You’d do it if you loved CCP ….

The demographic decline is way old news. Some of us were writing about it ten years ago. But the implications are still fuzzy to me. Spoiler – key to the future is consumer spending. Consumer spending depends on there being (1) enough people with (2) enough disposable income. Therein lies the complex Chinese tale.

Michael Pettis has written for years about the implications of excessive debt in China. Good examples are China’s Overextended Real Estate Sector is a Systemic Problem and How China Trapped Itself. But now the demographic changes will start to affect the micro and macro economy. Pettis is one of the few who can write reasonably about this topic, but to my knowledge he hasn’t addressed it. Daniel Rosen has an excellent beginning in his Foreign Affairs article The Age of Slow Growth in China.

Yi Fuxian, a senior scientist at the University of Wisconsin-Madison has written on some of these topics. An example is  https://www.project-syndicate.org/commentary/china-population-decline-will-mean-economic-geopolitical-decline-by-yi-fuxian-2023-02 and https://www.project-syndicate.org/commentary/china-population-aging-lowering-economic-growth-by-yi-fuxian-2023-04  A hat tip to the ChinaCharts guys for the citation.

I’ve long been waiting for some serious analysis of demographic change, requirements for pension and health care spending as people retire, and contributions to the social welfare funds. Smaller population means fewer babies (starting about ten years ago) so in ten years fewer people paying into the welfare funds. People aren’t dying faster, so the age bulge is woefully out of favor for China. The working age population is decreasing about 5 or 6 million per year right now, but I don’t know how many of those are retirees and how many are young people who aren’t there. The demographic impacts on government revenues and spending are of critical importance.

China had something of a baby boom post-famine, let us say from 1962 to 1978, when the one-child policy went into effect. Most of those kids had siblings, but the boomlet lasted less than twenty years. And few of them had more than one child. Now that boomlet cohort is aging, and they get older every year. They are starting to retire now. The US had a demographic dividend from the baby boom generation – those born, let us say, 1945 to 1965. The difference with China is that boomers generally had more than one child of their own, so the boom created at least one minor boomlet from, let us say, 1965 to 1990. The dividend in the US lasted much longer and did not result in a later collapse of births.

Let’s summarize – China’s “pig in the python” demographic model was a great dividend for Chinese GDP, but is now becoming a great burden, a result of the one-child policy. The current “two or three child” policy is a complete bust. Total fertility rates have been below replacement since about 1990, are unlikely to reverse, and foretell with some certainty the demographic conditions six or eight decades ahead. The severe population decline is baked in, regardless of how much stimulus Xi wants to give to the economy or to Chinese men.

So now what? There are a bunch of questions –

My contention is the world is saturated with Chinese goods. There just can’t be great future increases in demand for Chinese-made phones, clothes, cars, tvs or washing machines. Replacements, of course. Development in Africa will arrive too late to help. If anything, Xi has managed to create a wellspring of BALAP – buy as little as possible – from China. Or maybe BANC – buy absolutely nothing from China. Regardless of acronyms, Chinese exports are unlikely to grow much in the next decade.

The infrastructure age is over – has been for more at least fifteen years. Economists see the extraordinary waste in more rail lines, more airports, more expressways, more ports. The real demand has long been met. Current debt problems for local governments are a result of a CCP edifice complex and an attitude of “if you build it they will come.” That worked in baseball. Not so much for people to ride trains. The point is that government no longer gets growth from more construction. It only gets more debt and short-term jobs. It is pushing on a string. Related, demand for steel and concrete will remain steady or fall. OBOR projects helped support Chinese construction exports and jobs, but even that era is mostly over. CCP is learning it will have to reduce interest rates and extend maturities on lots of OBOR loans.

With steady or only slowing increasing exports, there will not be much new demand for farmers to move to cities to work in factories or do construction. Of course these industries will not disappear, and farmers who get tired, hurt or old will be replaced. But new demand for apartments will slow dramatically even with hukou changes.

Real estate and its related purchases – beds and washing machines and air conditioners – currently constitute about 25% of total GDP investment, which itself is still about 40% of total GDP, far too high a percentage for a developed economy. Given falling population demand for new apartments and the severe crackdown on the real estate industry, these percentages must fall, with nothing to replace it.

Related, sale of land for real estate development became a major source of revenue for local governments in the last fifteen years. In some cities – Hangzhou is reported to be one of those – real estate revenues account for more than 50% of total revenues. The problem is severe enough that a major restructuring of central-local finances is in order. But in the meantime, local governments are cutting staff and cutting wages even for long term employees.

Real estate in the form of one or two or five apartments constitutes about 80% of family wealth. Extra apartments are usually not finished inside and are left vacant – they produce no income. What impact on family finances when the +/-65 million empty apartments cannot be sold for a high profit … or maybe sold at any profit at all? (NB – 65 million is about the population of Germany).

Pension systems have long been a source of corruption and mismanagement. Systems are being rationalized, but the demographic pig is going to swamp systems nationally. There will be a lot less money coming in than going out. (Think big American companies that had generous pension schemes dating from the 1950s and then people began living longer and at the same time the companies began streamlining the workforce …) This will require a large central government fix, as already happened years ago in Liaoning Province.

The reason why GDP could grow so fast in China is that metaphorically, it took a farmer picking rice and overnight put him in a factory where he was immediately more productive. Some training was required, but not too much. Training now is much better, but a lot of those unskilled factory jobs are disappearing. Fewer workers means fewer workers per job. That could be ok if rural schools can step up to train replacements for the urban retirees. But I’m not so sure, even with increased attention to rural schools. The generations still on the farm didn’t want to/couldn’t make it in the factory. (See Scott Rozelle’s Invisible China). What impact on wage scales?

Of course, what prospects for American companies selling at retail in China but with fewer people to buy or manufacturing in China as wages continue to go up and international pressures fester.  

Nothing said so far here about pollution, water availability and quality and energy generation. These are each enormous problems of their own. Nothing said here about promoting conflicts with neighbors, including Taiwan and Japan and Philippines and Vietnam and India.

Its pretty easy to point with alarm and ruminate over the impossibilities of the future. I used to worry about tea leaf harvesting on steep hillsides. That work is done by hand, tea leaf by tea leaf. You can’t run a big John Deere harvester through the tea bushes on the steep hillsides. As peasant incomes and opportunities increase in China, who is going to pick tea leaves in the enormous quantities needed? Then I discovered the hand-held trimmer, like a gigantic hair trimmer, that trims and blows leaves into a long plastic bag (one model of many https://www.alibaba.com/product-detail/139F-4-Stroke-Tea-Leaf-Harvesting_62043574397.html?spm=a2700.details.0.0.6e9239ddM3K92l , $330 for one). I can’t vouch for functionality, but perhaps I should just trust my engineering background and let the tea leaves fall where they may. Perhaps I should just trust in CCP to lead.

Yet unease remains. Years ago, a few economists – Barry Eichengreen for one – and demographers wrote about China getting stuck in the middle-income trap and getting old before it gets rich. The middle income trap reminds us that economic systems spawn tough organizational political supporters that don’t want to give up power. That now seems more likely, regardless of what Xi promises re: common prosperity and a “moderately prosperous society.

Yi Fuxian produced articles like Leaked Data Show China’s Population is Shrinking Fast from which the ChinaCharts guys derived a future disposable income figure. The concept in the figure below is to show a chart using data similar to that provided by BLS for the US, although China does not provide such data.

From ChinaCharts https://substack.com/profile/51042600-china-charts

Neither the derivation nor the assumptions are provided. One can see where they are going, but I’m not sure how they got there. What they are trying to show is that younger Chinese have far less lifetime purchasing potential than their parents.

