The China Thread

[Sheilbh]

A Hong Kong court ordered the liquidation of Evergrande now. The company has about 300 billion dollars debt. Might be just an exception or the first of a wave that will destabilise the Chinese real estate sector, which contributed an outsized share of GDP and taxes.

Also the impact on local government balance sheets. Although the 2-3 year period since the first Evergrande crisis may have allowed them to get out more safely.

My main thought is the two points are not mutually exclusive - that Xi's desire to focus on "the real" economy is going to cause a lot of trouble for China's economy...

Yep. And see just last week the central bank cutting interest rates and setting up a unit for loans to the tech and green sectors (as well as a few other areas) - when it's not clear that the issue is a lack of capital but, as Zanza pointed out lack of domestic demand.

I'd add that real estate bubbles bursting are almost always very bad for an economy - it doesn't mean that the better option is to keep the bubble going (this goes to the general levels of debt in a society being a risk, not just government debt - and total Chinese debt is almost 300% of GDP). But I think they are linked and China is trying to shift growth model away from local governments relying on property developers to hit the centre's targets (and worth noting that, so far, the central party has broadly required local governments to complete unfinished developments). Whether they're able to hit the targets any other way is another question.

As I say my view is in part prompted from what I've read from Chinese statements but also from the Economist, which characterised this shift as being banks trying to offset real estate losses with manufacturing:

No doubt that'd be right in a market economy. But I'm not sure it is in China. I think it's more likely to be policy/reflect a decision set by the party. Not sure it's just off-setting losses/increased risk in one type of customer.

And on that chart - in 2017, Xi made his "houses are for living in, not speculating with" comments. In 2019-20 they introduced a series of new regulatory requirements on real estate - Evergrande failed all of them. Then in 2021 as regulatory pressure increased, Xi published a piece in the party's theory journal on "understanding the new development stage" all about the "new development philophy" which was about creating "quality growth". Industrial policy, focus on tech and green manufacturing all fit into that. My totally personal guess is that Xi's piece was to make clear he was personally backing the regulatory pressure on real estate developers - so you (party leaders in local government, financial sector, the real estate companies themselves) either get in line, or you're opposing him. It wasn't either technocrats free-lancing in an area without much attention from the leadership, or something he'd give way on.

Even though Xi is unprecedentedly powerful I think the CCP is still about managing and balancing various interest groups within the party, which takes time. That may go wrong. Crisis management is difficult and there may be unknown unknowns out there (although the slow motion demolition may have allowed those to be squared away) which could destabilise unexpected bits of the economy. All those are big risks (although, this isn't the main story on Caixin) where things could get out of hand. Not to mention on the "quality growth" model - as Zanza says, where is the demand supposed to come from? Will it just be shifting one pile of debt to other sectors?

On this the "what if it works" point is whether the slow process of increased scrutiny from the central bank, increased regulatory pressure plus signs from the party leadership has given time to square away those risks. Are they able to deflate the real estate bubble, resolve Evergrande and other heavily indebted real estate companies without destabilising the wider economy and without causing crises elsewhere in the economy? That's challenging to say the least.

Also there are lots of ways China is and should be treated as a special case - but 70-something leader moaning about the weakness of the "real economy" v speculators and real estate doesn't seem like one of them.

[crazy canuck]

And again, both you and the Economist engage in an analysis that is only valid in a society with a strong Rule of Law.  The analysis looks great on paper, and an imaginary China where there is something resembling a viable legal liquidation process.

But what will happen is very different and chaotic and will be dictated mainly by whoever is in the right position, or knowns those in the right position, to take advantage of this large transfer of assets.

[grumbler]

So I guess there's two schools on Evergrande?

1) Oh man the Chinese economy is in trouble.

2) This is a deliberate move by Xi to recalibrate the economy on "the real" (i.e. making things, not speculating). So far I've only heard this from Sheilbh, but I'm sure he's not alone.

