Trade War

Newsletter 85 - September 25, 2021

Welcome to the 85th edition of Trade War.

Evergrande misses a debt payment and founder Xu Jiayin’s rags to riches background is explored. HNA executives taken into custody as Xi tightens screws on company executives.

Huawei executive returns home to a hero’s welcome and two Canadians released as China exercises “hostage diplomacy.” Foreign companies say China’s growing isolation bad for business but plan to continue to invest.

Evergrande’s ‘eerie silence’

Evergrande has missed a debt payment raising new fears about the fate of the beleaguered property developer, write The Guardian’s Vincent Ni and Julia Kollewe.

“The firm is now in uncharted waters and enters a 30-day grace period. It will default if that passes without payment,” reports The Guardian.

“These are periods of eerie silence as no one wants to take massive risks at this stage,” Howe Chung Wan, head of Asia fixed income at Principal Global Investors told the British paper. “There’s no precedent to this at the size of Evergrande … We have to see in the next 10 days or so, before China goes into holiday, how this is going to play out.”

China’s central bank has taken steps to bolster the financial system by injecting cash into the economy; “if Beijing were to become involved, it would most likely focus on making sure families get apartments they have already paid for, rather than trying to bail out banks or other creditors,” reports The Guardian.

“A lot of Chinese people have a lot to lose if their property prices plummet as a result of a disorderly collapse of Evergrande. It will hurt people’s confidence,” said Dexter Roberts of the Washington DC-based Atlantic Council’s Asia Security Initiative. “But on the opposite side, if the government is seen to have helped Evergrande too much, it will cause moral hazard.”

Making an example of China’s most indebted company..

While China’s firm control over its financial system means this is unlikely to be a “Lehman moment,” as some have suggested, there is a real possibility that China’s efforts to play hard ball with Evergrande could hit the larger economy hard, I say in an interview with CNN International’s Richard Quest.

Telegraphed and controlled detonation

Beijing continues to show no signs that it plans to bail out Evergrande while its chairman has taken steps to reassure company employees, reports Reuters.

"I would characterize Evergrande as a telegraphed and controlled detonation," T. Rowe Price Emerging Markets Bond fund’s Samy Muaddi told the wire service. "If an investor was still investing in Evergrande they were investing against Chinese policy makers, which is a good way to lose."

S&P Global Ratings says it expects no direct support forthcoming for Evergrande. "We believe Beijing would only be compelled to step in if there is a far-reaching contagion causing multiple major developers to fail and posing systemic risks to the economy," the rating agency wrote in a Monday report.

In a letter to staff, chairman Hui Ka Yuan (the Cantonese version of Xu Jiayin) wrote "I firmly believe that with your concerted effort and hard work, Evergrande will walk out of its darkest moment, resume full-scale constructions as soon as possible."

Xu and Xi

Evergrande chairman Xu Jiayin’s life history follows that of the economic rise of private business in China, with both now being tested by Xi’s crackdown on inequality and entrepreneurial excesses, writes SupChina’s Chang Che.

“Xu Jiayin’s story mirrors the ups and downs of a changing China, first under Deng and now under Xi. If Xu’s ascent from rural poverty to real estate mogul owes much to the Party, then his downfall has roots in the Party’s u-turn: a rebuke of capitalists, the moneyed class, and the Party officials that helped developers thrive,” writes Chang Che.

“The whole freewheeling [former president] Jiang Zemin way of the world is gone,” Richard McGregor, author of The Party: The Secret World of China’s Communist Rulers, told SupChina. “We’re in different parameters and values now.”

“In Xi’s mind, Xu may not be so different from the officials he axed in his first term: both represent the excesses of an economic system that had worked for political and economic elites under Jiang Zemin and Hu Jintao, but had corrupted them and the Communist Party,” writes Chang Che.

An extravagant lifestyle now frowned upon

Xu’s fall from grace may be fueled by the China’s top leader’s expressed distaste for the extravagant lifestyles of the ultra-wealthy, not just his company’s excessive borrowing, writes The Guardian’s Vincent Ni.

“Xu’s taste for luxury earned him the moniker “belt brother”, after he entered China’s annual legislative conference sporting a gold belt buckle in the shape of an “H’, logo of French couture house, Hermè,” reports Ni.

“Xu is a colorful figure. He lived an extravagant lifestyle that is now frowned upon by Xi as he kicks off his ‘common prosperity’ campaign,” says Dexter Roberts, senior fellow at the Washington DC-based Atlantic Council Asia Security Initiative. “For a long time, Evergrande’s business model, borrowing large sums of money and aggressively selling apartments that have not even been built, seemed like a smoking gun.”

“Xu is also one of those people Beijing now finds distasteful – flashy and over the top,” says Roberts. “I’d be really surprised if he emerges from this crisis unscathed.”

China detains once high-flying HNA execs

The authorities in China have detained the two top executives of the once high-flying HNA Group, writes the New York Times’ Keith Bradsher.

Chairman Chen Feng and chief executive Tan Xiangdong of the transportation and logistics company notorious for a global buying spree that led to its debt-fueled collapse in 2017, have been taken into custody in Hainan province, reports the paper.

The two were detained “in accordance with the law for suspected crimes,” the company said in a statement without providing details. Complicating the situation, Tan appears to be a U.S. citizen, according to a company filing.

“The Communist Party has responded to public concerns about rising income inequality by shifting its emphasis in economic policy. A goal of “common prosperity” has begun to supplant a previous tolerance for a private sector that grew rapidly but sometimes borrowed recklessly,” writes Bradsher.

Xi’s ‘messianic streak’

Xi is trying to carry out a risky “amalgamation” of the public and private sectors of the economy and has a “messianic streak” that could prove destabilizing for the world, writes Washington Post columnist David Ignatius.

“The Chinese leader speaks internally of “amalgamation” of the public and private sectors, according to Christopher Johnson, a former top CIA China analyst who now heads the consulting firm China Strategies Group,” writes Ignatius.

“Johnson describes an explanation often heard in elite circles: “Xi wants the state sector to have more market discipline, and the private sector to have more party discipline.” The result is a severe squeeze on what Xi views as “undisciplined” entrepreneurs.”

Citing a recent blockbuster article on Xi’s crackdown on the private sector by the Wall Street Journal’s Lingling Wei, Ignatius refers to a “chilling detail” where Xi advisor and market-oriented advocate Liu He had to do a “self-criticism” for his role in allowing the controversial $4.4 billion IPO of ride-hailing company Didi.

“This humiliation of a senior official was an echo of Mao’s Cultural Revolution, which eviscerated China’s educated middle class in the 1970s,” Ignatius writes. Xi, “like Mao and other visionaries, [has] a messianic streak that could prove destabilizing for the world and downright toxic for China.”

