29Comments

1. 1.

   NotoriousJRT

   August 27, 2023 at 6:36 pm

   Stay safe, Adam (and all others in Idalia’s path)!

   Reply
2. 2.

   Rekoob

   August 27, 2023 at 6:36 pm

   We all appreciate your selfless efforts to keep us informed and your thoughtful commentary. We can wait — stay safe in the impending storm!

   Reply
3. 3.

   Sister Golden Bear

   August 27, 2023 at 6:45 pm

   Obviously your safety is more important than the updates, and if you need to miss an update or two, weathering a hurricane is an entirely understandable reason. Thanks again for all your work since the war began.

   Reply
4. 4.

   Adam L Silverman

   August 27, 2023 at 6:59 pm

   @NotoriousJRT: @Rekoob: @Sister Golden Bear: I’m not too worried. I keep my hurricane/emergency supplies maintained year round. I just have to bring the stuff in from outside so it doesn’t go air born, fill up the water bricks, fill up the bathtub, fill up the clean garbage can that is only used to hold extra water during a tropical storm or hurricane, and that’s it. I’ll probably cook off the chicken breasts and thighs and the brats. I’m hard boiling the two dozen eggs now. Got plenty of other food that either doesn’t need refrigeration or, in the case of the veggies and the apples, will keep if I lose power for a bit.

   Thanks for the well wishes!

   Reply
5. 5.

   Gin & Tonic

   August 27, 2023 at 7:02 pm

   Those “machine translations” are really getting to be good.

   Reply
6. 6.

   NotoriousJRT

   August 27, 2023 at 7:03 pm

   @Adam L Silverman: thanks for your dedication to this effort each day! I am in awe of your commitment!

    

    

    

    

   commitment.

   Reply
7. 7.

   Adam L Silverman

   August 27, 2023 at 7:06 pm

   @NotoriousJRT: I do have to be back in custodial care by 4 PM every day.//

   Thank you for the kind words. You are most welcome.

   Reply
8. 8.

   Adam L Silverman

   August 27, 2023 at 7:08 pm

   @Gin & Tonic: Can’t tell if serious or sarcastic.

   Reply
9. 9.

   Nukular Biskits

   August 27, 2023 at 7:37 pm

   Adam,  I know I sound like a broken record, but I appreciate the time and effort you put into these updates.

   v/r

   Reply
10. 10.

    Gin & Tonic

    August 27, 2023 at 7:41 pm

    @Adam L Silverman: I’m serious. Finding very little that I’d quibble with.

    Reply
11. 11.

    oldster

    August 27, 2023 at 7:45 pm

    What can we say? Progress is slow, but it heads in the right direction. Zaluzhny has a nearly impossible job to do, and has not been given the resources that anyone else would require.

    But he is resourceful himself. He knows how to squeeze his opponents slowly, as he squeezed them out of Kherson a year ago. He has heroes for soldiers, and the other side has drunks, half-wits, and criminals. He has the initiative.

    I hope every day that there will be a galvanizing breakthrough. But if Zaluzhny and Zelensky can learn patience, then so can I.

    Reply
12. 12.

    BeautifulPlumage

    August 27, 2023 at 7:47 pm

    Thanks for the info- heavy update & I hope your household stays safe!

    On drones – Tartarigami tweet

    Yep, I have being trying to address this issue, but the most common response I get is: “we don’t make cheap crap”.

    As compared to

    reports last night’s attack on Kursk air base was conducted by Australian designed “SYPAQ” drones. Made of pressed cardboard, various models can carry explosive warheads of 3-5 kg at ranges up to 120 Km (~74 mi).

    Reminds me of the movie Cheap, Fast, & Out Of Control

    Reply
13. 13.

    Alison Rose

    August 27, 2023 at 7:47 pm

    As others have said, obviously if you need to skip an update, no one here would grouse about it. We’re blessed to have these updates but your safety is 87538 times more important.

    Regarding prigozhin, I mean, “russia confirmed he’s dead” doesn’t necessarily mean anything, since we know they can and do lie about literally everything. But in the hopes that this is one time they’re actually telling the truth, then huzzah.

    Zelenskyy sat for a long interview with Natalia Moseychuk (Ukrainian journalist). It doesn’t have subtitles, and the YT auto-translated captions aren’t terrific, but it was still very interesting.

