China

[Crafty_Dog]

https://dailycaller.com/2022/11/29/lockdown-protests-china-xi-jinping/?utm_medium=email&pnespid=6uNoCysXMbEdy._RrDu3FouKpE7zTpp2I.C8neY1oBRmyE.4TKPfCW6YHqlYJpJShOY.YNCx

[DougMacG]

https://www.scmp.com/news/china/science/article/3202087/chinese-graduate-students-invent-invisibility-cloak-can-slip-past-security-cameras-and-recognition

[DougMacG]

As Chinese authorities move to ease the burdens of sweeping pandemic lockdowns, lengthy quarantines and regular mass testing, the country’s hospitals are feeling the first shock of a giant wave of infections and shortage of health workers. Since the State Council, China’s cabinet, rolled out a new 10-point plan Wednesday to ease its stringent Covid-19 controls, ending mass nucleic acid testing and allowing some infected people to quarantine at home rather than in centralized facilities, hospitals are facing increasing workloads as infections surge. In cities such as Guangzhou, Shijiazhuang and Beijing that have taken the lead in implementing the new policy, fever clinics are full of patients and cross-infections between patients and doctors have begun to emerge. Experts predict a peak of infections in the next one to three months with about 60% of the population infected, which would squeeze already swamped hospital emergency rooms and intensive care units and burn out health-care workers. (Source: caixinglobal.com)

[Crafty_Dog]

Framing China’s Demographic Decline
undefined and Asia-Pacific analyst with RANE
Nate Fischler
Asia-Pacific analyst with RANE, Stratfor
9 MIN READDec 19, 2022 | 21:42 GMT



Editor’s Note: This column is the first part of an ongoing series that will explore China’s demographic challenges.

China’s impending population decline is often cited as a harbinger of its economic and strategic collapse. But while a shrinking population represents a major challenge, the assumption that a country derives its strength from the number of people living within its borders is often overly simplistic.

Indeed, China is facing various demographic issues with wide-ranging implications beyond population decline. The next five years will be critical in addressing these issues, which should be framed as part of an ongoing — and painful — middle-income transition that the Chinese government has determined requires strong central leadership to manage.

Centralization of Power
In October, Xi secured another five-year term as China’s leader, along with a thoroughly loyal cabinet. Since he came to power in 2012, there has been a clear trend of ever-growing power being concentrated in Xi’s hands — moving China away from the rule-by-consensus model established in the 1970s. This shift is a direct response to the various development challenges that China has been late to address, as a strong central government theoretically enables policymakers to be flexible, quick and decisive in addressing ongoing crises, as well as mitigating the societal turmoil that often accompanies middle-income transitions.

Each of the various demographic issues China is facing — which include a shrinking and aging population — would be difficult to overcome individually in a much smaller country, let alone simultaneously and at the unprecedented scale that China is grappling with. This daunting socioeconomic dynamic will, in turn, provide political justification and rationale to double and triple down on centralized power as Beijing prioritizes alleviating China’s various demographic crises through top-down policymaking.

A Hyperexpression of the East Asian Model
China’s meteoric rise was bound to slow. A low-income country implies production potential, and a country can develop from a pre-industrial to a post-industrial society only once, which China accomplished with impressive speed from the 1970s. Reaping the benefits in the form of seemingly boundless economic growth thus must occur within a constrained time frame, which has now run its course.

In many ways, China is experiencing a typical transition of East Asian economies. Japan and the Asian Tigers (i.e., Hong Kong, South Korea, Singapore and Taiwan) underwent similar middle-income transitions. This model involves low-income, high-growth stages leading to middle-income, middle-growth stages that then require reform, innovation and boosted per capita productivity to lead to a high-income, slow-growth stage.

China is broadly attempting to enter into the final stage and escape the so-called middle-income trap — a phenomenon where countries that undergo rapid economic growth are unable to make the final leap to become high-income developed economies after successful low-income to middle-income transition stages. In its effort to avoid this trap, the country is experiencing sweeping structural, cultural and social adjustments that go far beyond population growth (or lack thereof). Indeed, this transition is natural from a socioeconomic and development perspective, regardless of birth rate.

But China faces particularly daunting challenges as it undergoes what is otherwise a typical phenomenon due to its sheer size, unique political and societal implications, and shrinking population. For one, China’s population, geographic size and industrial capacity dwarf all of the aforementioned East Asian economies; taking on the middle-income transition at such a mass scale and under such unwieldy circumstances has never before been attempted.

With the exception of Singapore (due largely to its manageable size), the other three East Asian Tigers (Hong Kong, South Korea and Taiwan) all experienced significant sociopolitical turbulence during their transitions to advanced economies and broadly democratic political systems, including high unemployment, social unrest and political upheaval. Likewise, Japan declined into economic malaise and Indonesia endured mass protests. China, however, is attempting to prevent upheaval typical of the later stages of this transition model while also nurturing economic development (a combination not seen in the other cases), which requires innovative and technologically-driven mass social control and the enforcement of desired cultural mores. This creates an acute risk in China, where people lack an outlet to express their discontent — creating a pressure cooker that could explode into mass civil unrest, like that seen in 1989 (which culminated in the Tiananmen Square massacre) and, more recently, the Nov. 25-27 protests against the government's strict “zero-COVID” policies.

Then there is the issue of China’s looming demographic decline, as transitioning to an advanced economy with a population and workforce that has already peaked is far more difficult than doing so with a growing population (as was the case in Singapore, Hong Kong, South Korea and Taiwan).

Population Decline and Pronatalism
China’s population has long been expected to peak and start shrinking at some point between 2020 and 2040. But there are signs this decline may have already begun. China’s National Statistics Bureau recorded 10.62 million total births in 2021, down 11.5% from the previous year. Between 2020 and 2021, China’s birth rate also fell from 1.3 children per woman to 1.16 children — far short of the 2.1 replacement level.

These birth statistics are comparable to those China saw in the early 1960s, when the country was experiencing cataclysmic famine brought on by the Great Leap Forward and had half as many people. According to China’s 2020 census, the country’s population count stood at 1,411,778,724 people, though the actual number is likely smaller given Beijing’s tendency to massage national statistics and inflate demographic figures. After years of soft-pedaling or outright denying the issue, in 2017 the Chinese government finally began to acknowledge that the country’s fertility rate was suboptimal and has since become increasingly vocal on the issue, now admitting that population growth has slowed to the point of nearly contracting. But Beijing is acting far too late to reverse the trend, assuming it ever could.


The country’s population decline is compounded by rapid aging. Fewer people of working age (between 15-64 years old) create more retired dependents, reducing state revenues and increasing government expenditures on healthcare and pensions. This cohort of working-age Chinese citizens peaked in 2014 and, according to census data, has been declining at a rate greater than the total population — shrinking by 40 million from 2010-2021. The share of retired dependents, meanwhile, is skyrocketing.

A decreasing population, particularly among the working-age cohort, risks dragging economic growth in the absence of significantly increased per capita productivity. According to the data analytics firm CEIC, China’s growth in productivity per capita (where productivity outpaces labor force decline) is still outpacing the United States, but has been declining since 2010.

Additionally, increased labor costs in China — already twice that of neighboring Vietnam — will drive low-margin, labor-intensive manufacturing out of the country into markets with labor abundance. This, however, is partly purposeful given low-end labor moves overseas in developed economies. Nearby countries with cheaper labor (like Bangladesh, India or Vietnam) also can’t match China’s logistics and infrastructure, which will help mitigate this manufacturing exodus.

In response to its shrinking population, China has adopted pronatalist policies, ending its One Child Policy and Two-Child Policy and introducing the Three Child Policy in 2021. The country has also pledged to make pre- and postnatal services and fertility treatment more effective, affordable and accessible. Over the past decade, childhood education has emerged as a key government focus and is now widely available across the country. Local governments enacted subsidy programs for new parents and extended maternity leave. In wealthier regions, new mothers are now entitled to up to 158 days off, up from the 98-day statutory minimum established in 2012. This minimum maternity leave is on par with Japan and is higher than those set by several developed countries, such as Sweden and South Korea (which mandate at least 84 days of leave for new mothers). China also has the highest abortion rate among the world’s largest economies, at nearly 50 abortions per 1,000 women aged 15-49 (compared with 12 in the United States and five in Japan). China is taking measures to curb abortions for non-medical purposes, including sex-selective abortions, and more restrictions are likely as Beijing seeks to boost its population rate.
 
However, these pronatalist policies have so far failed to increase China’s birth rate. Indeed, there are few historical examples of sustained fertility growth in any country once it has dropped. In reality, China’s society is rapidly evolving along the track of other industrialized Asian nations and the global north in general. Marriage rates are declining and divorce rates are increasing — especially in the country’s highly urbanized coastal and eastern cities — amid a general deterioration of traditional social norms.

More couples are also choosing not to have children, and those that are starting families are waiting longer to do so. This is due to several factors. For one, the high cost of housing and education has made child-rearing too expensive for many; according to the Chinese think-tank YuWa Population Research, the average total cost of raising a child in China is nearly seven times per capita GDP (compared with four times in the United States). China’s insufficient social safety net is also deterring people from having children.

The notorious One Child Policy is often cited as the catalyst for China’s shrinking fertility rates. But the ban on having large families may have, ironically, not been necessary to contain China’s population growth, as the effects of the country’s industrialization in recent decades — including urbanization, broad access to education, and women joining the workforce — would have likely naturally slowed fertility rates.

However, population growth is not inherently advantageous. If economic outputs cannot keep pace, resources will become scarce and expensive. Such a predicament led the Chinese government to institute the One Child Policy in the first place, to control overpopulation and increase the standard of living. Growth in terms of per capita GDP can outpace total GDP growth, which is an indicator of greater individual wealth and higher individual productivity. China does not, then, necessarily need to rely on population growth for a stable economic trajectory. At nearly one billion people, China’s working-age population still dwarfs every other country (for comparison, the U.S. working-age population is 215 million, while Japan’s is 74 million).

Instead, China will look to manage a strategic demographic contraction by reorienting its economic fundamentals. This, however, will prove to be a major challenge as such economic fundamentals are encapsulated in retirement and social security, real estate and capital, labor, geography, and broader regional and geopolitical developments — all of which will be explored in the subsequent parts of this series.

[Crafty_Dog]

https://www.scmp.com/news/china/politics/article/3203833/chinas-shrinking-working-age-population-send-ripples-through-global-economy

Explainer | China population: with 2022 set to be a turning point, what’s next as economy, coronavirus take toll?
After increasing by just 480,000 to 1.4126 billion last year, demographers have predicted that China’s population could reach a turning point in 2022
Some 13 out of China’s 31 provincial-level jurisdictions saw their populations shrink last year, with six suffering declines for the first time in modern history
Luna Sun
Luna Sun in Beijing
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Published: 7:00am, 19 Dec, 2022


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China had 267.36 million people aged over 60 at the end of 2021, representing 18.9 per cent of the population, up from 264.02 million a year earlier. Photo: AP
China had 267.36 million people aged over 60 at the end of 2021, representing 18.9 per cent of the population, up from 264.02 million a year earlier. Photo: AP
As China’s path to fully reopening remains murky and chaotic with mounting economic headwinds, one pitfall seems to be more inevitable than others – the looming demographic crisis.
Demographers have predicted that China’s population could reach a turning point in 2022, with bleak birth rates and anecdotal evidence indicating that the increasing economic and political pressures have taken a toll.
The 20th party congress in November highlighted that “timely adjustments” have already been made to China’s childbirth policy, while President Xi Jinping also promised further improvements.
Demographers, though, have argued that it will be difficult for China to reverse the effects of its previous one-child policy amid the ongoing economic disruptions and changing attitudes within society towards marriage and family.
What key population figures were revealed in 2022?
Mothers in China gave birth to just 10.62 million babies in 2021, representing an 11.5 per cent drop from 2020, the National Bureau of Statistics (NBS) confirmed in January.
The national death rate was 7.18 per thousand last year, putting the national growth rate at 0.34 per thousand.

This contributed to an overall population increase of just 480,000 to 1.4126 billion last year.
The national birth rate also fell to a record low 7.52 births for every 1,000 people, down from 8.52 in 2020, to the lowest rate since records began in 1949.
Some 13 out of China’s 31 provincial-level jurisdictions saw their populations shrink last year, with six suffering declines for the first time in modern history.
What’s the make-up of China’s population?
China’s working-age population age – between 16 and 59 – stood at 882.22 million at the end of 2021, representing 62.5 per cent of the population, down from 63.35 per cent in 2020 and 74.53 in 2010.
China had 267.36 million people aged over 60 at the end of 2021, representing 18.9 per cent of the population, up from 264.02 million a year earlier.
Last year, 200 million people were aged 65 and over, up from 190.64 million in 2020, and accounting for 14.2 per cent of the population.

Permanent residents in urban areas increased by 12.05 million to 914.25 million, while rural permanent residents fell by 11.57 million to 498.35 million last year.
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China’s so-called floating population, featuring mostly migrant workers, reached 384.67 million in 2021, 8.85 million more than in 2020.
How many people are getting married in China?
The number of marriage registrations in China dropped by 7.5 per cent in the first three quarters of 2022, reaching 5.4 million, according to official data.
Last year, 7.64 million marriages were registered, which was the lowest total since records began in 1986, according to the Ministry of Civil Affairs.
The number of people getting married for the first time, a statistic more closely tied to new births, dropped to a record low of 11.58 million people last year, down by 708,000 from 2020, to the lowest since 1985.

00:13 / 01:05
Population decline in China raises concerns of economic implications
In November, authorities from the Inner Mongolia autonomous region said three years of coronavirus restrictions had not only brought tremendous impact on the economy, but also affected the normal life of residents, with marriage rates suffering.
​​Official records from Sichuan province showed that the number of marriage registrations dropped by nearly 30 per cent in 2021 compared to 2016.
The local government attributed the decline to a fall in the population within a marriageable age, rising wedding costs and a more diverse perception of marriage.
What’s been done to address China’s population problems in 2022?
After officially ending its one-child policy in January 2016 and responding to the 2020 census results by allowing each couple in the country to have up to three children since May 2021, China has taken further steps this year.
Provincial and municipal authorities have rolled out initiatives to encourage people to have more children, including offering parents more days off work as well as financial support.
In May, Jiangsu also became the first Chinese province to subsidise companies for paying insurance to female employees during their second and third period of maternity leave.
Companies can be reimbursed for 50 or 80 per cent of the social insurance paid to women who have a second child or a third child for six months, in a move viewed as a bid to help counter discrimination against hiring women.
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In November, Ningshan county in Shaanxi province became the first to offer cash subsidies to all couples, with a one-time subsidy of 2,000 yuan (US$287) for one child, 3,000 yuan for two and 5,000 yuan for three.
It also vowed to provide a monthly subsidy of 600 yuan for couples with two children until the second child turns three-years-old, while couples with three children can receive 1,200 yuan per month until the third child reaches 36 months.
In December, Yunnan province also offered one-time cash subsidies for families with a second and third child.
Cities are also loosening home purchase limits for parents with more children, while many have also started to cover assisted productive techniques under medical insurance.

00:04 / 00:30
China to roll out new incentives for couples to have more babies amid birth rate drop
In February, officials in Beijing announced that the city will include more than a dozen fertility services in a government-backed medical insurance scheme.
To address the problem of declining marriage registrations, provincial authorities are even playing the role of matchmaker, with vows to help young people find a partner while also implementing policies to ease financial burdens.
China has also launched a new nationwide marital and maternity survey to gain insight into what is driving the country’s declining marriage and birth rates.
The survey, authorised by the NBS and carried out in conjunction with family planning and demographic authorities, kicked off in September in several regions of Hunan province.
What’s next for China’s population?
Demographers predict that the negative effects of the coronavirus on births will bring the fertility rate in 2022 even lower than it was last year, while many have estimated that China’s population will peak this year and start declining in 2023.
“We will improve the population development strategy, establish a policy system to boost birth rates, and bring down the costs of pregnancy and childbirth, child rearing, and schooling,” Xi said in his speech to the 20th party congress.
Some demographers also see China entering a normalised phase of population decline, meaning the population level could fluctuate around the point of growth stagnation in the coming years before it starts to decline.

00:09 / 00:20
As world population hits 8 billion, China frets over too few babies
Chen Wei, a professor with the Population Development Studies Centre at Renmin University, said earlier this year that China’s natural population growth might not continue falling in the next 10 to 20 years, instead it will fluctuate around zero and could see small declines without rapid decreases.
India is projected to overtake China as the world’s most populous country next year, according to the United Nations’ “World Population Prospects 2022”.
Just three years ago, the UN projection was for India to overtake China by around 2027.
By 2050, China’s population is expected to have fallen to around 1.32 billion, while India’s will have hit 1.67 billion, according to the UN.
China is expected to release its official 2022 population figures at the start of next year.

[Crafty_Dog]

https://www.youtube.com/watch?v=cFgcgf3KwVY

[Crafty_Dog]

China's Inflexible Financial System Amid a Declining Population
undefined and Asia-Pacific analyst with RANE
Nate Fischler
Asia-Pacific analyst with RANE, Stratfor
13 MIN READFeb 22, 2023 | 16:43 GMT





Editor's Note: This column is the third part of an ongoing series that explores China's demographic challenges. Part one can be found here; part two can be found here.

As discussed previously, China's shrinking population and rapidly aging workforce are pushing its government to adjust its social security, pensions and retirement policies. Yet Beijing's success with respect to these issues is intertwined with and will depend on the evolution of the country's broadly inflexible savings, finance and investment mechanisms.

As an economy advances and becomes more complex, the financial system plays an increasingly important role in properly allocating capital and labor to accommodate later stages of economic development. China's financial system, however, has failed to keep pace with its economic growth and increasing degrees of systemic complexity, as evidenced by the country's inefficient stock markets, overreliance on real estate investments, and overfunding of bloated state-owned enterprises.

Without changes that increase high-productivity capital growth, China's inflexible financial structure will continue to impede its economic development, as well as its leaders' ability to offset the impending fallout from the country's population decline. There is no existing model for China's predicament, but certain economic fundamentals will have outsized impacts on whether Asia’s largest economy can escape the middle-income trap in the face of mounting systematic and demographic challenges.

