It’s so easy to be like Tom Friedman and get totally dazzled by the Beijing airport and the Shanghai skyline and the fast railway and revamped subway systems and the spirit of irrepressible optimism that seems to pervade both cities. I was dazzled by it too, and still am. I love it there. And this spirit of optimism isn’t limited to just two cities. I felt it in Chengdu and Kunming, in Xi’an and Guangzhou.

But as I’ve mentioned before, for the past year I’ve been editing an executive summary of weekly business, manufacturing and financial news from China, and I’ve been amazed at the intensity and speed of the current slowdown. There is a poignant story in the NYT you should read about a visiting professor in Chongqing that reveals the misery this slowdown, coupled with the ineptitude and corruption of an uncaring government, is inflicting in people we’re not likely to meet or know much about.

I wanted to find out what was on the minds of ordinary people. What did they talk to one another about? So in 2007, with permission of the authorities, I put up billboards featuring images of trees, like the “wish trees” in Daoist, Buddhist and Confucian temples, where people tie notes about their private desires to the branches, hoping that the wind will blow their prayers to heaven. Chongqing residents stuck hundreds of their leaf-shaped notes onto the branches of my “trees.”

Their wishes and worries were candid, heartfelt and startling: people had lost their optimism and were yearning for security and freedom from anxiety. Income is a primary worry for those who have lost their jobs or land. Pensions and social welfare payments are almost nonexistent. People struggle to pay for education. They can’t afford medical treatment; clinics and hospitals require patients to pay cash in advance. A serious illness can spell financial ruin for an entire family.

China’s one-child policy has turned family life from a source of solace to a font of anxiety. Parents now get just one chance for a child to succeed and to support them in their old age. Single children carry an unbearable burden of parental and grandparental expectations. (more…)

Update: Let’s add this to the thread. A very, very funny parody of the “why I’m leaving China” that seems in vogue at the moment.

Update 2: Wow.

This is an open thread to which I’d like to add a few links. I am late to this, but if you haven’t read Mark Kitto’s article on why he’s leaving China, do so now. I read it behind a pay wall more than a week ago and was blown away. Mark received some fame eight years ago when the magazine business he built from scratch was simply seized by the government, leaving him with no recourse. He only touches on that, a real act of badness, but it ties in with his other complaints about life in today’s China. (more…)

How many times have we discussed whether China would be better off with some form of democracy as opposed to its one-party authoritarian system? I know, too many times. But this article on the recent debate between CCP apologist and shill Eric Li and professor of government Minxin Pei is well worth reading. If you don’t believe me about Li being a shill, or if you are unfamiliar with him, read this. This is one of my favorite of Li’s assertions:

China is on a different path. Its leaders are prepared to allow greater popular participation in political decisions if and when it is conducive to economic development and favorable to the country’s national interests, as they have done in the past 10 years.

However, China’s leaders would not hesitate to curtail those freedoms if the conditions and the needs of the nation changed. The 1980s were a time of expanding popular participation in the country’s politics that helped loosen the ideological shackles of the destructive Cultural Revolution. But it went too far and led to a vast rebellion at Tiananmen Square.

That uprising was decisively put down on June 4, 1989. The Chinese nation paid a heavy price for that violent event, but the alternatives would have been far worse.

The resulting stability ushered in a generation of growth and prosperity that propelled China’s economy to its position as the second largest in the world.

For a marvelous take-down of this drivel go here. As if all of China’s great progress rests firmly on the shoulders of the Tiananmen Square massacre.

Anyway, sorry for that digression, but you have to know who Li is to appreciate this debate.

I’ve always been careful to say I don’t believe Western-style democracy would necessarily be the answer to China’s problems of corruption, human rights violations, and the injustices inherent to any one-party system that operates without the checks of rule of law. Pei makes a strong argument, however, that the huge political and economic challenges China is facing are weakening the government and will ultimately result in an “unraveling” of the one-party system. So China should have a democratic infrastructure in place if the party implodes. In a nutshell:

The economy has been driven primarily by investments at home and exports to developed countries, which isn’t sustainable. In the political sphere, we’re seeing manifestations of a fundamental vulnerability of one-party systems globally: a tendency to drift into benefiting a relatively small, and ultimately predatory, elite at the expense of society generally, and the associated phenomena of high-level corruption and inequality.

