So How Are Things Going In China?

 May 28, 2024 Francis Menton @ Manhattan Contrarian

How are things going in China? That is a question of great interest to everyone in the world, both inside China and out. Of all countries, China has either the largest or second-largest population (neck and neck with India at about 1.4 billion), and an economy that is a relatively close second to the United States in absolute production (although less than 20% as prosperous on the basis of per capita GDP). 

 

China’s economy has clearly grown rapidly since the 1980s, but there is conflicting information as to whether that growth is continuing, or perhaps stalling out. If China is continuing its rapid economic expansion under the increasingly authoritarian regime of Xi Jinping, its enhanced economic strength could pose a growing threat to its Asian neighbors and indeed to the rest of the world. But other information suggests that China’s economy is in grave distress, and that the country has entered into what could be a period of extended contraction and decline.

You would think that it would be easy figure out which scenario is the real one, but in fact it is quite difficult. I for one am betting that the decline has set in, but I do not claim to have the definitive answer. My bet is instead based on the perverse incentives created by a strict authoritarian/communist political and economic system, which I think lead inevitably to long-term decline, at least in relative terms compared to free economic systems. But at this point my view is only a bet. Arguing in favor of my side of the bet is that all the liberal media and economists dutifully chanted during the 1970s and 80s that the Soviet economy was rapidly expanding, and would soon overtake the United States. After the collapse in 1990, it all was revealed to be smoke and mirrors.

What does the evidence indicate as to China today? The problem is that getting real evidence from a dictatorship like Xi’s China is not so easy. Let’s consider a few reports.

From the New York Times, April 15, “China’s Economy, Propelled by Its Factories, Grew More Than Expected.” Excerpt:

The Chinese economy grew more than expected in the first three months of the year, new data shows, as China built more factories and exported huge amounts of goods to counter a severe real estate crisis and sluggish spending at home. To stimulate growth, China, the world’s second-largest economy, turned to a familiar tactic: investing heavily in its manufacturing sector, including a binge of new factories that have helped to propel sales around the world of solar panels, electric cars and other products.

Or again for the optimistic view, you could turn to the IMF, as dutifully recited by Reuters today, “IMF upgrades China's 2024, 2025 GDP growth forecasts after 'strong' Q1.”

China's economy is set to grow 5% this year, after a "strong" first quarter, the International Monetary Fund said on Wednesday, upgrading its earlier forecast of 4.6% expansion though it expects slower growth in the years ahead.

Well, that is the official line. But does state-directed expansion of production of things like solar panels and electric cars sound like real economic growth to you? Or does it sound more like the Soviet Union building more and more steel mills, far beyond any possible productive use for the output, because steel capacity was the “prestige” economic activity of the day? At the time they counted all the steel production in the Soviet Union as a 100% addition to GDP, just as today they count all the electric cars and solar panels coming out of China as a 100% addition to GDP.

For a different perspective, try Lawrence Person’s BattleSwarm Blog from yesterday, “China Throws Money At Semiconductors Again.” Person is talking semiconductors this time, instead of EVs and solar panels, but the gist is the same: state-directed investment in something that sounds prestigious but will be very unlikely to earn a profit (which is the same thing as being very unlikely to be a real addition to productive economic activity). Person quotes a May 27 report from NewsBytes:

China has launched a massive $47 billion fund, the largest in its history, to bolster its semiconductor industry and establish a local supply chain. This fund, equivalent to 344 billion yuan, is the third phase initiated by the China Integrated Circuit Industry Investment Fund [also known as the National Integrated Circuit Industry investment Fund Company (ICF), or just “Big Fund.”-LP]. It’s worth noting that this amount is twice the total funds raised in the previous phases in 2014 and 2019.

But Person points out that the previous 2014 and 2019 rounds of Chinese state-directed investment in chip-making resulted in rapidly shuttered factories and funds that disappeared into the hands of government cronies:

Do you remember the last time I covered where the money went to in those previous phases? The money went to companies like Wuhan Hongxin Semiconductor Manufacturing Co. Result? “Hongxin’s unfinished plant in the . . . city of Wuhan now stands abandoned. Its founders have vanished, despite owing contractors and investors billions of yuan.” Or maybe Tsinghua Unigroup. Result? The[y] arrested a whole lot of executives, a lot of money disappeared into various pockets, and “Tsinghua Unigroup abandoned its plan to build DRAM memory chip manufacturing plants in Chongqing and Chengdu in southwest China earlier this year.”

Here’s a previous piece from Person on April 25, “90% Of Chinese Factories To Close?” The piece focuses on a YouTube video from a source called China Observer — which, to be fair, is not a fan of the Xi/CCP regime. The video contains dozens of examples of Chinese businessmen reciting terrible business conditions for manufacturing in China today. Now, are 90% of China’s factories really facing imminent closure? I seriously doubt that. But are very large amounts of Chinese manufacturing being kept alive by the state in order to maintain the Potemkin appearance of a thriving economy? That is entirely possible. Also unsustainable.

Or consider the Epoch Times — again, clearly unfriendly to the Xi/CCP regime. But they have one recent piece after another about weak economic conditions in China, and particularly about state support for different sectors designed to keep up the appearance of stable economic activity when in fact there is vast overcapacity and inability to pay debt. For example, here is a May 27 piece on China’s latest “rescue plan” for its “failing real estate market”; here is one from May 24 on the closure of high-speed rail stations due to a “debt crisis”; and here is one from May 13 about China’s attempts to “hide negative foreign investor sentiment.” There are many more in a similar vein.

And did I mention that China has a frighteningly low birth rate and is facing a rapidly declining population for the rest of this century?

Just because China faces a period of serious decline does not mean that it will not be a threat to its neighbors and the world. However, if the world just waits them out, the seriousness of the threat looks likely to lessen over time.