Chinese Economy : Updates and Discussions

Nilgiri

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Dec 4, 2017
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I have always believed that economic problems are always laced with political undertones, just never realized how much. Thank you sir for the excellent write up. I am so sorry putting you through the trouble of typing all that, regrettably I will bug you a bit more. The true oligarchs in Pakistan is the military as you rightfully wrote. Most of their produce is commodity goods like cement. So, technically speaking ramping up cement production in India should cut our import(however little) from them and also make us more competitive in global markets, further hurting their exports prospects. Pakistan is largely speaking an agricultural economy, their economy is not as diversified as ours. Their agriculture much like ours depends heavily on the elements. A lack of water for example can have devastating impact on their agriculture, reason for all the Indus Water Treaty rumblings. It seems to me that there is a lot we can do to hurt them economically, yet very little action is seen on the ground. Why is that ? Are their any legal barriers preventing us from taking punitive economic action ? Or is it something else ?
Its no trouble at all....members from another forum know just how long I can type things up on certain matters :p ...its the teacher in me I suppose. I also like to see how my thoughts on issues comes out in written form....so don't worry...its no trouble but fun.

As for Pakistan economy being not as diversified, thats true. But there is not so much we can do internally.

If you look at say the poorest African country, as long as it is within its means externally (trade, loans, investment etc i.e stuff that brings in currency not under its control)....internally there is not much another country can do sanction wise (i.e people grow food, eat that food, do some basic production of other stuff and build dwellings....all using the currency the country creates and manages by banks for that).

The only thing that is a country's sensitive spot w.r.t others is the external footprint/imprint (i.e stuff you cannot make yourself in reasonable timeframe/effort...so you need access to what others can sell you and pay for it by selling them stuff you can make). It surprised me that only now India revoked trade advantages that Pakistan enjoyed and is starting to build up pressure (i.e tariffs on top of that). However it needs far more concerted effort with other countries given Pakistan mostly gets bailouts/loans and engages in trade with those countries compared to what it does w.r.t India.

Your example of one industry (concrete) is little more nuanced as we would need to explore what absolute advantage vs comparative advantage is....that just gets a bit complicated....but conclusion is another supplier can still compete with you on your own turf even if you have full realised economy of scale (because you have found even MORE productive use for the resources going to that industry whereas they haven't so they sell for less to you etc even though you are more efficient/productive/cheaper because you would rather make more money elsewhere from same set of resources).

A binary option to MNCs (and developed countries organisations more broadly, given their govts would not be too responsive so its best to bypass them altogether) for example should have been given right after 2008 mumbai attacks....either you can engage (invest, trade , operate) with Pakistan or with us....but not both.....but maybe Indian govt did not want to rock the boat too much economically. Now we have grown much more and our trajectory is much more solid too.....so I expect next administration to take some action on this front. Make examples of every MNC that continues to operate in Pakistan....India can afford to lose a few given we have plenty operating inside India to take the place of those that choose wrongly. We are no longer dependent on just a few.....the market size is large and resilient enough now....so time to start using that. Make Pakistan fully reliant on Chinese SOEs and a mix of standard gulf investors.....in fact we can start checking how far we can push UAE (regarding the latter) on it too....they have really commited lot more to India than Pakistan....and just need bit of extra nudging I feel. But first get EU, USA, Japan, Korea, ASEAN, Australia etc... companies to make the "tough" choice....rest will follow depending on what we can prove there.

How do you explain the "till now insulated" economy of China with over 600 million apartments lying unoccupied in Ghost Cities, all of this happening with massive funding from Central Banks of China. Still the CNY is appreciating.
China is interesting case. The govt is a complete static monolith that has flipped on its earlier fully Marxist doctrine (keeping only the authoritarian aspects, but ignoring the process methodology).

So basically in the 80s, they went for greater foreign participation in their economy and have not looked back.

Why the bubbles in certain sectors (like real estate which you have pointed out) have formed is due to the overriding govt intervention present again (this time afforded a large buffer from the more productive and competitive industries). It is basically what the Chinese govt can "launder" for use in less competitive "internal" sectors...with the goal of providing easy employment (construction is notable one, mining is another....construction/mining etc workers don't need a heck lot of investment to train...nor do they face much competition from other foreign labour pools etc).