Together, Pei claimed, these two domains of contradiction tend to impede the growth of China’s economy and undermine the legitimacy of its government. You can see the last two decades as a story of the rise of the Chinese system, Pei said; but the next 10 to 15 years (no less than 10, no more than 15) will be one of the system’s unraveling. And this is what the United States and the West generally need to worry about — not China’s strength but its weakness, because when the transition to a more democratic system comes, it will be very difficult to manage, particularly given the country’s deep ethnic divisions, its disputed borders, and its complex integration with the global economy.

Li’s arguments are familiar: all of China’s mistakes have been dwarfed by its accomplishments, the party has put China on a long trajectory of growth and it would be insane to shift gears when the current system is working, Western democracies are thrown into chaos by politics and therefore can’t get things done, etc. Pei argues that by clinging to an unrepresentative system of government, China may be on a path to collapse should the economy falter dramatically, and having no other alternative to the CCP political bedlam could ensue. A comparison to the collapse of the Soviet Union is not inconceivable.

Li showed his true stripes several times, and he was proud of them. This was one of my favorites:

In response to a question from the audience, Li also criticized the very ideas of political liberty and individual rights. Unless you think rights come from God, he insisted, you really have no theory of why any one view of political liberty any discrete set of individual rights should be sacrosanct at all. “If they’re from men, they’re not absolute; they can be negotiated.” It was only too bad there wasn’t time to discuss what “negotiated” means here.

“I want to break the spell of the so-called right to freedom of speech,” he added later. “Speech is act. It has harmed from time immemorial.”

It’s too bad he sounds like such an apologist. Some of his arguments are fair. We all know how well China has done compared to 30 years ago. I believe the CCP has to be given a lot of credit for improving the quality of the lives of so many of its citizens, and wonder whether its people are ready for pluralism. But who gets to decide that? And if the people so adore the CCP, why do Li and other shills so strongly oppose free elections? And if the government is so confident in China’s future, why are so many party elites moving their assets out of China? Li got kind of tongue-tied over that one.

Anyway, read the whole thing. Nothing new, exactly, but thought provoking. And you really are left wondering what the answer is. Neither Pei’s nor Li’s answers are totally convincing and it’s hard for me to say who “won.”

In 2008 I annoyed some of my readers by predicting China would weather the economic crisis better than the US would. I know, the US fundamentals are stronger and China has all these really bad problems, but my argument was relatively simple: China had enough money in the bank to buy itself out of the recession, at least for a few years, while the US, mired in debt, would be in a far less enviable position.

Then I wrote four months ago:

The bottom-line prediction: things will continue more or less the same, with a sharp, painful drop in property prices at some point and a steady decrease in GDP as domestic consumption fails to live up to expectations and deficit spending clogs China’s economic arteries. As always, we’ll just have to wait and see.

Two years earlier I wrote:

Friends have been telling me about the deranged property prices in Beijing, and once again, as with the malls, it just strikes me as common sense that this is not sustainable. And you have to consider all the ripple effects a housing bust would foment – all those migrant workers on construction sites, all the construction machinery makers, the cement and lumber providers, all the ancillary businesses, door-knob makers and house painters.

What Epstein [of Forbes] is describing mirrors to the letter what we saw in the US five years ago, and is even more reckless: flipping properties and creating massive pools of debt and the same insane mass hypnosis: “Property values can only increase!” We all know how that goes.

I do not want to see this happen… But again, my common sense tells me there’s no way he can be wrong. Any student of bubbles, from tulips to dot-coms, can see the gathering storm. I wouldn’t want to be owning any property in China when it meets land.

Now, I’m getting the distinct feeling that the inevitable may not be too far away: China’s real estate bubble really may pop. From Foreign affairs today:

For years analysts have warned of a looming real estate bubble in China, but the predicted downturn, the bursting of that bubble, never occurred — that is, until now. In a telling scene two months ago, Shanghai property developers started slashing prices on their latest luxury condos by up to one-third. Crowds of owners who had recently bought apartments at full price converged on sales offices throughout the city, demanding refunds. Some angry investors went on a rampage, breaking windows and smashing showrooms.