Their conclusions –

–  The feasibility of consumption-led growth in China is gone. The ship has sailed, and the window has closed for any potential reforms. China’s demographics, even adjusted by lifetime earnings, are stepping off the cliff literally this year (2023). It’s an inflection point.

– To compensate for the demographic cliff, China would have to achieve sustained wage growth of ~9% year-on-year to maintain consumer earning and spending power levels.

–  Historical data from Bloomberg shows the most recent print for median wage growth at ~4.7% and falling.

Their Remaining Lifetime Earnings by Age Group figure above seems unnecessarily vague but the conclusion – that significant growth in consumption may not be possible – seems right. That fits with the demographic changes, accompanied by a middle income trap, the necessary decline in GDP growth, the end of infrastructure, the end of great export growth, the need to address debt overhangs, the need for government to spend more on education, health, pensions and welfare, and a world that is less awed by CCP propaganda about hurting the feelings of the Chinese people. If this is such a great civilization, how come everyone is so fragile? And how come they don’t want to make more Chinese to be a part of it?

Notes –

Bureau of Labor Statistics – Consumer expenditures vary by age –

https://www.bls.gov/opub/btn/volume-4/consumer-expenditures-vary-by-age.htm

Barry Eichengreen on the middle income trap and China –

https://www.nber.org/papers/w18673  and

https://eml.berkeley.edu/~webfac/eichengreen/e191_sp12/econ191_conclusion_4-23-12.pdf

When economics becomes a morality play

… just a comment from disparate readings in the past week –

Michael Pettis has written for years about the conundrum CCP created for itself in its development model.The model has been essentially supply-side stimulus for the last 40 years. Simplifying, there is only one answer to how to grow the economy – more construction. The costs of that model are in depressed wages, mediocre health care and education for a large share of the population and a significant wealth gap. We note that the “China Dream” promoted by Mr. Xi is not the American Dream. It is not a dream of individual accomplishment, but a dream of national rejuvenation. Now that economic model has taken China about as far as it can. More construction now is more wasted investment. As Pettis has been saying for a decade, there is a need to shift to a consumer-oriented model. His recent Foreign Affairs piece makes the case – How China Trapped Itself -The CCP’s economic model has left it with only bad choices. What is needed are demand-side reforms, to health care, education, pensions, banking, the hukou, and communication. The trouble for CCP is that demand-side reforms carry with them demand-side demands for change. Demand-side means that consumer expression becomes more important than plans of leaders.

This change is very hard to do and its by no means clear that CCP can do it. Too many vested interests in the current way of doing things, and too many ways in which CCP can be shown to be on a wrong path. In Xi’s terms, to be anti-CCP is to be anti-China and disloyal. In any case, economic reform is not on Xi’s agenda, as observers like Martin Wolf and Minxin Pei have noted.

Ci Jiwei is a political philosopher who wrote Moral China in the Age of Reform and the more recent Democracy in China – The Coming Crisis. He describes two forms of freedom in China – economic freedom and moral freedom. Economic freedom is the freedom to buy and sell, to profit from investment. This is not so different in China than it is in the US. Moral freedom is the freedom to think, write, worship and associate as one wishes. This is the kind of freedom we think about instinctively in the US. A modern economy needs both kinds of freedom, appropriately nurtured and constrained. One might say the more advanced, the greater need for moral freedom – the right to think as one wishes, to speculate and invent without fear, the right to be wrong without devastating consequences. The right to publicly disagree with government and the right to organize with others to craft a different idea.

China has been able to profit wonderfully in the last forty years by focusing on economic freedom – for my purposes here, interpreted as construction – public and private, apartments and airports and trains and factories. At some point, though, middle class people want more – more than just more stuff, they want personal expression, and that runs us into the realm of moral freedom, which as anyone knows from recent reading is ever more highly constrained in China now, so much so that my CCP friends characterize current times as like the era of the cultural revolution. In surveys, most Chinese remain enthusiastic supporters of CCP. But that support may not be enough if the economic model cannot adjust to new ways of earning and learning.

I came across a comment from Stephen Roach, the former chief economist for Morgan Stanley, who was a bit of a panda hugger for a while, but in the last few years has come to a different understanding. I thought his comment was short and clear in a piece by Edward White in Financial Times – Xi Jinping’s last chance to revive the Chinese economy –

Roach says the sort of individualism that a stronger consumer economy requires goes against the Chinese system under Xi. “To really unleash the ‘animal spirits’ of a consumer-led society, you must look at the characteristics of what that means in other nations: it is an aspirational mindset, upward mobility, freedom of communication, shared values that continually change and move into new areas,” he says. “To a nation focused on control, it is antithetical to them.”

Chinese certainly have the aspirational mindset and a notion of upward mobility. But the control now coming out of Beijing, and likely to remain through Xi’s third (and fourth?) terms, is not a good sign. In Marxian terms, a consumer economy in one in which the individual has a strong hand to match the strength of capital. But CCP is built on control of capital.

Among all the stories of CCP authoritarian clampdown we read about now, I came across this twitter post. Not a big item by itself, but it struck me as signaling the end of an ability to do personal expression free of state supervision, free of an ability to be anonymous even for a few minutes on a subway. This is the screen one sees when buying a subway ticket –

@GabrielCorsetti     https://twitter.com/GabrielCorsetti/status/1575321661464870912

Since I left Beijing in June, one thing has changed: you now need to provide name and ID info to buy single-use subway tickets. This was one of the few things you could still do without there being a record, but now this loophole has been fixed.

And some comments, edited here –

And of course, the ticket machines only accept Chinese ID numbers, not passport numbers. So as a foreigner you either have to use the booth with a person if that’s available, or hope that someone kind agrees to buy you the ticket. How hard can it be to add a passport option?

… As a long-term resident I have a transport card, so this doesn’t affect me. But even my old-style plastic transport card now has to be linked to my health kit app in order to work, so that travelling without a green code would be impossible.

… Even back in 2018, China was becoming impossible for anyone without a national ID card. Most hotels won’t accept foreigners, restaurants require using app which requires national ID card, etc, etc.

… To be fair, I’ve never been unable to eat in a restaurant anywhere in China. You may need to use WeChat or Alipay to pay, which if you don’t have a Chinese bank account is a problem, but being a foreign citizen in itself is not.

… The last time back in BJ I find it extremely frustrating for not having a Chinese phone number, as I need it for WeChat => pay with it for almost everything; and need it to enter my alma mater. Then my ID hasn’t expired yet so lucky me. Let’s see next time.

… Nowadays it would literally be impossible to be here without a Chinese phone number, because you would need to use the health kit mini-program on WeChat. God knows when this will change.

There is no phone call, no visit to a grocery store, no trip to see a friend or go to work, no trip to the park or the zoo that is free of state supervision.The panopticon state is pretty complete.

As much as Chinese economists and leaders talk about changing the economic model, little has changed in more than a decade. Mr. Xi shows no willingness, despite speechifying, to alter the current path. If anything, China is far less open than it was a decade ago, thanks to Mr. Xi. One wonders how a more advanced economy comes into being. Not because of subway ID requirements, but because of the fears of moral freedom that would destroy CCP.

Macroaggressions

From America Online – Several billionaires have recently criticized the wealth tax proposal of presidential candidate Sen. Elizabeth Warren (D-MA). And fellow lawmaker Rep. Alexandria Ocasio-Cortez (D-NY) has come to her aid.   AOC: ‘Y’all, the billionaires are asking for a safe space’

But perhaps the billionaires threatened with having to pay taxes almost like the rest of us have learned how to do political threats from their experience with China. 