Hence not only do we have ghost apartments etc....there is also massive renovation always going on (one observer I know noticed that malls basically get redone every 3 years which is ridiculous....and a clear employment over market need based scam).

China has basically bulked up enough elsewhere (electronics, manufactures etc) competitively plus has created a forex stockpile over the years to subsidise its employment further. Think of this as holding back + investing foreign earnings rather than using it to consume products from the producers of other countries. If you did the latter, it makes more productive/market sense overall....but at cost of a huge amount of jobs internally. Basically China operates fully on jobs + prevent revolution/upheaval tendency in the short term (because they allow ZERO political process from the actual people). Market economy is delegated more the mid and long term objective.

That is why huge part of Chinese economy is still state run.....it is the bridge between the overriding short term goal and mid+long term stuff. No matter what they say otherwise, I have it on good authority (from a CPC defector) that Chinese govt was and still is spooked a huge deal by Tienanmen massacre.

This kind of stuff comes out much later too as well (but is part of the overall thing going on in China):

https://www.reddit.com/r/science/comments/aydmbb
The answer for the anomalous Chinese model normally comes from asking the "why" rather than the "what and how".
 
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Shajida Khan

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The answer for the anomalous Chinese model normally comes from asking the "why" rather than the "what and how".
But doesn't that 'un-do' a lot of things that an economy should provide? A functioning and diverse economy that is. See it in this way, if the Government keeps on doling out these 'jobs' and create jobs out of thin air it does exactly opposite of what a healthy economy should do: to create a diverse set of jobs according to the demand. It essentially creates a rather 'unholy' coupling among branches of the economy where it should not exist! I moves money from one branch into another artificially. Now, China has experienced a sustained growth but when that growth will stop it will blow up ALL those jobs which were not even looking as connected. Whats more, it will completely blow up any saving/investment that people did in those "projects". I guess people of businesses must have bought those apartments and business spaces which are just existing as a vault of wealth now.

In a different more organic design, the limited job opportunities will force people to find new ways for employment or business, keep the wages lower and consumption in line with real demand. Hence a shock will destroy only that part of the economy which was vulnerable to it, keeping other parts relatively less damaged.

All depends upon how much cushion the government has piled up for absorbing the shock. So long the cushion lasts ie China's forex reserve etc, the system will work. In due time, it will go bigger. But the day the cushion gets side-stepped or runs out, it will be a blood bath of epic proportions. It can also cause a sort of "perpetual stagnation".

I remember that Japan of 90s or 80s had a similar structure. They had weird jobs which made no sense: like job for a guy to run the elevators etc. It was not needed but the job remained because the government paid for it. Then in 90s Yen appreciated, causing a slump and stagnation of economy from which Japan has not yet recovered.

Its the same pattern, you delay the pain or divorce from reality, it will come back and bite you hard. Its only a matter of time. And yes, time can be arbitrarily long. Its never 'different this time', its just how long.
 

Nilgiri

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Dec 4, 2017
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But doesn't that 'un-do' a lot of things that an economy should provide? A functioning and diverse economy that is. See it in this way, if the Government keeps on doling out these 'jobs' and create jobs out of thin air it does exactly opposite of what a healthy economy should do: to create a diverse set of jobs according to the demand. It essentially creates a rather 'unholy' coupling among branches of the economy where it should not exist! I moves money from one branch into another artificially.
Well in China (in current govt setup), the economy is seen as a means to an end, rather than being an end itself.

The end is more focused on ensuring complete govt control and social stability. Doing that while the people are poor and miserable is lot more difficult than if they have some means. Added advantage is the more bulk they have, the better Chinese govt (CPC party) can project globally too (which again hedges better for its continued survival/relevance).....because they have come to understand that this (lack of power projection) is why the USSR collapsed so suddenly even with the might it achieved.

Thus the more nuanced economic debate (on free market sustainability) does not really apply that much in the first place to China right now.

