What Economists Don’t Get About China
The Reasons for its Downward Spiral
Every economist I have read concerning China's economic woes reiterates one point: that China must "evolve" an internal consumer-led economy. If the Chinese people would only shop more, many of China's present economic problems would be solved. This premise ignores the most important fact about China.
China is a Poor Country
China has one-fifth of the world's population and 10% of the arable land, which is shrinking due to climate change and the depletion of fossil aquifers in China’s north. The country is now only 65% self-sufficient in food, and that figure is declining. Additionally, China must import 60% of its oil.
China has roughly the same land area size as the US, but it has approximately three times the population.
Americans, including economists, seem to miss the fact of America's huge geographic and resource advantage over, well, every other country. It has ice-free harbors on the world's two main oceans. The US is a net exporter of food despite having the world's highest per capita calorie consumption. And since 2019, the US has been a net energy exporter. No other country is blessed with such a variety and abundance of natural resources.
Not so with China, especially with the population it needs to support.
The only way China can pay for its essential imports is to make stuff and export to other countries. Persuading Chinese citizens to go out and spend more on retail items in their own country, as economists suggest, will circulate money, but it will not create the actual wealth that China needs to purchase imports. China needs to trade value-added goods for energy and food, or die. If China doesn't run a currency trade surplus, its people will starve.
China recognized the population-to-resource problem decades ago, hence the initiation of the one-child policy, which has now led to another problem: a demographic collapse. China's one-child policy has resulted in a population becoming skewed toward older people. Even if the Chinese economy were not slowing due to other factors, there will not be enough young people to sustain a viable workforce to support the aging population. To make matters worse, the misogynistic tendency of the Chinese to prefer boy babies has resulted in preferential abortions and infanticide. Now, tens of millions of young Chinese men will never find wives. This population skew should engender a labor shortage, yet unemployment among young people in China is now high (the government stopped publishing stats when it hit 20%). This high unemployment is due to factors that I will outline below.
The Great Real Estate Bubble
President Xi Jinping initiated his three red lines policy in August 2020, establishing new stringent requirements for acquiring loans based on the ratio of debt to assets, equity, and cash. The policy was intended to slow real estate speculation. But Xi, having by this time apparently purged anyone from the government who might give him useful advice, did not seem to have a clue how overextended most real estate developers really were. The three red lines policy resulted in the cutting off of funding to developers, dramatically hastening the inevitable crash in real estate. Builders could not complete projects, and some of the largest, like Evergrand, found themselves bankrupt. Millions of Chinese have made significant down payments and are continuing to pay for mortgages for homes that may never be completed. There is a mortgage revolt among folks refusing to continue to pay; combined with defaults on loans made to developers, this has resulted in a crisis among a number of regional banks. Much of the people's wealth is tied up in real estate. Property prices are declining, but they are still the highest in the world on an income basis. They have a long way to fall. And the farther they fall, the poorer the Chinese who have invested in real estate will feel, and the further the economy will slow.
Government Revenue
Selling land leases to developers is a major source of income for local governments to finance infrastructure. With real estate development drastically slowed, they are starved for revenue.
Crackdown on Tech Companies
Xi wanted to shift the tech economy's attention from internet games and communication, including online tutoring, to AI development. His purge of internet companies resulted in millions of layoffs. But young people who have been trained in, say, internet marketing, are not AI engineers.
Lack of the Highest High-tech
China, unlike Taiwan, has little capacity or knowledge of how to make the highest-end chips. President Biden's policies severely restricted the export of products containing that technology to China. President Xi lusts after Taiwan's semiconductor industry, which produces most of the world's high-end chips. In his mind, Taiwan belongs to China; therefore, Taiwan Semiconductor Manufacturing Company belongs to him. But TSMC founder Morris Chang would burn TSMC to the ground before he would let China have it. And TSMC's engineers would flee to the US if China invaded Taiwan. TSMC is already investing 40 billion dollars in a production plant in Arizona.
Government White Elephants and Debt
Chinese high-speed trains are a marvel. However, to keep the economy growing, they kept building lines into regions where it made no financial sense to do so. Likewise, the Belts and Roads initiative was partly aimed to keep Chinese workers employed by sending them to overseas infrastructure projects. But now, many Chinese government loans to developing nations are turning bad.
For decades, China has always managed to build its way out of every economic slowdown. Some 30 % of the economy has been construction. Private developer and government debt are bringing that to a grinding halt.