    Thank you as always, Adam.

    Reply
14. 14.

    Adam L Silverman

    August 27, 2023 at 7:47 pm

    @Nukular Biskits: Thank you for the kind words. You are most welcome.

    Reply
15. 15.

    Adam L Silverman

    August 27, 2023 at 7:47 pm

    @Gin & Tonic: Okay. Good to know they’re getting better.

    Reply
16. 16.

    oldster

    August 27, 2023 at 7:47 pm

    @Gin & Tonic:

    I’m glad to hear that it’s fairly accurate, but I’d still like to know what “rozminous” means.

    Reply
17. 17.

    Gin & Tonic

    August 27, 2023 at 7:55 pm

    @oldster: Well, you can’t correctly translate that which is misspelled in the original. The word was intended to be “розумній” – which is smart/wise/perspicacious.

    Reply
18. 18.

    oldster

    August 27, 2023 at 8:12 pm

    @Gin & Tonic:

    Thanks for solving that puzzle. I envy your knowledge of the language — you know it well enough to be able to spot errors and figure out what the correct version would have said.

    Reply
19. 19.

    Jay

    August 27, 2023 at 9:07 pm

    Perun has a new vid/analysis up,

    https://www.youtube.com/watch?v=va3UtYl6PUs

    Reply
20. 20.

    Carlo Graziani

    August 27, 2023 at 9:22 pm

    Another good update, Adam. Kastehelmi is a real find—his tour of the Robotyne battlefield is extremely informative.

    Reply
21. 21.

    Madeleine

    August 28, 2023 at 1:05 am

    It sounds like you’re preparing well—and, yet, take care.

    i haven’t for a long time expresses my gratitude for your nightly updates. Without them I wouldn’t know what is happening.

    Reply
22. 22.

    Madeleine

    August 28, 2023 at 1:06 am

    It sounds like you’re preparing well—and, yet, take care.

    i haven’t for a long time expresses my gratitude for your nightly updates. Without them I wouldn’t know what is happening. Thanks and be safe.

    Reply
23. 23.

    YY_Sima Qian

    August 28, 2023 at 2:37 am

    @Another Scott

    To answer your questions from yesterday concerning the factors leading to the rapid deterioration in Sino-US ties since 2019, I think there are numerous issues on both sides that have contributed to the interactive downward spiral.

    Note: I will henceforth use CPC for Communist Party of China. I had been using CCP, but people get it confused w/ the CCCP, & the moniker has become a totem for the GOP to demagog against.