China not making a pretense: a straight hostage situation

Beijing’s decision to immediately release two long-detained Canadians after Huawei executive Meng Wanzhou was allowed to return to China, suggests the country’s leaders have adopted a new hardball tactic, write the New York Times’ Chris Buckley and Katie Benner.

“The executive, Meng Wanzhou, landed in China on Saturday night local time to a public that widely sees her as a victim of arrogant American overreach,” writes the Times. “By the same turn, Michael Spavor and Michael Kovrig, two Canadians detained by Chinese officials just days after Ms. Meng had been arrested, were released and arrived in Canada.”

“The swiftness of the apparent deal also stands as a warning to leaders in other countries that the Chinese government can be boldly transactional with foreign nationals, said Donald C. Clarke, a law professor specializing in China at George Washington University’s Law School,” write Buckley and Benner.

“They’re not even making a pretense of a pretense that this was anything but a straight hostage situation,” Clarke told the Times, referring to the two Canadians who were held on spying charges. “In a sense, China has strengthened its bargaining position in future negotiations like this.”

Flag-waving Huawei welcome

“It’s a Huawei welcome,” tweets China communications strategist Marc Ross, with an accompanying picture of the flag-waving welcoming party waiting for Meng Wanzhou in Shenzhen.

Welcome Home!

And China’s foreign ministry spokesperson tweets “Welcome Home!” and “Justice prevails” upon the Huawei executives return.

“Now, control is more important than growth”

Newly released surveys show foreign companies are hurting as China keeps its borders largely closed to travel and continues to clamp down on business while favoring domestic firms, reports the Wall Street Journal’s Liza Lin.

The American Chamber of Commerce in Shanghai’s annual survey shows 45 percent of companies’ have experienced negative business impacts because of China’s strict border crossing limits, with over a quarter seeing their profits suffer.

The measures have “made it difficult for multinationals to send in employees from overseas into China, including senior executives to assess the market or critical engineering talent,” according to chamber chair Jeffrey Lehman. Meanwhile, one half of surveyed companies “felt strong or some favoritism toward local companies,” up from 47 percent a year ago.

The European Union Chamber of Commerce in China reported in a separate survey that China is favoring its state-owned enterprises over foreign companies, while its focus on national security and self-sufficiency could eventually drive away investors and hurt its economy.

European companies too are dealing with growingly nationalistic Chinese consumers and fear possible boycott as experienced by Swedish retailer H&M earlier this year. For now, most foreign companies say however, they have no intention of leaving.

“China is all about balancing growth and control. Now, control is more important than growth,” Jörg Wuttke, the European Chamber president, said in a news conference announcing his organization’s survey.

Notable/In Depth

What a week in China news. I spoke to Bloomberg Businessweek Radio’s Carol Massar and Tim Stenovec about Evergrande, the latest crackdown on crypto, and what comes next in Xi’s assault on business, in this podcast (starts at 8:55).

Here’s an interesting chart that shows that China will become the world’s largest economy in the early 2030s and remain so for many years. (I am among those who are skeptical China will smoothly transition to global power - I lay out why in my 2020 book The Myth of Chinese Capitalism.)

Despite Beijing’s calls for companies to start treating their gig workers more fairly, “neither local governments nor trade unions have shown any resolve to stop tech giants from dodging employer responsibilities,” writes the China Labour Bulletin.

“Most of China’s labor protests are directed not against, but at the central government. Protests are initiated, for example, by home buyers who are betrayed by real estate companies, by migrant workers who have had their wages withheld, or by investors who have lost their savings,” writes (in German) University of Vienna professor Christian Goebel.

“Instead of bringing expensive and hopeless legal proceedings against politically well-connected entrepreneurs, real estate companies or shadow banks, they try to use protests to force the government to act.”

Twitter avatar for @Chri5tianGoebelChristian Goebel @Chri5tianGoebel
I'll start with your last question. Haven't looked for news reports, but found more than 6.000 protest events on Weibo for last year, but there are certainly more - my estimate is twice as many. Here's a report I wrote (…) 1/

Donald Clarke 郭丹青 @donaldcclarke

@Chri5tianGoebel @peterlorentzen Of course protests happen daily - there are 1.4 billion people. But not sure how we can say that news about most protests is not censored, since if it were censored we probably wouldn't know about the protest. Can we really find 365 news reports about protests in the last year?

Once China’s national champion, Huawei is now fighting to survive, writes Bloomberg Opinion columnist Hal Brands.

The failure of Blackstone to acquire property developer Soho China shows that “everything is political” in China today, reports the Financial Times.

“Many of China’s largest non-state business systems are more akin to mafia systems, or organized crime, than they are to other conceptualizations of firms (i.e. entrepreneurs, small and medium enterprises, state-owned enterprises, national champions, and so forth) or even business groups,” write Harvard University Business School’s Meg Rithmire and University of Southern California’s Hao Chen in a paper from earlier this year.

“Mafia-like business systems can be identified by two features of their organization (plunder and obfuscation) and two means of growth and survival (relations of “mutual endangerment” within firms and between firms and political elites and manipulation of financial systems).”

Montana moment

Some pictures of morning fog from a recent walk.

Trade War

Newsletter 84 - September 18, 2021

Welcome to the 84th edition of Trade War.

Australia, the U.K., and the U.S. sign a new security agreement that includes nuclear-powered submarines, angering France and China. Beijing applies to enter the successor trade group to the Trans-Pacific Partnership, once pushed by the U.S.

Beijing blocks Blackstone-Soho China real estate deal. The implosion of Chinese property giant Evergrande continues while the economy shows more weakness. And China in the greatest “state of flux” in decades, argues new report.

AUKUS responds to China’s growing hard power

Australia, the United Kingdom, and the United States have signed a new trilateral security partnership, called for short AUKUS, angering France — who saw its earlier $66 billion agreement to supply submarines to Canberra scrapped -- and China who views the agreement as directed at containing its rise.

“Despite all the industrial, legal, and diplomatic disruption, the Australian government has decided only the stealthy nuclear-powered submarines developed by Britain with US support can provide the genuine naval capability it needs long-term,” writes London-based think tank Chatham House chief executive Robin Niblett.

“The AUKUS announcement showed that China’s growing hard power is now eliciting a genuinely tough and structural political-military reaction,” writes the Chatham House chief.

At the same time it allows Biden “to send the global message that America is indeed back, just three weeks after the ignominious retreat from Afghanistan” and “remind the world that the Indo-Pacific is where the US will be putting its main effort in the future.”

US won’t leave ‘Australia alone on the field’

“The world saw China’s aggressive response when Australia led calls for an inquiry into the origins of COVID-19.” said Secretary of State Antony Blinken at a press conference in Washington D.C. on the new security alliance, that also included the U.S. defense secretary and Australian counterparts.

“Beijing has seen over the past months that Australia will not back down and that threats of economic retaliation and pressure simply will not work,” Blinken said in a reference to China’s recent sanctions on imports of Australian beef, barley, wine and lobsters. “The United States will not leave Australia alone on the field – or better yet, on the “pitch” – in the face of these pressure tactics.”

