China staring at very big storm

A few years ago, President Xi Jinping started warning that a 100-year big storm is coming. As is typical of the early days of a hurricane, one can now feel it. The circumstances and the mood in China have indisputably changed to become more threatening. These changes are mostly due to big cycle forces.

The most fruitful environments thrive on freedom, civility, and creativity, enabling individuals to turn their dreams into tangible successes, shared by the majority. China exemplified this from roughly 1980 until recent years. However, such booms often sow the seeds of their own downfall through debt bubbles and widening wealth gaps. Concurrently, global power dynamics intensified, placing China in the post-boom era amidst great power conflicts. Understanding this requires tracing the Big Cycle over the past century, highlighting China's current challenges. This narrative, drawn from personal experience, relationships, and research, underscores the intricate interplay of historical forces shaping our world.

The Big Cycle in China that unfolded through distinct phases:

1.?????? 1930-45: A tumultuous period marked by global depression, the Chinese civil war, international conflicts, natural disasters, and technological shifts. The end saw the establishment of new world and domestic orders.

2.?????? 1949-1978: Under Mao's leadership, China experienced a consolidation period characterized by communist economic and political policies, along with isolationist foreign relations. This era saw few advancements amid significant challenges.

3.?????? 1978-2012: Deng Xiaoping's reforms ushered in a capitalist rejuvenation, leading to economic growth, increased living standards, and a degree of openness to the world. However, wealth gaps and corruption also grew during this period.

4.?????? 2012-present: Xi Jinping's presidency marked a transition period focusing on economic reform and anti-corruption measures. Initially, there was openness to outside influences and a push for further market-driven reforms. However, consolidation of power and bold initiatives like the 2025 plan intensified international tensions, especially with the US. The emergence of COVID-19 in 2019-20, coupled with growing debt bubbles and wealth gaps, culminated in a significant crisis by 2021. Xi's third term brought about a shift towards communist nationalism, leading to purges and crackdowns.

How Xi is choosing to play his role as The Great Leader

Xi Jinping's leadership role must be understood within the context of the evolving times, shaped by the Big Cycle. As conditions dictate, leaders emerge to fit the environment rather than the other way around. Thus, Xi's actions and decisions must be analyzed without bias, focusing on understanding rather than judgment.

Capitalism, regardless of "Chinese characteristics," generates credit, fostering spending power and prosperity. However, it also leads to debt and wealth gaps, potentially triggering a reversal in the cycle. China currently faces such challenges alongside domestic and international power conflicts, environmental disruptions, and technological shifts, increasing the likelihood of a "100-year big storm."

In response, leaders tend to adopt more autocratic policies to maintain stability and order, a trend especially prevalent in Chinese history. Xi Jinping's approach appears to blend legalist principles with Marxist/Maoist characteristics, emphasizing strict control during turbulent times.

While debates may arise over the merits of such governance, it's crucial to observe developments objectively rather than rushing to judgment. The current situation in China reflects this dynamic, and understanding it requires a nuanced perspective.

What is currently happening in China?

Currently, in China, several significant developments are unfolding amidst the influence of five major forces driving the changing world order:

a)????? Economic System: China's economic system is undergoing scrutiny and adaptation. The country faces challenges such as rising debt levels, widening wealth gaps, and the need for structural reforms to sustain growth and stability.

b)????? Internal Order: Domestically, China is experiencing shifts in governance and social dynamics. President Xi Jinping's leadership has emphasized centralization of power and stricter control mechanisms to maintain stability and enforce compliance.

c)?????? World Order: Internationally, China's role and relationships are evolving. The country is navigating complex geopolitical tensions, particularly with the United States, while seeking to assert its influence through initiatives like the Belt and Road Initiative and regional alliances.

d)????? Acts of Nature: China is grappling with natural disasters and environmental challenges, including floods, droughts, and pollution. These events pose significant risks to infrastructure, public health, and economic stability.

e)????? Technology: Technological advancements and innovation are reshaping various aspects of Chinese society and economy. China is investing heavily in areas like artificial intelligence, digital infrastructure, and renewable energy to enhance competitiveness and drive future growth.