    1. Structurally, tension is inevitable between the incumbent great power & the rising great power, lest we forget the US & the UK actively prepared war plans targeting each other until the rise of the German Empire, & the xenophobia that greeted the economic rise of Japan in the 80s (lasting into the 90s, by which time Japan had already started to stagnate). The incumbent power will seek to preserve its status, helped by allies/partners who are the primary beneficiaries of the existing distribution of power, while the rising power will seek to modify the distribution of power to accommodate its interests & ambitions, helped by those who are dissatisfied w/ the current order. The situation is exacerbated by the fact that both the US & the PRC conceive themselves as righteous status quo powers (the former to preserve the current distribution of power, & the latter to preserve the relevance of the UN based system), while both are actually selfishly selectively revisionist (the former modifying/sidelining international institutions that it once underwrote to gain more freedom of action, the latter seeking to reform/revise the international institutions to better reflect its prerogatives & setting up alternative organizations).
    2. Many in the West have questioned by Xi discarded Deng’s grand strategy to “hide one’s strength & bide one’s time”. The reality is that by the 2008 Summer Olympics China was already too large & too powerful to hide. The GFC, & the damage it caused to the standing of the US & the causes it advocated, removed the incentives for the CPC leadership to continue Deng’s strategy. By Hu’s 2nd term, the PRC was no longer “hiding & biding”, Xi merely continued & amplified the trend, which has broad support among the CPC leadership, the economic elite & the population at large (all the more so since Trump started his trade war & Biden started the tech war). Rising powers simply will not “hide & bide” indefinitely, it’s part of the human condition.
    3. Did the CPC leadership jump the gun post-GFC? Probably. However, it is worth remembering that the GWB administration came in in 2001 w/ a foreign policy emphasis of “strategic competition” w/ the PRC, which the 2001 Hainan Spy Plane Incident brought into sharp relief. Had 9/11 not intervened, & the GWB’s neocons not become distracted by the GWOT, Sino-US rivalry probably would have escalated from the early aughts, rather than mid- to late teens. By Obama’s 2nd term (or early into Xi’s 1st), Pentagon was already agitating to pivot from the GWOT to Great Power Competition w/ the PRC & Russia as the central organizing principle of US defense policy. Obama kept a lid on competition because he & his 2nd term natsec team believed there are too many long term global challenges that required cooperation w/ the PRC (& in their view Russia, to a lesser extent). Trump brought in nationalists who are committed to US primacy, many of whom have been über China Hawks for decades.
    4. Part of the discarding of the inhibition of “hiding & biding” is much greater assertiveness & aggressiveness in the PRC’s neighborhood. This is evidenced by much more forceful & physical assertion of Chinese claims in the South & East China Seas, such as the start of regular Chinese Coast Guard patrols of the waters around the Diaoyu/Senkaku Islands, a standoff w/ the Philippines at Scarborough Shoal (the Obama Administration had to negotiate a deescalation, which the PRC took advantage of to siege control of the shoal), culminating in the construction of the artificial islands in the Spratleys. These actions motivated the regional players to firm up their security partnerships w/ the US (even as they continued to deepen their economic relations w/ the PRC), & the US had to respond to maintain its credibility as the security guarantor in the Asia Pacific, & was happy to respond to attempt to wedge the regional players away from Chinese influence.
    5. The rationale for détente w/ the PRC started to steadily erode in the US throughout the 2010s. Post-Cold War & Tiananmen Square, the justification was mutually beneficial economic & cultural engagement, while sustaining the “Asian Peace” & jointly address global challenges. It was sold to the US public as a way to peacefully evolve the PRC into a liberal democracy (“because in the heart of every Chinese there is an American dying to get out”). Some among the US political elite might even have believed it themselves, & it was source of suspicions for the CPC leadership since the beginning of the late Cold War era éntente. When China failed to liberalize politically, failed to neoliberalize economically, failed to stay in its non-threatening place in the global supply chain as the low cost/low value added/labor intensive link, continue to build its military strength, & increasingly eager to throw its weight around & challenge/subvert the current global distribution of power, the stated rationales for détente started to collapse. Even trade became another point of friction, as opposed to the ballast it had hitherto always been. Even combating AGW has become arena for bickering & field to “win” the race to dominate green tech.
    6. I think it is well known in political science that, on matters of foreign policy, popular opinion generally follows elite opinion. Negative elite opinion toward the PRC & the CPC regime have heterogenous origins. Some are appalled by the regime’s hard authoritarianism & atrocious human rights record, always have been, such as Nancy Pelosi. Some are appalled by its anti-labor practices, as well as the negative impact of the “China Shock” to US manufacturing, such as labor unions & their political supporters. (Here though, offshoring of US manufacturing started in the 70s, to the “Asian Dragons”, China was just the latest stop. The US also reaped enormous benefits from global trade, that these benefits have disproportionally accrued to the rich & the corporations is due to pathologies in the US’ political economy, & largely not malice on the part of its trade partners.) Some are distraught that China failed to liberalize & neoliberalize as they expected & hoped. (This sentiment is particularly strong among some “Old China Hands”, such as David Shambaugh, Orville Schell & Michael Schuman.) Some fear the rise of the PRC & its [selectively] revisionist tendencies will overthrow the “rules based international order” that predominantly favors the US & the West, such as the liberal internationalists/interventionists/hegemonists. Some feel threatened by a rising rival power period (its regime type & human rights practices incidental), such as the US primacists, some of whom were fanning Nippophobia back in the 80s. Some are militarists looking for a new dragon to slay, so to justify the forever expansion of the MIC & the natsec state. Some are committed anti-Communists, never mind that the PRC is Communist in name only. Some are geopolitical strategists that simply feel more comfortable in a familiar state of Great Power Competition. Some naively or cynically hope that the China “threat” will promote domestic unity & foster domestic renewal, such as former self-styled left-liberals like Matt Stoller & Matt Yglesias. Some see in the rise of an “alien” threat an opportunity to promote their Herrenvolk nationalism & authoritarianism, which probably describe most of the GOP. I am sure many politicians & analysts have multiple motivations, although I believe GOPers are only motivated by cynical ones.
    7. I think the CPC regime’s worsening domestic policies have had a hardening effect on those more motivated by internal liberal values, not so relevant to those motivated by other factors. The CPC regime’s mass detention program in Xinjiang in ’16 – ’18, IMO likely meeting the criteria of crimes against humanity, & relatively (but only relatively) less harsh practices since, is Exhibit A. However, I would argue the ’19 protest movement in Hong Kong had a greater impact on Western elites, & broader public. Hong Kong is more familiar, the protestors marched & fought under the banners of freedom & democracy, & footages of the earlier peaceful protests & the later violent riots were broadcast across the world. In contrast, the only indications of the crimes in Xinjiang are satellite photos of suspected detention camps (some of which were not), leaked Chinese government documents (some appear to be genuine & other possible forgeries, still others misinterpreted), & accounts of people who have have experienced detention (some are quite believable & excruciating to read, others’ fall apart upon closer scrutiny). Unfortunately, the Uighur victims were/are largely nameless & faceless, mostly statistics in news articles or government reports.
    8. A great deal of the conventional wisdom in the West wrt to hardening (of the already hard) authoritarianism under Xi suffers from presentism & selective amnesia. I assess that the CPC regime likely committed crimes against humanity in Xinjiang from ’16 – ’18, because it is evident even if one takes the regime’s words at face value: > 10% of the Uighur/Kazakh population (higher if we consider adults only) were sent to extra-legal/judicial detention for varying lengths of time during those years, ostensibly for “de-radicalization” & “vocational training”, in reality punishment & intimidation. There is no possible justification for these policies, even given the wave of terrorist attacks in the region in the mid-’10s that caused thousands of casualties. Most media coverage & expert analysis seem to suggest that this is unprecedented since the Reform & Opening period, or at least once Tiananmen Square. They forget that Jiang suppressed the Falun Gong movement in the late ’90s w/ a brutal campaign of detentions & arrests targeting hundreds of thousands (if not millions), also ostensibly for “de-programming”. The core of the FLG has always been kooky & reactionary, but most of the tens of millions of followers at the time were casual adherents, desperately looking for means to improve their healthy, after the CPC regime dismantled the old system of socialized medicine. Indeed, one could see that the mass detention of FLG followers presaged the mass detention program in Xinjiang, which ostensibly targeted Salafists (though in reality anyone who displayed any sign that could remotely be construed as having conservative religious leanings, such as growing long beards as young adults, or having/forcing their wives to wear niqabs & burqas).