Now, China has experienced a sustained growth but when that growth will stop it will blow up ALL those jobs which were not even looking as connected. Whats more, it will completely blow up any saving/investment that people did in those "projects". I guess people of businesses must have bought those apartments and business spaces which are just existing as a vault of wealth now.
We will have to see. It is a matter of velocities and accelerations of different things relative to each other in the end (esp when some shock or group of shocks occur) and how the interact and play out during any collapse (which basically defines its scope and size).

Thats why the ironically named derivatives played a large part of the 07/08 crisis for similar reason....just like why you have to choose the correct detonation velocities and intensities when levelling a building so it implodes on itself rather than affect the neighbourhood or start major domino collapse even beyond that etc.

In a different more organic design, the limited job opportunities will force people to find new ways for employment or business, keep the wages lower and consumption in line with real demand. Hence a shock will destroy only that part of the economy which was vulnerable to it, keeping other parts relatively less damaged.
Yah but governments and societies broadly operate and argue with a huge fudge factor that is labour inelasticity.

If labour was perfectly elastic, there would be little social friction to job churning (i.e more jobs open up elsewhere by the market which easily soak up the ones displaced). But real world has such things like getting a truck driver to learn high level coding overnight (just one extreme example to illustrate)....just doesn't happen because its impossible. So the rest is matter of scale of that going on in some particular country. Human beings are not perfect free market units....we have some level of inelasticity in all of us. That is where the govt has a role....but where the govt fails is it is swept up by its own ego and donors and over-intervenes in skewed way most of the time rather than having a good open debate and standardised application for everyone. There is also massive data loss from govt over-intervention/projectioneering, often as basic as where the jobs actually are (often in blue collar trades in US, that have been frowned upon traditionally - again thanks to govt/society narrative). This is a long subject to get into.

All depends upon how much cushion the government has piled up for absorbing the shock. So long the cushion lasts ie China's forex reserve etc, the system will work. In due time, it will go bigger. But the day the cushion gets side-stepped or runs out, it will be a blood bath of epic proportions. It can also cause a sort of "perpetual stagnation".
Yes China is no different to any other society. Do/perpetuate enough bad things....when they outnumber/outweight the good/neutral stuff...the balance swings other way.

I remember that Japan of 90s or 80s had a similar structure. They had weird jobs which made no sense: like job for a guy to run the elevators etc. It was not needed but the job remained because the government paid for it. Then in 90s Yen appreciated, causing a slump and stagnation of economy from which Japan has not yet recovered.
Japan was not so skewed as China is now. They had issues after their model ran out of steam like you said....but the subsidized legacy jobs etc were not that dominant in any major way....and certainly were not the reason for Japan's stagnation since. That has more to do with Japan (and Western Europe as well) basically being a benefactor of the US system post WW2. Basically in return for being US allies and stationing US military (And footing some of the bill for this).....these countries got access to two major things: access to US market + USN keeping the sea lanes open and peaceful. The US in return got a leg up in containing communism which they saw as existential threat. With the end of cold war, the impetus for this declined and also the wealth of these countries more or less reached the same as the US (market)...so there was no longer the driver momentum as before.

With China its pretty different imo....they have a vastly larger population, are NOT allied to the US....yet benefited from the system in operation (not designed for them) big time from the 90s onwards....by collaborating with certain wall street entities and political donor groups within the US. Problem is that the money windfall is not producing the commensurate jobs on the ground for the US (given the crowding out by higher wealth/price levels of the larger economy)....and really the US made a mistake allowing China into the WTO in the first place (the argument was a richer China would produce a more democratic China over time, which is frankly stupid and reeks of the globalist agenda). Thus China has made full use of all of this and grown dependent on it because it does not want to do political reform. Thus its (lower order) bubbles are somewhat different to the "original system" countries like Japan, who like the US tend to have their bubbles higher up the chain. Both have different set of risks and status quo management styles.