Unwieldy State-Owned Enterprises
China places great emphasis on strengthening specific industries, such as its so-called ''new-energy vehicle'' sector (which includes battery-powered electric cars and plug-in hybrids). But compared with developed economies, the country still lags behind in total productivity growth and innovation — both of which are critical to achieving a high-income economy. Capital allocation has proven a major inhibitor to innovation, which will likely prompt China to diversify its financial system from overly cumbersome state-owned enterprises (SOEs) to more streamlined, high-value-added SOEs and private enterprises while maintaining a high level of government involvement in the economy. China also possesses a plethora of advantages suggesting that a higher degree of innovation is attainable, including an enormous domestic market; generous investments in research and development; millions of scientists, engineers and software developers; and a developing legal framework to protect intellectual property.

Utilizing these advantages, however, has proven difficult. The Chinese government conducted a regulatory crackdown beginning in 2021 on the country's technology sector, which has curbed the angel investor practices of Chinese tech giants like Alibaba and Tencent. Dynamic tech startups built on intellectual property (as opposed to more traditional assets) have thus faced institutional constraints due to inflexible financial channels, political favoritism and weak rule of law, further suppressing innovation. To address these challenges, the Chinese government has said it will prioritize allowing market forces to allocate labor and capital away from bloated SOEs, which generate few patents, and into the far more innovative private sector. But state intervention in industrial planning and non-fiduciary priorities for SOEs confound this reallocation.

China typically has poor overall productivity growth due largely to the injection of capital into inefficient SOEs, which are often tasked with policy goals that limit their productivity. The government uses SOEs to fulfill social responsibilities like stabilizing employment. This, however, not only leads to employee redundancy that reduces worker efficiency and profits, but perpetuates Chinese workers' so-called ''iron rice bowl'' expectations of having a reliable job and long-term benefits. State support for SOEs — like preferential access to loans and financing, state bailouts and state contracts that significantly reduce the need to be competitive — also perpetuates China's inefficient allocation of capital and thus labor.

China has frequently stated it will enforce equal treatment and competition neutrality principles to reduce SOE inefficiencies. But it has rarely acted on these statements, which has created increasingly capital-needy state entities by letting stronger SOEs continue to merge with and acquire weaker ones. When the mostly state-owned companies in strategic sectors find themselves on the brink of bankruptcy, Beijing has also shown an unwillingness to let them fail — opting instead to continuously bail them out. China's hesitance to let SOEs go under is partially driven by the desire to prevent major layoffs that could lead to unrest. Yet reducing labor inefficiencies is key to boosting income, which is necessary to help ameliorate the challenges of a diminishing workforce.

Risky Banking and Underdeveloped Credit Systems
Credit allocation is a major factor in financial health, but decisions to that effect in China are typically made with heavy reference to window guidance (or regulatory directives vis-a-vis the credit supply as a means to realize policy goals) provided by the central bank or other government bodies, as opposed to market forces, which can distort valuations. China's decades of rapid economic growth saw liquidity expand and real estate and asset prices skyrocket. Households, businesses and financial institutions were then incentivized to ride the wave and take on risks that allowed them to systemically outperform those that did not, creating widespread individual and systemic financial risk brought on by financial distortions. Inverted balance sheets continue to drive insolvency risk, particularly as previously underlying economic assumptions — such as perpetually rising asset values, expanding liquidity and monetary stability — fluctuate unpredictably. This has been acutely demonstrated by China's ongoing real estate crisis, where the debt value of assets in a formerly reliable sector outpaced real value throughout the market and led to widespread default.

This highlights China's need to transfer GDP share to the household sector and provide investment avenues that more readily respond to market dynamics, which further implies a need to expand access to household credit. China, for a middle-income economy, has relatively high levels of bank and savings account ownership but low levels of formal credit use, with informal networks (such as friends and family) and informal credit from subprime financial markets being far more common. Informal credit carries a higher cost and financial risk in largely unregulated financial activity and is not effectively reinvested into the economy. Beijing wants to increase access to formal credit for individuals, as it did in 2022 by cutting lending rates in response to economic struggles and the depreciation of the yuan. But this has been complicated by the lack of credit rating agencies in China, making it difficult to gauge risk. Such an increase would give Chinese households greater access to purchases that are likely to appreciate in value over the long term, such as education and stocks. China's social credit score system is meant to partially address this issue, along with giving the state another lever of control over markets. Ultimately, the goal is to boost household spending power and, in turn, help offset the economic impact of China's demographic decline by strengthening consumption, ensuring each person spends more as the country's population shrinks. If China has fewer people but each spends more, this will help offset some of the economic headwinds inherent to a smaller population.

Overreliance on Real Estate
The volatility of China's stock markets has made them unreliable investment avenues. As a result, Chinese household investment remains heavily concentrated in real estate and other physical assets. Chinese investors also largely do not own many stocks or other forms of capital. But real estate holdings cannot be quickly turned into cash for consumers and investors — making them a highly underutilized source of capital with limited economic value.

The inability to effectively utilize capital — as well as China's recent real estate slowdown — is a driver for persistent capital flight, even after tightened regulations in 2016. China is broadly attempting to redirect investment into the country's stock markets and end its overreliance on real estate, which comprises about 70% of household wealth and generates about 30% of China's GDP. But as the primary store of household wealth, real estate cannot be unwound before Beijing establishes a viable investment alternative, which it is attempting to do by developing the country's private wealth management sector.

At the same time, China may need to undertake measures to help its ailing real estate sector due to the industry's economic importance. This could see Beijing relax the so-called ''three lines policy'' it introduced in 2020, which has since wreaked havoc on China's real estate sector by severely limiting the amount of debt property developers can take on. Without the ability to increase debt to fuel their growth, Chinese developers have scaled back their construction plans, pushing several into default. As Beijing tries to balance continued austerity and speculation busting with the overall health of the sector, it may loosen borrowing restrictions for the healthiest property developers, thereby providing these companies with enough liquidity to complete some of the unfinished projects that have recently triggered mortgage boycotts and unrest. Combined with Beijing's recent moves to improve mortgage terms for first-time homebuyers, this could help reinvigorate modest consumer demand for housing, which has fallen since the implementation of the ''three red lines'' policy. But the key would be to do so without re-incentivizing consumers to use real estate as an investment vehicle.

In addition to being a source of investment, China also sees real estate as a tool to support birth rates. Many local governments now provide loans and housing subsidies to families with two or three children, particularly in lower-tier cities where people are relocating for lower living costs — a practice that will only expand in the coming years.

China may seek to increase real estate taxes as well. Currently, the government only collects taxes on owned real estate assets (like properties) when the ownership is transferred — effectively making China the only major economy without a real estate tax. In addition to redirecting investment to the stock markets, China may make slow regulatory adjustments that enable the government to collect a low level of tax income on owned assets. Instituting a tax would put real estate into circulation as taxable rental housing as opposed to the current situation wherein every time a property is occupied it loses value. China has toyed with introducing real estate tax programs, but Beijing may be ambivalent to pursue such ideas in the near term amid the ongoing real estate crisis for fear of further disincentivizing homebuying.

Decreasing housing demand has translated to lower property values and higher vacancy rates in recent years — a trend that risks solidifying as China's population shrinks and further dampens demand, putting even greater pressure on the country's leaders to develop more efficient investment mechanisms.

Inefficient Stock Markets
In the coming years, China will likely look to improve the stability and productivity of its stock markets by, for example, supporting the growth of the private wealth management industry (especially for foreign firms in China) and diversifying into higher growth sectors like technology. China introduced two domestic stock markets in Shanghai and Shenzhen in 1990, and its stock markets' total market capitalization is now second only to that of the United States. Nonetheless, the system remains less efficient than its Western counterparts — largely because the original purpose of China's stock markets was to raise funds for SOEs, not to build a sound market economy. The stock markets' early days were characterized by rampant public speculation and day trading, which sank many investors and contributed to the perception that they were unreliable investment destinations, exacerbating the overexposure of citizens and institutions to real estate. Today, China's stock markets only account for around 3% of financing that the real economy can access, as measured by the country's Aggregate Financing to the Real Economy (AFRE).

IPOs, for their part, are often used for political means (like inflating a local government's economic portfolio), blurring the value of what is typically considered a reliable economic growth data point. IPOs are also constrained by lengthy approval processes and tight regulations that lead to frequent trading suspensions imposed by the China Securities Regulatory Commission (CSRC). These delays and interruptions often damage corporate credit and incentivize reverse mergers, leading to underperforming public firms and a near-zero delisting rate. Though this is slowly changing under tighter delisting regulations that seek to clear out shell and zombie companies by raising standards based on financial performance, share performance, compliance and law violation. Further, the CSRC on Feb. 1 began allowing companies to register IPOs directly with the Shanghai and Shenzhen stock exchanges, reducing regulatory hurdles. Such IPO reforms indicate that the actual health of an enterprise will play an increasingly prominent role in the country's stock markets, thereby increasing competition and making the stock markets a more reliable investment destination for small, medium and household investors. This will be crucial to boosting innovation through private enterprise, increasing household wealth and increasing consumption — all of which will be key in helping China navigate its middle-income transition and offset the adverse effects of its population decline.

Looking Forward
China's efforts to redirect investments away from real estate and into the stock markets imply the need to absorb a substantial amount of economic costs brought on by bad debt from mismatched balance sheets. China's accumulated public and private debt in all sectors of the economy totals upwards of $51.9 trillion, or nearly three times its GDP — amounting to a debt burden larger than that of the United States (which, as a developing economy, China is less prepared to manage). China's debt levels will only grow as retired dependents make up a larger share of the population due to pensions, insurance, healthcare and other social spending costs, highlighting the need to bring the country's financial systems up to speed with its increasingly complex economy.

Absorbing the costs of this redirection will probably fall squarely to the government (and, subsequently, local governments) as Beijing is unlikely to put the burden on businesses or households. The success of this redirection will be critical to China's success in weathering its impending demographic decline, since raising the GDP share of the household sector is necessary to drive a consumption-based economy.

Chinese policymakers understand that ensuring continued economic growth with a shrinking and rapidly aging population will require systematic changes that reorient China's economic fundamentals. They are already making substantive policy decisions to this effect. But deeply rooted institutional norms and co-dependent goals (like the fact that China cannot redirect household investment out of real estate without first boosting the efficiency of its stock markets) will ultimately constrain the impact of such decisions. Beijing will also need to reduce its favoritism for SOEs in order to realize its capital allocation goals, but non-fiduciary social responsibilities and the need to maintain employment for the sake of social stability will make this difficult. Potential solutions need to further account for additional strains emanating from China's labor mismatch, geographic divide and broader geopolitical challenges, which will be explored in the subsequent parts of this series.

[ya]

To know when China will initiate a war over Taiwan, watch their UST holdings, currently at 867 B. The last few years have shown a  decline in Chinese UST holdings. Based on that the war over Taiwan is still a few years away.

https://ticdata.treasury.gov/resource-center/data-chart-center/tic/Documents/mfh.txt

For historical data see here https://ticdata.treasury.gov/resource-center/data-chart-center/tic/Documents/mfhhis01.txt

[G M]

An interesting analytical point!

To know when China will initiate a war over Taiwan, watch their UST holdings, currently at 867 B. The last few years have shown a  decline in Chinese UST holdings. Based on that the war over Taiwan is still a few years away.

https://ticdata.treasury.gov/resource-center/data-chart-center/tic/Documents/mfh.txt

For historical data see here https://ticdata.treasury.gov/resource-center/data-chart-center/tic/Documents/mfhhis01.txt

[DougMacG]

Yes, good point.  Looks like already headed in that direction.
-----------
"UST holdings, currently at 867 B. The last few years have shown a  decline in Chinese UST holdings."

As an aside, China is not buying our debt (in recent years) as some keep saying, it's a net negative.  Even when it was over a trillion total holding, it was a cupful in a now 32T(?) bucket. 

Further aside, why are we still in deficit at all and still needing anyone to buy our debt?

[Crafty_Dog]

Despite Recent Growth, China's Economy Is Still Headed for a Greater Slowdown
Apr 5, 2023 | 19:28 GMT





People walk on a street at the end of the workday in Beijing, China, on March 17, 2023.
People walk on a street at the end of the workday in Beijing, China, on March 17, 2023.

(GREG BAKER/AFP via Getty Images)

Despite the post-COVID uptick in economic activity, China's medium-term growth potential will continue to decline, while macro-financial vulnerabilities will remain elevated, which will accelerate efforts to strengthen political oversight of the economy — especially as policymakers try to reduce China's exposure to external economic pressure. Over the past 40 years, Chinese policymakers have proven remarkably adept at maintaining high growth rates while effectively managing financial risks. The government has relied on a mixture of state-led economic development and gradual, market-oriented liberalization. More recently, the government has backtracked on market-oriented reform despite previous commitments to let markets play a ''decisive role'' in economic development. China's political economy model has traditionally proved very effective in terms of mobilizing savings and channeling them into strategic sectors. A combination of financial repression (keeping interests on bank deposits low) and government-guided bank lending provided a cheap and stable source of funding for development-oriented, strategic economic sectors. Today, however, this system is channeling savings into relatively low-productivity sectors, like real estate and physical infrastructure, creating financial vulnerabilities and limiting future economic growth.

China's real GDP growth has averaged 8-9% over the past four decades. Recently, however, ten-year average economic growth has slowed to 5%. The government's official growth target for 2023 is ''around 5%.''
At the Chinese Communist Party's Third Plenum in 2011, China committed itself to letting markets play a ''decisive role'' in the country's economic development. Over the past few years, however, Beijing has increased the role of the government (and thereby the Communist Party) in state-owned enterprises and has announced its intention to do the same in the case of private Chinese companies.

China's traditional approach to economic development has been strained for some time, and the continued failure to reform it will increasingly weigh on the economy's medium-term growth outlook. The International Monetary Fund (IMF) and most private-sector economists expect China's real GDP growth rate will continue to decline, which will put pressure on China's political economy model and financial stability. China's banking system intermediates a large share of total domestic savings, channeling significant amounts of it into the real estate and infrastructure sectors, which then leads to banks holding large financial claims on real estate companies and households. At the same time, local-government-backed funds — so-called local government financing vehicles (LGFV) — also raise funds to finance local infrastructure and housing projects, while local governments in China derive revenue from real-estate-related land sales. This system is highly interconnected, and financial problems in one part of it can quickly cascade through the entire system. Moreover, the system works well as long as there is sufficient demand for real estate and infrastructure, prices continue to rise, supported by solid economic growth, and borrowers are able to repay their debt. Moreover, the system works well as long as there is solid economic growth, sufficient demand for real estate and infrastructure, a continued rise in real estate prices, and borrowers are able to repay their debt. But banks face potentially significant losses if real estate companies are placed under financial distress and mortgage defaults rise. China has experienced a slight uptick in credit losses tied to the real estate sector, following the introduction of greater restrictions on real estate developers. These losses, however, have so far been relatively minor. If real estate prices fall or infrastructure investment proves unprofitable, banks will experience financial losses and LGFVs may be forced into bankruptcy or restructuring. To the extent that these vehicles are backed by local governments, the authorities may then be forced to bail them out at a time when they start to lose revenues from declining land sales. Viewed from a macro angle, ''excess savings'' are being channeled into sectors of the economy that will generate low returns and low productivity growth, which will weigh on China's medium-term economic growth and increase the risks of financial losses.

Bank loans amounted to 180% of China's GDP in 2022, up from less than 100% in 2008 and 150% of GDP in 2018. An alternative measure of domestic non-financial debt stands at around 300% of GDP, which is extremely high by international standards — particularly for a middle-income economy.
Land sale-related local government revenue amounts to 2-3% of China's GDP, while LGFV-related debt amounts to about 40%.
Chinese policymakers are fully aware of the significant medium-term economic challenges and macro-financial risks related to overinvestment in real estate and infrastructure, but they will continue to struggle to rebalance the economy. To the extent that policymakers are successful in terms of rebalancing the economy away from overinvestment in real estate, economic growth will slow, unless savings can be put to better use. According to the IMF, China's domestic savings rate amounts to 45% of GDP. It is impossible to reduce the excess domestic savings rate from 45% of GDP to, for example, a more reasonable 35% within just a couple of years without causing major disruptions, the very thing Beijing is trying to avoid. This means there is no such thing as a quick fix to China's economic challenges, leaving Beijing with no choice but to gradually adjust the country's economic model. If Chinese authorities continue to go slowly in terms of reducing the importance of the real estate and infrastructure sectors and limiting concomitant financial risks, financial instability risks will remain manageable due to China's high savings rate, significant control over the financial system and capital controls. Effectively, the entire system will remain backstopped by the government. A precipitous downward shift in economic growth, however, would expose these vulnerabilities immediately; by the same token, a precipitous reduction in real estate and infrastructure investment would lead to a sharp economic slowdown. This is precisely why Beijing has opted for a gradual approach. Such slow and steady policy adjustment will still lead to declining economic growth (and, in turn, increasing — if manageable — financial losses), but it will also make that slowdown more manageable overall.

Estimates vary, but most put the combined direct and indirect contribution of China's infrastructure and real estate sectors at 20-30% of GDP.
Non-performing loans (NPLs) stand at less than 2%, but the NPL ratio is a backward-looking indicator.
In light of deteriorating medium-term growth prospects and continued domestic financial vulnerabilities, Chinese policymakers will intensify efforts to limit China's susceptibility to foreign economic and political pressure. In addition to the aforementioned domestic challenges, China is also facing mounting foreign economic pressure — particularly from increasing U.S. investment and export restrictions — that could further hamper its economic growth by targeting innovative, high-productivity tech sectors, such as semiconductor chips, artificial intelligence and quantum computing. To mitigate this threat, the government will accelerate policies geared toward the ''securitization'' of foreign economic relations. In addition, Beijing will press for a more rapid shift toward ''dual circulation,'' a policy focused, among other things, on increasing domestic consumption and reducing supply chain vulnerabilities. But while these policies will help make China's political economy less susceptible to external shocks, they will also further weigh on medium-to-long-term economic growth. Greater state intervention and a lower degree of economic and financial openness will be less conducive to competition, innovation and hence economic growth. Chinese policymakers might be able to halt a slide in economic growth if they strengthen the role of the private sector and limit government interference in growth-oriented, high-productivity sectors. But Beijing is unlikely to offset these securitization measures with further market liberalization, despite such reform being needed to ward off a precipitous deceleration of economic growth that could keep China from reaching high-income status (a phenomenon known as the ''middle-income trap'').

