The China Thread

[Zanza]

I'm in two minds about this...

On one hand, I am absolutely prone to schadenfreude when it comes to Xi's China.

On the other hand, I'm pretty sure that a massive shock to the Chinese economy would suck for a lot of people across the world.

From what I read most Chinese consumers are not that exposed to the stock market, so the crash is not that terrible.

The only evitable crash of the real estate market in the other hand...

I guess the overall trajectory of the Chinese economy is negative for them and the world. They are no longer the main driver of the world economy. Instead their over investment into producing industry combined with repressed domestic demand will be bad for the world economy.

[Sheilbh]

I'm in two minds about this...

On one hand, I am absolutely prone to schadenfreude when it comes to Xi's China.

On the other hand, I'm pretty sure that a massive shock to the Chinese economy would suck for a lot of people across the world.

I think the third possibility is that it is broadly in line with what Xi has been speaking about and intending to do. I saw this in the Economist, framed as trying to offset the real estate slump:


And that could be right but given that the party will be in all the businesses including those banks, I'm not so sure. Xi has talked many times about not wanting money being wasted in non-productive sectors like real estate. This could be to offset losses elsewhere, but I think it could also be the policy goal.

I think there's something to Pettis' view here:

Michael Pettis
@michaelxpettis
Jan 23
"Wall Street economists are also ringing alarm bells about how long the real-estate slump will last."

In fact some economists were warning two years ago that in a speculative market (i.e. one in which the main reason for buying was... via @WSJ
expectations of further price increases), it would be almost impossible to stabilize prices. This is why, when many were calling for policies to support property prices, we argued that these were counterproductive and couldn't possibly work.
That's because in a speculative market it's all but impossible – once expectations of permanently rising prices have reversed – to revive buying until prices fall to below their fundamental values, e.g, perhaps when rental yields compare favorably with government bond yields.
I think we still have a long way to go for that to be the case.

But we should be clear, although continued weakness in the property markets may hurt the economy in the short term, the faster the property market adjusts, the better for China in the medium and long term.
Here, Japan provides (as it often does) a useful example of what not to do. Japan's property bubble burst in 1991, but property prices didn't stop declining until 2009. While China's bubble wasn't quite as crazy as Japan's, the adjustment lesson is nonetheless the same.
Until prices clear, the property sector will continue being a drag on the economy, and the longer it takes, the greater the cumulative impact. So while many analysts see lower prices as a bad thing, and argue that Beijing should do all it can to slow the adjustment in...
property prices, I'd argue instead that it is a good thing, and that Beijing should speed it up while implementing policies aimed primarily at counterbalancing the costs to the household sector (yes, that means initiating income transfers to the household sector).
No country overly-reliant on non-productive investment in property and infrastructure has ever been able to avoid a very difficult adjustment, and China is an extreme case, but there are better and worse ways to absorb the adjustment costs.
Too-rapid adjustment can lead to crises and hysteresis (e.g. Brazil in 1983). Too slow can lead to decades of stagnation (Japan after 1990). But one way or another the economy will adjust.

I'm not sure whether it's good or bad for the world but Zanza's right that the large increase in industrial capacity (and continuing to move up the supply chain), without increasing domestic demand is going to lead to trade tensions. As elsewhere China's share of global manufacturing is growing at twice the pace of China's share of global GDP and three times its share of global consumption.

Which means it will only work if the rest of the world's trade policy is willing to accept further and bigger Chinese surpluses - and in fairness the US won't, the EU might not, the ROTW might.

But as I say for all the concern about it I always keep thinking that the comparison you often see on real estate bubbles is Japan - and China still has an awful lot of catch-up potential, I think, before that level which may change things. But also, looking at Xi's comments and the sectors China's manufacturing is growing etc - I'm not sure it's not deliberate and I'm not sure it won't work either.

[Tamas]

If there is an autocracy and things are seemingly going not well, the most likely assumption is that thing are simply not going well, not that the there is A Plan by the Strong Man that makes this actually a good thing.

[Sheilbh]

Maybe. As I say it's in line with what they're talking about in terms of their policy goals.

But that general attitude strikes me as dangerously complacent especially when dealing with an autocracy that's succeeded (on their own terms) as much as China's has in the last 50 years.

[crazy canuck]

Explain how China is succeeding on their own terms? Why all accounts they are now failing quite miserably.

They had the potential to be much more successful on their own terms but the new glorious leader made some pretty bad blunders, which has made success, very unlikely.

[Sheilbh]

I was talking about success over the last 50 years which seems pretty self-evident to me.

At the minute Xi's talking is about Chinese productive capacity and know how, particularly in relation to future technologies - green tech (EV, solar etc), AI etc. On the other side of that has been moving from "non-productive" spending such as basically banning education tech companies or this deflation of the real estate bubble (Xi on this: "homes are for living in, not speculating with") - which I think has been bigger and more severe than they'd anticipated. And more broadly redistribution and a "crackdown" on corrution.

So my point is not that they are necessarily succeeding but that we should be open to that possibility. As much as anything I think not being open to that possibility is at risk of being complacent and arrogant and maybe wishcasting a little bit - it seems very Clinton on China's early attempts at controlling the internet: "good luck". There's a 50 year record of relative success by this technocratic autocracy and that what's happening now seems to be within the framework of the policy goals set by the leadership. I think the real estate bubble getting popped has been more severe than expected. But I think the bigger indicator of things going "wrong" (on their terms) would be outcomes that you wouldn't expect from their policy agenda or ones that just seem outside that framework - and I'm not totally sure that's what we're seeing.

[crazy canuck]

I would argue a 50 year time span is irrelevant (or worse, misleading) to an analysis of the policies that have been adopted by the current leadership.

[Crazy_Ivan80]

Explain how China is succeeding on their own terms? Why all accounts they are now failing quite miserably.

