Something big is happening in China, domestically and geopolitically. First, the government has been unleashing a deluge of regulations for the last few months. Second, a viral blog claimed that a “profound revolution” is happening in China and the blog was republished by all the major Chinese state media. The gist of the blog is that China is going to punish capitalists, address inequality, drive “common prosperity,” and stop worshiping Western culture. All this makes people wonder if Xi Jinping is attempting Cultural Revolution 2.0! Let’s analyze…
Why Now? Inequality, Bubble, and Slowing Economy
Although China is a one-party system with seemingly unchecked powers for the government and the communist party (CPC/CCP), the authorities are very sensitive to public opinions. And things haven’t been going very well in China. For a supposedly communist/socialist country, there is tremendous inequality in China: The top 1% own 31% of the wealth — same as the USA.
Another way to measure inequality is the GINI coefficient index for income, which is 46.5% in China. And that is much higher (i.e. worse) than all the developed nations except the U.S., which is just a tad bit more at 47%.
The Chinese economy is also slowing down due to many reasons — maturing economy, high debt, shrinking workforce, aging population etc. After this year, China’s annual GDP growth rate will never hit even 5%. Experts predict that China’s economy will be growing at 2-3% before the end of this decade.
No wonder that young people and lower middle class are disillusioned. Phrases like “Tangping” or “lying low” are being actively censored by the government. Marriage rates are falling dramatically and people are not having enough babies. Housing prices are insanely high — 45 times as large as the average annual household income in cities like Beijing and Shenzhen.
Cynical Promises – Arson to Fight the Fire
When there are big societal problems in democracies, politicians from one party blame the other party and make big claims. For example, Obama promised “hope” and Trump said he would “drain the swamp.” Considering that there is only one party in China, the authorities have a lot of chutzpah in promising “profound changes.”
One of the main driving forces behind these theatrics might be Xi Jinping’s upcoming “re-election” by the Party apparatus next year. After the tumultuous years of Mao, Chinese leaders wanted to avoid autocracy and personality cult. Thus, they introduced term limits. However, Xi Jinping amended the Constitution and removed the term limits for himself. Next year will be the end of his second term. Although he is virtually guaranteed to get elected for the third term, there are political rivals — mostly other princelings — who would pounce on him if the country faces a major economic crisis or if his approval ratings take a dive.
So, Xi and his loyalists have to convince the masses that the government is working hard, although it’s the government that fueled the daunting problems.
Consider the inequality or the Gini coefficient index in China, which has stayed pretty constant for the last two decades. So, the people responsible for this are now going to fix it?
A major source for inequality — CCP’s alleged new concern — has been the ruthless exploitation of “migrants” for the last four decades. These migrants — farmers who moved to the cities — were relegated to low-wage and dangerous jobs without basic labor rights. They were denied access to public services such as education, healthcare, and housing in the cities. Thus, 30-60% of the people in Chinese cities are deliberately kept in poverty. How can the Chinese government now pretend to worry about inequality?
The demographic problems are obviously due to CCP’s one-child policy that started in 1980. In 2016, China established a two-child policy and this year introduced the three-child policy. Too little, too late. If the technocrats were smart, they would have never had a one-child policy or at least would have abolished the limits two decades ago.
As for unaffordable housing, the government encouraged the bubble, which is now worth $54 trillion. The real estate ecosystem accounts for stunning 28% of China’s GDP. The ratio of (house price) to (annual household income) is more than 40 in big cities like Beijing and Shenzhen. Even in NY and SF, that number is 10.
Everyone loved the housing bubble. Beijing wanted the GDP to keep growing. Enterprises such as developers, steel companies, appliance makers, real estate agents and many more up and down the supply chain loved the real estate mania. Local governments depended on land sales for revenues; party officials and bureaucrats got big bribes from the private sector for approving inflated real estate projects and handing out monopoly rights. As the book “Red Roulette” reveals, CCP officials and politicians typically get 30% commission for deals.
As for the regular people, housing speculation was a guaranteed winner. Everyone assumed that the government would never let house prices go down. So, they borrowed and borrowed, buying as many homes as possible. The Top 10% of households have three or more homes. The mania continued and household debt grew tenfold from 2008 to 2020.
Now, the bubble may be about to burst. Evergrande, which was once the world’s largest developer, is now the world’s most indebted developer. It has $15 billion in cash but $300 billion of debt and liabilities. It is now struggling to pay back banks, trusts, contractors, employees, and bond holders. Evergrande must also finish building about 1.5 million homes for which it has already accepted payments. Evergrande’s stocks are down 90% since last year, its bonds are deep in junk territory, and is guaranteed to go bankrupt. 4 million jobs are dependent on Evergrande’s sprawling projects in 200+ Chinese cities.
