Peter Hartcher on why China is tanking its economy on purpose

from the newsrooms of the city Morning Herald and the times this is the morning edition I'm Samantha Singer Morris it's Thursday, March 28 For decades a recession in the Chinese

economy

has been a boon for investors in the West, but then came an unwanted announcement Earlier this month, Chinese government political and international editor Peter Harer explains why this announcement is simply bad for our

economy

, but is a reminder of China's dangerous and dramatically renewed geopolitical goals. So, Peter, we've been hearing about China's struggling economy for many months. now specifically your real estate crisis, but before we get into that, can you briefly explain to me how historically it has been a positive thing for foreign investors that the Chinese economy is experiencing a recession because this would seem counterintuitive?

Well, I've described it as a Pavlovian form of conditioning because in the past the response of the Chinese authorities has been very predictable and that's when the economy starts to slow down, the authorities increase the stimulus to boost economic growth back to where it was, where they wanted and that happened. Routinely for the last almost 40 years since China started its reform and opening up movement under Dang Sha Pang, which started in 1978, so, you know, Mao's old autarkic communist Marxist economy was thrown out for the dung and Dong brought this new era and So the Beijing government would set an annual, anytime growth target and it was quite ambitious, the average over those 40 or so years of average annual growth of China's economy was 9% and part of the secret was that Every time growth went down, the government doled out these massive amounts of central government spending which would then flow to all sectors of the economy to boost growth and that meant exporters to China would make more money than investors in the Chinese markets. once they opened their markets to foreign investors they would make money and everyone be happy okay so tell me how bad China's economy is right now, well in historical terms it slowed down dramatically eh as of about 3 years ago, well actually, but everyone assumed that after that China would experience a massive recovery driven by excessive amounts of central government spending, but where the country has departed from its historical norm is that instead of Xi Jinping, the president went back to normal and grabbed the accelerator lever and pulled hard, said no, this is a good point to purge our economy of excess and As you mentioned, the greatest of those excesses, the most obvious and The most dangerous was the real estate market and that's fine, there was too much debt, there is too much speculation in the sector and one of XI Jinping's cries in recent years was that houses are for living. not to speculate, this is how you justified crushing the speculative fever that took over the market and, interestingly, you point out and just allude to it a little bit, that this economic recession is intentional, what Chinese President Xi Jinping actually wants.

It is this way, so how has it really created this economic recession? Yes, it is a strange thought for us. You know, Western democratic countries where leaders are horrified by the idea of ​​a major economic slowdown and do everything they can to avoid it. They have independent central banks because It turned out that politicians couldn't be trusted with the responsibility of slowing down their economy enough to defeat inflation and inflation always kept winning, so starting in the 70s governments around the world They began to create more independent central banks, but because the politicians themselves are simply married to growth because growth makes them more popular it makes them re-elected Xijinping also does not share that incentive having installed itself as ruler for life without facing real elections but also decided to face the system problems just to point out the scale of the real estate sector in China is disproportionately large because China has had this huge wave of its population moving from the towns and the countryside and the rural villages into the big cities over the last 30 years;

It went from something like 20% now to 55% of the population now living in big cities and needed a place to live and that gave rise to these vast forests of apartment buildings which, as you may have seen, were taking up about a third of the real estate sector and everything related to it, including its suppliers. a third of the total Chinese economy, which is a huge portion and much larger than in any developed country, etc., and the debts and it was a kind of Ponzi scheme in which the developers were always short of cash and dependent on pre-selling buildings that they hadn't built yet, so people were buying the plan and they needed to collect that cash from the buyers to finish the projects, but Xi Jinping put an end to all that and what he did was in 2020 he created a policy called the three red lines applied financial restrictions to large real estate development companies and the simplest of them was that, for example, a developer could only borrow as much debt from his bankers as he had in equity, so he could not I couldn't borrow more than it was worth those kinds of rules now worked, they tanked the real estate sector, in fact they worked maybe too effectively and last year the Chinese government started easing those restrictions and ended up the Chinese economy seems to be stumbling with the prices. exports have fallen and imports have plummeted unemployment has risen and the real estate crisis has been deep the court has ordered the liquidation of China once for a company that was once the pride of the Chinese real estate sector it has been a dramatic fall I am united and the residents here, are very worried about all these negative news that may affect the prices of their properties, even in a big city like this, it has been a big blow for the Chinese population because the middle class in China invested all their hopes future real estate prices would rise. what they have done tirelessly for 40 years and suddenly they have stopped, so the path to wealth, that aspirational path, has been closed, it has caused a lot of pain and a lot of bitterness in Chinese society and Xianping has not only taken strong measures. the real estate market has also introduced other policy changes and restrictive measures that have really tanked the economy, that's right, yeah, so the bigger picture here is Samantha, as her years in power have progressed, it's becoming increasingly increasingly controlling in all areas of Government policy, including the economy, has slowed the real estate sector and growth and speculation.

