China has seen a surge in protests in cities all around the country, targeted at the country's Covid Zero policies. But nearly three years into this pandemic, why did they happen now? How does recent economic weakness factor into the demonstrations? And why did the government allow them to go on in the first place? On this episode, we speak with Victor Shih, a professor at the School of Global Policy & Strategy at UC San Diego and author of the new book, “Coalitions of the Weak: Elite Politics in China from Mao’s Stratagem to the Rise of Xi.” Shih explains this perilous moment for China, as it navigates the pandemic, a real estate bust and other assorted economic stresses. This transcript has been lightly edited for clarity.
Key insights from the pod:
Recent protests in a historical context — 6:02
Why are these protests being allowed to happen? — 8:53
What triggered the protests? — 10:57
Will foreign influence or local officials be blamed? — 13:19
Covid Zero restrictions and manpower — 16:57
The role of land sales in local government finances — 19:45
Will China relax its Covid restrictions? — 22:16
Are political factions allowing the protests? — 25:21
Why didn’t China form an exit plan from Covid Zero? — 29:04
The economic impact of Covid Zero — 35:17
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Joe: (00:10)
Hello, and welcome to another episode of the Odd Lots podcast. I'm Joe Weisenthal.
Tracy: (00:15)
And I'm Tracy Alloway.
Joe: (00:17)
So, Tracy, obviously a lot of the images and videos that we've seen out of China over the last week, I mean, I think it's safe to say they're pretty extraordinary.
Tracy: (00:26)
Absolutely incredible. So, I remember, I guess it might have been a month or two ago, someone posted a sign in Beijing that was critical of the party leadership and the Covid restrictions. And that alone had just reams of ink spilled over this one sign that managed to be put up in Beijing, and it stayed there for a little while. But now we have these protests that have erupted in a number of Chinese cities -- everywhere from Beijing to Shanghai and other places -- where people are marching in the streets. They're holding up multiple signs. And the extraordinary thing is that this has been allowed to happen at all.
Joe: (01:08)
Allowed to happen. And also the people in many of these cases are almost certainly taking huge personal risks. There have been some videos that people are calling for you know, Xin Jinping to resign. And my understanding of China is that that is the type of public comment that could get one in very serious legal jeapoardy.
Tracy: (01:28)
Absolutely. So this is a fascinating moment in Chinese history. It's a fascinating moment from an economic perspective as well, because of course, China is the world's second biggest economy. It has had a number of quite stringent Covid-related restrictions over the past three years or so. And unlike other countries, it hasn't really eased up all that much. And so we're seeing this groundswell of populist anger and a lot of criticism over the way the party, and specifically Xin Jinping has actually handled this whole situation.
Joe: (02:03)
Right. I mean, we're coming on, you know, almost three years now of Covid Zero. I first heard of Covid in, you know, it was December, 2019. Here we are, we're recording this episode November 28th. So it's coming up to December, 2022. And you know, this is an extraordinarily long time to have life disrupted in a very extreme way. Of course the tightness of the lockdowns has sort of waxed and waned at times, but it's pretty extreme. In many cases, the efforts to contain Covid have been quite draconian. And as you say, the economic situation was already not that great. Growth is poor. Earlier this year we talked about a lot of the problems facing the real estate industry. We also, of course, recently had the Party Congress, so an extraordinary moment for China in general right now.
Tracy: (02:55)
Yeah. And since you mentioned the Party Congress, you know, I think there was an expectation that maybe after this big political event was out of the way, after all the attention that had been turned on Xi Jinping basically securing leadership for life, that after that had passed, maybe some things would start to change. Maybe some of the restrictions would be eased up a bit. That doesn't seem to have happened. And so, well, there have been some other things that have happened in the interim, including a fire in Urumqi, where people have criticized the government as having, you know, because of the Covid restrictions on this building, people were unable to escape. And I think 10 people were reported to have died in that fire. That's the thing that sort of sparked all of this, but it is, as you say, the results of three years of major, major disruptions to people's lives.
Joe: (03:48)
Right. And you mentioned, you know, there may have been, some people might have thought, ‘okay, after the party Congress, then the government can ease up perhaps on Covid restrictions.’ But, you know, we talked about this with Dan Wang, there is still the sort of brutal math for China of limited healthcare capacity, limited hospital beds, limited success in mass vaccination. And opening up means a lot more people will die. And when the government has sort of made a point about the success it's had in containing Covid, particularly compared to the rest of the world, that is a choice the government doesn't want to make.
