Red Flags: Why Xi’s China is in Jeopardy: George Magnus, 2018, Yale university
Intro
-2017 Xi started “XJP Though on Socialism with Chinese Characteristics for a New Era”
-2018 disbanded term limits, tightened Part grip
-Xi is taking advantage of splintered world economy to redefine China’s role
-4 economic traps
1. debt trap
2. RMB trap
3. demographic trap, ageing trap
4. Middle-income trap
-definition of reform is different; reform of prices, taxes, admin in accordance to CCP
-centralization of power is reaction to perceived external threats
Ch3 End of Extrapolation
-2000s China no longer an export led economy, but an investment led one, reliant on credit to grow
-income inequality has grown
-cannot continue: more credit -> economic and fin instability -> possible growth crunch
-CCP wants to rebalance from investment to consumption economy. If they reduce investment but people do not consume, still have a surplus. CCP needs to reduce savings rate, encourage spending
-China investment has been inefficient, mostly in infrastructure
-SOE reform: stalled, reversed
-land reform: still in hands of gov’t, do not compensate farmers
Ch4 Debt Trap
-2008, world demand slowed, many factories let people go, China started easing credit through bank lending, and has continued to 2017
-household debt usually for mortgage
-local govt has monopoly on land sales, want high prices for coffers
-people use housing as a bank account
-if housing prices fell, many implications
-non-fin borrowing: SOE, local, prov govt
-local govt had LGFV local govt fin vehicles, exchanged for bonds, bonds used to increase borrowing
-cannot grow out of debt because debt is used to grow
-high savings rates have been around for years, but credit oriented investment and growth significantly increases loan to deposit ratio
-most instability is not from main state banks, but outside
-probably debt will simply drag growth and not implode
-smaller banks at risk
-deleveraging must be done -> growth must stop for a while, but China has time
Ch5 Renminbi Trap
-China cannot have 1. currency stability if domestic money and credit policies are not compatible, 2. current account surpluses and capital controls restrict accumulation of rmb by foreigners
-china needs current account deficit -> allow foreigners to hold rmb, or to have open capital account, but china restricts capital outflow
-china restricts foreign goods, still runs surplus, as well as restricts capital outflows
-ch bond market heaviky restricted
-ch controls markets by state
-impossible trinity: pegged xch rate, independent monetary policy, open capital account, only 2 of 3
Ch 6 Demographic Trap
-fewer working age pop (WAP), less income, less spending, less growth
-skills shortage
-ch retirement age: 60 men 55 women
-could increase productivity
-increase robots
-hukou restricts workers
-less women in labour force, underutilization
-increased health spending
-inadequate protection
-trad multi-gen homes now “beanpole”, multiple-gen, separate, few siblings
Ch 7 Middle Income Trap
-nation squeezed btw low income, poor countries and higher wage, richer innovators
-transition btw low cost to innovation
-ch moves from investment growth to productivity growth
-fin stability doesn’t incr productivity
-how does authoritarian regime help?
-property rights, rule of law provide confidence for investment
-efficient governance, corruption, transparency, personal freedom
-may need disruption to change, but CCP does not want that
-can ch innovate in a closed environment?
-tech still dependent on foreign sources
-need country-wide education, majority completing secondary school
-in ch only 24% complete, lower than other countries that broke the middle income trap, 90% in urban, but only represents 25% of all kids. 30% rural kids don’t finish jr high
-health care in rural very bad, hukou prevents them from better environment
-ch incr CCP education, lacks nobel laurieats
-can ch do innovation in an authoritarian govt?
Ch8 Trade Dogs of War
The rest of us look on with curiosity and concern at both the Trump administration and China. The US says it supports the multilateral trade system in principal, and yet it is simultaneously pulling back from its long-standing Asian and global commitments. China tells the world that it wants to champion globalisation, maintaining a free and open trading system, and open up to foreign firms and capital, and yet pursues policies that are the exact antithesis. It is precisely as Edward Luttwak described. p156
-Trump gives ch an advantage when the US left the TPP
-ch has big market but lacks credibility and trust, economic respect but not trust
-world would want ch to abandon capital controls or run a trade deficit, us does both
-world can’t access ch capital due to restrictions on capital exports, won’t change soon
-world wants ch to import more, does not need ch capital
-to import more means bal of payments deficit -> save less, import more
-ch unwilling to do this
Ch 9 The East Wind Prevails over the West Wind
-BRI is large connectivity project
-many projects pre-existed, so cannot say how large is BRI
-BRI eurasian project or ch economic, foreign policy?
-use ch skills, expand ch tech abroad, establish own products standards
-BRI used to dump excess ch SOE products abroad
-debt trap for poorer countries, cannot pay -> ch takes it over, form of colonialism
-ch extends itself to SCS
Ch10 Xi Jinping’s China
-politics back in command
-high growth vs fin stability
-current high leveraging needs to be reversed sometime
-GDP targets need heavy financing, which need to be paid back vs slower growth , people oriented, environmental, social goals
-demographic issues: rapid aging, smaller work force