Can China deal with debts and property crisis? – Arthur Kroeber

 

Arthur Kroeber

China’s economy is dealing with some tough years, writes leading economist Arthur Kroeber, author of China’s Economy: What Everyone Needs to Know®, in ChinaFile, especially now that it does not have enough tools with debts and the property crisis like it did in the past. “So we need to brace for the consequences of the Xi model: slower growth in China, a big rise in Chinese technology exports, and more protectionism in the rest of the world,” he writes.

Arthur Kroeber:

China’s economic malaise results from a combination of political decisions, structural factors, and policy mistakes. The central reason for it is that Xi Jinping has decided to make national security and technological upgrading—not economic growth—his policy priorities.

The broadening definition of national security, and the increased influence of security interests in economic policy, have soured private investor confidence. The focus on technological upgrading has led to an economic strategy that relies almost exclusively on industrial policy. This means that the government devotes most of its attention to the supply side of the economy: boosting production of semiconductors, clean energy equipment, electric vehicles, industrial machinery, ships, and other products seen as needed to increase the country’s technological capability and self-sufficiency. Virtually no serious effort goes into figuring out how to unlock domestic demand—especially from households, which now save about a third of their income, one of the highest savings rates in the world.

These policies mean that China’s economy will have two faces in the coming years. The chronic shortage of demand will mean disappointing GDP growth—probably 3-4 percent on average over the rest of the decade—and a constant struggle to shake off deflation. But at the same time, its technology-intensive sectors will thrive, thanks to both government support and China’s uniquely competitive manufacturing ecosystem. The result will be persistent high trade surpluses and, probably, a strong wave of protectionism from countries that want to preserve their own industrial capacity.

This policy stance also makes it very hard for China to solve two of its biggest structural problems: the collapsing property market and the huge and growing debt burdens of local governments. The last time China faced a challenge of this scale was the late 1990s, when nearly half of all bank loans went bad. At that time, it responded with a combination of financial engineering to postpone the reckoning of bad debts, well-targeted infrastructure stimulus, and aggressive deregulation of manufacturing and housing which unlocked huge new sources of entrepreneurship and household demand. As a result, China grew out of its problems and by 2010 became the world’s second-biggest economy.

A similar approach today would recognize that deregulation of services—which account for more than half the economy, and all net new employment—is the main path to boosting consumer demand and accelerating economic growth. Too much of the service economy is either in state hands, or burdened by stunting regulations. But such a policy would conflict directly with Xi’s desire to keep the state’s finger on all economic levers. So we need to brace for the consequences of the Xi model: slower growth in China, a big rise in Chinese technology exports, and more protectionism in the rest of the world.

More views of other economists in ChinaFile.

Arthur Kroeber is a speaker at the China Speakers Bureau. Do you need him at your meeting or conference? Do get in touch or fill in our speakers’ request form.

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Continued stress on China’s fiscal system – Arthur Kroeber

 

Rating agencies have been lowering China’s rating. Renowned economist Arthur Kroeber, author of China’s Economy: What Everyone Needs to Know®, does not see an acute financial problem for the country, but costs for financing its debts will constrain its economic growth, not only for the quarters to come but for the next few years, he tells CNBC.

Arthur Kroeber is a speaker at the China Speakers Bureau. Do you need him at your meeting or conference? Do get in touch or fill in our speakers’ request form.

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How China’s leadership changed its contract with the people – Arthur Kroeber

 

Arthur Kroeber

China has entered a new era, where the communist party has changed its contract with the people, says economist Arthur Kroeber, according to Bloomberg. The new iteration? It’s called values-based legitimacy.

Bloomberg:

China’s recent economic performance and policymaking have prompted a slew of economists—Bloomberg’s included—to lower their estimates of the country’s trend growth rate for coming years. But don’t count on this to undermine the Chinese Communist Party’s grip.For decades, the CCP encouraged the idea that its legitimacy flowed in large part from stoking rapid growth. Deng Xiaoping, the Chinese leader famous for his “reform and opening up” mantra, declared that development is the “hard principle” driving policy. Year after year, China’s leaders have touted GDP figures showing how the party was delivering on this mandate.

Go back further than Deng and you’ll find a different contract between Beijing and its people. Mao Zedong’s initial version was ensuring the common people won the “class struggle” against land-owners and businesspeople (in part through mass killings).

These days, Xi is writing up another contract, says Arthur Kroeber, a China economist and founding partner at Gavekal Dragonomics. In a recent lecture, he said “there’s a fairly extensive propaganda effort going on to shift away from that old social contract,” in part to avert mass criticism of a slowdown in Chinese growth.

