Economic Notes, July 2024

It has been quite a while since I wrote anything. I went back to China, got seriously ill, and spent a long stretch anxious and muddled. I had plenty of thoughts, but no desire to put them into words. I still do not, really. Somehow the moment arrived today, so here are a few notes.

China first.

After travelling around the country in April, I came away convinced that the actual standard of living in China's big cities, the first-tier cities and provincial capitals, has already surpassed that of an ordinary city in the developed world. Converting incomes and expenses at the exchange rate is a distraction. Daily life in a large Chinese city offers an abundance of high-quality goods and services, unmatched convenience and speed, and a striking degree of physical safety. Theft and robbery are rare. These advantages make up, to a considerable extent, for the political pressure and bleak sense of the future.

But a decent reading today can contain a huge crisis tomorrow. China's economy has lost its engines of growth. Confrontation abroad and people giving up at home have put both exports and consumption under severe pressure.

The response is becoming clear: raise taxes on a large scale, especially, or even including, personal income tax, to fill the fiscal hole. The subtext is that if individuals refuse to spend, the government will collect the money and spend it for them. This is an aggressive and dangerous approach. In the short run, higher taxes can close part of the gap and fund government investment. Over the long run, it is killing the chicken for the eggs and forcing people to lie flat. One of the greatest achievements of China's decades of reform was the recognition and protection of private wealth, including through plenty of grey, informal arrangements. As those protections recede, and the state can take private property under whatever name it chooses, people have no option left but to give up.

To put it mildly, the outlook for China's economy has gone far beyond bleak. If the authorities keep following this version of "never forget the original aspiration," they will probably get exactly what they asked for. The aspiration of the man who repeats that slogan seems to have been formed around 1970. The result of realising it is not hard to imagine.

There is little point discussing individual economic measures. The market, and perhaps society too, has lost faith in government economic policy. The one thing worth mentioning, and the funniest, is the state media stepping in to insist over and over that this is not history's garbage time. After marking the boat to look for a lost sword and buying the box while throwing away the pearl, they have moved on to covering their ears while stealing the bell.

The Chinese companies still holding their own, Huawei, BYD and Xiaomi among them, will keep running into geopolitical pressure. They will probably be dragged into the whirlpool of privacy and censorship as well.

The only investment in mainland China that looks worth owning right now is physical gold.

The RMB exchange rate is not the main problem. A slow, mild depreciation can accompany the slow advance of history's garbage time.

Local government debt and bad bank loans will eventually land on everyone through taxes. That will shake the foundations. It is certainly not good, but is it bad?

The foundations and the very idea of rule by law are being weakened and quietly substituted. Administrative power now outweighs legal authority. The damage accumulates, and once it crosses some threshold, a brittle fracture will be hard to avoid.

Next time I mean to write a little about America, though I have no idea when I will manage to start.