xiaohongshu

Sorry for not putting up a source because it is such a matter of fact in China that everyone already accepts as a given.

Here’s an article about it: https://www.sohu.com/a/286706975_175523 (use machine translation)

My friend, mercantilism is like the oldest trick in economic warfare.

First of all, you need to understand that the only reason we have cheap goods today is because the world has a surplus of industrial capacity. If the world’s demand is larger than the supply of goods, then prices will rise globally, and Western countries would not enjoy cheap goods at all.

For the past 50 years, many developing countries have listened to the IMF (and under the coercion by World Bank and GATT/WTO) and oriented their economy into the infamous “export-led growth” model. Instead of investing in their own domestic wellbeing, they allocated significant share of the labor and resources into producing export goods. They were being told that to become a “high income country”, you have to “balance your budget” and be a fiscally responsible kid, and that means earning as much trade surplus as possible to cover up your budget deficit.

This allowed the US to enjoy the benefits simply by running a large trade deficit and turning itself into a major source of consumption to absorb the surplus exports from the rest of the world. The developing countries, on the other hand, rely on export revenues to invest domestically, and it is this constant source of consumption demand that keeps their factories running, their workers employed etc. Meanwhile, the developing countries compete with one another, by depressing wages, depreciating their own currency exchange rate etc. to maintain a competitive advantage in the export sector.

The end result is that we have an oversupply of cheap goods, where the excess is absorbed by the US running a permanent trade deficit.

Now that the US suddenly wants to impose global tariffs, and most of all, on China. What does that mean?

It will mean prices increasing in the US and American consumers purchase less goods. The share of global consumption suddenly shrinks, we now have an even more over-supply of goods against a shrinking share of consumers. Most importantly, it shuts Chinese exporters out of the American consumer market. As a result, China has to dump their cheap goods elsewhere or else their manufacturing sector will go into slump, and unemployment will rise. This is also a very bad timing for China because of the recent pandemic, and the property market imploding also means many people are less likely to spend as their savings dwindle, and the local governments facing a debt crisis since they could no longer leverage the rising land price to pay off the huge amount of debt taken out for infrastructure building.

So somebody else has to buy China’s huge surplus of goods originally intended for the Americans. Naturally, they dump the goods into Europe, which will kill off the European domestic industries because the Europeans simply cannot compete with the cheap and perhaps even superior Chinese goods, if they don’t also put up tariffs like the Americans. This is why the EU put up tariffs against Chinese EV last year as soon as Biden did so.

On the other hand, if they refuse Chinese goods, they will also run into problems with importing critical materials for their own industries. The rare earth export restriction was just such a reminder to them. But worse of all, reduced Chinese imports from the EU means a surplus of export goods that cannot be sold elsewhere, and the European factories will have to close down and layoff their workers, leading to a recession.

This is why EU has no choice but to fold, especially with their energy prices jacked up after the Nord Stream bombing.

And this is why Trump’s tariff is a financial warfare, where failing businesses prime them to be harvested by the American finance capital. If this situation is not resolved in some ways, we could be looking at mass IMF bailouts in the Global South at a scale not seen before.

There is no re-industrialization, despite what Trump says! The guy leading Trump’s “trade war” is Scott Bessent, who was responsible for the 1997 Asian Financial Crisis. This is a finance guy doing finance thing. I’ve written about this in a previous comment on the very interesting history of Southeast Asia.

The only way out is for China to start importing from the Global South countries, and that means China has to start raising wages (by a lot) for its working class and give up its net exporter status.

You misunderstood what Yu Yongding was saying. He was criticizing the neoliberal-centric solution to underconsumption which is to fuel more consumer lending. For example, the Chinese government is loosing restrictions on consumer lending on the grounds that “our household debt level is still not as high as the US and Japan!” as well as loosening the RRR to promote more commercial bank lending.

In fact, this is exactly what Western neoclassical economists want China to do when they say China has a consumption problem, which will only benefit the banking sector.

I am 100% behind investment on high tech economy, but we shouldn’t have to do this by sacrificing the welfare of the people. Can you give a reason why the Chinese working class should suffer from more working hours, higher retirement age, and depressed wages?

More investment isn’t going to solve that problem. The main problem is wealth inequality, and only by raising the wages of the working people can we work toward solving that. An over-supply of goods when the people are too poor to afford isn’t going to work, and will only increase reliance on the export sector because you now simply shift the consumption part to foreigners.

What I am proposing, from a Marx/MMT-centric view, is for the government to directly increase the wages of the working people, so that they have the purchasing power to directly consume the goods produced domestically, and even import from the other developing countries to help grow their economies. More importantly, this actually reduces wealth inequality because the Chinese economy has been structurally primed for the wealth to flow to the top.

This is a completely different model from the US credit-fueled consumption economy.

You`re welcome to link any other actual Marxists and their takes on China which btw I've never seen you actually do. This is an ideological battle in China, not just of good vs bad intentions.

