China

September 24th, 2021

Awake Goy

Something big is happening in China, domestically and geopolitically. First, the government has been unleashing a deluge of regulations for the last few months, targeting numerous private sectors. Second, a viral blog claimed that a “profound revolution” is happening in China and that blog was republished by all the major Chinese state media. The gist of the blog is that China is going to punish capitalists, drive “common prosperity,” and stop worshiping Western culture. All this makes people wonder if China is reviving Mao’s disastrous policies of Great Leap Forward and Cultural Revolution. Let’s take a deeper look.

Why Now? Inequality, Bubble, and Slowing Economy

Although China is a one-party system with seemingly unchecked powers for the government and the communist party (CPC/CCP), the authorities are very sensitive to public opinions. And things haven’t been going very well in China. For a supposedly communist/socialist country, there is tremendous inequality in China: The top 1% own 31% of the wealth — same as the USA.

Another way to measure inequality is the GINI coefficient index for income, which is 46.5% in China. And that is much higher (i.e., worse) than all the developed nations except the U.S., which comes in just a tad bit more at 47%.

The Chinese economy is also slowing down due to many irreversible factors — maturing economy, unsustainable debt, shrinking workforce, declining birth rate, aging population etc. After this year, China’s annual GDP growth rate will never hit even 5%. Experts predict that China’s economy will be growing at 1-2% by the end of this decade.

No wonder that young people and lower middle class are disillusioned. Phrases like “Tangping” or “lying low” are being actively censored by the government. Marriage rates are falling dramatically and people are not having enough babies. Housing prices are insanely high — 45 times as large as the average annual household income in cities like Beijing and Shenzhen.

Cynical Promises – Arson to Fight the Fire

When there are big societal problems in democracies, politicians from one party blame the ruling party and promise changes. Considering that there is only one real party in China, the authorities have a lot of chutzpah in promising “profound changes.”

One of the main driving forces behind the new populism might be Xi Jinping’s upcoming “re-election” by the Party apparatus next year. After the tumultuous years of Mao, Chinese leaders wanted to avoid autocracy and personality cult. Thus, they introduced term limits and the concept of collective leadership. However, Xi Jinping amended the Constitution, removed the term limits for himself, and made himself the virtual emperor.

Students from primary schools to universities are now forced to learn “Xi Jinping’s Thoughts.” It’s quite surreal to see such propaganda and brainwashing in the 21st century.

Next year will be the end of Xi’s second term. Although he is virtually guaranteed to get re-elected for an unprecedented third term, there are political rivals — mostly other princelings — who would pounce on him if the country faces a major economic crisis or if his approval ratings take a dive. (Princelings are the descendants of the original communist revolutionaries who won the civil war in 1949. Xi Jinping is a princeling himself).

So, Xi and his loyalists have to convince the masses that the government is working hard, although it’s the government that fueled the daunting problems.

Consider the Gini coefficient index (inequality) in China, which has stayed extremely high for the last two decades. So, the people who ignored it for two decades are now suddenly going to fix it?

As for the acute demographic problems, they are obviously due to CCP’s one-child policy that started in 1980. In 2016, China established a two-child policy and this year introduced the three-child policy. Too little, too late. In a poll, 94% of Chinese couples said they will not even consider having three children. If the technocrats were smart, they would have never had a one-child policy or at least would have abolished the limits two decades ago.

Exploitation of “Migrants”

A major source for China’s inequality — CCP’s alleged new concern — has been the ruthless exploitation of “migrants” for the last four decades. These migrants (farmers who moved to the cities) are relegated to low-wage, dirty, and dangerous jobs without basic labor rights. These people toil in factories, mines, construction sites, restaurants, janitorial services etc. and have been the driving force behind China’s prosperity. However, they are denied access to public services such as education, healthcare, and housing in the cities regardless of how long the migrants live there. This is due to the Hukou or household registration system, which treats rural Chinese people like illegal immigrants from another country.

Migrants are paid below minimum wage and are deprived of workplace benefits such as health insurance, injury/disability insurance, pension plans, vacations, and sick days.

Migrant children, even if they are born in the city, face similar institutional discriminations. Thus, many migrant couples are forced to leave their children in their home villages. This is why rural Chinese has tens of millions of “left-behind children,” who grow up without their parents, enduring psychological trauma and even physical abuse. Only 5% of rural children end up going to college; most drop out of school by 9th grade.