Overall, China's current landscape reflects the interplay of these forces, shaping the nation's trajectory within the broader context of global dynamics and the evolving world order

Major issues that could lead to “Big Strom”

1.?????? Big debt & economic problems: China is currently facing significant debt and economic challenges, leading to depressed economic activity, prices, and overall psychology. The financial strain is widespread, with falling real estate and asset prices, decreased employment opportunities, and declining employee compensation adding to the hardship. Moreover, many companies and local governments are burdened by debt and financial woes, which could have long-term consequences if not addressed properly. These factors have contributed to a more pessimistic mood among the populace.

Addressing these problems requires a nuanced approach, akin to that of a doctor treating a patient. A crucial step is implementing a debt restructuring plan, ideally engineering a "beautiful deleveraging" to mitigate the deflationary impact and reduce the debt burden. While some advocate for monetary easing to spur credit creation, it's likened to giving an alcoholic a drink to alleviate withdrawal symptoms. Instead, a balance between deleveraging and monetary policy easing is necessary to achieve a sustainable solution. However, this should have been initiated earlier, and failure to act may result in a prolonged economic slump akin to Japan's lost decade, albeit with Marxist characteristics.

The aging population exacerbates these challenges, imposing a heavy burden on families, government finances, and social services. With retirement age averaging 53 and life expectancy at 84, individuals must be supported financially for an average of 31 years after retirement, compounded by the one-child policy's effect of placing caregiving responsibilities on a single child. Despite the need to raise retirement age and improve social support systems, progress has been slow due to political reluctance and bureaucratic inefficiency. As the workforce shrinks and elderly care demands increase, this issue remains a pressing concern that requires bold and decisive action from the government.

2.???? China’s $23 trillion local Infra led debt Trap

China is facing a looming local debt crisis, with cities and provinces struggling under the weight of massive debts totaling around $23 trillion. Despite official figures putting China's public debt at 126% of GDP, economists estimate the actual debt is much higher, reaching alarming levels of 264.8% of GDP in September 2021. Excessive borrowing has become one of the biggest challenges for China's economy.

The debt crisis is primarily driven by extravagant spending on infrastructure projects, which were aimed at boosting GDP but have now left local governments burdened with unsustainable levels of debt. Much of this borrowing is hidden in local government financing vehicles (LGFVs), set up to circumvent borrowing restrictions. These entities now account for a significant portion of China's corporate bond market.

Beijing has been urging local governments to address debt risks, particularly hidden debts, which do not appear on official balance sheets. However, efforts to curb debt have been challenging, and the crisis continues to escalate. To address the problem, there are speculations about implementing another debt swap program, involving trillions of Yuan in hidden debt that needs to be repaid or swapped.

The financial difficulties of several provinces and cities have reignited concerns about the true scale of public debt, leading to fears of a local government debt crisis. These concerns are already impacting China's financial markets, with investors growing increasingly anxious about the stability of local governments and the broader economy.

In summary, China's $23 trillion local debt trap poses a significant threat to the country's economic stability, and urgent measures are needed to address the escalating crisis before it further destabilizes the economy.

3.???? China’s M2 money supply

China's M2 money supply has experienced unprecedented expansion over the past 15 years, making it the largest in the world, nearly double the size of the United States'. In August 2008, just before the onset of the global financial crisis triggered by the collapse of Lehman Brothers, China's M2 money supply stood at approximately US$6.56 trillion. Fast forward to March 2023, and China's M2 had surged to an astounding US$40.84 trillion, dwarfing that of the US, which was at US$20.84 trillion.

