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.
South China Morning Post @SCMPNewsBeijing has unleashed a flurry of new regulations in recent weeks, disrupting global markets and triggering huge losses for investors. https://t.co/9TYeL8Q8Cy
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.
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.
Bonnie Glaser / 葛來儀 @BonnieGlaserFor First Time, Half of Americans Favor Defending Taiwan If China Invades | Chicago Council on Global Affairs https://t.co/a0p9UUEX0z
“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.
Late summer evening in Montana.