GORDON CHANG: China’s stocks keep rising even as the economy shows deep signs of strain
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China’s communists have returned to their old ways, at least in international financial centers.
Foreign investors, who once described China as “uninvestable”, are now flocking to the country’s stock markets. According to the Institute of International Finance, offshore inflows into Chinese equities in the January-October period increased by 443.9% compared to the same period last year.
But observers aren’t sure this is a good idea. “Many investors have completely bought into the narrative that nothing can stop China’s global rise,” writes Rana Foroohar of the Financial Times. Investors believe Beijing has already won the trade war with President Trump and is poised to dominate chips and artificial intelligence. It is certain that China will become the new global hegemon.
Even Foroohar, once the Chinese bull, no longer shares the optimistic streak. He argues that the fundamental nature of the regime makes China unprepared to lead the world.
Foroohar is right. When you look more closely, the bullish narrative appears flawed.
First of all, the Chinese economy is stagnating. Key indicators show that official gross domestic product figures are exaggerated.
Chinese President Xi Jinping is pushing an exhausted economic model to the breaking point. (Oliver Bunic/Bloomberg via Getty Images)
More importantly, Xi Jinping is pushing an exhausted economic model to the breaking point. For example, decades of overinvestment in real estate has created a bubble. According to He Keng, a former senior statistics official, Chinese It has enough vacant housing for the entire population of 1.4 billion. This oversupply cannot be extinguished without either a crash or, worse, a Japanese-style recession of a decade or more.
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Xi has also presided over the overbuilding of infrastructure, particularly the high-speed rail network. Chinese rail technology is amazing, but the system is losing tons of money; This will be evident if China State Railway Group Corporation properly accounts for capital costs and debt servicing.
But Xi is not changing course. Last month, at the Communist Party’s Fourth Plenum, it announced the 15th Five-Year Plan, covering half a decade starting next year. The plan calls for “high-quality development” through advanced technology.
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As a result, China is developing the world’s most efficient manufacturing – the country’s “dark factories” are so automated that there are no lights on assembly lines because humans are not needed – and is flooding the world with its products.
Desmond Shum, author of Red Roulette, writes about X: “What makes China unique is not the technology, but the political environment that has accelerated its spread.” “In democracies, automation is slowed by elections, unions, NGOs and courts. China has none of these shock absorbers. When the state forces it, the system moves.”
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The Chinese Communist Party has created an “engineering state”. Dan Wang, author of Breakneck: China’s Quest to Engineer the Future, says its leaders treat society as a huge engineering project, where people are just another building material that the leadership wants to replace and destroy when necessary.
China’s “construction material”, that is, its people, is now extremely unhappy. In this decade, gloom settled over Chinese society; This is evident during strict Covid-19 lockdowns and especially after the economy failed to recover from the pandemic.
Widespread pessimism has led to people becoming “inactive” or “retiring” and various ways of disengaging from society. And people either postpone or refuse to have children. This trend, along with other factors, will cause China to lose three-quarters or more of its population this century.
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No wonder Chinese intellectuals and social media users have called this moment their country’s “trash time of history.”
Meanwhile, Xi Jinping has no other response to society’s unhappiness other than launching a censorship campaign against “extremely pessimistic sentiments.” Most importantly, he is not willing to implement structural changes to put more money into the hands of laobaixing, the ordinary people.
Consumption currently accounts for around 38% of the country’s GDP, one of the lowest rates in the world. This rate will drop further, given Xi’s pro-industrial policies.
Although few economists, analysts or observers think his export-led plans are sustainable, Xi is confident in his power. World markets are not large enough to accommodate China’s factory production.
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Talk about short-term thinking. “We have been evangelized for decades to think that China has a culture of strategy and has always taken the long, patient view,” Blaine Holt, a retired U.S. Air Force general and current China watcher, told me. “Today the Communist Party is hanging by a thread, wondering how it will get by for the rest of November instead of the rest of this century. Long-term no longer means decades, but months.”
Chinese President Xi Jinping speaks after participating in a group photo during the G20 Summit in Rio de Janeiro, Monday, Nov. 18, 2024. (AP Photo/Eraldo Peres) (AP Photo/Eraldo Peres)
“This is a powerful manufacturing machine standing atop a fragile socioeconomic structure,” Shum writes, referring to China. “It’s a flammable combination; it’s not an environment that foreign capital is keen to take on.”
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For now, foreign capital is willing, but China has punished investors before.
Given the unstable nature of the economy and society, foreigners are almost certain to lose money again.
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