GenZedong

You have overly simplified China’s economic growth without looking at it as distinct phases of an economic development history.

Deng’s reform was only possible because of the first 30 years of industrialization under Mao (helped massively by the Soviets in the early years). China already had world-class heavy industries (e.g. shipbuilding and infrastructure building) when it opened up to the world. This was what attracted Western capitalists to China, instead of other developing countries.

Dengist reform worked really well for the first 20 years, until it didn’t. The PRC experienced its first economic crisis in history in 1995, which led to record unemployment and poverty:

The transition period was challenging. This was the first critical hinge point where China could have transitioned into a domestic consumption (internal circulation) economy, but instead they decided to join the WTO in 2001 to save the economy. This was accompanied by a huge loss of labor rights and deteriorating working conditions just to compete with the rest of the world to produce cheap goods made by hard working Chinese labor to satisfy the insatiable demands of Western consumerism.

It worked well for a few years, then the 2007 subprime mortgage crisis quickly turned into the 2008 Wall Street financial crisis, then into the 2009 global economic crisis. Western consumer demand slumped, and Chinese manufacturers were at severe risk of shutting down production.

This was the second hinge point where China could, once again, have transitioned into an internal circulation economy. Instead, China decided to invest massively into infrastructure building and rampant real estate construction. Property market, that never existed under socialist China, emerged for the first time in 2009. This may sound like a good idea at first, but it is accompanied by far reaching consequences that China is still struggling with today.

How bad could it be? Let’s dissect this in detail:

In an attempt to save itself from the Wall Street financial crisis, the US turned to large scale currency issuing, and through quantitative easing (QE) created $3.9 trillion US dollars. More than 60% of this dollar liquidity ended up in the international commodities market and caused serious inflation. China as a manufacturing country imports nearly 70% of their raw materials and energy (as well as good), and the inflated commodity price had resulted in a severe hike of PPI (producer price index) which plunged the profitability for the manufacturers.

This plummet in the real sector (as a country enters a recession) triggered vast capital outflows. Where did they all end up? The real estate sector.

This over-investment in the real estate has created a serious problem for the central government down the road. >50% household debt and >50% of corporate debt are now mortgage debt. This means that much of the national income was not spent in the real sector (for consumption), but instead went into servicing mortgage debt and inflating the real estate sector.

Additionally, 60% of household assets are now in the real estate. What this means is that if the real estate sector crashes, there is going to be a serious plunge in household assets as well - a lot of people are going to lose their wealth. Similarly, much of corporate assets are also in the real estate, which means that corporate asset value and the stock market will plunge if the real estate bubble is allowed to burst. A lot of companies are going insolvent if that happens.

But this is not all. We’ve talked about property developers and financial investors above. But there is an even deeper problem to this crisis: as the investment outflow from the real economy all went into real estate, local governments in China found themselves no longer able to generate adequate revenues from the real economy. Their solution? Convert land from a long-term cultivation/development resource into short-term revenues to make up for the losses from the real economy through land sales (more precisely, through land enclosure and making profit from the price difference of the land development).

Through this, local governments became entangled with real estate developers. But this is still far from over. As the local government expenses grew from a slumping economy, its debt inflated as well. Local governments were then forced to take out loans from commercial banks to service the interest payments of the old debt, just so they can be granted the issuance of new debt to finance their operations. In other words, borrowing and selling land to pay off old debt just to get new loans to continue financing the local governments - an endless spiral of debt crisis in the making.

How bad is all this?

China now has already built enough housing to accommodate for 6 BILLION residents, in a country of only 1.4 billion people. Most of the properties will NEVER be sold. There will never be enough prospective buyers for those newly constructed houses. But why did they keep doing it?

This, once again, stems from the debt bubble of the local governments. The total local government debt amounts to 37 trillion yuan (2023), but this is not counting the hidden debt from city investment firms etc., which adds another 66 trillion yuan - a total of 103 trillion yuan indebted. A huge proportion of these loans were taken for the purpose of servicing mortgage debt.

According to research, 90% of the local government debt came from prefecture-level and county-level cities (mostly cities below Tier 3 and Tier 4).

But why? Why is everyone building new housing properties when everyone already knew those properties will never find their buyers? This is because real estate development generates a huge amount of GDP for the local governments. The current system of evaluation judges the performance of local government weighed heavily on GDP numbers, and local officials who want to be promoted simply could not do it by investing in the real economy when cheating through real estate is the way to go. Every city government raced to boost their GDP by investing in real estate to compete with one another, resulting in an over-investment in the real estate.

This was the strategic decision made by China after the 2009 economic crisis. The second hinge point that could have led them into an internal circulation model instead of the mess they have right now - too much money is being tied into the real estate sector that everyone will lose something, if not a lot, if the bubble bursts.

As you can see, there is no easy way out of this. The crisis is complex that entangles various key players in the economy. Everyone from your average households, to the corporations that had nothing to do with real estate, to the financial institutions and shadow banks, to the local governments - they are all at risk because so much investment and debt have been tied to real estate.

No, China is not going to collapse like some people are fantasizing, but let’s not pretend like it’s not a challenging crisis to resolve.

As I have always emphasized, an internal circulation/consumption economic model is the only way forward for China.

So yes, to answer your question, the US has messed China up. Just not enough to collapse it.