    Given the constraints of the format, I will stop here. I am sure I am missing other angles. For the PRC’s contribution to the downward spiral, I recommend Susan Shirk’s Overreach (on the part of the CPC regime, though the last chapter discusses US overreaction). For the US’ contribution, I recommend Van Jackson’s Pacific Power Paradox (traces the steadily then rapidly rising China Hawkery through the Obama, Trump & Biden Administrations). Jackson’s book is really a broad review of US policy toward the Asia Pacific over the decades, & how it took turns serving as security bulwark, aloof hegemon, & active arsonist in the region, alternatively contributing to, irrelevant to, & actively undermined the “Asian Peace”. One of his key insights is that Sino-US détente has been a central pillar for the “Asian Peace”, & that peace is now threatened by Sino-US rivalry.

    For the situation in Xinjiang, past & present, I recommend books & articles by James Millward & Darren Byler. It is worth perusing the stuff produced by Adrian Zenz & the Australian Strategic Policy Institute, but they need to be read very critically. I find their scholarship shoddy, & often not arguing in good faith.

    Reply
24. 24.

    YY_Sima Qian

    August 28, 2023 at 2:40 am

    @Carlo Graziani

    To answer your question from yesterday: I am not an economist, but I think the vast majority of the analyses by Western financial press & Western economists fail to grapple w/ the Chinese political economic as it is, & instead try to pigeonhole the pieces of data they see out of China into their mental models dominated by how developed OECD economies function. Some of the macro-economists seem content to rely upon the most superficial GDP accounting analysis, instead of diving 1 or 2 layers deeper. All tend to make wild assumptions & extrapolations, indeed have to due to the increasing CPC secrecy, but often fail to check their assumptions & extrapolations.

