China: China Coping with Calamity

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November 12, 2023: Chinese manufacturing activity has been shrinking for most of the year and is one of several indicators that the Chinese economy is in trouble. The problems are largely self-inflicted. The shrinking of Chinese economic activity is the result of several different economic problems, including consumers not resuming their pre-covid spending habits. Less consumer spending was not expected. None of this should be a surprise because all the problems have occurred in China before, but not all at once. Paying attention to Chinese history is a respected popular tradition for basing major decisions on. Chinese leader Xi Jinping came to power in 2012 and initially concentrated on reinforcing government control of the military. He, like most Chinese leaders, pays more attention to history than foreign counterparts do. Chinese military history is measured in thousands of years while Westerners, in most cases, have a few centuries of it and don’t pay as much attention to past experiences as China does.

Chinese economic history over those long periods did not change much either. It was largely feudal and, since 1910, China has been trying to develop a form of government capable of handling economic problems more effectively. Xi Jinping has had some success and recently saw the Chinese banking sector improving to the point where it can assist in reviving the economy. The economy is still in bad shape, with too much debt, so many foreign companies are pulling out of China while too many Chinese companies are barely staying in business with a growing number slipping into insolvency and bankruptcy.

An example of unique Chinese economic problems can be seen in the current real estate crisis. The usual solutions are not working as well as the government expected. The largest problem is corruption at the provincial and local level. Over the last decade there has been a major effort to purge the false reporting from national economic statistics. The false data problem is not gone but at least it is recognized. This was painful because it revealed that past economic growth was more uneven and less than everyone believed. Many foreign economists had figured this out but now everyone knows. China now realizes it has a dangerous real-estate bubble that must be deflated with extreme care or it could cause a major economic recession. China has to develop a system to verify economic data coming from provincial officials because of the risks a major real estate default poses to the entire economy. The major real estate firms are Evergrande and Country Garden and, to prevent a debt default, government owned banks and enterprises that hold much of this bad debt have been ordered to tolerate delayed overdue payments on this debt.

There are also political problems. Leader Xi Jinping has made himself leader-for-life and Xi now screens or makes all key economic solutions. Xi isn’t an expert in economics or aware of the complexity of the Chinese economy or historical examples of similar situations. Back in the 1980s China adopted a market economy and shed most of its socialist, state ownership of everything, responsibilities. China was still ruled by a nationalist dictatorship government. This threatens to create a similar situation to the one that occurred nearly a century ago when China had a self-appointed “leader-for-life” running what is officially known as a socialist dictatorship. Back in the 1930s Germany had a relatively free market economy in a country controlled by the tyrannical NSDAP (National Socialist German Workers Party) or Nazis. Spain had a similar government with a dictator technically acting as regent for a deposed monarchy. Japan had a market economy, but its constitutional monarchy had been usurped by a military coup that put a military dictatorship in power that ruled in the name of the emperor. Italy was run by a dictator who was a lifelong socialist but also a nationalist dictator promising to revive the Roman Empire on the cheap. That did not end well, nor did the other similar governments. Nevertheless, Xi Jinping is trying a Chinese brand of fascist rule hoping it works for him.

In the last few centuries, China had endured periods when independent warlords ruling portions of a divided China, and the communist Chinese fear this might happen again. For thousands of years, the large East Asian area dominated by the Han variant of Chinese people was sometimes united but more often divided into separate kingdoms. After World War II the Chinese communists won a decades-long civil war against non-communist factions and proclaimed a communist dictatorship of China, or at least most of it. There was a long list of neighboring territories that were still independent or belonged to neighbors and China is working its way through it as diligently and non-violently as possible.

Currently China has a more immediate problem, a shrinking population. Other East Asian nations have the same problem after having experienced a sustained economic boom that has moved much of the population into the middle-class. Even China is now suffering from this, with fewer babies born each year to replace those dying. The current Japanese birth rate is 1.39. In 2008 it was noted that China’s birth rate had fallen (to 1.8 births per woman) beneath the replacement rate (2.1). As a result, the population has begun to slowly decline and this will continue for the next decade or two.

But the biggest problem is the growth of retirees, and the shrinking number of workers to support them. Proposals to allow more births run into arguments about limited resources. Moreover, as women become more affluent, they are less inclined to have lots of children. Japan is way ahead in this population curve, and China does not want to join them, but no one has yet come up with an acceptable alternative. The impact of fewer births in urban areas over two decades ago is showing up in growing shortages of skilled labor. The costs of manufacturing high tech items is growing, forcing Chinese manufacturers to move more factories to nations with cheaper labor. The military is giving the troops a raise, especially the technicians. Otherwise, it can’t recruit them, or keep them. South Korea already has a lower (1.11) birth rate than Japan. Taiwan has the lowest worldwide at 1.09, followed by South Korea at 1.11, Singapore at 1.17 and Hong Kong at 1.23. The American birth rate is 1.66 but most Western nations have lower rates. For Europe as a whole, the rate is .98.

 

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