XHS take, who hypes nothing ever
This is not correct lol. I was one of the loudest voices on de-dollarization back when Biden raised the interest rate to “fight inflation” back in 2022 and early 2023 that led to a global dollar liquidity crisis.
I was hyping when Russia (very correctly) forgave $20 billion of Africa’s debt in August 2022, and China also followed suit with waiving the interests of some African debtors. I said very clearly back then that if China used its dollar reserve to pay off $800 billion of Africa’s debt, then we have a chance of wiping the slate clean and forge an alternative economic bloc while the US was mired in soaring inflation.
However, I also warned that the so-called BRICS nations, if they were serious about de-dollarization, have a limited window because when the short term US treasuries begin to mature, the huge fiscal flow generated from interest payment will simply flood the external sector and reverse the dollar liquidity shortage again. This proved to be correct.
I hype when the conditions are right. I don’t hype now because… the conditions simply aren’t there.
Having said that, I still pin some hope on the 15th Five Year Plan. So we’ll see.
China has been attempting to push for a Dual Circulation Economy (external growth e.g. export balanced by internal growth e.g. domestic consumption) since 2020. This ended in a remarkable failure as China’s trade surplus soared to a record $1 trillion while the domestic economy undergoes deflation and wage stagnation.
So what’s the problem here?
The government tries everything, from fighting involution, to promoting consumption through giving various subsidies and lowering credit interest, except to address the elephant in the room: wealth inequality.
In June 2020, the late Premier Li Keqiang (RIP) revealed to the nation for the first time that 600 million of our population still live, on average, with an income of 1000 yuan (~$150) per month. For most of us, this was the first time that we learned about this fact - coming straight from the government itself.
Despite talks about eradicating absolute poverty, it is sobering to realize that the bottom 40% of China’s population (most of them in rural areas) still live on very low wages. This 600 million sized demographic contributes effectively very little to the domestic consumption.
The people that spend the most are the middle/upper middle class. However, these middle class people are now facing a serious problem: many of them bought houses in the 2010s, and the property prices are now plunging. As the asset prices continue to deflate, they are unable to sell their houses, and still have to pay the mortgage for the next 30 years. As such, consumption from this group is also plunging, leading to deflation as businesses fail, and more people are getting unemployed as production scales down.
As an anecdote, my friend persuaded her husband, AND her parents, AND her parents-in-law to purchase houses in 2019 - when the property bubble was already near its peak (although everyone still had the illusion that it will keep growing forever, somehow). The whole extended family went ALL IN. By 2021, Evergrande would begin its implosion and house prices across the country would begin to fall. Now, the average house prices have fallen to 2017 level, and they have effectively lost 40-50% from the initial value, but still have to work harder than ever to pay off the mortgage loan. She keeps complaining that she has lost the will to live.
That’s just the reality of the middle class in China today. People reduce spending and begin to save wherever they can for the fear of losing their jobs in the broad climate of economic downturn and uncertainty. And the accumulated savings - money not spent - set off the deflationary spiral as less consumption led to less business activity, less profit, less demand, and less need to keep workers employed.
What China is doing to prevent a downturn is to dump its exports to other regions amidst Trump’s tariffs, causing countries like Mexico to put up 50% tariffs on Chinese goods to protect its industries and in return, invited China’s wrath. So China’s economy is probably going to be fine, but the Global South countries will have to suffer because of China’s neoliberal policies.
This is why I keep saying that you cannot resolve these fundamental issues without directly tackling the wealth inequality. And the wealth inequality comes from the neoliberal ideas of “balancing the budget”, which encourages countries to run trade surpluses by suppressing domestic demand, when what they should be doing is to run large deficits and give people the money to spend.
There are 600 million people who live on 1000 yuan monthly. If China is willing to give up its neoliberal model and start raising the income of these people through running high deficits, then it can unleash the true potential of China’s domestic consumption to solve much of its economic woes. That’s how you tackle wealth inequality.