    China’s economy is weak right now, almost entirely due to the deflation of the real estate sector. All of the other sectors of the Chinese economy are recovering from the pandemic, evidenced by all of the indicators being ignored by Western financial press, but not enough to compensate for the headwinds from the real estate sector & achieve GDP growth of 5% in the next 12 – 18 mos (whatever official data says). The deflation of the real estate sector has resulted in great financial stress among real estate companies (both state owned & private), as well as many of the Local Government Financial Vehicles (LGFVs) that have funded & funneled China’s urbanization, infrastructure build out & real estate expansion.

    Analysts whose opinions I value all believe there is little threat of a financial crisis as of this moment, since the Chinese central government has by far the strongest balance sheet in the world, has more than enough fiscal space to cover the losses of the LGFVs/state owned banks, & more than enough foreign exchange reserves to defend the Yuan at whichever level it sees fit. The debt issued by LGFVs & RE development companies were spent to build infrastructure, public goods & housing, which have very long lives & thus more likely to still be able to generate value. The PRC’s current economic difficulties is not due to an exogenous shock or internal collapse, but an accumulation of distortions since the GFC & the massive stimulus enacted in response, & an effort at controlled demolishing by Xi & the Chinese government since 2020 (arguably since 2012 when Xi assumed leadership) to correct these distortions.

    Furthermore, LGFV debts specifically are backed by local assets, not fiscal revenue, unlike the case in OECD economies, & fiscal revenues are much more closely tied to GDP growth. Right now, the book value of all LGFV assets still exceeds all LGFV liabilities, Of course, the actual value will be quite a bit lower than the book value. How much lower requires diving into the thousands of assets spread across hundreds of LGFVs, analysis that is currently missing from Western press/think tank reports. The Chinese government has been sending hundreds of inspection teams across the country for exactly such a deep dive, to determine which LGFVs are healthy, which ones need to be restructured, & which ones liquidated. That is a time consuming process.

    There are many aspects to Western conventional wisdom on China’s political economy that are IMHO completely wrong:

    1) So much of China LGFV debt are asset based, it is improbable that these assets (infrastructure & housing) are worth zero, so the central government does not have to fill the entire hole, perhaps only a minority portion. LGFV debt is a liquidity issue, not a solvency issue, & it is well w/in the central government’s wherewithal to provide such liquidity. It is not doing so immediately to avoid a reflation of the RE bubble, a worsening of the distortion of local government finances, & to discipline the local governments.

    2) Because the current slowdown is the result of a controlled demolition effort, the Chinese government has greater control to modulate the deflation of the RE sector, & to avoid a complete seizing up of the sector, which could greatly worsen China’s economic downturn, given the centrality if the RE sector to credit impulse through the wider economy. If the slowdown had been caused by an exogenous shock (a la the Asian Financial Crisis) or unforeseen indigenous shock (a la the GFC), then the Chinese government’s would have less control over the events.

    3) Deflating the RE sector, no matter how controlled, will produce strong headwinds to the Chines economy, there is no escaping it, given the sector accounted for 20 – 25% of GDP. Shifting gears to other sources of growth (such as Industrialization 4.0, indigenization of the semiconductors value chain, energy transition, non-RE consumption) takes time, & it will not be a smooth or pretty process. China is making progress to varying degrees in most of these fronts, except for consumption right now.

    A number of the more insightful Western observers have recognized the nature of the current slowdown in Chinese economy, but they often still have the wrong conception of how the Chinese economy functions, thus their analyses & proposed solutions are often divorced from Chinese realities. Michael Pettis might be the poster child. He is correct that the RE bubble has been unsustainable, & that deflating the bubble will negatively affect Chinese GDP growth for years to come. However, he is wrong on several important counts:

    1) Pettis argues that the Chinese government has ignored the RE bubble, that is not true. As soon as Xi assumed leadership, Chinese central government launched programs to stem RE speculation by imposing restrictions on purchasing property. Combined w/ the anti-corruption campaign, completed RE developments as well as RE related employment actually peaked in China back in ’13 & has been slowly trending down since. That led to the economic slow down of ’13 – ’16 (which most Western commentators seem to have forgotten), driving the Chinese government to go on a deleveraging & excess capacity reduction campaign, which may well have saved China from a financial crisis today. Faced w/ slowing demand, RE companies started the “pre-selling” properties to buyers before start of construction (regulations later forced them to hold off until projects are at least 25% completed), to pay off debt coming due & finance new projects. This is a new form of financialization of the RE sector that alarmed the Chinese government. The government imposed the “Three Red Lines” in Autumn ’20, at a time when the Chinese economic recovered quickly after the Spring lock down, in face of a new mini-bubble in the RE sector. That was the start of the controlled demolition. It was always expected that some of the weaker developers would not survive the process.

