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OK y'all. Today's Broken China Ping will be slightly different. Unemployment is rising in the PRC and the economy is slowing even if you accept CCP figures at face value, which I don't recommend. Closely associated with this is the mountain range of debt being held at all levels in the PRC. More on this later. I apologize for the Economics lesson which follows but it is necessary. Economics isn't called the dismal science for nothing.
It is a generally accepted rule that when an economy is stagnating that the central government should take on debt and encourage consumption. This can be done either by direct transfer payments to individuals to spur private consumption or by state spending on infrastructure projects.
It is patently obvious that there is already a glut of housing, roads, etc. in the PRC. It is also obvious that private consumption is lagging and needs to be increased. Consumption only accounts for about 40% of the PRC economy vice about 68% in the US.
So why is the CCP continuing to invest in infrastructure projects and not in boosting the share of consumer spending in the economy? There are several reasons.
1. The primary objective for the CCP is to create jobs and hence reduce the unemployment which causes internal unrest. It is NOT to create unneeded infrastructure. So, again, why is the CCP spending money they don't have through primarily state-owned enterprises vice boosting consumer demand? The answer is CONTROL. I will return to this.
2. The CCP also knows that if they simply give people money, they won't necessarily spend it. They already think that people save too much and know that if they simply gave people money many would either save it or pay down debt. This would help individuals but do nothing for the national economy or the CCP so it won't happen.
2a. If every person in the PRC were given 1000 Yuan (about $134 US) and they spent all of it, the GDP would only expand about 1%. This is not enough and would only leave the national government with more debt. If consumer spending were a larger percentage of GDP then this would have a greater effect.
2b. The other big problem with this, from the CCP's perspective is that it reduces dependence on, and hence the influence of, the CCP. They already think this is a problem.
3. Now let us return to the debt debacle. This level of debt is unsustainable. It must and will come down. The reason that it MUST come down is found in the impending demographic contraction of the population. The only question remaining is whether it will be fast or slow and how much civil unrest there will be. Will they will use the Japan model or the Kuomintang model. Either way it will mean the end of the CCP.
3a. The Japan model is the slow, steady contraction of the size of the debt, the economy and government influence over it. This began in the late 80s and led to a very difficult three decade decline in the Japanese economy. To their credit, the Japanese handled it magnificently. Without young workers coming on they couldn't maintain export led economy they had followed after WW2 as they re-industrialized. They moved their factories to where their consumers were. In the case of automobiles it was the US. In the case of electronics it was the PRC or SE Asia as that was where the low cost workers were.
There are two big problems for the CCP with this model. The first is that Japan is the CCP's favorite boogeyman. The second is that this will increase unemployment at a time when unemployment is already high. The CCP is sure to get MORE rather than less civil unrest even though it is the safest way to unwind the massive debt they are saddled with.
3b. The Kuomintang model is to print money to pay off debt. This is likely to cause runaway inflation as it did for the Kuomintang during the depression and immediately after WW2. This will likely lead to business bankruptcies, decreased consumer demand, and increased unemployment. Increased unemployment leads to increased unrest.
4. ALL Chinese governments, regardless of form, operate under the "Mandate of Heaven". This means that so long as the government acts to keep the people fed, employed, and safe from strife, the Chinese people will go along with it no matter how difficult their personal lives. When the government fails at this they lose the Mandate of Heaven and it is acceptable to rebel. Civil wars start or coups take place and a new government replaces the old.
The past 75 years under the Breton Woods System (brought to you by the US Navy) have been the most peaceful and productive in Chinese history. This is true even with the Great Famine (1959-1961) caused by the Great Leap Forward (1958-1962) and the Cultural Revolution (1966-1976). Breton Woods allowed for free trade. Without this, China would never have industrialized.
5. So which way will the CCP go? I think they will try to go with the Japanese model under a different name with a little money printing. My personal opinion is that they will screw it up BIG TIME. 6. So how long will the CCP last? I don't know. If you are hoarding CCP tchotchkes I urge you to sell them ASAP. 7. I also urge all of you to stay out of the PRC. I was talking with my youngest daughter last night after her return from Europe as part of her Masters Program. I urged her not to visit the CCP and if any of her classmates were thinking about visiting to talk them out of it.
WWG1WGA
Garde la Foi, mes amis! Nous nous sommes les sauveurs de la République! Maintenant et Toujours!
(Keep the Faith, my friends! We are the saviors of the Republic! Now and Forever!)
LonePalm, le Républicain du verre cassé (The Broken Glass Republican)