Migrants are also victims of large-scale wage theft and are powerless to fight back. In Chinese factories, migrants typically work for 12 hours but get paid for 8. In construction, migrants often don’t get paid for months; and when they get paid in the end, they get shortchanged. Migrants cannot form grassroots labor unions and lack collective bargaining power. Lawyers and activists who attempt to help migrants are arrested on fake charges like “picking quarrels” or “disturbing social order.”

Migrants are invisible and left out of urban statistics. Thus, stats related to urban home ownership, wages, wealth, life expectancy etc. are much rosier by excluding migrants.

In summary, 30-60% of the people in Chinese cities are deliberately kept in poverty. So, how can the Chinese government now pretend to worry about inequality?

Real Estate Bubble

As for unaffordable housing, the government encouraged the bubble, which is now worth $54 trillion. The real estate ecosystem accounts for a stunning 28% of China’s GDP.

Everyone loved the housing bubble. Beijing wanted the GDP to keep growing. Real estate developers, steel/cement companies, appliance makers, real estate agents and many more up and down the supply chain loved the mania. Local governments depended on land sales for revenues; party officials and bureaucrats got big bribes from the private sector for approving inflated real estate projects and handing out monopoly rights. As the new book “Red Roulette” reveals, CCP officials and politicians typically get 30% commission for deals they approve.

For China’s middle class, housing speculation seemed like a guaranteed winner. Everyone assumed that the government would never let house prices go down. So, they borrowed and borrowed, buying as many homes as possible. The Top 10% of households have three or more homes. The frenzy continued and household debt grew staggering tenfold from 2008 to 2020.

Now, the bubble may be about to burst. Evergrande, which was once the world’s largest developer, is now the world’s most indebted developer. It has $15 billion in cash but $300 billion of debt and liabilities. And 4 million jobs are dependent on Evergrande’s sprawling projects in 200+ Chinese cities.

Thanks to the government’s recent “three red lines,” Evergrande is unable to borrow more money. It is now struggling to pay back banks, trusts, contractors, suppliers, employees, and bond holders. Evergrande must also finish building about 1.5 million homes for which it has already accepted payments. Evergrande’s stocks are down 90% since last year, and its bonds are deep in junk territory. Bankruptcy or restructuring is guaranteed.

In a sense, Evergrande is a microcosm of China’s economy, which has been too dependent on infrastructure spending for growth. For example, 40,000 km of high-speed rail is great for bragging rights but leaves the society with $1 trillion of debt and permanently loss-making trains.

Evergrande is too big to fail and thus, despite the moral hazard, the government will step in and resolve the situation. Many other conglomerate giants such as HNA, Anbang, Wanda, and Huarong have been bailed out by the government in the last couple of years.

However, bailout doesn’t solve the overall problem regarding the housing bubble. Evergrande is not an isolated case. Stocks of many other developers like Shimao, Vanke, and Country Garden are down 50% this year. The debt crisis for developers is widespread and the risks of contagion are real. This is why some experts are saying that this could be the “Lehman Brother’s moment” for China.

The government is caught in a rock and a hard place. It can’t keep the bubble growing forever. On the other hand, if the bubble bursts, hundreds of millions of people will lose a considerable portion of their investments — 75% of household wealth in China is tied up in real estate. Moreover, if the construction bubble bursts, millions of people will lose their jobs.

No wonder that the government has passed new laws to ban “rumors” about the economy and “malicious” opinions about government policies. This repression of financial media will only exacerbate the crisis. (Although freedom of speech is guaranteed in China’s constitution, the reality is quite different).

Culture War

In a rather disturbing trend, the Party has been escalating the culture war this year. Earlier this year, numerous social media accounts of influential feminists and LGBT groups were purged abruptly without explanations. Numerous women’s rights activists and journalists related to the MeToo movement have been arrested and disappeared over the last couple of years. Some of the activists later showed up on government’s confession tapes like POWs. The entire legal system is stacked up against women in China.

In 2021, China’s regulators ordered TV shows to ban effeminate or “sissy men.” Shockingly, the government used the homophobic slang “niangpao,” which is used to bully and insult gay men. China’s young ultra-nationalists are also targeting and canceling social media influencers who don’t conform to traditional gender norms.

