Chinese Military Corruption
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Category Archives: China
Panic In China
One thing that has not been covered much lately is the panic currently griping China’s investor class. This quote from Bloomberg gives you a feel for the sentiment..
“We need the state to come in like a white knight or we may just lose our jobs,” said one fund manager.
It is not so much that the 6% drop last Monday was all that bad in and of itself as it is that people are starting to give up on the market ever recovering. As Reuters reports….
Stock markets in Hong Kong and in mainland China plunged on Monday, extending a long spell of weakness driven by an exit of foreign investors alarmed by China’s wobbly economy and a lack of stimulus measures. Share prices stabilized somewhat on Tuesday after authorities announced plans to support the market, but analysts were hesitant to cheer.
The small-cap CSI1000 index (.CSI1000I), opens new tab has traded below the 5,000 level this week, after a 6% plunge on Monday to its lowest level in nearly four years.
Market participants said the drop triggered “knock-in” levels on “snowball” products, also known as “auto-callables” in some markets, leading to forced selling of stock futures contracts which further pressured the market.
Although a lot of people are pointing at the “snowball” hedges as being a big part of the current meltdown, that is more of a symptom then a cause. The bigger underlying cause is the continued and still unresolved meltdown in the real estate sector. For example, you will read that China’s government is trying to throw roughly $300 billion at the stock market to support share prices. However, the largest failed real estate company (Evergrande) in China has over $300 billion dollars in debt all by itself. And it is very questionable how much of that money investors will ever get back.
One of the reasons I have not been covering this much is because China lies so much and has done so much to undermine what rule of law there was in China that it is hard to tell what is going on. For example, it is not even clear that the bankruptcy proceedings against Evergrande will be honored in mainland China. If they are not honored, then it will be a long time before we can say what the assets that Evergrande still has are worth. A cynic might be inclined to argue that China does not want that discovery to take place for fear of what it would reveal. But failing to follow through with any kind of price discovery means that the holders of the $300 billion dollars of debt that Evergrande owes are getting nothing. To be fair, the investors in Evergrande are likely to get nothing in any case so from China’s perspective there might not seem to be a lot gained by forcing everything to sell off. On the other hand, if they don’t force a sell off and nobody gives Evergrande more money, all the assets are just going to sit around and rot anyway.
But the real issue hear is not Evergrande itself, but the property market as a whole. 20% to 30% of China’s GDP is based off of investment in the property sector. If Evergrande is representative of the state of the property market in China as a whole (and all sources seem to agree that it is), that sector of the economy is hosed. Even if it was only Evergrande it would be a big deal. To put the 300 billion that Evergrane owes in context, the entire US budget for the US Navy and Marine Corps in 2023 was 231 billion dollars. So even by US standards, $300 billion is a lot of money and that is only one of the failed real estate companies in China (albeit the largest one as far as we know now).
I don’t have time to parse the wider figures in China to see which are trustworthy and which are not. But just by going by the one figure that I think is accurate, China seems to doing very poorly. So poorly that we might be looking at an economic problems on the scale of the Great Depression.
The one set of figures coming out of China that I trust is the figures for the value of goods that China imports. I think this figure is trustworthy because it can be correlated with figures of what other nations have exported to China (normally I would think that China’s export figures are good for the same reason but this year I think they are off due to goods that got held up in China in 2022 due to zero Covid). And if you look at import values, you will see that China’s imports in dollars terms dropped by 5.5 percent in 2023 compared to 2022.
Now on the surface that might not seem so bad but you need to understand that those are not inflation adjusted figures. So a 5.5 percent drop in 2023 compared to 2022 is probably closer to 10% drop in real terms. Moreover, 2022 was not a great year for China. And if you understand that China imports thing primarily to make things, you have to wonder where the 5% growth that they claim to have in 2023 came from if there imports were down in real terms by almost 10%. You have to go all the way to 2020 to find a year where China’s imports were as low as they were in 2023 in nominal dollar (i.e., not adjusting for inflation). And since inflation in US dollar terms from 2020 to 2023 is 17%, I am not at all sure that in real terms China had lower imports in 2020 then 2023.
That is all the insight I can muster on this topic for now. But if I was betting man, I would bet that China’s economic performance will be a much more prominent news topic in 2024.
On a side note, if you want to understand what a mess Evergrande’s liquidation order is going to create, watch/listen to the below.
China has a College Problem
If you read certain conservative sources, you will often read allegations that China is secretly supporting this or that ideology in order to weaken America. But there is one idea that is as American as apple pie that is doing its bit to destroy China. And that is the idea that every good little boy or girl will go to college and get a white collar job. This insidious American idea (you could argue it is more an Anglo-Saxon one but I think America should take credit) is making China’s demographic problems a lot worse.
The basic demographic problem that China faces is that its working age population is dropping like a rock while the number of retirees soars. China’s work force has shrunk by 40 million in the last 3 years. That is like losing the entire population of Canada if Canada was solely populated by people 16 to 59 years old.
With people falling out of the work force at an accelerating rate, you would think that it would be a great time to be a young person in China looking for a job. But you would be wrong. In June of this year, the youth unemployment rate in China hit a record high of 21.3%. China promptly fixed this problem by no longer reporting this number so we have no idea how bad it is now.
How is it that China can have a demographic crisis that is crashing their working age population while at the same time having a high youth unemployment rate? The answer is simple. All those only children born as result of the one child policy were pushed to go to college by the same government that mandated that parents only have one child.
From the Council On Foreign Relations…….
For decades now, the Chinese government has encouraged university enrollment, pushing the number of students in higher education from 22 million in 1990 to 383 million in 2021. During the pandemic, it pressed even harder, expanding graduate-school capacity. Master’s-degree candidates rose by 25 percent in 2021. China’s Ministry of Education estimated that 10.76 million college students would graduate in 2022, 1.67 million more than in 2021—and it expects a further large rise in 2023.
383 million collage students currently enrolled in higher education is greater than entire population of the United States. Even for a nation as big as China, that is massive share of its young people to push through higher education. And for what? Do you need a collage degree to work on factory floor? Do you need a college degree to build a building? The point is, China is not producing near enough jobs that need college degrees (even taking an American HR departments view of what jobs “need” a college degree) to absorb all those college graduates.
The result is predicable. As the South China Morning Post delicately puts it….
Manufacturers and others are pointing to a growing mismatch between the jobs young people are looking for and the jobs that are in dire demand.
So the bottom line is that people with skills that China desperately needs can’t be found while at the same time a bunch of young people educated to sit at a desk can’t find a desk to sit at.
Anecdotally this problem is made worse by China’s culture. In America, it is common for young people to get a worthless degree and then go get a job in something that has nothing to do with that degree. They are not happy about it, but that is what they do. But in China it seems that going to school and being the first one in your family line to get a college degree makes it very shameful to then go work in a factory. So China’s collage graduates (often with the support of their families) seem very reluctant to face the fact that the degrees they got have no economic value and they have to look at jobs that they thought would be “beneath” them.
As was noted in the beginning, a lot of people focus on the bad things being imported from China to America. But it is a two way street and lot of bad ideas in America work their way into China and it seems like ideas that are bad in American seem to have an even worse impact in other countries. Overinvestment in higher education certainly seems to be an example of this. It is a big problem in America but it seems like an even worse problem in China.
But the more you look at China, the more this seems to be the rule rather than the exception. A lot of China’s problems stem from looking at what “success” looks like in other countries and deciding to copy that at an insanely rapid pace. They are now reaping the results of that in everything from demographics to skills gaps to overinvestment in real estate.