It’s a Minsky moment. Welcome to capitalism, China.
IIRC they were antagonized by the insanely ethno-nationalist regime of the Khmer Rouge, who were slaughtering ethnic Chinese and Vietnamese and, out of paranoia, launching preemptive incursions in neighboring countries. China attacked and instantly regretted it; Vietnam, with some 80-million strong right along its border and having many battle-tested warriors some three years after the fall of Saigon, said “Game on”, invaded Cambodia, crushed the Khmer Rouge, and installed a puppet who still rules to this day.
I think this is a key aspect that many don’t realize. It’s not just Evergrande…in fact, there are several similar companies that are also on the edge of or even have already defaulted on loans. Even if it was ‘just’ Evergrande it ould be disastrous, but we are looking at the potential for a general failure in a whole sector of the Chinese economy, and one that is hugely more tied in and connected to the Chinese people than this is in the US or any other country on the planet. And it’s a bubble of massive proportions…again, I don’t think people really realize the scale of this thing or how invested (in every sense of the word) the Chinese people are in this.
It’s why it’s on my list way higher than Taiwan or the Indian border dispute. And it couples with other very serious issues that are also impacting China right now.
Agreed - I mean as soon as Evergrande became a story, my first question was “Okay, so who’s next? What else is out there?” It’s as clear as day that Evergrande wasn’t the only player out there because the Chinese government was essentially blessing the real estate bubble growth – in the same way that US politicians in 2005-6 had no problems with subprime mortgages. It’s really their version of the subprime crisis. The only good thing for China is that households typically have more savings, so maybe they can outlast a crisis – for a while.
Long term? I think China can fix this and they could even end up being a model for governance worldwide – which is a scary thought. But again, just because a country or regime has the capability to grow from its scandals and mistakes doesn’t mean they will.
I still hold, as I have held for a while, on to the position that China’s rise is generally inevitable, that it will eventually overtake the U.S. as the premier global power. But what’s much less inevitable is how long they maintain that status. And for the record, I think a lot of China’s success will have much less to do with their brilliant governance and more to do with the US crumbling from within.
Exactly. And in China, it’s uniquely weird (it’s 'capitalism with Chinese characteristics). In China, no one owns the land their building or whatever is on. The state (CCP) owns everything and basically leases the land for long terms (that can, of course, be annulled any time the CCP wants…and often they do if they can make more money by leasing it to someone else), usually to companies like Evergrande. These companies purchase these leases (at very expensive rates), then leverage those leases to get the capital to built whatever they are trying to build. Often they sell the apartment or whatever long before construction starts, using that money to buy more leases. It’s almost a Ponzi scheme and is totally based on the expectation that they can and will always sell more, and the prices will always rise. On the surface and from a western perspective it’s really crazy…but it works in China. This has to do with that 70% household wealth and is tied into things (I think) I mentioned earlier (or dreamed I mentioned and didn’t) about needing a house or apartment for basic services like medical care or school or other state benefits (tied into a weird system called something like hukou…not sure how it’s spelled) that has to do with where you are born or where you have property. It’s also the best…and often the only viable or reliable…investment for most Chinese, which is why you see that 70% wealth stat, or the fact that many Chinese have 2 or 3 properties. Hell, the Chinese game the system and actually get divorces that are fake so that they can have more than the allowed 3 properties. They also go into huge debt and often get loans or other money from their families to purchase properties.
The CCP is much more involved in this than the wildest dreams of the US politicians during the subprime mortgage fiasco. And by ‘CCP’ here I mean at all levels. The local CCP governments use this money (and what they skim off in a variety of ways) to not only pay for the government’s functions but also to make bank for themselves. The national CCP uses this in similar ways, taking their cut. But also, the CCP is involved in making the loans, leveraging the leases, OKing the buildings, oversight and authorization and approval of construction and adherence to regulation…and all of the corruption to circumvent all of that at their specific direction. That’s why so much of China’s real estate is called, by their own people, tofu construction. Yet the people STILL buy it. It’s really hard to grasp the scale of this, or how invested (again, in every sense of the word) the CCP is in this…as well as the Chinese people.