But Evergrande is not alone. Among the top 15 most indebted developers in the world, 14 are from China. Sunac, Country Garden, Guangzhou R&F, Sinic and many others are in trouble. In fact, Chinese developers owe whopping $5 trillion of debt and liabilities.
The government will certainly step in and help the too-big-to-fail Evergrande — likely nationalizing the company. Many other conglomerate giants such as HNA, Anbang, Wanda, and Huarong have been bailed out by the government in the last couple of years.
However, it doesn’t solve the overall problem regarding the housing bubble. The government is caught in a rock and a hard place. It can’t keep the bubble growing forever. On the other hand, if the bubble bursts, hundreds of millions of people will lose a lot of their investments — 75% of household wealth in China is tied up in real estate. Plus, if the real estate bubble bursts, millions of people will lose their jobs as well.
No wonder that the government has passed new laws to ban “rumors” about the economy and “malicious” opinions about government policies. When you screw up, you should always stop others from talking about it.
What the government should have done
The Chinese government fell asleep on the wheel and let the problems fester. Now, it’s passing thousands of regulations, which is like a driver pressing the brakes hard when the car is going at 100 mph. Instead, the government should have gradually started the reforms 15 years ago — Like the ones mentioned below:
- Increase wages. Consider that when China became the #2 economy in the world by surpassing Japan in 2010, the manufacturing wages were $2 an hour. Sheer exploitation, which also created terrible inequality.
- Build homes, schools and hospitals for migrants in the cities. (Rather than building apartments and fueling the housing bubble)
- Invest in more universities and raise the quality so that Gaokao entrance exams aren’t so competitive.
- Impose high property taxes on second and third homes.
- Fines for empty homes. (Now, 25% of urban homes are empty)
- Developers should be able to sell only finished homes. In China, people are forced to pay upfront and then wait for two or more years for the homes to be built. This creates a virtual Ponzi scheme as developers depend on new sales to fulfill old promises.
- Introduce capital gains tax and increase income tax on the uber-wealthy
- Put an end to corruption
- Halt useless infrastructure projects (40,000 km of high-speed rail sounds good for bragging but leaves the government with $1 trillion of debt and loss-making trains)
- Develop rural areas.
Oligarchy and Kleptocracy with Chinese Characteristics
Perhaps Xi Jinping truly believes in “common prosperity” but he should have started on that journey back in 2012 when he took office. Instead, he fueled the housing bubble. Between 2013 and 2015, China used more cement than the US had used in the entire 20th century. Xi also didn’t do anything to help the migrants — he could have abolished or reformed the Hukou system (household registration system that creates institutional discrimination against migrants).
The Top 1% in China have FIVE times as much wealth as the bottom 50%. This is not a feature of a “socialist” or a “communist” country. This is kleptocracy in state capitalism. High-level CCP members, white-collar workers at state-owned enterprises, and politicians have cushy jobs and make a lot of money. Some make millions of dollars in kickbacks and bribes. These people demonize the West while sending their kids to American universities (even Xi’s daughter studied at Harvard), buying million-dollar properties in the Five Eyes countries, and hoarding money in offshore bank accounts.
Above these people are the “red families” and princelings, who are billionaires and the true ruling class. When Xi Jinping forces a handful of billionaires and tech firms to give money to charities, it’s political theater and populist charade. Xi’s own family (sister, brother-in-law etc.) was worth $1 billion back in 2012. Former premier Wen Jiabao’s family was worth about $3 billion in 2012 — his wife was known as the “diamond queen” and launched one of the first public companies in China’s new stock market in the 1990s. Former President Jiang Zemin’s kid ran the telecom empire in China; and the grandson’s private equity firm made billions from Alibaba, Ping An and other firms.
There are numerous “little pinks” — young idealist CCP loyalists — who are getting fooled by the Party propaganda. No, there won’t be any common prosperity. The oligarchs and kleptocrats are not going to share their wealth with the masses. Instead, the party-state will redirect people’s anger towards internal enemies like “sissy men” and external enemies like America and its “running dogs” (Japan, Taiwan, UK, Australia etc.). If the Chinese government attacks and cripples the hi-tech firms, that will certainly be a great leap backward.
China could have had a meritocratic government with prosperous industrial socialism and an open society … but somewhere along the journey, it lost the vision.