The government has banned immensely popular idol shows, fan clubs, celebrity rankings, and even many karaoke songs. Kids under 18 can now play online video games only on the weekends, one hour per day, between 8-9 pm.

If the CCP hopes to fix China’s demographic crisis with such authoritarian and reactionary laws, it is going to be deeply disappointed.

Pragmatic Solutions

The Chinese government fell asleep on the wheel and let the problems fester. Now, it’s passing thousands of regulations, which is like a driver pressing the brakes hard when the car is going at 100 mph. Instead, the government should have gradually started the reforms two decades ago when it joined the WTO. Here are some suggestions:

Increase wages. Consider that when China became the #2 economy in the world by surpassing Japan in 2010, the manufacturing wage in China was $2 an hour. Sheer exploitation, which created terrible inequality.
Build public housing, schools and hospitals for migrants in the cities. (Rather than building apartments and fueling the housing bubble).
Invest in more universities and raise the quality of education so that entrance exams aren’t so competitive.
Impose high property taxes on second and third homes.
Levy fines for empty homes. Now, 25% of urban homes are empty.
Allow developers to sell only finished homes. In China, people are forced to pay upfront and then wait for two, three or more years for the homes to be built. This is not only unfair to home buyers but also creates a virtual Ponzi scheme, since developers depend on new sales to fulfill old promises.
Introduce capital gains tax and increase income tax on the uber-wealthy.
Put an end to widespread corruption and crony capitalism.
Halt useless and vanity infrastructure projects.
Develop rural areas.

Oligarchy and Kleptocracy with Chinese Characteristics

Perhaps Xi Jinping truly believes in “common prosperity” but he should have started on that journey back in 2012 when he took over the Party. Instead, he let the housing bubble grow bigger. Between 2013 and 2015, China used more cement than the US had used in the entire 20th century. Xi also didn’t do anything to help the migrants — he could have abolished or reformed the Hukou system.

The Top 1% in China have five times as much wealth as the bottom 50%. While there are 1000 billionaires in China, 600 million Chinese people live on less than $6 a day. This is not a feature of a true socialist or a communist country. This is kleptocracy in state capitalism.

High-level CCP members, white-collar workers at state-owned enterprises, and politicians have cushy jobs and lucrative salaries. Some make millions of dollars in kickbacks and bribes. These people demonize the West while sending their kids to American universities (even Xi’s daughter studied at Harvard), buying million-dollar properties in the Five Eyes countries, and hoarding money in offshore bank accounts. The Panama Papers revealed how Chinese officials – including families of the Politburo Standing Committee – and businessmen use shell companies to stash hundreds of billions of dollars in Cayman Islands, Swiss banks etc.

At the top of the societal hierarchy are the “red families” and princelings – the billionaire ruling class with political power. When Xi Jinping forces a handful of tech billionaires and their firms to give money to charities, it’s political theater. Xi’s own family (sister, brother-in-law etc.) was worth $1 billion back in 2012. Former premier Wen Jiabao’s family was worth about $3 billion in 2012 — his wife was known as the “diamond queen” and launched one of the first public companies in China’s new stock market in the 1990s. Former President Jiang Zemin’s kid ran the telecom empire in China; and the grandson’s private equity firm has made billions from the IPOs of Alibaba, Ping An and others.

Conclusion

There are numerous “little pinks” — young idealist CCP loyalists — who are getting bamboozled by the Party propaganda. No, there won’t be any common prosperity. The oligarchs are not going to share their wealth with the masses. Instead, the party-state will redirect people’s anger towards internal enemies like “sissy men” and hi-tech entrepreneurs, and external enemies like America and its “running dogs” (Japan, Taiwan, UK, Australia and other allies).

Young people in China and America face similar problems. Both countries need a profound revolution but it must be real and ground up, not a populist sham from those in power.

China could have had a meritocratic government, prosperous industrial socialism, and an open society … but somewhere along the journey, it lost the vision. China’s strategic imperative now should be to declare peace vis-a-vis Taiwan and South China Sea, tone down the wolf-warrior diplomacy, and focus on economic development for the next couple of decades. Considering the economic and geopolitical turbulence, China should immediately forge a grand bargain with Biden, who has been repeatedly offering an olive branch. If Republicans gain control of the Congress, they will unleash Cold War rhetoric and hardline anti-China policies, making US-China rapprochement impossible.