It has also slowed down the private sector. He gave an example to Jack Mah, the largest businessman in the country, billionaire, one of the richest people in the world uh he was crushed taken for interrogation he left the country for many months uh he reduced all his financial plans he had to cancel the IPO of what would have been the largest stock exchange in the world an insurance company that was floating xijinping has crushed a number of the country's largest and most successful businessmen, some of them have ended up in jail allegedly for corruption corruption applies selectively Generally it is the pretext for other reasons in this case it was to send a message I am in charge of the the state is in control and the party the communist part is in control of the state the private sector gets down to work and does what they tell you is becoming too brazen you are becoming too ambitious and you are getting too much freedom moving too much Capital around you are the Global Empires, they were forced to start selling their international holdings, a repatriated capital.

We saw many large office blocks and multi-million dollar developments sold in Australia in recent years by Chinese developers, so it slowed down the real estate sector at home, it slowed down big business owners and the tech sector in China to put everything under their control. control and it has also become tougher on foreign investors and foreign companies and what they are allowed to do and there have been more tax inspections, more other regulatory inspections, you know, fire inspections and audits and the arrests are quite arbitrary arrests of foreign executives. Foreign companies have taken the hint that many have left, others have reduced their investment plans in China, so this is the bigger picture and why it is doing all these things, partly it is because of the control impulse that it has and that is inherent to all RS, but he is particularly prone to that, but also because he is anticipating a war, uh or or major security crisis in the near future, he talks about this quite openly, but you know, when he visits military bases, his routine One of its routine lines is for troops to prepare to fight and win wars. uh, he, he tells you to put all your efforts into preparing for war, so don't worry about all the business ventures that you guys have been enjoying and running for little corruption scams that you've had.

This is about war. This has become serious. He speaks in public speeches. He talks about extreme circumstances ahead. The way China talks in prophetic terms about a clash with the global hedgemon, meaning of course the US, has talked about extreme storms that China will have to face, the idea is that if we have economic problems if there are vulnerabilities in the system, I want to address them now in a controlled way, so that when we have the crisis we have the war, then we will not have uncontrolled crises that distract, create problems and open vulnerabilities, so that's all happened, but it's what Xi Jinping wanted.

Western investors look at that and say, "Oh, it's terrible, you know, they can't stand it." That means there has to be massive investments and new stimulus coming and they will recover. The old 9% growth rates said the current projection of five and even five is ambitious in the current political setup, but no, there has been no massive stimulus, there is no plan for massive stimulus because Xi Jinping wants it ordered , he wants it controlled and he wants it. he's prepared for a crisis he's expecting and who knows, he may even help precipitate, we'll be right back when he subscribes to the Sydney Morning Herald, he'll get more information on what interests him, he'll find all the Australian news and investigations.

Featured journalists All the recipes, cooking tricks and what's for dinner, fine dining inspiration, all the ups and downs of the sporting world, all that and more, it's all yours to discover with the Sydney Morning Herald, so you're really talking of seismic change and economic policy in China that Xiin Ping is consciously sacrificing economic growth in favor of national security priorities, so what kind of changes is he making in that regard? What kind of growth industries do I assume he is focusing on instead of helping real estate? market and so on, yes, okay, great question, so two things, a very striking emblem of this change of approach, of reform and openness to control, especially with a security-oriented mentality, is that the Central Bank , the People's Bank of China, which was in favor of reform. and the pro market for decades has been degraded, a new commission has been placed on top of the Communist Party, a commission has been placed on top of it, so it has been crushed in the hierarchy of power, the Ministry of State Security has been elevated and has its own Twitter. uh account and several other waybo accounts as of last year have been given a new voice and authority in the system, so it's a nice institutional reorganization that helps us materially visualize how Xiin Ping's priorities have changed your question of uh, okay.

What are the alternative industries? The government published a new list at the NPC National People's Congress and what they have done is Xi Jinping has adopted a new slogan called with emphasis on what he calls citing new productive forces, which is obviously a contrast. to real estate that is not considered productive, especially residential, and has nominated a number of new priority industries and all of them have a specific role in boosting China's capacity for the coming war and they range from some pretty simple things that What you would expect of lithium batteries. Aerospace, especially what he calls the low-altitude economy, which means flying men and planes and unmanned craft below 1,000 MERS.