China can threaten the NBA based on a single vague tweet from an otherwise obscure NBA general manager.  A China so afraid of a tweet is a China willing to transform a nonaggression into a macroaggression, and needs special care and handling from the world.  Perhaps CCP doesn’t get sufficient love from its family at home. 

China is clearly looking for a safe space in the world.  The Chinese mentality is that China is constantly under attack from the barbarians, whether it is xiongnu in the north two thousand years ago or the western barbarians whose sinister plans to destroy CCP and China were exposed in 2013 by Mr. Xi in Document No. 9

And maybe China has learned from the NBA – the best defense is a good offense. 

So China has created a safe space for itself by threatening multinational corporations everywhere, and by caving to the tantrum the multinationals have temporarily created a safe space in which to do business until the next unfortunate lower level employee tweet, or some corporate employee’s kid in Kansas draws a map in school showing Taiwan as an independent country. 

Now the companies and their owners are seeking a safe space from the horror of paying more in taxes in the US. 

CCP has a safe space.  The billionaires have a temporary safe space in China, and now seek a safe space from AOC in the US.  The US Congress – at least the Senate – has a safe space behind the orange haired baboon.

What would be a safe space for the rest of us, concerned not only about taxes but free expression?

Attached, a list – soon to be outdated – of multinationals which don’t remember first they came for the socialists.  From Lucas Niewenhuis at Supchina, All the International brands that have apologized to China.

The definitive list of international companies that have issued apologies to maintain their market access in China in recent years. Plus, a record of the even more widespread phenomenon of self-censorship for the Chinese market.

Read the whole list.  Fun and shame, at the same time.

PS – Remember that China creates a safe space for multinationals only temporarily.  Foreigners can be had in more sophisticated ways than blocking markets.  I wrote about this in IP Theft – No More Worries and Steve Dickinson at ChinaLawBlog follows up his prior posts with this below.  Anything encoded by a foreign company – patent information, employee information, market information, customers, clients, revenues – will be available – without asking – to CCP.  

China’s New Cryptography Law: Still No Place to Hide

….

So in the end, inviting foreign providers and users of cryptography is just a trap for the unwary. Once data crosses the Chinese border on a network, 100% of that data will be 100% available to the Chinese government and the CCP. Cryptography may work well to prevent access by the public, but all this data will be an open book to the PRC government.

This then raises major issues for U.S. and other country entities that are relying on end to end encryption in China as an exception to U.S. export control rules. Under China’s new system, end to end encryption will no longer exist in China and for this reason this exemption from U.S. export controls will no longer be effective. As the U.S. expands the scope of technology subject to export controls, the risks for foreign companies will become progressively more significant.

No place for a multinational to hide – at least in China. Safe space is always in the eyes of the aggrieved. 

My First Protest

February, 2015 

We are in Jingzhou, Qing’s home town in Hubei Province. 

We went out with Ben for a walk, and the Jingzhou district government compound is less than a block away.  The district is an urban subdivision, akin to a ward in Chicago, though much bigger than a ward.

The district compound is a series of small buildings, like a small university campus, some offices, some residences.  Leafy, low key, surrounded by the usual wall with three entrances, or gates.  Buildings look old, a bit decrepit, although probably built in the early 1980s. Qing says this area was pretty and clean and orderly when she was growing up.

Now, it is different. 

Everything in Jingzhou is dirty, bad construction site dirty, all the time, everywhere.  Leaves on trees and bushes are covered with a film of greasy dirt.  You can see the green under the dirt, but it is not leafy green.  Some unfamiliar green.  What was built in 1985 has suffered from 40 years of no maintenance, at all. All of Jingzhou suffers from the tragedy of the commons problem – no one is the owner of public space, including buildings, so no one  takes care. But the district is the hub of local government.

Never let it be said that everything in China is better now than it was before.

At the district main entrance about 30 or 40 men and a few women were protesting. I asked Qing to get some details, and we talked to the leaders for a few minutes. They were protesting not being paid – for a year – on a construction project that has been taken over by the government.   The original developers of a wholesale shopping mall fled, the government took the project over, and promised to pay workers.   They are apparently owed several million yuan –  maybe ten million yuan – for themselves, their employees, and suppliers.  It was now close to New Year’s, workers were going home, and they needed their promised wages. They had a cloth sign that blocked the exit for district government employees to leave in their cars.   They had been there for several days, they told us.

Main entrance, Jingzhou District headquarters, after clearance

About 4:30 in the afternoon, the police showed up, two personnel vans, a few cars, some police in riot helmets with the pull down plastic visors and heavy vests with heavy guns, some not.   About thirty policemen to match the protesters.   Police stood around their cars, waited for a few minutes.

The leader walked up separately.  Chengguan is the term for the non-uniformed thugs employed – or let us say, arranged – by the government to break up protests, beat up old women and men, and occasionally murder protesters.   The leader was a thug in anybody’s book.  Big, fleshy, jowly. Scowl. No uniform, just a pullover shirt and a light jacket.  Right out of casting, but this was not rehearsal.  Qing and Ben and I were standing right around the protesters and the police – this entire event was unfolding in the driveway in the picture, between the building entrance and the street, about 30 feet of sidewalk and parkway.  We were taking pictures. The thug threatened Qing, didn’t know what to do with me. 

Qing told the thug that if he wanted trouble, that was ok.  She said she was American.  She was not in a mood for cooperating.  Police wanted us to go away, but we were slow.  Qing said that my presence might have calmed the police a bit in their later action against the workers.   The thug shook his head first, as if telling his subordinates he had decided not to proceed as planned.  He then nodded, the police moved in, tore down the sign, pushed the protesters out of the way, to either side of the driveway.   They broke the protesters up into small groups, and surrounded them against the walls of the entrance. Pretty well organized, like they had done this before.  Very clear that any resistance would be met with overwhelming violence.

The protesters did not react much, at least not much compared with being physically shoved out of the way. The concept was to separate the protesters, and then the police formed a line on both sides of the driveway, so the government officials in their cars could leave on time at 4:30.  

Some people standing around, watching, but most passers-by just kept passing by.  Either not news or not news they want to be a part of.

About half a dozen cars left the compound, moved into traffic.  The police hung around for about 20 minutes, gathered, got back in the vans, left.  No arrests this time, no bloodshed.  The protest was finished for the day. Qing said that the thug was not chengguan, but a representative of the central government security force, a somewhat secretive unit that exists in each city.   I did not know about them.   But the central government has a security presence even in the cities.   I have a couple of pictures, nothing juicy.   I will go back tomorrow, see if the protesters are there again.

My first protest in China.  Things you can learn by going out for a walk.  I knew that it was common for migrant workers to work for six months or a year and then not get paid, and there is little recourse. The blue roof shacks you see on all construction sites are the housing for the farmers who do the work, on projects big and small, and they live on the site, and usually get a little money for food, but they agree to get paid when the contractor or the developer gets paid, and so they work and exist on scraps for a year, waiting for the big payout at the end.  Often, the big payout never comes.  If the workers get half, or 25%, of what they are owed, that will be a good outcome. 

The CCP says that China is in the beginning stages of socialism.  I guess that is true. The worker’s paradise is not here, just yet.

Cultural Economy

In the old days, before about 1890, there was no field of economics.  There was only political economy, rightly reflecting the link between institutions and laws and the incentives they created.  As Acemoglu and Robinson pointed out in Why Nations Fail, what we call economics arises from the interplay of culture and institutions, and to think that economics is the same for all is to think poorly.

