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China Cannot Let This Happen

After borrowing — and largely wasting — $15 trillion during the Great Recession, China now looks like a typical decadent developed-world country, complete with slow growth, anemic consumer spending and unstable financial markets.

But it’s not France, Canada or the US, where recessions happen and voters peacefully replace one major party with the other. China, within living memory, has seen civil unrest beget open rebellion beget multi-decade civil war.

Just as Germany is never going back to hyperinflation, China will not tolerate mass protests. Which means it somehow has to find jobs for the tens of millions of citizens who aspire to middle class life. This need for growth at any price explains the borrowing/infrastructure binge of the past five years. And soon it will explain a massive devaluation/QE program. From Monday’s Wall Street Journal:

China’s Workers Stumble as Factories Stall

XIGUOZHUANG, China—For decades, an army of migrant workers drove China’s boom times, flocking to its cities to sew T-shirts, assemble iPhones, or build apartment blocks and Olympic stadiums.

The arrangement helped millions of poor, rural Chinese join a new consumer class, though many also paid a heavy price.

Now, many migrant workers struggle to find their footing in a downshifting economy. As factories run out of money and construction projects turn idle across China, there has been a rise in the last thing Beijing wants to see: unrest.

In Xiguozhuang, a village among cornfields some 155 miles south of Beijing, it had been rare to see working-age men for much of the year. This year, however, many of the men are at home, sidelined by a fading property boom.

“Times are tough now,” said Wang Hongxing, a 39-year-old father of three who has worked at building sites across China’s northeast since his teens, but who has spent the past two months tending his farmland plot. “There are too many workers and wages are dropping.”

But for other migrants, especially those of a younger generation who took jobs in factories along China’s coast, a return to farming isn’t an option. Nor do they necessarily want to join the service sector China sees as a cornerstone in its shift to a new economic model.

Wang Chao dropped out of school when he was 15 and left his home in Anhui province. After a series of jobs up and down China’s east coast, he felt he had struck gold with a job in a textile factory near his hometown.

The factory closed in July. Mr. Wang, now 19, and other workers gathered recently outside the factory premises to demand back wages. He says he is owed two months’ pay, or about 2,000 yuan, or $320. The owner of the factory, which produces cheap trousers, told workers he is in deep debt and can’t afford to pay them. He couldn’t be reached to comment.

Mr. Wang hopes he can find another factory job. In Shanghai, he worked in a restaurant but doesn’t want to do that again. “Factory work is so much more comfortable in comparison, and better paid,” he said.

As a result of a rural-to-urban flow that many scholars say is likely the largest in history, roughly 55% of China’s 1.37 billion people now live in cities, compared with just under 18% in 1978.

The migrant workforce now numbers some 274 million but the pace of its expansion has slowed, and many economists believe China now faces a shortage of unskilled labor in urban areas. A mismatch of workers’ skills and aspirations with actual labor demand has exacerbated the problem.

…In August, after the factory a which made Power Wheels cars and other toys for Mattel Inc., shut its doors, hundreds of workers protested to demand unpaid wages.

Such unrest has become more common. China Labour Bulletin, a Hong Kong-based watchdog, has tracked more than 1,600 labor protests and strikes in China since January, already exceeding last year’s overall tally of 1,379.

The malaise has even affected workers at major state-owned enterprises. In May, thousands of workers staged protests over proposed layoffs at China National Erzhong Group Co., a debt-riddled machinery maker in Sichuan. Workers shared images on social media of banners criticizing company officials. One read: “360 yuan! How can we live on that!”

In response to such disputes, local authorities have at times adopted harsh tactics, including sending police officers to break up strikes and detain protesters. But in some cases authorities have also sought to appease workers.

The recent unrest is still far from the massive protests that swept over China in the late 1990s and early 2000s as state-owned enterprises laid off tens of millions of workers and local governments expropriated farmland around emerging cities for development.

But the rise in frequency of strikes and protests has caused concern in Beijing, which in March urged bureaucrats across the country to prioritize “harmonious labor relations.”

Take a surplus of young men (the result of China’s one-child policy which put a premium on male children), combine it with a shortage of good jobs, and the obvious result is instability.

The equally-obvious solution? Easier money designed to get people borrowing and spending. So now it’s just a question of which central bank is first to address its country’s crisis (slow growth and a massive influx of refugees for the eurozone, slow growth and a demographic implosion for Japan, slow growth and global chaos for the US, and now slow growth leading to civil unrest for China) with a massive devaluation. China, given its history, might be the odds-on favorite.

30 thoughts on "China Cannot Let This Happen"

  1. I can never understand Americans, starts a website called dollarcollapse.com
    and then starts worrying and lecturing about yuan? Claims proficiency in finance and then starts predicting social unrest in country on other side of the world and to which he has never paid a visit, neither can speak or understand their language (to best of my knowledge). Okay I know BO lecture on exceptional Americans still don’t you think it is stretching it a bit too far

  2. China has been duped by Monsanto to a model of toxic agribusiness, but they are waking up. As the glyphosate scandal spreads around the world, I hope they listen to Vandana Shiva and others who show a sustainable model of food production and land management which takes quality of life and non toxicity into account. Farming is a great way to employ citizens, when it is done wisely and in harmony with nature. It does not have to be isolating, either, with internet access. Permaculture, urban rooftop gardening, and other options can absorb the unemployed, and give a meaningful, healthy life as well, something many factories did not offer.

  3. The author forgets that China has nearly US$4 trillion in foreign reserves and this and the AIIB will fund the Silk Road, One Belt project and the building of a massive double railway line across Central Asia to Russia and Germany. This will revitalize the region and create jobs for tens of millions of people and create great wealth for China, Russia, Kazakhstan, Germany and indirectly Europe. Cars and goods made in Germany, Russia and Europe can now be railed China and vice versa, saving many days of shipping.