China's success is likely as much a result of American benevolence on the world stage as CCP effort. Don't think China would be where it is today if the US (and later on the West and then the rest of the world) wouldn't have opened up their markets or allowed their technology to be 'transferred'.

[Josquius]

I would argue a 50 year time span is irrelevant (or worse, misleading) to an analysis of the policies that have been adopted by the current leadership.

I dunno. On both Chinese and Marxist time scales 50 years is nothing.

[Tamas]

I would argue a 50 year time span is irrelevant (or worse, misleading) to an analysis of the policies that have been adopted by the current leadership.

I dunno. On both Chinese and Marxist time scales 50 years is nothing.

Nah, I am with CC. It's easy to see, for example, that Xi has returned to the Maoist ways of instituting himself as God Emperor. That was a big no-no for the leadership generation after Mao. There's zero consistency so Winnie has zero claim to the successes of the past 50 years.

It's not like Sunak can claim credit for the victory in WW2.

[Sheilbh]

I would argue a 50 year time span is irrelevant (or worse, misleading) to an analysis of the policies that have been adopted by the current leadership.

I think these are two slightly different things though. On the 50 year record it is that China's technocrats in a country that's very complex have been pretty successful at running it and at delivering the leadership's policy agenda. By that I don't mean any judgement on any policy agenda of the last fifty years, or that there's continuity. Simply that the people running China (at the levels below the leadership) seem pretty competent. I think that earns a benefit of the doubt for the civil service/party technocracy.

Looking at the current outcomes and Xi's policy agenda, I'm not convinced it isn't the result of pretty skilled technocrats trying to deliver that. I think in terms of things going "wrong" I'd be more interested in signs of the economy going in a different direction than the current policy agenda, or the completely unexpected.

Separate to that is Xi's policy agenda. On economics I'm not convinced it's entirely wrong or won't work - because it seems to me it's not a million miles away from what I think the West should do. It seems based on the fact that we're entering an era of great power competition. So China needs to build up its technological self-sufficiency and also its manufacturing dominance, particularly in the key industries of the future especially for energy transition. Plus building alternative markets as a mitigation against trade wars (but that'll only ever mitigate a risk). I think a lot of that would also go for the West so we avoid dependence and vulnerability to China and I can see why they might think the same. Plus some measures to mitigate inequality (though China still seems allergic to building a welfare state), and crackdowns on corruption (always real, but often politically motivated).

I don't think the challenge to that approach is the stock market or real estate - I think it's China's ageing (and soon expected to start shrinking) population and youth unemployment. Again not issues that are unfamiliar to the West. And, which is more unique to China, recklessly aggressive language and style in foreign policy (also a core part of Xi's approach) which turns countries who might be subornable against you, undermining the economics.

Nah, I am with CC. It's easy to see, for example, that Xi has returned to the Maoist ways of instituting himself as God Emperor. That was a big no-no for the leadership generation after Mao. There's zero consistency so Winnie has zero claim to the successes of the past 50 years.

Ish. I think we should be cautious about this. He has re-instituted the cult of personality and is the most dominant/domineering leader since Mao (although I always slightly wonder about the degree Deng's power behind the scenes remembering his dictum for China: "hide your strength").

But he is not particularly like Mao. He might like the red culture and the references back to Mao but there is none of the chaos and there is none of the voluntarism or any of that sort of thing. Not least because of Xi's family background in the Cultural Revolution. To the extent it's "Maoist" it's a very, very controlled version.

[Tamas]

but there is none of the chaos and there is none of the voluntarism or any of that sort of thing.

[Sheilbh]

Maybe. I think there's almost zero sign that any Chinese leader, including Xi, wants to unleash potential disorder in the way Mao did (and enjoyed).

Similarly even on the technological stuff it looks more like the classic communist problem of companies reporting that they're a bit more advanced than they actually were, so the tech/trade war maybe came a bit soon. But it's that problem, not Maoist style leaps forward.

[Tamas]

Maybe. I think there's almost zero sign that any Chinese leader, including Xi, wants to unleash potential disorder in the way Mao did (and enjoyed).

Similarly even on the technological stuff it looks more like the classic communist problem of companies reporting that they're a bit more advanced than they actually were, so the tech/trade war maybe came a bit soon. But it's that problem, not Maoist style leaps forward.

The point is, you cannot claim a 50 years continuity to Xi in any shape of form that gives Xi credit for those 50 years. Besides that being silly in every case, he is the most autocratic power centraliser in China in my own living memory.

[Sheilbh]

The point is, you cannot claim a 50 years continuity to Xi in any shape of form that gives Xi credit for those 50 years. Besides that being silly in every case, he is the most autocratic power centraliser in China in my own living memory.

I agree. But that's not what I'm doing. I'd also add that if we're discounting continuity, then surely we also need to ask what are the metrics for success under Xi - because why would they be the same as under Hu or Jiang or, say, involve stock market figures? That may have been relevant for the last 30 years or so and under previous Chinese leaders. Given that there is discontinuity - is it still relevant for Xi?

I'm claiming 50 years of continuity for the Chinese state and giving them a lot of credit for that. Not least because I think China's a very big, complex country to run and I think there's always a lag and space between central leadership and actual delivery. So local actors - lower down party functionaries, civil servants, other technocrats etc have a fair amount of lee-way.

Policy has changed under Xi, although I think it's largely evolution from thinking within the Chinese leadership and CCP and there is a significant amount of continuity - with the exception of the cult of personality which I think is a revolutionary change.

So when we're looking at "things going wrong" I think you've got to look at whether it's within the range of expected outcomes from Xi's policies. If it is, then surely a possibility is that it is those technocrats in the Chinese state pivoting and effectively delivering the new policy directive.