Sunday 12 December 2021

Trouble in China: All is not well in the Middle Kingdom

From Evergrande, to the ill maintained and now unprofitable high speed train network, to rising authoritarianism, not all is well in the Middle Kingdom, and that could hurt the global supply chain and your own pocket.


China has a massive impact on your life. If you look at your cellular phone ahead of you, or your computer ahead of you, the chances it or part of it was manufactured in China are quite large. In fact, your keyboard, as well, your mouse, the chair you're sitting on could well even have been manufactured in China.

China is an integral part of the world economy, and when you hear about certain shipments being stuck on ships offshore and that being a reason why you can't get certain things to give to family for Christmas, you might also be unaware that a lot of that has to do with supply chains and to do with the fact that a lot of products are made in places like China. 

Now, that was quite controversial in the early 2000s when China had only just been admitted into the World Trade (trade) Organization. And the argument was that China would become better by trading with other nations, and it has pulled a lot of its people out of poverty through all of this trade, but the accusations of: slave labor, of poor human rights, of companies, which operate in China, not respecting the environment to the extent that the water becomes poisoned, the air becomes poisoned, and all sorts of problems emerge for communities who live there. So that their vegetables might make them sick, so that their water might make them sick, so that often the Chinese people have to drink water not from the taps but from a big plastic sort of containers which are used much like an office water cooler ... Which themselves might often simply be got from a local well which has been poisoned. 

And yet, businesses when they saw all this bad publicity continued to produce in China because one of the reasons why they were producing in China was to get rid of the effects of over-regulation. Especially if their competitors were producing, without less regulation, they needed to be more competitive and so they continued on.

But certain things have been happening in China which will have a great effect on the global economy as a result. You already might know about the supply crisis which is partially due to a lot of ships being scrapped during the pandemic, and to a rapid reopening where you don't actually have the supply lines in place, or the amount of bulk which is supposed to go through any longer. But you also have, in a place like China, you have whole cities put on rolling blackouts as less than enough coal is produced. You have strange things happening with the railways, and you have strange things happening with homes. China is a controlled economy, and a controlled information economy. What's happening in China, you often don't hear about anywhere else in the world. You only really hear about it if you know where to look and often even that is hushed up. 

And certain people have lived in China, certain westerners such as the people who run the ADV China channel which were adventure motorcyclists, who toured all of China - northern and southern China. And who also looked at the ghost cities built by certain now infamous construction companies. They looked and they saw these apartments which were built and when they touched them - they came apart, already, as though they're 40 years old when they were only a few years old. And they looked at them and they saw that there were things much like Styrofoam which were keeping it up. And that the concrete was massively substandard. In fact these buildings weren't designed to be lived in. 

When they looked for a place to buy, some of these westerners, they were told: don't buy investment properties. You won't be able to live in them. They're not safe. Buy properties which aren't investment ones. But even those often fall apart ... over ... after a few years, because there's not adequate maintenance of them, because during the cultural revolution in China the four olds were targeted. The old knowledge, the culture, the things which created a so-called 5000 year old Chinese history. Though China within those years was a lot of different little nations within where China is. But, nonetheless, that history was largely erased, and the famine also had a huge effect on China. 

But what China has done with infrastructure is quite concerning and it extends beyond property, beyond these massive ghost cities being built for investment purposes when China has a falling population and an aging population. So that these properties will never be required, and yet they're not built so to be lived in, nonetheless. 

And Evergrande is something which has hit the news, recently, but that has been discussed a lot by people who know China well before then ... Something else which is not hitting the news so much is the infrastructure problem ... is the lack of maintenance. In particular, China's famous high-speed train network, that was originally created as this great mastership stroke to show how great China is. 

A lot of what China does is about face, is about creating this impact of ... China is this great nation, this nation which is moving forward, this nation which is greater than the West or any other nation ... China lifting itself out of poverty ... to a degree that when China declared that poverty was combatted they shut down soup kitchens, despite the fact that the average Chinese person would be very poor by Western standards.

But back to the trains. China built its train network, and they built it as this masterpiece, and yet there was so much corruption around it, that they decided that they needed to offload it into a sort of semi-private type of company to run it. 

And to continue extending it, they did much like what South Africa did when it inherited the power stations from the previous government, which had produced way in excess of the needs of power stations. What they did is they started extending the grid to as far as they possibly could, to people who often couldn't afford to pay, and they made it unlawful for Eskom, the power company in South Africa, to disconnect people if they weren't paying or to disconnect at least the municipalities not paying ... To an extent that that cross subsidization which occurred hits a sort of problem, where electricity prices simply couldn't be raised enough to combat all the debt the company got into, and of course South Africa has rolling blackouts quite regularly and a electricity grid which is in great danger of being shut down altogether in the future. 

