|
|
Musings Report 2024-34 8-24-24 China Adrift: Now Is the Winter of Our Discontent
You are receiving this email/post because you are a subscriber/patron of Of Two Minds / Charles Hugh Smith.
China Adrift: Now Is the Winter of Our Discontent
Every economy, no matter how robust, experiences periods of expansion and malaise that manifest as enthusiastic confidence in the heady boost phase and demoralized discontent in the exhaustion phase. I have often used the S-Curve to map this recurring pattern in economies and in Nature.
The United States went through such a period of discontent and malaise in the 1970s, an era I've described as being misunderstood as an ultimately positive phase of long-term investment and adjustment to new realities.
In the S-Curve, the boost phase is expansive because policies and current conditions fuel a self-reinforcing dynamic. The conditions for expansion are present--low-cost credit / savings to invest, people to house, feed and put to work, global markets willing to import surplus production, ample natural resources, geopolitical peace--and policies that incentivize and reward expansion are in place.
The rapid growth is infectious, and public confidence in a better future are also self-reinforcing: as hard work and sacrifice ("eating bitter tears") are rewarded with rising prosperity and prospects, anything seems possible--not in a distant future, but right now.
In this boost phase, the low-hanging fruit is just waiting to be harvested, and those who scramble ahead of the crowd reap the windfall and become rich. In the glorious boost phase, the low-hanging fruit seem endless, as if there will be plenty for everyone.
But nothing is limitless, and once the low-hanging fruit has been plucked, diminishing returns set in: all the easy windfalls have been exploited, and what's left is barren soil that requires investing more capital and taking on more risk--risk that goes unrecognized, because everyone has become accustomed to easy, guaranteed gains.
Since everything is running smoothly, there's no impetus to change policies: why risk messing up what's been working so splendidly? There is also no incentive to look for evidence that the engine of growth is sputtering. Rather, there are powerful reasons--for example, recency bias--and financial and emotional incentives to dismiss or paper over signs of diminishing returns as mortal threats to a status quo that has boosted everyone's prospects and hopes.
This is how the status quo ends up doing more of what's failed: since the policies worked so well in the boost phase, the answer to diminishing returns is to do more of what worked so well in the recent past. If loosening credit greased the astounding expansion, then the solution to a slowdown is to loosen credit even more. If subsidies and stimulus worked beautifully, then the solution is to expand subsidies and stimulus.
The problem is that the policies only worked in conjunction with the conditions, which have now changed as a result of the rapid expansion. The low-hanging fruit has been picked, the easy profits booked, the consumer demand has been met and exports have reached every corner of the globe.
The mighty engine has consumed the available fuel, and so throwing gasoline on the embers no longer creates growth, it generates systemic hazards, as loose credit and subsidies encourage the moral hazard of high-risk investments in marginal projects that become tottering dominoes in the financial system.
That there can be too much of a good thing is not in the public consciousness in the boost phase: growth seems endless, and endlessly positive. Ramping up the production of highly educated workers by building hundreds of universities, for example, boosted productivity and growth in the expansion phase, and so graduating ever larger classes of graduates seemed like an unbeatable strategy for boosting expansion.
But eventually the number of graduates swamps the number of jobs requiring a university degree, and the graduates who can't find jobs form a discontented surplus elite.
Demographics can also become less constructive after a generation of expansion, as prosperity tends to reduce the birthrates and older workers retire, becoming dependent on government pension and healthcare programs.
Everyone from workers to students to retirees to policymakers assumes that the trajectory of growth is now a permanent feature of the economy, and so plans are made based on limitless expansion.
But eventually, doing more of what's now failing pushes diminishing returns into negative returns, and doing more of what worked so well in the past now increases the risk of failure as overindebted companies who sunk borrowed money into marginal projects go bankrupt, workers who counted on lifetime employment are fired and other workers who expected raises find their wages have been cut.
Policymakers are flummoxed, as everything they're doing more of has either little effect or it generates negative consequences that the system is not set up to handle, as the system was optimized for rapid growth. Now that the economy is sliding down the backside of the S-Curve, the system is accelerating the stagnation by doing more of what optimized expansion in the boost phase.
When faced with stagnation, policymakers' first instinct is to increase their control of the economy as a means of arresting the decline: imposing new standards and punishments, pushing new subsidies and stimulus, exhorting business and workers to spend more money to boost consumption--all of these end up increasing the sense of ennui and malaise, as it's clear none of it is working as intended.
The ship of state is adrift and the public mood has darkened; the mood is resigned, disgusted, demoralized, and phrases such as "the Garbage Time of History" gain widespread use.
This brings us to China.