In the long run though, China is in trouble as the US shuts off the older system altogether (esp to countries it was not designed for) as its not longer working for its people. Will have to see if China has garnered enough elsewhere and internally to keep it going (since they have not realised anywhere close to the wealth per capita that Western Europe and Japan did on the back of it during the cold war)....but my bet is they are in for serious hurt, seeing how they are already inflating their growth numbers just to keep some mirage going....and it would need political reforms to grow true resilience and sustainability....for same reason that monolith monopoly does not work regarding the free market either.
 

Nilgiri

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Dec 4, 2017
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A binary option to MNCs (and developed countries organisations more broadly, given their govts would not be too responsive so its best to bypass them altogether) for example should have been given right after 2008 mumbai attacks....either you can engage (invest, trade , operate) with Pakistan or with us....but not both.....but maybe Indian govt did not want to rock the boat too much economically. Now we have grown much more and our trajectory is much more solid too.....so I expect next administration to take some action on this front. Make examples of every MNC that continues to operate in Pakistan....India can afford to lose a few given we have plenty operating inside India to take the place of those that choose wrongly. We are no longer dependent on just a few.....the market size is large and resilient enough now....so time to start using that. Make Pakistan fully reliant on Chinese SOEs and a mix of standard gulf investors.....in fact we can start checking how far we can push UAE (regarding the latter) on it too....they have really commited lot more to India than Pakistan....and just need bit of extra nudging I feel. But first get EU, USA, Japan, Korea, ASEAN, Australia etc... companies to make the "tough" choice....rest will follow depending on what we can prove there.
Article+illustrations to show the potential that India can leverage that I was going on about above:

https://www.bloomberg.com/news/arti...l-gdp-growth-come-from-in-the-next-five-years
 

Gautam

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Article+illustrations to show the potential that India can leverage that I was going on about above:

https://www.bloomberg.com/news/arti...l-gdp-growth-come-from-in-the-next-five-years
Don't you think it will still take awhile to leverage any of this ? I mean assuming the estimates here are totally accurate, its still 5 years away from 2018, in other words 2023. Shouldn't that mean we aren't still ready to produce a "You are either with us or against us" to global companies/investors/countries ? Since we aren't terribly integrated to global economies/value chains, shouldn't our leverage be limited ?
 

Nilgiri

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Don't you think it will still take awhile to leverage any of this ? I mean assuming the estimates here are totally accurate, its still 5 years away from 2018, in other words 2023. Shouldn't that mean we aren't still ready to produce a "You are either with us or against us" to global companies/investors/countries ? Since we aren't terribly integrated to global economies/value chains, shouldn't our leverage be limited ?
Well just look at current situation itself. India accounts for 13% of global growth....about 13 times that of Pakistan....thats also about twice the per capita intensity. I say thats plenty enough to start approaching and broaching the topic with relevant players and starting some policy on it (prioritise first, rather than across the board policy). Start looking at elements of how the US has done it with its partner countries regarding China (Huawei) etc. It doesn't have to be 1:1 scale obviously, but it should be explored now, rather than later.

Also this is a macroeconomic number, there are sectors where the disparity between India and Pakistan (market/operation/integration/trends wise) are much much higher....start leveraging those first as priority etc.

Also you have to remember companies look at future projection seriously (5 years is really relevant window)...so definitely the fact the contribution of India is on serious upswing (from 13% to 16%) compared to Pakistan (which gets replaced by Bangladesh in the projection for the 1%) should not be underplayed. I am assuming Pakistan drops to less than 0.9%. It is serious hand to use if done right.
 

RISING SUN

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China seeks to avoid fate of Japan in US trade war deal as heavyweight economists gather in Beijing
A group of heavyweight Chinese economists sat down with Japanese counterparts in Beijing on Tuesday to discuss whether China can avoid its own “lost decades”, as the government looks to negotiate a deal to end the US-China trade war.

Japan engaged in a lengthy trade dispute with the United States in the 1980s, with a series of deals over currency and market access blamed in some quarters for the decades of economic stagnation that followed.

It is known that many in Beijing are worried that a bad trade deal with the US could result in China following a similar trajectory, with currency exchange rate and market access high on the list of demands of Washington’s negotiators.

