CHINA: PAST AND PRESENT
18th Century imagining of Emperor Qin Shi Huang
We have addressed the many financial, economic and social ills facing the US, England and various continental nations. None of these problems are being seriously addressed by those in political power. So, they will not only continue to fester but will grow at an increasing pace. Looking East, one sees many of the same problems.
China
A little history is useful to appreciate the miracle of present day China. In the year 221 BC, Ying Zheng unified China and declared himself to be Emperor Qin Shi Huang. We use the term "unified" in the historic sense meaning he "defeated and subjugated" the former seven states comprising China. He initiated nearly 2000 years of imperial rule and is credited with important economic and political reforms, including building a national road system and playing a role in the construction of the Great Wall. He died in 210 BC and was followed by 559 emperors who ruled through 83 dynasties. China has an exceedingly long and rich history.
In 1839 it was forced into the first Opium War pitting the Qing dynasty against the British. The Chinese government sought to enforce its prohibition against the use of opium. In an effort to achieve that goal it destroyed opium supplies owned by British merchants in China. The English responded by sending in a naval expedition, forcing China to pay for the losses and continue to take in opium. The second Opium War saw British and French forces soundly defeat the Chinese. The results were that opium continued to be forcibly imported, China was made to pay reparations and cede territory to the British (e.g. Hong Kong). The Chinese refer to this long time period as its "Century of Humiliation."
China was subjected to many interventions by foreign states including England, Germany, Italy, Austria-Hungary, France, Russia and Japan. However, by 1945 the "Republic" of China emerged from World War II, became a globally important power and a member of the UN Security Council. It was transformed into the People's "Republic" of China" by Mao Zedong in 1949. We put the term "Republic" in quotes, because China has never come close to meeting the definition of a republic where supreme political power resides in the people. China is and always has always been an autocratic nation with supreme power residing in the hands of the imperial and political elite.
Zedong's "Great Leap Forward" was a disastrous effort to reshape the nation. It is estimated that between 20-55 million people died, most from starvation but also from violence and harsh forced labor. The Chinese government acknowledges that some 20 million people died. Deng Xiaoping, now known as the "Architect of Modern China," was an authoritarian leader who believed in the absolute power of the Chinese Communist Party. He came to power in 1978 following the death of Zedong in 1976.
Xiaoping consolidated power and led China through a period of dramatic reforms and the opening of its economy into what has been called a "socialist market economy." He famously declared, "To get rich is glorious." His leadership helped to transform China from a very poor, rural nation of a billion people into the vast industrial, commercial and military power it is today. China's current leader, Xi Jinping gained power in 2012, becoming president in 2013.
While China is now the world's largest producer of goods, that has turned out to be both a blessing and a curse. It produces far more than its population can consume and makes vast sums of money selling its excess production into foreign markets. However, those foreign markets are increasingly dismayed by the incessant flood of cheap Chinese imports that hurt local producers and cause huge sums of money to flow out of their countries to China. China has a positive trade balance with most of the world.
A typical response by the affected nations is to impose tariffs on Chinese goods. But doing so is also a blessing and a curse. Local consumers benefit greatly from the high volume, low-priced Chinese imports and rail at increased prices resulting from tariffs. However, local producers and their employees favor high tariffs hoping they will keep the employers in business and their workers' jobs intact.
The economic theory of "comparative advantage"holds that nations should focus on producing that which they are best equipped to efficiently produce based on available raw materials and labor force. If efficiency in production and low costs were the controlling issues, employing comparative advantage makes abundant sense. But in the world of realpolitik, government's efforts to protect their local businesses (corporate taxpayers and political contributors) and local labor (taxpayers and voters) always take precedence over economic theory. Tariffs are now being freely imposed - for better or for worse.
While it may appear to outsiders that China is an unstoppable dynamo destined to dominate the world, if you peek beneath the curtain you can see some serious problems. China has a shrinking population resulting from Xiaoping's draconian "one-child" policy imposed for over thirty-five years (from 1979 to 2015). It was ruthlessly enforced by fines, forced abortions, sterilizations and other highly coercive measures. Like most one-size-fits-all government dictates, the one-child policy had dramatic unintended consequences. Many couples aborted female fetuses believing that male children would be better able to support them in their old age. This resulted in a large shortage of women available for marriage and fewer workers to support the growing elderly population. The government abandoned the one-child policy in 2016, permitting two children.