The IMF expects Chinese real GDP growth to fall below 4% over the next four years. Some private-sector economists expect the growth rate to decline to a mere 3% before the end of the decade.
Under the leadership of President Xi Jinping, China announced a policy of ''comprehensive national security'' in 2014. In view of intensifying conflict with the United States, the trend toward increased political control will likely continue to limit market-based competition and weigh on productivity and economic growth.
China is the world's second-largest economy in nominal dollar terms at market exchange rates. It is the world's largest economy in purchasing power parity terms, a more accurate measure of economic size.

[Crafty_Dog]

Anti-War Post Goes Viral on Chinese Social Media Amid CCP’s Increased Aggression Toward Taiwan
Chinese People's Liberation Army (PLA) soldiers taking part in military training at Pamir Mountains in Kashgar, northwestern China's Xinjiang region, on Jan. 4, 2021. (/AFP via Getty Images)
Chinese People's Liberation Army (PLA) soldiers taking part in military training at Pamir Mountains in Kashgar, northwestern China's Xinjiang region, on Jan. 4, 2021. (/AFP via Getty Images)
Alex Wu
By Alex Wu
April 30, 2023Updated: April 30, 2023
biggersmaller Print

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The Chinese communist regime’s threats to annex Taiwan by force has escalated this year, accompanied by its more frequent military incursions into Taiwan’s water and air territories. Meanwhile, an anti-war post denouncing the regime’s war efforts has gone viral on Chinese social media platforms, resonating with countless Chinese citizens.

The post reads: “If the war breaks out, I will not go, and I will not let my children go. I am a person who lives at the bottom of society. No one remembers us in times of peace. Only in times of difficulty do they just begin to think of us. They say that when the country is in trouble, everyone needs to fulfill their duty. But they are not giving us the same treatment when they receive benefits or enjoy national privileges. Whoever wants to go to the war, go ahead. Anyway, I will not go, and I will not let my children go.”

Epoch Times Photo
Chinese People’s Liberation Army cadets conduct bayonet drills at the PLA’s Armoured Forces Engineering Academy in Beijing on July 22, 2014. (Greg Baker/AFP/Getty Images)
The anti-war post has been reposted on various online platforms in mainland China, and many netizens shared similar views in their online comments.

One asked in a post: “The children and wives of high rank officials have all moved to the United States. Why should we, the common people, have to risk our lives [to go to war for them]?”

Another said in a post, “Give me a weapon and see who I will fire at. I will definitely target those who force me to go to the battlefield. I have no grudges against anyone else.”

A netizen named “Le Si” posted on the Quora-like platform Zhihu, “Those who have received more benefits from the country should be more active to join in the war.”

Epoch Times Photo
Customers dine near a giant screen broadcasting news footage of aircraft under the Eastern Theatre Command of China’s People’s Liberation Army (PLA) taking part in a combat readiness patrol and “Joint Sword” exercises around Taiwan, at a restaurant in Beijing, China, on April 10, 2023. (Tingshu Wang/Reuters)
Some netizens also suggested that corrupt officials should be sent to the war, “Let urban management and agricultural management personnels go first!”

In another post on Zhihu, a netizen named “Thinking Slowly about the World” shared his views on the reasons why “unwilling to fight for the country” has resonated with so many Chinese people.

“First, the abuse of power and mistreatment of people by agricultural management, urban management, and even traffic police have caused significant negative impact, especially the agricultural management personnels who offended at least 60 percent of the public.”

The second reason is the huge disparity between the rich and poor in Chinese society, the netizen wrote, “such as the COVID-19 PCR testing product companies using the pandemic to make tens of billions of dollars.”

The third reason is the communist officials’ mass corruption, the post said. “They use their power to benefit their cronies, which is disgusting. That’s why some netizens asked, ‘Who are we going to defend? To defend ‘young master’ Zhou or to defend the ‘arctic catfish’ with nine-figure savings?’”

Zhou refers to Zhou Jie, the son of a Chinese Communist Party (CCP) official in Jiangxi Province who once flaunted his wealth on social media, saying that the tea he drank cost 200,000 yuan a catty (about $22,000/lb).

The “arctic catfish” is the name used by Chinese on social media for the granddaughter of a retired Shenzhen city official who is now studying in Australia. She bragged on social media that her family have nine-figure savings, all of which are provided by the common Chinese people, which triggered public anger.

Continuous Sentiment
This is not the first time that the Chinese public has expressed anti-war sentiment towards the CCP’s war mobilization efforts and war propaganda.

In February, mainland Chinese media published an article online, which read: “If the motherland has the need, will you go to the front line?” The report claimed that 94 percent interviewees were “willing to come forward.”

However, posts in the comment section of the article showed overwhelmingly the opposite response. Chinese netizens posted one after another: “Let the officials go first.”

“If I get conscripted, then I will rebel since I’ll have a gun in my hand.”

Epoch Times Photo
Chinese People’s Liberation Army (PLA) soldiers assembling during military training at Pamir Mountains in Kashgar, northwestern China’s Xinjiang region, on Jan. 4, 2021. (STR/AFP via Getty Images)
The CCP has taken a series of actions to prepare for war, most likely to invade Taiwan and repel the United States and Japan who would come to Taiwan’s aid.

The CCP has implemented new military Reserve Personnel Law on March 1, which raised the upper age limit for various ranks in China’s reserve forces, from soldiers to officers, up to 60 year-old.

The Chinese regime also passed a resolution on Feb. 24 to adjust the application of some provisions of Criminal Procedure Law for the military during wartime, which took effect on Feb. 25. The new adjustments took aim at “crimes of a military nature” that might pose a threat to the CCP, such as “defection and desertion” in the military during wartime.

The resolution also outlined a legal basis for the CCP to declare martial law if needed for domestic control.

China affairs commentator Li Dayu said of the anti-war post during his NTD News talk show on April 29: “If what the regime does really represents the will of the people, and its rule is really recognized by the people, people will not talk about it like this,” he said of the CCP.

“Starting an unrighteous war, what they will get is people’s indifference, and people will even help the other side.”

Li Yun contributed to this report.

[Crafty_Dog]

Deeper Economic Struggles
Ballooning debt, tepid consumption and worsening relations with the West to weigh on growth, economists say
By Stella Yifan XieFollow
 and Jason DouglasFollow
May 30, 2023 12:01 am ET

China’s era of rapid growth is over. Its recovery from zero-Covid is stalling. And now the country is facing deep, structural problems in its economy.

The outlook was better just a few months ago, after Beijing lifted its draconian Covid-19 controls, setting off a flurry of spending as people ate out and splurged on travel.

But as the sugar high of the reopening wears off, underlying problems in China’s economy that have been building for years are reasserting themselves.

The property boom and government overinvestment that fueled growth for more than a decade have ended. Enormous debts are crippling households and local governments. Some families, worried about the future, are hoarding cash.

Chinese leader Xi Jinping’s crackdowns on private enterprise have discouraged risk-taking, while deteriorating relations with the West—exemplified by a new campaign against international due-diligence and consulting firms—are stifling foreign investment.

Economists say these worsening structural problems are hobbling China’s chances of extending the growth miracle that transformed it into a rival to the U.S. for global power and influence.

Instead of expanding at 6% to 8% a year as was common in the past, China might soon be heading toward growth of 2% or 3%, some economists say. An aging population and shrinking workforce compound its difficulties.

China could drive less global growth this year and beyond than many business leaders expected, making the country less important for some foreign companies, and less likely to significantly surpass the U.S. as the world’s biggest economy.

“The disappointing recovery today really suggests that some of the structural drags are already in play,” said Frederic Neumann, chief Asia economist at HSBC.

China’s economy expanded at an annual rate of 4.5% in the first quarter, boosted by the end of Covid-era restrictions.

Yet more recent signals suggest the revival is ebbing. Retail sales rose 0.5% in April compared with March. A bundle of data on factory output, exports and investment came in much weaker than economists were expecting.

More than a fifth of Chinese youths aged 16 to 24 were unemployed in April. E-commerce companies Alibaba and JD.com reported lackluster first-quarter earnings. Hong Kong’s Hang Seng Index, dominated by Chinese companies, is down 5.2% year to date, and the yuan has weakened against the U.S. dollar.

Most economists don’t expect China’s problems to lead to recession, or derail the government’s growth target of around 5% this year, which is widely seen as easily achievable given how weak the economy was last year.

McDonald’s and Starbucks have said they are opening hundreds of new restaurants in China, while retailers including Ralph Lauren are launching new stores.

A boom in electric-vehicle production allowed China to surpass Japan as the world’s largest exporter of vehicles in the first quarter. Beijing’s industrial policies and China’s manufacturing prowess mean it is still finding ways to succeed in some major industries.

“We still have confidence in the long-term growth story of China,” said Phillip Wool, head of research at Rayliant Global Advisors, an asset manager with $17 billion under management. He said the country’s transition to one that relies more on domestic consumption instead of exports will help keep it on track.

Still, many economists are growing more worried about China’s future.

The big hope for this year was that Chinese consumers would step up spending, as the main drivers of China’s past growth—investment and exports—languish.

But while people are spending somewhat more after almost three years of tough Covid-19 controls, China isn’t experiencing the kind of surge other economies enjoyed when they emerged from the pandemic.

Consumer confidence is low. More important, some economists say, is that Beijing hasn’t been able to meaningfully change Chinese consumers’ long-running propensity to save rather than spend—a response to a threadbare social-safety net that means families must sock away more for medical bills and other emergencies.


Chinese household consumption accounts for around 38% of annual gross domestic product, according to United Nations data, compared with 68% in the U.S.

“Consumer-led growth has always been a bit of an aspirational target” for China, said Louise Loo, China lead economist in Singapore at Oxford Economics, a consulting firm. Now, it might be even harder to achieve, she said, given how cautious Chinese consumers are coming out of the pandemic.

Although Beijing is trying to make it easier to borrow this year, lending data indicate households prefer to pay down debt than take on new loans.

In March, Zi Lu dipped into her dowry and paid off the remaining 1.2 million yuan, equivalent to about $170,000, on her mortgage for an apartment she bought in Shanghai two years ago. Working for an e-commerce retailer, she said sales have been underwhelming this year. Lu said she is anxious and wants to reduce her debt burden.

“I’m scared of getting laid off out of the blue,” she said.

Also looming over the economy is its massive debt pile.

Between 2012 and 2022, China’s debt grew by $37 trillion, while the U.S. added nearly $25 trillion. By June 2022, debt in China reached about $52 trillion, dwarfing outstanding debt in all other emerging markets combined, according to calculations by Nicholas Borst, director of China research at Seafarer Capital Partners.

As of last September, total debt as a share of GDP hit 295% in China, compared with 257% in the U.S., data from the Bank for International Settlements shows.

Viewing the debt buildup as a threat to financial stability, Xi has made deleveraging a centerpiece of his economic policy since 2016, weighing on growth.

To help deflate the country’s housing bubble, regulators imposed strict borrowing limits for property developers from late 2020. Property development investment fell 5.8% in the first quarter of this year despite policy efforts to stem the pace of the slide.


Two-thirds of local governments are now in danger of breaching unofficial debt thresholds set by Beijing to signify severe funding stress, according to S&P Global calculations. Cities across the country from Shenzhen to Zhengzhou have cut benefits for civil servants and delayed salary payments in some cases for teachers.

These problems are deepening when China’s appeal as a destination for foreign firms is waning, data show, as tensions rise with the U.S.-led West.

Foreign direct investment into China tumbled 48% in 2022 compared with a year earlier, to $180 billion, according to Chinese data, while FDI as a share of China’s GDP has slipped to less than 2%, from more than double that a decade ago.

Competition for investment with countries including India and Vietnam is heating up as firms seek to diversify supply chains, partly in response to the risk of disruption from conflict between the U.S. and China.

Jens Eskelund, president of the European Union Chamber of Commerce in China, said uncertainty over China’s long-term economic prospects is another factor in companies’ investment decisions.

“Naturally, it dampens the willingness to go out and invest in additional capacity if you are not super optimistic about the economic outlook,” he said.

Reforms to foster more productive, private-sector activity have stalled under Xi, who is placing greater emphasis on security than economic growth. Beijing has tightened regulation of sectors including technology, private education and real estate, leaving many business owners unwilling to invest more.


In the first four months of this year, fixed-asset investment made by private firms grew 0.4% from a year earlier, compared with 5.5% growth in the same period in 2019.

Chinese leaders have dialed up rhetoric to reassure entrepreneurs and investors. Li Qiang, China’s No. 2 official and new premier, said in March that China will open further to foreign players, and told Communist Party officials to treat private entrepreneurs as “our own people.”

Economists are split over whether policy makers, who have held off on launching large-scale stimulus as they did in 2008 and 2015, will resort to more aggressive stimulus now. Some, including economists from Citigroup, expect China’s central bank to cut interest rates in the coming months to lift sentiment.

Others say that Beijing’s restraint stems from fear of compounding already-high debt levels, and that more stimulus might do little to trigger demand for credit anyway.

Jeff Bowman, chief executive of Cocona, which makes temperature-regulating materials used in apparel and bedding, said he is still optimistic about China. He said that during a recent two-week business trip to Taiwan and China, customers who were focused on China’s domestic market were far more upbeat than their counterparts exporting to the U.S. or Europe, who he said “are hurting for sure.”

He said that Cocona, based in Boulder, Colo., plans to set up a subsidiary in China to expand its business there.

But many analysts still wonder where the growth will come from.

“The big question is, have we reached the point where awareness of the structural slowdown is becoming a near-term issue for confidence? Then it’s a bit of a vicious cycle,” said Michael Hirson, head of China research at 22V Research, a New York-based consulting firm.

Write to Stella Yifan Xie at stella.xie@wsj.com and Jason Douglas at jason.douglas@wsj.com

[ccp]

listened to John Batchelor show last for short time
missed a lot of it

guest was telling John how the Chinese consumer had reduced spending
which China has relied on for the economy - even on mundane items like detergent

plus CCP had made poor investments overseas losing hundreds of billions

tried to find podcast on line

will post if I find it

[Crafty_Dog]

Malinvestment is broad and deep.

[Crafty_Dog]

https://www.theepochtimes.com/in-depth-chinas-economy-is-faltering_5329514.html?utm_source=China&src_src=China&utm_campaign=uschina-2023-06-24&src_cmp=uschina-2023-06-24&utm_medium=email

[G M]

https://www.theepochtimes.com/in-depth-chinas-economy-is-faltering_5329514.html?utm_source=China&src_src=China&utm_campaign=uschina-2023-06-24&src_cmp=uschina-2023-06-24&utm_medium=email

https://amp.scmp.com/news/china/military/article/3225127/can-china-fix-youth-unemployment-woes-military-recruitment-drive

[Crafty_Dog]

A tempting linkage indeed!

[Crafty_Dog]

How Geopolitical Challenges Complicate China's Demographic Future
undefined and Asia-Pacific analyst at RANE
Nate Fischler
Asia-Pacific analyst at RANE, Stratfor
Jul 5, 2023 | 14:52 GMT





An elderly man and woman are pushed in wheelchairs along a street in Beijing, China, on May 11, 2021.
An elderly man and woman are pushed in wheelchairs along a street in Beijing, China, on May 11, 2021.
(Photo by WANG ZHAO/AFP via Getty Images)

Editor's note: This column is the conclusion to a series that explores China's demographic challenges. In parts one, two, three, four and five, we examined China's retirement, pension, financial and labor systems, as well as China's geographic divides. This final section outlines how external factors and geopolitics complicate the picture.

China's population is forecast to almost halve by the end of the century. While no country has attempted to economically overcome a population decline of this magnitude, the previous parts of this series have argued that China can surmount the risks of its shrinking population if it passes necessary (and sometimes painful) policies. These policies would aim to manage China's retirement and social security systems, the suboptimal relationship between real estate and capital markets, labor mismatch, geographic divides, and the transition from a middle-income to a high-income economy.

Nevertheless, there is no demographic or economic model for China's road ahead, especially in the face of geopolitical circumstances that are sometimes well beyond China's direct control. Chinese policymakers have staked the country's assertive geopolitical strategy on the assumption of a declining West and an ascendant China, but demographic issues and slowing economic growth suggest that this assumption may be flawed. This exposes a gap between strategic objectives and real capacity that spells risk to China's development.

Demographics and the Military
China's workforce peaked in 2011. Since then, China's labor pool has continued to shrink at an accelerating rate, and the total populations of the United States and its allies, which already total 70% of China's, are forecast to reach parity with China's around 2050. What's more, the population gap between the United States and China will likely shrink to a relatively small 400 million (from around 1.1 billion currently) by 2100. Though this timeframe is beyond the scope of immediate concerns, it speaks to the notion that time is no longer on China's side.

One way this shrinking population will affect China's strategic goals (beyond the economic implications discussed in previous parts of this series) is by lessening the conventional manpower available for the country's still untested armed forces. This development will put even more pressure on the country to develop its high-tech sector. China has already likely achieved technological superiority over the United States in certain areas, such as hypersonic missiles, but Beijing will have to make even greater technological gains in the military space to compensate for its waning populace.

This time crunch has also contributed to Chinese President Xi Jinping's distinct foreign policy choices, such as a slow strategic and rhetorical retreat beginning around 2014 from the longstanding "hide your strength, bide your time" mantra cultivated in the late 1970s. Under Xi, China has more actively pressed its territorial claims (Taiwan, the South China Sea and the East China Sea) and challenged perceived U.S. hegemony in the Asia-Pacific region and beyond. While this policy shift partially reflects China's vastly improved military capacity, it is also due to China's closing window of opportunity — both in terms of population decline and the diminishing economic dividend.

While this sense of urgency could lead China to take more drastic military actions, war would severely exacerbate the country's demographic challenges. Because the vast majority of Chinese families have only one child, a full-blown armed conflict could extinguish millions of Chinese bloodlines, creating an acute risk of social turmoil and widespread anti-government sentiment. This possibility will limit Beijing's willingness to pursue large-scale conflict, revealing how demographic decline is both a driver of and a constraint on China's geopolitical ambitions.

Pressure on the Social Contract
The Chinese social contract since the days of former leader Deng Xiaoping has been that the Party will provide economic prosperity if the people remain loyal and quiescent on political matters. To date, the government and populace have by and large upheld their ends of the bargain. However, the viability of this contract is declining since China can no longer rely on outsized economic growth to fuel an increase in living standards, leading to a projected new normal of 3-5% annual economic growth in the medium term. As the economy slows, socioeconomic inequalities will increase alongside sharpening geographic divides and regionalism. With enough strain, China's social contract could rip open, potentially leading to protests, unrest and, perhaps more consequentially, widespread doubt as to the Party's political legitimacy.