In particular, US demands that China have been compared with the Plaza Accord, under which Japan, France, Germany, the United Kingdom and the US agreed to push the value of the US dollar down against the Japanese yen and German Deutsche mark.

The US flag flies over shipping cranes and containers after a report said the United States and China are close to reaching a major trade deal that would see both sides lower some of the tariffs imposed during an often-bitter trade war.

At a symposium on Tuesday, Hua Sheng, a Chinese economist and honorary dean of the economics school at Southeast University in Nanjing, said he was eager to hear from Japanese experts over how the Plaza Accord had changed the Japanese economy.

“It’s a big warning for the Chinese people,” Hua said. “Japan is China’s neighbour, and Japan’s path has significant referential value for us.”

Through the Plaza Accord, the five countries began selling large amounts of US dollars, leading to a significant loss in dollar value. The intervention resulted in the Japanese yen doubling in value against the US dollar in under two and a half years.
Japan’s exports became more expensive and less competitive as a result, arguably defanging the engine of its 1980s economy.As China and the US reach enter the final stages of negotiations over a deal that could end
the trade war , the parallels are clear for many in China.A widely-held perception among Chinese scholars is that the Plaza Accord helped to fuel Japan’s asset bubbles in the following years, which led to decades of economic stagnation and wrecked Japan’s chances of catching up with the US economy. Indeed, former Japanese deputy vice-minister for finance, Masahiro Kawai, said last month that he is in regular touch with Chinese officials and economists on this topic.

While details of the US-China deal have not been disclosed, speculation in China is rife that the US is pushing for a “new Plaza Accord”, and this has faced some resistance in official circles.
Taoran Notes, a social media outlet controlled by Beijing, said that the deal between Beijing and Washington is unlikely to enable the US to “pressure on China for appreciation of yuan”.

The symposium was sponsored by the Sasakawa Japan-China Friendship Fund and supported by the Chinese People’s Association for Friendship with Foreign Countries, a Beijing-affiliated organisation now chaired by Li Xiaolin, daughter of former Chinese president Li Xiannian.

At the event, Xu Xiaonian, a professor of economics at the China Europe International Business School, said that the US-China trade dispute has broader geopolitical and ideological context than the Japan-US dispute because “the US is seeing a challenger for its global leadership” this time around.
“It is utterly important for China to reach a deal with the US through negotiation,” Xu said. “It can send a message that China will continue its opening-up policy, it can show people that trade disputes can be settled by making compromises, and it can relieve the nervousness in the US about China’s rise.”

Xu said that the real lesson China must learn from Japan is about domestic reform, namely liberalising its economy to give businesses more freedom.

Jia Kang, the former head of a research institute under China's Ministry of Finance, argued that the trade war could be a positive thing for China. Photo: Xinhua

Jia Kang, a former researcher with China’s Ministry of Finance and president of the China Academy of New Supply-side Economics, told the event that the US demand for greater market access and structural economic reforms could promote positive domestic change in China.

“An escalated trade dispute [with the US] is forcing China to open its market wider and to take a new stance,” Jia said. “A bad thing can be turned into a good thing.”

But not all speakers saw the same potential dangers for China’s economy in Japan’s history.

Chi Hung Kwan, a senior fellow at the Nomura Institute of Capital Markets, said it was wrong to see the Plaza Accord as the source of Japan’s decades of deflation. Instead, he blamed Tokyo’s slowness in allowing the yen to appreciate for flooding the market with liquidity and creating bubbles in the stock market.

“One lessons for China is that a stable exchange rate does not warrant a stable economy,” Kwan said. “Sometimes you have to let the exchange rate move.”

This article appeared in the South China Morning Post print edition as: China seeks to avoid fate of Japan in trade deal
Can China avoid repeating Japan’s ‘lost decades’ in US trade war deal?
 
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Gautam

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Old news but worth a post..............

