Why China's economic recovery won't happen, plus revoking China's normal trade status could be US' next big decoupling move -- China Boss News 12.15.23
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What happened
The Chinese government is resisting its own reforms of a decades-old internal migration control system over fears of social upheaval and additional debt burden.
In another effort to support China's fragile economic recovery, Beijing earlier this year told cities with fewer than 3 million people to abolish the "hukou," a Mao-era policy that restricts the internal migration of hundreds of millions of Chinese workers.
But "progress is stalling" due to reluctance "to take decisive moves that might disrupt social stability and burden indebted cities with added costs," Reuters reported last week, citing government advisers.
Jia Kang, founding president of the China Academy of New Supply-Side Economics, told Reuters that changing the hukou, for both Beijing and local governments, "is a hard bone to chew."
"[W]hile neither the central government nor local governments oppose further hukou easing, implementation depends on cities having the funds and public service capacity," he added.
“China's largest cities have limited residential supply and face pollution and congestion, affecting their ability to absorb more people.” But even though “[m]edium-sized and smaller cities have excess housing stock,” their “ surging debt” prohibits them from “expand[ing] access to health facilities, elderly care and education,” other government advisers said.
Ironically, the lack of economic growth is also increasing reluctance among migrants, themselves, to change their hukou residency status.
"In China, rural hukou come with land rights - and, implicitly, the insurance policy of living off the farm if city jobs are unavailable - making many migrant workers from the countryside reluctant to apply for urban permits, especially in a slowing economy. Local governments can lease land for farming, as well as residential, commercial and industrial development, but there is no private land ownership in China and land rights cannot be traded freely,” Reuters staff wrote.
That's right. Although it should come as no surprise - China’s archaic communist land control system is also sucking the air out of its once ballooning economy.
Why it matters
No city card, no security
Mao created the hukou in the last century to stop starving rural peasants from overrunning cities' food stores during the famines that resulted from his own mismanagement.
But the policy has its roots in the millennia-old "baojia system,” which was a means of security by surveillance and population control used by various dynasties.
"The aim of this system was twofold. On the one hand, the security system relieved the local government of administrative duties. The members of each security group cared for the proper registration of their households, mutually observed each other (an old method called lianzuofa 連坐法), and in addition to that, organised the defence of the village community. In that way, the security system was a kind of local militia taking over duties normally carried out by military garrisons," according to China Knowledge, a website run by German sinologist Dr. phil. Ulrich Theobald.
In other words, household registration is an ancient concept deeply embedded in Chinese tradition. But pretty much everyone, including Beijing, recognizes the hukou as a major obstacle to modern Chinese development.
"Cai Fang, a central bank adviser, estimates migrant workers typically spend 23% less than those with urban hukou, potentially depriving the economy of more than 2 trillion yuan ($281 billion) - or 1.7% of last year's GDP - in domestic consumption annually," Reuters staff noted.
Migrants spend less because they have less economic security than urban permanent residents.
"Migrants get smaller reimbursements for medical expenses than those with urban registration and cannot take their employer's contributions to retirement savings - two-thirds of the pot - with them when they return home. As a result, they save more of their income, keeping household consumption - which China wants to make a more prominent driver of economic growth - subdued."
Control freaks
The financial strapping of migrants would be less of an issue if there weren't so many.
Because they are not documented, they are difficult to quantify: But China's own 2020 census counted 376 million, and there could be many millions more.
Note that China's population is skewed towards the elderly and retirees because it is aging, and that, by the official data from 2022, its workforce was about half of its 1.4 billion people, around 733.5 million.
That means that roughly 50 per cent or more of the Chinese workforce may be considerably hamstrung by the government's hukou security blanket.
Ouch.
In his latest Bloomberg op-ed, Claremont McKenna College Professor Minxin Pei said that, although on a downward trajectory, China's "[l]ong-term fundamentals are stronger than pessimists think," but "[a] real recovery . . . require[s] reforms the government simply won’t make."
"The government can’t tackle this problem because it is the problem. In the past decade, there’s been a fundamental shift in the survival strategy and governance structure of the ruling Chinese Communist Party. The regime has prioritized political control over economic development and systematically shifted resources from the private sector to state-owned firms, mainly through industrial policy programs such as Made in China 2025," he said.
In other words, China's governing control freaks naturally see the elimination of the hukou and communist-era land use policies as unbearable political risks that could undermine their hold on power.
Still it's a losing situation for everyone.
"If Xi can’t reverse this trend, the loss of confidence in his leadership among private entrepreneurs will depress investment and job creation. The share of private capital in China’s total investment in 2022, for example, fell to roughly 54% , the lowest in a decade," Pei warned.