These domestic risk factors have previously contributed to government overthrow, which is a chief fear among policymakers. To forestall this possibility, Beijing will seek to enhance its legitimacy and create unity by increasingly emphasizing national security and Chinese nationalism. Utilizing a siege mentality, China will claim that the United States and its partners are attempting to contain China's growth, which, given that this is by and large the case, will not be a difficult idea to sell. The Party previously changed the focus of its social contract from revolutionary ideology under Mao Zedong to pragmatic economic development under Deng, showing that a fundamental shift in the source of the Party's legitimacy has worked before. However, even a successful transition of the social contract will happen incrementally and keep Beijing vulnerable to policy failures that may chip away at its legitimacy.

Tech Restrictions
In recent months, the United States has imposed export controls to block China from accessing technology and machinery used to produce semiconductors and has convinced some of its allies — such as Japan and the Netherlands — to follow suit. Given that China lags behind in cutting-edge semiconductor manufacturing equipment capacity — and has little recourse to circumvent these export controls for the time being — these restrictions are severely inhibiting China's semiconductor sector and, by extension, its plans for high-tech innovation intended to spearhead the country's economic transition. Moreover, the United States is considering similar export controls on artificial intelligence (AI) and cloud computing technologies, and the European Union is discussing its own set of restrictions on technology exports to China. This suggests that supply chain resiliency will play a larger role in Chinese foreign affairs and policymaking going forward in an attempt to bypass and neutralize these Western-led restrictions.

These export controls are also compounding China's employment struggles. China's youth unemployment rate hit a new high of 20.8% in May, revealing that there is a significant discrepancy between the increasing number of highly educated Chinese workers and the number of jobs that meet their qualifications. With Western nations constraining the growth of China's technology sector, this trend will likely only grow, further straining China's social contract. However, Western countries' attempts to cut off China's access to emerging technologies will make it easier for Beijing to emphasize the importance of national security as that social contract adopts a new focus.

International Leadership
An additional geopolitical challenge for China is resource scarcity, particularly with respect to its ever-growing demands for fuel and other energy sources, as well as high-protein foodstuffs. Because China does not have enough of these resources within its borders to ensure a smooth economic transition, it will look to increase its footprint and investments abroad, partially via Beijing's Belt and Road Initiative (BRI). BRI investments enable China to expand its influence in younger (and primarily less developed) Eurasian countries with lower labor costs, while also linking the region to tertiary Chinese territories in Tibet, Xinjiang and Yunnan. In addition to bolstering its relationship with Russia, which has become a source of cheap hydrocarbon products following its invasion of Ukraine, China is making significant inroads into Central Asia where it can import oil and gas.

To ensure it has enough resources to cope with its aging population, China will also look to leverage trade routes beyond its immediate periphery by forming and leading international institutions and groupings, such as the Regional Comprehensive Economic Partnership (the largest trade pact in the world) and the BRICS forum. In doing so, Beijing will seek to insulate its supply chains from potential shocks to its bilateral economic relationships amid its growing rivalry with the United States — particularly in light of the sanctions Washington and its allies have imposed on Russia following its Ukraine invasion; such sweeping Western sanctions would be far more catastrophic for China, a net importer of food and energy, and could lead to devastating food and energy shortages.

In addition, China's desire to challenge the United States as the world's only superpower has pushed it to cultivate economic partnerships in Central, South and Southeast Asia and beyond — not just through engagement, but by providing an alternative development and authoritarian governance model to third countries. However, these efforts could be constrained, as China also eschews formal military alliances as both a matter of policy and its political culture, which isolates the country despite its vast network of global economic partnerships.

Indeed, China has made efforts over the past year to raise its international profile as a responsible stakeholder and peacemaker. In 2023 alone, China brokered detente between Saudi Arabia and Iran, sent a mediator to attempt to broker peace in Ukraine and put forward a new peace proposal for the Israel-Palestine conflict. These initiatives reflect Beijing's desire to secure and multiply partnerships (but not alliances), and it is doing so with particular urgency to make up for lost time following three years of intense isolation during the country's "zero-COVID" policy.

Conclusion
China's population decline is coming amid a long list of other interrelated challenges, but Chinese leaders are not sitting on their hands. Though some policies will be less successful than others (such as Beijing's pronatalist initiatives), the crux of the matter will be transitioning China's economy to high-income status via the potential avenues laid out in this series while mitigating external threats to its development.

But China's recent economic slowdown — combined with its shrinking and aging population — has cast doubt on assumptions about a declining West and an ascendant China. As China pursues its goal of challenging the United States as the world's only superpower, the divergence between its growing geopolitical ambitions and shrinking demographic strength will invite new challenges from potential adversaries that Beijing will struggle to surmount.

[DougMacG]

https://www.realclearpolitics.com/articles/2023/07/13/rep_gallagher_chinas_xi_trying_to_replace_god__149490.html#2

[Crafty_Dog]

https://www.theepochtimes.com/analysis-chinas-economy-is-facing-its-biggest-challenge-in-decades_5133409.html?utm_source=China&src_src=China&utm_campaign=uschina-2023-07-17&src_cmp=uschina-2023-07-17&utm_medium=email

[DougMacG]

Signs of deflation are becoming more prevalent across China, heaping extra pressure on Beijing to reignite growth or risk falling into an economic trap it could find hard to escape. While the rest of the world tussles with inflation, China is at risk of experiencing a prolonged spell of falling prices that—if it takes root—could eat into corporate profits, sap consumer spending and push more people out of work. Its effects would ripple across the globe, easing prices for some products that countries like the U.S. buy from China, but would also deprive the world of important Chinese demand for raw materials and consumer goods, while also creating other problems. Some economists see alarming parallels between China’s current predicament and the experience of Japan, which struggled for years with deflation and stagnant growth. (Source: wsj.com)
--------------------
Despite China’s government throwing just about everything in its policy basket at the real estate crisis, the sector continues to deteriorate, with sluggish sales, a growing list of unfinished projects, and mounting debt repayments. Consequently, more developers than ever are on the edge of defaulting on their maturing bonds estimated to be worth over 2 trillion yuan ($357 billion). Recent revelations indicate that the crisis, which is stretching into its third year, has now spread to state-owned developers, whose deep pockets had largely insulated them from the chaos, as well as some of the largest private developers. These include some of the biggest names. For instance, earlier this month, state-backed Sino-Ocean Group Holding Ltd. told creditors it’s been working with two major shareholders on its debt load. The nation’s second-largest developer by sales, China Vanke Co., said that the home market is “worse than expected.” Meanwhile, a key unit of Dalian Wanda Group Co. warned creditors of a funding shortfall of at least $200 million for bonds coming due. And to cap things off, Country Garden Holdings Co. Ltd., China’s largest developer, reported its first annual loss since its Hong Kong IPO in 2007. Source: caixinglobal.com

[Crafty_Dog]

   

Morning-Jolt.png
WITH DOMINIC PINOAugust 07 2023

hero
NR PLUS MEMBER FULL VIEW
China Is Not ‘Eating Our Lunch’ Economically

This is Dominic Pino filling in for Jim Geraghty, who is out on vacation. I’ll be back tomorrow, and then Noah Rothman will take over Wednesday through Friday.

On the menu today: China’s weak economy, and what it should teach us about the failures of central planning.

China’s Financial Woes

You wouldn’t know it from many American politicians’ rhetoric, but China’s economy is in big trouble right now. The country’s economy is setting off alarm bell after alarm bell, and its supposedly genius industrial planning is coming undone.

Let’s survey some recent facts about China’s economic performance.

China only loosened its Covid protocols in December, well after the rest of the world got back to normal. The totalitarian control of everyday life spooked many businesses operating in China and spurred them to seek alternatives. And the reopening of the Chinese economy has not gone as well as the reopening of Western economies.

After a brief surge in the early part of this year, the Chinese recovery is sputtering. “China’s consumer-driven recovery is showing more signs of losing momentum as spending slows on everything from holiday travel to cars and homes, adding to expectations for more stimulus to support the economy,” reported Bloomberg on June 25. “The rebound in consumption after China shed its Covid controls has propelled growth so far this year, but confidence is weak and evidence is mounting that the economy may need more help.”

To that end, while most other central banks around the world are raising interest rates in response to inflation, China’s central bank is cutting rates and worried about deflation. “China’s consumer prices did not rise at all in the year to June. The country’s GDP deflator, a broad measure of the price of goods and services, fell by 1.4% in the second quarter, compared with a year earlier. That is the biggest decline since 2009,” reported the Economist on July 27.

Falling prices might sound like a good thing, but it’s bad for an economy trying to catch up to the West. The Economist explains:

In catch-up economies, productivity grows briskly in industries, like manufacturing, that trade goods across borders. Because output per worker rises quickly, firms can afford to pay their workers more without raising their prices, which are pinned down by global competition. Meanwhile, in sectors such as services, which are not much traded across borders, productivity grows more slowly. Service firms must nonetheless compete with manufacturing for the country’s workers. That obliges them to raise their wages to attract recruits. Higher wages, in turn, force these firms to raise prices. These price hikes are required because productivity has not kept up, and possible because services are sheltered from global competition. The hikes also make the country more expensive: the price of haircuts rises in sympathy with the growing wages of increasingly productive manufacturing workers.

As a result of the weakness in prices and slowing growth, the Economist says that Goldman Sachs projects that China’s economy will be 67 percent the size of the United States’ this year, down from 76 percent in 2021. So China is losing ground relatively quickly.

The Chinese stock market is flagging. “The country’s benchmark CSI 300 index lost around a fifth of its value last year, and has risen much less than major indexes in the U.S., Japan and elsewhere in 2023,” reported the Wall Street Journal on July 31. “That is creating a sense of despair among the office workers, civil servants and other ordinary citizens who are responsible for the bulk of trading in China’s stock market.” About 200 million individual investors trade on Chinese markets, and many of them are moving their money to savings accounts despite the central bank’s rate cuts meaning lower rates of return there. A low but positive rate of return is better than a negative one.

The Journal also reported on August 3 that private-equity funds are afraid of investing in China: “U.S. dollar fundraising by private-equity firms that invest mainly in China has all but dried up. The days of large and easy profits are also over, as the country’s internet gold rush has ended. Chinese companies are finding it increasingly hard to go public in Hong Kong and the U.S., limiting many private-equity funds’ exit strategies. Chinese funds’ returns for the last two years have also disappointed investors.” The average annual return for China private-equity funds in 2022 was negative 5.6 percent.

Again, despite lower interest rates, home sales in China are cratering. That’s especially bad in China’s overly real-estate-dependent economy. Home sales from the top 100 developers fell by 33.1 percent year-over-year in July. Developers are worried about default, given the country’s ongoing credit crisis.

“China’s housing market is so bad that homebuyers appear to be flocking overseas to purchase a home in the US,” reported Business Insider on August 3. “Chinese buyers represented 13% of foreign buyer home purchases in the US, up from 6% of foreign buyer purchases last year.” Most of these purchases were of relatively expensive homes, and they were mostly for living in, not renting. That could mean wealthy Chinese are increasingly bearish about their country’s prospects and are seeking alternatives before things get even worse.

Net foreign direct investment in China hit its lowest point in at least 25 years in the second quarter. Bloomberg added:

The slump could be a lot deeper in reality than what both datasets show, analysts including Logan Wright of Rhodium Group wrote in a July report. That’s because the data increasingly measures purely financial transactions — including those by Chinese state-owned companies, rather than foreign corporate decisions, they said.

Youth unemployment is at a record high. The 16–24-year-old unemployment rate was 21.3 percent in June. (U.S. 16–24 unemployment was 7.5 percent in June.) Large numbers of unemployed young people, especially young men, have historically been a cause for concern in authoritarian countries. When the economy is delivering in a poor country, people are more willing to overlook an abusive government. When the economy stops delivering, dictators could be in trouble.

The mighty manufacturing sector is contracting. “China’s factory activity contracted for a fourth consecutive month in July, while non-manufacturing activity slowed to its weakest this year as the world’s second-largest economy struggles to revive growth momentum in the wake of soft global demand,” reported CNBC on July 30. And that’s based on data from the Chinese government’s National Bureau of Statistics, so the real picture might be even worse.

One of the main arguments U.S. politicians use for steel protectionism is that the Chinese government supports its steel industry and reaps great rewards for doing so. Not so much. “China’s leading steelmakers warned the industry faces a very challenging second half as demand disappoints, profitability lags, and pressure to cut costs mounts in the world’s top producer,” reported Bloomberg on July 29. Profitability has lagged for almost a year, and things are not projected to get better in the near future.

The other industry politicians like to talk about related to China, semiconductors, is another example of Chinese failure. China’s industrial-policy efforts in that industry, despite multiple attempts and billions of dollars spent, have yet to yield fruit, as the country still imports about 90 percent of the chips it needs.

All of this comes on top of the long-term problems caused by the one-child policy, which might go down in history as the worst government policy ever. The survival of the communist regime might depend on reversing the declining population that it brought about through its barbaric prohibition on having more than one child. The policy was enforced through decades of abortion and sterilization; now, the government is trying to get people to have more kids. Milton Friedman joked that if you put the government in charge of the Sahara Desert, there would be a shortage of sand. It turns out that if you put communists in charge of China, there will be a shortage of people.

It’s vital for the U.S. to take China seriously. Military, cybersecurity, and espionage issues are extremely important for the U.S. to get right, and the defense of Taiwan should be top of mind. Part of taking China seriously, though, is relying on facts, not rhetoric. China is not “eating our lunch,” as Joe Biden has said, and the country’s economic record is not a reason to jettison free-market principles. A country with newly built, nearly vacant cities is not a model for economic policy.

As Chinese economist Weiying Zhang wrote in his 2021 book, Ideas for China’s Future, “Imagine seeing a person without an arm running very fast. If you could conclude his speed comes from missing an arm, then you naturally will call on others to saw off one of your own arms. That would be a disaster. . . . Economists must not confuse ‘in spite of’ with ‘because of.’” China’s past economic successes have been in spite of its government’s penchant for planning, not because of it.

[Crafty_Dog]

https://www.reuters.com/world/china/chinas-consumer-prices-swing-into-decline-deflation-risks-build-2023-08-09/?utm_source=Sailthru&utm_medium=Newsletter&utm_campaign=Daily-Briefing&utm_term=080923

[Crafty_Dog]

Second


TUESDAY, AUGUST 8, 2023
8/8/2023 4:24:00 PMShare This Episode
Why Millions of Chinese Young People Are Unemployed
More than one in five young people in China are jobless. The government blames college graduates, insisting that their expectations have gotten too high. WSJ’s Brian Spegele unpacks why new grads are holding out and what it could mean for China’s economy.


This transcript was prepared by a transcription service. This version may not be in its final form and may be updated.

Jessica Mendoza: China's once buzzing economy is a shadow of what it used to be. Analysts projected it would come roaring back once COVID lockdowns eased up. But that hasn't been the case, and the job market for new graduates is especially bleak. Many of them have taken to social media to share their struggles through day in the life videos.

Speaker 2: (foreign language). Lately, life is like this. Either I'm interviewing or on the way to interviewing. When I had left home, my family asked, "What kind of a job do you want?" That time, I still had ideals and goals. Now I don't have any standards as long as I can make money. I want to ask you all, when you all are looking for jobs, is it also this hard?

Jessica Mendoza: More than 20% of young people between the ages of 16 and 24 who want a job, don't have a job. Our colleague, Brian Spiegel, based in Beijing, just came back from a reporting trip where he tried to figure out why.

Brian Spiegel: The most surprising thing I took from this trip is that it's not that jobs don't exist in China. Jobs do exist in China. The real crux of the matter is that there's a disconnect between the sorts of jobs that young people want today in China, especially college graduates, and the sorts of jobs that are available to them out in the market.

Jessica Mendoza: Welcome to the Journal, our show about money, business, and power. I'm Jessica Mendoza. It's Tuesday, August 8th. Coming up on the show, millions of young people in China can't find the work they want. To get a sense of what's going on with new graduates in China, Brian traveled to a city called Hefei. Around 9 million people live there. Brian says it's kind of like a Cincinnati with way more people.

Brian Spiegel: We wanted to go to a place that was not one of the wealthier Chinese cities out there like Beijing where I live, or Shanghai or Shenzhen for that matter. We wanted to go to a place to kind of understand what does it feel like to be an ordinary Chinese at this moment of particularly a young person. One day we went to a recruiting site and this recruiting site specialized in finding basically factory jobs, factory work, assembly line work for people of any age. And we go, and I'm expecting it's going to be completely rammed with people given the state of the economy and everything that I'd read about unemployment, youth unemployment and the place was entirely empty, and I'm kind of scratching my head about this.

Jessica Mendoza: That empty recruiting site reflects the gap between the kinds of jobs that students want and the jobs that are actually available in China today. And the gap is growing.

Brian Spiegel: Just to take university students alone, in 2023, the government estimates 11.6 million people are going to graduate from Chinese colleges. And if you compare that to just 2019, that number was only 8.2 million. For so many years, the Chinese government has been prioritizing the education of young people trying to move its economy up the value chain into higher skilled higher knowledge work. And so people heeded those calls and they went to college.

Jessica Mendoza: Many college grads chose fields that would get them into high paying industries. In China, that often means white collar jobs in the private sector or inside one of its huge state-owned companies.

Brian Spiegel: What the data shows is that the tech space, generally, according to one survey from a recruitment firm, it showed that 25% of undergrads wanted to go work in the tech space broadly defined. The next highest category had less than half of the same proportion. So what it shows is that not surprisingly ambitious people in China, just like they want to go work for Google or whatever it is in the United States, they wanted to go work for the hot tech company in China too.

Jessica Mendoza: But when COVID hit, the Chinese government under President Xi Jinping imposed years long restrictions that really hurt the economy. On top of that, Xi also implemented policies reign in growth of the very same industries that students wanted jobs in.

Brian Spiegel: The government of Xi Jinping had been on a very aggressive regulatory campaign against all sorts of private businesses, in particular businesses in the consumer technology space, big internet platforms. The property sector was being reigned in.