I want to point out some of the ways in which economic thinking can differ across cultures, and explain some of what we see in development in China, and in foreign countries with Chinese companies. 

Economic issues are necessarily paramount for any national leader.  Right now, both Mr. Xi and Mr. Trump derive their legitimacy from promises to achieve national greatness again, and for both, this fervent hope has much citizen – that is, cultural – support.  For Trump, the political slogan is Make America Great Again; for Xi, Made in China 2025, or perhaps, Socialism with Chinese Characteristics for a New Era.  

In China, this promise is more than a political slogan – more than, it’s the economy, stupid.  For Xi and CCP, the promise of development is at the heart of the promise to the Chinese people. All other values are to serve that purpose.  That has been CCP policy since inception.  The CCP Constitution is pretty clear –

In leading the cause of socialism, the Communist Party of China must persist in taking economic development as the central task, making all other work subordinate to and serve this central task.

Chinese development internally has been one of the world’s great stories – from extreme deprivation and depression to dual tier markets and township village enterprises and some land rights and property rights and competition law and insurance and stock markets and financial markets of all kinds.  The infrastructure miracle is the obvious sign of change for investors and foreigners alike.  But China doesn’t seek to export its development model.  It is understood that China is sui generis – except for infrastructure, where the universal model always seems to be, if you build it, they will come.

Many revenue-generating infrastructure projects within China seem structured as loss leaders for economic development, to the benefit of the local party chief.  There just isn’t any way for the completed project to throw off enough cash to pay for all construction and development and operating costs. One sees this in some expressways, subways, some high speed train lines, some airports and ports. The completed projects are beautifully appointed white elephants. How can this go on, year after year, across China?  Where is the ROI calculation?  Where is the money coming from? Who is eating the losses?

One has to understand the difference in ways of understanding economics in China and the west.  This means understanding how culture drives incentives. Economic interpretations are culturally implanted. Thinking about long and short term can be different. Thinking about goals can be different.  What is rational can be different. Let me give you some examples. First, from the savings side of the market.

Example 1 – bank savings 

It is about as fundamental an economic idea as there is.  When returns go up, people invest more and restrain consumption.  Interest rates go up, people will save more, and restrain consumption.  At the national level, macroeconomists have to figure out the impact of potential changes in interest rates, exchange rates, employment rates and investment.  What will people do? And while every situation has its own special character, when one has been making judgments for a while, one gets a feel.   So it was with some surprise that I saw Chinese policy makers discussing the impact of a rise in interest rates on savings.  This was at a time that policy makers were debating whether to allow rates on bank savings to rise, giving citizens a bit more of a return on their money, commensurate with growth in the economy, and ever-so-slightly slowing demand for money from developers and governments.

But what’s to discuss?  If interest rates go up, people put more money in the bank.  That is how the world works.

But maybe not always.  Our standard assumption, seldom noted, is that people are unconstrained in their choice to save or consume – that is, people are free to alter their spending or savings pattern as they wish.  For many savers in China – for most of us in the real world – that is not true.  You know the deep cultural importance attached to education in China.  Families, grandparents, will sacrifice mightily to save enough money to send their star student off to college, maybe high school, in America.  That may take extreme savings over a fifteen year period, but the investment is considered worth it.   If the grandparents have a defined monetary goal – $50,000 in fifteen years, then savings of $240 per month are required if interest rates on bank savings are 2%.  Returns in the real economy might be 7%, or 10%, but savers never see those returns.   But suppose policy makers allow interest rates to rise – say to 5%.  Then monthly savings of $193 are required to meet the future monetary goal, and perhaps grandma and grandpa can eat a little better, or afford the medicine they sacrificed for the cause.  Current consumption instead of savings.  The policy question is then, will they spend the extra $47 per month, or save it?  If you are a policymaker, how do you think about the goals of savings?  If you raise interest rates, will people put more money in the bank – or less?  Without some handle on the cultural features of savings, you don’t know.  And don’t let libertarians or advisors whose understanding of economics includes no psychology or human behavior tell you that economics has no cultural biases. 

Example 2 – trust and good faith

Getting to Yes is the well-known book on negotiating by Roger Fisher and William Ury.  I think everyone in the world who has ever taken a negotiation course has read this book.  In it, Fisher and Ury lay out the major principles for successful business negotiating over time – focus on interests, not positions; try to invent options for mutual gains; quantify or be clear about goals and measures of success. They are well aware that some negotiators lie, cheat, and distract, for the sake of the bargain.  But a general assumption in the US at least, is that the parties are negotiating in good faith – meaning a sincere intention to deal fairly with others.  In American contract law, good faith means that one party will not act so as to destroy the ability of the other side to receive intended benefits.

That is decidedly not a good assumption in negotiating in China.  The best known classics of war, and negotiating, in China are san shi liu ji, 36 Stratagems, and sun zi bing fa, the Art of War, by Sunzi.   Both are studied closely by students and businessmen.  Both emphasize deception, misdirection, and secrecy in dealing with the enemy.

With apologies to Chinese businessmen who have been highly successful by acting in open and principled ways with Chinese and foreigners, good faith is not a good assumption.  Stories about misunderstandings in completed negotiations or the irrelevance of a signed contract can be attributed to cultural differences. This is part of learning the turf.  But other problems, such as quality fadetheft of molds and IP, even kidnapping of American business people over payment disputes, are not cultural, but simply describe dishonest behavior.  This, when negotiations in China are designed to take extra time in order to build relationships.

Even within a company, growth plans can be secret, the province of only the owner. Survival and growth in the market is akin to warfare. Sunzi tells us that deception is a necessity, even when dealing with subordinates. 

5:19 Energy – Thus one who is skillful at keeping the enemy on the move maintains deceitful appearances, according to which the enemy will act.

6:9 Weak Points and Strong O divine art of subtlety and secrecy! Through you we learn to be invisible, through you inaudible; and hence we can hold the enemy’s fate in our hands.

11:35,36 The Nine Situations  It is the business of a general to be quiet and thus ensure secrecy; upright and just, and thus maintain order… He must be able to mystify his officers and men by false reports and appearances, Literally, “to deceive their eyes and ears”and thus keep them in total ignorance.

Per Sunzi, and per common practice, implementation in business or government can then be undertaken without clarity for underlings. It is a powerful tool in both business and government. Clarity for CCP underlings is not required when leaders are the only source of truth and know the goal.  For leaders, lack of clarity permits use of oppression when unclear laws are violated. For citizens, lack of clarity requires self-censorship in word and deed. In business, proper use of unclarity and deception might induce the “other side” in any negotiation to reveal its secrets or preferences, or even act rashly when confronted with apparent delay or indecision.  In the best of times, trust in good intentions is limited.  There is no good faith in the absence of relationship built over time.

This is both a powerful tool and a crippling handicap in Chinese international infrastructure deals.  Initial lightning speed and mystery in decision-making overwhelm opposition, but in the longer term, substantial good will is lost.  We dealt with that problem in the US – the model of government action as “decide, announce, defend” became too costly in time and lawsuits.  Better is “discuss, decide, build.”  But that isn’t necessary in an authoritarian state.

