What will work better between USA and China, short-term economic cycles or long-term systemic assets or baggage? The picture may look not so clear if seen from Beijing.
USA-China mirrors
Beijing has just launched a whole array of measures aimed at compensating for lackluster growth at the beginning of the year, and its main thrust is about pouring money into the market – but this may exacerbate the situation, as Reuters reports:
Latest official data shows financial institutions issued 5.5 trillion yuan ($766.12 billion) worth of long-term deposits known as certificates of deposit (CD) in the first quarter of this year — the largest such quarterly issuance since the product was introduced in 2015.
Domestic investors have rushed into these CDs over the past year in a desperate search for returns as they withdraw from real estate and the stock market, both traditional investment options now looking treacherous because of regulatory and economic problems.
Companies have joined the scramble this year, adding to the drag on China’s economy. It effectively means businesses and households are hoarding cash rather than investing it, despite lower interest rates. This classic liquidity trap plagued Japan for years beginning in the 1990s.
It means that so far, people and companies don’t want to spend their money; it’s not that they have no money to spend in the market. In that case, Beijing’s cash injections will not work because supply-side answers don’t solve demand-side questions.
It looks like Japan’s 1980s liquidity trap. What can Beijing do to kickstart demand and give confidence to consumers and investors? Why do they lose confidence? This might be the crux of the matter, and it’s not simply financial.
At least three elements contribute to the situation. The real estate market, for over two decades the main driver of growth, collapsed. Now, it languishes, with possibly up to 100 million unsold finished apartments. Real estate accounts for some 60% of the outstanding bank loans.
No other engine can replace real estate at the moment. Infrastructure building was the other significant driver, with long-term and low returns; meanwhile, it blew up the local and national debt.
Moreover, investors and consumers have grown more timid. A decade of anti-corruption campaigns has scared many entrepreneurs who initially made money while cutting many corners. Plus, longstanding anti-Covid measures choked the markets for three years instead of one year for other countries. Now, many still feel the aftershocks. Finally, the tense international situation and the threat of sanctions cast a shadow over foreign trade.
The accumulation of all these problems could crush the Chinese economy and thus spread into society and politics. Chinese leaders know it. They are pragmatists, not ideologues, and before these issues, they radically changed course in the past. Then the question is whether we can expect a dramatic turn in China soon.
Some changes will happen for sure; however, how radical they will be is an open question because the Chinese are still unsure about the example America is giving them.
A picture from two sides
The Chinese see a list of intertwined problems in the US that make China look safer and better in comparison.
Here is a brief summary list:
- Overuse of legal and illegal opioids and drugs sold quite freely;
- Spread of firearms and violence, unsafe urban environments;
- Poor basic healthcare;
- Poor primary and middle school education;
- Youngsters all hooked on super-addictive smartphones and games;
- Persistent race issues, perhaps hiding class issues;
- Lousy food, an overweight population and dropping classical education;
- Broken families;
- Infrastructure in shambles.
Plus there is the American ballooning public debt with doubts about its sustainability, while this question sits in the middle of complex global trade situation. Can the USA fix it?
Conversely, Beijing feels that China has been outperforming the US in building long-term social resources. It has:
- Few drugs;
- No firearms, safe urban environment;
- Improving basic healthcare;
- Improving basic education;
- New rules limiting children under 18 to two hours of smartphone usage per day;
- No racial issues;
- Greater study of Western classics, art, and music;
- Strong family values;
- More infrastructure spending domestically and internationally.
The list is simplistic and confusing, as many items would deserve deeper examination. But they are the nuts and bolts of any country, and China here feels, right or wrongly, that it has been outperforming America. Therefore, the present economic difficulties might just be hiccups that need to be fixed but do not require a significant U-turn.
Conversely, do the differing political systems favor China or the US in dealing with their respective problems?
Indeed, in both countries, there are vested interests that oppose systemic political change. But China may feel that its political system is better endowed with the levers to undertake necessary modification. Beijing, this time has started a series of measures to turn the economy around.
Conversely, Beijing feels that although Washington sees its problems, the Americans have been unable to make much progress on any of those issues for years. Many problems have gotten worse. The rich and well-off have good schools, health care, families and safe environments; the poor have none of those.
In this way, Donald Trump’s declared plan to vastly increase presidential powers seems to respond to this crisis of inaction. If Mr. Trump were to become president again, he would be unlikely to improve health care or primary education, which are not on his agenda. But the social divide, the distance between the entitled elites and the growing marginalized ordinary people, creates the resentment that fuels Trump’s outbursts.
In other words, seeing things from Beijing, Trump is the ugly face of an American necessity to change. The US reaction may look as if American elites are trying to eliminate Trump and what he stands for without making any difference. This may prove that there is systemic resistance to necessary US reforms.
This situation in America confirms that despite whatever temporary contingencies and vested interests are involved in keeping the Chinese system, Chinese elites may feel there are no compelling reasons to alter a political structure that may outperform the US in the long run. This opinion is not based on ideology but on pragmatic perceptions of results. The argument may be partial, tainted and inaccurate, but it is not ideological like the old Soviet communists’ arguments.
The times, they are a-changin’
The next few years are crucial to see whether Beijing can get out of its present quagmire and boost domestic confidence, which will drive higher consumption and, thus, better economic performance.
The issue may have more to do with the domestic situation. People may need to feel safe about their assets and protected against future indiscriminate attempts of the authorities to encroach on their properties and to constrain their legal personal freedoms, as happened with the anti-corruption and anti-Covid campaigns.
Here we have a conundrum: These reforms would limit the present boundless power of the party, the one thing that drives the current changes.
Therefore, Beijing might become stuck, trying for lateral moves that won’t correct the big picture, or it might pull a rabbit out of a hat and offer an unexpected solution.
In all of this, it would behoove America to show real progress on all the issues that make the Chinese feel discouraged and hopeless about the US. Real reform in the US could bridge the gap with China and encourage steps in the same direction in Beijing.
On the other hand, if Beijing’s economic performance remains stagnant, it could start some other rethinking in China.
Still, there are historical examples that can be important for both the USA and China.
In the 1960s and 1970s, in the middle of the Cold War, with Presidents Kennedy and Johnson, the US undertook a series of welfare and civil rights reforms that improved the fabric of society and mended fissures that the Soviets could have used to break American social order apart.
The action transformed American life and created some conditions that made it possible for the West to beat the USSR. It wasn’t painless. Some of the problems those reforms brought about have not been digested yet, but they saved the day by addressing structural issues.
The USSR, with Gorbachev, started to address some of its social and political problems only after more than 20 years had passed, in the 1980s, and it didn’t go well. With hindsight, many blame the reforms for the fall of the USSR, while the issue was with the systemic faults of the Soviet state.
In other words, the Soviet problems of an almighty bureaucracy stifling all life, and the need for democratization, ought to have been addressed much earlier, when their domestic impact was clear but not so pervasive, at latest by the 1950s, after the war and Stalin’s death. The USSR didn’t address the problems, which festered, and when finally they were attended to it was too late; the system rejected the reforms and imploded.
Is China now starting its necessary reforms while the US is skirting them? From Beijing, it may look like it, creating an odd situation and a false sense of confidence. Still, the process is complicated and American difficulties are neither excuse for nor salvation from Chinese troubles.