And there will be even less opportunity for more than half of Chinese workers to have a better life with sufficient discretionary income to spend in amounts that would bring China's economy out of its doldrums.
This Week’s China News
The Big Story in China Business
REVOKING CHINA’S TRADE STATUS ON US LAWMAKERS' AGENDA: The House Select Committee on the Chinese Communist Party on Tuesday released a far-reaching report proposing to sever remaining economic and financial ties and to revoke China’s Permanent Normal Trade Status.
The bipartisan document outlined nearly 150 steps that the US government could take to address a "‘multidecade campaign of economic aggression’ that had undercut American firms, dominated crucial global industries and left the United States highly vulnerable in the event of a broader military conflict," New York Times staff said, citing language in the report.
“They ranged from imposing new tariffs on older types of Chinese chips to further cutting off the flow of capital and technology between the world’s largest economies. Among the report’s other recommendations were requiring that publicly traded American companies disclose ties to China and investing further in U.S. research and manufacturing capacity to counter China’s dominance of sectors like pharmaceuticals and critical minerals,” news staff noted.
‘Intense pushback’: While many of the recommendations seem to have broad support in the House, the recommendation to end China’s normal trade status immediately met pushback from influential groups tied to "farm district Republicans and agricultural lobbies," Politico reported. Some Democrats also rejected the language.
“The pushback among Democrats and farm state Republicans was so intense that Krishnamoorthi, the lead Democrat on the committee, argued that the panel was not actually recommending a repeal of China’s normal trade status, despite the report’s explicit recommendation to rethink tariffs on China. . . . Instead, he and [Rep. Mike] Gallagher said, the report recommends devising a new tariff structure for China that would allow lawmakers to vote each year on tariff levels for a variety of goods.”
Applying the duck test: But the end result would be the same as repealing China’s PNTR, which made the proposal's opponents all the more anxious.
“The lawmakers, including ag district Republicans Dusty Johnson of South Dakota and Darin LaHood of Illinois, along with Democrats Jake Auchincloss of Massachusetts and Ritchie Torres of New York, managed to secure small changes to the trade language, which essentially made it palatable enough for some, though not all, of its critics,” according to Politico’s report.
Torres subsequently told reporters that “[w]e did our best to moderate the language, to water down the language."
"But it remains alarmingly vague, so it gives me pause,” he said.
Resistance may be futile: The Times’ staff explained that “[r]eaching consensus” on the items in the report already “required months” of bipartisan negotiations, with “[o]nly one member of the 24-person committee” voting against the final version.
Rep. Krishnamoorthi told NYT after that China’s Communist Party assumes the US is too “divided” and “tribal” to “deal with challenges.”
“On this particular issue of competition between the United States and the C.C.P., we are of one mind,” he said
In other China business news
DEFLATION FEARS RETURN: "The Consumer Price Index (CPI) dropped 0.5% in November on an annual basis, the biggest fall since the depths of the pandemic three years ago, " CNN Business said, citing data released by China’s National Bureau of Statistics on Saturday.
"The drop marked an acceleration in the rate of deflation from October, when the CPI fell 0.2% from a year earlier, and prompted calls for urgent action from Beijing to boost demand and prevent a downward spiral of prices," news staff added.
US PENSION FUNDS STILL HEAVILY EXPOSED TO CHINA, REPORT FINDS: America's biggest institutional investors are still heavily exposed to China funds, a new study by Future Union, a non-partisan trade organization, says.
"The majority of U.S. public pensions, as well certain universities and non-profit organizations, have committed funds to China and Hong Kong, including in sensitive technologies — some as recently as this year," the study's authors noted.
Andrew King, executive director, told CNBC that there was “ a staggering 75% renewal rate by pension portfolio managers entrusted to responsibly manage the retirement wealth of the U.S. pensioners, despite the geopolitical implications."
“It’s become the latest greenwashing, where everybody says the right things [about divesting from China] but getting them to adhere to it is a different story,” he said.
Law and International Xi
US SANCTIONS RUSSIA’S PROCUREMENT NETWORK IN CHINA, OTHER COUNTRIES: The US has sanctioned over 250 companies and individuals in China, Turkey and the UAE for supporting the Russian military, Bloomberg reported on Tuesday.
“The measures take aim at what the US agencies calls Russia’s procurement network, a loose coalition of companies that help keep it supplied with cutting-edge technology and weapons in violation of American sanctions and export controls,” news staff wrote.
Hu Xiaoxun, owner of Chinese private defense company Jarvis HK Co., was singled out for utilizing his international affiliates “to structure deals circumventing United States sanctions and Chinese controls on the export of military-related materials, including for conventional weapons and electronic components with Russian customers ranging from thousands of dollars for ammunition, to hundreds of thousands of dollars for loitering munitions, to millions of dollars for semiconductor microchip manufacturing equipment,” according to the Treasury Department's press release.
