Briefing #139: China’s Economic Future: Crisis or Collapse?

Dialogue China BriefingAbout China TodaySeptember 15th, 2023 – Issue 139Topics in This IssueThe articles translated here do not necessarily reflect the views of Dialogue China Briefing or Dialogue China.
Feature Story:China’s Economic Future: Crisis or Collapse?A Beleaguered World Factory
Policy/Politics (Public Opinion within the Great Firewall):How Many of China’s More Than Four Million Doctors Are Able to Publicly Reveal Their Salaries?Among the Candidates in Taiwan’s 2024 Presidential Election, Who Will Be Elected and Who Will More Readily Facilitate Cross-Strait Reunification?
Finance and Business (Public Opinion within the Great Firewall):Country Garden: Enemies at the City Gates or Besieged on All Sides?Housing Prices in 70 Cities are Falling at an Accelerated Rate. Why the Property Market Cannot Be Saved this Time?China’s Private Enterprises Are Concerned Not Only About Taxes, Markets, and Debt Chains, But Also About Social Status and Recognition

Feature Story
China’s Economic Future: Crisis or Collapse?Wang Dan – Radio Free Asia – August 15, 2023

An unfinished apartment building in Zhengzhou city, Henan province, June 20, 2023. (Agence France-Presse)As China’s giant real estate companies such as Evergrande and Country Garden have been imploding, there have been increasing discussions about the future pace of China’s economic development. Many people believe that the collapse of the Chinese economy is inevitable. However, I think that such a conclusion is still open to question. For instance, what exactly is meant by “economic collapse”? What kind of situation would give rise to an “economic collapse”? Will the Chinese economy truly collapse? All these questions deserve careful and rational thinking.

Of course, there is no room for debate in saying that the Chinese economy is already facing a serious “crisis.” The situation of real estate enterprises such as Evergrande and Country Garden has revealed the very fragile state of the entire real estate industry in China. The real estate industry is the leading sector in the economy and it involves other both upstream and downstream industries. Indeed, the collapse of the real estate industry is due to the outbreak of an economic crisis. Furthermore, and importantly, the real estate industry has been one of the biggest sources of income for the Chinese Communist Party, and the financial administration of land sales is an economic pillar of the Chinese government. Therefore, the impact of the collapse of the real estate industry seriously affects not only the economic situation but also the political situation in China. This is the true source of the crisis.

In the past, Evergrande and other real estate companies announced exaggerated and fraudulent profit figures. This leads to two questions: 1. Was Evergrande the only company responsible for such fraud? Were the local authorities and auditing departments unaware of what was occurring? In fact, the Evergrande crisis and the real estate crisis were both created by large financial consortia in collaboration with the Chinese Communist Party (CCP) authorities. Where would Xu Jiayin – the billionaire chairperson of the board and CCP secretary of the Guangzhou-based Chinese real estate developer Evergrande Group – be without the support of the Chinese government? Thus far, we have only been concerned with the problems of Evergrande, but we should not overlook the responsibility of the authorities. 2. In the recent past, the Politburo, the leading decision-making organ of the CCP, held a meeting to discuss the economic situation in the country. The official report on the meeting focused on the situation in the real estate market, thus indicating that the authorities well aware of the severity of the crisis and they hope to rescue the market. However, can it still be saved?

I think the root of China’s economic problem is the lack of confidence in China’s future economic development. This cannot be remedied by implementing some hurried policies to attract foreign investment. The lack of public support is actually much more important than mere import and export statistics, financial stimuli, and so forth. Without public support, economic development is impossible. The issue of confidence is obviously a political issue, not an economic issue. Because the real problem is a political problem, the Chinese economy is unlikely to recover. Regardless, the fact remains that China is already facing an irreversible economic crisis.

However, an economic crisis does not necessarily lead to an economic collapse. Japan has been facing a slow-moving economic crisis for thirty years. The Chinese economy, which has been developing for over forty years, is still exceptionally large, and the objective existence of the scale of the market will, and will continue to, attract continued investment. Even though GDP growth may decline significantly, there should be no problem in maintaining a low growth rate. The problem is that China’s economic growth in the future will be at the low end. We should emphasize the word “low end,” but low end does not mean inferior, nor does it mean low speed, so people will still be able to survive. Although their standard of living and quality of life will drop substantially, this will not be to the extent that they will have nothing to eat, but still high consumption will be unlikely. The increased focus on the economic market shows that the authorities are well aware of this problem. It is unlikely that overnight China will return to Third World status after decades of market reform and opening, but an impoverished socialism is likely to become China’s new reality.

