As we’ll unpack, the financial press has been depicting the soft Chinese economy as teetering on the edge of a crisis. As we’ll soon show, even though China has had to intervene to defend the renminbi, the current wobbles are overhyped. That isn’t to say that China has a housing debt bubble whose unwind will be a drag on growth. And that isn’t also to say that China isn’t at risk of an eventual crisis. But its current wobbles are not that.
But the media piling on comes in connection with some major press stories and now Jake Sullivan depicting China as a threat, for its alleged hegemony-building and now, per Sullivan, not being transparent enough about its economy. While yours truly is not a China fan, it’s pretty rich for the declining superpower to get upset about geopolitical competition, particularly when the new kid on the block has yet to engage in our speciality, regime change operations.
First to the finance part of the story. Conventional wisdom had it that China would rebound quickly from its Zero Covid restrictions, to the degree that its demand was expected to push up global energy prices. However, that didn’t happen. July figures showed a 14.5% fall in exports and 12.4% in imports, the worst showing in three years.
China has also been suffering from a falling housing market. From Bloomberg last week:
Judging by China’s official statistics, the nation’s housing market has been remarkably resilient in the face of tepid economic growth and record defaults by developers.
New-home prices have slipped just 2.4% from a high in August 2021, government figures show, while those for existing homes have dropped 6%.
But the picture emerging from property agents and private data providers is far more dire.
These figures show existing-home prices falling at least 15% in prime neighborhoods of major metropolitan areas like Shanghai and Shenzhen, as well as in more than half of China’s tier-2 and tier-3 cities. Existing homes near Alibaba Group Holding Ltd.’s headquarters in Hangzhou have dropped about 25% from late 2021 highs, according to local agents.
While it’s difficult to make apples-to-apples comparisons, industry insiders and economists say China’s official home-price indexes are likely understating the depth of the downturn…
That’s heightening concern among investors about the availability of timely economic data in China, where access to some information has become increasingly restricted under the government of President Xi Jinping.
The article explains that China’s official housing price figures relies on surveys, not on transaction data.
Mind you, it is hardly news that information about the Chinese economy is not terrific. Analysts would look at electricity consumption as a better measure of GDP growth than official stats.
It is also hardly news that China has been seen for some time at risk of a crisis due to its high level of private debt and its increasing dependence on debt for growth. A few of many many examples: Ambrose Evans-Pritchard of the Telegraph started banging on, even before the financial crisis, about how each dollar of Chinese debt was buying less in the way of GDP increased. In 2016, Steve Keen declared China a “zombie to be” economy”.
Storied short seller Jim Chanos for years has been documenting how China has been unintentionally doing its version of Japan’s bridges to nowhere by building ghost cities. The counter-argument is that that housing will eventually be occupied and in many (most?) cases is being warehoused, including by parents to make sure their children, when married, have a place to live that is big enough for them to have kids.
The problem is, as any estate judge will tell you, housing that is not occupied deteriorates. Skeptics have also visited some of these developments and found shoddy construction, not just facades falling off but cracks in structural elements. Again, it’s hard to know how common this is but the fact that it happens at all is not a good sign. The “ghost city” video seems to be a hardy Chinese perennial:
However, it is possible to have a housing bubble unwind, even a pretty big one, not morph into a bigger economic crisis. In the early 1990s, the US suffered from both the well-publicized savings & loan crisis and a much less widely-discussed, but still pretty serious collapse of late-stage leveraged buyouts, which resulted in bankruptcies and workouts. New York City real estate was also a casualty, due to the hit to Wall Street employment and bonuses. Steve Ross of the Related Companies and Donald Trump were rumored to be the only major developer/owners not to have to give up equity in their debt restructurings.
Nevertheless, despite widespread distress, the US suffered only a short 1991-1992 recession. Its period of faltering growth was also shorter than many expected, due significantly to Alan Greenspan engineering a very steep yield curve, so that banks did very well from simple-minded “borrow short, lend long”. That meant they rebuilt weakened balance sheets quickly.
