The China Bust

National Review Online

Thursday, August 17, 2023

 

Everything is going so well for the Chinese economy that the government doesn’t even need to print statistics anymore. What a glorious victory for Comrade Xi!

 

Of course, the real reason the Chinese government has been releasing less and less economic data over the past few years is that the Chinese economic picture is becoming less and less positive. Rather than release information that would reflect poorly on the CCP, China is just keeping more of it under wraps.

 

It’s a common tactic in authoritarian regimes. East Germany won praise from around the world for including environmental protection in its constitution in 1968. It then gradually classified its environmental data over the next two decades. When the communist regime fell and the facts came out, it turned out that East Germany had assembled one of the worst environmental records on the planet, with air and water pollution far above the rates in free-market West Germany.

 

Whenever the communist regime in China falls, expect a similar reckoning about its economic data. The economic data China has released heretofore has likely been doctored. Independent estimates of Chinese economic output based on satellite imaging or energy consumption (which can’t be faked) have consistently found lower GDP estimates than the official numbers.

 

It was a struggle for Western economies to reemerge from their government-imposed shutdowns, but none of them had a shutdown like China’s. Foreign businesses scrambled for alternatives as the rest of the world began reopening but China remained shut. It was China’s openness to global markets that had made it wealthier, but the signal from the government to foreign businesses was clear: We’re more interested in exerting our authority than doing business with you, a signal it has amplified in other ways, such as in increasing the party’s influence within the operations of foreign companies doing business in China.

 

The return to a model closer to the older command-and-control posture from the Chinese government has led to predictable consequences. The economy is slowing, and China’s post-pandemic recovery has been a disaster.

 

While the rest of the world is worried about inflation and too much consumer spending, China is worried about deflation and too little. While most central banks are raising interest rates, China’s is lowering them. While the West is, slowly but surely, recovering to pre-pandemic levels, China is falling further behind.

 

Numerous Chinese economic schemes are failing. The export-led development model that China had used in the past has been falling apart, and factory activity is contracting. The government-backed steel industry hasn’t been profitable for over a year, and forecasts don’t show things turning around any time soon. Chinese banks are making roughly the same amount of loans as they did during the global financial crisis, which demonstrates that the central bank’s efforts to juice borrowing aren’t working.

 

The Chinese housing market is caught in a deflationary cycle. Buyers expect prices to fall, so they aren’t buying, which causes prices to fall more, etc. China’s largest property developer is on the brink of default, and its sales are down 34 percent since last year. There has also been an increase in wealthy Chinese purchasing homes in other countries, suggesting they could be hedging for a worse economic future.

 

China’s “trusts,” large shadow-banks that are involved in equities, bonds, commodities, and real estate, are in deep trouble as well. One of the largest has been missing payments, and the Chinese government has assembled a task force to investigate the industry. Analysts are concerned about financial contagion from the trusts’ struggles, given their involvement in nearly every part of Chinese markets.

 

Local governments are up to their necks in debt. The financing vehicles that they’ve used to fund infrastructure projects for decades are in trouble, and it turns out in many cases that they overbuilt. A Goldman Sachs estimate puts the total local-government debt at $13 trillion, though it’s difficult to know for sure because of lack of transparency. The national government has begun sending officials to local governments to salvage their finances. Expect the intra-CCP blame game to be vicious.

 

The flagging Chinese stock market has investors running for the safety of savings accounts. Even though those accounts are paying lower returns due to lower interest rates, a low return is better than a loss. The Chinese stock market is performing much worse than the stock markets of the U.S., Japan, or other developed countries. The number of hedge funds focused on China is declining, and the ones that are left are taking losses. Meanwhile direct foreign investment in China in the second quarter of 2023 was down by 89 percent, year on year. China can no longer assume that the West will be an easy source of capital.

 

Youth unemployment is at 21.3 percent, and the government announced it won’t be publishing that number anymore. (U.S. youth unemployment is at 8 percent.) A large population of unemployed men is a bad sign for any dictatorship.

 

All of this is made worse by China’s compromised demographic profile, which is largely the result of decades of the one-child policy. Not only are those young men unemployed, many of them are also unmarriageable because there aren’t enough women to marry (it has around 35 million more men than women). India is surpassing China as the world’s most populous country this year, and China is on an irreversible path to population decline. That means it will become old before it becomes rich, and there won’t be anywhere near enough workers to support the elderly population. China’s retirement problems make Social Security look rock-solid by comparison.

 

What all of this means for China’s military ambitions is unclear. China certainly hasn’t stopped its espionage activities against the U.S. and others, and it remains intent on military buildup. Rhetoric from state media remains bellicose. A weakening economy might spur it to lash out militarily to rally national sentiment. The U.S. must remain vigilant against the threats China poses and be sure it has the capabilities to defend itself and its allies in the event of Chinese provocation.

 

It’s becoming more obvious by the day that the Chinese economic model, supposedly a viable alternative to the West’s, isn’t working. The CCP can pretend it can’t read the data, but that doesn’t change the facts. It should be a wake-up call to the developing world, and to some aspiring central planners in the West, that free markets, not government control, are the path to prosperity. And the Chinese slowdown (which will also be felt internationally) should, if the change in political direction there is not enough of a deterrent, act as a warning to Western companies that betting heavily on assumptions of high levels of Chinese growth in the future is not the way to go.