As the population continued to shrink, in 2021 the government decreed that couples would now be permitted to have three children - but few are doing so due to their deteriorating financial conditions. It is estimated that the Chinese fertility rate is about 1, with 2.1 necessary just to maintain the population at current levels. Thus, the fuse on the demographic time bomb continues to burn. The population is expected to drop to 1.3 billion in 25 years and then fall precipitously to 767 million within 75 years - resulting in a loss of over 500 million people! Here is a chart from Pew Research Center projecting China's catastrophic population decline.
In an effort to turn this tide, the government is offering financial support to those who have children. Time will tell if that and other inducements will make any difference. Query: If an autocratic government can forbid its people from having more than one child, can it force them to have several?
China has large government debt (estimated to be over 200% debt-to-GDP) that must be serviced by taxes on a worker population that lags developed nations' household incomes. Local governments also have very large debts. Many massive public projects (e.g. highways, high-speed rail lines, and airports) were constructed but remain underutilized. Local governments and banks helped to fund the vast construction of living units. That helped to employ millions of workers brought in from rural areas. However, there was little or no thought about demand.
Many millions of units are unsold, unoccupied, and in many cases, unfinished and abandoned. Reuters estimates that 7.2 million homes are vacant and the Wall Street Journal estimates that 65-90 million apartments are vacant. Few finished units are being sold because there are few buyers. This has caused prices to fall dramatically (30% of more in some cities). Many unfinished units will not be completed because the developers are bankrupt. Evergrande, one of the country's largest developers, defaulted on its massive debts in 2021. Buyers have suffered enormous financial losses, causing them to increase their savings and consume less of everything, hurting GDP.
Another problem is the number of young adults graduating from college (estimated to be some 8 million) but finding no employment appropriate for their degrees. China is graduating more engineers than any other country - which is good news. The bad news is that it lacks positions for many of them. The youth (ages 16-24) unemployment rate is estimated by Reuters to be 15%. Others suggest it may exceed 20%. China stopped reporting its youth unemployment rate when the number reached embarrassing levels. In any event, its statistical data should not be taken at face value. For example, it reports 5% GDP growth but that number appears to be heavily massaged - perhaps overstated by a factor of two.
We do not call out just China for criticism of its "official" data. Great skepticism is appropriate for all governments' data. They are incentivized to manipulate them to lull the public into believing that "Everything is fine, don't worry" when the truth is often otherwise. A recent glaring example is the US Bureau of Labor Statistics. It reported that 147,000 jobs were created in May and another 144,000 in June. Those "headline" numbers were dutifully splashed across the main stream media. What gets little attention are the "adjusted" numbers subsequently reported. It was recently disclosed that those two months' data were overstated by 258,000 jobs! Clearly, the BLS data collection methodology is grievously flawed or its data is knowingly manipulated to serve political purposes. The US Federal Reserve Bank ostensibly relies on this jobs data in setting its interest rate policy. This helps to explain why the Fed is always behind the curve in predicting the direction of the US economy.
Like all regimes, China faces the threat of popular discontent. Chinese leadership is said to depend on its "Mandate from Heaven." That simply means that Chinese leaders must maintain the popular support of their people. Its history shows that when that mandate is lost, leadership will change, often abruptly. While this is true for all governments, it is especially true of dictatorial regimes. Notable examples include King Louis XVI and the French Revolution and Czar Nicolas II and the Russian Revolution. China has its own revolutionary history: the 1911 Xinhai Revolution ended the imperial system and established the Republic of China, and the 1949 Chinese Communist Revolution which established the current People's Republic of China.
In order to maintain its "Mandate" Chinese leadership has a desperate need to sell abroad the country's massively excess production. If countries continue to impose tariffs on Chinese goods, that is likely to threaten Chinese business closings, worker layoffs, and force the government to spend huge sums of money to bailout failing businesses and support laid off workers. It is a Hobson's Choice - failure to do so will threaten the political leadership's survival but doing so will burden the nation with unbearable debt. In that every government's goal is to preserve itself, one should expect China to choose the second option. From a leadership position, it is always better to face a fiscal crisis tomorrow than a revolution today.