Admittedly, the China bust has been so often predicted without arriving that it’s easy to depict observers as having been lulled into complacency. Nevertheless, careful China watchers think the current bout of weakness has been greatly overhyped by the Western media:
We're not facing a "Lehman Moment". China is instead experiencing a long, drawn out economic slowdown as it is forced to reduce its over-reliance on non-productive investment without a commensurate rise in consumption. This has been the story for years.https://t.co/YZrjbpVolI
— Michael Pettis (@michaelxpettis) August 23, 2023
Everyone thinks there’s some big crisis taking place in China, but the reality is that they’re missing their 5% GDP target by maybe 0.5%, everything is trading normally, and the central bank is under-reacting relative to jittery Western analysts. https://t.co/XLU1Xu40yo
— Philip Pilkington (@philippilk) August 22, 2023
For China to miss its 5% GDP target this year by a mere 0.5% its annual GDP growth rate would have to fall to 3.6% in the next two quarters. Substantially lower than Q1 (4.5%) and Q2 (6.3%). If this is the baseline case of analysts they are not doing their modelling properly. pic.twitter.com/sOo9TRWshE
— Philip Pilkington (@philippilk) August 22, 2023
— Reuters (@Reuters) August 22, 2023
Pettis in a separate tweetstorm points to the real problem, which we also wrote about many many years ago: China has not transitioned to an economy model driven by investments and exports to one powered by consumption:
But while most analysts now recognize that China must urgently raise the role of consumption in generating demand, and an increasing number recognize the institutional constraints in doing so, the real shocking imbalance, as this article notes, is China's extraordinarily…
— Michael Pettis (@michaelxpettis) August 20, 2023
One consequence is that a rising share of economic activity has had to shift from sectors of the economy that operate under hard budget constraints (mainly the private sector) to those that can operate under soft budget constraints (mainly government-controlled sectors).
— Michael Pettis (@michaelxpettis) August 20, 2023
It was only when investment became non-productive in the aggregate, roughly 10-15 years ago, that debt associated with investment began to rise faster than GDP. In fact this is almost the definition of non-productive investment.
— Michael Pettis (@michaelxpettis) August 20, 2023
Note that that time frame is when Ambrose Evans-Pritchard started pointing out that increases in China’s debt were less and less productive in terms of GDP growth. So this is not news to anyone who has been paying attention.
Pettis has previously pointed out that China’s measures in the early 2000s to deal with a serious banking crisis, where its four biggest banks were insolvent and required a huge bailout, had the effect of shifting the costs to consumers, which worked against the need to move to a consumption-led system.
We have also pointed out that no economy has gone from being export and investment led to consumption-fueled without experiencing a financial crisis. Perhaps China will somehow escape that fate and merely suffer a long period of zombification. But regardless, as they say in some circles, it is not this day.
With that as background, we have the unseemly spectacle of Jake Sullivan whinging about China’s lack of transparency. From the Financial Times:
US national security adviser Jake Sullivan has called on China to be more transparent about the state of its economy as Beijing grapples with a slowdown that poses risks to global growth.
China’s government last week halted publication of data on its soaring youth unemployment amid concerns that it would reveal new weakness in the recovery of the world’s second-biggest economy, and has cracked down on corporate due diligence reporting in the country.
“These are not in our view responsible steps,” Sullivan told reporters in Washington on Tuesday. “For global confidence, predictability and the capacity of the rest of the world to make sound economic decisions, it’s important for China to maintain a level of transparency in the publication of its data.”
I have no sympathy for this sort of thing. I suspect Sullivan’s complaining, despite complaining about growth risks to the rest of the world (um, Chinese growth will be whatever it winds up being regardless of the adequacy of China’s reporting) is mainly on behalf of US investors. They took the risk of betting on an economy not operating on Western lines. That includes its degree of disclosure.
Mind you, this is the same Jake Sullivan, who according to a Seymour Hersh source, was the moving force behind the recent flop of a Jeddah peace conference:
He planned it to be Biden’s equivalent of [President Woodrow] Wilson’s Versailles. The grand alliance of the free world meeting in a victory celebration after the humiliating defeat of the hated foe to determine the shape of nations for the next generation. Fame and Glory. Promotion and re-election. The jewel in the crown was to be Zelensky’s achievement of Putin’s unconditional surrender after the lightning spring offensive. They were even planning a Nuremberg type trial at the world court, with Jake as our representative. Just one more fuck-up, but who is counting? Forty nations showed up, all but six looking for free food after the Odessa shutdown [due to Russia refusing to extend the Ukraine grain deal].
And the US particular has no standing to complain about information in light of the 2007-2008 crisis, which we foisted on the rest of the world by having them eat our bad subprime cooking. In particular, we allowed the creation of an unregulated insurance product, the credit default swap, and had nada in the way of reporting on volumes and exposures. I recall the Bank of England’s semi-annual Financial Stability Report attempting to put together where things stood.
Even in early 2007, when it was clear CDS and CDOs composed substantially of CDS were greatly amplifying real economy subprime exposures, the Treasury and Fed did absolutely nothing even to get a dim idea of who was holding the CDS bag, not even pressing banks and monoline insurers for some answers.