“We spoke in detail about China’s destabilizing activities and Beijing’s efforts to coerce and intimidate other countries, contrary to established rules and norms,” said defense secretary Lloyd Austin. “And while we seek a constructive, results-oriented relationship with the PRC, we will remain clear-eyed in our view of Beijing’s efforts to undermine the established international order.”

With CPTPP, China too now actively courting partners

Just a day after Biden announced the new security alliance, China announced it had applied to join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), writes the Wall Street Journal’s Lingling Wei

The 11-nation Asia-Pacific trade pact, once promoted by former president Barack Obama in part to counter China, includes Australia, New Zealand, Canada, Japan, Mexico, Chile, Peru, and the Southeast Asia countries of Vietnam, Singapore, Malaysia and Brunei Darussalam.

“It underscores that both the U.S. and China are actively courting partners and looking for coalitions to join or create to promote their interests,” Wendy Cutler, vice president of the Asia Society Policy Institute and a former U.S. trade official told the business paper.

“With its application for the CPTPP membership, Mr. Xi is seizing on the irony of seeking to join a pact with standards set by American negotiators but rejected by a U.S. president [Trump].” writes the Journal’s Wei.

CPTPP bid ‘good old fashioned gaslighting’

“What does it mean for [the] PRC to try and join a trade bloc the U.S. [government] once claimed was ‘equivalent to a carrier battle group’ for advancing U.S. regional interests?” asks PerthUSAsia Centre research director Jeffrey Wilson, in a tweet thread.

“For its entire history, the TPP (and CPTPP successor) have been billed as a US-led alternative model to the PRC's economic initiatives in the Indo-Pacific, such as [the Belt and Road Initiative]. So why the hell would the PRC join?! It’s like if the US had made a bid for COMECON membership during the [Cold War]!”

The answer: Beijing’s move is not about economics or trade — despite the fact the CPTPP countries account for 13.5 percent of the global economy — as there is little chance it could — or is willing — to make the necessary changes to its increasingly state-led economy.

“The reality is the 'reform cost' of joining the CPTPP is completely unimaginable for its political system. It would require the PRC to make structural reforms to its state capitalist model it simply will never make,” Wilson writes.

Instead, Beijing’s aims are twofold: to block Taiwan from entering the group; and “good old fashioned gaslighting. By presenting itself as ‘committed to economic cooperation’, the PRC can diplomatically retail itself as an alternative partner to the US.”

Blackstone drops ‘unpatriotic’ bid for Soho China

Facing unexpectedly long regulatory hurdles, Blackstone has given up on a $3.3 billion takeover of China commercial property developer Soho China, reports the Wall Street Journal.

“After the deal was announced in June, the husband-and-wife team [Soho’s high profile entrepreneurs Pan Shiyi and Zhang Xin] faced criticism in China, with assertions online that they were cashing out and moving money abroad, despite Beijing’s aversion to such practices,” writes the business paper.

“The transaction had caused disquiet in China with several Chinese press and social media posts urging [the State Administration for Market Regulation] to block the transaction due to the premise that the deal is unpatriotic,” wrote Arun George, an analyst at Global Equity Research, adding that “antitrust approval would also not sit well with President Xi Jinping’s recent calls for wealth redistribution.

If Evergrande had to dump its inventory onto the market…

Protests by aggrieved investors are spreading outside offices of beleaguered property developer Evergrande as fears grow the company could collapse, reports Bloomberg News.

“While it’s impossible to know for sure what would happen if Beijing allows Evergrande’s downward spiral to continue unabated, China watchers are gaming out worst-case scenarios as they contemplate how much pain the Communist Party is willing to tolerate,” writes the financial news service.

“As a systemically important developer, an Evergrande bankruptcy would cause problems for the entire property sector,” Shen Meng, director of boutique investment bank Chanson & Co. said to Bloomberg. “Debt recovery efforts by creditors would lead to fire sales of assets and hit housing prices. Profit margins across the supply chain would be squeezed. It would also lead to panic selling in capital markets.”

Perhaps even scarier for Beijing is the possibility of social unrest, driven by Chinese who have parked their savings in property, an industry which makes up as much as a quarter of China’s economy.  “Without a social safety net and with limited places to put their money, Chinese savers have for years been encouraged to buy homes whose prices were only ever supposed to go up,” writes Bloomberg.

“Today, real estate accounts for 40% of household assets and buying a house (or two) is a cultural touchstone. While housing affordability has become a hot topic in the West, many Chinese are more likely to protest falling home prices than spiking ones.”

Market-wide panic & people on the street

“This massively indebted property group might well trigger a market-wide panic. In the meantime, people are already on the street,” tweets Jingzhou Tao, a merger and acquisition lawyer.

Evergrande ‘essentially a ponzi scheme’

Evergrande can be considered a ponzi scheme, argues J Capital Research’s Anne Stevenson-Yang in a commentary in Forbes.

“Evergrande is essentially a Ponzi, collecting cash from the pre-sale of an ever-growing number of apartments, plus hundreds of thousands of individual investors, and using the cash to fund further sales by accelerating construction in progress and funding down-payments,” writes Stevenson-Yang.

“Like any Ponzi, this works as long as it’s accelerating. But inevitable for every Ponzi is the same endgame.When the market slows, those incoming streams of cash start to fall behind the growing arc of cash demands. Evergrande now has about 800 unfinished projects, and there are about 1.2 million people waiting to move in, according to press reports.”

Who will be hit hardest in a possible collapse? “The short answer is that investors, lenders, and apartment owners lose. Insiders win. China’s financial system remains standing. Governments at every level ramp up repression,” Stevenson-Yang writes.

“The losses suffered by a large number of urban families in contrast to the protection of the actual engineers of these schemes may be reaching a rising level of social and political risk that is contributing to Xi Jinping's widely promoted campaign to redistribute the wealth of China's most visible tycoons,” she adds.

Consumption ‘weakest link’ adds to economic troubles

Weak retail sales and falling home purchases are contributing to worries about the strength of China’s growth trajectory, reports the Wall Street Journal’s Jonathan Cheng.

Retail sales, considered an important measure of consumption, grew only 2.5 percent in August from a year earlier, well below economist expectations of 6.3 percent growth. Meanwhile, the value of home purchases dropped by almost 20 percent in August as compared to the same period last year, the biggest fall since April 2020, during the worst of the pandemic.

“China’s property market has long been a key driver of the country’s growth, while reorienting the economy toward domestic consumption has become a priority for policy makers concerned about an unhealthy tilt toward infrastructure- and export-led growth,” notes Cheng. “Consumption has been the weakest link in China’s pandemic recovery and the last corner of the economy to get back on its feet, hurt by stagnant income growth and the government’s stringent Covid-19 measures.”

