China’s Economic Model Is in Crisis (and Xi Knows It)

1/24/2023 10:05:00 PM

COVID exacerbated the imbalances in China’s economy. But the Chinese Communist Party hasn’t found the political will to correct them.

.michaelxpettis on China’s obsolete economic strategy, the growing conflict between Beijing and local government elites, and the nation’s declining population. A conversation with EricLevitz

COVID exacerbated the imbalances in China’s economy. But the Chinese Communist Party hasn’t found the political will to correct them.

one-child policy has just begun.Article Share ISLAMABAD, Pakistan — Three weeks ago, Pakistani authorities ordered all markets, restaurants and shopping malls to close early, part of an emergency plan to conserve energy as the country of 220 million struggled to make overdue payments on energy imports and stave off a full-fledged economic collapse.January 22, 2021 The Energy Department was required by law after Biden signed the Infrastructure Investment and Jobs Act in November 2021 due to Sen.: Ben O'Hare Tesla Model Y wait times are increasing in Germany, albeit only by a few weeks.

What happens in China does not stay there.The economic trajectory of the world’s most populous country has profound implications for its trade partners and geopolitical rivals.On Monday morning, the country’s overburdened electrical system collapsed in a rolling wave of blackouts that began in the desert provinces of Baluchistan and Sindh but quickly spread to nearly the entire country, including the densely crowded cities of Karachi, Lahore and Rawalpindi.To get a better understanding of what’s ailing the Chinese economy — and what could plausibly heal it — I reached out to Michael Pettis, a senior fellow at the Carnegie Endowment for International Peace.Fox News noted the report was required to be published within 90 days but was ultimately not released for more than a year.A former Wall Street trader, Pettis is a longtime critic of China’s growth model.Twice before, in 2015 and 2021, similar nationwide blackouts occurred.In his 2020 book Trade Wars Are Class Wars , co-authored with the journalist Matthew Klein, Pettis argued that China’s economic policies increase global inequality and reduce American prosperity.Brandenburg Economy Minister Joerg Steinbach told Automotive News Europe that Giga Berlin “has to grow up more” in terms of output.

We spoke last week about China’s obsolete economic strategy, the growing conflict between Beijing and local government elites, the nation’s declining population, and why Joe Biden’s most nationalistic economic policies are actually “trade-enhancing,” among other things.Hospitals were left in the dark for hours, textile factories shut down, and people overran gas stations to buy generator fuel.S.What is the biggest headwind facing China’s economy in 2023? In order to understand what China’s facing today, you really have to look beyond the past two years.COVID did not change the Chinese economy so much as it exacerbated its underlying problems, which are at least a decade old.Pakistan’s Imran Khan pulls his party out of legislatures, vows to press for new elections “Load-shedding has been happening two or three hours a day, but I’ve never seen a 24-hour breakdown like this,” Omar Salim, a shopkeeper in Karachi, told Dunya TV news.Those problems are most visible in the property sector.” When Biden revoked the permit, the project was said to be over halfway done, was on track to be completed in 2022, and would have been operational in the early part of this year (2023).But they derive from China’s growth model.“No power, no gas, no jobs, people waiting in long lines for flour trucks, inflation higher than ever,” he said.

That model has two parts.First, through a variety of policies, you increase the share of national income that goes into savings and reduce the share that goes into consumption.” Liaqat Ali, 50, a garage mechanic in this capital city, said he used his small generator until it ran out of fuel but had no money to buy more.President Barack Obama speaks on the Keystone XL pipeline, watched by Vice President Joe Biden, on November 6, 2015 in the Roosevelt Room of the White House in Washington, DC.In practice, this means restricting the amount of GDP that goes to households and increasing the amount that goes to businesses.Second, you channel those savings through the banking system into investment.Advertisement “We are already struggling to keep our business going with the daily power cuts, but when the light goes out for 20 hours and we have to shut down, it ruins everything,” Ali told The Washington Post.This model is not unique to China.S.