Jessica Mendoza: All that made the job hunt harder for new graduates. On his reporting trip, Brian talked to one of them.

Brian Spiegel: We met Leo (inaudible). We met her in Hefei at a coffee shop in Hefei. She graduated from college this spring.

Jessica Mendoza: Leo is 23 and she went to university in Hefei. She wanted to study animal sciences, but her parents convinced her to get a degree in engineering instead. And how did her parents respond when she agreed to study engineering?

Brian Spiegel: Yeah, I think they were all happy and proud of where she was going. It really looked like a pretty close to a sure bet that things were going to turn out well.

Jessica Mendoza: But then while she was in school, COVID happened, and when she graduated, the job hunt was rough.

Brian Spiegel: She told us she had an interview at a state telecommunications company that she was excited about. It didn't happen. Then she had another one at the giant appliance maker in China, also didn't happen.

Jessica Mendoza: Eventually Leo settled for an internship at a company that sold cell phones at a local shopping mall, not the engineering job she expected.

Brian Spiegel: And she said like, well, this is not exactly why I studied engineering. And she found herself kind of scratching her head saying, well, this isn't what I studied to do. Why did I spend the last three years, what did I do all that studying for? The other thing that happened in Leo's case that was kind of interesting was when she was a trainee, she was getting paid the Chinese equivalent of like $630 a month, which doesn't sound very much in the United States, but you could live off of it in Hefei. Well, as she gets to the end of her traineeship internship thing, they offer her a full-time job. But as part of that, they cut her base salary in half and they say, the rest of your salary can come from commissions. And she's doing the math in her head having seen the local economy saying, there's no way I'm going to get even close to making the amount of money that I was making as a trainee.

Jessica Mendoza: Leo decided not to accept the offer and she left the company. Her family is supporting her while she considers her next steps.

Brian Spiegel: It's important to remember that the young people in China today, the sort of people who are graduating from college, many if not the vast majority come from single child families as a result of China's one child policy. So parents in many cases have thrown everything into the success of their single child. And so if they're coming out of college and the parents have worked really hard and tough jobs for a long time for their kid to go to college, and they do and they come out and there's no job available, I think the parents, in many cases, they're okay. They don't want them to have the same difficult life that they had.

Jessica Mendoza: Right. It doesn't seem like progress.

Brian Spiegel: Yeah. Why would somebody who had studied so hard in the Chinese education system for so many years had been under pressure by their parents to go out and get the best job and to do them proud, why would they then be willing to fall back on a blue collar job? And that's when it began to hit me. In part, the phenomenon of youth unemployment today is a matter of expectations.

Jessica Mendoza: And the Chinese government has very different expectations than those of young graduates. How that friction is playing out, that's next. China's economy still depends a lot on manufacturing and exporting stuff to the rest of the world, but young people just aren't rushing to take factory jobs anymore. So publicly, what has the government been saying about the job situation?

Brian Spiegel: The government's message to young people is pretty clear. It's go and get a job. One of the slogans they like to use is find a job first, find a career later. When you read newspapers like The People's Daily, which is the Communist party kind of mouthpiece or flagship news newspaper, you understand that their message to young people is you're not too good for blue collar jobs. And the contributions you can make to society on working on a factory line are a lot better than if you're sitting on your parents' sofa.

Jessica Mendoza: Your duty essentially is to be working, not to be waiting for the right job to come up.

Brian Spiegel: And I think when young people see this, there's a lot of scoffing about all this. There's a lot of people feeling like the party's out of touch when they make statements like this that they don't recognize how difficult the job market is.

Jessica Mendoza: But the government is also taking action. They want to get young people working, doing any kind of work. They're offering subsidies to companies to hire new grads and rolling out loans to young people who want to start a business. Why does this situation matter so much to the Chinese government?

Brian Spiegel: A stable economy and a stable job situation are so fundamental to Xi's vision of making China a much more powerful country. But if you're not able to jumpstart people's careers early on, there can be so many knock on effects from that. What we're seeing in China, for example, is that if you don't have a stable job or stable income, you're going to be much less likely to go out and buy property. That puts pressure on the real estate market, which can then create financial risks for China. So you can begin to get a flavor of some of the economic costs of the fact that many young people in China are unemployed today.

Jessica Mendoza: So there are clear economic consequences, but there could also be political ones.

Brian Spiegel: For the communist party, the risk is that millions of young people end up living on the fringes of society. They're a bit bored without a clear direction. We're talking about such huge numbers of people, millions and millions of people. I think it's more than 11 million people are graduating from college in China this year. So you have to be careful about how much you generalize. But that's at least what I found in Hefei when I was there talking to people. At what point do these people begin to get disgruntled about how they're doing in life, about their prospects for the future? Already we see many Chinese scholars talking about the risks to social stability of young people not having jobs.

Jessica Mendoza: Does it seem like there's a future where the government just makes young people go to work whether they want to or not?

Brian Spiegel: There is no evidence of the government forcing anybody to take a job, which might've happened 50 years ago, or under (inaudible), for example, and I would find it highly unlikely they would try to implement a system like this.

Jessica Mendoza: And so what does this situation mean for China?

Brian Spiegel: It's one more important data point that the Chinese economy is facing serious issues right now. What the evidence shows is that the youth unemployment problem is at least in part a reflection of a lack of confidence and a lack of hiring, especially by the private sector. So the question to my mind will be what Xi Jinping do next. Up until this point, there's been a high priority placed on ideology. Does he take a more pragmatic turn? I think as we've seen many of the problems become much more pronounced in the Chinese economy, the Chinese government has said many things designed to shore up the confidence of business, to give them the confidence to invest, to hire young people, to grow their businesses for the future. But at the same time, it's really important to also note that many of the investors and economists that we speak to, they're really skeptical of empty promises.

Jessica Mendoza: That's all for today, Tuesday, August 8th. The Journal is a co-production of Gimlet and the Wall Street Journal. If you like our show, follow us on Spotify or wherever you get your podcasts. We're out every weekday afternoon. Thanks for listening. See you tomorrow.

[Crafty_Dog]

https://www.youtube.com/watch?v=j_m6RnCV-G0&t=1s

[Crafty_Dog]

https://www.youtube.com/watch?v=doaXfyF2Sq0

[Crafty_Dog]

https://www.theepochtimes.com/mkt_app/china/analysis-china-is-heading-towards-a-decade-of-economic-stagnation-5459079?utm_source=China&src_src=China&utm_campaign=uschina-2023-08-15&src_cmp=uschina-2023-08-15&utm_medium=email&cta_utm_source=China&est=pufK5dRm5SCWYfULBlNjHjgaKc16RjyDbJvF1UZke5%2FBJ553Hdq8z3GZl1%2BSGK7rGKjL

[Crafty_Dog]

https://www.theepochtimes.com/mkt_app/china/chinas-evergrande-files-for-bankruptcy-in-new-york-5473817?utm_source=China&src_src=China&utm_campaign=uschina-2023-08-18&src_cmp=uschina-2023-08-18&utm_medium=email&cta_utm_source=China&est=KEJKbBVR7D2oWkcUVwmamVF1sx0Z3pLY4%2BoBXNpItBhlqL2C0AD6Y98YL0Y99JF5Hmk3

[ccp]

we've heard this before:

https://www.washingtontimes.com/news/2023/aug/16/no-let-china-nuclear-weapons-expansion-stratcom-ge/

[Crafty_Dog]

China: Never Grand

China’s Evergrande, the world’s most heavily indebted property company, has filed for Chapter 15 bankruptcy (a mechanism used in certain cross-border cases) in New York, a step designed to help its restructuring.

The Wall Street Journal’s Alexander Saeedy explains:

China Evergrande Group is seeking a U.S. court’s approval to restructure more than $19 billion in the company’s offshore debts, as the embattled property developer pushes forward on plans to complete one of the world’s largest and most complex debt restructurings…

[The] chapter 15 bankruptcy in New York…would recognize and give effect to the offshore proceedings for three Evergrande companies based in Hong Kong, the British Virgin Islands, and the Cayman Islands, respectively.

Court approval of the debt restructuring would make the deal legally binding in the U.S. and would close the door to any disputes against the plan that could be brought in America. Many of China Evergrande’s $19 billion in foreign bonds are governed by U.S. law.

Evergrande rose to become China’s second largest property developer, but it had built that position on the back of massive borrowing. Evergrande’s outstanding debt of $340 billion is, as Dominic Pino noted on Thursday, equivalent to about two percent of China’s GDP. Against that the company has assets supposedly worth $256 billion, although in situations such as this, assets have a way of being worth rather less than advertised. 

Not content with wild borrowing, Evergrande added some wild diversification to the mix. It has just sold a 28 percent stake in its electric vehicle (EV) manufacturer, Evergrande NEV as part of its effort to raise cash. That a heavily indebted property developer should have owned an EV maker in the first place was yet another warning sign, but there were plenty of others. Evergrande also owned (or owns), among other unexpected assets, fifteen “Fairyland” parks, aimed, Business Insider’s Matthew Loh reported back in 2021, “at promoting Chinese culture by using next-gen tech.” Loh links to a Wall Street Journal piece (also from 2021) in which the writers (Yoko Kobota and Liyan Qi) report that the theme parks involved “$100 billion in total investment, according to Journal calculations based on local-government numbers.” $100 billion! Perhaps inevitably Evergrande owned a soccer team. No less inevitable were the increasingly desperate measures taken by the company to keep afloat.

The Financial Times (September 20, 2021):

Crisis-hit Chinese property developer Evergrande used billions of dollars raised by selling wealth management products to retail investors to plug funding gaps and even to pay back other wealth management investors, according to executives of the company in Shenzhen.

Catastrophe had been on the way for a while, but what triggered the crisis at Evergrande was Beijing’s belated introduction in August 2020 of regulations — the Three Red Lines — designed to force a partial deleveraging of the hugely over-borrowed real estate sector (Evergrande was by no means the only culprit). Its other objective was to take some of the air out of a housing bubble which was not only intrinsically dangerous, but, by leaving too many people priced out of the market, risked creating social tension.

Evergrande defaulted on its dollar bonds in December 2021. It has not been the only property company to do so.

Writing in the Washington Post at the beginning of this year, Bloomberg’s Enda Curran looked back at how companies such as Evergrande had ended up in the position they had:

In 1998, China created a nationwide housing market after tightly restricting private sales for decades. Back then, only a third of its people lived in towns and cities. That’s risen to two-thirds, with the urban population expanding by 480 million. The exodus from the countryside represented a vast commercial opportunity for construction firms and developers. Money flooded into real estate as the emerging middle class leapt upon what was one of the few safe investments available, pushing home prices up sixfold over 15 years. Local and regional authorities, which rely on sales of public land for a chunk of their revenue, encouraged the development boom. This also helped the central government to meet its annual targets for economic growth, which often hit double digits.

The property craze was also powered by debt as builders rushed to satisfy expected future demand. The boom encouraged speculative buying, with new homes pre-sold by developers who turned increasingly to foreign investors for funds. Annual sales of dollar-denominated offshore bonds surged to $64.7 billion in 2020 from $675 million in 2009. Opaque liabilities made it hard to assess credit risks. The speculation led to astronomical prices, with homes in boom cities such as Shenzhen becoming less affordable relative to local incomes than London or New York.

Overall, housing prices were estimated to have increased six-fold over the fifteen years leading up to 2022.

But having acted too slowly, Beijing then (arguably) did too much too quickly. While the Red Lines were somewhat more flexible than their name might suggest (restrictions on further borrowing depended on how many Red Lines were crossed), the crackdown on borrowing created a liquidity squeeze (made worse by the Covid slowdown) that left many over-borrowed property companies with no chance of finding a way out, should one have ever existed. Adding to the misery has been the way that some property companies used preconstruction sales to finance current operations (that’s not unusual in this sector, but in China it was much less strictly regulated than elsewhere). Faltering new sales have meant that, in some instances, there has been no money to complete properties that had already been paid for in whole or in part.

Back to Curran:

Across China, millions of square feet of unfinished apartments have been left to gather dust. Economists at Nomura International HK Ltd. estimated in mid-July that Chinese developers had delivered only about 60% of the homes they pre-sold from 2013 to 2020. (Buyer protections commonly used abroad, such as escrow accounts and installment payments, have tended to be weak.) By mid-2022, wildcat mortgage boycotts by owners of unfinished homes had spread to over 300 housing projects in about 90 cities. The protests later subsided. But with more than 70% of urban China’s wealth stored in housing in some parts of the country, many livelihoods are at stake and the threat of popular unrest lingers.

Ambrose Evans Pritchard writing in the Daily Telegraph:

China’s $60 trillion property edifice is by far the largest asset class in the world.

It accounts for half of the world’s entire property sales, an astonishing figure given that China’s workforce is already contracting and net migration from the countryside has stopped.

The developers have debts of $5 trillion. By comparison, this is six times greater than America’s $800bn subprime property debt on the eve of the Lehman crisis.

In January, Beijing moved away from the Three Red Lines.

The Financial Times (January 11, 2023):

Beijing is now easing constraints on developer credit and even rolling out potential loans following a severe downturn that saw housing and land sales collapse, threatening a major pillar of an economy already ailing from coronavirus lockdowns.

Officials at multiple state-owned banks said they had effectively shelved the leverage curbs — whose three red lines refer to targets for debt, equity and assets for individual companies — in their assessment of borrowers. Late last year, state-owned banks announced hundreds of billions of dollars of potential new lending to property developers.

The authors of that report wondered whether this relaxation would be too late for Evergrande. Now we know. 

The next domino may be Country Garden (China’s largest house builder), which, as Dominic Pino noted, is teetering on the brink of default.

The Economist:

Country Garden is renowned for its huge projects in China’s second- and third-tier cities. The firm’s debts are smaller than those of Evergrande, a big, heavily indebted company that defaulted in 2021. But at the start of the year Country Garden was building four times more homes than Evergrande was before it defaulted. At the rate Country Garden was delivering them in the first half of 2022, at least 144,000 buyers will not receive homes they were promised by the end of this year. A sudden debt meltdown at the firm would leave even more families out in the cold.

That won’t delight a regime forever worried about its grip on power.

The Economist:

Until recently, most thought that Country Garden was immune to default. Since late last year officials have sought to calm the market by drawing up an informal list of healthy developers, including Country Garden, which investors could feel comfortable funding and Chinese citizens could trust.

The calculation has changed in recent days. Country Garden’s issue is not one of over-leverage in the style of Evergrande. Instead, it is a victim of a loss of confidence among regular folk—a sign the government is losing control. After a short rebound following the lifting of covid-19 controls, the property crisis has intensified. Prices are dropping. Sales among the 100 biggest developers fell by 33% in July compared with a year earlier. Country Garden’s tumbled by 60%. The firm’s decline is forcing market-watchers to confront their deepest fears about the property sector.

One is that property supply chains collapse. Over the past three years suppliers of materials, along with the engineering and construction firms that build homes, have often not been paid on time by developers. But so far this backbone of the sector has withstood the pressure. That could change as developers grow shorter on funds. The decline in payments to suppliers is already noticeable. Between 2021 and 2022, Country Garden’s transfers to such firms fell from 285bn yuan ($44bn) to 192bn yuan, according to S&P Global, a rating agency. They are all but certain to fall further this year. Although the biggest contracting firms will probably survive with help from the government, it is not hard to imagine widespread collapses among the myriad smaller engineering and materials companies that do the work on the ground.

Economist’s writers, singling out Sino-Ocean, also speculate that the trouble could spread to state-owned builders, up to now seen as safe.  They also suggest that Country Garden has the money ($22.5 million) to pay the debt that fell due this month by the end of a grace period that expires in early September, but that it is signaling a desire to eventually restructure as a way of putting pressure on the government to step in and help.

Pino also noted concerns about wobbles in the shadow-banking sector, which is, inevitably, heavily exposed to property. Trouble there would be another potent source of financial contagion. And then there is the matter of massive and often murky local government debt. Coping with that burden won’t be made any easier by the collapse in land sales, which (as mentioned by Enda Curran above) have been a useful source of revenue for local governments. One way or another, real estate may, on some estimates, have accounted for nearly 40 percent of local government income in recent years.

As Pino relates, the full extent of local government indebtedness is hard to quantify, but as Marc Joffe noted in an article for Capital Matters, the IMF estimates that, after adding in off balance sheet items, it stands at around 53 percent of GDP, and there are additional liabilities on top of that (at least one estimate suggests that the real number is running into the 70s). The central government is again sending out inspectors to work out how much that debt really amounts to, prior, presumably, to cobbling together a solution that avoids the social, political and economic risks of local governments running out of money. According to the finance ministry their income fell by slightly more than a fifth in the first half of the year, a number that, given the Chinese state’s way with statistics, may well be an understatement.

The ratio of China’s central government debt to GDP is (according to the IMF) 77 percent. Total Chinese debt (households, companies and the government) has been estimated by JPMorgan Chase at 282 percent, somewhat more than the average for developed economies (256 percent). The figure for the U.S. is 257 percent. But what distinguishes China is how rapidly this debt has grown. According to the New York Times’ Keith Bradsher, it has more than doubled when compared with the economy in the past fifteen years. A rapid accumulation of debt is a red flag under many circumstances. To be sure, there can be in a jump in the “good” debt that helps finance the growth of a rapidly developing market, but it’s not unusual for that to be accompanied by a surge in “unproductive” debt, something that China now has in enormous amounts.

Under the circumstances, it’s not surprising that Xi has been signaling to the private sector that the government will be handling it with a lighter touch than in the recent past. It would be foolish to believe him. In particular, foreign investors, who can easily take their money elsewhere, have watched the regime’s tightening grip and, finally, it seems, prompted in part surely by China’s slowdown, have been coming to a sensible conclusion. In the second quarter (Bloomberg reports) foreign investment in China fell to its lowest level in twenty-five years. Growing worries about a possible economic crisis are not going to help Xi’s efforts to lure them back, which is no bad thing. The West needs to do much more to loosen its unhealthily close trading relationship with China, and if the profits to be made in that market fall, so will the incentive to do business there. Falling rates of foreign investment will also hit China’s ability to, uh, innovate. As economist Kenneth Rogoff notes, “foreign companies build plants and they copy them. That has been the Chinese model. The slowdown in FDI [foreign direct investment] will also imply a slowdown in innovation.” Good.