    China has also initiated the second massive project called The Maritime Silk Road, linking China to South East Asia to India, Pakistan, Kenya, South Africa, Oman, Iran, Egypt, Greece, Turkey and to the EU and this will boost trade and commerce.

    Even the Kra Isthmus has been mentioned and if that canal is built it will save at least 3 days of sea freight from China to Europe and vice versa and make the Strait of Malacca a relic of the past..

    All the above projects have one thing in common. They will bypass USA and the the Pacific Ocean which is dying anyway, with 300 tons of contaminated water pouring from the the nuclear reactor meltdown in Fukushima daily and has already caused havoc in the West coast of the North America.

    So which country will resort to massive devaluation first first? My bet is that it is the USA which already had US$18.2 trillion in debt and 45 million living on food stamps.

  4. China will obviously determine the only solution is to distract and rally the troops with a war. Between China building Islands in the Pacific and Russia entering into territoral waters and being caught arming nuclear weapons, a war will be easy to step into.God help us if Obama is still in office or a democrat becomes the next president.

      1. Yeah, we need another democrat because they didn’t drag us into WWI, or WWII, or Korea, or Vietnam, or Libya, or Ukraine, or Syria.

  5. Very interesting article.
    It will be interesting to see if this translates to many factories closing or just one or two.
    The thing China needed to learn was that countries need to be able to make money so that they can buy Chinese products.
    I really hope they don’t go down the path of QE as it does not work and cannot work.

  6. I don’t think “easier money” to encourage borrowing and spending is a solution for any of those countries. It hasn’t worked in the US, Japan, or Europe so far and I doubt it will in China. Even if the money came interest-free I think most people wouldn’t want the hassle of having to pay it back. Income is too uncertain and/or too low. If it’s truly “free” money (“helicopter”) then maybe, but then wouldn’t it be funny if everyone rushed to buy PMs if that happened?

    1. What it does, however, is make slaves out of people…they are too hobbled with debt to protest or travel for gatherings. Americans used to travel for protests and marches. Now they are afraid and tied up with debt. Tell me that wasn’t deliberate. The young were hogtied early with student loans

      1. What people need to do now – and I’m a little surprised it hasn’t happened already because of the unprecedented social communications technologies, but maybe it will soon – is for people to mass default on their debts. Since everything is so financialized now anyway that could be more effective than just a physical protest. So what if the vast majority then has a “bad” credit rating. What a joke. Maybe then a 500 will be the new 800.

        1. Student loans…perhaps…they are pure confidence trick.

          Debt forgiveness sounds wonderful, but it’s not fair to people who have really sacrificed to pay them off. Maybe they should get a refund? I like that!!

          1. I’m not talking about debt forgiveness, I’m talking about hitting the banking system/PTB in the mouth. The implications could be vast, and beneficial to “the middle class.”

            That said, a true debt forgiveness program WOULD give previous debtors a refund in that everyone would receive, say, $100,000. Those without debt would receive a windfall/refund and those with debt could expunge it. It’s actually a form of “helicopter” money in that the extant debts/”assets” held by the banks are bullshit to begin with. “Real” money was never lent, so there would be no “real” loss. Most people don’t understand that, hence the current system and status quo.

          2. Yes…but nobody wants to go to jail or get fines. People are afraid of this huge confusing power structure that can seem to read your mind.

  7. According to article statistics, China has averaged 9.7M migrants to cities every year for 38 years! I think in 2 years that’s the entire USA’s factory sector (17.6M jobs).

  8. “So now it’s just a question of which central bank is first to address its country’s crisis….”. You would think that the USA, being a big food exporter, would have the leg up on a huge food importer, like Japan. China grows a lot of food, but I think they are a net importer, so a deliberate inflation policy would seem to be a huge gamble. yet, it is the USA that is losing, not winning, the hyperinflation war. Still early though.

    1. I think the US is a net importer of food now, or close to it. And around a quarter of the oil we import goes straight to agriculture, so the food we do grow here is still subject to a skyrocketing import oil price. But the US could absolutely produce far more food than we do, and I don’t know if that’s true of China. Agricultural subsidies have led to all kinds of malinvestment here (who grows corn in the desert?), but if forced, we could do things far more sensibly. Organic farming done well actually has higher yields than petro-farming if you look at a longer time span (say, 10 years or more) because of petro-farming’s diminishing returns. The thing is that organic farming can’t be done on a massive scale, so we’d need a lot of small, local farmers. (Hey, this isn’t sounding half bad….)

      The production lines for many products involve a slew of countries, and if any one of them hyperinflates it would disrupt the whole line, so we’re all vulnerable. If Canada mines rare earth metals, sends them to China to be refined, then they go to South Korea to be put into a part which is sent along to Japan to go into a laptop, which is carried by a Greek shipping line to be sold to US consumers… well, if anybody along the line hyperinflates, that business stops. Scary thought. Hyperinflations used to be such local events….

      1. With ARM Chromebooks selling for less than $200, I don’t think the laptop business stops until they are selling at $500, at which point we might have a snowball’s chance in hell of making that laptop in the USA.

        1. That was always my hope with a falling dollar, that it would bring some manufacturing back to the US. But if everyone is devaluing it might not work that way.

        1. Not a net exporter of oil though. We produce about 9 million barrels a day (although half a million is exported, so basically 8.5 million barrels) and we import another 7 million barrels on top of that. There’s no way we ever become net exporters.

        2. Nah, not true. The US is still a net importer of oil. We export quite a bit of refined products since gasoline consumption is still well below 2007 levels.

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