Tracy: (04:25)
Well, I mean, the term painting yourself into a corner kind of springs to mind. And of course, the big question is what can China do now? It's tied a lot of its political legitimacy to keeping people alive, which means you have to have these Covid restrictions. So what can it do in the face of mass unrest? So we really do have the perfect guest to talk about this today.
Joe: (04:46)
Absolutely. We are going to be speaking with Victor Shih. He is a professor at the School of Global Policy and Strategy at UC San Diego, and he is also the author of the new book “Coalitions of the Weak.” Victor, thank you so much for coming on.
Victor: (05:00)
Thank you for having me, Joe and Tracy.
Joe: (05:02)
Well, why don't we just start with the sort of big picture question, which is how extraordinary from your perspective are the protests that we've seen across the country?
Victor: (05:11)
This has been very, very extraordinary in that these are in person, on the street protests across multiple major cities of China, and this is really something that we have not seen since 1989. So this is very, very striking indeed.
Tracy: (05:29)
So this is actually one thing I wanted to ask you, which is, there is a perception that, you know, China doesn't tolerate any dissent. But historically, over vast periods of time, we have had certain protest movements, you know, student unrest or maybe laborers or farmers. Can you sort of put what we're seeing now in a historical context, what does this actually remind you of? Or are there historical analogies or parallels that you can reach to explain this?
Victor: (06:02)
Yeah. So as you point out, indeed, even though in the major cities, we have not seen major protests for quite a number of years, there are protests, sit-ins, even riots that take place all the time in China, according to statistics that we, you know, as outsiders were able to gather from a few years ago, there were tens of thousands of protests across China. But nonetheless the vast majority of protests up until recent days have taken place in rural areas, smaller cities, maybe medium-sized cities. In a couple of cases, they have tended to, you know, really focus on grievances that are very local, like land seizures, like benefits that people are not receiving, like a local abuse of power by the police forces.
What we are seeing today instead is multi-city protests in some of the largest and politically most important cities in China, like Shanghai, like Beijing, and the slogans at least of the protestors are not very specific. They're very general slogans, calling for constitutional reform, calling for democracy, calling for freedom as well as the downfall of the Chinese leadership. So that's, you know, very striking and something that we haven't seen for decades.
Joe: (07:21)
So I mentioned in the intro that my perception is that anyone engaging in these protests is potentially taking big personal legal risk. What is the law? What does it say about whether you can go out and protest or call for Xi Jinping to step down? Is it against the law to do this?
Victor: (07:40)
So, of course, constitutionally Chinese citizens have the freedom of speech and the freedom of assembly. However, both in the constitution and also in the number of regulations and laws, any subversion of the Chinese Communist Party is considered illegal. And of course, calling for the downfall of the, you know, leadership of the Chinese Communist Party would fall afoul of these regulations and laws.
Tracy: (08:05)
And everything is always open to significant interpretation, or at least, you know, that seems to have been the case in Hong Kong with the National Security Law. It's vague enough that if you do something that upsets the Party or the leadership that they can crack down on you. But this leads into another question, which is why are these protests being tolerated right now? Because, as you point out, these are pretty big demonstrations with what would be very inflammatory slogans and language for the Communist Party, things that are very critical of Xin Jinping calling for democracy and human rights and freedom. Why are these being allowed to happen?
Victor: (08:53)
My read of it, is very tactical so far. And in fact, today we've seen a lot of tightening up. You have to remember that since 1989, the Chinese government, of course, has not been standing still. They've been doing an incredible amount of research, looking at experiences overseas, looking at domestic cases of disturbances, and really trying to engineer the best response to protest movements over time. And I think one of the lessons that they've learned is that if, you know, there really is a high level of dissatisfaction, which is, you know, which is the case here in China, after three years of lockdown, there is indeed a very high level of dissatisfaction among the people, at the first sign of trouble, you crack down using very brutal forces that could invite backlash protests. And I think they tactically allow, you know, at least for one- or two-day period for people around China to protest, to even post things online.
I mean, one of the puzzles is, you know, why are they able to post things online and even, you know retweet them and so on and so forth. Part of it could be tactical. Today, we have certainly seen a lot more tightening, a lot greater police forces. It does take time for the police to deploy, get organized to figure out a coherent response. I think kind of the extent and the scale of the protests also has been very surprising even to the authorities. Today we're seeing a more coherent response.
