China's Boom Is Over
A guest post by Jason Bedford and podcast with Yasheng Huang
In my career, I’ve tried to make sense of three big economies that were foreign to me—Russia, Brazil, and China. I started my career in Russia, worked for a bank with significant Brazilian operations (BankBoston), and focussed a lot on China while at Bridgewater and since leaving. The shortcut to unlocking each is spending time with people who can explain how things really work.
In terms of China, one of those people is Jason Bedford, who I am delighted to have as a guest writer. Jason is a fluent Chinese speaker and a former colleague. Another is Yasheng Huang, author of The Rise and Fall of the East, who is my latest podcast guest. The podcast (click this link) with Yasheng delves into President Xi’s politics in a way that goes well beyond the headlines. Between the two of them, you will get a great understanding of what is going on.
The big thing we all need to get our heads around is that the Chinese boom, a four-decade boom, is over.
The topic Jason is unpacking—the Chinese consumer—may sound wonky to non-specialists, but it is a big deal. One of the reasons the global economy worked relatively well over the last forty years is because China was growing fast and this growth brought millions of people into the global labor force. Global labor costs and inflation fell. Fast growth and low inflation are very bullish for global stock prices and prosperity.
Now that boom is over, largely because Xi took over and in China, everything depends on Person #1, as he is known. The focus in China, as Yasheng points out, is now politics and ideology, not growth. The full scale of the employment and income problems in China has not yet been widely appreciated and is far worse than imagined. This creates a huge challenge for millions of Chinese and impacts how we all need to save and invest.
China’s Consumer is Not Coming Back Anytime Soon
By Jason Bedford
At the end of last year, global stocks rallied on an expectation of a China boom. That never happened. Chinese stocks are down about 3% this year. The main reason is simple, China’s roughly 500 million households are not in a position to spend.
This is due to a self-reinforcing chain reaction. Unlike many countries in the West, during Covid, Beijing did not provide meaningful financial support to households which, combined with the destructive nature of Covid Zero policies, left household balance sheets in a worse state post-pandemic than pre-pandemic. Weak post-Covid household spending in addition to the real estate bust is leading to weak spending overall, falling wages, and falling household borrowing. Equities are performing poorly despite government efforts to prop them up. Add on top of this the internecine feuds inside Xi’s court (that Yasheng speaks of) and the picture is not good.
Spending is income and borrowing. Below I dig into each.
Income - China’s Unemployment Is Worse Than it Looks
While youth unemployment has skyrocketed and hit an all-time high in June at just over 20%, the non-youth unemployment ratio is, in theory, 4.1%. This has led to skepticism around the data, exacerbated after the government decided to stop releasing youth unemployment numbers in July. Chinese unemployment data is not manipulated, however, it is simply poorly calculated.
Unemployment in China is measured off of social security contribution data, If someone has a company paying social security benefits on their behalf, that person is deemed employed. Yet, there are structural and cultural reasons why Chinese citizens will continue to make Social Security contributions even after losing their job.
For instance, in China, you need a permit to move between cities. These “hukou” applications normally require 5 to 7 years of uninterrupted Social Security contributions. Reinstatement of Social Security after a period of unemployment is a notoriously onerous process. So people pay in even if they are unemployed.
There are also strong cultural motivations to maintain social security contributions after loss of employment. Many people in China will turn to family businesses or so-called “salary companies” and make payments to them which are then routed into continuous social security contributions. Even Chinese emigres living in foreign countries often continue to make these payments. I spoke with a live-at-home spouse, who maintains her social security contributions through a friend’s solar power company because her parents insisted on it.
Moreover, fearing loss of credit, some corporates hide lay-offs and even pay staff social security contributions after sacking staff. Small and medium-sized entities know the government will restrict access to credit if they fire workers. Local governments have a strong track record of punitive action including outright fines, threats, loss of business licenses, etc. Some tangible recent examples include:
In March 2023, Shenzhen fined a technology company Rmb30mn for laying off 500 workers without proper notice.
In April 2023, Guangzhou denied a permit to a manufacturing company that laid off 1,000 workers.
In May 2023, Hangzhou launched an investigation into a property development company that laid off 2,000 workers.
In June 2023, Wuhan Department Store was pressured to reverse the layoffs of 3,000 workers (30% of its workforce) by the local government—which it eventually did.
This then leads to surprises. One consumer lender I spoke to said that in four months in 2022, their non-performing loan ratio jumped from 10% to 44%. Their geo-spacial data and bank account data indicated the underlying borrowers were no longer employed because they were home all day. Conversely, social security data showed these people were still officially employed and receiving social security payments.
It’s also true that China includes self-employed people in employment ratios, something that is not that common[3]. China has good structural reasons for including self-employed people—they represent a large chunk of the workforce. However, the definition of self-employed has become stretched and has no income threshold. Setting up a shop on e-commerce site Taobao can qualify one as employed. There are reports of universities pressuring students to set up e-commerce shops on Taobao and Xianyu (a platform to sell second-hand goods) in order to bump their post-graduate employment stats for their student body.