Update on China

 

Ghost cities, fleeing millionaires: China’s rudderless economy

President Xi’s obsession with security and party control is hobbling tech companies and scaring off the foreign investment the country so badly needs

Ian Williams

Sunday July 21 2024, 12.01am, The Sunday Times

Asia

China

Economics

Technology

Xi Jinping

If economic growth was measured by the output of empty slogans, then China would surely be booming again. There will be “high-quality development” and “innovation vitality” to “comprehensibly deepen reform” and achieve “national rejuvenation on all fronts”, the Chinese Communist Party (CCP) declared at the end of a key meeting last week aimed at rebooting the country’s ailing economy.

All this under the leadership of “supreme reformer” Xi Jinping, who was hailed as the heir to a modernising predecessor, Deng Xiaoping — even though his principal achievement since coming to power in 2013, 16 years after Deng’s death, has been to put “reform and opening” sharply into reverse.

That era of change is over and the economy is rudderless and beyond reform — and Xi is the biggest obstacle to change.

President Xi has been in power since 2013

WU HAO/EPA

As the grey men (and they are overwhelmingly men) of the CCP’s central committee gathered, economic sentiment was dismal. The five-yearly meeting — the “third plenum”, in party speak — was delayed from last year, amid rumoured wrangling over how to tackle mounting economic problems. It coincided with figures showing a sharp slowdown in growth and continued falls in property sales and prices. Soaring youth unemployment, plunging levels of inward investment and widespread signs of social stress, including a spike in protests, all added to the gloom.

China’s National Bureau of Statistics cancelled a news conference that usually accompanies new data — perhaps wary of warnings from the Ministry of State Security, the country’s main spy agency, that gloom about the economy is a foreign smear and that “false theories about “China’s deterioration” are being circulated to attack its “unique socialist system”.

It is not as though Chinese officials do not see the problems with the country’s economic model — “unco-ordinated and unsustainable”, in the words of China’s last premier, Li Keqiang. This model, and the heady rates of growth that used to accompany it, was heavily reliant on cheap exports and on massive and wasteful state-led investment in property and infrastructure, which sent debt soaring amid diminishing returns.

A building frenzy has left China littered with ghost cities containing 60 million to 100 million empty or incomplete homes. Property accounts for up to a third of the economy, and CCP efforts to reinflate the bubble have fallen flat. A recently announced $42 billion (£32 billion) fund to buy up empty apartments is a fraction of the $533 billion that developers estimate is needed to finish housing they have sold to buyers and then failed to complete. Companies accounting for 40 per cent of China’s home sales have defaulted — an army of zombified firms that will not be put out of their misery for fear of social unrest.

Local governments, which depended on land sales to developers for a substantial share of their income, have run up debts of more than 66 trillion yuan (£7 trillion), equivalent to half of China’s GDP. They have resorted to desperate measures to boost their coffers: almost all traffic fines issued in Hebei province in northern China in 2023 were exposed as bogus, while a local government in the southwestern province of Guizhou had a local contractor arrested after she demanded the full payment of an invoice for building schools.

It’s widely agreed that Chinese consumers need to spend more, since private consumption accounts for just 39 per cent of the economy — extremely low by world standards (the figure in the US is 68 per cent). But with 80 per cent of family wealth tied up in property and no meaningful social safety net, they are reluctant to splash out.

Officials also talk of creating a self-sustaining innovation economy to turn China into the world leader in cutting-edge technologies. They want to move from an economy based on copying and applying western technology — re-innovation, as it has been dubbed — to one driven by home-grown tech. Ever since Deng launched China’s reforms in the late 1970s, obtaining foreign know-how by all available means has been central to modernising the economy and military, spawning industrial-scale cyber-espionage and the forced transfer of technology as a routine price for doing business in China.

This strategy is no longer so easy, amid growing western restrictions on technology transfers and heightened wariness over Beijing’s espionage and high-tech tie-ups in business and academia.