Joe: (10:41)
So I guess another question is, why now? Why in November/December, 2022, obviously the Covid Zero lockdowns have been, you know, happening for almost three years uninterrupted, but why now?
Victor: (10:57)
Yeah, so the immediate trigger of course, as you point out, is the fire in Urumqi, but one of the potential triggers for that event, as well as other events we've seen online where the neighborhood committees have barred people in their homes and not let them leave their homes sometimes with very draconian measures like, you know, putting a rebar across people's doors, and so on and so forth, that was triggered by a relaxation of Covid policy that was announced on November 11th. So part of that relaxation was to switch from a seven-day offsite quarantine in one of these giant quarantine warehouses, switch it into fewer days of that, to five days, but then more days of mandatory in-home quarantine.
But for the local authorities whose resources are extremely stretched already they took shortcuts. He was like, well, how do we make sure that people don't leave their homes when they're supposed to? Let's put a rebar across the door to make sure the door doesn't open. In some of the wealthier localities like Shanghai, they've put electronic monitors outside of people's doors to monitor whether doors get open. That's a bit more humane. But in some of these poor localities, they have resorted to some very crude measures. And that, you know, certainly has pushed people's level of frustration and anger over the edge in many cases. So ironically, I think it partly was triggered by this relaxation of Covid policies, which, you know, people were right after the 20th Party Congress there has been some relaxation. So for foreigners traveling to China, they don't have to quarantine for as many days. They don't have to test as often, etc.
Tracy: (12:43)
So just on this note, I mean, historically when there have been protests in China, one of the playbooks that gets trotted out very, very quickly by the ruling party is blame foreign influence and blame local officials for bungling, you know, Beijing's grand plan, the plan was fine, but the local officials just implemented it poorly and it's all their fault. A) is that the kind of thing we're going to see here? Is that the playbook that we're going to see? And then B), do local officials deserve some of the blame here?
Victor: (13:19)
Yeah, so we are seeing today some commentaries not from official Chinese government websites yet, but certainly unofficially -- they have a lot of influencers, let's just say, online -- they are saying, ‘oh, foreign hostile forces are behind these protests.’ Of course that's ridiculous because there are no foreigners left in China. After three years of lockdown, the number of foreigners in China, you know, have been cut by 90% or something like that. So even if foreign hostile forces would like to, you know, do something, they literally cannot do it.
In terms of local officials, I think, you know, of course they bear some of the blame because some very crude measures have been implemented by them. But for local level community workers, remember, you know, at the grassroots level, the Chinese governments, they have something called residential committees, but these are not people who are fully paid for by the Chinese governments. Oftentimes their retirees, they get a very modest stipend, a few hundred dollars a month, but they don't get the full pay and benefits of Chinese government officials. But for the past three years, there have been the main force implementing public policies in China, you know, instituting the lockdown, doing testings, delivering food, and sometimes even social services to distressed households.
They’re stretched to the brink. You know, the Chinese government transfered some resources to the local level there. There's free food for these community workers. Sometimes there's bonus pay. But also the other factor is that at the local level, local governments, they don't have a lot of money. Revenue is down close to 10% at the local level, and even civil service pay is being cut, much less the pay of these community level workers. So they’re stretched, you know, beyond their initial capacity, and one can understand why they take shortcuts when they're asked to institute very onerous, you know, to the new policies, you know, really ask a lot of them because they have to track, at the household level, who's supposed to stay at home, who has freedom of movement, and that's just not something they have the capacity to do in many cases.
Tracy: (15:35)
So this leads into something else that I wanted to ask you, and I love this conversation because it's one of those where you answer something and then I immediately have like five other questions, but just on this note, I think people outside of China maybe don't necessarily appreciate how much manpower it actually takes to have these kind of Covid restrictions where, you know, if you're in a big apartment building, there is a group of people who are charged with making sure that people aren't going in and out when they're not allowed to, and that people are, you know, reporting their test results and that everything is sort of going to plan.
And then also, when you have these kind of protest movements, it takes a lot of manpower to police and potentially suppress them. So today, for instance, I'm seeing images of police officers who taking protesters phones individually and deleting photos off of them of the demonstrations, which is similar to what we saw in Hong Kong as well. So can that kind of, I guess manpower, you need an army of workers basically doing this, can that be maintained or is there a chance that eventually, you know, the people who are enforcing a lot of these rules are just going to say, you know what, ‘it's not worth it anymore and I'm out’?