Many people expect that the economic crisis will trigger political change in China. I can understand this sentiment. However, if China’s economic crisis is characterized by a prolonged period of low-end development rather than economic collapse, then it is unlikely that an economic collapse will lead to political turmoil. In considering this issue,, the level of tolerance of the Chinese people to lower living standards will is an important variable. As of now, we do not see any obvious signals of an economic crisis leading to a political crisis. But the economic crisis will hurt the interests of the rich and powerful. Whether their loss of benefits will aggravate the discord and struggles within the ruling clique is perhaps a matter of even greater concern.Feature Story
A Beleaguered World FactoryJo – Think Tank Briefing – September 15, 2023

China is an autocracy, and experience shows that economic development cannot force the democratization of the Chinese political system. (Radio Free Asia)In the early 1990s Stephanie was a Chinese university student majoring in foreign trade. After graduation, m of her classmates entered the foreign trade industry, riding the wave of globalization, and they all were very successful. But, Stephanie told Dialogue China, in recent years her peers have been closing their businesses one after another, and after the beginning of 2023, her last few classmates who still insisted on persevering have all entered a liquidation stage and are preparing to close down their businesses.

After thirty years of hardship, why are foreign trade executives currently retreating en masse? Figures from the National Bureau of Statistics show that in July 2023 China’s manufacturing industry Purchasing Management Index (PMI) was 49.3, below 50 for the fourth consecutive month. The PMI can generally be understood as the business confidence index. A figure below 50 not only represents a contraction of economic activity but also indicates that entrepreneurs’ expectations about the future are pessimistic, and therefore they likely will not expand investment in production. Since October of last year, new orders from overseas – which are included in calculation of the PMI – continued to fall to a record low and the size of the manufacturing workforce fell for the fifth consecutive month.

China PMI
Blue Line: Caixin Index (private and state-owned companies)
Red Line: Chinese official Index (large state-owned enterprises)
Source: Macromicro.meData from China’s General Administration of Customs show that in July 2023, China’s imports and exports totaled US$482.9 billion, down 13.6 percent year on year – the biggest drop since the outbreak of COVID-19. It should be noted that although this is already the biggest drop, the baseline for calculating this drop is the state of the economy in July of last year when cities such as Shanghai had already been closed for several months, so it is not difficult to imagine the miserable state of industry today.

Data from the United States for the same period show that more than 60 percent of U.S. apparel retailers no longer use China as a major supplier. In the next two years, nearly 80 percent of U.S. apparel companies plan to reduce purchases from China.

China’s foreign trade change
Green Line: Export change y-o-y
Red Line: Import change y-o-y
Source: WindAlthough the economies of all countries were devastated by the pandemic, China was the only country that reaped profit, even though it was under lockdown since February 2020. During the past three years, the Chinese economy has been supported by its exports. When China suddenly abandoned its pandemic controls at the end of 2023, some optimistic economists predicted that the Chinese economy would quickly recover and once again drive global economic growth.

But half a year later, not only has there been no such rapid recovery, there has not even been a shadow of a recovery. Stephanie, who has now worked in the foreign trade industry for nearly thirty years, observes that the recent decline in exports is visible to the naked eye – empty containers at all major ports piled up in mountains due to a lack of cargo. Sea freight prices are now facing a precipitous decline, plunging to levels unseen since before the outbreak of the pandemic in 2019.

Source：Freightos Baltic IndexFurthermore, foreign investment is declining rapidly as well. Total foreign direct investment in China in the second half of 2022 amounted to just US$425 billion, a 73 percent year on year drop. In the second quarter of this year, foreign direct investment in China totaled only US$4.9 billion, a year-on-year plunge of 87 percent and the lowest rate since 1998.

Michael Hart, president of the American Chamber of Commerce in China (AmCham China), has stated frankly that the biggest challenge in 2023 is the deterioration of Sino-U.S. relations, and U.S. companies have now been pushed to a critical crossroads as the overall investment environment in China has become ever more unpredictable for foreign-invested companies. According to a survey by AmCham China, two out of three of the 109 U.S. companies in China said they would not, or are not sure they would, increase their investment in China in the next three years; nearly one out of three have already shifted their supply chains to outside of China.

The decline in the manufacturing index, the fall in import and export data, the decrease in foreign investment, coupled with the fall in commodity prices, have all contributed to the serious lack of demand in China’s manufacturing industry. With insufficient demand, factories are forced to resort to layoffs to cut labor costs. In April of this year, during the period of the Canton Fair, a factory worker in Guangzhou, who was interviewed by the media, said that China has lost so many foreign orders and so many factories have moved away that many workers in China cannot find jobs.

