3 – 4 became known as the Tiananmen Square Massacre, as troops with assault rifles and tanks killed unarmed civilians trying to block the military’s advance towards Tiananmen Square.
On June 1 China halted access to CNN and prohibited any photographing or videotaping the demonstrations or Chinese troops. No one knows how many demonstrators were killed in the massacre, although China has acknowledged that 241 died. The Chinese Red Cross estimated the death toll to be around 2,700 people on June 4. Great Britain’s ambassador to China in a secret cable estimated 10,000 protestors were killed.
The iconic picture of a protestor standing in front of a tank on June 5, the day after the Massacre, gives the image that the protestors accomplished something. This is false since the protestor known as ‘Tank Man’ was never seen again and China subsequently erased all references to Tiananmen Square in text books and historical museums throughout China. Children in China will never learn anything about the massacre. On the 30th anniversary of the Massacre on June 4 2019, there were no public memorials or protests, due to tight government suppression. At his monthly briefing, spokesman Wu Qian was asked by journalists if the People’s Liberation Army had any comment on the suppression of students 30 years ago:
“I don’t agree with the word ‘suppression’ in your question. Over the past 30 years, the process of our reform, development, stability, and achievements has already addressed your question.”
While China cracked down on dissent within China, it worked hard to foster the impression throughout the world that it was in the process of adopting western tenets of democracy and capitalism. Tiananmen Square was portrayed to western journalists and academics as an unfortunate mistake by hardliners who had been removed from power. This wasn’t true but western governments wanted to believe China could become a global citizen and provide access to its untapped economy.
In 1993 four years after Tiananmen Square, China allowed the founding of the Unirule Institute, which would serve as a platform for pro-market ideas, including the dismantling of China’s state sector, greater private property rights, and the rule of law. Over the years Unirule became a respected voice in Chinese intellectual and policymaking circles, and was even consulted by some government agencies and state-owned enterprises. It held regular seminars in which in-house experts and guest lecturers would discuss wide-ranging subjects such as Chinese history, urban development, and health care. China’s leadership could point to the Unirule Institute as evidence to western governments that China was opening up.
Unirule’s work frequently clashed with the Communist Party line, especially after President Xi assumed leadership in 2012. In the last two years Unirule’s websites and social media accounts have been shut down. Last November authorities blocked Mr. Sheng, the executive director from traveling to the U.S. to attend a Harvard University symposium on China’s economic reforms. Mr. Sheng said Unirule has let most of its staff go after effectively being forced to close by the government:
“China’s government says it wants the rule of law. But in reality, it doesn’t adhere to legal principles.”
Prior to joining the World Trade Organization in 2001 China promised to become more democratic and hold open elections. Beijing tamed the internet by limiting its use to commerce, technology and social media. It blocked political organizing by threatening and sometimes jailing those who posted critical comments. In an Orwellian twist China has in recent years turned the internet into an instrument of the state by using it to identify and track dissidents. In recent years President Xi has purged any opposition through his crack down on corruption, and last year named himself President for life.
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