China crisis risks Lehman-style crash

This is Iain Martin’s weekly newsletter, exclusively for Reaction subscribers.

When in 2017 Michael Auslin published his prescient book The End of the Asian Century: War, Stagnation, and the Risks to the World’s Most Dynamic Region he faced some criticism.

Wasn’t he overstating the problems in China? Critics observed that the mighty Chinese Communist Party was on the case.

At the US-based Association for Asian Studies, Zhiqun Zhu was sceptical of Auslin’s critique. Zhiqun Zhu is Professor of Political Science and International Relations at Bucknell University, in Lewisburg, Pennsylvania.

“Many of the problems he (Auslin) detects in China, such as the gross domestic product (GDP) slowdown, poor state-owned enterprise (SOE) performances, huge macro and local debts, property bubbles, and income disparities that have bothered China for a while have been addressed by the Chinese government.”

Well, that’s okay then.

“Few believe that these longstanding problems will cripple China’s economy anytime soon, especially when the Chinese government is actively dealing with such issues,” wrote Zhiqun Zhu. China was undergoing a great, green transformation, wasn’t it? Moving away from pure GDP growth and seemingly charging ahead in areas such as infrastructure, artificial intelligence and e-commerce.

Six years on, Auslin wins. 

On the basis that, as I wrote recently, every week brings fresh news of China’s woes, here’s the latest crop of developments showing the country has stalled and may be entering a period of relative decline.

So dismal was the latest economic data published by the Chinese government last week that the nation’s central bank cut a key interest rate (the one year medium term lending facility rate) to 2.5%.

The central bank’s new governor Pan Gongsheng is trying to stimulate activity and deal with the aftershocks of an epic property crash. For decades China spurred its growth by building apartments and infrastructure, fuelled by cheap money. Estimates vary on how many empty flats and houses lie empty. Somewhere between fifty and sixty five million, it is claimed.

Now there are tremors in the Chinese financial system that have, as the WSJ put it on Friday, rekindled a debate on whether a “Lehman moment” is about to hit the world’s second-largest economy.

The collapse of Lehman Brothers in September 2008 was the singular event that triggered the main phase of the Great Financial Crisis. There was panic in global markets and governments. Trust evaporated and a few weeks later, Britain’s RBS, then the world’s largest bank, had to be rescued. 

The risk of global contagion if fear ripples out through markets is obvious. One of the US’s leading investors believes stock markets are at least 30% overvalued. To put that in context, the Dow Jones Industrial Average finished this week at 34,500 – at the start of 2013 it stood at 16,576. If China crashes, the West will feel it and there is a long way to fall.  

In China, investors and analysts spot signs of stress at Zhongrong International Trust, a financial firm that has helped finance property development. It has $108bn under management and, according to the WSJ, the firm missed payments recently. It is part of a bigger group providing wealth management products in a $3trillion shadow financing industry. If the payment problems spread and trust disappears, well, we know in the West what happens next.

George Magnus, veteran China expert and former chief economist at UBS, says if there is a “Lehman moment” there will be massive intervention by the Chinese government: “No major Chinese banks will be allowed to go under – repeat after me… no major Chinese etc etc.”

Magnus says – further to his 2018 book Red Flags: Why Xi’s China is in Jeopardy – that this is not just about Covid or the property crash. The “Chinese Communist Party knows best” model is flawed, he says. As the problems mounted, governance became more repressive and anti-growth. Now the regime is trapped.

Meanwhile, rising youth unemployment hit 21.3% in June. And those were the Chinese Communist Party official statistics. Imagine what the real number must be. 

The Times this week reported on youth unemployment creating a generation of “forever children” in China, that is high-flying graduates hunting for any bar work they can find. They had expected as university leavers to get well-paid jobs in business, finance, technology, engineering, property or the media. The jobs aren’t there, with China’s economy struggling to recover from the pandemic and the disastrous zero Covid lockdowns.

A few days ago, the Chinese government announced it will no longer publish data on youth unemployment. Those are not the actions of a regime confident of its future.


Religious Roger, Just Stop Oil’s prophet, and signs of a reformation

I know I shouldn’t read the Guardian or bother with Twitter, or whatever it is called now, but avoiding both would mean missing out on the world according to Roger Hallam, the environmentalist campaigner who founded Extinction Rebellion. He is guru to those who run Just Stop Oil, the impractical and economically ruinous campaign to end all use of fossil fuels immediately.

If you want an insight into the climate alarmist movement, to understand the warped thinking and what his followers could do next, then you have to pay attention to what Hallam says and writes when he pops up.

It was Hallam who in 2019 described the Holocaust as “just another f***ery in human history.” He writes in an unsettling staccato style, and sounds like someone who believes himself to be a persecuted prophet who has seen the perfect truth.

His seminal article, entitled English Gulag, from late last year on the Extinction Rebellion site, was a Christmas account of his time in jail. Not a very happy Christmas. Notwithstanding that Wandsworth prison must be a highly unpleasant place to be lodged, it is an especially apocalyptic screed.