The Chinese official youth unemployment rate in July 2023 was a record high of 21.3 percent. However, the real unemployment rate was actually much higher than this. Zhang Dandan, an associate professor of economics at Peking University, recently published an article stating that China’s youth unemployment rate only counts the school population between the ages of 16 and 24, but in reality there are many young people who are not in school, so if they are included in the number of youth who are unemployed, China’s youth unemployment rate in March of this year actually reached 46.5 percent, with nearly one-half of young people in China unable to find a job. Since July of this year, the Chinese government has thus stopped publishing the youth unemployment rate.

In addition to unemployment, the lack of demand is also leading to overcapacity. Stephanie told Dialogue China that many manufacturing companies have recently been forced to shut down and their investments have been frozen, which in turn has led to a lack of local government inputs and repayment of loans. This is one of the reasons why local governments are now facing such elevated levels of debt. As local governments continue to issue bonds, their overdrawing and plundering the future wealth of the Chinese people will continue, thus creating a vicious cycle.

The Financial Times recently revealed that several Chinese economic analysts, think-tanks and university researchers have been warned by the Chinese government that they are prohibited from speaking negatively about deflation and capital flight in China. However, the world’s major investment banks have continued to repeatedly downgrade their forecasts about the Chinese economy. Among these investment banks, Nomura Securities is the most pessimistic; it has already lowered its forecast for growth of Chinese GDP for this year to 5.1 percent – the lowest rate since 1990 (with the exception of 2020 and 2022, the two years distorted by the pandemic).

Regardless of what the final GDP figures will be for this year, the trend of an economic slowdown in China is irreversible. It may even lead to a downward spiral. Dialogue China believes that there is a high level of consistency among the two major political parties in the United States in terms of their policies toward China, and they both have a very clear bottom line. China is an authoritarian regime, and past experience shows that economic development will not lead to democratization. Dialogue China suggests that the two U.S. political parties maintain consistency with respect to the China issue, continue to implement their current policies without relaxing them, and prevent China from having any opportunity to access the free-market system to earn the dividends of internationalization. Policy/Politics (Public Opinion within the Great Firewall)
How Many of China’s More Than Four Million Doctors Are Able to Publicly Reveal Their Salaries?Xin Ying – Financial Services and Healthcare – August 16, 2023

After the anti-corruption storm in healthcare since the end of July 2023, how many of the 4.28 million Chinese doctors are willing to reveal their incomes in public? (Visual China)Summary:
This article examines the income situation of Chinese doctors. Since the medical anti-corruption storm in late July 2023, the incomes of China’s 4.28 million doctors has become the focus of social concern. Despite their many years of training, high technical requirements, and high work pressures, the incomes of doctors in China are not as high as expected. According to a survey conducted by Finance and Health, there are significant differences in the incomes of doctors due to factors such as geography and specialty. For example, even in the Beijing-Tianjin area, where doctors’ salaries are relatively high, the annual income of most doctors do not reach high-income standards. In addition, one of the reasons why many doctors choose to leave public hospitals is that they can be better remunerated in other occupations. The industry generally believes that the remuneration system for doctors in public hospitals should be reformed, especially for mid-career doctors who are between the ages of 35 and 45. According to the “China Hospital Manpower Survey Report 2022,” the average clinical income of doctors is US$94,000, while 70 percent of them have a pre-tax clinical income of less than US$100,000. In economically developed first-tier cities, the pay for doctors is relatively higher, but an overall gap still exists.（Read The Original Text）Policy/Politics (Public Opinion within the Great Firewall)
Among the Candidates in Taiwan’s 2024 Presidential Election, Who Will Be Elected and Who Will More Readily Facilitate Cross-Strait Reunification?Yan Mo – Baseling Thinking – August 4, 2023

Taiwan Vice President Dr. Lai Ching-te’s position is relatively conservative, emphasizing Taiwan sovereignty but recognizing the importance of dialogue with the mainland. (Getty Images)Summary:
This article provides an in-depth examination of the cross-strait relations stances of the three major candidates in the Taiwan presidential election. First, Hou You-yi, current Taipei city mayor, is described as a pragmatic politician who values economic cooperation and exchanges to promote cross-strait relations. He hopes to engage in dialogue with the mainland while maintaining friendly relations with the United States. Second, Koh Wen-je, former mayor of Taipei city, maintains a neutral stance, trying to find a balance between the mainland and the United States to avoid becoming a victim of either one. Third, Lai Ching-te, former mayor of Tainan, takes a more conservative stance, emphasizing Taiwan sovereignty but also recognizing the importance of dialogue with the mainland. The article reveals the positions and strategies of each of the three candidates, which reflect the complexity of views on cross-strait relations in Taiwan society and how external forces have influenced Taiwan’s election strategies.（Read The Original Text）Finance and Business (Public Opinion within the Great Firewall)
Country Garden: Enemies at the City Gates or Besieged on All Sides?Zhang Wenjing, Li Yanyan – Chinese Entrepreneurs Magazine – August 11, 2023