Yet the most effective way of encouraging domestic innovation — giving more sway to the market and to private companies — has been thwarted by Xi’s obsession with security and party control. He has hobbled China’s most innovative technology companies, which have faced tightening restrictions. Leading entrepreneurs have been forced out of the companies they founded; many, including Bao Fan, one of China’s most famous and respected financiers of tech deals, have simply disappeared amid vague accusations of corruption.

Last year, China led the world in the number of millionaires leaving the country, according to the Henley Private Wealth Migration Report. The party’s tightening grip, increasingly in every boardroom, lab and classroom, hardly seems conducive to innovation or reliable science.

BYD cars are readied for export. China spends billions subsidising its electric vehicle industry

GETTY

In the medium term, Xi hopes that renewable-energy tech can replace property as a new motor of growth, and mouthwatering subsidies have been thrown at industries ranging from solar panels to electric vehicles (EVs) and batteries, leading to massive overcapacity and vicious price wars. Between 2009 and 2023, China spent $230.8 billion supporting its EV industry alone, according to estimates from America’s Center for Strategic and International Studies.

Yet the benign international environment that accompanied China’s earlier export splurges has gone; both the US and EU have imposed hefty tariffs on Chinese EVs that, they allege, are being dumped at below cost.

Meanwhile, China has become a hostile place for overseas businesses. Last year, direct foreign investment into the country fell to a 23-year low. Even China’s most enthusiastic corporate cheerleaders in the West appear to be having doubts; Apple, for instance, is quietly diversifying its supply chains away from China. “Resilience” has become the watchword in western boardrooms, with the Ukraine war exposing the danger of over-dependence on autocrats with hostile ambitions. Foreign companies have never enjoyed a level playing field, and the days when they would put up with almost any indignity for a share of the mythical China market are fast disappearing.

A building frenzy has left China littered with ghost cities stuffed with empty or incomplete homes like these in Huai’an, Jiangsu Province

GETTY

Top western business leaders are due in Beijing this week to meet officials in an effort to understand what the latest pronouncements mean. Good luck with that. The loosening of political control necessary for real economic reform to take root is contrary to everything Xi stands for. Under his leadership, the use of trade, investment and market access as weapons of coercion has become routine, belying the platitudes of reassurance from the third plenum — a meeting that can best be seen as a requiem for the era of reform and opening.

Ian Williams’s new book, Vampire State: The Rise and Fall of the Chinese Economy, is to be published by Birlinn on September 5

Useful look at the implications of tight fiscal rules:

 Wine club

---

Appointments

---

Times Bookshop

---

Authors

---

ANDREW SENTANCE

It’s time to stop thinking public borrowing is a bad thing

If government borrowing is inhibited by so-called fiscal rules, we can be denying the opportunity to invest in transport and other essential infrastructure

Andrew Sentance

Monday August 19 2024, 12.01am, The Times

Despite the change of government, one thing has not altered when it comes to government economic policy. Before the election, Jeremy Hunt was determined to rein in public borrowing and to stick to his self-imposed fiscal rules. Now Rachel Reeves, his successor, is just the same.

Before the election, no commitments could be made by Reeves and her colleagues unless they were “fully funded”, that is there would be no addition to public borrowing. This paranoia about additional borrowing has continued as Labour has moved from opposition into government.

On July 29, our new chancellor made a statement that allegedly uncovered a £22 billion “black hole” in the public finances. Despite subsequent analysis suggesting that half of this addition to the deficit was down to the chancellor’s own decisions, closing this “black hole” and reining in borrowing is likely to feature significantly in Reeves’ first budget on October 30.

Underpinning all this concern and anxiety is the notion that public borrowing is a “bad thing” to be avoided at all costs. This idea has been a damaging notion permeating British politics for many years. It is time to knock it on the head.

In the private sector, borrowing generally is regarded as part-and-parcel of a healthy economy. Businesses need to borrow to fund investment and to finance new initiatives. Households need to borrow for a mortgage to buy a house or to fund other large purchases. We rarely question whether this is a good thing or not.

Indeed, the most recent episode when excessive borrowing caused serious economic problems was the 2007-09 global financial crisis, driven by excessive bank lending to the private sector. In other words, private borrowing, rather than public borrowing, has been a bigger source of economic instability in recent times.