The new iteration? It’s called values-based legitimacy.

What are the components of this new contract? They include culture, history, nationalism and an anti-corruption drive aimed at easing concerns about rising inequality.

More at Bloomberg.

Arthur Kroeber is a speaker at the China Speakers Bureau. Do you need him at your meeting or conference? Do get in touch or fill in our speakers’ request form.

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Has China’s economy hit the wall? – Arthur Kroeber

 

Arthur Kroeber discusses recent economic schools on China

Leading economist Arthur Kroeber discusses China’s economic state and looks at the gloomy predictions from other economists. We do not have enough post-COVID-19 data to draw firm conclusions, he argues and goes on to take down three schools of gloom in current economic thinking about China’s future, at the Fairbank Center for Chinese Studies.

Arthur Kroeber is a speaker at the China Speakers Bureau. Do you need him at your meeting or conference? Do get in touch or fill in our speakers’ request form.

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2023-09-25

How the state gets grip on housing, education and health care – Arthur Kroeber

 

Arthur Kroeber

The Chinese state is extending its grip on previously private investments in different areas like housing, health care, and education, similar to its crackdown on tech sectors in the past, says leading economist Arthur Kroeber to Reuters. Investors now prefer to turn to those industries, as they have the state as a backup.

Reuters:

China’s recent sweep of the medical sector came as a shock to many investors who had thought the end of Beijing’s three-year regulatory purge of the property and tech sectors meant there would be no more industry-wide crackdowns as policymakers prioritised economic recovery.

Several government bodies in July launched a year-long anti-corruption campaign into the medical system, making clear that China’s drive to deliver affordable housing, education and healthcare to its masses was more important.

That forced many investors to quickly draw parallels with last year’s crusade against private tutoring and a long-running one against tycoon Jack Ma’s consumer finance firm Ant Group.

The one unanimous conclusion they came to was that Beijing wants a greater state presence in these sectors.

“The underlying principle is that healthcare is kind of like a social service that should principally be in state hands,” said Arthur Kroeber, partner and head of research at Gavekal in New York. Kroeber says the crackdowns are about “defining what the state does, what the private sector does, and creating a more limited sandbox for the private sector to play in.”

“This links to the idea of common prosperity because it’s the state’s job to guarantee a level of provision of basic services, whether it’s education or healthcare, so it’s important for the state to have a role,” he said.

That has left investors now picking the state over the private sector.

More in Reuters.

Arthur Kroeber is a speaker at the China Speakers Bureau. Do you need him at your meeting or conference? Do get in touch or fill in our speakers’ request form.

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Expect no massive stimulus in China – Arthur Kroeber

 

Economist Arthur Kroeber is not expecting a significant stimulus of China’s economy as the central government has done in the past. The government is instead hoping the economy will outgrow the current post-Covid-19 dip without massive intervention, he says at CNBC.

Arthur Kroeber is a speaker at the China Speakers Bureau. Do you need him at your meeting or conference? Do get in touch or fill in our speakers’ request form.

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Taking stock of the USA-China fight – Arthur Kroeber

 

Arthur Kroeber

The geopolitical arguments between China and the USA are developing fast. Renowned economist Arthur Kroeber takes the stock right now as US treasury secretary Yellen visits Beijing, for the NPR. How can two major economies disentangle if they rely so much on each other?

NPR:

SCHMITZ: It’s been four years since a U.S. treasury secretary visited Beijing. And in that time, relations between the U.S. and China have worsened considerably. For years, these two economies really needed each other. To what extent is that still the case?

KROEBER: I think that’s still enormously the case. You know, all-time – trade is at an all-time high, over $700 billion. You have a lot of U.S. companies that still rely on China as one of their major markets, both for volume and for growth. So there’s definitely been some chipping away in certain areas, notably semiconductors. But the level of interdependence is still extremely high.

SCHMITZ: And, you know, the U.S. has been trying to disentangle itself from China more recently, you know, reshoring supply chains, placing controls on semiconductor technology, as you mentioned, you know, keeping Trump era tariffs on Chinese goods in place. I’m curious, how do you think this has shaped how China interacts with the rest of the world?

KROEBER: Well, I think the Chinese have come to the conclusion that it is the purpose of U.S. policy not just to reduce its reliance on China but to slow down China’s growth and its technological development. So it’s made China a lot more suspicious than it already was of U.S. intentions. So it’s created that problem. It’s also encouraged the Chinese to ramp up the charm offensive to international companies both from the U.S. and from Europe, and in other areas because they want to continue large inflows of foreign investment and looking for companies to act as a counterweight against political pressure that’s coming not only from Washington but also from Europe as well.