China seeks security guarantees for Pakistan belt and road projects after terror attacks
  • Chinese Vice-President Wang Qishan raises concerns with Prime Minister Imran Khan
  • Insurgents appeared to target Chinese interests

Sarah Zheng
Published: 8:30pm, 28 May, 2019
Updated: 10:48pm, 28 May, 2019

Pakistani Prime Minister Imran Khan (and Chinese Vice-President Wang Qishan in Islamabad. Photo: AFP

Chinese Vice-President Wang Qishan has urged Pakistan to bolster security for Beijing’s major development drive in the country, following the deadly terror attacks two weeks ago which appeared to target Chinese projects, including the strategic deep-sea port at Gwadar.

Wang met Pakistan’s Prime Minister Imran Khan during a three-day state visit to Islamabad, which concluded on Tuesday, and raised concerns for the China-Pakistan Economic Corridor (CPEC), including the need for “effective measures to provide security guarantees” for the US$62 billion network of roads, railways, and pipelines in Pakistan.

Khan said during the meetings that Pakistan had established a special committee dedicated to ensuring the safety of Chinese personnel in the country, according to a report from China’s Xinhua state news agency.

Officials and businesspeople in Pakistan – which touts its “all-weather” strategic partnership with China – have stressed the need to address security concerns over projects under CPEC, which is regarded as a key pillar for Beijing’s broader Belt and Road Initiative across Asia, Africa, and Europe.

Security concerns were heightened after insurgent gunmen stormed a five-star hotel in Gwadar in early May, not long after an April attack on a bus travelling from Gwadar that killed 14, including Pakistani military personnel. The Baloch Liberation Army, which has threatened further violence against Chinese interests, has claimed responsibility for both attacks.

While in Islamabad, Wang said the two countries would work towards the next phase of high-quality development of the corridor and discuss issues including third-party cooperation, according to Xinhua.

Both sides signed various deals on agriculture and economic cooperation, and inaugurated a number of projects such as a transmission line and a special economic zone, Pakistan media reported.

Addressing a meeting of the Pakistan-China Institute, Wang was reported to say: “No matter how the international landscape changes, China will always stand by Pakistan’s core interests … CPEC will produce new outcomes and lend new impetus to the economic and social development of Pakistan and economic integration of the region.”

In addition to security risks within Pakistan, CPEC has also faced a backlash from neighbouring India for running through the disputed Kashmir region – which is claimed by both Islamabad and New Delhi – as well as its perceived lack of transparency, disproportionate benefits for Chinese firms and wealthier areas in Pakistan, and for furthering Beijing’s geopolitical intentions.

But given its importance, Pakistani military spokesperson Asif Ghafoor told Chinese media in Islamabad after the Gwadar hotel attack that the military was planning to deploy another division-sized force to ensure the security of the corridor. Pakistan launched a 15,000-strong special security force in 2016 to protect projects and workers in the area.

Sheharyar Khan, assistant professor of international relations at Iqra University in Islamabad, suggested Wang wanted to use his visit to address key security concerns for the economic corridor, including security risks and the problems of project suspension because of government’s reviews, as well as the impact from Pakistan’s economic woes.

The International Monetary Fund granted Pakistan a US$6 billion bailout in mid-May to help the country avert an economic crisis.

“This high-powered visit was meant to share Chinese concerns and reassure [Pakistan about] China’s commitment to the CPEC,” he said.

“Pakistan is under pressure [because] Baloch insurgents can mount attacks on Chinese interests, even in secure zones. The visit would reassure [China of] Pakistan’s commitment to ensure security and not harm CPEC, while making other deals with IMF or any other country.”

After leaving Pakistan on Tuesday, Wang will head to the Netherlands and Germany.

China seeks security guarantees for Pakistan belt and road projects
 

Gautam

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The Problem With China's Investments -- From Malaysia To Sri Lanka, Pakistan, And Uganda

By Panos Mourdoukoutas, Contributor
Markets

Photographer: Atul Loke/Bloomberg, © 2018 Bloomberg Finance LP

China has been on an investment spree in recent years, at home and abroad. At home, investment has been one of the engines that, together with exports, have fueled its robust growth. Abroad, investments have served China’s ambitions to control the South China Sea and secure a waterway all the way to the Middle East oil and Africa’s riches.

