Welcome to Newsletter 29 of Trade War. This week the shocker in U.S.-China relations was a report that Washington is considering a sweeping ban on all Chinese Communist Party members and their families from entering the U.S., a number that could reach as high as 270 million people. The move was panned by many as overreaching and overly provocative.
And in a reversal of the dramatic 6.8 percent drop experienced in the first quarter, China reported that its GDP grew by 3.2 percent from April through June, buoyed by heavy state spending. Worries about the sustainability of the imbalanced growth were accompanied by some outright skepticism about the actual numbers.
Blindly dumb, dangerous and beyond self-defeating
Reports of a possible ban on Chinese Communist Party members and families, a move that was never imposed during the height of the Cold War against the then Soviet Union’s party members, drew widespread criticism from China scholars and others who argued it could devastate the already fragile bilateral relationship.
“Narrowly targeted visa restrictions on certain Chinese officials may make sense, but banning all Chinese CCP members, SOE execs & PLA members from the US would be, frankly, blindly dumb, dangerous & beyond self-defeating. We aren’t in a state of war,” tweeted Scott Kennedy of the Center for Strategic and International Studies.
The Communist Party is both powerful and mundane
One point made was how difficult it would be to establish who was a member of the 92 million-strong Chinese Communist Party. “Trying to immediately identify party members to either prevent their entry or expel those already in the United States would be difficult,” reported New York Times reporters Paul Mozur and Edward Wong who originally broke the story.
Also emphasized was how it would affect large numbers of lower level cadres who have little to do with setting any policy goals seen as anathema by the U.S. administration.
“The Communist Party is both a powerful and mundane part of life in China,” wrote the New York Times. “While its leaders maintain control of domestic and foreign policy, those on lower rungs do everything from supervising schools to managing neighborhood-level governance. In recent decades, many citizens joined to get a leg up in a wide range of sectors: business, academia and even the arts.”
Hong Kong Autonomy Act
U.S. president Trump signed the Hong Kong Autonomy Act, ending the territory’s special trade status, reported the South China Morning Post. “Hong Kong will now be treated the same as mainland China,” Trump said in a news conference at the White House. “No special privileges, no special economic treatment, and no export of sensitive technologies.”
Deepen trading relationships with India
As the relationship with China reaches new lows, calls are growing for the U.S. to strengthen relations with India, the world’s most populous democracy, but up until now, only America’s ninth largest trading partner, just ahead of Taiwan. A closer trading and investment relationship would not only help boost India’s economy, but would also pay strategic dividends as tensions with China continues to rise, wrote Bloomberg Opinion’s Noah Smith.
“Having the U.S. as a stable source of demand for manufactured products would also help India to build up its industrial sector in the same way that China and South Korea did. And it would be unlikely to increase the trade deficit or put U.S. workers out of a job; instead, it would result in some companies shifting labor-intensive manufacturing out of China into India, as is now happening with Vietnam,” Smith wrote.
Also important would be for the U.S. to increase direct more investment into India. “In addition to making both countries money and aligning the interests of the two nations even further, making India a richer, more advanced and more powerful country would strengthen it as a bulwark against Chinese domination of Asia.
China’s economy back to life?
China’s economy reversed its first quarter drop and grew by 3.2 percent in the second quarter reported Bloomberg News, while cautioning that it was powered by industry rather than a longterm sustainable jump in consumer spending.
The recovery “was driven by credit stimulus as evident in the strong infrastructure and property investment, while the recovery in retail sales and private investment has continued to lag,” Michelle Lam, greater China economist at Societe Generale SA in Hong Kong told Bloomberg.
Bicycle with boxes of debt, ridden by a drunk
Using slightly more colorful language the Financial Times’ Asia bureau chief Jamil Anderlini described the Chinese economy’s unsustainable reliance on heavy state spending as “like a bicycle laden with enormous boxes of debt, ridden by a drunk and with strategic competitors such as the US trying to knock it over.”
lmao this is fantasyland
Meanwhile, China economy watchers are expressing skepticism about the veracity of the numbers. “If you really believe China’s GDP grew 3.2% … lmao This is fantasyland,” wrote longtime China economy watcher Nerys Avery.
China-focused economic and political consultancy Trivium China had this to say in a report before the official release: “There is No Way China’s economy genuinely expanded in Q2 on a y/y basis.”
Bifurcating economy into haves and have-nots..
In the aftermath of the worst of the coronavirus, China’s economy seems to be bifurcating even more than before into winners and losers, with state-connected companies and those with money doing well, while many private firms and the less rich are suffering.
Those who can afford higher end goods are driving renewed sales of autos and smart phones, for example, as witnessed by the long lines outside Beijing’s new Apple store.
World’s biggest asset bubble
It is also driving anew a massive property bubble. “Even the coronavirus hasn’t stopped the world’s biggest asset bubble from getting bigger,” reports the Wall Street Journal.
“After a brief pause during coronavirus lockdowns in February, a Chinese property boom in some megacities that many thought was unsustainable has resumed its relentless upward climb, with prices rising higher and investors chasing deals despite millions of job losses and other economic problems.”
Migrant incomes, not so much
Meanwhile the pandemic has slammed the fortunes of the low income population. The average monthly incomes of China’s migrant workers were down by seven percent in the second quarter, as this chart by Economist reporter Simon Rabinovitch shows.
“Side businesses”
In a measure of how bad the jobs situation likely is, China state media is playing up efforts to encourage “independent businesses,” “self-employment” and the “sharing economy.” Chinese authorities “unveiled a guideline to support the healthy growth of new business models, in the latest move to boost consumption and create jobs,” reported Xinhua News.
Magnifier of pre-existing disparities
A new paper by one of the world’s foremost experts on China’s hukou or household registration policy, University of Washington professor Kam Wing Chan, confirms other reports showing how badly migrants are faring.
“The pandemic has acted a magnifier of the pre-exiting (sic) disparities, worsening the situation of the poor and the disadvantaged,” Kam explains in the paper published in the Eurasian Geography and Economics.
“In China, the rural-hukou population have borne more of the brunt of the outbreak. More than 90% rural-hukou migrant workers were stranded after they returned home and could not find work as of late February. This percentage was only 42% for urban-hukou holders.”
The revolution will not be pandemicized
For those predicting a pandemic-induced uprising in China, research from the 21st Century China Center at the UC San Diego suggests otherwise.
Indeed, the survey found growing Chinese support for the government, with the very big caveat that it only covered urban residents, those who have fared much better under the pandemic.
“National crises may inspire citizens to “rally around the flag,” and China’s relative success in controlling the virus’ spread inside China probably also contributed to citizen satisfaction,” reports the center’s China Data Lab. “The sudden onset of the crisis also led to a huge mobilization of public resources at the municipal level, enhancing the degree of dependence by citizens on the local authorities.”
Notable/In Depth
“India’s China Challenge” by noted journalist Ananth Krishnan is a soon-to-be-released book to look out for.
Lessons Mao learned from Stalin and the WTO were both covered in a talk I recently had with the incomparable Manjeet Kripalani, executive director of Gateway House. You can watch us here on YouTube.
How China’s rural-urban divide threatens its continuing economic success was the topic of this conversation I had with Jake Blumgart, reported in CityMetric.
Upcoming talk on China’s economy
Evan Osnos, staff writer of The New Yorker will join me to talk about “The Myth of Chinese Capitalism” and what challenges lie ahead for China’s manufacturing miracle, this coming Friday morning at 9:00 am Beijing time (Thursday evening 9 pm EST). Register in this link.