FT takes a look at ‘end of the Chinese miracle’

In what is a first on this blog, I need to point out that this is a sponsored post. I was contacted by an agency to watch and blog about the following video. However, the opinions and observations expressed are my own.

Produced by the Financial Times, “The end of the Chinese miracle” makes a bold point – the stunning growth of the Chinese economy is over, mainly because the average wage of Chinese factory workers has increased significantly, companies can no longer rely on cheap labor which has previously been the backbone of the Chinese economy. Migrant workers make up most of the workforce in the Chinese manufacturing industry and are responsible for making much of the goods that are exported, such as computers (maybe the very one you’re using now), TVs or shoes. Driven by poverty and lack of jobs at home, these workers come from provinces all over China to work in factories in the more prosperous, industrial coastal provinces. One could say China’s economic “miracle” of the past 15 years is heavily due to these migrant workers.
Now, China’s economic development has meant that younger migrant workers have bigger expectations, especially for salaries and work conditions, which is not surprising because who wants to work 6-day weeks for minimum wages at repetitive tasks, and factories are finding it harder to find workers.

Now, while rising wages may be a good thing for workers and suggest the economy is doing well, the issue is this comes amid a slowing economic growth for China, negative global economy, and an aging Chinese population which actually suggests the opposite. Rising wages means more companies are relocating from China to poorer countries like Vietnam or Bangladesh, with the number being expected to grow in the coming years.

However, there are Chinese companies which are now doing something that sounds strange for a country with 1.2 billion – bringing in foreign workers, such as from Vietnam to work in China. Many of them are smuggled across, as a woman says, to work in factories. There is an interview with a Vietnamese man who worked in a factory in China’s Guangxi autonomous region, which borders Vietnam, for 12 hours a day, but without any contract. Back on the home front, a Chinese migrant worker who returned to his home village says there are alternatives at home like farming or running a small business.

It’s an interesting video that shows how the times are changing for China’s migrant workers and maybe it is not such a bad thing for them, though it will have an adverse effect on the world economy.

The FT also has a features section on China’s migrant workers and their impact on the economy.


China focus moving from praise to concerns

It’s no secret that the global economy is in some trouble. There has been a lot of bad news in the US, Europe, Japan and emerging markets, experts are making dire predictions about a repeat of the 2008 crisis and banking, stock market and housing crashes, and so on. But the biggest news is China and its economic slowdown, which is generating major headlines and alarming predictions like this. These aren’t the only problems the world is facing, as you also have environmental issues, refugees and wars, but for this part of the world (East Asia), the economy might be the most serious one, with China’s slowdown affecting almost every single country in the region and its own regions Hong Kong and Macau.

China’s slowdown has led to a shift in what had been a major story for years – the “rise of China.” This is a story that had been told in countless books, articles and expert analysis, with some proclaiming China would overtake the US and become the world’s biggest economy within decades. I never fully believed this, even in my pro-China days (or I should say, years), but I was optimistic that China would keep rising back then. Now though, for the past year (perhaps longer), its mighty economy is unraveling with stock market crashes (yes, plural since it has happened at least 3 times since last June), yuan devaluation, capital outflows, factory closures, export and import declines, and property price falls.

Personally, I also feel, and maybe my pessimism is a little out of hand, that the economic crisis is also leading to the end of another big theme – the “rise of Asia” story in which the 21st century will be that of Asia’s as the West loses its dominance and importance. China’s “rise” and “dominance” isn’t even unprecedented because decades ago, similar things happened but on a smaller scale such as the rise of the Asian tigers (South Korea, Taiwan, HK, Singapore) and the perception that Japan might soon overtake the US. Nevertheless the latter did not happen and Japan ended up in a prolonged economic slump whilst still remaining a very developed nation. Meanwhile, among the tigers, Taiwan isn’t doing very well and HK faces serious socio-economic and other problems. India is being seen as the new China because of its strong growth and giant population, but I’d say it won’t become a developed nation anytime soon, at least not before it fixes its serious infrastructural, political, social and cultural problems.