The trouble is that many of these projects aren’t economically viable; they are built at inflated costs; and leave the host countries heavily indebted to Beijing.

They aren’t economically viable because they serve the needs of Beijing’s central planners rather than the needs of the local markets.

“Chinese President Xi aims to realize the ‘great rejuvenation of the Chinese nation’ by projecting power overseas through the “Belt and Road” initiative, which covers both Southeast Asia and Africa,” says Xiaomeng Lu of Access Partnership. “This political economy effort is paired with China’s growing military might in the South China Sea and the African continent, posing a growing challenge to the U.S. security umbrella worldwide.”

They are inflated because they are mostly built by Chinese state construction companies in partnership with local contractors rather than by private contractors under transparent bidding.

And they leave host countries heavily indebted to Beijing, because they are financed by China’s state-owned banks.

China’s investment in Sri Lanka is a case in point. “While some of China’s infrastructure projects benefited the island, others proved to be costly white elephants that forced Sri Lanka into a debt trap,” say Neil DeVotta and Sumit Ganguly in “Sri Lanka’s Post—Civil War Problems,” in the April issue of CURRENT HISTORY. Like the deep-sea Hambantota port project, the Colombo Port City complex, and the Mattala Rajapaksa International Airport.

The result? “The overpriced projects left Sri Lanka owing $8 billion, or around 10 percent of the island’s debt,” explain Neil DeVotta and Sumit Ganguly. “That is close to what Sri Lanka owes Japan and India, but what rankles many is how Chinese loans have been used to fund questionable projects that generate little income. The situation has fueled accusations that China seeks to entice strategically located countries (others include Djibouti and the Maldives) into debt traps that it then leverages to seize control of key infrastructure.”

China’s investment in Pakistan to build the China Pakistan Economic Corridor (CPEC), which stretches from Western China to the Indian Ocean is similar to those made in Sri Lanka.

While CPEC helps Pakistan advance its plans to build a sound infrastructure, it adds to Pakistan’s corruption, which keeps pushing the costs of the project higher by the day.

As of 2019, the cost of CPEC projects is $62 billion, up from the original value of $46 billion back in 2014.

And that makes Pakistan more indebted to China, which has been financing the project. In fact, Pakistan’s external debt took off shortly after CPEC was launched; and sent Pakistan to IMF for a $6 billion loan to cope with the situation.

Meanwhile, there’s South Africa, where China’s investments follow a similar pattern. “As a South African, I’ve seen China’s activities on the continent up close. It’s clear that China’s primary goal with foreign investment is geopolitical, not economic,” says Ted Bauman, Senior Research Analyst at Banyan Hill Publishing. “The most consequential investments are undertaken by state owned companies, not by Chinese private capital. They tend to focus on infrastructure like highways, ports and dams, and on public networks like the electrical grid.”

The reason? “These investments help to bind countries to China politically, and through debt obligations,” continues Bauman. “It creates a form of leverage that China can use to force these countries to support Chinese ambitions globally. In some cases, such as the Angolan oil sector or Congolese rare earth mining, Chinese investment helps to lock-in supply relationships with essential commodities.”

In other cases, Chinese investments help make Chinese contractors rich at the expense of the host countries, as it has been the case in Uganda, where each kilometer of the four-lane expressway cost $9.3 million dollars.

The bottom line: China’s investment projects may end up doing more harm than good to host economies.

That’s why they should be carefully evaluated by host country governments, as Malaysia did recently.

The Problem With China's Investments -- From Malaysia To Sri Lanka, Pakistan, And Uganda
 

RISING SUN

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China auto sales in July on track for worst year in history
New automobile purchases in China have declined for 13 straight months, raising the specter of the world's largest market contracting by double digits for the first time this year.

For the month of July, auto sales fell by 4.3% on the year, the China Association of Automobile Manufacturers said Monday. Sales have undershot year-earlier figures since July 2018.

The road to recovery remains elusive amid soft stock prices, a speculative real estate market and stricter emissions standards.

"Our revenue has fallen more steeply than last year," said an employee at a Geely dealership in Guangzhou. "It's because the economy is bad."

