What’s Going On In China?
A summation with observations and analysis
I am convinced that China, and its now leader for life Xi Jinping, are entering a very challenging period — on several levels. This moment has implications for internal Chinese health care systems, economics and politics; as well as for the region and world in general. As I write, a complex and interconnected series of trends and ensuing events are profoundly impacting the country and its institutions, threatening to upend growth, the economy and perhaps societal cohesion.
Let’s start with the recent, unexpected dialing-back of the CCP’s Zero-Covid policy, which appears to be a reaction to a couple of recent developments, and not the product of a thought-out strategic plan or advance preparations. This is very unlike the way China normally works, with tightly planned and controlled projects that are often years in the making. That’s what makes it so interesting and potentially disruptive.
The analysts and pundits I read and listen to are of the opinion that dropping Covid restrictions is a response to the “white paper” revolution that emerged across several of the country’s largest cities in the last couple of weeks. Because dissent is not allowed in China, protestors all held up blank white papers. Their meaning and intent was obvious to all. We remember that those demonstrations were sparked by an apartment building fire in Urumqi, the regional capital of Xinjiang province that killed ten. Video of the incident confirms that fire equipment and would-be rescuers were prevented from getting to the building because of pandemic quarantine barricades, and rumors spread quickly on social media that the victims were locked in their rooms unable to escape. The news was widely shared and already skeptical citizens nationwide took to the streets to protest across the country. Not since 1989 and Tiananmen Square have such protests been seen in China. And when many influential college/university campuses organized to protest, including Xi’s alma mater, the CCP got worried. I expect they’ve got their eyes on what’s going on in Iran and other authoritarian countries at the moment as well. This created pressure for change.
But I’d suggest, as some pundits are, that the main reason China is opening up so quickly and unexpectedly is the Country’s impending economic collapse. Those are strong words, but are backed up by the facts. Even before Covid, China had a brewing, festering problem with its model for economic growth — which was largely predicated on new property development, financed by government-owned banks. It’s a long and complicated progression of events, but I’ll sum it up as succinctly as I can.
Over 60% of China’s growth every year is based on property sales and construction — literally the *engines* that have been powering the country’s growth for over a decade. Like many ‘bubbles,’ the process got over extended based on either irrational exuberance or incompetent management and construction companies started leveraging their unfinished buildings to obtain loans to start new ones. It’s kind of like the old spinning plate analogy, at some point there’s some breakage that’s bound to happen. In China’s case, the rush to finance and build more-and-more new projects resulted in completion times for existing projects being massively delayed. In many cases construction on promised housing was entirely stopped. Importantly, in China new properties are sold upfront, ahead of completion; with buyers taking out mortgages on future occupancy.
When construction on a large percentage of new buildings stopped due to lack of funds and manpower, mortgage holders revolted and withheld their mortgage payments. That put a strain on the already overextended banks and posed an existential threat to the country’s largest construction companies. For the first time, some regional banks were forced to limit access to account holders cash; which resulted in noisy protests on the steps of several banking branches.
The entire situation was exacerbated over a year ago when the Chinese government put in new banking regulations that were designed to stifle speculation. Xi notoriously pronounced that new homes were for living in, not for specuclative purposes. As a result, the Chinese central bank regulator imposed new rules to increase capital buffers and scale down risk exposure. This resulted in the 19 biggest banks in the country covered by the new regulation, those deemed too big to fail, all tightening credit and reducing loan exposure. In practice, that meant that property developers and large construction companies no longer had access to an unlimited pool of credit, and that quickly became a problem for them and for China as a whole. The Country’s largest property developer, Evergrande, went bankrupt and into administration shortly thereafter, and several smaller but important developers quickly followed suit. An example of the law of unintended consequences at play.
This development posed such a big problem the new regulations have just been eased to prevent a total collapse of a sector that is critically important to the country’s growth and continued prosperity. That’s a total turn-around in banking policy, which is unusual and speaks to the gravity of the challenges the government faces in turning the economy around.
But it gets even more complicated I’m afraid. You see, in China, there is very little private property allowed. Oh one can buy a house or purchase a new car, pick up personal items and the like, but the vast majority of property is owned by the government, often local governments. It’s how they generate revenue. Selling property to developers is a vital source of income for local authorities.
The property crash, therefore, has crippled local government finances as that revenue is no longer flowing. Additionally, the expense of building massive quarantine facilities; employing an army of Covid inspectors, building and staffing antibody testing stations, and hiring additional police required to enforce lockdown regulations has also hit local economies hard. It appears that one underreported reason for the recent relaxation of Zero Covid policies is quite simply the lack of resources to continue to fund them.
Now, add the Covid pandemic to the mix, in an already troubled economy, and things instantly get even more complicated and dire.
As we all know, China is where Covid first emerged, in Wuhan Province. The CCP adopted a unique and untested approach to the pandemic, its “Zero Covid” policy. This is the kind of approach, quite obviously, that only works in tightly controlled, authoritarian regimes capable of such mandates. Zero Covid resulted in massive quarantines, sometimes of entire cities like Shanghai or Guangzhou (formerly Canton); the construction of expensive, massive quarantine centers; the alienation of large parts of the population, and finally a critical disruption of the manufacturing supply chain. The latter, in the world’s biggest manufacturing and shipping hub, has proved to be yet another major blow to the country’s growth and economy. One that according to all accounts will take years to rebalance.
The Foxconn Guangzhou plant story is a good example of the manufacturing disruptions taking place. Foxconn, based in Taiwan but with mega factories in China, is the world’s largest contract electronics manufacturer, responsible for all of Apple’s iPhones amongst other products. The Guangzhou plant employs 300,000 people. You read that right. Since Zero Covid the plant has seen serious disruptions on the product line, riots in the dormitories, Covid deaths on campus, and finally not long ago, a massive break-out with thousands of critical employees climbing over fences to escape and return to their home villages. Ouch. This has, BTW, caused Apple to develop a significant backlog of unfilled orders for their newest phones. This kind of scenario is playing out all over industrial China.