How deep a crisis lies ahead is impossible to say. The stock market is at a nine month low and the yuan has come under pressure. The latter may mean trouble for those businesses — many of them in the U.S. and Europe — that compete with Chinese imports, as well as for those already struggling to sell their products into China’s sluggish economy.

Beijing now faces the challenge of reversing the deepening gloom, a challenge made all the more difficult by the interconnectedness of its woes. However, unlike its democratic counterparts, the regime has tools at its disposal that enable it to, so to speak, insist on calm. And it could always throw cash at the problem. Bloomberg reports that one prominent adviser to the Central Bank has called for direct payments of $551 billion to households to stimulate demand, an approach that an unenthusiastic Communist Party leadership has in the past denounced as “welfarism.” On the other hand, if writing large checks, whether to its citizens, its local governments or its embattled companies, or to all of them, is what it takes to maintain social peace, that’s what a Beijing leadership eager to hang onto their jobs will do. But even if such moves defuse the crisis for now, returning to the growth rates, however unsoundly based they may have been, of the last decade or so is going to be tough. Morgan Stanley is forecasting that China’s economy will grow by 4.7 percent this year. We’ll see. Capital Economics is predicting that (real) trend growth in the later 2020s will be 2.8 percent.

All emerging markets have smash-ups along the way, and China is still, whatever some of its boosters may claim, an emerging market. Nevertheless, the Daily Telegraph’s Ambrose Evans Pritchard observes that China is “no longer on the same trajectory as Japan, Taiwan, and Korea at a comparable point of development.”  There’s a lesson there.

[Crafty_Dog]

https://www.theepochtimes.com/mkt_app/china/economic-crisis-may-expedite-beijings-timeline-for-attacking-taiwan-rep-gallagher-5479567?utm_source=China&src_src=China&utm_campaign=uschina-2023-08-24&src_cmp=uschina-2023-08-24&utm_medium=email&cta_utm_source=China&est=FMnpzbpignRqxGIHB%2BKOiF6eIRIkwHmGypj6XNVDd9JR4a6ScANMg9b1GzEaNFtOMbgD

[Crafty_Dog]

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https://www.theepochtimes.com/opinion/7-reasons-why-the-china-crisis-has-finally-arrived-5478822?utm_source=China&src_src=China&utm_campaign=uschina-2023-08-26&src_cmp=uschina-2023-08-26&utm_medium=email&cta_utm_source=China&est=Wm5e%2FN9dFN9RNNAN0Iu2MVPUJZHrhK0xgFtZJDXG%2FF5HqZF2TnHI4gHpVMN1qfs1AhTP


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https://www.theepochtimes.com/china/china-saddled-by-almost-double-local-government-debt-expert-5480630?utm_source=China&src_src=China&utm_campaign=uschina-2023-08-26&src_cmp=uschina-2023-08-26&utm_medium=email&cta_utm_source=China&est=6WIRJpd05ThIhOkcWGgqLrNvVKTfUMJLzePlx1qyADZuKKNjOpya60LA8dY5thPEBaJ6

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How Will China Tackle Its Mounting Real Estate Woes?
Aug 25, 2023 | 19:39 GMT

Facing mounting real estate problems, the Chinese government will likely pursue a modest intervention that would cause financial losses for investors and further slow economic activity. But large-scale social unrest or the imminent collapse of a systemically important company could trigger a heavy intervention that would stabilize the economy in the short term but plant the seeds for a far worse financial crisis in the future. Country Garden, China's largest real estate developer, missed debt payments and suspended onshore bonds in early August, fueling expectations of a coming debt restructuring. Chinese trust firm Zhongrong International Trust Co. — which is heavily exposed to real estate investments — also missed payments for dozens of investment products in July, prompting protests outside its office in Beijing. At best, these missed payments suggest the continued stagnation of China's real estate sector and the financiers thereof. And at worst, they presage a financial crisis as debt dominos fall in the real estate, finance and banking sectors, as well as in local government balance sheets and household savings. Beijing has been dealing with the issue of excessive real estate debt for decades, but in the last few years, the sector's sales have consistently dropped after China introduced its Three Red Lines policy of debt limits in August 2020, which short-circuited the real estate sector's debt-fueled growth model. In addition to Country Garden and Zhongrong's large debt issues, property developers representing over 40% of China's home sales are also estimated to be having trouble servicing their debts, which means that the sector as a whole is facing increasing financial risks. Moreover, China's current debt problems are taking place amid slowing economic growth, which may push Beijing to stray from its standard response to such issues in recent years: namely, the prioritization of debt sustainability over short-term economic growth.

On Aug. 18, Chinese real estate developer Evergrande filed for bankruptcy protection in U.S. courts, though the company clarified that it hadn't filed a bankruptcy petition. As of the end of 2022, Evergrande's outstanding debt had risen to $340 billion, surpassing Country Garden's $196 billion.

Lower-than-expected economic growth in 2023 has fueled Beijing's concerns about the real estate sector by reducing the Chinese economy's tolerance for a debt crunch and elevating risks of social unrest. Since Beijing ended its strict ''zero COVID'' lockdowns in late 2022, domestic and global expectations of a surge in economic growth have largely been unmet. China recorded only modest growth in the first quarter of 2023, which then gave way to a slowdown in activity in the second and third quarters. The much-anticipated rebound in domestic consumption after COVID-19 has yet to translate into a boom for retail sales, while foreign direct investment into China hit a 25-year low in the second quarter. Youth unemployment also hit a record 21.2% in June before the authorities stopped publishing the figure in July. In addition, industrial production continues to lag amid low Western demand for Chinese exports, while the yuan recently fell to a 15-year low against the U.S. dollar. Moreover, fixed asset investment — a perennial source of ''easy growth'' for the Chinese economy — hit a 15-month low at 5.3% year-on-year growth in July. Meanwhile, as of March, two-thirds of China's local governments had surpassed severe debt stress indicators set by Beijing. On top of official debt, the International Monetary Fund estimates that local governments' off-balance-sheet debt will hit $9 trillion this year. This dire situation prompted Beijing to send debt auditors to its 10 poorest provinces in August to get a better grasp of the scale of these obligations. But despite these manifold headwinds, Beijing refrained from announcing major stimulus at its mid-year economic policy meeting of the Politburo in July. Local government revenues and household savings, as well as corporate investment and lending portfolios, are all heavily tied up in real estate investments and physical housing, and thus these groups would be hit the hardest if real estate companies continue to miss debt payments. These vulnerabilities could spur social unrest, given the high concentration of household wealth in real estate, putting more pressure on Beijing to intervene somehow in this latest round of debt issues.

A government-affiliated think tank of Guizhou, one of China's poorest provinces, published an article in April claiming that it was ''impossible to effectively solve'' the province's debt problems on its own. The article was quickly taken down and Beijing has since urged the nation's economists to limit discussions of ''negative'' information.

Earlier this month, the U.K. bank Barclays and the Swiss bank UBS both downgraded their 2023 growth forecasts for China, with the former now expecting the Chinese economy to grow by 4.5% this year (down from 4.9%) and the latter now expecting it to grow by 4.8% (down from 5.2%).

The elevated social unrest China saw in 2022 has persisted into 2023, including the Wuhan pension protests in March, the August protests against the Bazhou city government for its botched flood response and, most recently, the Beijing protests over Zhongrong's missed debt payments.

Beijing's most likely course of action is a light intervention that lets some companies go under without massive bailouts, but significant social unrest or the risk of a systemically important company collapsing could force the government to intervene more heavily. Despite the real estate sector's financial struggles over the past two years, the Chinese government has held firm on its debt restrictions in the sector, which suggests long-term debt management remains a top priority for Beijing. Beijing will thus likely let some smaller real estate, banking, and investment companies undergo painful restructurings or even go bankrupt without offering major assistance via capital injections and other bailout measures. This strategy could perpetuate volatility in Chinese stock markets and prompt financial losses, primarily among investors as Beijing urges banks and developers to prioritize repaying household depositors and fulfilling housing construction contracts for first-time mortgage holders. But it could also trigger a broader downturn in business confidence in China. Beijing would only intervene heavily in restructurings if the collapse of a systemically important company seemed imminent, like it did in mid-2021 with Huarong, one of China's four national asset management companies. But if debt troubles simultaneously struck enough financial and banking companies, these troubles could hit households (despite Beijing's efforts to protect them) and spur protests that cross city and provincial borders. For Beijing, such widespread unrest — as seen in the ''white paper'' protests of November 2022 — would make a heavy intervention more attractive. Such an intervention would involve large bailouts of many companies, which would ameliorate current debt struggles and largely prevent the aforementioned, near-term downturn in markets. But it would also elevate China's long-term risks of financial crisis by delaying debt mitigation measures and reinforcing the belief that Beijing will deploy a safety net whenever the market is headed for a downturn, thus encouraging further risky lending and investments among stakeholders in the real estate, banking and finance sectors, as well as among households.

While still unlikely, it is possible that a wave of real estate defaults spurs a nationwide financial crisis that undermines President Xi Jinping's solitary position of power in Beijing and rattles the global economy. Such a crisis would also set back China's economic transition even as it somewhat eases the U.S.-China strategic competition. The Chinese Communist Party (CCP) has proven moderately successful at averting financial crises and softening economic downturns via state interventions. But these interventions required issuing significant local government debt, which is now Beijing's top economic concern alongside real estate debt. In the current real estate downturn, the country's leaders are unsure of the true scale and sectoral interconnectivity of China's domestic debt problems. Thus, a light intervention may risk letting seemingly isolated solvency issues evolve into a cross-sectoral debt crunch. Such a poorly executed intervention could prompt a heavy intervention or even a financial crisis, if Beijing's efforts prove incapable of stopping an avalanche of defaults in China's $52-trillion real estate industry. For scale, China's 2022 gross domestic product was $18 trillion. The fragility of China's economic recovery elevates this risk of Beijing mismanaging a light intervention effort. This is because local governments and businesses — with their assets either tied up in under-water real estate or their revenues stricken by low demand for land sales — have a lower tolerance for bearing additional liquidity strain, and the fact that Chinese households are already highly concerned about the future of their nest eggs, given three-fifths of household savings are in real estate. A true financial crisis could spur an economic recession in China and the world, making it harder for China to avoid the middle-income trap and surpass the United States in military and economic might. This crisis would also spur massive unrest in China, reducing President Xi Jinping's ruling legitimacy in the CCP and increasing the chance that Xi's outsized influence over the party is diffused across a broader cohort of top leaders, whom Xi must rely on to help steer China out of its dual social and economic crises. A more consensus-based leadership would make China's domestic and foreign policy more predictable and less national security-focused than under Xi alone, easing the rapid deterioration in China's relations with its neighbors. Still, China's technological and economic competition with the United States would persist, albeit at a slower pace as Beijing reprioritizes economic stability.

A Chinese financial crisis could start with a wave of real estate defaults, including some large bankruptcies, followed by solvency problems for the banks and third-party lenders that lent money to those developers, before finally hitting depositors and corporate investors that store wealth in the banking and real estate sectors, as well as in the countless wealth management companies overexposed to real estate investments.

In the 2008 global financial crisis, Beijing buoyed consumption by releasing $586 billion worth of stimulus spending on infrastructure, with much of this debt falling on local governments. And in 2015, a stock market crash wiped out 30% of the value of China's class A shares in just three weeks, prompting Beijing to spend $500 billion in reserves to buy up the market, which continued to fall a couple of months later.

[Crafty_Dog]

China's Great Economic Rebalancing, Part 1: The Problems
undefined and Global Economy Analyst at RANE
Markus Jaeger
Global Economy Analyst at RANE, Stratfor
Sep 11, 2023 | 21:10 GMT





Boats travel on the Huangpu River against the skyline of Shanghai, China, on Aug. 28, 2020.
Boats travel on the Huangpu River against the skyline of Shanghai, China, on Aug. 28, 2020.
(Photo by Kevin Frayer/Getty Images)

Editor's note: This is the first of a three-part series about China's economic rebalancing. Part 1 analyzes the problems Chinese policymakers are trying to solve, as well as those China's evolving economic model is causing.

China's economic rise over the past four decades has been nothing short of remarkable. With economic growth averaging nearly 10% annually since 1980, Chinese policymakers have proved adaptable and effective, in part due to China's state-capitalist economic system. This system offers a closed capital account, extensive state ownership and a prominent — even dominant — government position in the economy. As a result, policymakers can intervene forcefully and quickly to safeguard financial stability and maintain high economic growth.

However, China appears to have changed tactics and strategy. Instead of forcefully kickstarting the country's economic growth following the COVID-19-induced slump, the government has primarily limited itself to microeconomic reforms. Since then, most economists have downgraded China's growth potential to well below 5%, China appears to be on the verge of sliding into deflation, and recent defaults of major real estate developers have raised concerns about financial stability.

This shift in strategy is part of a broader rebalancing of China's economy as the country aims to stave off even greater economic and financial problems in the future. While policymakers have the tools to avoid a financial crisis as they manage this rebalancing, it remains risky, and it is far from clear what policies will replace China's defunct economic model in the coming years.

The problem of overinvestment
One major problem Chinese policymakers are trying to solve is the issue of overinvestment in unproductive sectors. This problem begins with China's high savings rates, which have underpinned the country's economic model for the last several decades and are currently at 45% of gross domestic product. By comparison, America's savings rate has not exceeded 20% of GDP in the past two decades.

In national accounting terms, savings are the share of national income that is not consumed. Savings can be converted into investments or exported in the form of current account surpluses. Since peaking at a massive 10% of GDP in 2007, China's current account surplus has declined to around 2% of GDP or less following the massive stimulus program launched at the height of the financial crisis in 2008. This leaves 43% of GDP (savings minus China's current account surplus) to be converted into investment.

China has invested most heavily in real estate and productivity-enhancing infrastructure projects, which boomed during the government's aforementioned stimulus program in 2008. For a while, China supported this boom, as housing and infrastructure projects were necessary parts of the country's urbanization. However, demand for real estate and infrastructure projects has since declined, leading to dangerous overinvestment.

Financially, overinvestment in real estate and infrastructure projects has increased financial risks. For example, excess apartments in cities with undeveloped real estate markets will remain unoccupied, at least for now, resulting in financial losses for investors and real estate developers. Additionally, unused real estate will not increase the productive potential of the economy. As a result, overinvestment in this sector is weighing on China's economic growth, relative to more productive, alternative investment elsewhere in the economy. Or at least, this type of economic growth is bound to be unsustainable and lead to significant financial losses.

These factors mean China is increasingly unable to convert part of its savings, which comprise a massive percentage of its GDP, into profitable investments. If this trajectory continues unabated, major medium- and long-term economic and financial risks will follow. To break this pattern, China needs to find alternative, profitable investment opportunities into which it can pour its excess savings. Structural economic reform would help aid this transition.

The risks of rebalancing
Until recently, China's government reluctantly intervened in the real estate and infrastructure sectors by bailing out debt-burdened developers and local government-related entities when their projects failed to provide sufficient returns. This interventionist policy prevented many investors from incurring too many losses and kept the real estate sector running smoothly. However, this strategy failed to motivate developers and investors to manage associated financial risk more wisely. As a result, they continued to invest money in unproductive projects, which helped prevent a broader macroeconomic adjustment.

To break this cycle, Chinese policymakers introduced the "three red lines" policy in 2020, which forced real estate developers to reduce the amount of borrowed money they use to make investments. This policy exposed developers' accumulated financial risks, and many large developers defaulted on their debt as a result. This time, the government did not bail them out, forcing developers to deal with the consequences of their poor risk management. These defaults have slowed investment in the real estate sector overall, which was a key goal of Chinese policymakers.

However, reduced investment and growth in the real estate sector (which, by some estimates, accounts for 25% of China's GDP), is slowing the country's overall economic growth. While Chinese policymakers view this slowdown as a reasonable price to pay to avoid further financial risks and the continued misallocation of savings, their economic rebalancing strategy has begun to have second-round effects. These include stagnating or falling real estate prices, as well as financial losses incurred by banks, individual investors and local governments.

Regarding the latter issue, a sharp reduction in housing-related income from land sales, on which local governments depend for revenues, will significantly restrict local governments' budgets. In addition, local governments often raise funds for infrastructure and housing projects through local government financing vehicles (LGFVs). If these investments go bad, local governments may have to bail out their LGFVs, incurring further financial losses. Therefore, economic rebalancing will put significant financial pressure on local governments.

Due to the risks of slowing investment in the real estate sector, Beijing must tread a fine line between rebalancing the economy and limiting the economic slowdown and financial losses. This requires a carefully calibrated policy that accounts for short-term and systemic financial stability, as well as medium- and long-term economic sustainability.

[Crafty_Dog]

Not super impressed with RANE (Stratfor) on economics, but FWIW, here it is:
=======================================================

China's Great Economic Rebalancing, Part 2: Potential Solutions
undefined and Global Economy Analyst at RANE
Markus Jaeger
Global Economy Analyst at RANE, Stratfor
6 MIN READSep 13, 2023 | 14:05 GMT





A truck drives between shipping containers at Nanjing port in China's eastern Jiangsu province on Aug. 6, 2023.
(Photo by STRINGER/AFP via Getty Images)

Editor's note: This is the second installment of a three-part series about China's economic rebalancing. Part one analyzed the problems Chinese policymakers are trying to solve, as well as those China's evolving economic model is causing. Part two offers potential solutions to these problems.

China's economic rebalancing is creating a host of issues. Most pressingly, government attempts to discourage overinvestment in the real estate and infrastructure sectors are slowing economic growth. Several short-term strategies are available to ease this transition, most promisingly an expansionary fiscal policy that increases private consumption. However, China will also need to make longer-term strategic changes to support its rebalancing, namely by creating alternative outlets for excess savings. Above all, these outlets will need to include more productive investment opportunities.

Short-term solutions: Consumption-oriented fiscal stimulus
To counteract the short-term slowdown in economic growth caused by reduced investment in the real estate and infrastructure sectors, the Chinese government has three primary policy levers: fiscal policy, monetary policy and exchange rate policy. Until now, Beijing has refrained from deploying these tools forcefully, instead focusing on microeconomic reforms aimed at facilitating private consumption. However, if the outlook for China's short-term economic growth deteriorates further, signaled by several months of deflation, policymakers would likely opt for a more expansionary fiscal policy to stimulate household consumption.

