The Myth of China’s Economic Revival: A System Doomed to Decline | Digging into China

Hi, I'm Dong Shong. Welcome to Digging into China, where we explore China in depths to review unique perspectives. Recently, China's economy has faced two significant challenges. The first is the collapse of the real estate market, which has effectively signaled the start of an economic downturn. The second is the persistent issue of over capacity, a chronic problem that continues to burden China's economy. If we turn our attention to the present, has China's economy reached its lowest point? Most would likely agree it has not. Given that the economy has not yet bottomed out, what will define the next phase of China's economic decline as it continues to worsen? Today, we'll explore what lies ahead in this next stage of China's economic challenges. So what will be the prevailing theme of this next phase? In my view, it's quite clear. A deepening sense of disappointment will continue to spread. Some may find this hard to accept, thinking more disappointment. I'm already deeply frustrated. How could I possibly feel more let down? I understand that sentiment completely. However, the disappointment I'm referring to isn't about expectations for the econ economy's trajectory, but rather a growing disillusionment with the direction of government policy. This may sound abstract, so let me clarify with a straightforward example. The issue of low birth rates. Low birth rates are a pressing concern in China today. a point on which most people regardless of their political stance can agree. What does it mean to have low expectations for policy direction? It's the belief that without the government intervention, the current birth rate trends will severely impact our future leading to issues like an aging population and a pension shortfalls. Conversely, what does high expectations for policy look like? It's acknowledging that the low birth rate are a problem and that the outlook is grim. Yet believing the issue can be resolved if the communist party prioritize it. Many hold that if the party implements policies, birth rates can recover. There are two perspectives on addressing low birth rates depending on one's trust in the party. Those who trust the party believe that if Xi Jinping recognized the severity of the issue, the party will introduce sensible policies to tackle it. The specifics of those policies unclear, but for them trusting the party is enough. After all, can anyone outsmart the chairman she? If she decides to act, they believe birth rates will rebound. Those who distrust the party may view it as oppressive. Yet many still think it could boost the birth rate if it chooses to obey it through extreme measures. For instance, they might envision a policy like Romania's underescu. With a menstrual police monitoring women's cycles and penalizing those who don't have children and such a drastic approach, China's birth rate issue could theoretically be addressed and the birth rates might rise. While this would come at a significant cost, many believe the party has the capability to enforce it. Both sides, despite their differing approaches, share the belief that the party can solve the problem. But is that truly the case? In reality, it's not. Even if the party now treats low birth rate as a top priority, what can it realistically do? Offering 3,600 yen in child care subsidies is already straining its financial limits, especially with the social security funds nearly depleted. Implementing something like a menstrual police would also require vast resources. If there is no budget for subsidies, where would the fund for such a force come from? Sure, if the party diverted all its resource to this issue, it might make progress, but at the cost of neglecting everything else leading to economic collapse. For the party today, the low birth rate problem isn't just about recognizing its severity. It's that they lack the means to address it. Many haven't realized this yet. This misperception is what I mean by misplaced confidence in policy. People acknowledge China's problems but focus on policy direction believing that if the party adopts the right policies many of China's issues can be resolved. This applies to the broader economy as well. Have the party's past strategies particularly under Xiinping been flawed? Undoubtedly the errors are numerous. Think of the vacant Shong new area failed the belt and the road initiative projects, extreme zero COVID measures, or the recent overcapacity from the new three industries. I won't list them all. It's difficult to find a single sound economic decision under shei. His missteps are countless, leading many to attribute China's economic ws solely to his misguided policies. However, there is a critical point many overlook. Even if she's policy were correct, could China's economy recover under the current system? To put it simply, many haven't considered that even if she stepped down and someone like a Huin Tao took over, the economy would still struggle. Take the recent anti-dlation and consumption stimulus efforts for example. Since early this year, the party has been battling deflation. It has started with a trillion yen consumption subsidy followed by efforts to curb involution. This represents a significant shift in approach if not a complete reversal. If Huin Tao were in charge, he'd likely pursue similar policies. But what's the outcome? His consumer conf has consumer confidence improved? Not significantly. It remains low. Has deflation been resolved? No. The two key deflation indicators, the PPI and the CPI, are either declining further or showing little change. Some argue she's policies lack sufficient force. True, they could be bolder. At the Davos forum, prominent proy econ economist Jin Kuru suggested a radical solution. Shift local officials performance metrics from GDP to consumption. She argued this could reverse deflation. Many investment banks endorsed her view. A major cause of China's deflation is distorted government KPIs. For years, the party has prioritized the GDP as the key measure of officials performance. Naturally, officials focus on boosting GDP to advance their careers. And what drives GDP in China system? Production and manufacturing. It's not just the most effective short-term way to raise GDP. It's practically the only way. Consumption can also contribute to GDP, but its impact is a slower and less direct. As a result, officials prioritize production, often ignoring actual market demand, leading to over capacity. In the past, this meant excessive infrastructure. Now, it's factories. However, I don't entirely agree with the Jin Kuru. I believe China cannot realistically adopt consumptionbased KPIs. Consumption is a challenging metric to enforce. GDP can be boosted through investment or large projects. A single major project can quickly spike GDP. Local governments create investment offices to target a few hundred key entrepreneurs, secure their support, and GDP rises. Consumption however isn't driven by a single figure or project. It involves millions of people across society. Boosting consumption requires better welfare systems and higher incomes which are indirect and slow. The government can't mandate consumption with something like a daily spending quota where failure to spend enough restricts your movement. That would collapse the economy overnight. Fundamentally, consumption as a KPI