Blackest swan may be China's fast-deteriorating political climate
Analyst Steven Kopits argues that while most investors associate risk from China with the economy, the real black swan is China's politics. Over the last few months, the nation's political climate has deteriorated at an alarming pace, seen in increasing censorship of foreign media, UK citizens being abducted in Hong Kong by the Beijing Government, and rising political tension in Hong Kong. Kopits says that a restless and unhappy country is emerging. Domestically, Beijing is putting pressure on foreign businesses and organisation, such as shutting down Apple's iTunes and squashing the Alibaba/Disney deal, and demolishing Christian churches. The report also suggests that President Xi Ping is more concerned about denouncing "Western capitalist values" and engaging in power politics, with the building and militarising artificial islands in the South China Sea used as an example, than making the country's economy a priority. 

For those of us accustomed to thinking of China as a dynamic, prosperous and constructive power, these developments are hard to digest. Back in 2013, the Rhodium Group, a consultancy with a focus on China, argued the liberal case: "The losses China would incur by reversing its hard-won market reforms far exceed any economic or political dividends from taking such a path" as excluding foreign suppliers. Most business people still feel that way, and it is certainly true.

The evidence, however, suggests that President Xi Jinping does not regard economics as a priority. Indeed, he has specifically denounced "Western capitalist values." What do these values represent if not personal freedom and economic progress? Xi has stated it explicitly: he rejects capitalism, as westerners might think of it, as his prime objective.

His real priorities are more evident in the country's foreign policy. The centerpiece of Xi's policy is the building and militarizing of artificial islands in the South China Sea, with an eye to annexing a 300,000 square mile triangle bounded by China's Hainan Island to the west, the southern tip of Vietnam and Manila in the east.

Why is China antagonizing literally all its major trading partners with this strategy? China is under no threat in the South China Sea, and the gains, beyond political control, are negligible. The venture fails any reasonable cost/benefit analysis. As a point of comparison, the U.S. Gulf of Mexico produces about $25 billion of oil and gas revenues per year, perhaps $30 billion if other economic activities are added. The South China Sea is considered less promising.

On the other hand, China exported $2.3 trillion goods and services in 2015. A loss of only 1 percent of this trade would offset the full economic benefit of the South China Sea. Why risk it?