Shanghai homeowners are hardly the only ones getting nervous. Sudden, steep price reductions are upending real estate markets across China. According to the property agency Homelink, new home prices in Beijing dropped 35 percent in November alone. And the free fall may continue for some time. Centaline, another leading property agency, estimates that developers have built up 22 months’ worth of unsold inventory in Beijing and 21 months’ worth in Shanghai. Everyone from local landowners to Chinese speculators and international investors are now worrying that these discounts indicate that “the biggest bubble of the century,” as it was called earlier this year, has just popped, with serious consequences not only for one of the world’s most promising economies — but internationally as well.

The biggest unanswered question is whether existing investors — the people holding all those sold but empty “ghost” condos and villas — will join in the sell-off, which could turn the market’s retreat into a rout.

What makes the future look particularly bleak is the lack of escape routes. If Chinese investors panic and rush for the exits, they will discover that in a market awash with developer discounts, buyers are very hard to find. The next three months will be a watershed moment for a Chinese investor class that has been flush with cash for years but lacking a place to put it. Instead of developing a more balanced, consumer-based economy, an entire regime of Beijing technocrats — drunk on investment-led growth — let the real estate market run red hot for too long and, when forced to act, lacked the credibility to cool the sector down. That failure threatens to undermine the country’s continued economic rise.

Hours after I read that, Paul Krugman’s latest column came out and it is even more pessimistic.

The obvious question is, with consumer demand [in China] relatively weak, what motivated all that investment? And the answer, to an important extent, is that it depended on an ever-inflating real estate bubble. Real estate investment has roughly doubled as a share of G.D.P. since 2000, accounting directly for more than half of the overall rise in investment. And surely much of the rest of the increase was from firms expanding to sell to the burgeoning construction industry.

Do we actually know that real estate was a bubble? It exhibited all the signs: not just rising prices, but also the kind of speculative fever all too familiar from our own experiences just a few years back — think coastal Florida….

Now the bubble is visibly bursting. How much damage will it do to the Chinese economy — and the world?

Some commentators say not to worry, that China has strong, smart leaders who will do whatever is necessary to cope with a downturn. Implied though not often stated is the thought that China can do what it takes because it doesn’t have to worry about democratic niceties.

To me, however, these sound like famous last words. After all, I remember very well getting similar assurances about Japan in the 1980s, where the brilliant bureaucrats at the Ministry of Finance supposedly had everything under control. And later, there were assurances that America would never, ever, repeat the mistakes that led to Japan’s lost decade — when we are, in reality, doing even worse than Japan did.

Let me be clear: I don’t want to see China’s economy slow down, let alone fall into serious recession. There are too many people I love in China and I hate the thought of them, and the rest of the Chinese people, suffering the consequences of such a catastrophe. But I think, especially at the level of local government, that officials are playing with fire, counting on ever-rising property prices to pay for insanely huge development projects. That is a house of cards. It sounds like the US and Ireland and Greece all over again.

The Foreign Affairs article at least ends with a note of optimism:

While frightening, the popping of China’s real estate bubble is not all bad news. Cheaper, more affordable housing could also unlock the savings of China’s working-class families, unleashing greater consumer demand and helping to rebalance the global economy. Investment long bottled up in idle real estate could flow to more productive pursuits. These adjustments have been put off too long. This is why at least some of China’s leaders appear determined to force a correction despite the risks. But they know they are walking a razor’s edge.

I hope he’s right, but wonder if China could pick itself up off its feet so easily if it has a hard landing. I am just hoping the central government has enough control to let the bubble slowly deflate as opposed to popping. This has been the consensus among the more optimistic China pundits, that the central powers can navigate the economy through the most treacherous waters because they control all the levers. Authoritarianism, the argument goes, can get things done, and I agree to a point — but sometimes, as America learned in 2008, forces can gather that simply can’t be controlled and then take on a life of their own. I hope the optimists right.

