China is cracking

[ This is a post based on insights from a visit to China earlier this week. I love China, and it breaks my heart to see the poorly-addressed problems. Next week I will post a new item on the Planetary Boundaries.  ]

After two decades of fantastic economic development and hiding of problems, this part of the party is coming to an end. Salaries are dropping and inflation is soaring, leading to net-salary-decreases for those who have jobs, and disaster for those on the side. I visited China earlier this week, and my friends are worried about the future.

The single-party system rules with opaque power and the legal system is often a farce. In the last twenty or so years, people have accepted mis-management and mis-allocation of resources, as long as they have been on the winning team. Most people have had real salary increases of 3-6 percent per year as long as they can remember. Most young professionals earn more than their parents, and the promise was that this would go on forever.
Of course, smart people have been noticing that a lot of the “growth” has come from extreme sacrifices of ecology, justice, health and equality. Sooner or later, someone has to pick up the bill.

Empty, half-built housing block in Shanghai. It looks the same today as in 2012.

One of the most insightful analysts is Peter Navarro, and his excellent but strangely named book “The Coming China Wars” describe eight mega-problems that the Chinese government has chosen to hide instead of to solve. His prediction in 2006 was that the hidden problems of piracy, drugs, pollution, oil, Chinese imperialism, water supply, social unrest and demographics would lead to international conflicts and wars.
(I think it is useful to note that all European countries and the US also suffer from a similar affliction; ignoring structural problems around energy/oil, ecology and money printing. More about that another time. )

In the past decades, local province governments in China have been printing money to support “local businesses” like Geely Motors, Huawei etc, to grow and go global. Indirect subsidies have helped Chinese players to kill international competition in many areas. Local province governments have printed money for real estate development, driving the house market into the skies. During 2016 alone, the house prices increased with 27% in Shanghai [2]. Vegetables and other food items increased by 6%. This is great for those who own lots of property. [5]

One of many “ghost towns” in China, photo Tim Franco. Clearly not the best use of land, energy and natural resources.

However, the same development is on collision course with the reality of those who depend on a salary to live (i.e. most people). Typical white collar salaries for those who stayed in a job increased with 3%, but the new hires got much less. In total, overall white collar salaries dropped with 4% in the last 12 months [1].

House price increase in Shanghai – price increase compared to one year earlier. End of 2016 it was 30%! Illustration from GlobalPropertyGuide.com

 

This is in stark contrast to the previous years, when salaries have been increasing, almost on par with the price hikes in real estate. Now the trends are definitely diverging and many people lose faith in the system. The cracks cannot be hidden any longer.

Therefore, more and more people are protesting the legitimacy of the single-party state [3], even at the peril of their own work and safety. The worst crack downs are right now in the Xinjiang province, but protests are everywhere (but not every day).

Beijing city center protest, earlier this year. Photo from GlobalRiskIndex.com.

I hope that the next step from the government is to increase transparency to improve their legitimacy. If I could have a one-on-one session with President Xi, I would encourage him to strengthen the legal system and encourage independent media. Talk about the immense challenges that the country is facing and invite more people from all over the world to participate in developing solutions. I would urge him to develop agro-ecological solutions and promote frugal hedonism instead of consumerism. (I would encourage all world leaders to do the same, actually…)

Ecological food production from trees – this is the future! Here I taste the Chinese “spring fragrance tree”, also called “onion-tree”, at an agro-ecological test site.

However, the developments in China are rather in the reverse direction. During the last years, lots of semi-independent media have been shut down and international connections (VPNs) have been blocked [4]. This week, Xi Jinping even started to read an allegorical fairytale on the morning China State Radio, in an eerie echo of Chairman Mao.

Let’s do what we can to help our Chinese friends in these difficult times.

 

[1] White collar salary drop http://zhaopin.investorroom.com/2017-07-17-China-White-collar-Average-Salary-Declined-in-the-Second-Quarter-of-2017

[2] China house price history https://www.globalpropertyguide.com/Asia/China/Price-History

[3] Social Unrest in China http://globalriskinsights.com/2017/07/social-unrest-china-threat-regime-legitimacy-economy/

[4] Decline of Independent Journalism in China http://thediplomat.com/2016/01/the-decline-of-independent-journalism-in-china/

[5] Money printing creates ghost cities https://qz.com/98045/chinas-ghost-cities-epitomize-the-problem-with-printing-money-paul-krugman-style/

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