China and the Middle Income Trap

 We have to keep an eye on China; it may end up exporting deflation to the West which could have several negative impacts on us - but what about China?

China’s property crash is becoming more dangerous by the day

The country’s ticking time bomb economy is nearing the point of detonation

AMBROSE EVANS-PRITCHARD17 August 2023 • 7:21pm

Xi Jinping faces an invidious choice between hurling credit at his deformed economy or biting the bullet and risking a depression CREDIT: REUTERS/Tingshu Wang

China’s financial system is one step away from a full-blown crisis. Unless radical action is taken to stem contagion through the shadow banks and halt the contractionary slide in demand, China risks tipping into a classic liquidity trap.

Cai Fang, a rate-setter at the central bank, has called for a $550bn blast of helicopter money – or high-powered QE injected into the veins of the economy – in order to stop a deflationary psychology taking hold as frightened households retrench.

“The most urgent imperative now is to stimulate consumer spending. It is necessary to use all reasonable, legal, and economically viable channels to put money into people’s pockets,” he wrote on China Finance 40, the opinion forum of the elite.

This increasingly feels like the make-or-break moment faced by the US Treasury in 2008 after Lehman Brothers collapsed, or faced by the eurozone in 2012 when the doom-loop threatened to engulf Italy and Spain. 

America and Europe acted in time, after a string of errors. 

It is far from clear that Xi Jinping has recognised the destructive mechanisms at work in China, or that economists in the West are alert to the global dangers through multiple channels of transmission, starting with an exchange rate shock. 

The yuan has fallen to a sixteen-year low against the dollar. The East Asian currency bloc is falling in tandem, pushing the euro trade-weighted index to a record high. 

The effect is to bludgeon a eurozone economy already in a deep industrial recession. The cheaper the yuan, the greater the tsunami of Chinese electric vehicles, machinery, or wind turbines, heading for Europe.  

Westerners emerged from the pandemic with windfall savings, thanks to furlough schemes. 

The Chinese endured draconian lockdowns for three years with far less support. The damage has undermined the finances of millions of small family businesses. A large chunk of the population has slashed spending in order to rebuild depleted savings. 

It is the immediate reason why the post-pandemic rebound has already fizzled and why the economy has tipped into deflation. 

The deeper reason is the painful unwinding of the great Communist debt bubble, an episode uncannily similar to the debt woes of the late Qing dynasty. 

The giant developer Country Garden, with total liabilities of $200bn, is days away from default after missing payments on dollar loans issued in Hong Kong. 

Ting Lu and Jing Wang from Nomura estimate that the company has already received payment for a million properties that have yet to be built. 

Like other developers relying on China’s “pre-sale” model it depends on a constant flow of new buyers to cover old debts.

The buyers have dried up. The CRIC Research Centre says sales in July by the top-100 developers were just 30pc of levels three years ago. 

“We believe the Chinese economy is faced with an imminent downward spiral with the worst yet to come,” they said, warning that half-hearted tinkering by the authorities so far will not stop a wave of defaults and chain-reaction through the economy.

“In our view, Beijing should play the role of lender of last resort to support major developers and financial institutions in trouble, and should play the role of spender of last resort to boost aggregate demand,” it said.

China’s $60 trillion property edifice is by far the largest asset class in the world. 

It accounts for half of the world’s entire property sales, an astonishing figure given that China’s workforce is already contracting and net migration from the countryside has stopped.

The developers have debts of $5 trillion. By comparison, this is six times greater than America’s $800bn subprime property debt on the eve of the Lehman crisis. 

They rely heavily on the $3 trillion “trust” segment of the shadow banking nexus known, which has no lender of last resort. These trusts are starting to blow up. The $140bn Zhongzhi Empire is the most disturbing casualty so far. 

The property bubble is the Ponzi scheme that keeps China’s local governments afloat. 

They rely on property for 38pc of total revenue, mostly from land sales. These sales have collapsed. The finance ministry says local government income fell 21pc in the first half of 2023. 

This must lead to a severe fiscal squeeze unless Beijing comes to the rescue with a huge stimulus package stimulus. The signs are that Xi Jinping is still reluctant to do so. 