Water
Northern China is a relatively dry region. Climate change has exacerbated summer droughts and heat waves. Much of the agriculture in this region is reliant on fossil aquifers, which are being depleted and are not renewable. The deeper the wells there are drilled, the more arsenic comes up with the water. Don't eat anything that comes from China. Many Chinese prefer to buy foreign food if they can afford it.
In addition to the country's food production problems in the north, southern farmlands have suffered from massive flooding. China is acknowledged to be one of the world's most climate-sensitive countries.
Xi's One-Person Rule.
China has long been under authoritarian rule. However, during the period between Mao Tse Dong and Xi, authoritarian power was distributed among a leadership cadre numbering at least hundreds. In the 12 years that Xi has been in power, he has systematically eliminated any rivals to his now undisputed rule. Corruption charges have been his favorite tool for purging potential rivals or even any that might contradict his policies.
It's a precarious situation for the world now when the leaders of its three most powerful nations are personalities who listen mainly to the echo chambers of their own minds.
There was a point when a sizeable population of Taiwan was amenable to reunification with China. That's over now since China's broken promises to Hong Kong under Xi's leadership and its crackdown on civil rights there.
Xi's continued sabre-rattling over Taiwan and China's outrageous territorial claims in the South China Sea have made a military confrontation between the US and China increasingly likely. This has made US corporations with investments in factories and businesses in China nervous, and it is part of the reason US corporations are relocating factories to other countries like India and Vietnam and reshoring to the US. Companies like Starbucks are entirely rethinking their expansion plans in China.
Xi's ambition to bring Taiwan under China's rule during his time in power is transparent. This aim is for the sake of his own and China's prestige, but making war is also a distraction tactic common to dictators when their countries' economies are not doing well.
War game simulations have shown that the United States would lose a war trying to protect Taiwan. US aircraft carriers would be sitting ducks. The US needs to defend Taiwan, but not with the outdated tactics of carrier groups. The US military needs new thinking, and it needs it fast. China's vulnerability in leading a war will be its lack of self-sufficiency, especially in oil.
Although Xi has undoubtedly used the pretext of corruption to eliminate potential rivals, his purges of the upper echelons of the military in the last year and a half appear to be based, at least in part, on facts. Bloomberg News reported that US intelligence indicated that a large number of missiles located in silos intended to be ready for launch are compromised, including being filled with water instead of fuel. As other military deficiencies come to light, China’s confidence to engage in military confrontation may be curtailed, at least for the medium term.
Reshoring
The supply chain disruptions during COVID-19 became a wake-up call for many Western corporations. Combined with the current political sentiment and the fact that production costs in China are no longer cheap, some US companies are bringing their factories home.
China still has a huge edge in producing affordable solar panels and EVs. Still, with both political parties in the US now leaning hard into protectionism, these advantages will be muted. The US and Canada now have 100% tariffs on Chinese electric vehicles, essentially closing their marketplaces for these goods.
The Diaspora
Wealthy Chinese and Hong Kongers have been preparing their go-bags for a while. Although Canada has placed a moratorium on foreign purchases of residential homes, mainly due to Chinese buyers' run-up of real estate prices, business investors are still welcome, and investment in start-ups is a path to immigration.
Although China mandates strict controls on currency leaving the country, many loopholes exist. Hong Kong, as it has for decades, continues to be the hub for black and gray market currency transactions. The New York Times reports that Chinese people buying multimillion-dollar apartments in Tokyo with suitcases full of cash. Crypto and gold are popular mediums for moving wealth from China.
However, the currency drain on China will have a relatively minor impact compared to the talent flight of the country's entrepreneurs.
Closing Thoughts
If President Xi were to unleash the economic stimulus that Western economists are encouraging, it would precipitate a brief sugar high, and the stock market would rally, but it would not last. He knows that now. So, he sits in his bubble, looking for a solution. Having purged his advisors, he has no one to seek counsel from.
A few years ago, predictions that China would become the world’s dominant economic power still seemed believable. Not so now.
Do I feel schadenfreude? A little. I have long felt empathy for the dissidents in China, but not so much for those Han Chinese who support the brutal government repression of ethnic minorities, such as the Tibetans and the Uyghurs, and the threat against cultural minorities, such as those of Hong Kong and Taiwan who have every moral right to determine their independent nationhood.
But I know how propaganda can eat people's souls. That's the tragedy of our age. Mass communication was supposed to make people better informed and smarter. Unfortunately, as we have seen, even in supposedly more advanced countries like the US, it hasn't.