Shanghai headquarters of Country Garden: Country Garden announced late at night on July 12, 2023, that eleven corporate bonds would be suspended as of July 14. This may lead to an expansion of the real estate market crisis in China. (EPA)Summary:
This article examines the financial situation of Country Garden, a large private real estate company in China. Country Garden has recently been in the spotlight due to two failed payments on its U.S. dollar-denominated bonds, totaling about US$225 million. This has caused worries and panic in the market. Although it is the largest private real estate company in China in terms of sales, with sales reaching 464.3 billion yuan by 2022, the market is skeptical about its financial health. Insiders have said that Country Garden still has a 30-day grace period, and it is not yet in default. Li Yujia, chief researcher at the Housing Policy Research Center of the Guangdong Provincial Urban Planning Institute, believes that compared with Evergrande, capital operations of Country Garden are less complicated, and recent positive signals from the real estate market have provided it with a buffer. The article also mentions that Country Garden’s board chairperson, Yang Huiyan, donated 20 percent of her Country Garden Services shares to the National Foundation for the Betterment of Hong Kong. Overall, this demonstrates the financial challenges faced by Country Garden and the market’s response.（Read The Original Text）Finance and Business (Public Opinion within the Great Firewall)
Housing Prices in 70 Cities are Falling at an Accelerated Rate. Why the Property Market Cannot Be Saved this Time?Xie Jiu – Sanlian Life Weekly – August 17, 2023

Many young people from middle-class families already have a home with their parents, so this generation of young people does not have a pressing need to buy a home. (Hong Kong News Agency)Summary:
Recently, housing prices in China’s 70 large and medium-sized cities have generally declined, with the rate of decline significantly increasing. Although China implemented two real estate bailout policies, in 2008 and 2014, which led to a surge in housing prices, this time the bailout failed to replicate past patterns and instead accelerated their decline. The data show that among the 70 sample cities, the prices of second-hand houses in 65 cities fell year on year, and the prices of second-hand houses in 63 cities fell month on month. Not only did the number of cities with falling housing prices increase but the rate of decline also accelerated. China’s real estate market has entered a new stage, with significant changes in supply and demand. After more than 20 years of rapid development, China’s housing market has shifted from an shortage of supply to an oversupply of demand. China’s rate of urban homeownership is currently very high, and many young people from middle-class families already have homes with their parents, so this generation of young people does not have an urgent need to buy a home. In addition, as China’s birth rate continues to decline, new demand for housing will gradually decrease in the future. In recent years, the number of births in China has been declining by more than one million per year, thus indicating that new demand for real estate will continue to decrease.（Read The Original Text）Finance and Business (Public Opinion within the Great Firewall)
China’s Private Enterprises Are Concerned Not Only About Taxes, Markets, and Debt Chains But Also About Social Status and RecognitionLiu Zhiqin – Chongyang Institute for Financial Studies at People’s University of China – August 3, 2023

The Chinese government must make further efforts to ensure that private enterprises are treated equally and fairly by society. (Bloomberg News)Summary:
This article discusses the concerns and challenges of private enterprises in China. The central government and the National Development and Reform Commission recently issued a series of industrial policies related to private enterprises, aiming to promote the healthy development of the economy. The focus of these policies is to provide more market access, tax exemptions, and other support measures for private enterprises in order to improve the environment for their survival and development. Although the government has provided a great deal of support to private enterprises, many private entrepreneurs say that their main concern is not only about taxes, markets, and debts but also about their status and recognition by society. Private entrepreneurs want the same social status and recognition as state-owned entrepreneurs. In addition, the article points out that in actual business operations, China’s private enterprises do not have high status or credit. For example, some corruption cases are reported to be related to “private entrepreneurs.” But such terminology may lead to misunderstandings and prejudices against private enterprises in the society. Although the government has taken a series of measures to support private enterprises, further efforts are needed to ensure that private enterprises are treated equally and fairly by society.（Read The Original Text）