His allies have published a media note entitled “Clarifying the Eight Misconceptions about Expanding Domestic Demand”.

Xi faces an invidious choice. Hurling credit at the deformed Chinese economy every time the sugar rush fades and the economy slows is what has led to this colossal mess, but biting the bullet risks an economic depression and a crisis of legitimacy for the Communist Party. 

His immediate reflex is to silence unpleasant statistics. Youth unemployment data has been suspended after the rate jumped to a record 21pc.

A Beijing professor thinks the rate is nearer 46pc once you include those “lying flat”, the Chinese term for dropping out, living at home, and sponging off grandparents (four per child) to while away the day with friends in coffee shops. 

The Party’s first mistake was to ignore warnings by premier Li Keqiang a decade ago that China risked falling into the middle income trap if it clung too long to a catch-up model of state-led construction.

The second mistake was to launch a political purge against business bosses and turn away from Deng Xiaoping’s outward-looking economics, the motor force of China’s revival. 

The third was to revert to economic Leninism, thinking that 2008 was a systemic crisis of US-led capitalism and a validation of Party control over credit. 

The fourth was to pick a fight with the liberal West before China was close to economic parity.

The evidence is in. The growth rate of total factor productivity has fallen to the levels of mature economies before China is mature. 

The country is no longer on the same trajectory as Japan, Taiwan, and Korea at a comparable point of development. The nail in the coffin is an 87pc fall in foreign direct investment last quarter, the lowest level since records began in the 1990s. That is Xi’s legacy.

Capital Economics thinks China’s (true) trend growth will drop to 2.8pc over the late 2020s. If so, China will not surpass the US this decade, and will then fall back as the demographic decline gathers pace.  

China denies vehemently that it is succumbing to ‘Japanification’. 

In my view, it will be lucky to do as well as Japan. It has the same pathologies of boom-bust deflation and vanishing workers, but is further blighted by totalitarian leaders with a deep fear of the free market. 

Unlike Japan, it has angered the West and must now contend with strategic reshoring and a hi-tech blockade.

Joe Biden calls China’s economy a “ticking time bomb”. 

My presumption is that Xi Jinping will not let it detonate on his watch. At some point he will blink and take drastic action to shore up the property market and the shadow banks, putting off the day of reckoning for another cycle. 

If he does not, the global financial system is in for a dangerous denouement this winter.

Pensions - a long way off for you, much more of interest to me:

 

The number of people receiving a state pension has risen by 130,000 to 12.6 million

ALAMY

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Britain will spend more on old-age pensions in two years’ time than on education, policing and defence combined, official figures show.

Pension costs have risen sharply for years because of the government’s “triple lock”, the mechanism by which pensions rise by whichever is higher of the annual increase in average earnings, inflation or 2.5 per cent.

Last year, pension costs increased by £6 billion to £110 billion. By 2025 they are expected to have ballooned to £135 billion, a figure £2 billion more than the combined day-to-day budgets for the Department for Education, the Home Office and the Ministry of Defence, Times analysis shows.

• The big question: Should the pension triple lock be scrapped?

The departments receive separate funding for capital projects, to be spent on investment or future growth. A government source said: “That’s the cost that comes with protecting the old. They can’t get jobs, most people can, for many it’s their only sole source of income.”

But experts said that the triple lock was becoming “unsustainable” at a time of huge planned budget cuts across Whitehall over the next five years.

A third of people do not believe the state pension will exist in 30 years’ time, with those who voted Leave in the EU referendum and 2019 Tory voters feeling most pessimistic, according to polling by the Institute for Fiscal Studies think tank (IFS) and Abrdn Financial Fairness Trust.

The rise in pension spending is in part due to the ageing population, with the full impact of the late 1950s/early 1960s baby boom not yet having taken effect. Between April 2026 and 2028 the state pension age will rise to 67, and the plan is to raise it further to 68 between 2044 and 2046. However, a review is due.

A second government source said there was little that could be done to ease the cost in the short-term and that future decisions would be a “problem for the next government”. In the year to August 2022, the number of people receiving a state pension rose by 130,000 to 12.6 million.

Sir Steve Webb, the former Liberal Democrat pensions minister, said that as well as pension spending increasing, NHS and social care spending would rise to deal with the higher health costs of looking after more elderly people. He suggested ministers would eventually be forced to raise taxes.