“We reckon that China’s zero-covid strategy could be increasingly costly for the Chinese economy,” Nomura economist Ting Lu wrote in a recent note.

China in greatest flux since reform era

“China is in a greater state of flux in its domestic politics and foreign policy than in any time since the reform era began,” argue leading U.S. China experts in a new report entitled “China’s New Direction: Challenges and Opportunities for U.S. Policy.”

“Xi has created a highly centralized, personalized, and ideological authoritarian system that is prone to misperceptions and distorted policymaking. These attributes will only increase as the next leadership transition in 2022 approaches, leading to even more domestic and international overreach in Xi’s policymaking,” warn the report’s authors.

“China’s leaders have long supported state-owned industries and priority sectors, and recent actions show a clear intensification of these policies (for example, in global supply chains). Chinese policymakers are betting that their intensified controls are compatible with continued financial inflows, but risks related to high debt levels may derail these ambitious goals.”

Notable/In Depth

China is pressuring tech companies to improve worker conditions as part of Xi Jinping’s ‘Common Prosperity’ campaign, reports the Wall Street Journal’s Sha Hua.

China’s new ambassador to Washington Qin Gang has met with Henry Kissinger.

The World Bank has decided to end its ‘Doing Business’ report, after an investigation revealed senior staff altered data to please China, reports the Wall Street Journal.

Sounds like the ban on private tutoring is experiencing the common China phenomenon referred to as 上有政策,下有对策 (”Policies from on high will always be countered by strategies from down below.”)

Book plug from activist Wang Dan

Pleased to see Tiananmen activist Wang Dan citing me writing on China’s educational inequality, in the Chinese edition of my book 《低端中國:黨,土地,農民工,與即將到來的經濟危機》.

Upcoming speaking

Is China's economic rise sustainable and what Xi's 'Common Prosperity' and the crackdown on enterprises and entrepreneurs has to do with it will be topics I cover, when I speak next Wednesday at noon MST, hosted by the Montana World Affairs Council.

Montana moment

And a picture from a popular hiking trail outside Missoula, Montana.

Trade War

Newsletter 83 - September 11, 2021

Welcome to the 83rd edition of Trade War.

An explosive book and the phone call it prompts reveals the age-old and murky nexus between the families of corrupt top leaders and private entrepreneurs. A rare debate over Common Prosperity emerges and Beijing tries to reassure its nervous entrepreneurs.

I predict more industries being targeted for controls as Beijing struggles to deal with an unequal and declining economy, in a commentary in Nikkei Asia. And Xi’s crackdown on companies and the wealthy may actually hurt China’s already constrained consumption.

Oppose the state and see no good ending

Desmond Shum, the author of new book Red Roulette: An Insider's Story of Wealth, Power, Corruption, and Vengeance in Today's China, explains how his ex-wife’s connection to China’s power elite made the couple very wealthy, then later led to her disappearance, and most recently sudden reappearance, in this interview with NPR’s Morning Edition.

“A Chinese businessperson who was missing for years has abruptly reappeared. Whitney Duan was connected to the wife of a powerful Chinese official [former premier Wen Jiabao],” reports NPR. “She and her husband, now ex-husband [Desmond Shum], involved themselves in numerous businesses using their connections. And they rose, as China did, until Whitney vanished in 2017. There was no word from any legal authority about an arrest.”

“She called my phone - and - early in the morning. And I heard her voice for the first time ever in - for the last four years,” Shum told NPR’s Steve Inskeep. “She said she's on temporary release and they can take her back any time. And she want me to cancel the book publication.”

“She gave me a second call after the first one, you know, come to no result. And then the last one was more threatening,” said Shum. “She asked me the question, what would happen to our son if something unfortunate happened to me? She asked the question (sighing), how would I feel if something happened to our son? And then she used sort of the code slogan - you know, in China they have this slogan, so the ones who opposes the state will see no good ending.”

The game has changed completely

The four-year disappearance of businesswoman Whitney Duan can be seen as an especially severe example of the treatment of China’s entrepreneurs today, reports Bloomberg News Blake Schmidt.

“[Shum’s] vanished ex-wife, one of China’s longest-missing deal makers, is an extreme case of the pressure now facing the country’s rich and powerful,” writes Schmidt. “Jack Ma hid away for months after after the government dismantled his planned IPO following his criticism of outdated regulatory practices. Meituan’s Wang Xing was recently warned to stay out of the spotlight after making a controversial post on social media.”

“At the moment, every private entrepreneur faces a huge question: where does Xi Jinping want to take China?” Shum said in a video call with Bloomberg. “If you’re investing in China right now, you’re not playing a game that you understand. The game has changed completely.”

Rare debate over Common Prosperity

Xi Jinping’s push for “Common Prosperity” has sparked an unusual public policy debate, reports Bloomberg News.

On one side are leftist supporters of blogger Li Guangman, who called Xi’s crackdown a “profound revolution” in a commentary that was published in the state media, and wrote “the capital market will no longer become a paradise for capitalists to get rich overnight” and “all those who block this people-centered change will be discarded.”

A surprising voice against that argument has come from nationalist Hu Xijin, editor-in-chief of the Global Times, reports Bloomberg. “The goal, [Hu Xijin] said, was gradual social progress rather than a sweeping campaign that amounted to some sort of second Cultural Revolution.”

Less surprisingly, market-oriented economist from Peking University Zhang Weiying has also written a strong warning about the risks of taking Xi’s policies too far.

While the debate has some wondering whether it reflects a power struggle amongst officials over the direction for China, “more fundamentally, it represents uncertainty over how China can balance two key goals: Creating more balanced growth to bolster the party’s support among the masses, and spurring the technological breakthroughs needed to outpace the U.S. as global tensions rise,” writes the financial news service. 

How far does all this go?

Xi’s Common Prosperity push has “thrown a bright light on the ideological tensions and unease building as Mr. Xi’s assembles his agenda for a likely third term,” reports the New York Times Chris Buckley.

After the “profound revolution” commentary helped spark the debate over Xi’s policies, party officials “have tried to calm the waters without explicitly disavowing Mr. Li or removing his essay, and that has let confusion linger,” writes Buckley. “On Wednesday, People’s Daily — one of the party news sites that shared Mr. Li’s essay — published a front-page editorial that said the government remained committed to market forces.”

“Underlying this Li Guangman episode is deep anxiety and uncertainty about where Xi is taking politics and policy,” CSIS China politics expert Jude Blanchette told the paper. “It’s an anxiety based on uncertainty about this question: How far does all this go?”

Equality push “a major political matter”

The new emphasis on creating a more equal society is about politics and not just economics, report New York Times reporters Chris Buckley, Alexandra Stevenson, and Cao Li.

“Achieving common prosperity is not just an economic issue; it’s a major political matter bearing on the party’s foundation for rule,” Mr. Xi told officials in January. “We cannot let an unbridgeable gulf appear between the rich and the poor.”