So why are we so preoccupied with high public borrowing? The answer lies in the mists of time, nearly 50 years ago. In the 1970s, the government borrowed too much and this led to an economic crisis in the mid-1970s, with Britain forced to go to the International Monetary Fund for financial support in 1976.

The scars of that experience run deep in our national psyche. We received a reminder of this episode when Liz Truss’s government came to power and appeared to be taking an irresponsible financial course. The economic and financial problems created by Truss and Kwasi Kwarteng, her chancellor, in 2022 were short-lived, but they were a reminder of the difficulties that can be caused by bad decisions on public finances.

In some countries, there have been recent crises in which the lack of public sector financial discipline has played a part in creating broader economic and financial problems. Greece and the euro financial crisis in the 2010s come to mind, as well as Argentina and the troubles of other South American states. But these are countries that have little in common with Britain.

In a country like the UK, which has run broadly sound economic policies for more than 300 years, the key issue is to maintain the confidence of financial markets. This means ensuring that the international and domestic financial markets will buy government bonds because they have confidence in the economic policies of the government in power. If that financial confidence is maintained, the exact level of public borrowing or debt is not a significant issue.

Clearly, it helps if the government in power follows some basic rules. In normal times, the level of public borrowing should be kept at about 2 per cent to 3 per cent of GDP, what I would describe as the “safety zone” for public finances. That has been the case on average since 1948-49, when UK public borrowing has averaged 2.8 per cent of GDP. In today’s values, this would mean a budget deficit of £60 billion to £90 billion.

It also helps if public borrowing is used to finance investment rather than current spending over the longer term, which is a principle the new chancellor supported in opposition. But these are guidelines, not “fiscal rules”. If these guidelines are turned into iron-clad fiscal rules, they can become a straitjacket that prevents sensible economic policy decisions.

There will be times when public borrowing should be allowed to breach these limits. Recent examples when this has happened are during the global financial crisis of 2007-09 and in its aftermath, while the pandemic in the early 2020s placed strains on public finances that could not be accommodated by normal “fiscal rules”. In these circumstances, higher-than-normal borrowing is needed to keep the economy stable. The broader stability of the economy is more important than slavish adherence to a fiscal rule.

Denis Healey was chancellor when British had to turn to the International Monetary Fund

PETER CADE/CENTRAL PRESS/HULTON ARCHIVE/GETTY IMAGES

I am not advocating an uncontrolled splurge of public borrowing, Instead, we need a more flexible approach that allows the government to borrow when it is sensible to do so. If government borrowing is inhibited by so-called fiscal rules, we can be denying the opportunity to invest in transport and other essential infrastructure necessary to support the future growth of the economy.

Nor am I arguing for an unsustainable build-up of public debt. The economy has coped with varying levels of debt. Over the postwar period, our public debt-to-GDP ratio has fluctuated between 30 per cent of GDP and 250 per cent and at present is at 90 per cent to 100 per cent, close to the long-term average for the past 300 years. There is no economic theory that can dictate the ideal level of public debt, but if public borrowing is properly controlled, then the level of public debt normally will take care of itself.

I doubt if these words of advice — to be more flexible about public borrowing limits — will appeal to Reeves. She is likely to see more flexible fiscal rules as diluting the control of the Treasury over her spending colleagues. It is so much easier for the Treasury to insist that proposal X or policy Y will breach Treasury fiscal rules, rather than having a reasoned argument in cabinet on its merits.

So we are probably stuck with rigid and restrictive fiscal deficit and debt rules under this government. Sound economic arguments for more pragmatism and flexibility about the level of public borrowing are, sadly, likely to go unheeded.

Andrew Sentance is an independent business economist and a former member of the Bank of England’s monetary policy committee

Article on Belt & Road - failings of:

 

Kenyan train to nowhere reveals China’s debt trap diplomacy

Work has long since stopped on a Belt and Road project to connect Kenya and Uganda Jane Flanagan

,

Great Rift Valley

Goats are free to graze at the end of the unfinished railway line in Suswa

NATALIA JIDOVANU FOR THE TIMES

Since Chinese engineers routed a $4.7 billion railway through the Kenyan village of Emurutoto, residents no longer worry about being cut off by flooding. Or being hit by a train.