He said: “Pensioners are a protected group electorally, so the state pension gets protected. The NHS is a kind of national religion and is protected. And therefore everything else gets squeezed.”

Webb said defence, schools and working-age benefits had already suffered but added: “The time will come when none of those things can be squeezed anymore, and that’s when the crunch really comes.”

The triple lock led to the state pension increasing by 10.1 per cent this year. Both main parties have committed themselves to keeping the triple lock until 2030.

Both Lord Hague of Richmond, the former Tory leader and Times columnist, and the IFS have said the triple lock is “unsustainable”.

The Tory peer Baroness Altmann, a former pensions minister, said: “I don’t think the triple lock is a sensible policy.”

She proposed a “double lock” based on inflation and earnings but said money could also be saved by raising the number of years of national insurance contributions needed to qualify for a state pension.

Currently that is set at 35, but Altmann said this could be increased to 45 with those without a full record being eligible for a proportionate amount based on their contribution. “It would save money but still retain the principles that are so important to the system,” she said.

The IFS/Financial Fairness Trust research found that 15 per cent of people did not expect to retire until their seventies, and 13 per cent did not expect to retire at all. The survey also showed that 47 per cent expected to be less comfortable than their parents. Those aged between 50-64 were among those who believed they would be less well off than their parents, despite their parents on average having accumulated much less wealth than them.

The IFS has said that if the state pension age rises as planned, the share of those over state pension age would rise from 24 per cent today to 27 per cent in 2050 and then to 30 per cent in 2070.

But Altmann said governments would simply have to accept that the state pension bill would continue to rise. She said: “Unless you’re recommending euthanasia or mass poverty for elderly pensioners, how else would you do it?”

Rel

This might reduce anxiety about the cost of renewables - and global warming

 

Britain’s pathetic defeatists are cowering as China runs away with the clean-tech revolution

Our leaders risk losing a years-long lead in the energy race by clinging to obsolete technology

AMBROSE EVANS-PRITCHARD1 August 2023 • 2:09pm

Even Sir Tony Blair has been gaslighted into thinking that net zero imposes a ‘huge burden’ on Britain CREDIT: Stefan Rousseau/PA Wire

Et tu, Sir Tony Blair? For a man who moves in the highest levels of global statecraft, our éminence grise is remarkably out of touch on the geo-economics of the energy revolution. He falls for every fallacy of yesteryear.

After reading his New Statesman interview I am forced to conclude that he does not understand the elemental threat staring us in the face: that clean tech will entirely change the global economic system, not at some distant date but this decade; and that China is currently (but not irreversibly) running away with the great prize of the 21st century.

Any country that ducks this challenge and props up an uncompetitive legacy system will lose its economic footing and slide into irrelevance. Such a course is akin to opting out of the early industrial revolution, sticking to horse-power as others embrace the steam engine.

The Sunak government is dangerously close to going down this route.

I have no problem with its confetti of drilling licences for oil and gas. It is better to produce gas in the North Sea rather than to import liquefied natural gas (LNG) derived from fracking in West Texas, with horrendous methane leakage, and added CO2 emissions from liquefaction and shipping.

Local production reduces the insidious wealth loss of the UK’s structural trade deficit, but the scale is marginal and will not move the needle on oil and gas prices in the UK.

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The North Sea is mostly depleted. It has a high cost of extraction. Capital markets are unfriendly. Who will invest, knowing that Labour intends to reverse course?

My concern is that this Government is losing the plot on the much more important future of clean tech, carelessly undermining the greatest British success story of the last 15 years.

It has imposed a discriminatory and retroactive surtax on renewable companies that risks killing the goose that lays the golden egg. 

It has surreptitiously halved the UK’s effective carbon price, which plays to the worst caricature of Brexit and will lead to a showdown with the EU over level-playing clauses.

The surprise is that even Sir Tony has been gaslighted into thinking that net zero – i.e. upgrading to better technology – imposes a “huge burden” on this country.

He remains stuck in an outdated mental universe, seeming to regard green energy as a pious luxury for rich Western states while the rest of humanity belches out carbon because it must, incapable of remediation without the white man’s charity.