“Xi sees doing something on income inequality and the wealth gap in China as vital in this struggle of global narratives with the U.S. and the West in general,” Christopher K. Johnson, a former United States government analyst of Chinese politics​​, told the Times.

“Mao Zedong used the phrase ‘common prosperity’ in the 1950s, in the early stages of pushing China toward socialist collectivization that culminated in a disastrous Great Leap into communism,” reports the paper. “In the 1980s, Mr. Deng said that China should let some get rich first to lift the economy, but that ‘common prosperity’ was the distant ultimate goal.”

Not a Maoist war on the private sector

Eurasia Group China analyst Neil Thomas takes a closer look at the People’s Daily commentary that tried to reassure the private sector.

“[The] commentary is trying to reassure business after recent anti-monopoly [and] unfair competition crackdowns,” writes Thomas in a tweet thread. “The message is debatable but it's a tacit acknowledgement policies were opaque [and] unpredictable.”

“The commentary also makes plain that tougher market regulation is not a Maoist war on the private sector Rather, it's "a strategic move to grasp the initiative for future development to enhance our ability to survive, compete, develop and persist in...perilous situations," writes Thomas quoting the commentary.

China will persist in economic opening, says Liu He

China’s vice premier and Xi advisor Liu He has made a speech supporting a strong role for the private sector, reports Bloomberg News.

“The principles and policies for supporting the development of the private economy have not changed,” Liu said in a video speech to a digital economy expo in Hebei province. “They don’t change now, and will not change in the future.”

“China must stick to socialist market economy reforms and persist in opening up the economy, Liu said, vowing the country will protect property rights and intellectual property rights,” reports Bloomberg. “[Liu] reiterated that the private economy has contributed to over half of China’s tax revenue, more than 60% of economic growth and 80% of urban jobs.”

“China must heavily support the development of private industry to make it play a bigger role in stabilizing the economy and employment as well as enhancing the structure of economy and promoting innovation, Liu said.”

But Beijing likely to target more companies

With growth slowing amidst a persistent wealth gap and no clear exit from covid containment, expect Beijing to keep clamping down on private industries, writes this author of Trade War in Nikkei Asia.

"People are still not spending, even more than a year after they suppressed the significant spread of COVID-19," Louis Kuijs, Chief Asia Economist At Oxford Economics, said to Nikkei Asia. "So the question is, what is China's end game and how can they transition from the current path to a new one?"

“The answer remains unclear. Without a strategy to move to a more sustainable economic model and with the wealth gap becoming ever more apparent, the Communist party is left vulnerable,” writes Dexter Roberts.

“This will reinforce the authorities' inclination to identify ever more companies as suspect and then crack down on perceived misbehavior in the name of advancing the interests of the Chinese people.”

Chinese won’t become like free-spending Americans

Xi’s top-down state policies and regulatory crackdowns are hurting China’s already constrained consumption which is bad news for the global economy, writes Reuters Breaking Views’ Pete Sweeney.

“Companies who had bet that Chinese shoppers would evolve into free-spending Americans will be worried; trade partners should be alarmed,” he writes.

While China is still a key contributor to global growth, the reality at home is a country with an excessively national high savings rate - at 44 percent of national income one of the world’s highest - and very low household consumption, almost twenty percentage points below the world average, according to the World Bank.

“For decades its state-driven investment model captured earnings from Chinese workers and lent them to strategic industries at low rates via government-owned banks. Useful in earlier phases of development, the approach has engendered vast industrial and financial overcapacity, which the economy must shovel into overseas markets somehow,” writes Sweeney.

While Beijing talks regularly about its aim of growing consumption, music to the ears of foreign brands and governments, many of its recent policies run counterproductive to that goal, and “austerity remains a bureaucratic reflex.”

“Rising household debt, for example, may have caused officials to turn against spending on condos, pricey booze, video games and more, plus harshly pull back fintech giants like Ant for issuing easy consumer loans,” writes Sweeney. And the decision to ban for-profit tutoring cut off one very popular source of household spending and has led to major job losses.

Notable/In Depth

On this twentieth anniversary of the 911 attacks I recall the experience of getting a haircut from a barber in Beijing, who was wearing an Osama bin Laden t-shirt.

“Xi has been applying Mao’s strategy at a smaller scale. He selectively targets some officials, businesspeople, opinion leaders, stars … to please the impulse of some Chinese who are less successful [and] harbor hatred toward the rich.” writes the Financial Times’ Tom Mitchell.

“Beijing's [messages] to tech companies: 1. no IPOs in foreign exchanges; 2. no money into VIEs; 3. welcome to Beijing Stock Exchange! All in line with "Data Regulation with Chinese Characteristics"!” tweets Henry Gao, a law professor who specializes in China trade.

China’s cities are undergoing a demographic divergence, with some growing while others shrink, writes MacroPolo’s Houze Song.

“More than 60% of China’s total urban population lives in shrinking cities. A decade from now, even assuming that some people will leave for growth cities, more than 600 million Chinese citizens will still live in shrinking cities," writes Song.

Here’s a bizarre Fox News video of Tucker Carlson showing his affection for authoritarian governments while arguing why the U.S. should learn from China.

“The Secret Chinese United Front Influence Operation is far more powerful than I thought: Listen to Tucker Carlson on why America’s government should learn from China’s and control our lives more,” tweets University of San Francisco economist Peter Lorentzen.

Xi Jinping has leveled his sights on cleaning up China’s statistics system in recent weeks. Is that a reason to hope China’s notoriously massaged numbers will be cleaned up? Not necessarily.

“It's unclear whether China's new, improved statistics will be released to the public before they have been massaged and manipulated. Xi Jiping's (sic) other priorities include doing a good job on shaping public opinion and telling China's story (not necessarily non-fiction).” says a piece in the Dim Sums blog.

“In light of the recent unionization announcement from Didi, it's worth considering why earlier efforts to make taxi driving a decent job failed,” writes Cornell University’s Eli Friedman in a tweet referencing the recent article he coauthored with Renmin University’s Hao Zhang in the International Labour Review.

“I remain skeptical that a union can do much when the state views worker self-organization as an existential threat.”

Montana fall with smoky skies

Even as we move into fall, Montana is still suffering under some wildfire-caused smokey skies.

Trade War

Newsletter 82 - September 4, 2021

Welcome to the 82nd edition of Trade War.

Xi Jinping Thought now to be taught to China’s primary school children. Economics reporting faces new controls. And Alibaba fires staffers who revealed sexual abuse allegations.

George Soros issues a new warning over Xi’s heavy-handed approach to the Chinese economy saying foreign investors face a “rude awakening.” 996 overtime tech culture ruled illegal. Didi and get unions. And ‘Common Prosperity’ won’t “feed the lazy” in China’s rich province of Zhejiang.

Xi Jinping Thought - now on Chinese school curriculum

Plans to have children study Xi Jinping Thought in school is making Chinese parents unhappy, reports the Financial Times Sun Yu.