I have literally posted graphs to explain my arguments lol!

I have also said before that my views are heavily influenced by Zuo Da Pei (左大培) and Jia Genliang (贾根良), who are actual Marxist economists and the latter also has the advantage of understanding MMT and List, which means you not only understand class dynamics (Marx), but also finance (MMT) and international trade (List) covering each other’s blind spots.

Roberts likes to show some graphs about Chinese consumption rising over the years without taking into account the role of debt. This kind of superficial view of the Chinese economy completely fails to capture the complexity of the many moving parts under the hood. This is no different than the Bidenomics people showing how the US GDP has grown so much while failing to address the fact that most of the consumption share in the US was contributed by the top 10%.

Household debt leverage of US vs China vs Japan (debt to disposable income ratio)

US = purple, China = red, Japan = brown

Notice that China’s household debt leverage had exceeded that of US and Japan around 2018-2019.

So, there is nothing unusual about China’s increasing consumption when people can afford to take on more debt i.e. when the economy is going well. However, with exports being stifled by potential tariffs, when over-investments in property market imploding, with local governments saddled with unprecedented debt, it becomes inevitable that consumption becomes the only channel for where the economy must flow (if you’ve been reading anything I’ve written before, you know the drill).

Most importantly, Roberts’s argument that China has no consumption problem cannot explain why there is a deflationary spiral in China. This is a serious issue because many businesses in China that have taken out big loans are getting squashed by the deflation. Roberts completely ignored this part as though there is no debt problem faced by the Chinese business.

While I don’t pretend to be able to fully address all these problems, my model that takes into account many of these moving parts can at least explain the deflation problem, why (over-)investment in industrial capacity has failed to translate into wage growth for the Chinese working class, why the Chinese leadership does not simply stop exporting to the US but to seek a trade truce with Trump, because China cannot afford the inflation to rise in the US.

Trump’s global tariff is not a trade war, it is financial warfare.

Look at the trade balance between China and the EU:

I wrote this before:

As both export and import with the US have declined, China’s export to the EU has increased by 6.4% yoy and its import from the EU has decreased by 7.3% yoy!

That means Chinese exporters are channeling their goods to Europe, which will of course lead to a mercantilist fight where the European industries will now have to fight against cheap (and perhaps even superior) Chinese goods coming into their countries.

Meanwhile, China has reduced its import from the EU (likely because of the consumption slump and that China has been able to replace many products that once they could only obtain from the EU, like high end cars), and this will put pressure on the European exporters as they lose their income.

All of this is causing the EU to become even more desperate to secure a deal with Trump, since the European exporters are being squeezed to death by both the US tariffs and cheap imports from China. They will have to give Trump some really good deal, hoping to offset some of their losses. I suspect this is the true goal of the tariff war with China.

As expected, the EU is already folding: EU to Accept Trump Universal Tariff But Seeks Key Exemptions

The European Union is willing to accept a trade arrangement with the US that includes a 10% universal tariff on many of the bloc’s exports, but wants the US to commit to lower rates than that on key sectors such as pharmaceuticals, alcohol, semiconductors and commercial aircraft.

The EU is also pushing the US for quotas and exemptions to effectively lower Washington’s 25% tariff on automobiles and car parts as well as its 50% tariff on steel and aluminum, according to people familiar with the matter.

The European Commission, which handles trade matters for the EU, views this arrangement as slightly favoring the US but still something it could agree to, said the people, who spoke on the condition of anonymity.

They have no choice but to get a deal from Trump. That’s the true goal of Trump’s tariffs against China - to leverage China’s massive industrial capacity to destroy the other export economies so they are forced to enter a deal with the US - the only country that freely runs a trade deficit to absorb their export goods.

This is also why I keep saying that China has to give up its net exporter status if it really wants to fight the US financial war.

Guaranteed housing has not been a thing since 1998. The end of an era.

Young people these days only hear of this as some sort of a mythical past when you talk to them about this lol.

The problem goes way deeper than a simple “Chinese is socialist or not” and we can write entire essays about that.

But here are some points to consider:

First, the Chinese governance after Mao is highly decentralized, and this has been especially the case since the 1994 Tax Sharing Reform that gave the local governments the authority of land financing. The central government controls the behavior of the local/provincial governments by setting the criteria for their promotion (e.g. the most important KPI is GDP growth, which is why you see so much obsession with the GDP growth numbers in China).

Second, the entire leadership believes in the IMF doctrine. This means export-led growth, and keeping wages low to maintain export competitiveness. China has the natural advantage of a huge labor pool, and was able to exploit it to destroy the competitiveness of its competitors after joining the WTO in 2001.

Third, after the 2008 global financial crisis, the local governments found a “cheat code” to keep GDP growth up - land leasing. This came at the right time as the central government promoted the 4 trillion yuan stimulus to boost the economy through infrastructure building. By forming a pact with property developers and local banking institutions (through shadow banks before 2015), local governments took out huge loans for infrastructure building to bid up the land price.