Victor: (16:57)
Yeah, I think local fiscal stress can cause some kind of issues down the road. I don't think we're quite there yet, but, you know, basically grassroots level community workers and police forces who are official civil servants actually are very limited in numbers and it’s certainly not sufficient to carry out all the tasks that the government asked them to do today. You know, which include enforcing quarantine, providing social services, etc., etc. So the Chinese government has had to rely on these informal workers, quasi-formal workers at the community level for quarantine.
But also in terms of repression, there is a whole entire, you know, base of manpower who are quasi-formal enforcers for the Chinese governments, they’re contract workers, they get hired sometimes even on the spot. So I've seen footages where in Wuhan, to deal with a protest, the Chinese government just gathers a bunch of guys off the street, pay them and say, ‘okay, you all get 300 renminbi a day,’ and they become enforcers for the Chinese government.
That all works okay, as long as the money is there. But at the local level, not every local government can come up with the money at the drop of a hat anymore, especially in tier three, tier four cities in China, outside of provincial capitals, the fiscal resources are really stretched. Land sales have collapsed as you guys have discussed on the show already, that has been a major source of discretionary spending at the local level. Now, if there's a major protest at a second tier or third tier city, they have to write a note to the central government saying now, ‘Hey, you know, we have protests. Please give us some money so we can pay for people to quell the protests.’ That may not happen fast enough. And we really could see some things getting out of control. Fortunately, for the Chinese government in places like Beijing and Shanghai, there's plenty of money. Police forces in these places, as we're seeing, are enormous, especially in Beijing. There are just tens and tens of thousands of different kinds of police forces in the immediate vicinity of the city, and some of them are being mobilized right now.
Joe: (19:14)
You know, you sort of anticipated my next question, but can you talk more about the nexus of local government economic stress and the decline in real estate? Because I think, we've talked about it in a few different episodes in the past, how important real estate sales or land sales specifically are to local finances. But can you explain that mechanism? What is the role that local land sales play, and then how much stress have the local governments come under thanks to the well-known property bust that's going on?
Victor: (19:45)
Yeah, so there's an intimate link. I mean, the first thing to realize about China is that despite the fact that we talk about, you know, Chinese industrial policies and all these great tech companies in China, these tech and industrial companies, they only benefit a small handful of cities in China. So a lot of the industrial activities concentrated in cities in Guangdong, in Zhejiang Province, in Shanghai, obviously. And then of course, you have political financial activities in Beijing. Outside of these key cities -- you know, remember China has like 400 cities, right? So for the vast majority of cities in China, there's really not much going on in some of these cities in western China, northeastern China, and some parts of the southwest. And so for those governments, in order to generate GDP growth, what they need to do is to sell land to property developers.
Property developers build the land, and then also for the government, they use the current revenue stream from selling land, as well as the prospect of land value in the future, as collateral to get loans from the banks to build infrastructure. So using current and future land sales as way to finance infrastructure building is the main economic model for the majority of cities in China. The problem, of course, recently is because of deleveraging policies and Covid lockdown property sales have, you know, been negative for quite a few months now, and then that means land sales have completely dropped off, you know, down 26%, 27% year to date. And so then for the local governments, their ability to build infrastructure also has diminished quite substantially. And this has caused economic slowdown across many localities in China.
Joe: (21:32)
One other dynamic I'm curious about, and maybe it's totally off the mark here, but I seem to recall that at the recent People's Congress, one of the, and I can't remember his name, but one of the Chinese communist party officials that was elevated was perceived as having been rewarded for successfully implementing a hard lockdown in, I think it was Shanghai. And I'm curious whether regional chiefs, others sort of see this dynamic and sort of, when you're thinking about the sort of draconian approach to containing Covid, whether there's sort of an interregional competition among local officials who perceive this as a moment to elevate their standing within the National Communist Party?
Victor: (22:16)
Yeah, so I think you're referring to Yin Li who's a public health expert, former party chief of Sichuan who's been made the party secretary of Beijing, I believe. This by the way, actually will be a big test for him, because of course, part of a party chief's job is to handle instability. So I think you have cases like that, people getting promoted for pursuing very draconian lockdown policies. But in general, I think the problem is that, if you look at the new regulations issued on November 11th, the 20 measures, even though it signals some kind of relaxation at the same time, it also basically required local officials to still remain very vigilant about the spread of Covid, still holding them responsible for very rapid proliferation of Covid cases.