The Chinese government is aware of these problems. Financial Times recently wrote,
China has strongly criticised companies and local governments for fuelling overproduction that it blames for driving down prices, as inflation figures this week are expected to show that one of the country’s longest bouts of factory price deflation is running unchecked. Chinese producer prices have been mired in deflationary territory since September 2022, posing a challenge for policymakers accustomed to relying on manufacturing and exports to drive economic growth.
Another thing to keep an eye on is the increasing number of Chinese military and political officials who are being demoted, replaced with partisan supporters, prosecuted, or who simply disappear from public view. This suggests a rising concern by Xi Jinping that his leadership of the Chinese Communist Party is at risk.
When popular discontent arises in an authoritarian regime there is no outlet to deescalate the tension, such as through elections involving competing candidates. Consequently, all expressions of public discontent are ruthlessly suppressed lest they spread. An example of this is the government's response to student protests held at Tiananmen Square in 1989. The protesters were calling for political and economic reforms following a period of perceived government corruption, inflation and the lack of political freedoms. Xiaoping sent in army troops to violently clear the square. The number of casualties is hotly debated but it is widely believed that many hundreds of protesters were killed and a far larger number arrested. To this day, the Chinese government suppresses all discussion and commemoration of the incident.
Following the Tiananmen protest, the government quickly installed a vast network of CCTV with facial recognition to keep tabs on the whereabouts of all citizens and the persons with whom they have contact, coupled with Orwellian levels of surveillance of all social media sites, emails, text messages and other forms of communications. It also passed "national security" laws that forbid criticism of the government and its officials. Such laws were used to imprison Jimmy Lai, a prominent media mogul in Hong Kong who founded the pro-democracy newspaper Apple Daily. He faces a potential life sentence for having the temerity to criticize government policies. Dozens of other democracy advocates (the "Hong Kong 47") were arrested. Thirty-one have pleaded guilty with the hope of receiving a reduced sentence. Fourteen others were found guilty. However, brutal suppression of dissent is a two-edged sword. It may thwart criticism initially, but ultimately inflame the population.
School teachers and other public sector employees have been forced to turn in their passports. Curbs on international travel have been vastly expanded in the last year ostensibly to defeat "foreign espionage." The government is also striving to insure that the "correct" political education of teachers and their students is maintained. Xi was enraged when Chinese economists attended an economic conference in Washington DC and suggested that Chinese GDP growth numbers may be well less than their government reports. The Chinese securities watchdog has since warned economists to "play a positive role" and "boost investor confidence" in government policies and data. The government is especially sensitive to any discussion that the economy is deflating due to the property meltdown that is estimated to have wiped out $18 trillion in real estate values.
Residents in restive regions such as Tibet lost their freedom to travel many years ago. Children there are forced at an ever younger age (now four years old) to attend communist party run boarding schools that seek to eradicate Tibetan culture including the native language from the children, instruct them only in Mandarin, and indoctrinate Chinese communist party beliefs. The government understands that if it can control the children's rearing from an early age, it can better insure that the "red gene seeps into their blood and permeates their hearts." The exiled Dalai Lama is the spiritual leader of the Tibetan people and is a force seeking to counter the Chinese effort to eradicate their culture. He is 90 years old and plays a controlling role in selecting his successor. The Chinese government is now seeking to control his succession. China is taking a softer approach with Tibetans than it does. in Xinjiang where it uses internment camps to socially and politically indoctrinate the recalcitrant Uyghurs, a Turkic-Muslim minority.
Totalitarian governments always live in fear of their subjects because there are far more oppressed people than there are oppressors. The fatal flaw in all authoritarian governments is their misplaced belief that they know what is best for the people, all aspects of their economies and the social structure. Exhibit A debunking that myth is the former USSR.