Quite a number of countries have followed it.They talk about fixing things, but they do nothing for the common people.China has just followed it to a greater extent than any country in history.Is it a good model or a bad model? Well, it depends on the underlying circumstances.Experts have warned that the government is coming perilously close to defaulting on its foreign debt.Following Biden revoking the permits, Keystone XL was no longer a viable project and its builder, TC Energy, moved on from it, confirming its termination in June 2021.When China started this, it was among the most underinvested economies in the world.After five decades of anti-Japanese war, civil war, and Maoism, it was hugely underinvested.On my orders an inquiry is underway to determine reasons of the power failure.

So this model was exactly what it needed.Write to him at.Opportunities for productive investment were abundant.The urgent problem of recurring fuel and energy shortages is an especially visible result of a larger and complex problem with many moving parts.But the trouble with a very successful development model is that, by definition, it resolves the problems it was created to address.A good development model renders itself obsolete.Advertisement Meanwhile, the Pakistani rupee has plunged to an all-time low of 230 against the dollar, and the country’s foreign reserves shrank by 50 percent last year.And yet, if such a model eliminates its animating purpose, it does not eliminate the interest groups who’ve come to benefit from it.

The economist Albert Hirschman wrote about this way back in the 1970s.Inflation is rising at unprecedented rates of 25 percent in the past year, hitting fuel and essential food items such as flour, rice and sugar especially hard.A successful growth model will disproportionately benefit certain constituencies.And it will also make those constituencies disproportionately powerful.It has reached a most dangerous point,” economist Zubair Khan said on Geo News TV on Tuesday.Which makes it politically difficult to shift away from the model after it’s become obsolete.So you end up following an outdated economic strategy.We are now seeing the effects of a fragile economy every day.

What happens is that you try to keep rapid, investment-driven growth going after you’ve exhausted every easy opportunity for productive investment.So you fund nonproductive investments.It needs better economic management, and it needs to stop giving priority to politics.And then you see debt start to rise.This happened in China between 2006 and 2008.Some utility officials blamed one another for failing to anticipate the cascading blackout or for delaying needed repairs to the electrical power system.And debt continues rising until either you decide to adjust or you’re forced by debt constraints into adjusting.

And adjustment is always very, very difficult.Officials also said Sharif had ordered all government departments to reduce electricity consumption by 30 percent.So the reason COVID matters is because, if you look at all of the indicators, the consumption share of GDP got even worse during the COVID period, while debt rose very rapidly.And the share of growth attributable to nonproductive investments in the property sector and infrastructure grew.Khan, a popular leader with a large following, has held large public rallies in recent months.So, COVID accelerated all of the problems China already had.This year, and for many years to come, what China really has to do is find a way to adjust.Advertisement “We want this government to go.

So to be clear: China has a growth model that suppresses consumption in order to direct more money toward investment in infrastructure and capital-intensive projects.In the early stages of this model, when China was sorely lacking in infrastructure and housing, this was a very sound approach.On Monday, she said, “the lights went out when my kids were getting ready for school, and [the lights] didn’t come back on until after midnight.But now they’ve reached a point where they’ve picked all the low-hanging fruit.And opportunities for productive investment are actually constrained by the fact that consumer demand is weak, since the household share of income is low.Things are getting worse with each day.So the government starts investing in projects with little actual utility.

And that produces a massive bubble in the property sector.By evening, officials announced that power had been restored in many cities but not nationwide.In the property sector and in infrastructure.And the specific “adjustment” that they need to make is to redistribute income away from businesses and toward household consumption by promoting higher wages or social-welfare programs? Exactly.According to some reports, the blackout stemmed from an energy-saving measure to reduce power Sunday night, which made it more difficult to restart the system Monday morning.Now, in most countries, almost all income is divided between households and businesses.In China, however, a substantial share of income actually goes to local governments..

So technically, the way to solve the Chinese problem is not so much by redistributing from businesses to households but rather redistributing from local governments to the household sector.But, of course, the fact that local governments currently take in a lot of income makes them very powerful.And local elites are dependent on the growth of local government spending.You’ve written that the Chinese Communist Party is aware of the problem and officially wants to increase consumption.To the lay American, it might seem strange that a one-party government would find it politically difficult to enact a policy that, effectively, makes the vast majority of the population richer.