We’ve seen all kinds of warnings over the years about China’s economy. Several years ago it was all the rage to talk about the “hard landing” China was in for after so many years of growth. Never happened. The banks were going to implode and drag the country down. Never happened. The property bubble was going to pop. Hasn’t happened yet (though I think it’s inevitable). Doom and gloomers also made the general prediction that China’s collage of overwhelming problems — the environment, corruption, local unrest, the class divide — would all contribute to “the coming collapse of China.” It was imminent. I thought so too, back in the earlier days of this blog. Yet China keeps on going, the same existential problems dragging on it like shoes stuck in tar. And yet it keeps going.

Since so many “experts” have been so wrong for so long about China’s economic downfall, it’s risky to point to yet another calamity and say it could bring things crashing down. Maybe the effects of inflation won’t go that far, but I’m not so sure.

Just about nothing is as catastrophic as rampant inflation. A deflationary depression is the only thing worse, but they’re pretty close. As prices inflate, your money can be turned into confetti before your eyes. And it forms a vicious vortex as everyone demands more pay which only fuels higher prices and rents, and one thing feeds on another and the catastrophe spirals out of control.

This is the topic I hear most about from my friends in China. I saw it when I was there about five months ago. The hotel where I often stay in Beijing had gone from charging about 550 RMB per night to 1,000. (I stayed at a Home’s Inn that trip. 225 a night, though you do get what you pay for.) All the food prices had soared, and all my friends were concerned about their apartment rentals gulping up much of their salaries.

Calling a top to China’s property bubble has been as fruitful as those calling for the immediate collapse of China’s banks several years ago. What we do know is that property inflation can’t last forever and there has to be a dramatic drop in prices at some point. Nothing only goes up. Witness the US real estate catastrophe.

For a good overview of the crisis I recommend this post from one of my favorite blogs (and one that practically never mentions China). Although I’ve always loved the outrageous bargain of China’s taxis — you can take a cab from one end of Beijing to another for less than $15 — your heart has to go out to the taxi drivers who are being pushed further and further down the economic ladder.

The blogger seems optimistic that the CCP will take the sane approach and allow the yuan to appreciate. I hope he’s right but am not nearly so sanguine. The party seems convinced that inflation is tolerable compared to a drop in exports and the pain that would come with it. Along with exports, infrastructure stimulus — construction — seems to be the only way for the government to create jobs and keep the economy pumping, and slowing it down could lead to massive unrest.

My own amateur opinion mirrors what I recently read in this superb post that is too complex and detailed for me to quote from, but that should be read by all. The bottom-line prediction: things will continue more or less the same, with a sharp, painful drop in property prices at some point and a steady decrease in GDP as domestic consumption fails to live up to expectations and deficit spending clogs China’s economic arteries. As always, we’ll just have to wait and see.

In the meantime, my heart goes out to the Chinese people. Inflation is devastating, and I hate to think of how many decent people are going to see much of what they worked for washed away.

For anyone who has the time and fortitude, there’s a very long, detailed and brutal post up on Zero Hedge about China’s insane (in the author’s eye) purchase of US debt and its long term implications, all of which, he says, are terrible.

Not being an economist or a prophet, I can’t say whether he’s onto something or not, but it sure makes for some interesting reading. I’m just going to quote the opening and closing grafs for their sheer evocativeness:

Some people in Asia burn joss paper, also called ghost money, on the Lunar New Year, to give their deceased ancestors something to spend in the afterlife. Because ghost money doesn’t represent a claim on any actual goods or services in this world, there is no reason for its issuers to exercise any particular restraint, and in Singapore it is possible to find notes issued by the First Bank of Hell, with the mythical Jade Emperor’s picture on the front, in denominations ranging into the millions and billions of dollars. Perhaps we’re counting on this charming tradition to make Asian investors comfortable with the prospect of continuing to add to their holdings of European and American sovereign debt, despite the obvious fact that the money they’ve already lent us is money they’ll never get a chance to spend in this life….

In fact, despite its façade of capitalism and modernity, the Party is still making Mao’s mistake of acting first and thinking later. Lending a lot of money to people who will never pay you back is only a symptom of the underlying folly – you have to believe in something that isn’t true to believe that such an insane project is going to work out in the way you want it to, and any fixed untrue belief will eventually injure you somehow….