This monumental growth in China's money supply challenges traditional monetarist theories, which suggest that such rapid monetary expansion would inevitably lead to inflation. However, China has managed to keep inflation relatively low despite the surge in money supply. Several factors contribute to this phenomenon:

a)????? Surplus of industrial capacity: China's robust industrial sector has maintained a significant surplus in capacity, preventing excessive demand pressures that could lead to inflation.

b)????? Low labor force participation rate: Despite its large population, China has a relatively low labor force participation rate, which helps mitigate wage pressures and inflationary tendencies.

c)?????? Government intervention: The Chinese government has implemented various measures to control prices, including price controls and subsidies, to manage inflationary pressures effectively.

Overall, China's remarkable expansion of its M2 money supply has not resulted in runaway inflation, thanks to a combination of factors including industrial capacity surplus, labor force dynamics, and government intervention in the economy. However, the sustainability of this situation and its long-term implications remain subjects of debate and scrutiny among economists and policymakers.

4.???? China's property bubble

China's property bubble has significantly weakened real estate activity and sentiment in the housing sector, posing challenges to economic growth. Real estate and related industries, which contribute up to a third to 40% of China's GDP, are bearing the brunt of this slowdown. Weak confidence in the housing market has led to reluctance among homebuyers to make mortgage payments on unfinished buildings, further exacerbating the crisis.

The reduced demand for new homes has also impacted imports of construction commodities. Despite government efforts to stabilize the market, home prices in numerous cities have plummeted by over 20% this year alone. Given that housing constitutes a significant portion of household wealth and liabilities, its decline indirectly affects marriage rates, childbirth, and technological innovation.

The soaring median home prices, especially in major cities like Beijing, have created an unsustainable situation. Developers, in pursuit of profit, engaged in pre-selling homes that were yet to be built, fueling a Ponzi-like cycle. The debt-ridden real estate sector, accounting for a substantial portion of China's GDP, has become a cause for concern.

Evergrande, the world's most indebted property developer, has incurred massive losses over the past two years, with its colossal debt pile raising alarm bells about the stability of China's property sector. Dozens of property developers have defaulted on offshore bonds, exacerbating the crisis.

As developers default on payments, the crisis spreads to banks, eroding public trust in the banking system. The government has intervened to prevent bank runs and liquidity crises, but concerns about systemic financial risk persist.

There's no easy solution to China's property market woes. High leverage, falling home prices, population outflows, unfinished projects, and the withdrawal of private developers continue to plague cities across the country. Restoring confidence in the housing market and stabilizing the sector will require comprehensive reforms and prudent policies to address systemic issues and prevent further economic turmoil.

5.???? Youth Unemployment (16-24 Years old, educated) Crisis @ 21.3%

China is currently facing a youth unemployment crisis, particularly among educated individuals aged 16-24. The unemployment rate for this demographic stood at a staggering 21.3% in June, with estimates suggesting it may be even higher, reaching up to 46.5%. A record number of 11.58 million university graduates are expected to enter the job market this year, further exacerbating the situation.

This represents the most challenging period for youth employment in China since the country's reform and opening up in 1978. The economic slowdown, coupled with a lack of confidence in labor demand among businesses, has led to a reluctance to create new positions. Many companies, especially small- and medium-sized enterprises, are opting to increase employee overtime rather than hiring new staff.

One of the contributing factors to the rising youth unemployment rate is a mismatch between the skills graduates possess and the job opportunities available. Additionally, companies are adopting a cautious approach, adopting a "wait-and-see" attitude before expanding operations.

The tightening grip of government scrutiny on successful private tech companies has also added to the job crisis, leading to tens of thousands of young workers losing their jobs. Despite the general unemployment figure remaining at 5.2%, it primarily accounts for major cities and overlooks many migrant workers and other groups who do not qualify for unemployment compensation.

In light of these challenges, addressing youth unemployment in China requires comprehensive strategies to bridge the gap between education and employment, stimulate job creation, and provide support for those affected by job losses.