Of course, with Omicron, that is just going to happen with any degree of relaxation. Inevitably, you will have rapid spread of Covid. So local officials are still very afraid that they would be held responsible for rapid spread of Covid under their charge in the jurisdiction that they control. And therefore, in many cases, they've still ordered their underlings to be extremely vigilant against the spread of Covid, which then, of course has led to a lot of these crude measures that people are protesting about.
So I think what is required is a very clear signal from the central government that, you know, indeed we're not going to hold people responsible anymore for the rapid spread of Covid. And despite, you know, various rumors that are swirling around that, you know, some investment banks are talking about, I just don't see that happening in the immediate future because such a clear signal would really go back against sort of three years of very strict Covid policies, which the Chinese government has told the world, but especially the people of China, that the stringent policies have been China's model has worked against the spread of Covid. And to completely go against that, I think would be pretty unusual.
Tracy: (24:39)
I want to dig more into what sort of happens from here, but before we do, just going back to the question of why are these protests being allowed to happen now? I mean, one of the theories, and again, it's something that tends to pop up when there are signs of dissent. One of the theories is that, well, maybe there are various factions of political elites who are actually allowing these to happen and maybe signaling that they are unhappy with Xi Jinping’s leadership or something like that. This is basically your expertise, China's elite, so do you buy that viewpoint? Is that a possibility here?
Victor: (25:21)
I don't buy that they’re.... I mean, look, there are very dissatisfied people within the Chinese government, but they're not the ones who are in charge anymore. As you know, people who are not in Xi Jinping’s factions have been by and large removed, you know, from the Chinese government, forced into retirement. And the new leadership, which has taken power after the 20th Party Congress, they're almost all Xi Jinping followers with a record of being very loyal to Xi Jinping. I really think this is a matter of the authorities being surprised, but then also tactically not deploying the most brutal tools at their disposal immediately, for fear of a backlash protests.
What I do find a little bit odd, is how people are able to post footages of protests, slogans in various forms on online platforms. I mean, those are supposed to be censored very strictly. Clearly, at least for a day or two, it has not been very strict censorship of this content. Perhaps that is going to tighten. But certainly, we've had a lot of very deep dissatisfaction from the tech industry in China, and I do wonder if that has something to do with it.
Joe: (26:39)
Going back to, you know, we started this discussion, putting these protests in historical context, do protests make changes happen? And how does the government respond? Because obviously there's no,electoral democracy, so you can't easily switch out the government, but there's some feedback mechanism. How historically has the Chinese government adjusted policies in response to protests? And what could it look like here given the self-imposed Covid Zero constraints?
Victor: (27:11)
Yeah, so historically, you know, for some of these protests that are narrow in focus and ask for very specific things, protestors have had some success. You know, in fact, there's a saying in China that, you know, if you don't protest, you're not going to get a result. If you organize a small protest, you'll get a small result. If you organize a big protest then you'll get major results. So this is certainly a case of major protests. At the local level, we are seeing some concessions already -- at least for now, you know, of course some of these concessions can go away after a few days. At some of the elite universities, for example, at Tsinghua University, at Peking University, there has been some relaxation in Covid policies. The dorms have opened up, people can move a bit more freely.
All that can be taken away, of course. You know, at the neighborhood level, people are just taking down the barricades themselves. No one's really stopping them. So I think even if the central policies do not change de facto, I think sort of facts on the ground may be shifting, that we could see kind of a, you know, medium-term gradual relaxation of Covid policies as people take matters in their own hands. And as the government does not try to reinstitute very draconian lockdown policies. Of course, that will depend on the trajectory of Covid spreading. If Covid really becomes out of hand, and we have a large number of serious cases popping up, China's capacity to treat serious Covid cases is very limited, even in major cities like Beijing and Shanghai. So that could force the authorities to go back. The other thing that I think unfortunately will happen is that the authorities are of course taking very careful records of the protestors, and especially the protest leaders. They know who they are, and there will be a wave of arrest in the coming days.