    2) In ’21, when the Chinese economy was still buoyant, & the ROW reeling from the pandemic, the Chinese government went on a crack down of the cram school & the internet platforms industries. Most analysts would agree that the industries needed to be reined in, but the crack down short circuited the normal process for promulgating regulations. There were many warnings months ahead of time via statements by government officials & ministries, & Xi himself, but actions were sudden & caught most of the industries & their investors by complete surprise, which was what really drove down investor sentiments – fear of arbitrary governance. In hindsight, Xi was perhaps impatient to get on w/ his agenda (which is pretty populist economically), after encountering significant resistance during his 1st term while he was still consolidating power, & again interrupted by the beginning of the pandemic. He stressed the Chinese economy w/ 3 simultaneous [planned] indigenous shocks, making it vulnerable to the exogenous shock of Omicron in ’22.

    3) Pettis is correct that China has too much savings & investment & not enough consumption. However, he fails to distinguish between government investment to produce infrastructure & other public goods, industrial investment to boost capacity & capability, & private investment to purchase housing. He has been focused on the supposed waste in China’s expansive & expensive HSR built out post-GFC, but Glenn Luk has done detailed & data driven analysis of China’s HSR projects, & has concluded that the vast majority of these projects are not significant drains even on the basis of project financial analysis that ignore potentially massive positive externalities. I find Luk’s analyses very convincing. Industrial investment in China has been largely constant over the past decade (slight decreased over that time).

    4) Pettis has been on the investment vs. consumption soap box since the early ’00s, ignoring the fact that China has been on a accelerated schedule of urbanization, infrastructure build out to accommodate the urbanization, & industrial upgrade, all on a world historical scale. He rightly advocated China eliminating the unjust & repressive hukou system, which would have further accelerated the urbanization process, yet also advocates restraining investment into the infrastructure, public goods, & housing needed to accommodate the urbanization. That is ass backwards. His is the view of accountants aiming to maximizing financial efficiency, perhaps appropriate for developed economies, but detached from the developmental economics that serve the needs of developing economies.

    5) RE investment has been rising rapidly, but it is crowding out private consumption because households are exercising their agency to save their income for a property purchase (for cultural & financial reasons), not because their incomes are greatly suppressed. That is one of the main root causes of high HH savings rates. When HH purchase property, the transaction goes to the investment bucket in GDP accounting, but from the HH perspective it is actually consumption. Pettis & other Western economists often refer to a figure of HH income being 44% of Chinese GDP as abnormally low, thus sign of wage suppression. What this figure ignores is that the Chinese National Bureau of Statistics uses a very conservative formula to calculate imputed rent (which goes into HH income) than the OECD countries, & that difference alone is 4 – 8% of GDP. 90+% of Chinese HHs own their own homes. The CPC regime’s poverty reduction program is much more focused on “in kind” aid (free/subsidized housing, purchase of appliances, construction of rural housing, employment training/matching, communal kitchens for the elderly who live alone, etc.) than direct cash payments to HHs, & these “in kind” welfare account for ~ 7% of GDP. Adjusted for these disparities, HH income to GDP ratio is in line w/ OECD norm before tax, & higher than most after tax (because government tax revenues mostly come from VAT & not income tax, which is admittedly regressive). This is before considering the infrastructure & public goods investment that often have explicit or implicit poverty reduction objectives – such as connecting poor & geographically challenged regions to the rest of China & the larger world, dramatically reducing the cost & friction of communication & logistics.