6.???? China's serious internal challenges

China is facing a myriad of serious internal challenges that threaten its stability and future prospects:

a) Falling income and financial stress: Many individuals are experiencing declining incomes, leading to difficulties in meeting financial obligations such as mortgage payments. As a result, some people are skipping equated monthly installments (EMIs), putting strain on banks and the financial sector.

b) Demographic challenges: China is grappling with a demographic crisis characterized by an aging population and a declining birth rate. The proportion of elderly individuals is rising, putting pressure on social welfare systems and healthcare services.

c) Human rights abuses: China's ill-treatment of ethnic minorities, particularly the Uyghur Muslims, has drawn international condemnation. Reports of mass detentions, forced labor, and cultural repression underscore the grave human rights violations occurring within the country.

d) Regional imbalances: Disparities between China's coastal regions, which enjoy greater economic prosperity, and its inland areas, which are relatively impoverished, exacerbate social inequalities and regional tensions.

e) CCP's vulnerability: The Chinese Communist Party (CCP) faces mounting challenges on the economic and social fronts, raising concerns about its long-term viability and stability. Internal dissent and discontent pose significant risks to the party's grip on power.

e) Economic slowdown and dissent: China's economy is experiencing a slowdown, characterized by sluggish growth and declining consumer confidence. Rare expressions of dissent and public dissatisfaction further underscore the challenges facing the government.

f) Military upheavals: Internal turmoil within the People's Liberation Army (PLA) and challenges to military leadership signal potential disruptions within China's military establishment, raising concerns about its effectiveness and cohesion.

Addressing these multifaceted challenges will require comprehensive reforms, strategic planning, and concerted efforts by China's leadership to navigate turbulent waters and safeguard the country's stability and prosperity.

7.???? Internal wealth gap and resulting conflict over wealth and values

The internal wealth gap in China is widening, sparking conflict over wealth and values and instilling fear among the populace. The government's pursuit of common prosperity through seemingly arbitrary actions is perceived by some as anti-capitalist, while others interpret it as directives to align with government objectives. Traditionally, Chinese history has frowned upon wealth accumulation among government officials, viewing merchant-capitalists as inherently greedy and corruptible. Despite recent reforms allowing such individuals to join the Communist Party, the perception of wealth has shifted, with growing distrust towards the rich and heightened efforts to combat corruption.

This shift towards legalistic, autocratic policies prompts concerns about the extent of government intervention and its resemblance to past anti-capitalist campaigns. Memories of persecutions, wealth confiscations, and strict controls evoke apprehension, particularly among elites experiencing greater scrutiny. While some view President Xi Jinping's actions as protective against exploitation, others perceive them as oppressive, contributing to a more pessimistic outlook.

Uncertainty prevails regarding the trajectory of China's governance, exacerbated by a lack of clear communication from leadership. Speculation thrives due to this ambiguity, as traditional Chinese leadership norms prioritize opacity over transparency. China's recent discontinuation of press conferences further clouds the picture, signaling a shift towards less clarity amid heightened risk. As the pendulum swings towards more traditional modes of governance, the population grapples with the implications of this evolving landscape.

8.???? Great Power conflict between China & USA & its impact

The escalating great-power conflict between China and the US is having profound negative repercussions. Both foreign and domestic investors and businesses are increasingly wary of being associated with China, fearing discrimination on a global scale. This has led to a cat-and-mouse game in trade and capital flows, prompting companies and individuals to relocate or adopt strategies to appear less connected to China. Even in industries where China is highly competitive, such as electric vehicles, green energy, and technology, geopolitical and economic conflicts have blurred lines, leading to increased government intervention.

The notion of free and open markets is fading as protectionism and nationalism resurge, reminiscent of the 1930s. China's economic model, focused on dominating global manufacturing output, faces challenges as countries impose higher tariffs and accuse China of dumping goods. Cultural clashes exacerbate tensions, with Western cultures struggling to accept China's rise and differing approaches. Western culture's zero-sum mentality contrasts with China's focus on strategic maneuvers and gradual pressure.