But anyways, back to China. The problem would be serious enough even if it was only about the economy, but the government is taking it further by ramping up crackdowns, censorship and basically becoming more repressive, not to mention carrying out its dirty work beyond its borders like the kidnapping of the HK booksellers. China is even expanding media censorship to cover economic news, specifically negative news about its economy. In the South China sea, it has been militarizing its islets whilst lashing out at other countries like the US and Australia, the latter ironically for increasing its military spending. You’d think a country with such dire domestic problems should spend more time fixing them rather than picking arguments with its neighbors and stepping up tensions.

For people who live in East Asia or are interested in China, Asia, or global economic matters, I suggest keeping a closer eye on major news and events this year, especially regarding China.


China cracks down on rights lawyers while locking down stock market

China’s increasing repressiveness took another dark step over the weekend when it arrested and detained over 100 human rights lawyers and activists, branding them as criminals who organized disturbances and spread false online rumors. It is as preposterous as it sounds but the government doesn’t care. The strongly worded accusations mean the state is seriously intent on silencing the lawyers and activists.

These arrests were also the latest in a series of arrests of journalists, activists and academics that worsened last year. The arrests of the lawyers and activists took place across 15 provinces and major cities, starting with a Beijing law firm that has defended high-profile prisoners like Uyghur economist Ilham Tohti who was sentenced to life last year. The majority of them were released by Monday but the repercussions are still to be determined as the state will certainly follow up with heavyhanded measures that may include putting some of these lawyers on trial.

As if this wasn’t enough, there’s also a small matter of a stock market crisis that came to a head last week.
China also faced down a massive two-week drop in its stock markets last week with desperate measures, launching new rules and orders and measures to free up credit and investment. The Shanghai stock exchange had risen 150% since the beginning of the year, only to drop by 30% from the middle of June.

Nothing worked until the government made over 1,400 firms, up to half of all listed companies, stop trading while declaring an investigation on “malicious” short-sellers and having police visit the securities regulator. The authorities also ordered major shareholders to stop selling shares of their companies for 6 months and basically banned brokerages from selling shares while urging them to buy. All these measures worked because on Thursday the market (Shanghai and Shenzhen exchanges) rebounded by over 5%, then continued to rise Friday and Monday.

However, if you’re thinking that some of these moves don’t really make sense, such as ordering half the market to halt trading and preventing companies and traders from selling their shares, you are right. WSJ listed 5 peculiar (dodgy) things about the stock market meltdown.
The government’s intervention seemed effective but at a cost. The central government showed it has a lot of power in what they can do when they want and however they want. But with its almost daily intervention and desperation, it also showed it has little credibility.

It also doesn’t fix the problems with the stock market which had been rising rapidly since earlier this year despite overvalued stocks and companies with sketchy business operations and revenues.

The stock drop also raised fears about China’s economy, with some people saying it was even worse than Greece’s continuing economic woes for the global economy. The truth is China’s economy is in trouble and the stock market crash would only exacerbate the problems, not cause them.

I know I criticize and complain about China a lot but going beyond personal bias, there are some really negative things going on in this country and the crackdown of over 50 lawyers and activists even at a time of serious economic problems really causes me to wonder about the near future.


Taxi talk and China links – debating Shambaugh, scary economic troubles

Like my last post about a bunch of China links that were mostly not about positive news, I’m afraid this post is similar. But first, let me start with a story involving yet another talkative taxi driver on the way to work.