    6) The hypothesis of deeply suppressed wages also runs against the dramatic increase in manufacturing wages in China over past 15 years (while those in SE/S. Asia have remained largely stagnant), even as China rapidly gained share in global exports & global manufacturing value added (now as much as the US & the EU combined). That points to both rapidly increasing standard of living, rapidly increasing labor productivity, & rapid climbing of value chains. Chinese wages & worker welfare are suppressed, there is no labor union worthy of the name, but not to the extent & not in the way that Pettis & others suggest. Workers in China, especially young workers, are overworked & overstressed, & could be better compensated, just like their counterparts across the developed E. Asia (Japan, SK, TW).

    7) Deflating the RE sector, making properties more affordable, will unlock savings for potential consumption in the medium to long term. China probably does not need a massive stimulus directly supporting HHs. The Chinese government likely fears directly subsidizing HHs is ineffective right now, the cash rebates will be saved, or worse used to reflate the housing bubble. The challenge will be to prod HHs to spend the unlocked savings, rather than keeping it in bank accounts or other saving vehicles. That means improving the depressed consumer sentiments, result of the shock/confusion of “Dynamic COVID Zero” H2 ’22 & sudden reopening at the end of the year, current economic slow down, & uncertainties regarding the future. It also means improving public welfare & health care, but China has made a lot more progress in the past decade than often given credit for. Public heath care insurance has been rolled out to cover > 85% of the Chinese population, although reimbursement rate is isn’t great. Cost of health care in China is also quite cheap. From personal experience, cost of medicine, checkups, tests & inpatient care in China before insurance rebate is an order of magnitude lower than the costs in the US after insurance rebate, & one can schedule consultations w/ specialists w/ only a few days of lead time, get blood works/CT scans the same day, & a follow up consult also on the same day.

    8) Pettis & others are also wrong that urbanization in China has run its course. Only 65% of the Chinese population is urbanized, & only 45% have urban hukous (meaning there is still 20% of the population living in factory dorms, or renting substandard housing, unable to access the public welfare in the urban areas where they live). There is still huge scope for housing upgrades in China, as well. Many HHs are still multigenerational living in small apartments, & the housing stock built before ’00 is of low quality & design unsuited for modern living, only retiree want to live in them. Based on the precedent of SK & TW, China’s urbanization probably still has a decade to run. There is still more than enough run way left for the Chinese RE sector to land softly in the medium to long term, as long as the Chinese government prevents a seizure in the short term.

    Conceptually, the path forward for China is rather clear:

    1) Continue to deflate the RE sector w/o a seizure. Continue the urbanization process until ~ 85% urbanized population.

    2) Restructure the RE developers & LGFVs, some will be liquidated.

    3) Restructure local government financing to reduce the dependence on land sales, although that means redefining the fiscal relationship between the center & provinces. Since the fiscal reforms of the early ’90s, the central government has monopolized tax revenues, left the provincial & local governments w/ unfunded welfare & developmental mandates, thus maintaining control over the provinces via controlling the purse strings. Local governments made up the short fall by selling their single biggest assets – land usage rights. It dovetailed w/ the urbanization wave in China, but that will have to change going forward.

    4) Further develop the sophistication of China’s financial system, which is the root cause for many of the distortions. In the early aughts, China was learning from the US on establishing a sophisticated & mature financial system, but the GFC shot the credibility of the US’ financial engineering & innovations, & the reforms were stopped. That decision perhaps led China away from potential minefields, but into thickets of thorns, instead. Rich & upper middle class HHs invest in property because they have few other avenues to sustain or grew the value of their savings. LGFVs took on debt to finance infrastructure & RE projects w/ very long shelf life & very long pay off periods, but poor short term ROI per commercial project financial models, yet they took out commercial loans w/ short maturities & high interests rates. This is contributing to the liquidity problem. One of the solutions is to restructure the LGFVs’ commercial loans to  sovereign rated loans w/ low interest rates & long maturities, & that is already starting to happen. China needs a more mature bond market.

    5) Hukou system reform is long overdue, & will probably have a big positive impact across the economy in the medium to long term, including the RE sector. Jiangsu & Zhejiang, 2 of China’s richest provinces, have already issued regulations abolishing hukous except for Tier 1 cities. I would not be surprised of most of the rest of the country follow suit in the next year or 2. This will also help the RE sector in lower Tier cities, where there have been the most short term overbuilding. The increase in people looking to access public welfare in their cities will further stress their budgets, which gets back to #3.