Russian government bureaucrats set all economic policies including workers' compensation. They dictated who would produce what, the quantity to be made and the wages to be paid. The producers' over riding goal was simply to meet production quotas to remain in good graces with their political masters. The predictable result was large quantities of very poor quality products leading to the workers' jest that: "We pretend to work and they pretend to pay us." The USSR imploded in 1991 because communism (and all forms of centralized command-control of economies) is an inherently incompetent system to foster an efficient and vibrant economy that is made up of many millions of people who are independently seeking to improve their lives. Venezuela, Cuba, and pre-Milei Argentina are notable examples of top-down government failures.
A quick look at some other Asian countries may be worthwhile.
Japan
Japan's birth rate is also very low (sub-replacement) while its over 65 population is growing rapidly - meaning fewer workers to support and care for the growing elderly population. The nation has an exceedingly high 260% debt-to-GDP ratio which has only been manageable because the Bank of Japan has forced interest rates to near 0% for a very long time. Those rates are now slowly rising as the BOJ hopes to encourage savers and investors to keep their money inside the country. The rate for a 10-year government bond was recently 1.6% - paltry by Western standards, but rising. For a long time, Japanese investors were converting their yen to foreign currencies and sending them abroad where interest rates and stock returns were far more attractive. The BOJ hopes to reverse that trend.
Former Prime Minster Fumio Kishida (2021-2024) called for increased energy subsidies, wage support, aid to expand digital infrastructure and bailing out the social security fund whose holdings were declining and will not be sufficient to meet future demands. The current PM, Shigeru Ishiba, assumed office in October 2024. Much of his agenda sounds familiar: increase wages ahead of inflation, provide support for vulnerable households, stimulate investment in regional areas, raise corporate taxes, promote renewable energy, revitalize rural areas, increase subsidies for regional development, halt population decline, support women, the elderly and disabled in gaining employment and strengthen defense. There is precious little discussion of where the enormous sums of money to do all of that will come from. One of Japan's serious economic weaknesses is that it must import much of its energy. It gets oil products from China and Russia, and imports many factory components and goods from China making it dangerously dependent on an economic rival. It is hoping to secure more of these goods from Southeast Asian nations.
In recent elections, the long-dominant Liberal Democratic Party lost its majority in the upper house following its earlier loss of majority in the lower house. The biggest winners were right-leaning populist parties. There is now no majority party, leading to political paralysis. Inflation of 3.3% has become a topic of growing concern as it hurts the large elderly and retired population and may well be understated.
Japan has strict immigration rules, so it has not been flooded with people of vastly different cultures that make integration difficult and adversely affect social cohesion. Nevertheless, there is growing resistance to immigration. Foreign born residents total about 3.8 million or 3% of the population (compared to 18% in Germany). Japan, an extremely homogenous society, has found that immigrants, especially from Muslim countries, have great difficulty, if not an overt hostility, in integrating into the local culture.
The country is threatened with long term economic and demographic decline. Politicians, as usual, are disinterested in doing what is necessary to address these problems because doing so would be unpopular and they would lose their political offices. Official fear of price deflation led to decades of suppressed interest rates and QE, both of which lead to rising prices. Wage growth has been stagnant. It is increasingly difficult for many college graduates to find suitable employment.
While Japan has many challenges, it remains an incredibly efficient manufacturer and clever innovator both of which support its strong export industries. However, that market must deal with tariffs that hurt sales and profits. Its domestic and farm economy is far less efficient and in need of financial support. Recently, the Nikkei 225 stock market has been rising, but the nation remains at risk of an economic downturn. Poor demographics is a problem with no acceptable solution. Servicing the massive national debt is dependent on a healthy economy and continued low interest rates. There is growing popular discontent with the direction that politics and the economy are headed. This can be expected to lead to political ructions.
Russia
Russia is not strictly an Asian country. But it spans an incredible eleven time zones - running from Europe to the western Pacific Ocean, qualifying it as part of Asia. Following its invasion of Ukraine, forty-five nations imposed sanctions on the Russian government, some of its wealthy oligarchs, and Putin. The sanctioning countries expected that would quickly crush the Russian economy and force it to abandon the war. As is evident, that did not happen. Instead, Russia adapted and kept its economy going by investing huge sums of money in the armaments industries to support the war effort. That stimulated the economy. The IMF estimated that it grew by an impressive 3% in 2024 (higher than the US's economy) despite the sanctions. It has since fallen in 2025 to 0.9%, per the IMF. Inflation has risen dramatically due to the government money printing to finance the war. It is believed that inflation is near 9% and interest rates near 20%.