Example 3 – infrastructure investment

We are all astounded by the sheer extent of Chinese infrastructure investment in the last ten years.  The stimulus in 2008 was far larger, as a per cent of the economy, than the American one.  But those of us with some boots on the ground are also astounded at the sheer wastefulness of some of that investment.  We know that these projects are financed by bank loans, and those loans come due in three years or so – banks are not long term lenders.  And aside from projects taking three years to build, we have the experience of (theoretical) revenue generating projects that cannot possibly generate enough money to pay for construction and interest and operations.  No way.  A favorite example of mine is a new expressway built from Shanghai to Pudong, where the international airport is located, completed about 2008.  My first trip to the airport in 2008 was uneventful, for the simple reason that there were hardly any other vehicles on the road for 30 miles.  I mean, nearly zero.  At the time, this was a new expressway, and I suppose the information of its availability could have been scarce.  Possibly.  But I used that expressway at least twice a year for eight years, and the level of congestion hardly changed, anytime of the day or night, weekend or not.  Nearly no traffic.

There were simply too many other competing routes to the airport.  Big mistakes are possible everywhere in the world on infrastructure projects, the US being no exception, but we see similar stories repeated across China.  Transportation economists and engineers work pretty hard to forecast traffic and revenues, consider alternative routes and toll costs, and while the results are less than perfectly accurate, they are a decent guide to the investment decision.  But voters in the US, not to mention bond holders, would be more than a little exercised if their investment produced no ability to repay after so much planning.  Is there a different calculus in China?

Chinese planners have the means to make perfectly rational decisions about such matters.  So how can such revenue-short projects get built over and over again – aside from the pressure on local officials whose promotions depend upon generation of a target level of GDP in their three or five year term, and the need to spend following the huge 2008 stimulus.  Is the investment planning really for a twenty year horizon, at which time future demand will be sufficient to pay off the loans?  (I did transportation planning and economics work for some years.  There is no twenty-year projection of expressway use that is worth the spending of electrons to produce).

There is a way to make sense of these deadbeat projects, whether they are expressways, high speed train lines, airports or commercial ports.  And there is a way to understand the difference with western decision-making.  Given that the real decision is a political one, even more so than in the US, the trick is to consider than the long term doesn’t really matter.  A little bit of the cynical Wall Street IBG, YBG – by the time it matters, I’ll be gone, you’ll be gone.

How to understand this?  A simple chart from econ 101 should help.  A key point to understand is that the construction contractors, lenders, and local government investors in these projects are either government entities or heavily government-compromised.  While many big SOE make big profits, the companies can have political goals as well.  This means that they are not strict profit maximizers, in basic econ terms.  This also means that someone will take care of them in times of trouble.

Many, if not most, expressway projects in China are constructed by SOE as what we call B-O-T projects – build, operate, and transfer.  The concept is that the SOE contractor borrows the money to build the expressway, and receives tolls for a period of time – twenty years, let us say – to repay the loan and provide profits for the contractor. At some point in the future, the right to receive tolls reverts to the original government owner of the expressway.

But what happens when tolls are nowhere near enough to pay back loans?  This is a rather common problem.  Or would be a problem in the US.  Two particular ideas of “capitalism with Chinese characteristics” pertain here.

  • Loans for construction are bank loans, but the borrower may include local governments where the branch of the lending bank is located and even though loans come due every three years or so, the loans can be rolled over again … and again. That is part of what the SASAC (State Asset Supervision and Administration Commission) does – help borrowers roll loans among different local lenders. At some point in the future, someone will have to deal with these problem loans – perhaps one of the “bad banks” created for that purpose. But that is not now.  Just FYI, my favorite expressway to Pudong is now being handled by the one of the SASAC units in Zhejiang.
  • But wouldn’t the construction companies get cold feet, or nervous about not receiving planned income or having to repay the banks? Not necessarily.  In many recent cases, the borrower is actually a partnership between local governments and an SOE contractor.  And here is a neat trick, that could – theoretically – explain how the contractor can sleep at night.

How do regular retail stores decide to close for the evening, or the season?  How does a Starbucks decide to close at 10:00 PM, and then, miraculously, reopen at 6:00 AM?  Why not stay open all night?  Or, the ski lodge – open for five months a year, then close for seven months, and reopen?  How can this work, with mortgages and taxes and rents to pay?

The econ 101 answer is that businesses will shut down temporarily when revenues cannot cover average variable costs – for Starbucks, the cost of salaries and cups and coffee and heat or a/c.  If these variable costs can be covered, then the store will remain open.  If not, then close down and reopen when there will be enough customers – in the morning – that you can reliably cover average total costs.  In the morning, you will begin taking in enough revenue to cover operating costs and the bank loans and interest and rent and insurance and other fixed costs and make a profit. In the short run, you stay open if you can cover average variable cost.  In the long run, you have to cover all the other costs as well, but that is the long run. This is also the situation for the Chinese expressway with little traffic.

Stay with me on this, and the graphic representation will help.

In the figure below, you can see that the price P of the good is still above average variable cost AVC at the quantity Q being sold.  In this case, the seller should remain open, as long as the seller is confident that sales will pick up at some point in the near future (the morning) and sales quantities will then be at or above average total cost ATC.  Think of the price here as the price of the average sale at 2:00 AM; by 11:00 AM, both the average sale and the quantity sold will be greater, putting the company into a profitable situation again.

  • Even though the firm is not earning any economic profit, it is earning enough to pay their laborers (AVC), and thus it incurs less loss compared to the whole of average fixed cost.
  • In this situation, the company should continue producing the product.
  • P = MR > AVC , P = MR < ATC –> point where MC = MR minimize its loss
  • Economic loss = Q (ATC – P)
  • When AVC < P < ATC, the firm can stay open as long as they can cover the AVC
  • If a firm can cover all of the AVC and even part of the fixed costs, they will lose less than shutting down, as MR < ATC
    • Shutting down would mean losing everything and still have to pay for fixed costs, while in the loss minimizing case, costs are still covered.

Source: Welker’s Wikinomics

The same concept can apply to Chinese construction companies in BOT projects.  Loan servicing costs don’t really matter.  Someone, sometime, will deal with that, in the long run. If tolls from cars and trucks – and tolls are very high in China* – can cover operating costs – labor to collect tolls and trim bushes – then the project can remain open.

*Example – passenger car tolls for the 600 mile trip from Hangzhou to Jingzhou, in Hubei Province, are about 500 yuan, one way – say $75.

This is only a theoretical example.  I don’t really know if this is the thinking behind expressway projects that will never make money with debt taken into account. More likely is the the leader at some point said, proceed, and at that point, money became no obstacle.  And obviously some projects can pay their debts. You can see why big projects are often development projects, with revenues from related operations – retail stores, sales of apartments, rental from offices – rather than simply infrastructure projects.  Just like the building of the transcontinental railroad in the US, where the railroads were given land to use for non-railroad revenue.

The example shows what could be a rationale for continuing to operate the expressway.  And a positive spin on this story would be that to a much greater extent than in the US, Chinese infrastructure projects are expected to pay for themselves. 

When they cannot pay for themselves, loans are, in fact, rolled over again and again.  At some point, these projects with negative economic value must be recognized as such, and GDP will suffer as the project is written down to some value via sale to a third party, all the partners and the bank will need to take a big hit, or else someone – some government – will need to continually feed money into the project to cover debts.  This process usually happens quickly in the US, in bankruptcy.  In China, the process can take many years, but that is what the “bad banks” are for – to take the otherwise uneconomic projects and run them until they can be sold to someone or debt finally paid off by the Ministry of Finance.  The current idea is to convert the bank debt into bonds owned by the banks, and let the banks sell the bonds to (haha!) foreign investors.  Win-win!

Example 4 – stock investing

Stock markets were originally intended to accomplish two tasks – provide a source of funds for SOE, and “privatize” some of the risk. These efforts succeeded, and now most companies on the Shanghai stock exchange are SOE, with private funds supplementing a major government position, either ownership or management. Two way foreign and domestic stock market trade between Shanghai and Hong Kong has been allowed since 2014, and there is now an rmb clearing function in London, meaning trades can be settled in rmb outside of China. Now the government is pushing quite hard to get foreign investors directly into stocks and bonds in China.