Here I have to disagree with you completely. I don’t think this can be fixed, as it’s a fundamental issue with the system itself. There is no way to fix this, IMHO…it’s a disaster waiting to happen, and if it doesn’t happen now, it will down the road. I also don’t think that the CCP’s model is useful outside of China except in broad authoritarian terms, as I think it’s unique to China and the Chinese history and mentality. I also think that there are so many flaws and issues that it’s just a matter of time before it collapses under it’s own weight, but that’s much more speculative.
China’s rise is inevitable. Simply, with over a billion people you are going to have weight, and if you have even a touch of prosperity the aggregate is just huge. But the current government is on a foundation of sand, IMHO at least, and the flaws are more evident all the time, especially if you know where to look. One thing I didn’t mention here but is a real issue is demographics. Again, this is a self-inflicted wound, but the CCP really, really screwed themselves with their one-child policy, and this is something the, again, can’t ‘fix’…at least not on a time frame that will save them.
As for the US, I again disagree that we are crumbling from within or are on a downward trajectory. I think that the US, at its base, is solid. Today we are going through rough times and seem divided…and in many ways we are. But this has been the case multiple times in history, and, again, I think our fundamentals are sound. But regardless, I don’t see China as becoming a premier global power, not under the current government. YMMV of course. 
To be clear, when I say “fixed”, I don’t mean avoiding the near-term damage - that’s already baked in the cake. China’s in for some pain over the next 2-5 years, guaranteed - no doubt about that. This is so much worse than their little stock market collapse a few years ago. This isn’t a story about idiots chasing bubble stocks; this is China’s middle class in peril. In the next 2-5 years, it’s absolutely an existential crisis - serious as shit gets in the post-1979 era and have said this from the start of this crisis.
But China plays the long game, and as enigmatic as Xi can be, when you really see what’s what, China’s policymaking ideals are kinda, sorta in the right place, assuming that this isn’t a dog and pony show and that Xi intends to rectify the balance of market power more in favor of the working class. I know it’s antithetical to those who believe in the power of the invisible hand but honestly, I’ve never totally invested my faith in that hand – that might be where you and respectfully depart in terms of our long term prognostications.
That appears to have been the Evergrande business model. There are now many people with their money tied up in apartments that haven’t been built but on which no progress is being made.
One reason for this mess was that complaints about government favored companies got censored. If early information on the problems had been all over the web and the papers, the bubble wouldn’t have gotten this big. That’s where I’m optimistic. State control and censorship does not work well with free markets. Why invest in a company if you can’t trust its published balance sheet?
A lot of the growth happened during a time of relatively greater freedom, remember.
I’m relatively optimistic here as well. In the longer term, if China can contain crises while simultaneously enabling some revolution/evolution, maybe it ends up being like a giant Singapore. China will never be a Western democracy - I frankly don’t think they should be. If anything they should be a “democracy with Chinese characteristics”
It’s a good thing that the US doesn’t have buildings collapsing from shoddy construction and ineffectual maintenance
If anything, “the fundamentals” from a financial standpoint are less sound than they were even in 2007, notwithstanding the socioeconomic issues brought to the forefront of public awareness by the impact of the pandemic. The US economy is predominately leverage by necessity.
China has no interest in being the “premier global power” in any military sense; economically, they are already more influential in financial reach in their region and stemming to Central Europe and Eastern Africa than the United States by dint of “investing” in other countries in the Belt and Road Initiative (although said investments are more in line with loan-sharking and payday loans, and area into which the US has only engaged in domestically). The naval saber rattling is primarily intended to reinforce their image of strength domestically and to make sure that the everybody understands the stakes to which they are invested in controlling trade in the Asian Pacific region. If the PRC actually moved to invade Taiwan instead of just agitating about it it would be such a financial disruption that it would actually cause the very problems they are trying to avoid. The Communist Party of China (CPC) understands that it is necessary to demonstrate military strength to maintain economic dominance as well as control their population.