This North-South schema is a poisonous canard, a legacy of COP quarrels long ago. It is archaic.

Greenhouse emissions in the OECD states peaked 15 years ago. They peaked in Latin America 10 years ago. They peaked in Saudi Arabia, Thailand, and South Africa some five years ago. They are peaking today in China, Vietnam, Indonesia, and Egypt.

The later that countries reach the CO2 inflection point, the steeper the decline thereafter. 

The pace of decarbonisation is quickening for pure market reasons as new renewable power undercuts new fossil power in regions covering 90pc of the world’s population.

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Energy experts Ember estimate that wind and solar added 557TWh to the world’s electricity system last year, covering 80pc of the total rise in global power demand. 

This year they will top 100pc. Thereafter they will eat into existing coal and gas power.

This switch no longer has much to do with net zero. Nothing can compete with solar below $20/MWh (£15.60/MWh).

Other sectors are following this technology S-curve, one by one. 

The next wave of cheaper EVs for the mass market will achieve purchase price parity with petrol cars circa 2025, and widen the lead on lifecycle costs. The pace will quicken as solid state batteries quadruple EV driving range circa 2030.

Sir Tony says the extra CO2 emitted by China each year is more than the UK’s entire annual emissions. 

This was true in the metal-bashing heyday of the construction bubble but that era is over forever. Ageing China is ditching its exhausted catch-up model and is moving up the ladder to a mature economy.

The country released 10.55 gigatonnes of CO2 last year, a fraction less than the year before. Lockdowns undoubtedly distorted the figures but emissions will go into steep descent after 2025 for mechanical reasons.

The International Energy Agency estimates that China alone will account for 55pc for the world’s roll-out of wind and solar power in 2023 and 2024. 

This vast expansion across the empty deserts of Inner Mongolia and Gansu is being matched by 8 million EV sales this year – two-thirds of the global total – which helps to balance the grid.

The Chinese firm CATL, king of lithium batteries, is building the world’s largest gigafactory near Chengdu using zero-carbon hydro power. 

Benchmark Minerals says China will soon have a 95pc share of the next generation of heavier sodium-ion batteries, which do not need lithium, cobalt or nickel, and which open the way for cheap home-energy storage on a mass scale.

Nothing so confuses the Western debate on net zero as China’s coal expansion. 

The point to understand is that a) Xi Jinping has ordered 1GW of new coal plants for every 6GW of renewables as back-up power, so the two go hand in hand; b) that the levelised cost of coal power in China is $74/MWh compared to $34/MWh for onshore wind (BNEF data), and cannot compete; and c) that the regime is building redundant coal capacity as an insurance policy.

It fears that the US could cut off maritime gas supplies in a future conflict. It was also traumatised by blackouts in 2021 and 2022. If these plants are ever used, they will mostly sit idle.

S&P Global says capacity use was 70pc in 2000s, 53pc last year, and will fall to 26pc by 2050 as they are converted to peaker plants, and most will have carbon capture by then.

The larger point is that Britain needs green energy rearmament as a matter of national economic survival. It is not clear to me where Sir Tony discerns his huge burden, or how Lord Hammond conjures his £1 trillion bill for net zero.

A joint report by the International Monetary Fund and the IEA concluded that decarbonisation will halve energy costs worldwide from 4pc to 2pc of disposable income by mid-century.

It said a rapid switch to clean tech raises global economic growth by 0.4pc a year this decade, and is therefore a gain, not a cost.

It cuts average household energy and fuel bills from $2,800 to $2,300 a year by 2030 in advanced countries, and is even better for the world’s poor – the cheapest way to reach 800 million people with no electricity.

This is an unstoppable global juggernaut. It does not require lavish state spending. 

Markets are already doing the job with the right regulatory signals. The more that the British establishment succeeds in keeping the old order going for a bit longer by sending the wrong signals, the greater the damage to UK’s clean-tech leadership, and the greater the risk that this country will exclude itself from the prime growth accelerant of the next 40 years.

Sir Tony Blair laments that Brexit is an economic dead end. The utterly disastrous dead end is if the UK loses its nerve and clings to obsolete technology. He should watch his words.