My own somewhat cynical view is that this is not in the long term interest of Hong Kong or London – or foreign investors.  As long as CCP controls markets in China – and Mr. Xi is reestablishing the “Party is fundamental in all markets” philosophy – markets will not receive the sort of information needed to function efficiently.  Observe how much markets in China are affected by news reports or a speech by a particular high level official.  And observe the somewhat herd-like behavior of Chinese in purchases – a good word from the government suggests safety and profitability in a nation critically short of widespread basic economic news, not to mention divergent views. 

Michael Pettis does a superb job in pointing out the structure and pitfalls of China investing. He is one of the few China macroeconomic analysts with both western and Chinese investment trading experience, as well as the academic chops to put all in context.  Those interested in China financial markets should not miss a posting, now hosted at the Carnegie Center for International Peace.  Every post is rich.

Pettis writes most about overinvestment and the necessary macro adjustments, but his writing about the stock markets is also insightful. Writing in late 2013, he made an important point –  The recent Nobel Prizes in economics suggest both that markets are efficient, and that they are not. In fact they are likely to be efficient under certain conditions and inefficient under others.

Pettis argues that stock markets can be efficient at allocating capital under some conditions and not others.  He sees the need for an appropriate mix of three different kinds of investors, with different investment profiles, which he terms fundamental investors, relative value investors, and speculators. 

It is now 2019.  I don’t follow the Chinese stock market, and perhaps Pettis now has a different view.  But the fundamental conditions seem unchanged to me, if not more destabilizing than they were in 2015 and before.

He defines the three segments as follows –

  • Fundamental investment, also called value investment, involves buying assets in order to earn the economic value generated over the life of the investment. When investors attempt to project and assess the long-term cash flows generated by an asset, to discount those cash flows at some rate that acknowledges the riskiness of those projections, and to determine what an appropriate price is, they are acting as fundamental investors.

These investors are buying the long term trend of the economy, or the long term prospects for an individual company.  They want good financial information on companies.

  • Relative value investing, which includes arbitrage, involves exploiting pricing inefficiencies to make low-risk profits. Relative value investors may not have a clear idea of the fundamental value of an asset, but this doesn’t matter to them. They hope to compare assets and determine whether one asset is over- or underpriced relative to another, and if so, to profit from an eventual convergence in prices.

These investors are buying the shorter term trend in the market, and perhaps choosing among individuals stocks in one industry, based on what information they have.

  • Speculation is actually a group of related investment strategies that take advantage of information that will have an immediate effect on prices by causing short-term changes in supply or demand factors that may affect an asset’s price in the hours, days, or weeks to come. These changes may be only temporarily and may eventually reverse themselves, but by trading quickly, speculators can profit from short-term expected price changes.

These investors are looking at price changes over a span of minutes, hours, or days.  They respond to signals that are clearly not fundamental to the growth of the economy, such as insider behavior or political announcements.

Michael Pettis. The Difficult Politics of Economic Adjustment. China Financial Markets, November 11, 2013. Now at Carnegie Endowment for International Peace as When Are Markets Rational?  Note – versions of this newsletter are available online, but for the most part they do not include this stock market analysis.  The stock market portion of the post is at Naked Capitalism.

Pettis argues that stock markets in China are inefficient because the data necessary for fundamental investors – good macroeconomic data, honest financial statements, clear corporate governance – is lacking; and China has few value investors, because the conditions they need – ability to trade frequently and quickly at low cost, and ability to short securities – is also absent.  Speculators, he says, trade against very short term trend information, and are unconcerned about long term market fundamentals for a particular company.  China stock markets are dominated by speculators.

One could categorize these three investor types as having long, medium, and short term horizons.  Each type of investor looks at different information or analyzes the same information differently, and an efficient market can result when all information is available on which to trade.  Without a good mix of all three, markets lose flexibility, and don’t allocate capital well.  The Chinese markets are necessarily dominated by speculators – roughly 80% of stocks are held by retail traders, mostly individuals. The top ten listed companies on the Shanghai exchange are SOE, and most of the companies and the values are in government owned companies.  China has pension funds and insurance companies that can take a long term view; but even those industries cannot get access to trustworthy and general fundamental information on companies.  As a result, markets can be very volatile.

Example from Financial Times, September 27, 2017 –


When China’s vice-minister of industry said this month that Beijing was considering setting a deadline to ban sales of fossil fuel-powered cars, most auto industry experts did not overreact. The official did not offer any timetable, and rich countries such as Britain and France have set distant deadlines of 2040. Judging by the market reaction in Hong Kong, however, investors could be forgiven for thinking the statement was a bombshell. Shares in BYD, China’s largest producer of electric vehicles, surged to a record that day and are up more than 60 per cent this month. After BYD’s chairman speculated China’s deadline could be 2030 — in what experts said was more of a lobbying effort than a prediction — shares in the group’s separately listed mobile-handset unit also hit a record, despite the fact the company is not even involved in cars.

Not even involved in cars.

Even today, 80% of the listed companies on exchanges are SOE.  There can be little investor confidence in any market data, from government or an individual company.  Pettis notes that even credit decisions must become speculative, because when bankruptcy is a political decision and not an economic outcome, lending decisions are driven not by considerations of economic value but by political calculations.  See the example of Pudong expressway construction above. 

There are plenty of other ways in which “economics with Chinese characteristics” is different from that in the US – some of those ways make much more sense than what we think of as normal economics.  I thought it would be fun to point out some differences – for good or for ill – that could lead to cultural, institutional, and even economic change in the US.  After all, we import just about everything else from China.  Ideas may be next – after all, Mr. Trump and the GOP follow Mr. Xi and CCP in political philosophy in so many ways now.  Lightning speed and mystery and decision-making for the oligarchs and financial instability – no infrastructure, so far, though.

Was Democracy Just A Moment?

This is the title of a 1997(!) Atlantic piece by Robert Kaplan, the foreign correspondent and advisor to various elements of US defense and foreign affairs institutions.   I have long recommended the piece as a warning against American complacency about the health of our own democracy, and the futility of promoting democracy in places without the cultural means to sustain it – Russia and China being  prime examples.  Again, strongly recommended –

Robert Kaplan.  Was Democracy Just A Moment?  Atlantic Magazine, December, 1997.

The global triumph of democracy was to be the glorious climax of the American Century. But democracy may not be the system that will best serve the world—or even the one that will prevail in places that now consider themselves bastions of freedom.

A stone tablet depicting Democracy crowning the people of Athens with a wreath.Gjon Mili / Getty

Now comes 2018, perhaps the nadir of our confidence in a democratic future.  In a few weeks, the American midterm elections will foretell whether we have a chance to preserve democracy against oligarchic or autocratic rule; and in a few weeks, Britain will determine whether it will have voted itself (in 2016) out of being a major world economy.  

We should hope that 2018 is the nadir.  You know the line about how the outlook is always darkest … just before things go completely black.   But this short sampling of news from today fails to inspire –

Did Trump just kill the US auto industry?  David Goldman, Asia Times, September 22, 2018

http://www.atimes.com/article/did-trump-just-kill-the-us-auto-industry/

Economic historians will cite July 9, 2018 as the date on which the US lost the trade war with China – before the war began.

That was when Germany’s top manufacturing companies – Volkswagen, BMW, Daimler, BASF and Siemens – announced tens of billions of dollars of new investments in China as Chinese Premier Li Keqiang posed for a photo op with German Chancellor Merkel in Berlin.