With some calling it reminiscent of an earlier era when a Mao Zedong personality cult dominated China, more than a dozen parents interviewed by the Financial Times expressed concern about plans to start teaching Xi Thought in primary school next month.

“The eponymous philosophy, which features a mixture of patriotic education and praise for the Chinese Communist party’s general secretary, will become part of the national curriculum from primary school to university next month,” reports the business paper.

Starting from third grade, students will have one class every week on Xi. Primary school students will that “General Secretary Xi guides the whole party and the Chinese people”, while graduate school students must be able to “publicize, interpret and study” his thoughts, announced the National Textbook Committee Office of the ministry of education.

Hey kid, you better know your Xi

“At age 7 you study reading, writing, and Xi Jinping Thought on Socialism with Chinese Characteristics for a New Era,” says one tweet.

Xi Thought: obsessed with struggle but also versatile

Xi Jinping Thought mixes Marxist communist ideology with conservative morals, while also including advice on governance, says author and China researcher François Godement in an interview on PRI’s The World.

“It's literally a handbook on governance. Xi Jinping is a micromanager who touches just about every subject,” says Godement. “And there's a mixture of Marxist communist ideology — sometimes bordering on a return to Maoism — but also conservative morals, which is much more akin to traditional China.”

And while Xi Thought has become more militant and is “obsessed with struggle,” Xi himself is very versatile, as shown by his shifting approach to private enterprise, says Godement.

“For example, during [Xi’s] ascent to power, he actually courted private entrepreneurs, and even foreign enterprises, because it suited him. It was the language of the time. And also, as a provincial leader, he needed these guys to have a better economic record,” points out Godement.

“Now he's leading an onslaught against them, starting with the Chinese entrepreneurs and probably going on to foreign enterprises as well, slowly diminishing their role. And that is very close to Mao as well, who can, as you say, turn around on a dime.”

‘Malicious’ reporting on economy to be punished

Beijing will crack down on media that “maliciously” criticize China’s financial markets and its economy, report Bloomberg News’ Alan K. Wan and Amanda Wang.

The two month-long campaign will take action against those who “bad-mouth China’s financial markets and falsely interpret domestic policies and economic data,” the Cyberspace Administration of China said in a statement. Meanwhile, republishing critical foreign media “without taking a stance or making a judgment” will also be targeted. 

The new policy aims to ensure that the internet contributes to the “sustainable and healthy development” of China’s economy and its society. Tencent, ByteDance’s news aggregator Toutiao and Douyin, China’s version of TikTok have all promised to follow the new rules.

Alibaba fires staffers for revealing sexual assault allegations

Ten Alibaba employees that publicized the recent sexual assault allegations that rocked their company have been fired, report Bloomberg News Coco Liu and Zheping Huang.

The employees were fired for sharing the “harrowing account posted on an internal forum by a colleague surnamed Zhou, who accused a former manager of rape,” reports the financial news service. The sacked individuals violated company policies against sharing content from Alibaba’s online employee forums, people “familiar with the matter” told Bloomberg.

“The internal platform -- which is open to Alibaba’s 250,000 employees as well as many at fintech giant Ant Group Co. -- is considered off-limits and the company has fired others for leaking information in the past, the people said.”

Soros: China investors face ‘rude awakening’

China investors face a ‘rude awakening’ writes George Soros in a commentary in the Financial Times. Soros also singles out Xi Jinping for particular criticism, as he did in a recent piece he wrote for the Wall Street Journal.

“Xi Jinping, China’s leader, has collided with economic reality. His crackdown on private enterprise has been a significant drag on the economy,” writes Soros. “Xi does not understand how markets operate. As a consequence, the sell-off was allowed to go too far.”

“Chinese financial authorities have gone out of their way to reassure foreign investors and markets have responded with a powerful rally. But that is a deception. Xi regards all Chinese companies as instruments of a one-party state. Investors buying into the rally are facing a rude awakening,” he writes.

“That includes not only those investors who are conscious of what they are doing, but also a much larger number of people who have exposure via pension funds and other retirement savings.”

Running list of crackdowns

SupChina’s Chang Che has assembled a tweet thread that lists the myriad crackdowns now ongoing in China, including on ecommerce and fintech companies, firms that want to IPO in the west, real estate companies, and on celebrity culture.

‘996’ overtime work is illegal, says Chinese court

China’s Supreme People’s Court has ruled that the so-called ‘996’ tech overtime work culture is illegal, reports Reuters.

China's top court and the Ministry of Human Resources and Social Security “published guidelines and examples on what constituted as overtime work, saying they were focusing on the issue as it had attracted widespread attention recently.”

The overtime practice of "996", or working from 9 am to 9 pm six days a week, had become “a badge of honor for some Chinese companies and employees,” reports Reuters. “Silicon Valley heavyweights such as Sequoia Capital's Mike Moritz have highlighted it as a competitive advantage the country had over the United States.”

The move against "996" comes at the same time as the “wide ranging Beijing-led regulatory crackdown on country's technology giants that has targeted issues from monopolistic behavior to consumer rights,” the news service notes.

11 ride-hailing firms ordered to remedy “misconduct’

China has ordered 11 ride-hailing firms to fix their “misconduct,” reports Bloomberg News.

“Officials from the transportation ministry and other departments summoned executives from 11 companies -- including Didi, Meituan and Alibaba’s ride-sharing and navigation unit Amap -- and criticized them for disrupting fair competition and hurting the interests of drivers and passengers, according to a statement published Thursday,” reports the financial news service.

The use of unlicensed drivers, lax protection of user data, and engaging in “vicious” competition that hurt the industry’s safety and stability were all cited as concerns.

“The 11 companies were required to carry out self-inspections, fix those issues and draft compliance plans before the end of the year, according to the statement.”

Didi and both install official union

Didi and both have set up the official Chinese union in their operations, reports Reuters.

The opening of branches of the All-China Federation of Trade Unions in the two companies is a “landmark” in a tech sector largely without organized labor, writes the news service.

“Regulators in China have come down hard on its biggest technology firms this year, criticizing them for policies that exploit workers and infringe on consumer rights in addition to unleashing a slew of anti-trust probes and fines,” reports Reuters.

The move is seen as part of Xi’s ‘Common Prosperity’ drive which aims to more equitably distribute wealth. “In July, the ACFTU and seven other top Chinese government bodies published guidance about safeguarding the rights of gig economy workers and suggested unions could play a role in helping negotiate with firms.”

Some are skeptical that China’s notoriously toothless official union will push serious changes. “Aidan Chau, a researcher at the Hong Kong-based China Labour Bulletin, said the country's unions have rarely directly challenged how companies treat their workers, instead focusing on matters such as alleviating employee grievances and promoting work safety.”