But in China they did the same thing. They took the trains and they started extending the lines beyond these big first tier cities, to smaller and smaller places. These very, very, fast, super-fast trains, which aren't good at carrying things such as cargo, but are good at carrying people very fast. And so people, instead of taking a bus or a taxi or a motorcycle to go from city to city, could take a train and of course local governments began banning motorcycles, which were the main form of transportation and severely restricting them and confiscating them, because they wanted to have different means of transport for people. 

And so you have these specific trains which are built and which extended further and further into unprofitable routes in order to push this whole idea of the rising China and the problem is that that cross subsidization, especially with the pandemic, began to become less and less effective until it became not effective at all, so that the railway lines are in massive financial trouble and they need a government bailout. 

Something else which is in massive financial trouble is the local government in China, which has largely relied on property, and control of it, and the ability to rent it out, or to use loans based on, it in order to provide local social services, which the main government was not able to. And these property prices were linked to the ability of these massive construction companies to produce all of their ghost towns, and to continue producing, and producing and producing. 

Now, the other side of the ghost towns, is that they're beneficial because you're allowed to get married in China once you have in fact bought property in a certain area, and if you have property in a certain area you're allowed social services there for you and your children. 

There's often talk about how China has a sort of Apartheid system, a system where the rural Chinese don't really have rights, and have to come into other parts of China almost unlawfully, almost illegally, until such time as they buy property there. And that's been massively abused by companies, of course.

But the buying of properties, properties which someone couldn't afford to pay off in their lifetime, became quite common in China. And, also, the problems with Chinese speculation in the stock market pushed more and more people into property, and pushed these prices really, really high up. And yet the buildings being built weren't worth anything, quite often, to live in, because they were simply building facades to be sold on, and on, and on. And even the ones which were built to be lived in were not properly maintained, quite often, which resulted in buildings losing their life quite rapidly.

Evergrande, the biggest, the most indebted, company, dealing with construction in China, would sell properties. And they would sort of have giveaways where they give you away a chicken if you want a property. 

The property was bought before it was constructed. Despite the fact that China has more than enough housing for everyone to live in, these new properties would be built, and it was almost like a pyramid scheme. You know, what was being sold wasn't actually worth much. It was simply a façade of a building, and if it was more than a façade, if it was an actual building, it wasn't necessarily going to last that long. And even if it did last that long, it wasn't really worth the very, very high prices of property in China. 

And when the government began to clamp down on this Evergrande got into massive, massive financial problems, and it's not just Evergrande. 

A lot of the biggest ... financial ... biggest property development, biggest construction companies, in China, are in the same position as Evergrande, or near it, and Fitch has stated that China ... that Evergrande missed a payment and are in default. Now, they've been paying late, but within the one month's grace period to their foreign investors, and foreign creditors, but this time they didn't. 

Now, it's thought that maybe they didn't because they've been ordered not to, by the Chinese government, that the Chinese government wants them to pay their local creditors rather than the foreign ones, first. And that's quite possible, but the problem is that increasingly we're told by the market that China is going to have to bail out Evergrande, which they have suggested they're not going to do. Though, if they do bail out Evergrande, there's a lot of other companies which also need bailing out, and, also, they have their national infrastructure to think of. The national infrastructure in China is quite in danger. The trains need to be bailed out as well. They possibly need to be nationalized, and at the same time as nationalized, they might need to begin ... begin maintaining the trains properly. 

And yet the whole approach of creating a façade almost like ... You have the old story of a toy manufacturer being told to manufacture medicines, or medical devices, and it was thought to be a great deal, except that the sigma involved for faults with toys is much higher than that for medical devices. And so you have things which look very great on the outside, with the toy manufacturer, but, not that great inside of it. Things which can break more easily. 

And what China's focused on is the outside, is the face, and, especially, under Xi Jinping, and his rule, which has centralized power, and which has increasingly gotten rid of dissenters, and people who might speak ill of anything in China or any people to do with the government. So much so, that you had a case with a tennis player where she appears to have been disappeared for accusing a former, essentially, Deputy Prime Minister, in China, of forcing her to do things she didn't want to do. 

But that focus on face, that focus on appearance rather than on what's below, it has created a massive problem within China. And that massive problem can extend to the rest of the world, because of how much of the world is so deeply invested in China and how much of what is produced is produced within China. 

And also because if China really does face the sort of social downfall and economic collapse which might come from the sort of pyramid scheme that has been so much of its growth in the last 20 years - that might be a very good reason for China to start looking at the outside world - and looking for something to distract the local Chinese population from what's happening. 

And so what's happening with Evergrande, what's happening with the Chinese railways, what's happening with so much of what's going on in China, is not something which should be dismissed as unimportant. It's incredibly important and it should be incredibly concerning if you're able to see what's actually going on with it. 

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