Crash Out Brexit Virtually Guaranteed as EU Leaders Talk Tough to Theresa May, Reject Chequers Plan, and Give Her October Deadline

Britain Crash Out Nearly Guaranteed

 Posted by Ives Smith on September 21, 2018

and at Wolf Street –

Multiple Online Banking Systems Go Down in the UK

UK Payment Systems Go Down

by Don Quijones, September 21, 2018 

Payment chaos: For bottom-line-obsessed bank executives, IT systems are an expense to be slashed. The results are in.

A rationale for democracy as a form of government is that it is supposed to prevent big mistakes, or at least provide a means for correcting them once they occur.   Let’s hope that idea works in the US and Britain, historically the two leading lights of democracy in the world.  I will write more on this topic in the near future.

Jazz at the JZ Club

October, 2009 

Went with Jonathan Gong Wei, one of the IIT students from four years ago, to the JZ Club, a jazz club on Nanshan Road next to West Lake.  I invited two of my fellow faculty members, Wu De Gang (Dominick) and Zheng Li, to join us.

Nanshan Road is the place to see and be seen in Hangzhou.  It runs adjacent to West Lake, so the views across the river are beautiful.  Think of the view of downtown Chicago from the Fullerton Avenue bridge over the pond at night, or the view of downtown from the Planetarium. Except that the lake here is small enough to see across, and in the distance are hills lit up with lights from houses, and the moon is out, and the city has worked very hard to make this area attractive to the “gold collared workers” that my friend Bob Yovovich talks about.

The upshot of it is that even though the bars and restaurants and clubs are expensive, and have a lot of foreigners in them, the lakefront is free and open to everyone.  The park betweeen Nanshan Road and the lake varies in width, but here it is about 200 feet, so there is a lot of room for a lot of people to wander and stop and sit and hold hands and have a drink.  The city does fountain shows in the lake at night (sort of like the Las Vegas water show thing with water spraying in all directions from cannons at the surface that pivot or rotate).   There is coordinated music and plenty of vendors for cokes and beer and snacks and plenty of public washrooms (clean!).   This is one of the few areas in Hangzhou (and in China, I think) in which there are a lot of old urban trees, and the trees canopy the street, so the effect is very soft and human scale and just … beautiful.   Not all the buildings are new, and even some of the new ones have been designed to look older.   There is a bronze slightly 3D map of Old Hangzhou set in the sidewalk at one of the little openings in the walkway along the lake.  Date of map impression, probably 1900.   Size of map, about 30 feet by 20 feet.  Lots of older residents looking at the map, trying to find where their parents lived- or maybe where the new expressway is.  Hint- its not on that map, either.    At least two locations in enlarged sidewalk openings where people dance.  Not tai chi (although maybe they do that in the morning) and not waltz, but good old fashioned Texas Chinese line dancing.   With two hundred people dancing.  I think the two-step music came after we walked past.

I misread the time that the JZ Club opens (8:30) and we started off from the school a little early.  So Ms. Zheng and Mr. Wu and I got dinner at the Zhejiang University student cafeteria.  Zhejiang University is one of the best schools in China, and the cafeteria is proof of that (since they don’t have a football team, they need some way to tangibly demonstrate superiority).   We ordered at the counter, and the place is big and noisy and full of students, but the food is remarkably good and remarkably cheap.  Food is way better than the food at ZUST.   Zhejiang University has an old urban campus, narrow streets with big trees and some old buildings mixed in with new.

Neither Mr. Wu nor Ms. Zheng had ever been to the JZ Club, which again demonstrates the isolation of academics from the real world (not only the U of C economics department).   Or maybe it just demonstrates the inability of faculty to afford $60 bottles of not very good Spanish wine.   Mr. Wu, who looks to be about 30, is a self-described homebody, so he is not a candidate for too many future JZ Club adventures.   But they both had a good time, with the wine and the music and talking with Gong Wei.   After about half an hour, we were joined at our table by Ms. Sun, who is one of the owners.   From Gong Wei, her story is that about twelve years ago, she was a secretary in a government department.  She quit to start a coffee bar, did that for seven or eight years, and about six months ago opened JZ (with partners).    Ms. Sun supplied us with a bottle of champagne, which helped everyone’s mood as well.  Works in China, just like in the US.

Hard to tell right away, but the location and the prices and the milieu  suggest that Ms. Sun will do fine at JZ. Another capitalist success story.   The club is in an old brick house, on Nanshan Road right across from the lake.   Ms. Sun, or whoever the designer was, chose to keep the 1930s heavy timber framing and the effect, with modern lighting and furnishings in the old structure, are the equal of anything you can find on West Randolph Street or the West Loop.   Again, beautiful.  There are three levels, and the stairway is decorated with framed pictures of musicians and what purports to be a 33-1/3 record of their work- Peterson, Gillespie, Rollins, Davis, Coltrane, George Clinton (maybe not).   The third floor looks out onto west lake through some big trees.  I told Ms. Sun that I was from the government, and  the government needed her land and building for housing for some very important people and that, sadly, she would have to move out.   I thought it was worth a try, but she wasn’t buying it … or selling.  The location and view and building are sui generis.

The band was four guys- four black guys- from the US, who like a lot of groups, I guess, are in China sort of on tour, and play a few nights here and there.   Started with soft jazz, okay, good for the surroundings, and by the second set were cranking a little more.   When we left about 11:30,  they had just hit Sweet Home Chicago.   The crowd loved it. Mix of Chinese and foreigners, I don’t think any other Americans, but some guys who looked more Brit and Australian  (the Captain England and Captain Australia headbands gave them away).    No one dancing on tables, but everyone having a good time.

I don’t want anyone to think that there are no downsides to life in Hangzhou.  I just got through reading More Hangzhou (English, of course), which is sort of a Chicago magazine-Time Out Chicago.  Ads, restaurant listings and reviews, club happenings, and the cover this month ….. the three year history of the Hangzhou Harlequins Rugby Club.   I wonder if I can get replacement screws for my ankle if I get tackled wrong in a match ….   But the downside.   In the restaurant listings, and goings-on this month, is a ad celebrating a month of ….. Canadian Food.   The Canadian Food Festival is at Cafe Le Rendevous in the Landison Plaza Hotel.   ‘Nuff said.

Update on the Occupation in Hangzhou

 The G20 in the Potemkin Village           September 2, 2016

First off, let us stipulate –

  • It is vitally important for a nation to ensure security during the G20. National leaders will be present, en mass.  With terrorism threats salient everywhere, China wants to show off its prowess as a new member of the elite club.  In Hangzhou, terrorists and protesters,  ils ne passeront pas!
  • At the same time, China shows the major democracies, all of which are G20 members, and the world, that there are ways to ensure stability and harmony. No Seattle 1999 here!   Chinese soft power in action. 

 
The question for the G20 members, all of whom are seeing a Potemkin village Hangzhou, is what cost for stability.

One expects some concessions in time and convenience for a meeting of world leaders.  But perhaps the concessions go too far.

There are “checkpoint Charlie” locations everywhere going into the downtown districts.  All vehicles must stop to be checked, registered, and if desired, searched.  The checkpoints are at major arterial streets going toward downtown, generally 30 to 45 minutes driving time from Xihu, West Lake, the focal point of all directions in downtown Hangzhou.

On the way to the train station this morning, it only took me 5 minutes to get through checkpoint, at 5 am.  I left an hour early, anticipating longer delay.