SCHMITZ: You know, to what degree does reduced dependence between these two superpowers increase the risk of greater hostilities or even conflict between the two?

KROEBER: Well, if we really get to a point where the economies are significantly less dependent on each other, I think that is a problem. And if you look at two simple examples from the last two decades – we’ve had an extraordinary period of peace over Taiwan, which is kind of disputed territory. And one of the reasons for that is because the high level of economic interdependence between China and the U.S. and Taiwan means that the costs of China trying to solve that issue by military means are extremely high.

I think you can also see that in the Russia-Ukraine situation, that China has an alignment with Russia. They would probably like to do more to help them in the current situation. But they’ve been very, very cautious about staying away from exporting weapons to Russia, again, because of the costs, because of their high interdependence. So I don’t think we’re at a low interdependence level yet.

More at NPR.

Arthur Kroeber is a speaker at the China Speakers Bureau. Do you need him at your meeting or conference? Do get in touch or fill in our speakers’ request form.

The upside of China’s leadership changes – Arthur Kroeber

 

Arthur Kroeber

Many observers have been pessimistic about China’s recent leadership changes and the centralization under Xi Jinping. Still, renowned economist Arthur Kroeber sees a significant upside, at least for the short term. Also, what is Xi Jinping’s vision for the country’s economic development?

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China’s risk in the unlikely case of a US default – Arthur Kroeber

 

Arthur Kroeber

A default of the US is highly unlikely, even in the current chaotic political setting in the United States, says leading China economist Arthur Kroeber, but today the risks for China are much higher than during the 2008-2009 crisis. A crisis would not offer an opportunity to build an international financial system around the Renminbi, next to the US dollar, he adds in the ChinaFile.

Arthur Kroeber:

As in 2008-2009, a global economic meltdown would hurt China a lot. It would fare slightly better than most other countries because it runs a closed-off financial system that relies mainly on domestic savings, and is protected from the ups and downs of global financial instability by capital controls. But the impact of a U.S. debt default would still be devastating. In 2008-2009, the loss of trade finance and collapse in global demand sent China’s exports plummeting by nearly 20 percent, and upwards of 20 million workers lost their jobs.

Fifteen years ago, China’s government could respond by unleashing a massive debt-financed economic stimulus program, because the country’s debt level, at 140 percent of GDP, was relatively low and it still had significant needs for infrastructure and housing. Today, the space for maneuver is far narrower: debt has soared to nearly 300 percent of GDP, and both infrastructure and housing are seriously overbuilt.

Though severe, the economic consequences to China of a U.S. default would probably not be regime-threatening. Whatever pain the Chinese people were forced to suffer could rightly be blamed on outside forces. And in a pinch the government could still support a minimum level of growth by adding to its debt pile, since it would be borrowing from its own future, not from foreign creditors.

This leads us to the second question. If the U.S. defaults, could China create a substitute system, built around the renminbi? The short answer is no.

The U.S. treasury market is huge, and deeply intertwined with the rest of the world. (That’s why a default would be so bad.) There are $23.9 trillion in treasury bonds outstanding; foreigners hold $7.5 trillion, or 31 percent, of that pile; daily trading last year averaged $600 billion. In practice, this means it is easy for large companies and governments to hold treasuries in any amount, trade large volumes quickly, and easily obtain or dispose of as much collateral as they need for borrowing.

China’s government bond market is nowhere near big enough, liquid enough, or integrated enough with the rest of the world to substitute for U.S. treasuries. According to calculations by my colleagues, the total value of Chinese government bonds (CGBs) on issue—$3.3 trillion—is less than half the value of U.S. treasuries held by foreigners. The foreign holdings of CGBs are a mere $340 billion, one-twentieth of the country’s treasury holdings. The daily turnover of China’s government bond market is $30 billion, about 5 percent of the treasury market average.

After the 2008-2009 crisis, because it decided it was too dependent on the dollar-driven global financial system, China tried hard to internationalize the renminbi. Its efforts have borne little fruit. The renminbi accounts for just 2.8 percent of global official central bank reserves (compared to 60 percent for the U.S. dollar and 20 percent for the euro), a figure that has not changed much in the past several years. Similarly, it makes up just 2.4 percent of global trading in foreign exchange.

