EconVue Spotlight September/October 2021: The Great Fall of China

posted by Lyric Hughes Hale on October 4, 2021 - 10:48am

In 2003 David Hale and I wrote an oft-cited article in Foreign Affairs, China Takes Off. Nearly two decades later, has China’s inevitable deceleration begun?

No country can escape the gravity of negative demographics. China’s recent census revealed a birth rate of only 1.3 which means that by 2066 China’s population could literally be halved. The panic that has resulted in the new 3-child policy is highly unlikely to succeed quickly. China will get old before it gets rich on a per-capita basis, although some would disagree citing offsetting gains from productivity and investment. Income inequality is an enormous drag on these hopes in the eyes of Chinese policymakers

Xi Jinping’s “Common Prosperity” is the fuel for a blitzkrieg of regulatory activity in China this year which is likely to continue into 2022. But the idea is really nothing new and in fact was boosted by Mao Zedong, but rooted in Chinese history. As we wrote back in 2003:

In 1979, Deng Xiaoping popularized the term xiaokang, which was first used in Shijing, a classic book of poetry from the tenth to sixth centuries BC. According to Beijing scholar Lu Shuzeng, xiaokang represents the concept of an ideal society that provides well for all its citizens—a poetic notion to which Deng set out to give an economic dimension.

Last week I went to Washington to speak at the National Association of Business Economists annual meeting to offer my views on what is happening in China today. You can listen to my remarks, along with my fellow speaker Leland Miller of China Beige Book. The key points I made:

  • The current promulgation of regulations across all sectors is unprecedented and is likely to continue until the dust settles on the 20th Party Congress next fall
  • The “three mountains” sectors, housing, healthcare, and education have been targeted due to their relative share of consumption
  • Any private enterprise that creates data on Chinese citizens will find that they do not own that data
  • Power shortages, which are nationwide, will materially damage GDP in 2022. Is the cause high input costs without the ability of the suppliers to raise prices?
  • Electrification and a movement away from carbon fuels in which we are self-sufficient will create more dependency upon China which has a monopoly on key commodity minerals. This is a major geopolitical pivot to Asia from the Middle East.
  • In spite of increasing government-to government tensions between the US and China, American businesses are persevering. According to a survey of US-China Business Council members, fewer than 2% on-shored during the pandemic, and 40% plan to increase direct investment in 2022. Supply chains are sticky.
  • Lack of in-person communications since the pandemic began, likely to continue until 2023, will impact both business and government. The risk of accidental conflict is rising.

China was no doubt taken aback that US policy has not changed since President Biden took office, and in many respects seems to be Trump 2.0. Leland teased during our session last week that a major announcement by the Biden Administration was upcoming. Today’s speech at CSIS by USTR Ambassador Katherine Tai, the can’t miss event of the China-watching season, did not disappoint. My takeaway was that far from repudiating Trump Administration trade policy, the new team at USTR is building on the Phase 1 agreement, enlisting the support of allies along the way. The new catch phrase: “durable coexistence”.

During out session we of course touched upon the Evergrande debacle and financial markets, and many other subjects. Deep appreciation to NABE for making our session (please click below) as well as all others available to non-members for the first time.

Research Links

Below you will find links to research by EconVue experts, economists, and authors who challenge the conventional wisdom.

EconVue Experts & Friends

September 21, 2000 / Institute of International Monetary Research

Tim Congdon says that end-year US consumer inflation will be over 5%, not the FOMC's figure of 3.3%
Tim Congdon

My main point remains, as before, that US policy-makers – and particularly the Federal Reserve itself – have under-estimated the seriousness of the inflation sequel to their fiscal and monetary measures against Covid-19.

September 13, 2021/ Federal Financial Analytics

Are Federal Reserve Banks Forever?
Karen Petrou

Reform of the Reserve Banks may thus prove inevitable if only because the Board needs twelve sacrificial lambs to save itself.

September 15, 2021 / The Lowy Institute reposted by Real Clear Defense

Semiconductors: The Skills Shortage
Elliot Silverberg and Eleanor Hughes

Indeed, China has struggled to fill hundreds of thousands of semiconductor engineering jobs despite an ambitious investment strategy in effect since 2014. Beijing reportedly still needs 400,000 more semiconductor employees to meet its stated targets.

The limiting factor on diversification of the semiconductor industry outside of Taiwan is talent, not money.

September 7, 2021 / 4sight Health

Gaming Payment at the Healthcare Casino
David W. Johnson

There is a significant market opportunity for enlightened health systems and insurers to step out of the shadows and embrace price transparency. It would be the beginning of a beautiful and productive relationship with consumers.

September 3, 2021 / Global American

DiDi and the Risks of Expanding Chinese E-Commerce in Latin America
R. Evan Ellis

Washington, its partners, and the Western private sector need to pay more attention to the threat posed by the growing presence of Chinese firms in the e-commerce market, and its potential to support China’s commercial (as well as political and military) advances.