“Hu has worked with Pakistani associates and weapons dealers Syed Asadullah (Asadullah) and Nur Khabib Shakh (Shakh), as well as Russian associate Vladimir Krylov (Krylov), to coordinate sale and business proposals, structure plans for Russian domestic production of military goods, and procure various Chinese weapons and technologies on behalf of the Russian military and defense sector.” officials said.
Geopolitics
SOUTH CHINA SEA TENSIONS ARE SMOKING HOT: "Chinese coast-guard ships blasted water cannons at Philippine boats at least eight times near a contested atoll in the South China Sea, damaging equipment aboard one of them, as escalating tensions between the countries lead to more close encounters in the waters," Wall Street Journal reported.
Later, the Philippines announced that one of its senior military officials was onboard during the assault, according to Reuters.
"Philippine Chief of Staff of the Armed Forces Romeo Brawner said he was onboard a vessel that was both sprayed with a water cannon and rammed. Brawner told Philippine radio station DZBB that he was unhurt and that he did not believe China knew he was onboard the boat," news staff said.
On SeaLight Live, a Stanford University project tracking maritime grayzone warfare, Director Ray Powell said that "Chinese ships capped a weekend of alarming, escalatory aggressions against Philippine vessels by swarming into Second Thomas Shoal's interior."
"Generally, most of China's blockading force will return promptly to its nearby Mischief Reef base once the Philippine resupply boats and their escorts depart. This weekend, however, the vessel swarm remained for an additional 24 hours (until Monday afternoon) and 11 pushed inside before returning to Mischief. It's quite rare to see PRC vessels enter the shoal's interior at all, but 11 is certainly the highest number we've yet observed at SeaLight. In fact, it may be unprecedented," he said.
Meanwhile: South Korea said it deployed fighter jets after four Russian and two Chinese aircraft flew into its Air Defense Identification Zone (ADIZ) unannounced.
"China and Russia are North Korea’s traditional allies, and South Korea’s ally Washington warned last month that military ties between Pyongyang and Moscow were 'growing and dangerous,'” Aljazeera news staff said.
Reuters reported that "China-Russia trade hit $218.2 billion during January-November" which met "a goal that had been set by the two countries in 2019 a year ahead of schedule."
And Jakub Landovsky, the permanent Czech representative to NATO, "called for intervention in China's moves to support Russia" during a visit to Japan last week, according to Nikkei Asia.
"We should do our best to engage with China where it matters -- some global issues like climate change -- but also send to China a signal that rules must be observed. [Bilateral, trilateral and multilateral moves in the region] are very valuable not in containing China, but in promoting rule-based world order and freedom of navigation, which is so critical for all our trades."
Landovsky also said that he "[w]holeheartedly" supports the establishment of a NATO liaison office in Tokyo.
Best Reads
The China-Russia Axis Moves Into High Gear (Chels Michta, Center for European Policy Analysis): Michta ponders "if and how quickly" China and Russia's political and economic alliance "will morph into a hardcore military pact."
Xi’s Quest for Ethnic Unity Turns Genghis Khan Into New Danger (Bloomberg News): Xi Jinping is cleansing ethnic Mongolians of their history, culture, and language.
The Six Myths Kissinger Created About Himself — That Everyone Fell For (James Mann, Politico): James Mann, the author of About Face: A History of America’s Curious Relationship with China from Nixon to Clinton, sets the record straight on Kissinger's role in Nixon-era China policies.
Middle Kingdom Surreal
CHINA RAMPS UP COLLECTIVE PUNISHMENT OF FAMILIES, SAFEGUARD DEFENDERS SAYS: Safeguard Defenders has a released a new report, Families in Fear, on the Chinese government's use of "collective punishment as a political tool to control human rights defenders."
"Collective punishment is used to coerce confessions, frighten family members from advocacy and silence overseas critics. It is also increasingly adopted as a tool of transnational repression in 'persuade to return' operations to coerce overseas targets, including telecom fraud suspects, to go back to China," the report's authors wrote.
"No one is considered out of bounds: everyone from babies and toddlers to pensioners are being targeted," they said.
In one example, a miner who was jailed "because his daughter splashed ink over a poster of Xi Jinping" died in prison in 2022.
His body was "bruised" and covered in blood. Authorities "rushed through the cremation," and the family was denied an autopsy.
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Thanks for watching China with me in 2023. I'm excited (and a little apprehensive) for what's to come next year. See you in 2024. Boas Festas!