    Again, due to the constraint of the format, I will stop here. I have probably made mistakes in the above missive, the economists among the audience can correct me.

    For further reading, I recommend the contrarian views (relative to the conventional wisdom of the moment) from Adam Tooze (which is publishing a series of 5 articles on his substack on this topic, 3 are out right now), Nicolas Lardy at the Peterson Institute, & Louis-Vincent Gave at Gavekal Dragonomics (probably the best shop researching Chinese macro-economics).

    As mentioned before, Glenn Luk’s Twitter feed & substack is must read, since he is willing to dive a layer or two deeper into the Chinese political economy than the vast majority of Western analysts, & he is prolific. Lei Gong’s Twitter feed is also worth following, he does not hesitate to call BS on what he perceives to be ill-informed or ignorant analyses, though his own tend to give the Chinese government the benefit of the doubt. Both follow Chinese economic & technological development more as a job-adjacent hobby, but offer a wealth of unconventional insights.

    As for more mainstream analysts, who produces data based analyses (as opposed to vibes & feels), self-aware of their limitations, & are not beholden to their mental models: Brad Setser for Chinese balance of payments, capital flows & central government balance sheet; Adam Wolfe at Absolute Strategy Research; Andrew Batson at Gavekal Dragonomics & formerly of WSJ; Tom Hancock at Bloomberg.

    I will send out links later.

    Reply
25. 25.

    YY_Sima Qian

    August 28, 2023 at 3:14 am

    @YY_Sima Qian:

    Addendum: it is certainly possible that Xi & his team could fail in the delicate dance going forward, that they fail to stimulate private consumption, & Industrialization 4.0/indigenization of semicon value chain/energy transition fail to realize the expected economic boost. The concentration of decision making in Xi’s hands can certainly lead to policy errors, such as the heavy handed crackdown of the cram school & internet platform industries, & the 3 Red Lines targeting the RE sector risked causing a seizure. He & his team seems to be learning, though, regulations on AI & data security went through the normal draft notice, public comment, then finalized enactment process, w/ most of the unrealistic & unworkable provisions found in the draft notice stripped from the final version.

    Useful links on analyses of Chinese economy:

    Glenn Luk’s 5 part series on LGFVs on his substack.

    Glenn Luk’s substack article on the financial sustainability of China’s HSR build out.

    Glenn Luk’s Twitter feed.

    Lei Gong’s Twitter feed.

    Brad Setser’s Twitter feed.

    Andrew Batson’s Twitter feed.

    Tom Hancock’s Twitter feed.

    Adam Tooze’s ongoing 5 part series on China’s economic challenges.

    Nicholas Lardy’s contrarian view on China’s economic challenges.

    Louis-Vincent Gave’s contrarian view on the prospect of a financial crisis in China.

    Adam Wolfe’s Twitter thread on the context of high reported youth unemployment rate in China (before the Chinese government stopped publishing the data).

    Overall, if the central thrust of any China analysis is an amateur effort to psychoanalyze Xi’s mind, as if it is the main driver of events in China, then it is not serious analysis. Xi’s inner thoughts are unknowable, & the CPC regime’s fragmented authoritarian system does not work that way.

    Reply
26. 26.

    YY_Sima Qian

    August 28, 2023 at 5:08 am

    @Adam L Silverman: I have a comment in moderation, containing too many links. I would greatly appreciate it if you or another front pager could release it. Thanks!

    Reply
27. 27.

    YY_Sima Qian

    August 28, 2023 at 6:29 am

    Thanks for releasing the comment!

    Reply
28. 28.

    Another Scott

    August 28, 2023 at 7:33 am

    @YY_Sima Qian: Thanks very much for the detailed reply.  I appreciate it.

    Consider putting it, or something like it, on Medium or Substack.

    Thanks again.

    Cheers,
    Scott.

    Reply
29. 29.

    Evil_Paul

    August 28, 2023 at 10:26 pm

    Damn. Burning the piano.
    The way I’ve heard it, that’s a tradition that goes back to WW I. An RAF squadron commander insisted that playing the piano improved dexterity and made you a better pilot. Tried to make all his pilots learn even though it was an extremely unpopular idea. When he was killed in action, his pilots brought the piano out onto the runway, took turns playing it (badly), then burned it in memory of him.

    Reply