The week before this past week, while China’s annual “two sessions” legislature were going on, I took a taxi to work and while stuck in traffic, asked the driver if he was paying attention to the government’s announcements. Definitely not, he replied. “Why? Isn’t it important?” I asked. “It sounds important, but it doesn’t mean anything,” he continued. And then he gave me a great saying: “說的不做,做的不說!”  It means something like they (the government) won’t do what they say and they won’t say what they do, which is an excellent way to sum up how the authorities operate here.
Suddenly, the driver went on an agitated rant about the two sessions about the Americans, Canadians and British present who should stay out. I listened for a while before I realized with relief he was referring not to foreigners, but to Chinese who had gotten foreign passports but were at the gatherings – many wealthy Chinese and officials’ relatives have gotten foreign citizenship. “I don’t know what the hell these people are doing here in China They’ve gone overseas, how can they deal in our country’s affairs!” he said. “Yeah, these representatives weren’t chosen by the people,” I said. “That’s right, I didn’t choose them!” he replied. It’s a pity my Chinese wasn’t adequate enough to understand fully when he went on to say how he thought the “representatives” should have been chosen by the people. A truly badass guy, too bad my ride ended before we could talk more.


In my last post, I linked to a stunning piece that predicts China’s ruling party is going through its final stage. The article generated a lot of controversy and debate, because the author David Shambaugh is a top China expert who’s written several books on China and even as recently as last December, was attending a party school conference in China.

A group of academics and journalists got together to debate the article on Chinafile and their responses are interesting, as expected, and varied, some agreeing, others disagreeing. I thought Howard French’s view has the most merit – the easy part of China’s growth is over, and the country faces myriad challenges. French doesn’t think the party will collapse as Shambaugh predicts, as it’s hard to predict how China will cope, but he doesn’t think it’s out of place.

I think China’s main troubles will stem from the economy. What made previous predictions about China’s probable decline wrong or inaccurate was that China was going through economic growth rates of 10% and its economy seemed unstoppable. This meant that major problems like urban-rural and regional inequality, environmental pollution, and widespread corruption could be endured and overlooked. Growth slowed to a low of 7.5% last year and is expected to decrease further this year, which means the country cannot do the same and will go through tougher times.

Adding some heft to the economic gloom is Anna Stevenson-Yang, a noted China expert, entrepreneur and industry analyst who runs her own investing advising firm. She warned about the poor state of the Chinese economy a few months ago and her presentation “The deflationary bust and beyond” has some scary stuff on the country’s finance industry, crippling debt and widespread industrial overcapacity and false statistics such as whether China’s retail industry could really be as big as the US when US consumption is much larger than China’s. It’ll be one of the more interesting Powerpoints (in PDF format) you’ll ever read.

The NY Times has an indepth look at the troubles of a property developer Kaisa that was in danger of defaulting on $50 million in bonds in January and is still in trouble. The article of Kaisa’s rise and fall also shows how Western banks, hedge funds and other financial firms benefited from Chinese real estate, no matter how dubious. The company had a spectacular rise that included a dubious deal over a high-profile Shenzhen tower that resulted in a stormy court case in China, but which foreign investors completely ignored.

That’s not to say all the experts out there are pessimistic about China. Economist Jim O’Neill (famous for coining the “BRIC” term while at Goldman Sachs) is very bullish on China, though his reasons for being so seem general, while this Australian academic believes China will be able to “muddle through” and do well as it has been doing for the past few decades.


The bluntest take on China’s mounting problems

In one of the most straightforward interviews on China I’ve ever read, Anne Stevenson-Yang, a director at a research firm with almost 30 years of experience in the country, gives a blunt and dire take on China and its problems. It’s far more dire than the usual news and views about China, though the slowing property market and economy have raised concerns.
What’s good is she goes beyond that such as calling out international media for being too one-sided with their portrayal of Xi, who’s perceived as powerful and confident.

Her first point is extremely straightforward – “China, for all its talk about economic reform, is in big trouble.”
This, she says, stems from massive overinvestment in infrastructure and industrial overcapacity, which then led to rises in bad debt and credit growth.

However, the most impressive point is when she says Chinese economic data is tremendously inaccurate, to the extent that the economy might be one-third smaller than what it’s recorded as. This is in stark contrast to the hyped coverage over the recent IMF data that states China is the world’s top economy (by purchasing power parity and not exchange rates), which she disparages.

Interviewer:  How bad can the situation be when the Chinese economy grew by 7.3% in the latest quarter?Stevenson-Yang: “People are crazy if they believe any government statistics, which, of course, are largely fabricated.”