To question China's trajectory was considered sour grapes by envious Westerners for two decades, but now reports from the ground are reflecting an awareness that conditions have changed. It isn't sour grapes to discuss this, it's denial, a denial that does China no favors.
This is not to say that life in China won't be good--it's just to say that the 30-year boost phase is over and how to adapt to changing conditions is problematic for every nation, developed and developing alike.
As I have often expressed, I see the entire global economy as exiting a 25-year period of expansion driven by hyper-globalization and hyper-financialization, both of which are now in the decline / collapse phase of the S-Curve.
Of the many articles addressing these changes in China, these six reflect different aspects of the zeitgeist:
China’s Dead-End Economy Is Bad News for Everyone.
This Isn’t the China I Remember (also titled "China's most can-do city is tired")
China’s Real Economic Crisis: Why Beijing Won’t Give Up on a Failing Model.
A Glimpse Into the Chinese 'Garbage Time of History': Deals like the "Poor Guy's Package" and "Blind Box of Leftovers" point to significant changes in the Chinese economy affecting the lives of ordinary people.
'Garbage time of history': Chinese state media pushes back on claims country has entered a new epoch.
China's social media loses interest in the Olympics.
This video offers a well-sourced overview:
Why China's Economy is Failing (22:55 min)
What's clear is that China's glorious boost phase that began in the early 1980s and accelerated in 2001 has ended, and the leadership has tightened control of the economy to little positive effect. This has eroded public trust in policies that seem to change with the wind and ring false when accompanied by worn-out exhortations.
The public mood is no longer confident. Phrases leaking into social media speak to demoralization, resignation and disgust, an emotion associated with a collapse of trust: let it rot, laying flat, Garbage Time of History, our hearts are tired. Declines in confidence and trust feed on each other, and trust is especially difficult to win back once it has been lost.
China's leadership has outlined goals that are not natural fits with each other and conflict with what history offers up as successful templates. In Musings 17 (4-27-24), Pieces of the China Puzzle, I took a deep dive into the nuances of Chinese political philosophy and China's past and present-day governance structures to explain why President Xi is attempting to blend Communist ideology with traditional Confucian values, and to point out the uncanny similarities in the structures of the Ming (1368 to 1644) and Qing (1644 to 1912) Dynasties and the present system.
I wrote: "It seems clear that Xi's goal is to bolster the legitimacy of the CCP and nurture obedience to its authority by invoking Confucian ideals of "natural hierarchies" and "natural obedience." The secondary goal seems to be to shift the national identity away from a focus on economic growth as the source of legitimacy and identity to a focus on adherence to "Chinese characteristics" as the source of national identity and pride.
In this context, Xi Jinping Thought is understandably ambitious, for it is a recognition that legitimacy and identity are not permanent, and the structures that enabled China's fast expansion have now reached limits that threaten the rapid expansion that generated legitimacy and identity."
"The description of China's current tax collection system--'tens of thousands of neighborhood offices staffed by an army of local level revenue managers' who negotiate every business's tax payments informally, without depending on formal audits--mirrors the Ming tax collection system. (In both systems, meeting revenue targets is rewarded, failing to do so is punished.)
What's striking is how well this describes the Ming system of tax collection in which local officials gathered tax revenues in a give-and-take relationship rather than a formalized system in which companies calculate their taxes based on tax codes. The similarity is remarkable.
How many employees realize they would easily grasp the system used 600 years ago because the principles and processes are basically identical?
If the rules are effectively personalized rather than applied equally to all, isn't this one of the same structural flaws that undermined the Ming Empire? The personalized system works, but at what cost in structural limits?"
China's leadership has also set goals that may well be ideal for China but that turn a blind eye to what China's trading partners might find worthy of their cooperation: the goal is to make China an autarky, self-sufficient and not dependent on any imports, yet also the dominant global exporter of high-tech goods.
That this might not strike the rest of the world as incentivizing their cooperation doesn't seem to enter the picture: it's "my way or the highway," and there is abundant evidence that the rest of the world is not buying into this China-first game plan.
Another problematic set of goals is to boost high-tech production to flood the world with exports, but also shift the economy from export-dependency to a consumer-growth economy. That the policies for each goal might conflict or be at cross purposes doesn't seem to receive any recognition.
Then there's the bursting of housing bubble. The leadership has attempted to deflate China's enormous housing bubble, but there is no way that the extraordinary concentration of household wealth in property and the equally extraordinary dependence of local government funding on development fees from constant construction of new housing can be gently deflated, as there are no alternative investments or funding sources.