The irony of the complaint that the “Evergrande business model” is some kind of fatal flaw is that it is US-style real estate development studied down to the letter. Buy some property, start development, and then leverage the presumed value to buy more property, ad nauseam. “The apprentice becomes the master…”
Stranger
I thought about linking to a bunch of examples of collapsing Chinese buildings, infrastructure, and general tofu construction, but this sort of whatabout-ist stuff is just silly. The fact you think they are on par is a good indication you really don’t know much about this and are cherry-picking instances of bad things happening in the US to justify the same stuff in China. That’s fine and in some ways it’s relevant, but saying it happens in the US doesn’t mean it’s not a worry when it’s happening in China…and if you dig deeper you would see that it’s really not comparable. But I’m not going to play the what about game with you, as it’s just not interesting to me.
Man am i late to this party.
first, since Deng Xiaoping the faustian bargain has been you let us rule and we allow you to get rich. Full stop.
Second, without getting personal, I know someone that worked at a strategic level on the Beijing summer olympics and the upcoming winter olympics. The big difference is that the summer olympics was a China showcase, the Winter olympics is a pure propaganda piece
Third, Xi Jinping is the first among equals that has decided not to at least handover power on paper.
Fourth, all of the crackdowns over the past few years has resulted in self-censorship. The government doesn’t have to actually do anything, as the local governments, media folks, wechatizens ad nauseum fall over backwards to self censor. This is the pendulum that has swung after a few decades.
Fifth, the greying population and economic reality of the one child policy is rearing it’s head.
Sixth, the affordability index is completely out of whack. Property prices are crazy. My property bought in the mid 90’s has gone up 10x.
Seventh, Worse though is the over leveraged property companies with overleveraged customers. This is a nightmare for the government. Too big to fail, and too big to keep afloat and too big to keep the fantasy of ever rising property prices.
Eigth, covid driven supply chain disruptions will continue for prolly the next 2 years before reaching a new equilibrium.
okay, that’s enough brainstorming and food for thought…
Well, except for the fact that the current unpleasantness is the first direct shooting on that border since the 1970’s.
Back in early 1990s, I made a simplistic prediction. The Soviet Union lasted about 70 years, 1920-1990. So the People’s Republic will last about 70 years as well. That gives 1950+70 is 2020 for the PRC to collapse.
I don’t pretend there’s any validity to the prediction, especially because it’s wrong. 
But I do think that modern communications make inequitable regimes unstable. In some sense, the boom-bust cycles of economies are an inherent check on those in power.
@AK84 that is certainly incorrect. There were definitely incidents in the second half of the 1980’s and into the 1990’s. I didn’t follow closely after that until the last couple year flare ups on the Kashmir border.
And was there direct shooting recently? Propaganda news pieces said no shooting but use of medieval type weapons for hand to hand combat was part and parcel
I am going by the Indian reports that I follow.
I had a reunion with some friends I hadn’t seen in 25 years a couple months ago. One of them, Bill, had lived in China for some time, managing an apparel fastening plant. He told us some horror stories about doing business in China. He said that he fired a worker who had been stealing from the company. He said the former employee contacted the Triad, the Chinese equivalent of the Mafia, and they paid him a visit as he was standing on a street corner waiting for transport. They battered him with pipes and left him laying. He added “It was interesting.”
Bill said when he left the country for good, he had to hire 4 Cambodian bodyguards to escort him to the airport. They would get $500 if they managed to kill anybody who attacked him. Again, he added, “It was interesting.”
I asked him why he kept using that phrase. Is it because of the Chinese curse, “May you live in interesting times”? He said yes.
Yes, they were essentially using fists, rocks, and reportedly on the PLA’s side clubs with iron nails sticking out of them. Medieval indeed. That said, on the Indian side there were over 20 deaths and a lot of injuries, so it was a pretty serious clash. The PLA, of course, reported 4 deaths and a few injuries…something like that.
So, just an update, but looks like the India/China military talks broke down, with both sides blaming the other. Just for those who thought that the India/China border dispute was old news and not any sort of issue.
I give this a sphincter rating of, oh, maybe 6. Not something to freak out about, but perhaps something to actually follow and not handwave away. More concerning is China (and India) moving heavy forces to the area and building infrastructure in the region to support large-scale operations.
Still doesn’t make my own top list of events I’m concerned about, but it’s moved up a few pegs after this. YMMV of course.