It's like the Jetson in which everyone is going to travel at high speed. Low altitude aerial vehicles. New Materials. Quantum computing. and there is a list, but the point is that they are all Quote new productive forces in quotes according to Xi Jinping, but aimed at strengthening China's military industrial capacity for the war that he sees coming and it is interesting because at the same time He pointed out in his lastcolumn that China's Foreign Minister Wong Yi spoke in Sydney last week and said everything is fine, everything is normal, China's economy is growing as usual, so I wonder what he made of that statement.

You see that, as an attempt to hide what you are saying, it is Xiin Ping's true intention. You know what he has done to the economy. It's really interesting here. Samantha, one of the things that the Chinese Communist Party has done best in recent decades is to create a sense of inevitability, as Xi Jinping says one of his favorite phrases, the East is rising, the West refuses to give it an apparent historical inevitability and it's all about China's 10 foot tall Unstoppable Untouchable and everyone needs to step back and let us do what we want, that's the subindex and it has been successful, so having their average economic growth rate hurt and their overseas investment and all that suddenly diminishes opens a big hole in that story, having their economy stagnant is a big problem for that story, which is one of the reasons why In China it is illegal to speak ill of the economy and it's one of the reasons why Wang Ye, as you said last week in Sydney, started just trying to project an era of business as usual and said we're still in this huge urbanization push.

Now we have 55% of the population in the big cities, but we have another 20% left. In other words, everything will continue as before and that will again create the sensation of an unstoppable Chinese rise. this is the image they keep wanting to project to the world, of course, uh um, it just doesn't agree with the fact, by the way, shiin ping has this atheistic marxist view that excess personal consumption is corrupting and bourgeois and illegitimate and It does not promise that most politicians in democratic countries promise their people endless growth of prosperity. The perspective that you know, work hard and you'll get rich, right?

Don't you have a completely different mentality? He's back to M Mong, he's not. dang sha Pang dang sha Pang used to say getting rich is glorious, a shocking concept for a country that had just gone through Ma's communist era, now you have xiin ping and one of his lines is to promise the people of China happiness through fight, imagine. Anthony Alanes takes the microphone tomorrow and says: People of Australia, I promise you only happiness through struggle. They know that the good times are over, from now on there will be difficult difficulties. No Democratic politician would dream of that, but that's what Shiin Ping is saying.

I am not interested in speculative or even price increases in the real estate market. Xiin Ping is saying no. I promise you no more internal consumption, no more luxury, no more money. I promise you happiness through struggle. I really mean what you're talking about. It's a massive sea change, you know, cracking down on capitalist wealth, a real return to the communist days of President Mau, as you mentioned, so how do you think global leaders might respond to this massive shift? Yes, very good question and yes, you are right. one of Xiin Ping's phrases is, and he started using this a couple of years ago, is the pursuit of what he calls common prosperity, common Pro, so not private property or private luxury, common prosperity, and he has used as a rubric to crush these billionaires and everything else we have been discussing, but in the rest of the world most countries have acted as if nothing had changed, in China they have taken a long time to adapt to the new reality, businessmen, investors and companies that have made a fortune selling to China.

Now this is not universally true, of course, because many have some experience and some have deeper experience. Many Australian exporters, for example, do not understand China, they have been duchesses where they have had tours, official banquets and much more. of cheerful treatment and guarantees from their Chinese business partners without ever understanding what is happening around them without knowing deeply what is happening in the system, the political system, especially, they do not understand the language, they do not know anything about the culture they certainly do not I understand Marxist Leninism and the Chinese have persuaded everyone that they are not really Marxist Leninists, they are Westerners like us, we wear business suits and care about growth and capitalism, but this has ill-equipped our companies and many investors to the new reality our political class has been no different around the world and leaders in general continue to hope that China will return to the path that was on the path of growth by investing their future in China's growth, but that future has turned out to be a mirage thank you very much Peter for your time Pleasures samtha today's episode of The Morning Edition was produced by Julia car catel with technical assistance from Debbie Harrington our executive producer is Ruby Schwarz the Morning Edition is a period production and the Sydney Morning Herald yes Yes you enjoy the show and want more of our journalism, subscribe to our newspapers today, it's the best way to support what we do, search the age or smh.com.au SLS, subscribe and sign up to our Morning Edition newsletter to receive a complete summary of the day's most important news, analysis and information in your inbox every day.

Links are in the show notes. I'm Samantha Selinger Morris, this is the morning edition, thanks for listening.