Russia has been able to circumvent sanctions on its oil exports by employing a fleet of "ghost ships" sometimes referred to as its "shadow fleet" of unregistered ships that do not engage their maritime radio signals, to export its oil around the world. The sanctions require Russia to price its oil at not more than $60. China and India are big consumers of the oil which is being offered at bargain prices. They refine the oil into gasoline, diesel and other products to sell around the world. This caused Trump to threaten very high tariffs on India, leading to great political stress between these two former allies. Nevertheless, Russian total exports have fallen due to sanctions resulting in much less government revenues.
Many US companies (e.g., Starbucks, Coca Cola, Zara) felt obliged to withdraw from Russia to protect their reputations, allowing Russian companies to fill their gaps. Russians can also readily purchase US products by having them shipped first to a friendly country such as China or Georgia and then forwarded to Russia. Globalization has been a boon for Russia.
One problem that has no answer is finding enough workers for its factories because every available able-bodied man has been or is actively being recruited into the army. Russia has suffered over one million casualties (deaths and wounded) in the war. Many draft-age men fled the country at the outset to avoid being drawn into a war that many deem non-essential. Because military expenses have been consuming ever more of the budget, other sectors of the economy have suffered massive cuts. This has resulted in a decline of public services and decaying infrastructure such as roads, bridges and utilities. (We addressed the history leading to Russia's invasion of Ukraine in our March 17, 2022 issue titled "Global Disorder.")
South Korea
South Korea has had tremendous economic success and is a producer of high-quality goods. However, like many developed countries, it too is facing a growing elderly population, low birth rates (one of the lowest in the world), dependance on exports to support the government and national economy, high youth unemployment, high household debts and the entrenched "chaebol" economy consisting of large family owned business conglomerates (e.g. Samsung and Hyundai) that make it difficult, if not impossible, for upstart companies to compete. The shrinking work force is heavily taxed to support the large number of retirees resulting in a slowing economy with all of its negative consequences. The nation's large reliance on auto and tech exports is expected to be adversely affected by tariffs. It is heavily dependent on China for component parts.
The country also has a difficult time placing college graduates into employment suitable for their skills due to a disconnect between degrees obtained and degrees sought by industry. The chaebol system fosters nepotism, further frustrating graduates. This is leading to increasing youth unemployment and dissatisfaction with the political and social status quo. The population has taken on high debt levels, largely from mortgages. Rising real estate prices, especially in large cities such as Seoul, are leaving ever more people with the goal of owning a home, out of luck. Rising prices and fluctuating interest rates are inducing people to restrict their spending which, in turn, slows the economy. More people are expressing their unhappiness with their circumstances, leading to a growing, but presently weak, populist movement.
Thailand
Thailand has many problems similar to South Korea: low birth rate, aging population, and high household debt that limits domestic consumption and slows the economy. Its small and medium sized businesses are not growing, leading to falling GDP. US tariffs exacerbate the problem. Tourism has been a large portion of the economy but that is in decline. Chinese tourism has fallen by 5% due to the increased Chinese need to save. Political tensions with Cambodia has caused tourism with that country to decline. Thailand's small and mid-sized businesses are having increasing difficulties competing against large, monopolistic giants. Rising prices are hitting the middle and lower classes. The country faces many challenges.
Conclusion
While these countries face significant headwinds, it is not all bad news. Most have active, well developed economies capable of producing high quality goods and services. What each of them lacks is intelligent political leadership. Unfortunately, history has proven that to be an oxymoron. Consequently, all will suffer inevitable pain resulting from decades of dysfunctional, incompetent government leadership before they can trim their sails and set forth again into the future. Why must this happen? Because no one learns any lessons from history. Therefore, they will be obliged to suffer through entirely predictable crises. It will not be the end of the world but it will also not be smooth sailing.
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