The intensifying conflict breeds mutual mistrust, with both sides preparing for the worst. There's a dangerous prisoner's dilemma, with each side fearing the other's intentions and preparing for confrontation. To mitigate the risk of devastating war, understanding and respect for each other's cultures are imperative. Leaders must address each other's existential fears and collaborate on solutions to avoid catastrophic conflict. Without such efforts, the likelihood of a destructive war within the next decade remains alarmingly high, with damaging consequences for all involved.

9.???? China & USA tensions & its impact on Environment & Climate

The escalating tensions between China and the USA are casting a shadow over environmental and climate efforts, with significant implications for global sustainability:

a)????? Disrupted Supply Chains: Trade tensions have disrupted supply chains for critical climate technology components, such as solar panels and electric vehicles. This disruption hampers the global transition to clean energy and exacerbates challenges in combating climate change.

b)????? Hindered Collaboration: The strained relations between the two largest greenhouse gas emitters have hindered collaboration on climate initiatives, including at the United Nations Climate Change Conference (COP28). This lack of cooperation undermines global efforts to address climate change effectively.

c)?????? Impact on Investments: The recent spike in tensions has inhibited investments in climate mitigation efforts. US policymakers are providing subsidies for low-carbon technologies made without Chinese inputs and seeking to curb Chinese investments in American decarbonization projects, further complicating global climate action.

d)????? Shift in Supply Chains: The tensions are reshaping supply chains for critical components used in climate technology, such as solar cells and electric vehicle components. China's dominance in manufacturing these components, coupled with trade restrictions and tariffs, disrupts global efforts to transition to renewable energy sources.

e)????? Rare Earths and Global Supply Chains: As trade wars escalate, China has the leverage to disrupt global supply chains by controlling rare earth elements essential for climate technology. This manipulation could have far-reaching consequences for climate change mitigation efforts globally.

The ongoing tensions between China and the USA pose significant challenges to environmental sustainability and climate action, highlighting the interconnectedness of geopolitics and climate change mitigation. Collaborative efforts and diplomatic solutions are essential to address these challenges and advance global climate goals.

10.???Technology War between China & USA & its negative impact

The ongoing technology war between China and the USA has significant negative impacts, contributing to global uncertainty and reshaping geopolitical dynamics:

a)????? Partial Decoupling of Technology Ecosystems: The two nations are increasingly decoupling their technology ecosystems, which not only undermines cooperation but also complicates relations in other policy areas, potentially leading to further isolation and polarization.

b)????? Growing Digital Protectionism: The tech war has spurred digital protectionism worldwide, as countries seek to safeguard their technological sovereignty and security, leading to fragmented digital landscapes and barriers to innovation.

c)?????? Global Uncertainty: The conflict has fueled uncertainty globally, accelerating the unraveling of complex global supply chains and creating challenges for businesses and economies reliant on seamless technological integration.

d)????? Challenges for American Companies: American companies face significant challenges, especially in semiconductor industries, where restrictions on exports to China impact various products, from consumer electronics to defense systems.

e)????? Challenges for Private Big-Tech Firms: Private big-tech firms are caught in the crossfire, facing pressure from regulators to restrict Chinese firms' access to advanced AI infrastructure, further complicating the technological landscape and impeding innovation.

f)?????? Chip War: The semiconductor industry, crucial for various sectors, including defense, automotive, and consumer electronics, is at the center of the conflict. The U.S. is wary of China's access to sophisticated semiconductor chips, fearing potential military applications.

Overall, the technology war between China and the USA poses significant challenges to global technological advancement, innovation, and cooperation. Efforts to mitigate tensions and promote collaboration are crucial to navigating these complexities and fostering a more stable and prosperous technological landscape.

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