After soaring over their valley on vast concrete pillars, the tracks stop dead in a maize field. Goats graze on weeds between the concrete sleepers, and the railway bridge has become a multimillion-dollar walkway.

Emurutoto has done well out of China’s African investment project, which promised to connect the Kenyan port in Mombasa to neighbouring Uganda, and far beyond.

Local incomes had relied on small-scale farming or the nearby town of Duka Moja (which means “one shop” in Swahili) before the Chinese arrived in 2016, and set up camp.

Samuel Kiseentu, who at the time was a goatherd, was taken on as a labourer. “After some months I had savings for this,” he said, patting the motorbike beneath him.

There were hundreds of jobs for locals who benefited from a new dirt road and extended water pipes. Farmers with land along the route were given three million Kenyan shillings ($18,114) per acre in compulsory purchase agreements.

“Life became better here,” said Isaac Shonke, 30, who was trained as a steel fixer and made enough money to have his children to schooled privately.

Isaac Shonke did well — for a time — from the construction project

NATALIA JIDOVANU FOR THE TIMES

By 2017, the first half of the Kenya-Uganda line was operational, though losing money. In April 2019, work in the Great Rift Valley stopped. As alarms were raised about the mounting costs of the line, and secrecy around borrowing terms between Beijing’s banks and other African countries struggling to repay debts, China balked at financing the final 200-mile stretch linking Nairobi to the border with Uganda.

The single most expensive infrastructure project in Africa had become a case study in China swamping poorer nations with colossal debt. “The managers told us there was no more money to finish, and they went,” Shonke said.

The Times’s arrival in the village drew a small crowd asking for news that work would start again. A watchman living in rusting tin huts with his family had stuck around since the Chinese departed. The spoils of a three-year building flurry that had sucked investment away from basic services were dwindling.

Most of those gathered said they had never seen a train, let alone the huge, pristine station 15 miles up the tracks at Suswa, where rolling stock is plastered with slogans boasting prematurely: “Connecting Nations. Prospering People.”

Passengers on the 55-mile journey back to Nairobi were in festive mood. It was the last day of term and children on primary school outings were crammed into seats that cost 150 Kenyan shillings (91p) for a child’s day return.

The Nairobi to Suswa train was intended to continue on to Uganda but work has stopped

NATALIA JIDOVANU FOR THE TIMES

For a few miles near Mai Mahiu station, the train runs parallel to the century-old line built by the British, which was known as the Lunatic Express for its huge cost to both the Westminster government and a workforce preyed upon by disease and lions.

Kenya had deliberated for years on whether to renovate the old railway or invest in a new one. A report by the World Bank was among many that said the route chosen in the 1890s was still the best and recommended upgrading the existing network. But a new one with a wider gauge was settled on, designed, funded and built by China with no competitive tendering. A stretch of the old line is now being untangled from the bush to get cargo, offloaded on to older rolling stock, to the Ugandan border.

Children on a train from Nairobi to Suswa

NATALIA JIDOVANU FOR THE TIMES

The Chinese train leaves the Great Rift Valley through the Ngong Hills. East Africa’s newest and longest tunnel helps to explain why the line runs at such a great loss. The darkened windows draw alarmed wailing and prayers before the carriage emerges, its inhabitants cheering and blinking, on the other side. In another engineering phenomenon, the train is soon soaring over Nairobi National Park along a four-mile bridge high enough for a giraffe to comfortably pass underneath.

As the sun lowers on the capital’s skyline, someone shouts: “Elephant!” It is not clear whether they mean a white one.

Win-win? Xi’s project has had mixed results

If one policy is synonymous with President Xi’s China, it is the Belt and Road Initiative (Richard Spencer writes). Descriptions are awash with the Chinese Communist Party’s favourite slogans — “win-win co-operation” and “China meets the world” — but its underlying ideology is Xi’s.

The initiative poured huge sums of China’s surplus foreign exchange holdings into potential trade partners, particularly those in the global south. State-led by both Chinese and partner governments, it would also involve private enterprise and the market economy.