Common Prosperity won’t “feed the lazy” in Zhejiang

A pilot program for ‘Common Prosperity’ in China’s Zhejiang Province has set modest targets, writes Bloomberg News Tom Hancock.

Zhejiang, home to 65 million people and known for having many of China’s most successful private enterprises, including Alibaba and Geely, was designated in June as a site to pilot policies to cut inequality and control rising housing costs.

The plan calls for Zhejiang to reduce the gap between its urban and rural incomes, with city dwellers now earning twice as much as those from the countryside in the province, and to grow the share of labor compensation in GDP to more than one-half. Spending on education and healthcare is also to be raised.

Provincial officials made it clear they will not create a European-style welfare state supported by taxes, however. China can’t afford “to feed the lazy,” and “welfarism” is a “trap,” senior official Han Wenxiu said to reporters last week.

“The Zhejiang plan suggests Beijing wants to raise incomes through private sector investment in poorer areas, and to encourage rural residents to start their own businesses,” reports Bloomberg.

The plan also calls for wealthy entrepreneurs to donate more of their wealth to society. Zhejiang is home to at least 10 multi-billionaires, according to data collected by Bloomberg, with a combined net worth of $236 billion.”

Notable/In Depth

A commentary published in China’s state media has called the Xi crackdown on business a “profound revolution,” reports Bloomberg News.

China’s growing reliance on industrial policy and erratic regulatory actions could harm its vibrant tech sector, writes China Money Network founder Nina Xiang in Nikkei Asia.

A prominent Chinese economist and free market advocate has warned that ‘Common Prosperity’ could lead to too much state intervention, reports Bloomberg News.

“Top leaders have alluded to strengthening ‘tertiary distribution,’ or philanthropy, to encourage the rich to give back to society,” writes the financial news service.

“[Peking University economist Zhang Weiying] warned it’s crucial to preserve entrepreneurs’ motivation to create wealth, because without it ‘the government will have no money to transfer payments, and charity will become a source of water.’”

China’s ‘Common Prosperity’ drive to make a more equitable society can rely on both redistribution through tax policies and reforms of its market, writes former China director of the World Bank Bert Hofman.

On the economic costs of the tech crackdown

I talk about the economic costs of China’s efforts to control its private tech companies, in an interview with VOA Chinese (Chinese).

Speaking to Dubai-based Asharq News about Japan’s plans to up its defense budget and how it is related to worries about the U.S. and China clashing over Taiwan.

Six years ago in Beijing

At the 70 anniversary of the end of World War II, in 2015 Beijing held a massive military parade, here featuring a Red Flag with its sunroof being used in traditional Chinese leader style. (Yes, that’s Xi.)

Trade War

Newsletter 81 - August 28, 2021

Welcome to the 81st edition of Trade War.

Xi’s corruption campaign hits Hangzhou, home to Jack Ma’s Alibaba and Ant Group. Beijing announces crackdown on tax evasion by rich Chinese. And China facing economic “inflection point” amidst calls for Common Prosperity.

China’s shrinking population starts to hit the workforce while the economic slowdown picks up pace. And the betting begins on which leaders will emerge as most powerful at next year’s 20th Party Congress.

Hangzhou corruption crackdown

China has launched an investigation into corruption in Hangzhou, the home of Jack Ma’s Alibaba and Ant Group, reports Bloomberg News.

Hangzhou’s 53-year old Party Secretary Zhou Jiangyong is being investigated for “serious violations of party discipline and state law,” the Central Commission for Discipline Inspection announced in a statement (‘serious violations of party discipline’ is an expression commonly used for corruption.)

“Social media accounts wrote over the weekend that Zhou’s family bought up shares in [an unnamed] fintech company ahead of its initial public offering in November, before the listing plans were scrapped,” writes Bloomberg News. “Ant Group on Sunday denied that certain individuals purchased shares of the company ahead of its planned IPO last year, as ‘recent online rumors’ had suggested.”

“[Alibaba’s] outsized influence in Hangzhou has fostered a strong relationship with the local government,” the financial news service writes. “In 2019, [Jack] Ma was presented with a ‘Meritorious Hangzhou citizen’ award by none other than Zhou, the local party boss, who feted the billionaire tycoon for his contributions to the city’s economic and social development, according to government statements at the time.”        

Extreme concentration of wealth

The ongoing crackdown on the tech sector has as much to do with China’s wealth gap as reining in monopolies and controlling personal data, writes William Yang for the Independent.

“Beijing blames the private sector for generating a range of socioeconomic problems that could destabilize the country,” writes Yang. “Apart from concerns about data security and the monopolization of specific sectors, experts think China’s top leaders, especially its president Xi Jinping, have a real distaste for what they view as excessive wealth.”

“Quite naturally, Xi Jinping and others have seized upon the tech sector as that’s where you can see the most extreme concentration of wealth with the founders and CEOs of these different companies,” said Dexter Roberts, a senior fellow at the Atlantic Council’s Scowcroft Centre for Strategy and Security.”

But that may well backfire. “Roberts thinks the crackdown on the private sector is already hurting China’s economic prospects, and while the trend continues, there seems to be an increasing emphasis on supporting the state sector and having it play a larger role,” reports the Independent.

“In most cases, we see China’s state sector is a lot less productive than its private sector, so when the Chinese government is trying to give the state sector more priority, it’s going to hurt job creation and hurt innovation,” Roberts said. “Ultimately, they will also hurt the overall growth of the economy.”

No more tax evasion for the rich

Beijing has announced it will investigate tax evasion by wealthy Chinese, reports Bloomberg News.

“The State Taxation Administration vowed to . . . strengthen tax supervision on high-income and high net-worth individuals,” reported the financial news service, citing a statement the tax bureau posted on WeChat. 

“For major [tax evasion] crime cases, punishment will be made public and logged into the companies’ or individuals’ credit records shared nationally,” Bloomberg reports.

The move happens amidst calls for a new emphasis on Common Prosperity and after Xi “chaired a high-level meeting last week that pledged to better regulate high income and ‘reasonably adjust excessive income.’”

Industries clampdown already hurting economic growth

Regulatory crackdowns are already hurting China’s economy, reports Bloomberg News.

“China’s campaign to clamp down on industries ranging from steel to education to property has roiled financial markets and curbed the outlook for growth in the world’s second-largest economy,” reports the financial news service. 

Along with the recent crackdown on tech companies, China has set a goal of becoming carbon-neutral by 2060 which has led to steep reductions in the production of steel - at a 15 month low in July - and coal, at its lowest in at least four months.

Meanwhile China has instituted new controls over the property market including hiking mortgage rates, stopping some urban land auctions and banning private equity funds from investing in residential developments.

“Policy makers have reiterated their view that “houses are built for living in, not for speculation” and renewed calls for housing market stability at the July Politburo meeting,” reports Bloomberg News.  

Inflection point in China’s economy

Xi’s heavy-handed controls may signal a turning point away from reform for the Chinese economy reports the South China Morning Post’s Amanda Lee.