Tracy: (29:04)
So one of the criticisms that is sort of bubbling to the surface right now, given the fact that Covid Zero restrictions have gone on for something like three years now and given this outbreak of dissent, one of the criticisms is that China's government basically squandered three years of preparation time to get its house in order and maybe start thinking about what an exit from Covid Zero actually looks like. And that it doesn't seem like they had a viable exit plan in place. Maybe they were too focused on the National Party Congress and things going on with Xi Jinping and things like that. But why does it seem like there hasn't been much thought given to how to actually start to wind down some of these restrictions? We saw a little bit of movement after the Party Congress, as you pointed out, but it doesn't seem like Xi Jinping or anyone from the party has ever gone out and said ‘here are our steps to reopening.’
Victor: (30:08)
Yeah, no, I think that is a big puzzle especially on the vaccination front. China has had a vaccination campaign, a couple rounds of it, and you know, of course the vast majority of people in China have been vaccinated, but the vaccination and booster rates among the elderly population remains very low. And so instead of using its vast propaganda, publicity, grassroots level capacity to persuade the elderly population to get vaccinated, the Chinese government has not done too much on that front, at least not since 2020. So there was a round of vaccination in late 2020.
The other thing that's puzzling is that China runs a massive trade surplus, but at the same time, it refuses to approve any of the Western vaccines, the mRNA vaccines, and instead has focused on industrial policies to develop China's own vaccines. And that's very puzzling because, you know, even if China were to import mRNA vaccine for a few years, I'm sure within a couple more years, China will have developed pretty effective mRNA vaccine of its own given its own biotech capacity.
So for a few years, you spend a few billion dollars buying Western vaccines, from a trade balance perspective it’s really a small drop in China's vast trade surplus bucket. Yet the Chinese government has consistently refused to do so. And the latest, you know, after [German Chancellor Olaf] Scholz’s visit, finally, you know, foreigners in China, which you know, now number in just a few thousands, can get the mRNA vaccines, but no one else can. That's really, really puzzling. And it shows that the Chinese government makes policies according to its own logic, not according to even public health needs, and certainly not strictly according to the needs of its population all the time.
Tracy: (32:02)
So my impression is, you know, if you get three doses of the Sinovac vaccine, it's actually reasonably effective compared to mRNA. So in some respects, the focus on foreign vaccines is kind of a red herring. But it does beg the question why China hasn't, you know, we talk a lot about the benefits of a centralized economy and a centralized society in many ways, but why didn't China just, you know, tell people go out and get vaccinated, and if you get vaccinated, maybe some of these restrictions start to ease off a bit? It doesn't seem like a carrot was ever offered, and it frankly doesn't seem like there was much of a stick to force people to get vaccinated either.
Victor: (32:47)
Yeah, well, so there were some carrots being offered in late 2020, early 2021 when Sinovac first rolled out. And so that wave of vaccination had pretty high success rates even among the elderly population. But, you know, as you pointed out for Sinovac to work reasonably well, although I have to say there isn't like a ton of data on that.
Tracy: (33:11)
That's fair.
Victor: (33:12)
You know, I forgot whether people have to be triple boosted or, you know, get four shots or three shots, and there has not been a concerted effort to get the elderly population to get those booster shots. And that is indeed puzzling, especially puzzling, you know, that actually even would've made sense in the run-up to the 20th Party Congress or, you know, certainly immediately afterward it would've made sense to immediately launch a campaign to boost people, especially the elderlies. But we have not seen that. And of course, there's this interesting fact that the elderlies are the most drawn to government propaganda, you know, so if you look at kind of on Weibo, you know, who clicks on Chinese government messaging the most, they tend to be the elderly population who trusts the government the most. And so a concerted government propaganda campaign probably would've had a significant effectiveness. The Chinese government did not do that.
Joe: (34:13)
I want to go back to the economy for a moment. And of course we've talked about the real estate bust and the fiscal impact that that's having. And we've talked about that on past episodes. As you mentioned, one of the things that's been working very well for the Chinese economy is the exports. And it's just running an absolutely enormous current account surplus right now, partly due to exports, but also probably because it's not importing that much oil these days with the lockdowns. But even on the export side, maybe some signs that things are creaking. There was a report that came out, I believe today, again, November 28th, about supply curtailments for Apple, which is almost, you know, back to the future. One of the first topics that we discussed on this show three years ago is what would it mean for Apple's supply chain? But just more broadly, the economy, three years of disruptions, three years of various in-person service, things like restaurants and other services, not taking place as normal. What's this episode going to do to the Chinese economy and the sort of trajectory of where it goes?