The Financial Times had another revealing story the day before: China’s blueprint for an alternative world order. Quelle surprise! China is acting like a hegemon! Key bits:
When Xi Jinping, China’s leader, delivered an “important speech” at the UN in September 2021…Xi used it to propose a new scheme called the Global Development Initiative, which is now gaining recognition as a foundation stone in China’s blueprint for an alternative world order to challenge that of the US-led west.
Ostensibly, the GDI is a Chinese-led multilateral programme to promote development, alleviate poverty and improve health in the developing world. But along with two follow-up initiatives also announced by Xi — the Global Security Initiative and the Global Civilisation Initiative — it represents China’s boldest move yet to enlist the support of the “global south” to amplify Beijing’s voice on the world stage and build up China’s profile in the UN, Chinese officials and commentators say…
The key to China’s blueprint is to steadily institutionalise its leadership over the developing world by creating, expanding and funding a raft of China-led groupings of countries, according to Chinese officials and commentators. They add that the aims of this strategy are largely two-fold: to ensure that a broad swath of the world remains open to Chinese trade and investment and to use the voting power of developing countries at the UN and in other forums to project Chinese power and values.
The crucial context to this strategy is that by seeking increased leadership over the global south, China is throwing in its lot with the largest and fastest-growing part of the world. The 152 countries classified as developing at the UN vastly outstrip their developed counterparts on yardsticks such as population size and population growth, GDP growth rates over the past two decades and overall contribution to global GDP growth as measured by purchasing power parity.
In fairness, once you get past the headline, this is a pretty-level headed discussion, although it underplays how China has been on the path of forming strong relations abroad through investment and development for a very long time, notably with its Belt and Road Initiative and investment in Africa. Nevertheless, it seems surprising that the pink paper thinks it needs to tell its readers about Chinese measures like:
The list of international institutions in which Beijing hopes to magnify its influence and, by extension, that of the developing world is getting longer. It includes the UN, the World Trade Organization, the G20 and others, Chinese officials say. In addition, Beijing also intends to expand the membership and raise the profile of several groupings in which it already plays a leading role, including the Shanghai Cooperation Organisation, the Brics group and others.
This is the point where the article starts impugning China’s actions:
“We should not take the Chinese Communist party’s endeavours to establish a new world order lightly,” says Xu Chenggang, senior research scholar at Stanford University’s Center on China’s Economy and Institutions.
“Developing countries with authoritarian regimes, particularly those in conflict with the US and other democracies, are finding that China’s new order is beneficial to their domestic authoritarian rule and their foreign policy,” he adds.
It’s not as if the US has been fussy about who our allies are, starting with Pinochet, the Shah of Iran, and the Saudi royal family. And as much as great powers do tend to throw their weight around, to my knowledge, China has yet to engage in the US speciality of regime change.
The Financial Times suggests that China has been buying influence:
The most important move so far has come in the form of a new UN forum that China founded in 2020. Called the “Group of Friends of the Global Development Initiative”, it has about 70 member countries…
The full list of member countries in the group is confidential…However, a list compiled by the Financial Times of 20 countries believed to be members, shows that the group includes many of China’s biggest debtors under the BRI…
A study by AidData, a US-based research lab, shows that the 20 countries on the list have displayed impressive loyalty to China in the form of votes at the UN. Between 2013 and 2020, each of them have voted with China on at least 75 per cent of occasions in the UN General Assembly (see chart), the main policymaking body which issues recommendations on global crises, manages internal UN appointments and oversees the UN’s budget.
Lordie. How much of the time would have these countries have voted with China because developing countries often have common interests? And separate from the effects of the BRI to greatly strengthen economic ties, how many of these countries already had China as their biggest trade partner, and for that reason might also see eye to eye?
The article then recounts long-form a Chinese victory in the UN Human Rights Council. The Council voted down a Western-sponsored motion to debate China’s human rights record, this mere weeks after the UN Office of the High Commission for Human Rights found China had committed “serious human rights violations” against the Uighurs. The Financial Times pointed out how motions like this are almost never defeated. China then poked the sponsors in the eye:
Following that victory, China then enlisted 66 countries — most of them recipients of Chinese lending under the BRI — to support a statement at the UN praising its human rights record. Its signatories outnumbered the 50 mostly western countries that endorsed a rival statement which condemned China.
The article contains other useful elements, noting China’s efforts to position itself as a peacekeeper. It did mention China’s success in negotiating a deal between Iran and the Saudis, while neglecting to mention that China had earlier floated a high-concept peace principles document for ending the war in Ukraine.
One can almost sense that members of advanced economies, who’ve been part of the same winning club since at least the end of World War II, are now discomfited that what were once developing economies collectively have more heft and are quickly becoming a force to be reckoned with. And China is making great use of that shift.