Regarding the Chinese home market, she has this to say (which does explain a bit why prices are skyhigh in major cities).
“The Chinese home real estate market, mostly units in high-rise buildings, is truly bizarre. Many Chinese regard apartments as capital-gains machines rather than sources of shelter. In fact, there are 50 million units in China that are owned but vacant. The owners won’t rent them because used apartments suffer an immediate haircut in value. 

It’s as if the government created a new asset class that no one lives in.”
The interview also covers capital flight, which has been very significant, and why China’s massive foreign exchange holdings are not that impressive a tool. It’s a very interesting read with a lot of points that may seem obvious but which are not often presented in media coverage of China.

She’s a well-known Western expert on China, but she’s also married to a mainlander, first arrived in the country in 1985, and knows a lot of party officials and leaders (which does make her criticisms seem very daring), so she clearly has strong connections to China.


How strong is China?

China is a rising power, or so it seems based on a lot of what we read and hear. It’s definitely rising but is it actually a power? And how strong is it? Frankly it’s not that strong in a lot of areas, but don’t take my word for it. This impressive article by well-known China scholar David Shambaugh makes a convincing case for why China is not so formidable by going through a lot of areas like military, economy, diplomacy and culture. It’s a long read but very direct – Shambaugh doesn’t hold back on his arguments (but the article is not a diatribe or rant by any means).

Shambaugh does something that many people don’t seem to do when looking or talking about China – judging in terms of quality rather than quantity. What Shambaugh says about China’s economy – ” As in other areas, it is quantitatively impressive but qualitatively weak.” – can easily be said for many other aspects of China. When it comes to statistics, China is indeed the undisputed champion – its 1.3 billion-strong population, its 7-percent plus economic growth (even in bad years like this one), its giant army, its insatiable thirst for natural resources etc. But behind the numbers are a reality that show a different picture, as Shambaugh’s article illustrates. As will spending some time in regular society on the mainland.

About China’s military, this feature article boldly calls it “a paper dragon” and then goes into detail to explain why so. It has several strong arguments including the antiquity of much of China’s planes and tanks, the lack of professionalism in much of the ranks and the lack of strategic allies. Just like Shambaugh’s article, this one goes beyond the numbers and looks at the PLA in terms of quality and capability.

This doesn’t mean China is a weakling but that it is nowhere near as powerful and close to being a superpower – I do think it might be an economic superpower – it is no. 2 in the world and has much more room to grow- but it has many serious defects and burdens that prevent it from being as dominant and powerful as many would think.


The “shadow” over China’s economy

I don’t know what came over me last weekend, as mostly all that I could think about was China’s economic problems and writing a post about it. The thoughts didn’t come out of nowhere though, negative stories about the economy have been a big part of my workload for the last couple of months.

China’s economy is going through a rough period and there are signs of major troubles with key sectors such as property and finance. There’ve been a lot of dismal numbers, such as economic growth in the first quarter of this year having slipped to 7.4 percent, the lowest in 18 months. Yet it’s not numbers that’s worrying but fundamental problems with the economy. has this article that likens the current problematic state of China’s economy with Japan’s two decades ago, right before Japan suffered a property crash, and consequently went into an economic decline and stagnation that it still hasn’t really recovered from over two decades later. It’s an intense read that goes into detail about several problematic aspects of China’s economy such as housing bubble, cheap credit, and shadow banking.

China’s leaders aren’t foolish, which is why this current leadership has been pushing the message of reform for a long time now. More reform is definitely needed, tough measures need to be taken (for instance letting sketchy companies go bankrupt rather than bail them out), and problems should be tackled rather than swept aside or allowed to continue (the article above talks about this).