Anecdotally, there are reports in Western social media of wealthy Chinese living in the West returning to China to snap up distressed properties for 20 cents on the dollar. As Bloomberg reported--
China Unleashes Rapid Drop in New-Home Prices With Relaxed Curbs-- property values are in free-fall in once-ironclad markets. "Prices of second-hand homes in Shenzhen, once China’s least affordable city, have plunged 37% from a peak in May 2021, according to Centaline Group. They’ve tanked by about 27% in Beijing, Shanghai and Guangzhou from their respective peaks."
These enormous price drops are in Tier 1 cities; if prices of existing units have plummeted 37% in Shenzhen, then they've dropped far more in Tier 2 and 3 cities. Indeed, it seems there is no market at all for second-hand condos in some locales: "The result has been so steep and unrelenting a fall in real estate prices that elderly people, like my friend’s parents, can’t sell their apartments to pay for nursing or assisted living."
If there is no reasonable expectation of appreciation and high costs of maintenance, demand for decaying flats in Tier 2 & 3 cities with declining economies could be essentially zero. Even buying units for 20 cents on the dollar might be a losing investment if the building's elevators no longer function.
Meanwhile, tens of thousands of units were pre-sold and were left unfinished, as the developers went broke. The buyers have no choice but to live in the unfinished homes:
China's homeowners living in unfinished apartments – BBC News (3:21 min) Note that the police stopped the filming, as it reflects poorly on the status quo.
The expectation for 35 years was that buying property was the equivalent of a savings account, with the added bonus of hefty appreciation. But physical structures are not financial abstractions, they require constant maintenance. With time, they lose even the utility value of shelter once essential systems break down.
What is the plan to offset a massive, permanent decline in the value of housing in China? The "reverse wealth effect" will reverberate through both the economy and the social order, as what was understood as safe and valuable loses value that was the bedrock of household wealth.
(The same question will arise in the U.S. and other nations should their stock and/or housing bubbles burst, as I consider inevitable.)
Add in the costs of treating the 11% of the populace with diabetes and the estimated 300 million prediabetics in China, funded by a diminishing workforce, and the question becomes: what's the plan for making the inevitable period of decline and discontent into a transformative phase?
The answers typically offered tend to be entirely technological: China will build more nuclear reactors, more clean energy, more electric cars, and so on. Those goals are certainly within the power of a command economy to make happen, but if the fundamental problems are not technological, then technology can't fix what's broken.
This is what every nation and leadership faces in the slide down the backside of the S-Curve: the easy fixes no longer reverse what's failing.
Highlights of the Blog
The Social Recession Is Accelerating 8/23/24
Who Wins and Who Loses When the Housing Bubble Pops? 8/21/24
You Say You Want a Revolution 8/19/24
Best Thing That Happened To Me This Week
We were gifted beautiful homegrown tomatoes and made a pasta sauce with them.
What's on the Book Shelf
Wild Ride: A Short History of the Opening and Closing of the Chinese Economy.
Red Roulette: An Insider's Story of Wealth, Power, Corruption, and Vengeance in Today's China.
From Left Field
NOTE TO NEW READERS: This list is not comprised of articles I agree with or that I judge to be correct or of the highest quality. It is representative of the content I find interesting as reflections of the current zeitgeist. The list is intended to be perused with an open, critical, occasionally amused mind.
Many links are behind paywalls. Most paywalled sites allow a few free articles per month if you register. It's the New Normal.
The Depression of 2026.
'It is OK to be content with your simple life': is 'underconsumption core' the answer to too much shopping?
What Works in Taiwan Doesn’t Always Work in Arizona, a Chipmaking Giant Learns.
Will a Japanese Fire Sale Crash U.S. Debt?
Supplying Saks Was a Soapmaker’s Dream Until He Got a $74 Check
Small vendors complain retailer owes months-old debts or pays fractions of their invoices.
Through the roof: My journey into the surreal, infuriating future of homeowners insurance. (via Cheryl A.)
‘Every building sits on a thermal asset’: how networked geothermal power could change cities.
U.S. Cattle Inventory Smallest in 73 years
This Book Shows That Inequalities Are Caused by Genes, Not the Environment.
How an Instagram-Perfect Life in the Hamptons Ended in Tragedy: Candice and Brandon Miller showed the public a world of glittering parties and vacations. The money to sustain it did not exist.
The One-Hour Nurse Visits That Let Insurers Collect $15 Billion From Medicare Information gathered from Medicare Advantage patients in their homes triggered extra payments. (via Cheryl A.)
'Corporate Greed Is Out of Control': Warren Slams Kroger's AI Pricing Scheme.
"If a ruler can get rid of private crookedness and promote the public law, his people will become secure, and his state will become well ordered." Han Fei
Thanks for reading--
charles |
|
|
|
|
|