China has failed to internationalize the renminbi for the same reason it is relatively insulated from global financial shocks: capital controls. Bringing money in and out of China still requires permission from Beijing. From the Chinese government’s point of view, this is good. When economic conditions worsen in China, it is hard for Chinese citizens to take their money out and park it abroad. And by limiting the amount of money foreigners can bring in to China, and controlling the conditions under which they can take it out, Beijing reduces the risk that a global financial panic leads to a damaging outflow of foreign investor capital. As a result, Beijing does not have to work so hard to maintain domestic financial stability.

More in the ChinaFile.

Arthur Kroeber is a speaker at the China Speakers Bureau. Do you need him at your meeting or conference? Do get in touch or fill in our speakers’ request form.

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How Xi Jinping tries to balance between control and growth – Arthur Kroeber

 

Arthur Kroeber (right)

Leading economist Arthur Kroeber, author of China’s Economy: What Everyone Needs to Know®, discusses how China’s leadership balances between control and economic growth, looking at the zero-Covid policies and the property crisis at the Fairbank Center for Chinese Studies and the Harvard Kennedy School Rajawali Foundation Institute for Asia.

Arthur Kroeber is a speaker at the China Speakers Bureau. Do you need him at your (online) meeting or conference? Do get in touch or fill in our speakers’ request form.

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The upside of Xi Jinping’s centralized grip on China – Arthur Kroeber

 

Arthur Kroeber

Many analysts took a negative view of Xi Jinping’s more centralized grip on China’s policies, but leading economist Arthur Kroeber looks at it differently, at least in the short run. Major problems like the zero-covid approach and the downturn of property have already benefited from Xi’s more coherent approach, Kroeber says at the Starr forum at MIT.

Arthur Kroeber is a speaker at the China Speakers Bureau. Do you need him at your (online) meeting or conference? Do get in touch or fill in our speakers’ request form.

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China’s real problem: too low productivity – Arthur Kroeber

 

Arthur Kroeber

China’s real economic problem: they increase capital spending, but are not able to improve productivity that is already at a shockingly low level, says leading economist Arthur Kroeber, author of China’s Economy: What Everyone Needs to Know®, at a panel at CSIS discussing with Thomas Orlik, Chief Economist for Bloomberg Economics, and author of the book, China: The Bubble That Never Pops. While an economic collapse is unlikely, a grinding halt to economic development might be its largest danger, Kroeber adds.

Arthur Kroeber is a speaker at the China Speakers Bureau. Do you need him at your (online) meeting or conference? Do get in touch or fill in our speakers’ request form.

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What makes China’s economic growth tick – Arthur Kroeber

 

Arthur Kroeber

Leading China economist Arthur Kroeber discusses the basis of the country’s economic growth and its relations with the US, at a panel of the Brown China Summit. Kroeber “explained that China’s alignment with Russia is an effort to erode the current U.S. global order in order to create more space for the two countries.”

The Brown Daily Herald:

Kroeber opened the discussion by explaining that Chinese economic growth is motivated by “improvements in the labor force, increases in capital and increases in productivity.” In recent years, the trajectory of the labor force and capital has been “going into reverse, and … (the Chinese government’s) obsession with top-down control is not ideal for productivity growth,” he said…

The panel also discussed the global economic and military repercussions of China’s potential involvement in the Russia-Ukraine conflict. “I think there’s a belief among many Chinese leaders that … the United States is hostile and they’re very powerful, but they’re also in decline,” Kroeber said. He explained that China’s alignment with Russia is an effort to erode the current U.S. global order in order to create more space for the two countries.

“From a long-term strategic perspective, it is hard to see this as anything other than a big mistake by China,” Kroeber added. “Its economic relationship with Russia … is very narrow and based on resources.

“Over a five to 10 year period, this (alignment) will probably come to be seen as a pretty major error of judgment,” he concluded.

More at the Brown Daily Herald.

Arthur Kroeber is a speaker at the China Speakers Bureau. Do you need him at your (online) meeting or conference? Do get in touch or fill in our speakers’ request form.

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How China changed between the Olympics of 2008 and 2022 – Arthur Kroeber

 

Arthur Kroeber

Leading economist Arthur Kroeber looks at how China changed between the Olympics of 2008 and 2022 at the US Council of Foreign Relations. The role of the state, while it has always been strong, did become more emphasis on the economy and business relations, he tells at the forum.

Arthur Kroeber is a speaker at the China Speakers Bureau. Do you need him at your (online) meeting or conference? Do get in touch or fill in our speakers’ request form.

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