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October 11, 2023: For most Chinese, the state of the economy is their major concern. China is currently dealing with a housing bubble debt crisis, rising unemployment and inflation and continued slowing of economic growth. Economic growth continues to decline - it is now under two percent a year and getting worse. That means more unemployment and lower living standards for most Chinese. A decade ago it became clear that the purported years of ten percent GDP growth were ending, assuming they were ever true at all. Not just because economic growth was slowing but because the central government was finally forced to go public, for the first time, about the false economic data that provincial officials had been sending to the central government for decades. Since 2014 Chinese officials have become more open about the problem as they have been getting accurate economic information for such things like annual GDP and unemployment rates. Apparently Chinese GDP has not been growing steadily at nearly ten percent a year for decades. Chinese officials do eventually, as in months or years later, get more accurate data. Chinese GDP has actually been steadily growing over the last three decades; the annual growth has actually varied from 5-15 percent. Chinese official policy was to keep everyone calm by issuing less variable annual growth rates. In short, the official numbers were doctored. For more accurate and immediate indicators of economic activity Chinese and foreign economists and business leaders use things like electricity production, railroad traffic and similar data that cannot be manipulated by local officials to make their city or province look more successful. Many financial experts inside and outside China fear that all this official manipulation of economic data, an ancient practice in China, is masking some serious economic problems that could go sideways at any time and cause a banking crisis that would paralyze the economy for a while and cause political chaos. It’s very much a crouching tiger and hidden dragon situation. This is an ancient phrase warning that behind seeming success and talent lurks the possibility of imminent disaster. Chinese are ever mindful of this sort of thing.

A major cause of recent financial difficulties was the lack of government bank supervision that enabled risky practices to proliferate. This led to overbuilding and the inability of builders to sell their surplus housing. This led to major real estate default that had a negative impact on the entire economy. The major real estate firms involved are Evergrande and Country Garden. Government efforts to prevent a debt default by government owned banks and enterprises that hold much of this bad debt were ordered to tolerate delayed overdue payments on this debt. This damaged the viability of the banking system and a slowdown in investment in the economy.

All this was made worse by new political problems. Supreme leader Xi Jinping made himself “leader-for-life” and now screens or makes all key economic solutions. Xi isn’t an expert in economics or aware of the complexity of the Chinese economy or historical examples of similar situations. Back in the 1980s China adopted a market economy and shed most of its socialist (state ownership of everything) responsibilities. China was still ruled by a nationalist dictatorship government that left the economy alone and for a while that worked. There was a growing problem with corrupt CCP officials that eventually did more damage than anyone could cover up. This means that foreign investors or companies that want to move manufacturing operations to China are instead moving their existing manufacturing facilities out of China and often to smaller nearby countries that have fewer economic and political problems.

Xi Jinping hasn’t come up with a workable solution for all this yet. One reason for this lack of action is problems in the Chinese military taking up so much of his time. This is mainly about corruption, which went all the way to the top, as in the defense minister who was recently removed and replaced. It’s more difficult to deal with the many corrupt generals and admirals. All this corruption weakened the military. Finding enough honest junior officers to promote is difficult and time consuming. This is a critical situation for the CCP because Chinese soldiers and officers take an oath to defend the CCP which, in turn, is responsible for doing what must be done to rule the country effectively. After some reforms in the 1980s, the new relationship between the CCP, the military and the economy worked for a few decades until it didn’t. Crippling levels of corruption in the Chinese government, military and economy are nothing new and now the bad-old-days have returned. It requires a major political effort to turn this around and such efforts are often unachievable. Most wealthy Chinese know this and many have, at great expense, obtained foreign passports and moved some of their assets overseas as a form of insurance against another government collapse and possible civil war. That’s been the way China has worked, and malfunctioned, for thousands of years. The CCP is seen as just another dynasty that prospered for a while and then failed.

Chinese leaders pay attention to the thousands of years of Chinese history and cycles that continue to repeat.

 

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