An expansionary fiscal policy would raise government spending and transfers and/or cut taxes, making it the most direct way to stimulate domestic demand, especially private consumption. Additionally, as private consumption rises, savings rates will decline, which will decrease overinvestment. In this way, an expansionary fiscal policy would help solve China's short-term issue of an economic slump while also supporting the government's longer-term goals of shifting away from overinvestment. The central government would need to fund this stimulus, as local government finances are already weak due to their reliance on falling real estate-related revenues and their prospective financial losses.

If an expansionary fiscal policy proves insufficient, policymakers could resort to altering China's monetary policy by cutting interest rates more forcefully. However, this option is not ideal, as lower interest rates would also increase unprofitable investment in sectors like real estate, slowing the deleveraging of the sector. Lower interest rates would also reduce banks' net profit margins, undermining bank profitability and their ability to absorb credit losses directly or indirectly related to the real estate crisis. Moreover, this strategy would widen the gap between Chinese and U.S. interest rates, which would put downward pressure on the yuan and lead to increased capital outflows. These constraints mean the government would likely only lower interest rates if the risks of recession and deflation are particularly high.

Lastly, the government could try to stimulate the economy by adjusting its exchange rate policy. In this scenario, a weaker  exchange rate would make China's exports comparably cheaper, thereby increasing foreign demand for Chinese goods. However, this strategy would be unlikely to significantly kickstart economic growth, given that China is far less dependent on external demand than it was in the past (and economic growth in its major export markets is declining). Additionally, this option would require a substantial weakening of the yuan, which might undermine domestic financial confidence. If that were not enough, weakening the exchange rate would require the government to cut interest rates, which, as stated previously, might compound the issue of overinvestment and lead to a host of undesirable knock-on effects. Therefore, Beijing is unlikely to resort to a policy of currency depreciation.

Longer-term solutions: Profitable investment opportunities and consumption
To ensure that China's short-term economic slowdown does not become a long-term stay in the middle-income trap, policymakers must create new outlets into which the country can pour its excess savings. By putting these savings to work, China's economic growth potential, which is already considerable, would increase. This is evidenced by the fact that China's per capita income is less than a third of the United States', pointing to what economists call catch-up potential, a country's ability to adopt advanced technology, improve human capital and increase capital stock to support faster economic growth and higher per capita incomes.

To tap into this potential, China needs to create profitable investment opportunities. This would require policymakers to introduce wide-ranging structural reform aimed at ensuring greater competition, a less privileged position of the state sector, and a greater role for markets to improve productivity and economic growth. Beijing's decision in March to relax controls on the technology sector may reflect early moves in this direction. However, finding or creating financially profitable and economic growth-enhancing investment opportunities will be challenging.

If the government fails to create more productive investment opportunities, China will still need an outlet for its excess savings. Policymakers would likely attempt to solve this issue by continuing to stimulate private consumption. However, this would require much more than a simple, one-off fiscal stimulus. Instead, policies would need to increase consumption structurally by raising the household share of national income, which would be fiscally costly and may be difficult to achieve politically. Even if such a stimulus succeeds, a large share of savings would need to be shifted to consumption, which would be a long-term process. A gradual transfer of income from the government and the corporate sector would be preferable. The government could support this stimulus by providing government-financed health and pension benefits, thereby reducing households' precautionary savings. If necessary, the government could also try to finance all or some of these measures through deficits or through higher taxes on the corporate sector, thus reducing corporate savings as well.

Chances of success
Chinese policymakers will face many challenges in the next few years, but they also benefit from several advantages. First, China's state-capitalist economic system enables policymakers to intervene forcefully and quickly to maintain economic growth and preserve financial stability. Second, China learned much from observing the Japanese and U.S. financial crashes in 1991 and 2008, respectively.

As a result, Chinese policymakers will continue to remedy overinvestment in the real estate sector and mitigate its related financial risks. In this scenario, China would gently settle into a lower growth trajectory (underpinned by continued high investment) in the context of more sustainable financial returns on investment. After all, the economy has plenty of catch-up growth potential left.

However, if policymakers fail to act forcefully enough, they could lose control of China's economic rebalancing. If this happens, China could be forced to implement disruptive large-scale financial restructuring in the real estate and infrastructure sectors, and even costly government bailouts. It might also push the economy into more sustained stagnation that could lead to deflation. As we will see in part three, this failure could impact China's political stability and have far-reaching implications for trade partners around the world.

=====================================================
China's Great Economic Rebalancing, Part 3: Considering Failure
undefined and Global Economy Analyst at RANE
Markus Jaeger
Global Economy Analyst at RANE, Stratfor
5 MIN READSep 14, 2023 | 15:00 GMT





Delegates attend the closing ceremony of the Chinese Communist Party's 20th Congress at the Great Hall of the People in Beijing, China, on Oct. 22, 2022.
Delegates attend the closing ceremony of the Chinese Communist Party's 20th Congress at the Great Hall of the People in Beijing, China, on Oct. 22, 2022.

(Photo by WANG ZHAO/AFP via Getty Images)

Editor's note: This is the third installment of a three-part series about China's economic rebalancing. Part one analyzed the problems Chinese policymakers are trying to solve, as well as those China's evolving economic model is causing. Part two offers potential solutions to these problems, and part three analyzes the impacts of possible policy failure.

Despite policymakers' best efforts, worst-case scenarios sometimes come to pass. In the case of China's economic rebalancing, this scenario would involve a deep economic crisis and/or severe financial instability that sets the country's economic growth back for years. While these outcomes remain unlikely, they could occur if Chinese policymakers do not intervene forcefully enough in the face of excess savings and insufficient investment opportunities.

The consequences of such a failure could vary widely, potentially leading to a controlled recession or an all-out economic spiral. In either case, the effects would extend beyond China, significantly impacting China’s trade partners, particularly in Asia.

The path to policy failure
Chinese policymakers are discouraging investment in the country's real estate and infrastructure sectors, which is slowing economic growth. For this slowdown to remain only a short-term speed bump, China must support domestic demand, especially household consumption, and create new investment opportunities in the real estate sector's place to absorb the excess savings due to lower investment in the sector. However, in a low-probability, high-risk scenario, policymakers would fail to ensure that these alternative opportunities materialize.

A lack of productive investment opportunities would lead to an excess of savings with few profitable outlets. This would cause interest rates to fall, lowering financial returns. Decreased returns would weigh on financial institutions' earnings, hurting their capitalization levels and even long-term financial health, as happened in Japan in the 1990s and 2000s. Moreover, decreased investment would slow economic growth even further and could depress prices.

China's government has many powerful policy levers that could help prevent this scenario from spinning out of control. For example, the central government has enough fiscal space and financial firepower to implement a large-scale debt restructuring, leading to a period of "controlled bankruptcy." However, this option could lead to a significant fire sale of assets, which could depress prices and weigh on economic and financial confidence and growth. Additionally, tighter government control over the economy would likely lower economic confidence even more, which would make any stimulus policies less effective. For these reasons, the government may respond too slowly or not forcefully enough, thus increasing the risk of a financial crisis.

Domestic consequences
In a worst-case scenario, Chinese policymakers would lose control of the economic rebalancing and even the process of controlled bankruptcy. In the face of this uncertain economic future, Chinese households would increase their precautionary savings and companies would reduce investment, which could bring about economic stagnation. If this leads to price deflation, including of assets, the value of debt will rise in real terms, further compounding financial stress. This stress could lead both companies and households to save even more in order to pay off their debts or maintain their targeted net worth, exacerbating the above issues and leading to what economist Richard Koo has called a balance sheet recession.

Additionally, slow economic growth would make it difficult for debtors to repay their debts, raising the specter of a vicious debt-deflation cycle. It is worth noting, however, that China does not have an external debt problem. As a result, the government could forcefully intervene to stabilize the financial situation and impose a wide-ranging, if messy, restructuring of domestic debts.

Most importantly, a debt-deflation scenario could lead investors, including banks, to incur substantial financial losses in the context of low profitability due to lower interest rates. Additionally, if asset prices decline sharply, the nominal value of household savings would erode, and a slowing economy could also cause unemployment to rise. As Chinese citizens increasingly feel the pinch of this economic stagnation, the risk of social and political discontent will rise, possibly leading to protests.

Global impacts
If China enters a debt-deflation spiral of falling prices and depressed growth, even if it manages to avoid a financial crisis, the global impact will be serious. For instance, economic stagnation would lead to reduced consumption, including for foreign goods and services. China is the largest trading partner of around 120 countries, so reduced demand would negatively impact their economic growth.

Additionally, deflation would make Chinese goods cheaper in global markets, leading to higher Chinese exports and larger trade surpluses. This could quickly become a major source of international tension, possibly raising the specter of another U.S.-China trade war following the 2024 U.S. presidential elections. Protectionist tariffs, retaliation and counter-retaliation between the world's two largest economies would negatively impact global economic and investor confidence.

Looking forward
These potential domestic and international consequences of slow economic growth show how important it is for Chinese policymakers to create profitable investment opportunities and increase consumption. However, the complicated nature of forward-looking structural reform means nothing is guaranteed. Therefore, even if Beijing successfully rebalances the economy away from real estate sector investment, Chinese policymakers will have to muster all their skills to keep China's economic growth from declining further over the medium to long term.

[Crafty_Dog]

https://www.youtube.com/shorts/E-qZPmTJ3Ls

[Crafty_Dog]

Not as bold as Zeihan, but in a similar direction.

China’s Economic Slowdown Was Inevitable
The Illusory Success of State Capitalism
By Yasheng Huang
September 25, 2023

https://www.foreignaffairs.com/china/chinas-economic-slowdown-was-inevitable

As China’s economy steadily grew in recent decades, its advocates championed the country as an antithesis—and an antidote—to liberal economics and politics. This argument seemed credible as China grew rapidly under an autocratic and economically statist system. At the same time, the United States—that beacon of Western democracy—was suffering from economic and political sclerosis.

This contrast between the Chinese and U.S. systems, and their disparate performances, led to questions regarding the effectiveness of the Western model of free markets and liberal democracy. Perhaps, as some observers have argued—including, most recently, the economist Keyu Jin—the Chinese economic miracle could be evidence of an alternative playbook to that which enabled the West’s success. China has risen, in this view, thanks to the power of statism and the wisdom of Confucianism craftily combined with the efficiency of the private sector. As China’s growth rate consistently averaged nine percent a year, the basic ingredients in standard economics came into doubt. Perhaps market finance, the rule of law, and property rights were unnecessary and, from the perspective of Chinese culture, undesirable and counterproductive contrivances.

These arguments have become less credible lately, as Chinese growth slows and capital flees in search of overseas havens. In August alone, capital outflows amounted to $49 billion. Chinese capitalists are leaving, too, fearful for their safety and the security of their property. At this moment of maximum statism under Chinese President Xi Jinping, the country’s growth is faltering badly, revealing the effect of an increasingly interventionist government. Contrary to the widespread view, China’s economic miracle happened because the government retreated from the commanding heights of central planning and left room for the market economy. Economic statism is not the savior of the Chinese economy—it is an existential threat to it.

Many have sought to use China as an advertisement for statism, but the country’s economic success actually had little to do with it. Although Confucianism and statism are perennial features of the Chinese system, the economy’s superlative growth only began in 1978, after the Chinese leader Deng Xiaoping launched a program of economic reforms. These reforms were, in many ways, utterly conventional—slowly opening the Chinese market to the world, allowing greater entrepreneurship, reducing government price controls, and privatizing state-owned industries—and their collective effect was a reduction of the power of the state. Rather than China’s growth being a testimony to the expanding power of the state relative to the market, the opposite is true.

This can be seen through a study of the first phase of significant Chinese growth in the 1980s. It was powered by small-scale rural entrepreneurship. Tens of millions of entrepreneurs from humble backgrounds built factories that flooded China with consumer durables, construction materials, food, and labor-intensive goods. This miracle owed nothing to the wisdom of the Chinese Communist Party, as Deng acknowledged in 1987. Hailing the rural economy as “our greatest success,” he declared that it was “one we had by no means anticipated. . . . [These enterprises] were like a new force that just came into being spontaneously. . . . The Central Committee [of the Chinese Communist Party] takes no credit for this.” The Chinese state endorsed—or benignly neglected—the spontaneous, bottom-up explosion of rural entrepreneurship, and the reformist leadership deserved full credit for not stifling it. The virtues of omission, however, should not be confused with those of commission. The Chinese economy took off because the state let go, not because it intervened.

A comparison of Chinese regions also shows this to be the case. The regions that have performed most strongly economically since 1978, including Guangdong and Zhejiang, have been the most market-oriented and have experienced the least state interventionism. On the other hand, those regions in which the state intervenes the most, such as in China’s northeast, are mired in high debt and struggle with lower rates of growth.

SAFETY AND SECURITY
Classic economic theory holds that, in order to create the conditions conducive to economic growth, entrepreneurs need strong property rights. Yet China has never had these. Their absence has fed the myth that China grew because of statist finance and industrial policy.

But a study of the historical record reveals the flaws in this assumption. In 1979, the Chinese government released the capitalists who had been imprisoned during the Cultural Revolution. These businessmen then had their confiscated bank deposits, bonds, gold, and private homes returned to them. This episode shows that—although China has never had a U.S.-style constitution—Beijing moved away from Maoist totalitarianism under Deng, thereby instilling a sense of security and confidence among Chinese entrepreneurs.

Under Xi, this has changed. Chinese capitalists have once again been marginalized, harassed, sidelined, and arrested. An extreme instance of this treatment occurred in July 2021. Sun Dawu, an agriculture billionaire, was sentenced to 18 years in prison, ostensibly for violating land regulations but, in reality, for his outspokenness. China is moving backward, toward the Cultural Revolution, and away from Deng’s reforms, a development not lost on Chinese entrepreneurs. They have become reluctant to invest and are trying to move their capital abroad. Far from reaping a reward, Beijing is paying a price for its lack of the rule of law.

THE ISLAND ENGINE
Hong Kong has always been an outlier. From the end of British rule in 1997 to the enactment of the National Security Law in 2020, the city preserved property rights, a free press, and the rule of law. Many high-tech Chinese firms, recognizing the desirability of this business environment, established Hong Kong domiciles. The territory has always been the largest investor in China, though many Hong Kong investors are Chinese firms. These companies established themselves in Hong Kong to acquire its legal protections and enjoy asset security. They then plowed their capital into China. This kind of institutional laundering was legally ambiguous, but for many years the pragmatic reformist leaders chose to look away, allowing Chinese entrepreneurs to enjoy Hong Kong’s rule of law and market finance while building their businesses in China.

Hong Kong’s advanced capital market—and access to global capital in general—funded the early rounds of Chinese high-tech startups that began in the 1990s. Before the rise of China’s own venture capital industry, foreign capital was needed to fund Alibaba, Baidu, Tencent, and many other high-tech startups. Much of the money came through Hong Kong. This was a globalization story par excellence credited to China’s open-door policy; to the knowledge and expertise of foreign capital; and to the hard work, ingenuity, and vision of Chinese entrepreneurs.

The forces that created China’s high-tech economy were the same as those responsible for the rural miracle of the 1980s. Both low- and high-tech Chinese entrepreneurship were caused by liberalization—globalization for the high-tech sector and financial reforms for the rural sector. Statist finance, eviscerating the autonomy of Hong Kong, and a retreat from globalization can only undermine the vitality of Chinese entrepreneurship and China’s growth engine.

THE INFRASTRUCTURE MYTH
Statism has been crucial in building China’s impressive infrastructure. But there is an inconvenient truth: the Chinese economy took off well before the gargantuan expansion of infrastructure in the country. The large-scale building of Chinese highways, for example, happened in two waves—one in the late 1990s and the other after 2008. In other words, China built its infrastructure after more than two decades of rapid growth. Growth enabled savings and raised government revenues as well as land values, and it funded state projects. Statism did not give rise to growth; growth gave rise to statism.

Infrastructure is beneficial to growth. But the Chinese infatuation with it poses a threat to future economic prospects. Continually building roads, railways, and ports has plunged China into precarious indebtedness, and because of this infatuation, Beijing has chosen to invest in physical infrastructure at the expense of education and health in rural China. This prioritization has already had damaging effects. For example, the poor state of China’s primitive rural health-care system in part justified the draconian COVID-19 measures in 2022, inflicting severe and possibly permanent damage to the Chinese economy.

China has also underinvested in its human capital relative to the size of its population. Among middle-income countries, China has the lowest proportion of high school graduates in its labor force, according to research done by Stanford University. There is the increasing possibility that the Chinese economy may stagnate, as growth stalls. Should this poor economic performance become prolonged, the Chinese brand of statism will be to blame.

VANISHED PRAGMATISM
Chinese success is not a story of laissez-faire capitalism but one of gradual and pragmatic liberalization. That spirit of pragmatism has largely vanished from China. Since 2013, the Chinese government has adopted a statist view of economic growth. At the same time, an obsession with national security matters has weaponized the state at the expense of the private sector. Beijing has betrayed and rejected its own success formula, and the economy is paying the price. Ultimately, it is the Chinese people who will suffer for as long as their government gets wrong these basic economic decisions.

[DougMacG]

https://www.spectator.co.uk/article/can-china-contain-evergrandes-collapse/

[Crafty_Dog]

https://www.theepochtimes.com/article/chinese-escapees-describe-massive-pandemic-related-deaths-in-china-as-unprecedented-5500812?utm_source=China&src_src=China&utm_campaign=uschina-2023-09-30&src_cmp=uschina-2023-09-30&utm_medium=email&cta_utm_source=China&est=%2BZ1Uz5JNuZYt12dtKudVXPQYIDVQOUQPSMzWG6bb42hxjOTddR1Wc90BQUVno%2BWIei%2BS

[Crafty_Dog]

October 20, 2023
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China Joins the Chaos
Thoughts in and around geopolitics.
By: George Friedman

Amid the chaos of several wars and the trainwreck that is the U.S. House of Representatives, there would appear to be few things left unsaid. What appears to be obvious is frequently false. In this case, our attention must be drawn to China, which, in the middle of an economic crisis, is moving its society in a strange direction it calls a grid system.

China is increasing its monitoring of citizens. This is a countrywide effort managed by the Chinese Communist Party. Neighborhoods and regions have been divided into grids, and in many cases, residents of the grids have been recruited to go door to door, inspecting the living spaces in houses and reporting their findings to authorities. China has long conducted inspections of homes, but the organization of these inspections allows for more detailed searches. The monitors’ task is to visit houses regularly and collect information on people, places, events, objects and emotions. In particular, they are inspecting computers for sites visited and content viewed. The grid workers are members or supporters of the CCP.