So modern China is a sort of suicide machine, a train to nowhere with no emergency brake. It is deliberately designed to prevent the passengers from being able to avoid a crash. Not only does the Party espouse false beliefs, it seeks to prevent Chinese people from forming their own, true beliefs in the light of all the available information. Now it turns out it has had them all working long days these last many years just to pile up credit with the Jade Emperor. And who’s down there in Hell, spending it all, no doubt on dancing girls and lavish banquets, and laughing uproariously at your present difficulties? Perhaps the Great Helmsman himself, with Jiang Qing pouring out the wine

In order to see how/why he arrives at this extreme conclusion you need to wade through the whole thing.

Let me say straightaway that I have serious issues with this article, which has a decidedly ethnocentric anti-China slant (though it’s none too kind to the US either). Despite the author’s being a post-doctoral fellow at Princeton, the piece is riddled with ridiculous assertions (anyone who disagrees with the CCP’s policies gets sent off to work camps) and asinine references to Tiananmen Square and Chinese history. But his core point about the danger of China’s strategy-free purchase of US debt and where it might lead is quite interesting, and it’s definitely a fun read (as are the comments).

Fiverr.com is a truly interesting site. People tell you what they can offer you for $5, you tell them the specifics of what you need, and within a day or two they provide it to you. (The provider gets $4; the fiverr administration keeps $1 of every transaction.)

Today, for example, a student (who happened to be Chinese) was offering to take your photo and photoshop it to make you look like a character from Avatar. Someone else was offering “the world’s best barbecue sauce recipe” (and that’s the kind of thing where you can really rack up big money – when it’s something already prepared that you can just email off to lots of curious browsers). Someone else offered to call one of your friends and sing Happy Birthday in Mandarin to them.

A friend introduced me to fiverr just yesterday. Curious about how it worked, I idiotically put up an ad saying I could write a 400-word article on any topic for $5. Within an hour I found myself with three orders for press releases, one about real estate, another about single moms raising young sons and a third about a line of soap products all made from hemp oil. It didn’t take me long to write these, but still, it was worth way more than $5. So I took down my ads. The only way to make money on this site is to have something pre-written that you can then tweak, refashion and recycle for multiple use, like a barbecue recipe. Once you figure out the formula, you can actually make a lot of money.

All of that was a very long-winded way of getting to my very small point: A lot of service providers on fiverr are offering to put up a set number of positive comments on your blog, or to write positive reviews of your book on Amazon. In other words, they are the Made-in-the-USA version of China’s 50-centers, employed by business instead of the government.

I was especially depressed to see the offers to write Amazon book reviews. I write a lot of reviews on Amazon and I work pretty hard on them (most but not all are from reviews I put up here). And, gullible as I am, I take the reviews I read seriously. I had to wonder, how many of these glowing reviews were ordered and manufactured on sites like fiverr?

I’m not really that naive. I was always aware a lot of what we call “word of mouth” has been planted by insidious clever marketers. But it was disheartening for me to see there’s a whole cottage industry dedicated to planting BS reviews, written by anonymous sharks who never even looked at the book they’re raving about. 50-centers; pay per comment, pay per post, pay per review. It was just another reminder that you need to assume just about all the user-generated content you read on the Internet is, or at least might be, bogus. A shame.

I didn’t ask the question, The Global Times did in an interview with Professor Xu Xiaonian of the China Europe International Business School. This is one of those surprising articles where you wonder how the propaganda people let it get through.

I don’t want to get into the argument again of whether China faces a coming collapse or perpetual prosperity, as there is no answer. But I do think Xu’s remarks are interesting because they are coming from a Chinese economics professor and not a columnist in London. He can’t be dismissed as some outside meddler who doesn’t understand China. I enjoyed his pithy, no-nonsense outlook:

Let us first assume that those numbers are real and the economy is indeed recovering. I believe that the excessive credit supply of last year and the extremely loose monetary policy both resulted in recovery, which I regard as the result of squandering money. Whether the effects of squandering money will last depends on the government’s decision on whether to keep throwing money about.

Needless to say, squandering money will definitely stimulate the economy.

