China; the new Japan

Let’s start with the big picture. 

Over the 40 years or so since Deng Xiaoping, China made a historically remarkable leap from widespread poverty to industrial prowess. Other countries have gone through this cycle, of course, but none so large and certainly not so fast.

This had many global effects, including a massive boost to commodity demand. A growing but resource-constrained China imported vast amounts of energy and raw materials, which were then transformed into infrastructure, housing, and most of all exports to the West, often at prices low enough to render others uncompetitive.

Chinese creativity, resourcefulness, and an impressive ability to “scale,” combined with what used to be cheap labor gave them a massive Ricardian comparative advantage.

China transformed internally as rural farm workers took factory jobs in gleaming new cities. Living standards improved, at least near the coast, further boosting consumer goods demand. 

The nominally Communist government seemed to be seeking a new path of “communism with Chinese characteristics.” 

The regime seems to be learning that banks, left to their own devices, often get overextended. Particularly when they don’t have the kind of guardrails and institutional memories we do in the West, and particularly when they are encouraged and indeed incentivized to do so by local governments. 

Xi’s solution is to let the weak banks fade away while positioning the big state-owned banks to take a bigger role.

But the problem with bad debt is you can’t make it disappear; you can only move it into different hands. To an autocratic leader, this makes sense. Keep the potential problems under close control. 

But Xi has much bigger problems than real estate loans. 

Total debt in China—government, corporate, and household—is now approaching 300% of GDP.

Many families own 2 and 3 homes, which they see as a kind of savings account. This is not unlike the US in the housing bubble. 

One difference, though, is that many Chinese families only have one child. It isn’t unusual for the parents to own two homes and for the child to own one or even two homes. Savings, you know?

And for 30 years, housing was indeed a form of savings, until now it’s not.

That’s bad enough. But in the grand scheme of things, China has even bigger problems.

China’s Japanification trend has been underway since the Great Financial Crisis years, and by this measure recently became worse than that of Japan itself.

Japan became an export juggernaut; so did China. 

Japan had a real estate bubble; so did China. 

Japan’s bubble popped; so is China’s.

John Mauldin 25 October 2024

https://www.mauldineconomics.com/frontlinethoughts/broken-china

Deng Xiaoping ran China despite having no formal title other than Most Honorary President of the Chinese Bridge Association

Deng visited Singapore in November 1978

Singapore did not inspire him because of its level of development. If that were his priority, many cities in Japan or the West would have impressed him more.

Singapore was special because it represented the achievement of an estranged relative. Nowhere else outside China was there a country with ethnic Chinese in its majority.

Lee Kuan Yew var det självständiga Singapores förste premiärminister mellan 1959 och 1990.

https://englundmacro.blogspot.com/2024/06/deng-xiaoping-ran-china-despite-having.html