The problem here is that such massive infrastructure building phase was not centrally planned, or at least they weren’t planned well. Every local government competed with one another to entice the property developers and financial institutions, and eventually this turned into a proliferation of thousands of “ghost cities” - a massive oversupply of housing - that will never be occupied. It’s raising GDP for the sake of raising GDP. Many local officials received the career promotion of their lifetime simply by managing to jack up the GDP numbers.

We now end up with very nice looking villages and provincial towns, good infrastructure, but no jobs. Young people leaving for the big cities to look for employment and participate in the competition to the already intense neijuan (extreme competition) environment.

The recklessness of the local governments precipitated in the inevitable collapse of the property sector. However, at this point, it is too deeply intertwined land financing. Nearly 35% of local government revenues still come from land leasing, and you can imagine what a huge loss of the income (and hence the operating budget) with the fall in property prices.

So now they are betting on EV and solar panels (where green tech has been listed as a priority in the 13th Five Year Plan) and more recently, robotics and AI. Huge amount of investment have been poured into it by the local governments, making bets to recover their losses from the plunging land price. It’s one gamble after the other.

As the manufacturers receive massive subsidies from the local governments (because of competition, where each government wants the manufacturer to open their plants in their province), they become industries that are “too big to fail”. This is why even though the entire solar panel sector has been making heavy losses, you still don’t see bankruptcies coming out of the supply chain (yet). An inordinate amount of wealth continues to be poured into these industries to keep them from failing, because otherwise the local governments will take on even heavier losses as their investments go burst.

Add to the fact that the most important tax revenue is the value-added tax, they have to keep these industries alive by whatever means necessary. Now imagine where all these wealth come from to prop up these sectors? All those wealth could have gone into investing into giving welfare to the people.

Paradoxically, this means the wealth inequality grows, and the consumption (purchasing power) of the working people is reduced at the expense of even more investment to the manufacturing sector. As a result, domestic consumption falls, and the reliance on export grows so they can actually sell the goods are now in over-supply. If not, then the production will have to scale back, unemployment grows, and we get recession. Interesting, isn’t it? It’s one big circle back to relying on export-led growth once again.

We can keep going and this is really just a stream of consciousness of writing, but I hope you can see that the inability of the central government to rein in the recklessness of the local governments, the central leadership’s own belief in the IMF neoliberal framework, and the over-investment in sectors that are so deeply intertwined with the local government debt and the financial sector that it is now a very complex web of problems to disentangle.

Well they are “working on it” lol. We’ll see what new policies they announce in the coming months.

Unfortunately I don’t see us going back that route. The Mao central planning era is viewed with disdain by the current generation of policymakers now that China has grown spectacularly under the reform policies. Also don’t forget that most of the current generation of leadership were victims of the Cultural Revolution, and the old school conservatives (who want to return to Mao’s planning era) have been purged in the 1990s.

I think there should be a shift back towards more centralization especially after the recklessness of the local governments and the ineptness of the central government to rein them in, but we’ll see.

Yes I have made it very clear before that the consumption problem is merely a symptom.

The elephant in the room that the Chinese government has yet to (and refuse to) admit is the growing wealth inequality over the past two decades.

This is why I have also said that the government cannot simply subsidize its way out of this problem. No amount of macro/micro policy adjustments can solve that. It can only be done by resolving the fundamental issue of wealth inequality.

Funny you classify me as a doomer when I have been one of the very few people on this site that actually says that China is already economically and financially resilient enough to take on the US empire.

The people who keep making excuses for China’s liberal policies “but China is too weak yet… it needs to build up its productive capacity first…” and my favorite “China is playing the LONG GAME don’t you know” are the ones who are dooming lol.

Consumption in the US is driven by credit (borrowing) while keeping wages depressed to maximize profit for the banking sector.

What we are proposing here (Marx/MMT) is the government directly raising the real wages of the working people so they have the purchasing power to directly consume. But perhaps more importantly, it reduces wealth inequality which structurally favors the flow of income to the rich.

Very big difference here.

I have been a long time follower of Yu Yongding and I don’t see how he’s saying anything different from what I said.

I have said many times that the slump in consumption is merely a symptom to the real issue of wealth inequality.

I have said many times that China cannot possibly subsidize its away out of this consumption problem without solving the wealth inequality problem.

The difference is in the solution. Instead of investing heavily in and betting for a “technological breakthrough” to achieve “economic transformation”, the country can simply invest in social welfare and raising the living standards of the people. The Soviet Union wasn’t exactly considered as a technology pioneer (compared to say, Japan, of the same period) but its people were living well. I don’t see why China shouldn’t go for the social welfare route (of course, they don’t, because they still believe in the power of the free market).

Michael Roberts unfortunately doesn’t know what he’s talking about on China. He’s ignoring the private debt problem, the local government debt problem and the entire complex array of government finances becoming deeply intertwined with the property market, shadow banks and the financial institutions.