However, China’s economy has structural problems that cannot be easily solved by palliatives. Too much investment, too little consumption and purely relying on domestic investment and external demand-driven economic growth will no longer support sustainable development.

Chinese President Hu Jintao has repeatedly stressed the need to accelerate the reform of the economic growth model.

But contrary to our fantasies, squandering money did not change the previous growth model, and it has resulted in the structure of the economy deteriorating further. Blood transfusions and oxygen therapy may make a patient feel better, but the illness is not cured. Toxic water may cure your thirst, but it may still kill you.

That’s pretty eloquent. Like me, he’s skeptical that domestic consumption can dig China out of the hole that the “squandering” is creating, though I often wonder whether China can’t simply keep on squandering and absorbing the blows. That’s what every every other country seems to be doing at the moment. The US and UK and others, however, are spending on credit, while China is spending cash.

Some other choice quotes I enjoyed:

Cantonese like the number eight because they believe the number is lucky. I have no idea why decision-makers in the government like the number eight when it comes to growth figures. What is their logic? Where is their evidence?

…Intellectuals in modern society are required to be physically and mentally independent. Our goal is to discover truth and to publicize it. We as economists should have nothing to do with interest groups, governments or ordinary people. We should never fawn on authorities or kiss up to the public.

That is how we should behave. However, many Chinese economists nowadays distort their original convictions and moral principles to meet the need of other people.

Nice example of speaking truth to power. This comes via an Economist blog, which is not particularly optimistic about China’s economic future.

I think it’s safe to say that with it’s huge leaps and bounds China is always at some sort of crossroads, whether it’s dealing with organized labor, promising national health insurance, launching a soft power campaign or what have you. One of the smartest China hands, David Wolf, has an excellent piece in Ad Age China on perhaps the most important crossroads of all, the economic one, and on what it means for foreign companies doing business there.

Suddenly, just as people in China were starting to wonder if they still needed foreign capital and know-how, we went and proved to the Chinese that we were greedy, dumb, and actually needed China’s help to pull us out of our own mess…

Not only did that that gave the government the opportunity to put an end to policies that favored foreign companies in China, it was also a signal to the Chinese people that they could no longer take for granted that foreign brands were better than their local counterparts. Maybe they were just overpriced.

China, in other words, is starting to say “no” to our employers and our clients, and the above trends suggests that this is likely to get worse. Smart Chinese competitors are figuring out that they have an opportunity to take back some of their home turf, and they are refocusing their efforts on domestic operations.

This doesn’t mean, however, that China has all the answers, and is gliding through the crisis. Wolf spells out why China isn’t out of the woods, and why the current economic crossroads is so critical, and tenuous.

The global financial crisis has revealed the fundamental weakness of the nation’s export-driven economy: even in a healthy financial environment, the world cannot buy all of the goods China needs to sell to sustain 8-10% growth indefinitely. With no social safety net, Chinese consumers are focused on saving, and industrial productivity is so embarrassingly bad that nobody even talks about it.

Political stability in China is built on an unspoken social contract: the government delivers constant improvements in opportunities and lifestyle, and the people accept single-party rule, warts and all. Delivering on that promise is getting harder as China’s export engine sputters, as inflation grows, and may become impossible if the stock-market and real estate bubbles burst and the middle class demands that the government cover personal losses.

A thought of my own that popped up while I was reading it: The “Chinese financial crisis” is a phrase we don’t hear much anymore. I think we’ve been almost hypnotized into believing there is no economic crisis in China, that it was all about the US, and then Europe, with Asia remaining largely invulnerable. Indeed, a powerful meme took hold among financial writers over the past year, portraying China’s authoritarian system as superior in many ways to democracy because the party can make things happen fast without getting tied up in lawsuits and hearings and protests (usually). And this one-party system protected China from the crisis, allowing the government to launch a massive government spending program that kept the country afloat and free of the misery faced by weak democracies.

Wolf reminds, however, that the Chinese economy right now is quite tenuous, and that the shock absorbers that have seen it through so far – namely, government spending – may not be enough to hold everything together when the economy sours (and all economies sour).

“Read the whole thing.”

Words totally fail me. And I won’t say another word. Just go and see for yourself.

Am I really reading this?