The degree of inspection, the large number of people tasked with monitoring and the wide range of subjects intended to be monitored indicate intensifying unease within the CCP. Economic dysfunction, political struggles (including the disappearance of senior party leaders) and dissatisfaction among citizens have led to a massive increase in monitoring in terms of both the number and the depth of searches. It is not clear what punishment might be meted out to those deemed unreliable, but monitoring will likely be zealous, with people rated on the findings related to key issues.

Attempts to observe a large population on this scale are rare. In indicating tension in China, it puts in motion a process that begins with resignations, moves to fear and results at a certain point in anger. We are a long way from that, except that it is clear the CCP senses danger and is prepared to devote resources and risk anger to stamp it out. The rest of the world still views China as a successful power, but the CCP is signaling that it sees its greatness as flawed.

This may be a brief observation, but it is worth noting.

[Crafty_Dog]

https://www.youtube.com/watch?v=XupM5_zHDbM

[Crafty_Dog]

https://rumble.com/v3vmf9p-xi-is-panicking.-chinas-wealthy-are-fleeing.html

[Crafty_Dog]

China’s Colossal Hidden-Debt Problem Is Coming to a Head
Mounting financial stress at local governments leads Moody’s to lower its outlook on China’s credit rating
By Rebecca Feng and Cao Li
Updated Dec. 5, 2023 3:59 am ET


China is trying to defuse a financial time bomb that could severely damage its banking system.

Cities and provinces across the country have accumulated a massive amount of hidden debt following years of unchecked borrowing and spending. The International Monetary Fund and Wall Street banks estimate that the total outstanding off-balance-sheet government debt is around $7 trillion to $11 trillion. That includes corporate bonds issued by thousands of so-called local-government financing vehicles, which borrowed money to build roads, bridges and other infrastructure, or to fund other expenditures.

No one knows what the actual total is, but it has become abundantly clear over the past year that local governments’ debt levels have become unsustainable. China’s economic growth is slowing and the country is battling deflationary pressures that will make it harder for local governments to keep up with their interest and principal payments.

Economists say a significant chunk of the hidden debt—their estimates range from $400 billion to more than $800 billion—is particularly problematic and at high risk of default.

Chinese authorities have realized that the risks to the country’s financial stability and overall growth have become too large to ignore. They are trying to tackle the problem more systematically and are starting to swap out some hidden debt for new—and explicit—government debt.

The big worry is that a wave of defaults could spread losses far and wide. That could quickly snowball into a nationwide financial crisis if credit markets seize up and retail and corporate depositors start to get worried about the financial stability of banks that hold a lot of local-government bonds.

“Once a local-government financing vehicle defaults, the situation can easily get out of hand,” said Yao Yu, founder of YY Rating, an independent Chinese credit-research firm. Bonds from local-government financing vehicles make up close to half of China’s domestic corporate bond market, according to Wind data, and defaults could choke off funding for other borrowers if many investors and bond buyers back away.

In early November, China’s central government said it places “great importance to the prevention and resolution of the risk of hidden debts of local governments.” Bankers and local government officials were also warned that they would be held accountable for life if they raised new hidden debt.

Pan Gongsheng, the governor of the People’s Bank of China, said at a Beijing financial forum last month that the central bank would also provide emergency liquidity support to regions with relatively high debt burdens. He said China’s total government debt isn’t high by international standards and that the country is taking steps—including asset disposals and refinancing debt—to mitigate the risk posed by its local-government debt.

Moody’s Investors Service on Tuesday lowered its outlook on China’s credit rating to negative from stable, because the country is likely to provide more support to financially stressed local governments and state-owned enterprises. The credit-rating company also cited risks to China’s economic growth. Moody’s rates China A1, an investment-grade rating that is four notches below its top triple-A rating.


China has muddled through a yearslong property bust and dozens of real-estate developer debt defaults without massive losses to the country’s banks. That is largely because many property developers had raised money offshore by selling bonds to international investors and were less dependent on bank loans.

The situation is different for local-government financing vehicles. Most of their bonds are held by Chinese commercial banks, which also extended loans to them. A recent UBS report said domestic banks’ total exposure to local-government financing vehicles at the end of last year was equivalent to about $6.9 trillion—representing about 13% of the banking sector’s total assets.

For more than a decade, Chinese regulators have been trying to address the risks of the country’s hidden debt. The last round of major efforts occurred between 2015 and 2018. During that time, Chinese local governments also sold new public bonds to swap out their hidden debt, effectively giving the latter explicit government backing.


China’s Finance Ministry also told local governments to borrow more responsibly in the future. However, under pressure to stimulate growth, local governments went on another borrowing spree, and by the end of November, the outstanding bonds of their financing vehicles ballooned to more than twice what it was in 2018, according to Wind, a financial data provider.

Some cities and provinces are starting to show financial strains after a brutal property downturn caused local government income from land sales to plunge. Three years of heavy spending to contain the Covid-19 pandemic has also depleted their cash coffers.

In late 2022, Zunyi Road and Bridge Construction Group, a state-owned company that builds bridges and roads in debt-laden Guizhou province, extended the maturity of approximately $2.2 billion of bank loans by 20 years.

In May, a utility provider in the capital city of the financially weak Yunnan province repaid its domestic notes a day after their due date. And in October, a state-owned tourism group in Weifang, a city in China’s eastern Shandong province, missed $14 million in payments on nonpublic debt.

“In a lot of economically weaker regions and provinces, we’ve seen near misses and the last-minute scrambling to repay public bonds. It’s attracted more attention from the government to help alleviate these immediate liquidity problems,” said Chris Yip, a credit analyst at S&P Global Ratings.

There has been an urgent push for local governments to issue so-called special refinancing bonds to replace some of their off-balance-sheet debt.

Since October, close to 30 Chinese provinces and cities have raised the equivalent of around $200 billion in such bonds. The fundraising was mostly in regions with high leverage including the provinces of Guizhou and Yunnan, and the city of Tianjin. The debt swaps have helped lower the risk of imminent local-government debt defaults, by giving local governments more time to come up with funds.

“It’s not enough, but I think this is just the beginning,” said Robin Xing, Morgan Stanley’s chief China economist, of the debt exchanges that have been done so far. He reckons that there will need to be at least $700 billion worth of debt swaps to resolve the bulk of the troubled hidden debt.


“It is not really a restructuring plan but a refinancing plan. It leaves most of the problems with local government debt in place,” said Logan Wright, director of China research at Rhodium Group, a research firm. A report that Wright co-wrote last month said the debt extensions or swaps will hurt China’s economic growth in the long run because more fiscal resources will be required for debt repayment.

“Markets should still be concerned about near-term default risk and resulting financial contagion from [local-government financing vehicles’] debt,” Rhodium’s report said.

Most local-government financing vehicles currently depend on subsidies or capital injections from local governments and external funding. Most don’t generate enough cash from their operations to cover their interest payments, said Zhang Ning, a senior economist with UBS, after his team analyzed the financial statements of nearly 3,000 companies.

The longer-term solution, which could be hard to achieve, would involve restructuring some local-government financing vehicles’ debt and making them commercially viable enterprises. “The goal is not to come out debt free, but for them to become sufficiently profitable companies that don’t rely on governments for funding and support,” said S&P’s Yip.

Serena Ng contributed to this article.

Write to Rebecca Feng at rebecca.feng@wsj.com and Cao Li at li.cao@wsj.com

[Crafty_Dog]

https://www.wsj.com/world/china/america-had-quiet-quitting-in-china-young-people-are-letting-it-rot-5f10d4a0?mod=world_feat5_china_pos3

[Crafty_Dog]

China’s Jobless Don’t Always Show Up in the Data. But They Show Up in the Library.
Unemployed and afraid to tell their families, many need a place to figure out their futures; for some, it’s the stacks
Increasing numbers of people report spending time in the likes of Pudong Library in Shanghai after losing their jobs.
Increasing numbers of people report spending time in the likes of Pudong Library in Shanghai after losing their jobs.
By Wenxin FanFollow
Updated Dec. 24, 2023 12:01 am ET


Every weekday, Qin Ran arrives early at a Beijing public library, settles into her favorite cubicle, and tries to figure out what to do with her life.

It has been two years since the 36-year-old lost her job at a private-equity firm. Yet after a few freelance gigs and submitting a hundred or so résumés, she’s only landed two failed interviews.

She now spends her days browsing social media and studying for a graduate school entrance exam, which she hopes will let her delay the job search until later.

She has also started noticing other people around her age or younger showing up at the library every day. Although jobs aren’t part of the conversation when she talks to them, she says there is an unspoken understanding among them that they are all unemployed.

“It’ll be another 20-plus years before I reach retirement age. Will I have another opportunity to work?” asks Qin. 

China is facing some of its greatest economic challenges in a generation after the country emerged from the pandemic with sluggish growth and record-high youth unemployment. It is a whole new experience for many young Chinese, who until recently had only known a strong job market in which talented people could quit their jobs and find new ones almost immediately.

Many are taking refuge in a place that has long been a bastion for those in need of a place to hang out—or if necessary, hide out: the library.


Some say they feel cooped up at home or are too ashamed to tell their relatives that they lost their jobs, so they have to conjure up places to go during the day.

Hanging out at Starbucks costs money. Passing time in a park—which many Japanese salarymen did after that country’s boom went bust in the 1990s—doesn’t work when the weather is bad.

The idea has spread through social media, as more unemployed people post accounts of their experiences passing days in libraries, inspiring others to do the same. Such accounts have become so common that some readers have suggested an index be created with data from library attendance to better measure unemployment.


Although official unemployment is fairly low at around 5%, economists say that figure underestimates how challenging the job market has become because much of China’s rural population is excluded in the survey. Neither does the rate reflect the number of people who’ve recently lost full-time jobs, because anyone who works an hour or more in a week counts as employed.

Youth unemployment hit a record of 21.3% earlier this year, before the government stopped publishing the data, saying it needed to improve the methodology. Although authorities have promised to bring more jobs to college graduates, many private-sector companies have continued shedding staff.

In Guangzhou, Echo Wan says that as far as her extended family knows, she’s still working in risk control at Alibaba, the giant e-commerce company.

In reality, the 35-year-old quit in October after the company wanted her to move to a new team, which she felt wasn’t a good fit.


“Going to the library feels like the natural thing to do,” says Howie Huang, who spent four months unemployed.
Now, facing a tougher-than-expected job market, she regrets not trying to seek more internal opportunities before Alibaba broke up into six units earlier this year.

She finds some peace in the Guangzhou Library, where she can read or take a nap in one of the armchairs she finds. Otherwise, she works on sending out more résumés highlighting her master’s degree in mathematics and years of experience in risk control. 

Responses have been lukewarm, she says. Her career before now was much smoother, when she was riding the wave of China’s economic boom. “That is something difficult to duplicate at the moment,” she says.

She leaves the library after dinner and arrives home, where she lives with her daughter, her husband and his parents, by 9 p.m.—the time she used to get off work.

Although her husband knows she isn’t working, she has kept it secret from her in-laws. If they found out, they would be nagging her to stay home and have a second baby, she says.

Many unemployed people who pass time in libraries do get new jobs, though the experience sometimes shakes their confidence. 

Howie Huang, 33, spent months going to the sleek Pudong Library every day in Shanghai after he lost his job in information technology this summer. He sent out hundreds of résumés and jotted down his anxieties in an online diary, which he shared publicly.

The diary noted how he concealed his status from his parents, who don’t usually go online, so that they could be spared from worries. In an interview, he mentions a scene in “Tokyo Sonata,” a 2008 Japanese drama in which the protagonist hangs out in a park and a library after losing a position that was moved to China.

“The Japanese spent a whole day in a park during their economic downturn,” Huang says. “Now this is happening to me. Going to the library feels like the natural thing to do.”


Howie Huang was laid off twice in two years but eventually found work again.
After four months, Huang finally landed a new gig, though it involves an 80-minute commute each way. He had already been laid off twice in two years, alarming him after a decade of successful upward mobility.

Many of the most-regular library visitors are recent college graduates, who are among the worst-off in China’s labor market.

In a private library in a mall on the outskirts of Chengdu in western China, one 25-year-old woman, Tian, is growing ever more confused about whether going to college was a waste of her time.

After graduating two years ago, she wanted to get a civil service job for more stability. But that means competing with millions of other new graduates in an exam that only selects 2% of them, and she has already failed once.

While hanging out at the library, she has been studying for another go at the test, while debating whether it might be time to take a modest job beneath her qualifications.

Some of her classmates now make milk tea, she said. State media has been encouraging educated youths to “lose the long gowns”—symbols for learned scholars—and accept whatever work they can find.

“If everyone works in the system, who would be left to heal the pets or bring happiness to others from a coffee shop?” she told herself.

Yet she feels torn every time she is about to give in.

“I studied so hard so that I could have more options,” she says. “What’s the meaning of that?”

Write to Wenxin Fan at wenxin.fan@wsj.com

[Crafty_Dog]

https://www.msn.com/en-us/money/markets/china-s-10-trillion-hidden-debt-mountain-could-be-the-ticking-time-bomb-that-joe-biden-warned-of/ar-AA1fPx1n?ocid=msedgntp&pc=HCTS&cvid=f2c455f7fcd14ed0860ca7e95fb553b9&ei=15

[Crafty_Dog]

January 2, 2024
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2024 Annual Forecast: China
By: George Friedman


Forecasting national behavior is built on continuums. One continuum is a nation’s history. Another is our analytic method. Simply looking at nations will not provide a systematic forecast. The method, no matter how tested in the past, cannot produce one. Only a grasp of history, filtered through a forecasting method tested consistently and repeatedly, will yield a realistic forecast. We don’t look at a nation’s every issue; we focus on the issues that reveal patterns and indicate change. Thus, our forecasts will look at the past before they look at the future.

A Cycle Unfolds

China's central change has long been economic. The country has been impoverished by wars, internal instability and the need to appear to be a great power. For much of its modern history, the Chinese economy remained weak. This shifted around 1982.

There is a cycle to the emergence of major global economies lasting roughly 40 years. It was first seen in the emergence of the United States. Following the U.S. Civil War, the United States was economically shattered. By about 1890, the U.S. began focusing on securing investment from and, even more important, exporting to Europe. By 1910, the United States was producing and selling about half of the world’s manufactured products and exporting them primarily to Europe. This process was broken by about 1929, resulting in the Great Depression. World War I had cracked the foundation of the European economy, and by the mid-1920s, Europe could no longer absorb American production. Forty years after the American surge began, the U.S. economy went into crisis.

A similar process can be seen in post-World War II Japan. Smashed by World War II, the Japanese economy began to recover by focusing on manufactured goods, which were exported primarily to the United States. About 40 years later, U.S. businesses and the economy, overwhelmed by Japanese products, generated political barriers to Japanese goods. The Japanese economy staggered and around 1990 went into a deep recession, which many call the Lost Decade.

China has undergone a similar process. In the early 1980s, the regime shifted the Chinese economy from producing for the domestic market to manufacturing exports, primarily for the U.S. but also for other nations. China sought foreign investment as well. As the American economy and then the Japanese economy appeared unbeatable, China appeared to have taken their place. China was the power exporter and investment target for several decades and appeared to be about to dominate the world. As in the other examples, this process generated economic limits, as well as political ones. The cities and the provinces along the coast got rich, while the poorer, underdeveloped interior regions got left behind. The economy began to weaken in 2020, and by 2022, that weakening accelerated dramatically. As with the other cases, China’s system faced economic and political barriers, and roughly 40 years after it began its rise, the Chinese economy went into failure mode.

It's important to note that in the other two cases, the economic process was closely linked to war. The U.S. went into economic crisis because of the Civil War, had a growth period, and then went into economic crisis as a result of World War I and did not recover until World War II. Japan went into crisis because of World War II and began its transition to recovery during the Korean War when U.S. investment and demand for supplies were critical factors. China did go into economic failure due to World War II and Japanese occupation, but its emergence in the 1980s was not linked to war.

Forecast and Conclusions

We see the Chinese economy slowly emerging from its slump in the year ahead. But China still faces internal tensions within both the population and the regime. The country's economic problems, when viewed closely rather than from the standpoint of models, have created significant instability. All of China’s regions require investment, but the government lacks the resources to invest everywhere, which results in unemployment and business failures. This generates unhappiness in the population and attempts by the government to repress the frustration. We have already seen examples of this in China, and we expect it to continue or accelerate in 2024 with increasingly repressive measures.

The same sort of instability will exist in the regime. We have already seen significant shifts in the government. The president is seeking to build a structure filled with loyalists. He is also seeking highly capable personnel able to develop the country. Many countries around the world seek similar capabilities, but this condition presents a paradox. Loyalty and competence are frequently contradictory. As a result, we would expect personnel shifts to accelerate in 2024.

We do not see military action against the United States in the year ahead, for the same reason that China has bluffed but avoided war in previous years. Any large-scale military operation would have to depend on naval action, and any naval action against the United States means facing large numbers of anti-ship weapons launched not only from the sea but also from bases with multiple layers of defense. The Chinese cannot risk a defeat as it would delegitimize the government. Given the quality of U.S. space-based intelligence and multiple layers of defense and attack, a Chinese victory would be far from certain, and the risk of defeat makes war initiation politically dangerous.

Therefore the major events of 2024 for China will be some degree of economic recovery and managing the unrest. The economy should be steady, and while it may grow in 2024, it will be nothing like it was in the previous growth period.

[ccp]

https://www.washingtontimes.com/news/2024/jan/4/china-space-warfare-includes-cyberattacks-jamming-/

[Body-by-Guinness]

This piece examines rumor that water was used to “fuel” Chinese missiles, and that silo lids are ill-fitting, concluding it is disinformation, albeit arguing light is nonetheless shed on Chinese intentions.

https://weapons.substack.com/p/water-in-chinese-missiles-unlikely?r=1qo1e&utm_campaign=post&utm_medium=email&fbclid=IwAR1HLSqYQIKvf31PZ_933xROc1w02kvCW9kpyrcwlW3MN0hh9WXOHyDpSKY

[Crafty_Dog]

https://www.youtube.com/watch?v=43axCkGrrN4

Also comments on actual capabilities

https://www.youtube.com/watch?v=vn8nKcioRK8