China has made several serious mistakes, miscalculations, in handling the above cited developments. The government was blind to the property and construction bubble, and when it did intervene it caused even more problems leading to multiple very large bankruptcies. It underestimated the extent of damage the Zero Covid policy would create; it also underestimated the amount of resentment and push-back these policies would cause from the Chinese people. The country put a severe testing and quarantine policy in place, but surprisingly did not follow up with a massive vaccination campaign. When the CCP decided to do vaccines, it insisted on developing its own, Sinovac, which is only 75 percent effective compared with the over 95 percent effectiveness of the West’s mRNA vaccines. As a result, a significant portion of the Chinese population is unvaccinated — especially the vulnerable elderly.
It is reliably predictable, therefore, that now opened up, China will experience a very significant surge of Covid infections, hospitalizations and deaths. The CCP appears to be now ready to accept that in order to save the economy and salvage at least some growth potential. But it is certain that hospitals will be overrun, it’s already happening in Beijing according to reports. It is important to note that China has only 3.5 ICU beds per one hundred thousand, while the US in contrast has 25 ICU beds per one hundred thousand. And we all know from our own experience in the USA how the peak of Covid can crush health care systems. it will be much worse in China.
This fact will not be lost on China’s citizens, who are already skeptical of their government after the manner in which it has handled these crises so far. In a historically unprecedented move, the recent Chinese Communist Party conference, held only every five years, awarded Xi Jinping a third six-year term as Chairman and president — which has also contributed to popular skepticism and even outright criticism on Chinese social media. Now, the Chinese are asking if the end of Zero Covid is safe. They are, according to reports and social media posts, also wondering why this shift appears to be so chaotic, uncoordinated and unplanned. Not confidence building for many.
In recent years, pre-Covid, the Chinese population has been generally satisfied with their lives; blessed with continuous growth and prosperity; upward mobility that has elevated millions from poverty; and the promise of a better future for their children and grandchildren. That has all been undermined the last couple of years, and now there is growing discontent and even rebellion facing Xi’s newly appointed administration. Not something the CCP is used to.
Some new terms infiltrating popular Chinese culture are “Lying Flat (Tang Ping),” and “Let it rot, (Bailan)”. Lying flat is defined as doing just what one needs to do at work, at school, in life, to get by. It is described as a counterculture youth protest aimed at the strict, authoritarian, merit-based values and society in modern China. It has arisen, in the opinion of most observers, due to the Country’s inability to deliver on its promises to the youth. A college education is stressed in China, but today, many hard working students and recent graduates are finding it difficult to obtain the kinds of jobs they trained for and dreamed of. Based on social media posts, they are also chafing under the autocratic, centrally-controlled rule of the party — a party that in their eyes is forsaking them and not delivering on its promises. So they lie flat, and just do what they need to. Nothing more. Those who take it a step further, and that number is growing, reject societal expectations and norms entirely and just “let it rot”, refusing to even participate in society or meet cultural expectations. This is not the disciplined, obedient citizenry the CCP is used to or expects.
China already has demographic and generational issues to deal with. The Chinese work force is aging, and after decades of controlling the population, there is not now the supply of emerging young workers that will be required presuming China gets over its recession, its legitimacy crisis and back on the road to growth. Pair that with the hopelessness and antipathy of young workers, epitomized by the Tang Pang and Bailan movements, and one gets a formula for extended crisis.
To conclude, the current Chinese leadership is plagued, at a difficult moment, with issues around it’s legitimacy; its handling of the economy especially in the property development, construction and banking sectors; its management of the Covid pandemic; the failures of its much touted Zero Covid policy; and dangerously, the increasing skepticism of its citizens. Some consider this a “perfect storm”.
The danger here is several-fold. Most ominously, the CCP may under pressure decide that a major, catalyzing and distracting action is needed to turn the population away from its current concerns. An attack on the disputed China-Indian Line of Actual Control (LAC) border along the Himalayas is a possibility, as is the long-anticipated attack on Taiwan. There’s nothing like a war to district the populous and kindle nationalistic fervor.
One would hope the CCP has learned some lessons from Russia’s recent failures in Ukraine, and that it is aware of the potentially harmful International sanctions that would result from such action. But it’s not out of the question.
Another danger is that the CCP is weakened by its failures to the point of open rebellion or perhaps just massive popular non-compliance. An ungovernable China is not in the world’s best interests. I do not believe that is likely to happen though, given the CCP’s tight control of the military, the banks, and all local governments. What is more likely, in my opinion, is the CCP will flex, change some policies to appease the population, like they just have with both banks and Zero Covid; then reduce the overall surveillance state apparatus that is grating on the people; and finally underwrite the necessary funding required to repair damaged sections of the economy. Whether this will work in the short- and long-run remains to be seen.
AUTHORS NOTE: I follow developments in China, the world’s second largest economy and most populous nation (until India overcomes it sometime this year). I do so daily by watching 3–4 15 minute videos on a number of China-observing YouTube channels, regularly reading the South China Morning Post, Asia Times, BBC, and more occasionally Xinhua and India’s Hindustani Times. I recognize that at least some of the YouTube China channels are either funded or influenced by Falun Gong, and I factor that into my thinking. For reference, my personal favorite YouTube China channel is “China Update” hosted daily by Tony, a former lawyer turned analyst who studied Chinese foreign policy in Beijing and speaks Chinese. His summaries are concise, well-spoken and researched, with supporting evidence presented.