The biggest problem is property, which is a major part of the nation’s economy, providing the majority of local government revenue and taking up the majority of bank lending. For a long time, there’s been talk of a property bubble and there’re fears it’s right around the corner. In the first quarter of this year (Jan-Mar), property sales are falling significantly, even in first-tier cities like Beijing, to the point that some developers are offering big discounts on new homes. The vice-chair of a major developer was caught making some dire remarks about this. There are too many homes and offices being built, with seemingly every single mainland city and town in a construction boom in the past decade, prices are sky-high, home sales are lagging, and developers are having problems with cash flow, especially as banks have tightened lending.

Problems with the property market lead to problems elsewhere, which brings us to shadow banking – non-bank lenders such as trusts, leasing companies and money-market funds, with even state-owned enterprises and shipbuilding companies getting into the act (see the article above). These companies often lend to smaller property developers and other companies that find it hard to get credit from banks. As regulators have focused more attention on shadow banking, the sector has evolved as well, which is not necessarily totally bad, but the issue is if the expansion is going too fast and too out of control.
On the other hand, this article tries to argue it’s not so bad since a shadow banking crash won’t really affect real banks and that these banks can easily cover bad loans with their profits in the event of a shadow banking crisis. It’s a bit optimistic in my opinion, as the writers seem to assume the best and ignore serious ramifications, such as saying that if a shadow banking crisis occurs, this will benefit banks since savers will move money back to banks without considering that savers may not necessarily have their savings intact if shadow banking suffers a huge crisis, or playing down the effects on raw material exporting nations if Chinese imports drop (frankly the article’s arguments seem very flimsy). In any case, articles like this and this that show that banks do indeed cooperate with shadow banking institutions like trusts and are very much tied up.
More convincing is this article which says the failure of shadow banking is a ticking time bomb, and will be very bad. Shadow bank lending has been used to finance many projects and developments that are failing or going out of business, such as the $100 billion industrial project and eco-city featured in the piece that has been all but abandoned.

Meanwhile, overcapacity is a big problem in heavy industry, as sectors ranging from steel to cement to solar panels have too many companies that produce too much that can’t be sold or exported. The government has issued orders such as shutting down old and poorly performing plants (setting targets such as reducing steel production capacity by 27 million metric tons) and limiting the number of new plants.

China is still a place of great potential in fields like e-commerce and tourism. Actually, it has much room for growth in a lot of sectors. Unlike Japan 20 years ago, China is still a poor country with GDP per capita below $10,000. The issue is that its economic problems are vast and deep, and overcoming these will be painful.


Taiwan salaries, workforce going down

Taiwan’s economy hasn’t been doing too well, and here’re some bleak news to bolster this fact. Firstly, this news says that Taiwan salaries have actually decreased from 1998! It matches what I heard from a family friend from Taiwan who said that entry-level salaries have dropped since he started working (20-something years ago).

Then this report describes young Taiwanese going to Singapore as contract low-wage workers, putting them in a similar status as low-paid SE Asian workers (Filipinos, Indonesians, Thais) who come to Taiwan and Hong Kong on contracts. It’s very ironic considering how some Taiwanese look down on SE Asians since they only know them as manual laborers and maids. It’d be something if Singaporeans start thinking of Taiwanese only as lowly service staff. More than that though, it’s both embarrassing and a damning indictment of Taiwan’s economy, given that it’s GDP per capita is above US$20,000 which should mean it’s a solidly middle-income nation. Instead, Taiwan youth would rather go abroad to work in low-level contract service jobs in Singapore or farms or factories in Australia or New Zealand (on those working holiday visas) rather than stay and contribute to their home society.
However, the cost of living in Taiwan is quite low and social support, such as the national health care system, is quite good. Perhaps low salaries are a sacrifice that Taiwanese need to bear in order to maintain such a standard of living. On the other hand, perhaps higher costs, and higher salaries, would be a way of spurring Taiwanese on, because one thing I find is that Taiwan people always like things cheap (which admittedly I, and many of us probably do) and they seem to think everything should be cheap. Taiwan firms and businessmen should not be exempt from the blame either. The “cheap is good” concept applies both to how they run companies, especially the salaries they pay. I’ve experienced this at all the places I worked in Taiwan and it resulted in situations like high employee turnover, low morale, and pitiful marketing.