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Happy New Year everyone.
I don't do "Broken China Updates" just to hear myself type (This is good since I have a silent keyboard). I try to wait until I have something new or unusual to report. I have been almost uniformly negative in my updates this year (12/16/24, 8/26/24, 8/18/24, 5/12/24). I blame this on a year long bout of optimism. If anything, I have been nowhere negative enough about the economic and political situation in the PRC. The facts on the ground are, at best, dire. I'm probably STILL being too optimistic.
Why do I think this way? Buckle up. It's going to be a bumpy ride this year.
Item One: Destruction of private savings and investment.
As bad as inflation can be for destroying wealth, deflation is worse. You have heard me harp on the collapse of the Real Estate sector of the PRC economy. For the past four decades one of the major drivers of the PRC economy has been building. It has been one of the very few places that individuals have been able to invest in. As a result the people invested their retirement savings in real estate.
This began to unravel three years ago with the default of EverGrande and later Town & Country, the two largest developers in the country. This did more than harm those who had purchased houses and apartments. (In the PRC, you pay for the house BEFORE it is built.) It bankrupted subcontractors & materials providers through non-payment. Workers were also left with months of unpaid wages.
With the onset of a deflationary spiral, new home building has virtually ceased. It used to be 30-45% of the economy. The property resale market is down 80-90% in valuation meaning investors can't sell their property and remain on the hook for mortgage payments.
It is now estimated that some 30 TRILLION Dollars, not Yuan, of asset valuation has vanished during the period 2021-2024. This is wealth that the people are depending on to cover their retirement. They will not be happy to learn it is gone. They will demand the CCP so something it can't, bring back their money.
Item Two: The ongoing collapse of retail sales
At a time when the PRC desperately needs to boost private consumption to take up the slack in its export driven economy, retail businesses are closing at a record. Entire shopping districts in the tier one and two cities are eerily quiet with boarded up shop fronts being the norm rather than the rule. Upscale retailers are either closing or renegotiating leases for a fraction (20-30%) of their former rents. Landlords who won't cut rent to retain tenants find themselves with empty buildings which places a further downward pressure on rents. The rate of business closures at the low end, small food and retail shops is even higher.
This is placing a severe downward pressure on wages throughout the economy. Workers without wages can't spend them.
Item Three: Long distance Phishing
Over the past two months, over 80 senior business leaders of major Beijing, Shanghai, and Hong Hong stock exchange listed companies have been detained by local officials, generally at a distance from the company's primary business operations. This appears to be a shakedown effort by local governments to extort funds from these businesses to try and close local revenue shortfalls. It also appears to NOT be sanctioned by the national government although the national CCP does not seem to be acting to curb the practice.
This is yet one more negative item depressing the business environment in the PRC.
Item Four: Demographic collapse
I have mentioned this before. I do not believe that the PRC has anywhere close to its claimed 1.4B population. I have seen recent estimates running between one billion down to as low as 700 million. Regardless of what the true number is, it has the CCP scared to death. Family Planning clinics under the One-Child Policy are being reopened as birth promotion centers with all sorts of intrusive questions to newly wed couples inquiring as to the date of the wife's last menstrual period and how soon she expects to be pregnant.
I don't know how the CCP expects this heavy handed approach to have much effect when the 20-somethings they want to have babies are having trouble finding jobs that will allow them to feed, house, and clothe themselves.
Item Five: Misplaced spending priorities
It is evident the there are at least some in the hierarchy of the national CCP that see things clearly both as to the national problems and the necessary corrective action to be taken. That doesn't mean that they have either the power or the inclination to take that action as doing so will threaten the sinecures of others who would take action against them.
The CCP continues to spend extravagantly, trillions of Yuan, on things that will solve the national problems and reverse the decline of the PRC. Examples include: a continued naval build-up, hundreds of miles of high speed rail infrastructure without a pressing need, the Belt & Road Foreign Policy Initiative.
Conclusion:Where do I see things going?
This is the hardest question. Eventually the bill for economic misadventure will come due and the CCP will not be able to cover the tip, much less the bill. The Chinese refer to this as "Losing the Mandate of Heaven." At this point, historically, China has descended into civil war, famine, and population contraction until a new dynasty is founded. The CCP will either be swept away (dead), or will rule over a mountain of rubble and skulls.
The best we can do is not get caught in the crossfire.
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)