September 16, 2021 / SupChina

Red New Deal or Raw New Deal? Unraveling China’s astonishing barrage of regulatory action
Kaiser Kuo & Jeremy Goldkorn

As the Chinese Communist Party gears up for 20th Party Congress in 2022, Beijing is implementing sweeping changes across a host of industries and parts of society

September 19, 2021 / South China Morning Post

China defends sweeping tech crackdown in meeting with Wall Street chiefs

Beijing’s regulatory crackdown has erased US$1.5 trillion from Chinese stocks amid a broader sell-off at its most extreme.

September 21, 2021 / Selected Wisdom

"The One Like One Share Initiative" - How China deploys social media influencers to spread its message
Clint Watts

The CCP goes multilingual, multi (social) media & multinational to shape global opinions

September 23, 2021 11:01 PM

Xi Facing Opposition on Different Fronts in Run-Up to Key Party Plenum
Willy Wo-Lap Lam

It is also clear that Xi is facing substantial if as yet unspoken opposition in the run-up to the all-important Sixth Plenum in November as well as the 20th Party Congress next year.

Hugely impactful if accurate, from a highly respected commentator on Chinese politics.

If you have only one hour to spend on China this week, I recommend this lecture by economist Barry Naughton, an expert in industrial relations in China at USCD.

October 1, 2021 Foreign Affairs

The End of China’s Rise: Beijing Is Running Out of Time to Remake the World
By Michael Beckley and Hal Brands

But if Beijing looks to be in a hurry, that’s because its rise is almost over. China’s multidecade ascent was aided by strong tailwinds that have now become headwinds. China’s government is concealing a serious economic slowdown and sliding back into brittle totalitarianism. The country is suffering severe resource scarcity and faces the worst peacetime demographic collapse in history. Not least, China is losing access to the welcoming world that enabled its advance.

Are we witnessing peak China, and simultaneously, peak America?

September 25, 2021 Forbes

Chairman Xi, China’s Looming Crisis, And The Myth Of Infallibility
Anne Stevenson-Yang

 A gray regulatory mist envelopes pretty much all private business and financial activities, making it easier for the government to force private parties to take losses—people always wonder if their investment broke some rule, and it always did.

A veteran China analyst explains that the strength we impute from afar might not be align with reality from within. My take: a weak China is a far greater risk than a strong China.

September, 2021 / Harvard Business Review

The Emergence of Mafia-like Business Systems in China
Meg Rithmire, Hao Chen

Understanding the particular moral economy that underlies mafia-like business systems and their interactions with the state challenges methodological foundations of research on China’s political economy and helps explain recent conflict between high-profile business people and the state.

Begs the question of whether our own tech sector has similar characteristics.

September 14, 2021 / Twitter

The Mad Mad Story of the Most Notorious Crypto Mining Mafia

There's a mad mad story about how the most notorious crypto mining mafia colluded with gov official in Jiangxi, screwed Genesis Mining, led to central gov in China cracking down on crypto mining, and caused the big dump on May 19th.

It is now obvious given power shortages one reason why crypto mining was corralled. What is surprising: China’s exit from cryptocurrencies (keeping in mind that central bank digital currencies are their evil twin) has not affected prices.

January 15, 2017 / Amazon

Chinese Naval Shipbuilding: An Ambitious and Uncertain Course (Studies in Chinese Maritime Development)
Andrew Erickson

Why nuclear submarines are the gold standard. Useful to understanding AUKUS.

Back in the U.S.A.

September 15, 2021 / Bloomberg

‘Just Get Me a Box’: Inside the Brutal Realities of Supply Chain Hell
Brandon Murphy

Logistics managers are battling the pandemic, a labor shortage, and huge demand to get goods to your front door.

September 19, 2021 / Vox EU

Skill-biased technological change and the demographic composition of the US military, 1979-2008
Andrea Asoni, Andrea Gilli, Mauro Gilli, Tino Sanandaji

There is a common perception that the US military predominantly recruits individuals from the most disadvantaged socioeconomic backgrounds with limited other career options. This column argues that this is no longer the case.

September 14, 2021 / the Lancet

Considerations in boosting COVID-19 vaccine immune responses

FDA officials dissent from White House; say booster shots NOT needed. Others say we should distribute vaccines to other countries first. So why are we going ahead?

Recent Podcasts: The Hale Report

EPISODE 19  |  64 mins
The New New Economy: How We Got Here & What’s Next
Robert J Shapiro

In Episode 19 of the Hale Report, Economist Robert Shapiro shares his insights on economic policymaking and the future of the US economy, and the dark side of globalization.

EPISODE 18  |  52 mins
On the Changing Geopolitical Role of the U.S.
Robert Madsen

In Episode 18 of the Hale Report, Lyric Hale interviews Robert Madsen, Senior Economist at Hale Strategic, and an EconVue contributor. They discussed China, Japan, South Korea, Taiwan, and US economic policy.  

EPISODE 17  |  46 mins
On Self-Driving Cars
Joe Atikian

In Episode 17 of the Hale Report, Joe Atikian discusses his new book, Autonomous, The Coming Crash of Self-Driving Cars.  Especially interesting in view of the news about the Tesla probe today.

Upcoming podcasts: Albert Bressand on Energy Diversification, and Richard Katz on Japan.

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