CRG Weekly: Australian wine, poverty alleviation and the challenge of China's economy
The Chinese government stepped up its dispute with Australia on Friday, officially imposing tariffs of up to 212% on Australian wine after months of threats. China is Australia’s biggest wine export market, worth around £600m a year, and the Australian trade minister has pledged to take the case to the WTO. More than 60 Australian coal-carrying ships have also been left waiting to unload off ports in China, with rumours swirling of further sanctions.
Over in China, authorities have been investigating state-owned Yoncheng Coal and Electricity over its surprise debt default last week, which subsequently set off a string of provincial SOE defaults and bond issuance cancellations. Michael Pettis frames the China debt-growth problem well:
Between 1980 and 2010, Chinese GDP doubled four times, but debt levels were low and rose slowly. However, between 2010 and 2020 when GDP doubled again, China did so by tripling its total debt burden to $43tn, so that it now stands, officially, at over 280 per cent of GDP. Assume conservatively that the relationship between debt and growth doesn’t change, and China’s debt-to-GDP ratio will have to rise to over 400 per cent by 2035 if it is to double GDP again.
China’s leaders are well attuned to the need to rebalance from investment to consumption. This week, Vice Premier Liu He penned an article in "People's Daily" on government policy for improving China’s economic system, doubling down on the importance of household income increasing as a share of the economic distribution.
But tilting China’s economy from investment to consumption has proven difficult so far, and household spending is not without its own debt problems. As the Rhodium Group wrote in May, there has been a steep rise in aggregate household debt in China in the past decade. Part of it is a benign natural correction for a nation of savers, but it is also clear that China faces some big systemic challenges to financial stability over the next decade.
The most important story you might’ve missed this week is that China officially declared it has eradicated absolute poverty (albeit by its own national poverty threshold of $600 a year). This meets Xi’s initial pledge in 2013 to eliminate extreme poverty by the end of 2020, and that kind of economic progress is an important milestone for the CCP’s domestic legitimacy.
The Chinese government has experimented with a variety of policy solutions since rural poverty became a policy priority in the 2000s. Alongside huge infrastructure projects, local officials make door-by-door visits to assign solutions to individual households. Not all policies have been popular or successful. Take China’s core rural dibao programme, introduced in the 1990s, which was intended to guarantee minimum incomes through transfer payments. That programme had somewhat limited initial success in tackling poverty - a World Bank study found that only 11% of rural recipients in 2007 were actually eligible for the programme.
Having made large strides in rural poverty, inequality will likely be the next big problem. A paper by Piketty and co in 2019 crunched the data on income and wealth inequality in China, highlighting another major domestic challenge.
More broadly, the paper finds that income inequality in China has increased to such an extent over the past decade that it is almost comparable to the US. The share of national income earned by the top 10 per cent in both the US and China is more than 40 percent. And wealth in China is even more unevenly distributed than income. The next decade of pressing domestic challenges are worth keeping in mind, particularly in light of the CCP’s increasingly assertive rhetoric to the rest of the world.
In Hong Kong, Carrie Lam made her annual policy address this week, calling the national security law “remarkably effective” and pledging more patriotic education. Lam also told an interviewer that US sanctions on her bank accounts have left her reliant on cash, with “piles of cash at home” from her £500,000 annual salary.
The Telecoms Security Bill was introduced to Parliament. It will ban high-risk vendors like Huawei from 5G completely by 2027, and the government has also pledged to ban any installation of new Huawei equipment before 2024. The draft legislation includes fines of up to £100,000 a day for firms which fail to meet the new security requirements, although the government has also committed £250m to telecoms diversification.
Events
The CRG is launching a new report on Tuesday 1 December with Alexander Downer, Nathan Law and Rahima Mahmut. It will be livestreamed on our YouTube channel at 10:30am GMT. If you are a journalist and would like to attend, email julia@chinaresearchgroup.org.
Weekend reads
The first lesson of doing business in China: the state comes first. The Economist
Xi’s aim to double China’s economy is a fantasy; growth is constrained by demography and the politics of debt. Michael Pettis in the FT
The ethical questions that haunt facial-recognition research. Nature
China fulfills a dream to end poverty. Not all poor people are feeling better off. LA Times