But I had to get out of the car, go into the special police station built just for this purpose (construction started more than a year ago, and I wondered what this was for; now I know) and have police check my papers.   Took about 4 minutes.   But now imagine this checkpoint, with only two checking lanes, and every car has to stop for at least a minute, to have someone write down license plate number, check the hukou registration of the driver, and check the driver’s license against records.   Put this system on Lake Shore Drive in Chicago, or the Holland Tunnel in New York, 24 hours a day for two weeks.  Imagine the back ups at rush hour – could you imagine sitting in the line for an hour and a half?  two hours?   That is what people have to do here.  And, like the movie, No Way Out – there is no other way to get most places of business in Hangzhou, or the train station, or the airport, without going through one of these checkpoint Charlies.  

This checkpoint, and others at the train stations and airport, even at some school entrances, look like an occupying army has swept down.   More police than you can imagine, at any one location – two policemen every twenty yards, for two hundred yards or so, standing both sides of the access ramp, driving up to the train station dropoff;  plenty more policemen in the drop off zone, some with heavy body armor and weapons.   Inside the train station, a police lookout station, built just for the G20, with an armed guard surveying the train station masses.   Special luggage search lines, not only to get into the train station, but also to get out of the station.   Ticket and passport inspection, not only to get into the train station, but also to get out of the station.  

I posted before that there were very few taxis available on the streets in Hangzhou.  That is because most Hangzhou taxis have been allocated to the train stations and airport, and wherever the G20 people are staying.  It has never been easier to get a taxi at the train station in Hangzhou.  No line of people waiting.   Dozens of taxis in line waiting for customers.  

There are luggage checks on the buses and on the subways.  I cannot verify that myself – only reports, and in this environment, no reason to doubt.

Factories are closed in the districts of the city.  All construction has ceased in Hangzhou.  This applies only to the districts, not the outlying counties, where I think I saw some construction going on from the train.   But that means no one is working on construction projects at all for miles from downtown.  

There are absolutely no trucks on the streets at all – not last night at 8:30, not this morning at 5 am, not this afternoon at 1:30.   That means no deliveries of any kind.  I will say it again – no trucks at all.   Our main grocery store seems supplied, as of Saturday morning.  There is meat in the display cases, although I think less than usual.  I am going to bet that the stores will be running out starting today, and the G20 meetings are all next week.  

Thousands of businesses are closed.  From my looking, it is not clear what determines whether a business is open or not.  It feels a bit like after a tornado – only rumors, no information –

 “Is the bank open?”  
– “No, but maybe the branch across town.”
“is the mobile phone store open?”
– “No, all closed.  But I heard they might be open next weekend.”

For tens, perhaps hundreds, of  thousands of people, it is a two week forced vacation, but no place to go.   Locals are barred from many of the places they might want to go, like restaurants near Xihu, the big lake.  A permit is required to go anywhere close to downtown.

The Hangzhou government has encouraged residents to leave Hangzhou, to visit nearby places a few hours drive or train ride – “go anywhere, just go.” 

Even the streets outside downtown have a desolate feeling, like a highly selective neutron bomb went off.  Buildings are all there, but maybe 5% of the normal population walking around.  At 1:30 in the afternoon, driving back from the train station, the traffic on Tianmushan Road, a big 8 or 10 lane road (somewhat akin to Chicago’s Lake Shore Drive in local prestige) was less in volume than it would be at 1:30 in the morning.   No trucks at all.   Only a few buses.  Almost no one riding a bicycle, or a motorbike.

Buses are normally crowded, standing room crowded, any time of the day or night.  Even with substantially fewer buses operating, they are not crowded – score one for good planning by the transportation department.  Everyone gets a seat, when normally, almost everyone would be standing.   Looks like bus service in the suburbs.

I don’t know how the word has gotten out to business owners, and to bike riders.   But it is absolutely eerie.   Most hotels are closed, except for those serving G20 participants.   I drove by restaurants I have been to, and banks I have been in, and stores I went to.  All shuttered. 

Police, some armed, most not, are everywhere.  As I mentioned before, all schools are closed, with no one allowed in or out, except for a special few.   All foreign students were told to leave Hangzhou, and universities will open for classes two weeks later than usual.  At my school, foreign teachers who live on campus were relocated, with all their belongings, to a different building.  At one school entrance, where there would normally be hundreds of students and many cars and bicycles and motorbikes, there were ten policemen, a couple heavily armed.   Some school entrances have concrete barricades in front of entrances, in addition to the locked gates.

In the last month, police went to every apartment in our residential development, checking hukou for Chinese and looking for foreigners.  I was in Chicago, but they came looking for me two or three times.

On the streets, police are stopping people on bikes and people walking, checking ID.  This is not near any G20 events – at least ten miles from any event.

Every bus stop – every bus stop –  has a couple of volunteer assistants, standing all day in the sun, with bright red hats and vests,  ostensibly to help any G20 participants who might (a) be on a bus; (b) not be accompanied by a guide: (c) want to go exploring in the neighborhoods; and (d) might somehow need instructions.   The instructions are to report anything out of the ordinary to police.  Every bus has an assistant, as well.

It is an occupying army of police and chengguan (chengguan are the non-uniformed unofficial police, who serve as thugs as needed).   The city is in shutdown mode, except, I guess, where the G20 events are and the participants will be staying.   I don’t have a permit to get near downtown, but I know the streets are clean, the taxis are plentiful, there is no traffic other than G20 traffic, no noise from construction or trucks, no emissions from factories, the hundreds of girls serving as waitstaff are well-dressed and pretty and helpful, and there is no one on the street, for miles around, to take pictures, much less hold up a sign. 

But G20 promotion signs are everywhere, hung from metal posts on the sides of the major streets – “Hangzhou – A Good Host, A Better G20”   In the train station, the new cars on display have a G20 logo on the sides.   Buses all have a G20 promotion on their sides, as well.

Hangzhou and Zhejiang provincial government employees have the script down pretty well – “No trucks?  I am enjoying driving now.  It is so pleasant.”   Heard that from a couple of  friends.

All online searches in Hangzhou are blocked.  I was going to look at Hangzhou Expat, a site that would have other information about the gross government panic we are witnessing in preparation for the G20, but that is blocked.   A search for Hangzhou is blocked; also baseball and Chicago.

Selective internet blocking is a specialty here, so it is no surprise that the hundreds of journalists will have no trouble filing stories, as long as they remain within the village. 

In the train station in Shanghai, I could get some internet searches.   I found a little of the discussion in Hangzhou Expat.  Posts ended in early August.  I don’t know if Hangzhou Expat has been blocked since then, or not.   You see how rumor replaces information, when rumor is all you’ve got and you can’t evaluate the source.

Local TV has foreign journalists praising the organization of the Potemkin village, announcing that based on what they have seen, the G20 will be great for Hangzhou tourism and spending.  A young journalist from Africa expressed hope that China would bring investment to her country.   The foreign journalists interviewed all look earnest, well-scrubbed, and well under 30.

 At opening meetings of the B20, a business meeting in conjunction with the G, Xi Jinping walked out to address the foreigners come to pay tribute, Xi walking out to trumpet blasts announcing the emperor.  Applause was perfunctory.  No ovations.

One can learn from the history of Chinese GDP statistics, customarily announced publicly before the data could all be collected.  Two days before world leaders begin arriving,  I am announcing that the G20 will be a great triumph for Hangzhou and for China. 

Hangzhou is pretty, and modern.  Right now, not so bustling.  And not so good for business, or people’s incomes.  But no personal sacrifices are too great for the greater good of the state.  The world can learn from China.

Next meeting should be in North Korea.  Same safety, same theatrical sets, less expense.