The “win-win” was obvious. Countries short of cash would receive an infusion of investment, while China would have faster access to natural resources and bigger potential markets for its manufacturing industries.

The side-effects would also, Xi hoped, be useful for China. It would show off Beijing as an alternative “hegemon” to the United States and its western allies — and one that did not ask questions about human rights. It would also confirm the potential of China’s state-led economic model, a more attractive proposition to many governments than the West’s present insistence on privatisation.

Belt and Road has undoubtedly had some successes. Chinese companies have built ports in Latin America and railways in Indonesia. Trade has flourished. Three quarters of Brazil’s soybeans, for example, are now exported to China, the quantity more than doubling in eight years.

However, just as the Chinese economy has had a poor few years — particularly since Covid-19 exposed flaws in Beijing’s “command, control and no questions asked” system of government — so Belt and Road has also had problems. Kenya’s financial crisis, in part owing to debts incurred on Belt and Road projects, is one example.

Other countries were also taken aback by the unsentimental approach of their Chinese partners. Loans were handed down with tough terms, often disguised from voters by secretive contracts.

In Sri Lanka, a port built with Chinese money could not repay the debt and was eventually leased to a Chinese company instead. As Sri Lanka fell into a broader debt crisis, China was blamed, though its loans were only a tiny fraction of the total.

With Chinese banks wondering how many projects would offer a return on their money, and governments growing wary of the leverage China now had over them, the scheme began to wind down, or at least focus on smaller projects.

As with much of Xi’s legacy, many Chinese people are proud of Belt and Road’s results, but it is not only the Chinese Communist Party’s western critics who have noticed cracks starting to appear.

Some good arguments about what the UK is good at (for essays)

 

The fashion and textile industry supports 1.3 million jobs

It’s high time to get creative

Any industrial strategy should not overlook one of our top national assets, says David C. Stevenson

Over the next few months there will be an animated discussion about the role of industrial strategy in boosting GDP. But the current obsession with investing in things you can touch and build might cause us to overlook what, in policy terms and growth terms, make Britain great: creative products and services.

Take steel as a contrast, and consider the following statistics. The UK steel industry, championed by MPs and think tanks, exports goods worth between £3.5bn and £4.5bn per annum, while the British music industry – with no political champions – exports between £2.5bn and £3bn annually. 

The steel industry employs between 30,000 and 35,000 people directly. If we include indirect employees, the figure rises to 50,000-60,000. The music industry employs 190,000-200,000 people. And music is just one big part of the wider UK creative industry. The creative economy employs two or three million people, and has been growing at a terrific rate in recent years. It makes up 5%-6% of gross value added, a gauge of output used by productivity-focused economists. 

The creative sector is also key to trade. Creative exports typically account for around 10%-12% of the our total exports of services, with the UK ranking as one of the top exporters of creative goods and services globally, usually in the top five countries. Exports of creative goods and services increased by 150% between 2010 and 2017. One crucial last aggregate measure: 90% of the value of exports from the creative industries is produced domestically. The creative industries are self-sufficient and focused on the domestic economy, yet they have a significant positive impact on trade.

A boost for the local economy

As we dig a bit deeper into the various subsectors, this vital role becomes even more obvious. Take the film and television sector, which employs 180,000-200,000 people. According to the British Film Institute (BFI), an industry body, the combined spend by film and high-end television production (HETV) in 2023 reached £4.23bn, 32% down on 2022 (due to Covid and a writers’ strike), but almost level with pre-Covid output. 

Of that, the lion’s share was “contributed by HETV shows with £2.87bn, or 68%, with feature film production contributing £1.36bn, or 32% of the total spend… Inward investment and co-production of films and HETV shows combined delivered £3.31bn, or 78% of the combined production spend, [demonstrating] the UK’s global reputation as the world-leading centre for international film and TV production”. 

Another recent report from Knight Frank observed that films with a £60m-£100m budget generate more than £750,000 in daily spending, and those with budgets over £100m generate over £1m in daily spending. The slight fly in the ointment is that 70% of film and TV studios are in the southeast and London alone. And those big numbers could grow much bigger. 