Thoughts from Languish?

There has always been in China a bit of a moralist streak, taken from Confucianism, that argues that the people with real value to society are those who make things and that those who merely trade them are parasites.   

[Jacob]

Yeah the "old man yells at economy-clouds, but economy has to follow because he's chairman of the CCP" explanation is far from implausible.

[HVC]

There has always been in China a bit of a moralist streak, taken from Confucianism, that argues that the people with real value to society are those who make things and that those who merely trade them are parasites.   

Many western cultures had that too, wonder when it went away. Age of exploration?

As for chinas moving economic goals. I don't think they're moving to manufacturing and thus housing is failing, I think they're moving to manufacturing because housing is failing. Only so long you can prop up a housing bubble... unless you're Canada I guess.

[Sheilbh]

Yeah the "old man yells at economy-clouds, but economy has to follow because he's chairman of the CCP" explanation is far from implausible.

Yes. But this is where my China-hawkery leads me to a slightly uncomfortable place of maybe they're right?

Because I think what the West needs to do is to build up its industrial capacity particularly in cutting edge technology, through state industrial policy etc. Basically for the mirror opposite reason. I want to reduce our dependence on and vulnerability to China and, by extension, the CCP - and I think that matters more than growth in itself or the nostrums of a particular world order.

I think driving Xi's desire to move to "quality" growth and focus on developing those commanding heights of 20th century industry is because growth matters less (especially in a state so able, if reluctant, to re-distribute). What's most important is the autonomy of the regime to avoid dependence and vulnerability so extending the CCP's ability to determine China's future, and by extension, the world's in the 20th century.

As a random example, from the NYT last year:


And the other tension is - is it good for the world? I read today that Europe is capable of meeting about 5% of its energy transition targets without Chinese solar imports. Similarly Europe's move like a whale into LNG markets (because of Russia's invasion) has massively hurt South Africa and Pakistan's ability to import LNG which was a staple for them, they are both turning to China to massively import Chinese solar. Good for the world, bad for the West (and maybe oversupply and cheap goods in green tech isn't the worst thing?)

I find it hard to say that, no, a model more focused on real estate speculation is the right one if those are your priorities - if it is just growth for its own sake, maybe. And I think a focus on growth for its own sake or the theory of our model is what got the West into the trouble of using Russia for cheap energy and China for a cheap manufacturing base.

As I say I think there are risks for China - youth unemployment, demand shortfalls (or where is it coming from especially if Europe and the US starts imposing trade restrictions), debt shuffling around, risks to state credibility. I'm just not totally sure they are the same risks as or that they result from a general theory of autocracy.

[PJL]

I do think the old idea that globalisation (at least economic) was supposed to democratise the world but instead what has happened is that it has corrupted democracies due to the influx of Russian & Saudi petro-dollars and has strengthened the authoritarians in China and elsewhere. Back 20-30 years ago the idea of taking control of the commanding heights of the economy that left wing governments wanted to do 60-70 years ago seemed laughable. Now, in a way it seems like they might have had the right idea to some extent and it's reflected in Biden's economic policy and Labour's Green New Deal / securonomics proposals.

Couple that with all the financial / geo-political & pandemic / supply shocks we've had, it now looks as though the economic ideas of Reganomics and Thatcherism may have been the naive idealism instead of what went on before.

[Zanza]

The world could of course build a car battery without China. It's just a dirty business and doing it elsewhere would be more expensive. Same with solar panels.

[Josquius]

There is fundamentally something very broken in the modern economic system that just wasn't there 50 years ago that absolutely everything comes down to who gets precisely what profits skimmed off.
Just look at the shit trying to ramp up shell production for ukraine

[Valmy]

I do think the old idea that globalisation (at least economic) was supposed to democratise the world but instead what has happened is that it has corrupted democracies due to the influx of Russian & Saudi petro-dollars and has strengthened the authoritarians in China and elsewhere. Back 20-30 years ago the idea of taking control of the commanding heights of the economy that left wing governments wanted to do 60-70 years ago seemed laughable. Now, in a way it seems like they might have had the right idea to some extent and it's reflected in Biden's economic policy and Labour's Green New Deal / securonomics proposals.