Victor: (35:17)
Yeah, no, I think this is part of the reason why we're seeing so many young people coming out on the streets and protesting because the prospects for many of them are not good. You know, as we've seen in this US data, when you graduate from college at a time of economic recession, it affects the entire career trajectories of people. You know, if they don't find that first job, they don't get on the career ladder, you know, their ability to find jobs in the future is affected. The pay goes up more slowly, etc., etc. This is happening to an entire generation of people in China, especially those who do not major in electrical engineering or computer science. I mean, I think for the CS and EE people, they can still find jobs in defense in the tech industry, etc.
But for people, you know, who are majoring in social sciences and the humanities who typically would go into some of these service sector jobs, you know, helping a restaurant market their food, helping deliver various kinds of services legal services, etc., all of these industries are suffering tremendously because of the lockdown, because of how poorly the Chinese economy is doing. You know, of course the Chinese economy as a whole did okay in 2020, 2021 because of stimulus in the west, in the US and in Europe, which bolstered demand in these economies for a couple of years. But as you know, that is fading away in the west, demand for Chinese goods also has fallen. And so across the board, you know, China will face some economic headwinds in the next few months. And so I think, you know, of course the Chinese government's trying to counteract by relaxing property policies, now all these loans go into property developers that of course only helps them complete the projects that have been ongoing.
It doesn't necessarily stimulate demand to buy properties. I think for Chinese people, you know, the investment demand has dried up to some extent because people realize that there's way more supply than demand and the, what's called hard demand, so demand from new household formation, that has slowed down tremendously also because of youth unemployment over 20% right now. And it could be getting worse, in fact. So for a lot of these graduates of social sciences and humanities, the job prospects are very dim. They can work for the government, but the government in many cases will send them to the rural areas, you know, to a village in western China somewhere, where they live in, you know, conditions that they're not used to. For Xi Jinping, that's perfectly fine, perfectly normal because he himself went through that. But I think for this generation of Chinese who grew up amidst very high economic growth, initially a lot of hope for the future, unemployment or this kind of, you know, government-made employment are not very attractive.
Joe: (38:23)
Victor, she thank you so much for coming on Odd Lots.
Victor: (38:26)
Thank you for having me.
Tracy: (38:27)
Thanks, Victor. That was fascinating.
Joe: (38:30)
Yeah, that was really excellent. I really enjoyed talking to Victor and that helped clear up a lot of things in my head. But, you know, just to start, this idea of, you know, it's not just the sort of three years of Covid Zero and lockdowns and disruptions etc. on the property, but this idea of like a generation of younger Chinese students and graduates who may not have or may see that their future is not going to be what they expected because of this huge disruption and slow down is like a really interesting context for all this.
Tracy: (39:21)
Absolutely. And I guess, in that respect, it is probably important that a lot of this is taking place in Shanghai, which, you know, traditionally was that sort of hotbed of entrepreneurship and tech billionaires and then China cracked down on it, and now there's a big question mark over whether or not that kind of employment prospect still exists. The other thing that really struck me was just that, you know, the sort of manpower issue, which is it takes a lot of people and a lot of resources and presumably a decent amount of money to actually have these types of restrictions in place. And, you know, restrictions that are naturally crimping some of your economic growth at the same time. And I guess it's interesting to me the question of whether or not they're going to be able to maintain those.
Joe: (40:11)
Absolutely. And you know, I hadn't really thought about that prior in the context of the real estate collapse that we have talked about multiple times on this show. I knew that, and probably from some of our past conversations, I knew that they were a significant portion of local government revenue, but I hadn't really appreciated the degree to which, okay, if that fell, that really does constrain the state capacity of these local governments. And that, you know, even though it is sort of the Chinese Communist Party, etc., that there are a lot of people, as Victor pointed out, not working for full government salaries, even though they sort of are government officials, and that there really isn't, you know, a national budget the same way, kind of like here in a respect in which, you know, if there's a, you know, during the housing bust of California in 2008, 2009, that of course caused local austerity and layoffs. And so to see that sort of similar structure of government finance there, how it's playing out in the context of Covid is really interesting.
Tracy: (41:14)
Absolutely. It certainly seems like we'll have more to discuss on this topic, but shall we leave it there for now
Joe: (41:20)
Let's leave it there.
You can follow Victor Shih on Twitter at @vshih2.