Geely, formally known as Zhejiang Geely Holding Group, is the parent company of Sweden-based Volvo Cars and also holds stakes in Germany's Daimler as well as Proton in Malaysia. Though Geely is the third-largest automaker in China, the company does not rely on joint ventures with foreign car manufacturers, unlike domestic peers.

But Geely has fallen into hard times. Year-on-year sales have plunged more than 20% for three straight months through July. "The market downturn was worse than anticipated, and the uncertain conditions will continue into the latter half of this year," said a Geely insider.

BYD, the world's largest electric carmaker, is also on the ropes, as unit sales in July dropped 17% from a year earlier. In June, the Chinese government drastically curtailed subsidies for electric vehicles and other so-called new energy vehicles, which sharply undercut the automaker's bread-and-butter EV sales.

General Motors and Volkswagen -- the two market leaders in China -- posted poor performances as well, meaning none of the leading auto manufacturers has escaped the slump.

One of the largest contributing factors are stock prices. Retail investors account for about 80% of China's equity market based on volume. Stock values have come to be seen as an indicator of general consumer appetite. When the benchmark Shanghai Stock Exchange Composite Index falls below 3,000, customers typically put off auto purchases.

This trend closely mirrors the losing streak in the auto market. The Shanghai index dipped below 3,000 in the latter half of June last year, and the market currently hovers around 2,800.

Geely's sales have plunged more than 20% for three straight months and the outloook remains uncertain for the second half of the year. (Photo by Takashi Kawakami)

Speculative real estate investments explain part of the woes as well. The Chinese government is known to loosen restrictions on home loans whenever the economy sours.

"As a result, there is strong pressure to spend on real estate and take on debt, so money doesn't flow into the automobile market, causing a significant impact," said a source from an auto industry group.

The real estate money has made its way into China's inland regions, which have large potential for redevelopment. During the first six months of the year, real estate development investment rose 10.9% on average across the country, according to official statistics, while climbing 15.5% in the western part of China and 12.7% in the northeast.

"The effects of this speculative property investment are huge, and it's in fact the reason why Chinese [auto] manufacturers with a strong inland presence are struggling," said Tang Jin, head of Mizuho Bank's international business relations department.

China's policy decisions have not helped. Starting July 1, about half the country adopted stricter "China Six" emission standards. The rollout came a year earlier than scheduled, despite some pushback surrounding concerns over the auto market already suffering amid the U.S. trade war.

The government had apparently anticipated a surge in demand from those looking to trade-in their old cars for autos that conform to China Six standards. But consumers held back on purchasing, believing that the dealerships lack the full lineup of such vehicles.

"I want to buy a car, but the model I want is only built with the [previous] China 5 standard, so I'll wait until the model I want is sold with the China Six standard," said a 32-year-old man living in Shanghai.

EV subsidies have also negatively affected auto sales. The inducements used to be a major contributor to the expanding EV market, but the government decided to cut the subsidies by up to nearly half starting in June.

That move left a large dent in the auto market, leaving many in the industry to question the government's timing in curtailing the financial support.

China is working under a patchwork of competing policy measures affecting the auto industry. Guangdong Province has eased restrictions on issuing license plates for a number of major cities, but the new norms have yet to take hold to the extent of driving auto sales.

Some in the industry are placing hopes on tax breaks for small-engine vehicles. The tax relief was instrumental in boosting sales after the 2008 global financial crisis, and following the stock market crash in 2015.

However, that policy approach tends to cannibalize future demand. In addition, the last tax break lasted until the end of 2017. "Under current conditions, it will be tricky to push forward additional tax relief for small vehicles," said an executive at a Japanese automaker working in China. "The tax breaks have been scattershot, so I wouldn't expect another round to have the intended effect."

Fitch Solutions recently forecast that China's new auto sales for 2019 will shrink by 9%, a downgrade from the original projection of a 4% decline. With vehicle purchases slipping by 11.4% for the January-July period, a double-digit contraction for the full year could become a reality.
China auto sales in July on track for worst year in history