That is what I ultimately had to uncomfortably conclude. FDR and the New Dealers were correct. You had to control the strategic necessities for your economy and ensure prosperity for the average Joes and Janes and gender fluids or you were setting yourself up for disaster both domestically and in foreign affairs.

Hence my slide leftwards.

[Jacob]

There is fundamentally something very broken in the modern economic system that just wasn't there 50 years ago that absolutely everything comes down to who gets precisely what profits skimmed off.
Just look at the shit trying to ramp up shell production for ukraine

Hasn't it always been like that, except with the people doing the skimming being more secure in their power to maintain their take?

[Sheilbh]

I do think the old idea that globalisation (at least economic) was supposed to democratise the world but instead what has happened is that it has corrupted democracies due to the influx of Russian & Saudi petro-dollars and has strengthened the authoritarians in China and elsewhere. Back 20-30 years ago the idea of taking control of the commanding heights of the economy that left wing governments wanted to do 60-70 years ago seemed laughable. Now, in a way it seems like they might have had the right idea to some extent and it's reflected in Biden's economic policy and Labour's Green New Deal / securonomics proposals.

Couple that with all the financial / geo-political & pandemic / supply shocks we've had, it now looks as though the economic ideas of Reganomics and Thatcherism may have been the naive idealism instead of what went on before.

I basically agree.

But. 20 years ago I was a Blairite ultra who believed in the inevitability of globalisation and the third way as the route to mitigating its impact. So I also wonder if I'm not just, fundamentally a bit of a weather vane swinging to whatever's current?

I am however strongly of the view that any settlement or order contains within it the flaws that will ultimately bring it to an end/lead to its replacement. And I'm sure that's true of securonomics - whether Biden, Xi or Starmer's version.

[Josquius]

I do think globalisation and the victory of progressive democracies is "inevitable" - it won't happen automatically and will take effort but it is more likely this happens than the alternatives.
However that liberal economics would be the vanguard of this.... No.
I do wonder how people were so mistaken on this. Was it even good faith or just greed?

There is fundamentally something very broken in the modern economic system that just wasn't there 50 years ago that absolutely everything comes down to who gets precisely what profits skimmed off.
Just look at the shit trying to ramp up shell production for ukraine

Hasn't it always been like that, except with the people doing the skimming being more secure in their power to maintain their take?

Maybe.
But it is better if you know precisely who is taking what cut.
It's not the fact people in the system are making money which is really hobbling the west (though some are taking much too much) but the endless negotiation and jostling for what in the grand scheme are pennies.

[Tamas]

The world could of course build a car battery without China. It's just a dirty business and doing it elsewhere would be more expensive. Same with solar panels.

Orbán has clearly launched a massive program of having Chinese battery factories built in Hungary. A speculation I read that this also serves to secure his regime against German political pressures, as German auto makers will benefit from Hungary and not their own country being turned into a toxic dump to supply the fake green revolution of electric wheeled battleships.

[Sheilbh]

The world could of course build a car battery without China. It's just a dirty business and doing it elsewhere would be more expensive. Same with solar panels.

Sure - although Chinese dominance in the upstream stages (and there seems to be a strategy of building a dominant position down the entire supply chain) is more of a challenge there.

I suppose that attitude works as long as we think disruptions to supply chains or geopolitics intervening are relatively unlikely and I'm not sure they are. The world could build them without China, but from basically a standing start because of a supply chain crisis might be challenging with lots of knock on effects in the rest of the economy.

Ultimately we're choosing cheap and outsourcing the environmental impact over security of supply - which is a valid choice. But I'm not sure it's the right one given how I view the Chinese state/party.