China Schizophrenia: Jake Sullivan Makes Demands, Press Fulminates Its Ambitions as While Overhyping Current Economic Wobbles

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:

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:

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.

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  1. John R Moffett

    Notice how it is the US that constantly demands things of other countries like China, but China never demands anything from the US except maybe a little respect. Also, notice how China does not threaten the US with its military, but the US surrounds China with military bases and sails our navy up and down their coast. Whatever you think about China, they are not belligerent, and they are not threatening. I can’t wait until this current administration with the likes of Sullivan and Blinken are gone. I was around for the Cuban missile crisis and this feels almost as dangerous because of these neocon warmongers. We are one accident away from a nuclear disaster in Ukraine, while sabre rattling at China at the same time.

    1. Louis Fyne

      China has always (in the modern era) been a convenient bogeyman for western elites to bash.

      See the short story “The Unparalleled Invasion” by Jack London (“Call of the Wild” fame).

      The US can fight 2 world wars against Germans, yet Germany is our chum….but China-Russia-Soviets were/are seemingly on the borderline for “malice towards none, charity for all”

      Very odd (strongest explanation being xenophobia-racism and/or 25% of Americans self-report some form of German stock—-probably much higher among elites).

      1. John R Moffett

        Near the end of WWII, Winston Churchill proposed Operation Unthinkable to the Allies. It was a plan for the US and Britain to join with the remnants of the German army and attack the Russian army and push them back to Moscow. You can even find it on Wikipedia. Even as WWII still raged, the elites in the US and Britain preferred to join the Nazis to go after the Soviets. So really, considering the cold war, and now the Ukraine war, Operation Unthinkable was just delayed and modified, but is still being implemented slowly over decades.

        The Blob needs boogeymen. They can’t exist without them. That will never end until the people in charge are gone, and other wiser people gain control. Don’t see that happening any time soon.

        1. hk

          To be fair, I always wondered how “serious” Operation Unthinkable was–military planners who worked on it didn’t think much of it, thus the name. It probably shouldn’t be taken as an indicator of Churchill’s “intent” to go to war against USSR. Military planners draft all sorts of contingency plans, even against “strange” adversaries often enough after all (like various versions of War Plan Red, US war plans against the British Empire, which were continuously updated throughout 1930s, at least.)

    2. ardj

      @JR Moffatt. Indeed China hardly needs anything from outside its borders, except perhaps for the Piraeus and Hambantota ports, vast stretches of land in Africa, Tibet, India’s territories in the Himalayas and so on. Of course the seizure of islands in the South China Sea is merely a defence of territory which is widely acknowledged to have always belonged to China. The debts incurred by the likes of Argentina, Italy, Kenya, Malaysia, Pakistan &c under the Belt and Road project are clearly the fault of the nations themselves, and the view of China as ” a rapacious and unbending creditor, not so different from the Western multilateral corporations and lenders” is clearly misconceived.

  2. Stephen

    This is a balanced article. Thank you.

    Stepping back, I think we should view Chinese domestic challenges through the lens of the Gilded Age in the US or the early nineteenth century in the UK. These were arguably the equivalent periods when both countries industrialized. Inequality, tricky business cycles and unprofitable investments (eg the UKs 1840s Railway Mania) were all grist for the mill. China is in a similar phase, albeit lacking the population growth that these countries had, and does not seem to be doing badly. The country is also so much larger and tricky to manage as a result. It is so easy to forget context.

    To accuse China of buying influence is a case of the pot calling the kettle black too. A related point is that China seems to enable countries to build genuine civilian infrastructure. Clearly, they are not just altruists. It is in both parties interests. Which is a good basis for cooperation. But, increasingly western “help” is more akin to a military protection racket and enabling oligarchs to get rich rather than anything that benefits welfare in developing countries. The world is changing and western media carping about it will not stop it from doing so. Nor should it. We ought to embrace what is happening and work with it: not fight something that is desirable and unstoppable anyway.