conflicts with China's top-down system. Consumption is a tied to people's happiness, satisfaction, and welfare. Quality is more aligned with a bottomup democratic system. That's incompatible with China's current structure. This is the core issue. Many econ economists analyzing China's economy focus too heavily on economic theory, overlooking the influence of its political system. In China, politics always takes precedence. It's the decisive factor. This pattern extends beyond the birth rates and deflation to areas like real estate. I won't detail every case. She's past policies have been problematic. But what many haven't considered is that even if his policies were flawless and welldirected, they might only slow China's economic decline, not reverse it. That's the reality of China today. What does this mean for ordinary people? Why does recognizing this matter? I believe understanding China's economic challenges involves three stages of mindset. The first is blind trust. Accepting everything the party says as correct and beneficial. This inevitably leads to losses in any endeavor. The second is hoping for a wise ruler expecting someone like a hu to return. This mindset believes that ousting she and reverting to the reform and opening era would revive the economy. Still viewing the party as all powerful. The third is reflecting on the system realizing that as long as the party structure remains, economic recovery is impossible. It recognizes the party's limitations. Currently, many in China are stuck in the second stage. They view she as foolish, stubbornly clinging to flawed policies while overestimating the party's capabilities, believing that the better policies would fix the economy. In reality, she's policies over the past six months, while some, like mandatory social security are questionable, have begun loosening economic controls. Many policies echo the hua era, such as lifting restrictions on the film and TV industry, introducing child care subsidies, and addressing involution by deemphasizing production. Most notably, Jack Mah has been welcomed back, transitioning from a vilified capitalist to a respected figure again. She's recent policies are starting to appear more reasonable. Faced with these changes, are you still in a second stage mindset or have you reached the third? This choice is pivotal. Consider the recent relaxation of film and TV regulations. The party issued a new broadcasting guidelines removing the 40 episode limit for dramas lifting caps on historical dramas and promising less stringent censorship. Film and TV stocks surged to 20% in a day. How should you interpret this? Those in the second stage might see this as the party loosening its grip, signaling a new golden age for the industry and a rush to invest. Those in the third stage, however, recognize that this rally is temporary. Expecting deregulation to usher in a flourishing era for film and TV is unrealistic. The extent of this relaxation is uncertain. China's film industry struggles not only due to content quality, but also insufficient consumer spending, a fundamental economic issue that the relaxed controls can't fix. I'm not saying you shouldn't invest in these stocks, but you must understand the rallies, cause and limits. You are not profiting from an improving economy, but from those stuck in the second stage, hoping for a wise ruler. When the rally peaks, it's time to exit. Don't assume a single policy can transform an industry's fundamentals. This pattern applies elsewhere. Child care subsidies led to a surge in baby related stock. The reason the stock market rally stems from anti-involution policies with the markets believing reduced competition will boost profits. The party isn't oblivious. As the economy deteriorates, it will reduce harmful policies. But don't mistakenly believe that a few bad policies will lead to recovery. The root cause is the system. Avoiding unrealistic expectations is the best way to minimize losses. Shift from the second stage to the third as soon as possible. In a broader trend, a collective shift from hoping for a savior to disillusionment with the government from the second stage to the third is inevitable. It's just a matter of who gets there first. Early adopters benefit, late comers lose out. And who drives this shift? the party itself. Reality is the best teacher. China's future will likely see small rallies from favorable policies followed by larger crashes. People will cry through hope in the party, then despair and finally awaken. This mirrors Japan during its bubble burst. When Japan's bubble collapsed, stocks still saw temporary rallies. Why? People had unrealistic faith in the government, not in policy direction, but in financial tools. Economic theory suggests that lowering interest rates boost stock prices, encourages borrowing spurs consumption and revive the economy. So, people believed in Japan's future and stocks rose with the rate cuts. But despite the frequent cuts and even zero interest rates, consumption and borrowing stalled. Only then did the despair set in. Faith in policy crumbled and the Japan's economy continued to decline. Stepping back from narrow financial tools, Japan's situation was clear. Its per capita GDP was almost equal to the United States. GDP reflects productivity and it's unrealistic for Japan to exceed the top developed nation by such a margin. The rise was an illusion driven by financial tools. China faces a similar situation. The limits of an authoritarian system are evident. Many haven't realized that the deepest despair isn't about losing hope for the future. It's about losing hope for changing the future. When people see that even a wise she with perfect policies can't reverse China's economic decline, that's when true despair hits. Yet, this despair can be positive. As the saying goes, when things hit the rock bottom, they can only improve. This suits China's future. When the party's repeated market interventions fail, it signals a collective questioning of the system. The party's authority will begin to erode. Nobel Laurier Darren Au Marlo in the narrow corridor argued that a nation needs balanced government and societal cap uh cap capacities for progress. If one dominates, problems arise. When societal capacity is too strong, as in Latin America, issues like a rampant drug cartels challenging the government emerge, leading to near anarchy. China is the opposite. Its governmental capacity is overwhelmingly dominant, suppressing societal capacity. This immense power has defined China, instilling fear and making people believe the party is all powerful, capable of solving any issue. Many feel unable to challenge or overthrow it. But as she's stimulus policies fall fail to move the economy, as they fail to change China's reality, people will grow disappointed and desparing, not just about the future, but about the party's perceived ominate potence. Its authority will start to collapse. When most people stop believing in the party's power and recognize its system as the greatest barrier to economic progress, that's the foundation for a better future. Only when mindsets reaches the third stage can the parties downfall become possible. Thank you so much for watching. If you find this video helpful, please like it, drop a comment below, and hit the subscribe button right here. It really helps YouTube suggest my video to others. I'll be back with more content soon.