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Reprinted with permission Mises Institute Antonio Graceffo
Over one hundred years ago, Ludwig von Mises wrote about the impossibility of successful rational economic planning under socialism. Yet China is still trying, even while its blend of markets and socialism results in shortages and surpluses. This article examines three contemporary initiatives spearheaded by Xi Jinping, each marked by an inherent problem: food insecurity, the aging crisis, and the real-estate bubble. Each problem was created by legislation and is being made worse by further legislation enacted to correct the problem.
China is a net food importer, capable of producing only 66 percent of the food it needs. The country has less than half as much farmland as the United States and four times the population. In order to increase food security, possibly in preparation for war, Xi Jinping has ordered some public parks to be razed and planted with food. Meanwhile, he has also set a green agenda, incentivizing local governments to plant trees. To meet quotas for both objectives, some local governments are cutting down forests to make way for farmland while destroying other assets to plant trees.
China’s farmland is considerably less productive than US farmland. Soybeans, for example, a staple of the Chinese diet, cost 1.3 times as much to cultivate in China than in the US, and the yield is 60 percent lower. Before the government-mandated expansion of farmland, over 24 percent of the population worked in agriculture, compared to just 1.6 percent in the US. China should reassign its inefficient farmers to factory and service jobs, which contribute more to GDP; but tilling these new fields will instead require shifting manufacturing and service workers to agriculture, where their GDP contribution will decrease.
In 1979, Beijing implemented a family-planning policy which restricted most couples in China to having only one child. This was intended to limit the size of the population, ensure economic prosperity, and prevent hunger. The country was urbanizing by edict, and smaller families were easier to accommodate in the cities, requiring smaller apartments and fewer schools and hospitals. The policy also aimed to reduce the 68.1 percent dependency ratio to ease the burden on the urban social system.
To sell people on the idea—although they were not given a choice—the government launched a propaganda campaign with the slogan “one perfect child,” encouraging parents and grandparents to focus all of their money and love on a single child. As a result, singing lessons, dancing and music lessons, after-school tutoring, and math and English programs became standard activities for children three and up. Parents could afford the high prices of these extra lessons because they were using the combined wealth of six adults (their own plus their parents’).
By 2010, the fertility rate had dropped to 1.69 and the dependency ratio had hit a record low of 37. But in 2011 the dependency ratio began creeping up again because of the increasing number of older people. Just five years later, the median age reached 35, so the government began to encourage people to have more children. Rather than removing the limit entirely, the Chinese Communist Party (CCP) adopted a two-child policy. But the expected baby boom never came: the cost of raising one child was already so high that it required intergenerational wealth, and most families felt they could not afford a second. At the same time, the nominal price of apartments in major cities began to reach US levels while the average income hovered around $10,000 per year. Many young people had to delay marriage, which further reduced the likelihood of having multiple children.
The CCP’s solution was to raise the limit to three children in 2021. Once again, couples failed to respond to the legislation, and the number of births continued to drop. Since 2015, the workforce has declined by about twenty million. Last year, the population shrank by 850,000 people. The median age is now thirty-nine, and the government expects only seven million babies to be born this year among a population of over 1.4 billion.
When Japan and European countries entered their aging phases, they were already rich, developed nations. They leveraged technology to sustain high standards of living while employing fewer workers. In contrast, China is still in the process of development: its GDP per capita is approximately one third that of Italy or Japan and less than one sixth that of the US. China continues to rely heavily on low-end, labor-intensive manufacturing, although even these jobs are dwindling as China’s economy decelerates. In August, youth unemployment reached 21.3 percent, prompting Beijing to cease reporting that statistic.
During China’s period of strict communism, prior to the gradual opening of the economy in the 1980s, citizens had little, if any, discretionary income and few opportunities to invest. Once the economy began liberalizing, people became wealthier; but the only viable option for investment was real estate (citizens, however, cannot own land but only acquire a lease of up to 70 years that can be transferred and traded). When China’s first stock exchange opened in Shanghai in 1990, people already had ten years of experience with real estate but did not understand the stock market and did not trust the government’s opaque control over it. The bulk of investment, therefore, continued to flow into real estate.
To achieve double-digit GDP growth, the central government liberalized credit through state-owned banks, which in turn fueled the construction sector and incentivized local governments to float bonds to finance construction projects. Today, about 20 to 30 percent of GDP is invested in property and infrastructure, and housing assets account for two thirds of household wealth. The number of new projects, meanwhile, came to be seen as a measure of good governance and progress toward prosperity, whether or not they were needed or even completed. This led to the creation of uninhabited “ghost cities” and massive apartment complexes in sparsely populated areas like the Siberian border region.
The prices of apartments have been driven up by people purchasing them as investments, never intending to live in them or rent them out. This year, the government officially stated that “houses are for living in, not speculation.”
China’s debt—to-GDP ratio reached 280 percent this year as state banks sat on $8.4 trillion in property-sector debt. Real estate represents 90 percent of the income of China’s heavily-indebted local governments, and roughly 80 percent of local government funding vehicles (LGFV)—entities established by local governments to raise funds for infrastructure and development projects—do not have enough cash to make interest payments. If property sales were to stop, local governments would be unable to keep up their interest payments, and if prices were to come down, these LGFVs would have to default. Consequently, some local governments have even imposed price floors to prevent their investments from losing value.
Amid the economic slowdown during and following the covid-19 lockdowns, Beijing reverted to its traditional strategy of relying on the real-estate sector to stimulate the economy. Xi Jinping implemented new policies to boost lending, resulting in 50 million unsold apartment units. The prices are still artificially high, so the market cannot clear them. If the government were to cease all intervention in the real-estate market and let the prices drop to meet demand, many loans could go into default and harm the entire financial system.
Antonio Graceffo, Ph.D., has spent more than 20 years in Asia. He earned a PhD. at Shanghai University of Sport, holds a China-MBA from Shanghai Jiaotong University, and studied national defense at American Military University. Graceffo works as an economics professor and China economic analyst, writing for various international media. Some of his books on China include "Beyond the Belt and Road: China’s Global Economic Expansion" and "A Short Course on the Chinese Economy."
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