    1. Ignacio

      Cooperation you say. Diplomacy can be added. Taking account for interests other than one’s. All this has been forgotten if It was ever learnt. The sorry history of African colonization. Former empires aligning with the current decaying superpower. Is that what Europe shares with US? The Desire to rule the world? Our values? Garden vs Jungle?

      I believe much of this focus on foreign affairs is consequence of nothing of value to offer at home. A distraction from boredom at home. And of course another way to avoid confronting important matters that should be prioritary. Let’s pour some money in let’s say hydrogen so we can say we are doing our best. Ticker on climate change action. What’s next? Let’s de-risk, the new paradigm of the West.

  3. John

    The Cuban missile crisis felt dangerous for moments. I lied in New York City at the time and going off to work at the worst of it filled with the surreal feeling that it could all end … not really believing it possible … that felt dangerous. Now it feels dangerous and I do not trust the Us government not to do something terminally stupid … like, for example, get the notion that just one little tactical nuke will bring the Russians up short. I am convinced they may be that dumb.

    1. John R Moffett

      I think that a nuclear incident in Ukraine would either be an accident, or from Ukraine getting its hands on something. I don’t think the US will do that intentionally, even with their smallest warheads. I know that Russia won’t unless pushed to its limits. So an accident while moving them around is the most likely scenario, as that has almost caused multiple disasters in the past, like the H bombs lost over North Carolina.

  4. LY

    My understanding is that ghost cities are mostly in the “wrong” part of the country, which are being depopulated, as China is doing a speed run of industrialization and post-industrialization.

    China is loosening up its hukou household registration system, which will may help with real estate, but would also accelerate the population shifts.

    1. Mike Smitka

      There are smaller “ghost” developments in the Tier I cities, but it’s the Tier II and Tier III cities that are losing a small amount of population, Tier I gaining. Basically town/farm to city migration has ended, and the overall population is falling.

      The majority of the urban population are in the smaller cities, so it does matter, it’s not just remote places. See Rogoff and Yang, “A Tale of Tier 3 Cities” (a 2022 NBER paper, so behind a paywall if you don’t have access to a university library).

  5. Mikel

    “…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…”

    It’s all taking longer for them and costing more than it needs to for them. A lot of additional destabilization is constantly brought to regions all along the routes: Africa, Mid East, etc.

  6. Louis Fyne

    Arguably a debt bubble-asset crash is a small price to pay for the literal of hundreds of milions of people who have been moved out of subsistence poverty into a middle-income lifestyle in the past 30 years.

    1. Bill Taylor

      In the meanwhile, the United States cannot solve its homeless problem, and the gap between the .01% and the rest of the country gets wider and wider.

  7. The Rev Kev

    ‘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.’

    The only question here is if Sullivan even believed any of his own bs or that he decided to go through the whole circus to keep the neocons like Blinken and Nuland on side. And Biden too for that matter. I guess between the Jeddah peace conference and the Vilnius NATO Summmit, that the whole bunch had thoroughly convinced themselves that the Ukrainians would break the Russians who would just run away and literally bet the bank on that happening.

  8. Phenix

    China’s population is contracting. Is their an economic model that works with a contracting population and continuous infrastructure investment for a population that will never exist?

    China’s youth unemployment is very high and this generation is smaller than the previous generation etc bc the 1 child policy and many child bearing women are not having kid(s).

    As far as I understand Chinese policy, the CCP pushes for full employment to keep it’s citizens content…. this model is clearly breaking down.

    1. Yves Smith Post author

      Economic growth is a function of population increases and productivity gains. China appears to be doing well on the latter.

      The usual reason for concern about an aging population is the so-called dependency ratio, the # of working v. non-working. China has a very young retirement age, 50-55 for women, 60 for men, when their life expectancy is now longer than that of the US. So at least for the intermediate term, China could solve any dependency problem by increasing the retirement age.

    1. Will Deng

      Haven’t clicked those links, but a glance at the article titles (“regime”, “hubris”) tells you they’re not at all balanced.

      1. MFB

        Adam Tooze is a good writer and a competent historian of Germany, but because he’s a blindly bigoted Atlantic Council worshipper he is the last person you could expect to write sensibly about the U.S.’s self-defined main enemy.