“Beijing has unleashed a flurry of new regulations for internet-oriented tech companies, private education firms and overseas listings, disrupting global markets and triggering huge losses for investors,” writes Lee. “The government has cited concerns over data privacy, national security and the tech sector’s expanding influence on society as reasons for tighter oversight.”

The moves may signal a decisive turn away from the path of economic opening. Reforms were jumpstarted in 1992 during the so-called Southern Tour, or nanxun, by China’s paramount leader Deng Xiaoping, after stalling in the years following June 4, 1989.

“We are witnessing an inflection point in Chinese economic life that could prove every bit as significant as Deng Xiaoping’s Southern Tour nearly 30 years ago,” Larry Brainard, chief emerging markets economist at TS Lombard wrote in a research note.

Common Prosperity, everywhere, all the time

The top level emphasis now being put on Common Prosperity will lead to China’s ministries touting it as a goal in a host of unrelated economic, financial, and social policies, according to Peking University finance professor Michael Pettis.

“I said a couple of days ago that for the next few months every policy announcement would also announce that the policy was designed to help achieve "common prosperity," writes Pettis in a tweet thread.

“Most of these policies, as in the PBoC policies announced in this article will be unchanged from previous policies. This will make it hard to understand exactly what the real policy implications of "common prosperity" are likely to be.”

“The People's Bank of China has vowed to maintain the stability of macro policies and provide strong financial support for the country's bid to promote common prosperity,” reported the official news agency Xinhua.

“In order to promote common prosperity among farmers and in rural areas, the bank will continuously offer sound financial services for rural vitalization, provide financial assistance and shore up the construction of rural financial infrastructure and service systems.”

So what is Common Prosperity?

Common Prosperity or 共同富裕, gongtong fuyu is a major shift from China’s earlier “quasi-capitalist” economic strategy, writes Jamestown Foundation Senior Fellow Willy Wo-Lap Lam.

“Xi has apparently made seminal revisions to reform-era chief architect Deng Xiaoping’s philosophy that ‘to get rich is glorious,’” writes Lam. “Deng’s quasi-capitalist strategy helped to produce 1,058 billionaires in the Greater China Region last year, compared to 696 in the U.S. and 171 in India.”

The new policy also aims to help Xi consolidate power before next year’s 20th Party Congress. “Domestically, Xi realizes that because the Chinese economic miracle ended several years ago, more must be done to pacify the have-nots,” writes Lam. “Despite Beijing’s claims that it had wiped out absolute poverty by the end of 2020, Premier Li Keqianq also noted in June 2020 that 600 million Chinese subsist on a monthly income of barely 1,000 RMB (about $150) a month.”

“Realizing common prosperity is related to the important political issue of [bolstering] the party’s ruling basis (执政基础, zhizheng jichu),” said theorist Wang Ruolei.

“Xi’s resuscitation of the Maoist ideal of ‘common prosperity’ also has foreign policy implications,” explains Lam. “If China can ameliorate its inequality issues, more credibility will be accorded to the ‘China model’ or ‘socialism with Chinese characteristics in the new era.’”

What happens when a workforce shrinks

Labor shortages are hitting China’s economy, a preview of future challenges as the workforce ages, report the Wall Street Journal’s Stella Yifan Xie and Liyan Qi.

While both fears of covid and a global demand surge are behind the lack of workers (a situation mirrored in the U.S.), China is also facing “longer-term demographic shifts—including a shrinking labor pool—that are legacies of the country’s decades-long one-child policy, which was formally abandoned in 2016.”

“Those trends pose a serious threat to China’s potential long-term growth rate. They will also make it harder for China to keep supplying the world with cheap manufactured goods, potentially  adding to global inflationary pressures,” reports the Journal.

But China is simultaneously struggling with the opposite problem: too many workers for white-collar professional jobs. With over 9 million students graduating from college this year, this is “aggravating the structural mismatch in China’s labor market.”

“As China’s overall surveyed urban unemployment rate edged down to 5.1% in July from 5.7% a year earlier, the jobless rate among those aged 16 to 24 was 16.2% last month, though that was lower than an all-time high of 16.8% in July 2020.”

China population to fall to under 700 mill by 2100

The release of China’s latest census which shows a population shrinking much faster than expected is shaking up assumptions about China’s future economic growth trajectory.

“China’s new population census put it firmly in the UN's low variant. The long term implications are big: its population will decline to below 700 million by the end of the century,” with fewer workers supporting each retiree and the median age rising from 38 to 59, writes former World Bank China head Bert Hofman in a tweet thread.

“In the medium term, this means a declining household savings rate, and a steep rise in spending on health care and pensions. This may mean higher consumption, but butt also means less money to invest. Without better capital allocation, this means less growth.”

Betting begins on who wins at 20th Party Congress

Despite the murky nature of China’s political system, new technologies like crowd forecasting and prediction markets can be used to predict which leaders will emerge at next fall’s quinquennial 20th Party Congress, writes Neil Thomas for SupChina.

“Both approaches build on the insight that involving more people will bring more information to a question. And, in the case of prediction markets, those are people who are willing to stake money on their beliefs,” explains Thomas.

“Predicting the [all-powerful seven to nine memberPolitburo Standing Committee] line-up is a favorite “parlor game” of China watchers because intra-party negotiations on leadership appointments are maddeningly opaque.”

Probably the most important question determining China’s future is whether Xi Jinping will stay on for a third term as CPC General Secretary. “The markets are currently very confident” that Xi will opt to do so, with his chances being put at from 87 percent to 94 percent.

Meanwhile the fate of premier Li Keqiang is far less certain, with the odds of him remaining on the Politburo Standing Committee put at 50 percent.

A cautionary note: “as ever, the only certainty about the next Party Congress is that some surprises will be in store,” writes Thomas.

Notable/In depth

Is there a ‘China Model’ that is replicable for other countries, is the topic of this good thread from University of Michigan political scientist Yuen Yuen Ang.

A majority of Americans or 69 percent now favor Taiwan being recognized as an independent country but just over half support using U.S. troops to defend it if China were to invade, according to a Chicago Council survey.

“Mao Zedong waged war, so to speak, against the capitalist class in China. Deng Xiaoping and later leaders marched to a different tune, allowing people and private firms under the ‘reform and opening up’ slogan to get rich. Xi Jinping looks to be turning the clock back,” writes George Magnus, former chief economist of RBS.

Washington has failed to “adequately appreciate one of the most threatening elements of Chinese strategy: the way it exploits vital aspects of American and other free societies and weaponizes them in the service of Chinese ambitions,” writes former deputy national security advisor Matt Pottinger in Foreign Affairs.

Boston University professor Joseph Fewsmith talks about the state of studying Chinese politics and his new book Rethinking Chinese Politics, in this podcast with CSIS’ Jude Blanchette.

Montana evening

Late summer evening in Montana.

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