Why can’t a state that has authoritarian powers enact an agenda that has broad popular support? If you redistribute income from local governments to the household sector, that’ll certainly make households very happy.But it will be very painful for local governments.Right now, you could argue that households retain roughly 60 percent of GDP while governments and businesses each retain roughly 20 percent.So one way of looking at it is that households retain about three times the income share that governments do.In order for China to be — not even a normal country — but a normal low-consuming country, they would need to transfer at least 10 to 15 percentage points of GDP from governments to households.

So, at the end of this transfer, households retain not 60 but 70 to 75 percent of GDP, and governments no longer retain 20 but rather 5 to 10 percent.That means the ratio of household income to government income goes up by seven, eight, nine, ten times.Well, you cannot have such a massive redistribution in relative income without a massive redistribution in relative political power.And again, it is the very ability of local governments to fund enormous amounts of spending that has basically created a lot of local political, business, and financial elites.There’s a stereotype that to be a millionaire in China, you have to write computer code.

But that’s not true.The vast majority of rich Chinese are rich because they were in the property sector or in the construction sector or in other basic parts of the economy that receive lots of government spending.So adjustment requires a major transformation in all of the business, political, and financial institutions that have developed over the last 30 years.You could argue that the centralization of power under Xi Jinping might be necessary in order to force through such transformations.But certainly those adjustments are not happening yet.

We’ve been talking about them for 15 years, but they haven’t happened.Xi’s government is also quite aware of the problems in China’s property sector.And it’s made some efforts to temper its growth by restricting credit.But in recent weeks, the CCP has walked back some of those restrictions.Why did they change course? The first thing is to understand how out of control the property sector became.

The direct and indirect share of GDP attributable to the property sector is estimated to be between 25 and 30 percent, which is twice the level in other countries.Real-estate prices are equal to between 300 and 350 percent of GDP, which is two and a half to three times what it is in other countries.When you look at household savings, the real-estate component of household savings is between 60 and 70 percent, which is more than twice what it is in other countries.Real estate is always important in any economy.But in China, it is far more important.

And this has happened over 20 to 30 years of rapid property expansion and rapid increases in real-estate prices.When a boom lasts that long, it changes behavior.Whether you’re a business or a household or a bank, you learn to bet on continued expansion in the property sector.If you don’t learn that, you get put out of business.Households that borrow too much and buy too many apartments, instead of getting punished, end up becoming incredibly successful.

Property developers that find every way they can to borrow money — including ways that are technically illegal — and use it to buy land outperform the more prudent property developers.Banks that lend too much to real estate, and even cut corners to do so, are the really successful banks.And those that don’t do that lose market share.So eventually, after so many years, much of the economy is implicitly betting on continued expansion in the property sector.This is not just a Chinese problem.

We saw this in Japan and in the U.S.and Spain before the financial crisis.So when you try to bring the property sector under control, you are reversing this entire process.And that means everybody — households, banks, businesses, local governments — suffer enormously from any attempt to bring the property sector under control.

And the pain is so great at some point they try to back away.This was not the first time that they went after the property sector, although it has been the most aggressive attempt.They’ve gone after it many times before in the last five to six years.But they always pull back when they see the pain.And the pain is really brutal this time because they really clamped down on it.

And it’s particularly brutal for local governments because they’ve depended heavily on land sales for their revenues to pay for everything.And they’re being so heavily squeezed that they’re cutting their expenses, reducing salaries, doing all the things that they shouldn’t be doing, but they don’t have a choice.So now Beijing is trying to “stabilize” the property bubble without reviving it.They want to slow down the contraction.But we’ve never really seen that happen in a highly speculative market.

It keeps going up until it starts to go down, and once it goes down, it’s very hard to get it to stabilize.Speculative markets go up or they go down; they don’t do stability.So there’s a real big question as to whether or not Beijing will indeed be able to stabilize them.In addition to the problems in the property sector, China also faces really high youth unemployment.

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michaelxpettis EricLevitz Around 50% of the wealth in the world is owned by 1% of the population and they also got about 60% of new wealth created since the pandemic. I'm no fan of the Chinese regime, but it's not just their economic system that's not working. michaelxpettis EricLevitz What are these buildings....why would anyone want to spend their life saving on that? No wonder the rich Chinese are escaping China in droves....

michaelxpettis EricLevitz Very well written article. 👏👏👏 michaelxpettis EricLevitz Folks… this guy Pettis… is a huckster…

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