        1. ardj

          Tooze is also a respected analyst of economic affairs, and speaking of the “hubris” of the state’s management of Chinese economic affairs is a relatively mild criticism. Tooze is also prepared directly to attack USA policy, for instance on climate change. Maybe the position is more complex than you are prepared to appreciate.

  9. ISL

    I see a parallel between Ukraine and China where the west believes “controlling the narrative” is more important than actual reality on the ground.

    China is going to collapse are, as pointed out, a staple for decades, to date, always unrealized, as are “of course the US can’t collapse,” despite larger financial troubles and chicanery, which are based on an ever diminishing manufacturing base.

    Meanwhile China graduates 10X the STEM students as the US (and no reindustrialization efforts in the west here!), which IMHO, means that the current crop of China problems will iron themselves out on decadal time scales, and probably underlies in part, China’s near total monopoly on numerous key industrial manufactures and processes. Monopoly allows weathering of a lot of problems – ask microsoft!

  10. Mike Smitka

    Among academic economists, the two doyen China watchers are Dwight Perkins (emeritus Harvard but still active) and Nick Lardy (affiliated with PIIE). In the next (my) generation the most active is Barry Naughton (UCSD). I knew both Nick and Barry from (econ) grad school at Yale, Perkins was a reader of my undergrad senior thesis. There’s also Malcolm Riddell, with a long government career. I taught an undergrad course on the Chinese economy 1987-2019 when I retired, but I was a Japan expert – I last met Barry in Tokyo – and only learned to read Chinese after retirement. Anyway, the above three economists have decades of focus on China with the ability to read Chinese language sources and talk to Chinese scholars. I respect their analysis.

    So … Nick has a piece out last week that tries to put the real estate issues in perspective. Read it!

    He sees a slowdown, not a crisis:

    His thinking has gotten me to tone back my pessimism. So yet one more delay in completing my next article for the SeekingAlpha finance blog, on China’ auto industry with a focus on EVs.

  11. Mike Smitka

    Addendum: If you read Japanese, then look for articles by Marukawa Tomoo of Univ of Tokyo Institute of Social Studies. He has a regular column in (the Japanese language) Newsweek.

  12. Mike Smitka

    One more article from yesterday’s Financial Times that is consistent with economic pain but no crisis, based on a Goldman Sachs report:

    On China’s property mess and its banks’ ‘impossible trinity’
    Goldman Sachs says Chinese developers need to liquidate $2tn of property inventory
    Alexandra Scaggs, Financial Times, August 23, 2023

    They conclude with

    So while China is definitely giving off Japan-in-the-1990s vibes, there may be a few differences that could help limit the carnage (relatively speaking).

    based on some deleveraging and a shift from shadow financing to bank financing, where banks have capital to absorb losses over time. Of course (not detailed) there already has been an impact via lower construction levels, particularly in smaller cities, and construction has been the single largest driver of Chinese growth. So it’s part of the wider slowdown, but won’t create an economic meltdown. If nothing else goes wrong…

  13. ardj

    MR Smith’s article is indeed tolerably “balanced”. The coda where the FT article starts “impugning China’s actions” gets a little wayward.There is no conflict between thinking developing nations might have points and issues in common and thinking that China is a great believer in realpolitik, to the extent of bullying countries to support it (Taiwan, for instance). And for what it is worth, the US’s unconcern about the morality of their allies (or themselves) goes back long before Pinochet or the Shah of Iran

    But what I really find odd is that Mr Smith seems to approve China’s victory in the Human Rights Council (still headed. if memory serves, by those upstanding defenders of individual freedom, the Saudis). But maybe he is merely continuing his role of reporter who does not take sides.

    IN fact both Mr Smith’s work and the FT article on which he bases it are full of interesting points, and it is a pity that there are blemishes like the need to attack the admittedly egregious Jake Sullivan for noting the self-protectiveness in stopping the issuance of youth unemployment figures – it seems an unnecessary and ill-thought-through diversion from the main argument.

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