An optimistic estimate by Knight Frank sees film production spending reach £8.7bn in 2028, which would require 2.6 million square feet of additional TV and film studio space. The upshot is that we are now mid-way through a boom in new studio construction in London and the home counties. The top ten schemes underway in 2023 and 2024 involve the construction of at least 160 sound stages and a total rollout of a staggering 3.77 million square feet.

Some schemes, though, are facing local opposition. One big project in Marlow has already been halted. Buckinghamshire Council has denied permission for a proposed film studio at Marlow quarry. The BBC says that during a “meeting at the Strategic Sites Committee, concerns were raised that the site was an inappropriate development for greenbelt land and would have a significant impact on the local road network”. 

Councils pursue studios

Still, many other councils are jumping at the chance to host big studios. That’s partly thanks to all that local spending I mentioned earlier, but mostly it’s a matter of simple logic. Film studios are big-box sites that realistically are only likely to be used for one of three purposes: a logistics and distribution warehouse, a data centre, or a film studio close to the M25 and an airport. 

The first involves lots of jobs, many of which are relatively poorly paid. The second is vital for the UK economy to keep up in the world of artificial intelligence (AI), but it doesn’t involve many jobs (just lots of imported Nvidia chip sets). The last involves a lot of highly paid, highly skilled workers, many of whom might want to live locally. 

And of course, film and TV are just part of a broader creative-services economy. Alongside music, there’s also the UK’s other great crown jewel – its gaming sector, which directly employs tens of thousands of very highly paid workers, with estimates often ranging from 20,000-30,000 direct employees, but maybe indirectly reaching as much as 40,000-50,000. 

Exports are also at roughly the same scale as the music industry’s at about £2bn-£3bn per annum, powering a huge export drive into the US. We should also not forget the crucial importance of another part of the creative industry – the fashion industry. According to the UK Fashion and Textile Association, the fashion and textile industry in the UK supports 1.3 million jobs, one in every 25 jobs in the country.

Talk to bosses in all of these subsectors, and they tend to offer the same narrative. UK governments have, to their credit, been innovative in encouraging inward investment. In the film industry, the recent initiative for UK independent films involving a 53% production credit on their expenditure wins many plaudits, yet it only applies to films with budgets up to £15m. 

Likewise, the gaming sector has benefited from generous tax credits, but the Treasury keeps huffing and puffing about the credits and threatening to rip up the rule book. TV, which helps power much of the creative sector, largely misses out on these generous schemes. 

Two key difficulties

Two topics keep popping up in industry forums. The first is business rates. Film studios pay huge amounts in rates, with some facing 600% increases in recent years. Rumours abound that at least one major studio development is being canned because of those costs. One insider says the problem isn’t with the government as such, but with a quango called the Valuation Office Agency, which many accuse of hampering development. 

But skills also matter. The broadcasting trade unions, for instance, complain that huge numbers of freelance workers are underemployed. The issue is the quality of training. There are too many low-quality, media-based courses, and not enough on-the-job skills training. There is too little funding for further education, yet sustained demand for skilled vocational training. It’s wonderful that universities are churning out experts in media studies, rather less encouraging that we don’t have enough highly skilled game developers.

What makes that problem much worse is that, bar a few exceptions – the e-games segment in Dundee – too much of this highly skilled work takes place in the southeast, east and, to a lesser degree (in TV) the north west. If ever there was an argument for levelling up, it would be in the creative sector. Studies have shown that there are creative clusters in Oxford, Bristol, Edinburgh and Sheffield, along with as many as 709 micro clusters around the UK, in places as diverse as Carmarthen in Wales and Louth in Lincolnshire. 

Maybe the sensible thing to do for a new government focused on speeding up growth is not to spend hundreds of millions of pounds on single-place, mega-scale manufacturing facilities that sound “important”, but employ a relatively small number of people. Focus instead on creative clusters and sectors using lots of skilled, well-paid people whose offerings sell well worldwide. It’s time to create creative enterprise zones.

MoneyWeek