He writes: “The rumours are coming down the line. Except they’re not rumours, they’re facts. As they discovered in the Warsaw ghetto in 1943, they are going to have us die unless we stop them. The atmosphere is a gas chamber. It literally is a gas chamber. Except this gas chamber covers the whole world and there’s no escape.”

Hallam says “billions will die”. An increase of 1.5 degrees in temperatures is the end of the world, according to the prophet.
 
Hallam’s bully pulpit campaign is best understood in terms of religion. Here is a character straight out of the religious wars of the 17th century preaching hellfire and damnation, someone who fights his battles most fiercely with those who broadly agree with him but do not subscribe to every single aspect of his sermons.

Last week, Hallam tweeted robust criticisms of Devi Sridhar, who is chair of global public health at the University of Edinburgh and formerly a fan of the now disgraced First Minister of Scotland, Nicola Sturgeon. Eco-friendly Sridhar had written blandly in the Guardian criticising Rishi Sunak for defending motorists. Anti-car schemes save lives, she wrote.

Hallam was furious and attacked the middle class urban “left” for being too bland and insufficiently angry and disruptive. Here he was, attacking someone who, in essence, agrees with his position on climate change. Because she doesn’t agree with him quite enough, she is branded a heretic by Hallam.

There are all sorts of incongruities in the climate story. This week, the former hedge fund boss who runs the $1.4 trillion Norwegian oil fund – yes, the Norwegian oil fund, the largest sovereign wealth fund that made its money from actual fossil fuels – attacked the UK government for considering more oil and gas licences. We are now at the stage of “global boiling,” said the head of the fund, Nicolai Tangen. According to Tangen, climate change is not political, it is like gravity. Heavy, man.

In spite of all this, am I wrong to be hopeful that the new head of the IPCC (the UN’s Intergovernmental Panel on Climate Change) will bring some nuance and sense to the task?

The more we hear from Jim Skea the better. The 69 year-old Scot was appointed a few weeks ago. In an interview with the Spectator this week, he pushed back against the alarmist types who scare the young out of having children because they say the prospects for humanity are, see Hallam, supposedly so grim and pointless.

Skea is worried about the warming of the oceans and rising sea levels, and the impact on food production. He rejects the “it’s the end of the world” weeping and wailing, though. Technology gives the human race agency. 

Skea told interviewer Ben Lazarus: “1.5°C is not an abrupt threshold where you move from one state of the world to another. The risks escalate gradually as the warming goes up. Suppose we reach 1.5°C – we would not transition into a new world. It’s an incremental change in risk… Every fraction of a degree makes a difference – the warmer it gets, the more risks that we expose ourselves to.”

Could this approach – reasonable, rigorous, rational – catch on? Hope so.


This England  

On a cheerier note, it’s the World Cup final on Sunday morning. The England women’s team takes on Spain in Australia. Kick-off is at 11am.

This being Britain, there has been a “clamour” for the pubs to open early so fans can watch the game with a pint in hand. In this context, a “clamour” is a British tabloid word for a fuss got up by the tabloids when very few people are actually clamouring for anything.

Presumably the government will surrender by the time you read this, and allow the pubs to open at 6am so the most thirsty fans on Sunday can be half-cut by half-time.

Perhaps morning drinking is now just the British norm on high days and holidays. Certainly, habits have changed. Bars in airports in Britain now serve beer and cocktails pretty much round the clock. British travellers on their way overseas on holiday and waiting for flights can be spotted drinking pints at dawn, as though crossing the threshold of an airport has somehow altered time itself and made a Cosmopolitan, two Bacardi breezers and three lagers (each) okay before breakfast.

This Sunday can’t people just enjoy the game at home, remain sober at 11am, and then if England win (let’s hope it happens) open a beer or go out for a drink, by which time the pubs will be open and it will be after (checks watch) 1pm?

Until a few decades ago, many Britons would have been at church at 11am on a Sunday, and only afterwards gone to the pub.

The gap left by the decline of national religion was said by Nigel Lawson to have been filled in Britain by worship of the NHS. But there is another national religion competing for attention alongside the health service. It is football, and the holy offering, the game of two halves equivalent of bread and wine, is crisps and lager.   


What I’m watching

We watched Painkiller, the new Netflix series on the Sackler family and the opioid epidemic in the US that has claimed hundreds of thousands of lives. It was such a disturbing watch that I won’t dwell on it for too long. Empire of Pain, the book by Patrick Radden Keefe, covered this ground. The epidemic that ensnared tens of millions of Americans is a modern horror story.

After all that, our household needed cheering up, so we re-watched What We Did On Our Holiday, starring David Tennant, Rosamund Pike and Ben Miller. Yes, it contains dark material too, but this is a funny story of acceptance, redemption and realising what matters. Spoiler – set in Scotland, it centres on the death of the grandfather figure played by the heroic Billy Connolly, who somehow ends up being given a Viking-style funeral, pushed on a burning raft out to sea off his favourite beach in the Scottish Highlands.

The other star is the scenery and seeing it on screen reminded me how much I miss Scotland and its landscape. Those Scots old enough to remember the advert for Tennant’s Lager from the early 1990s (I may have mentioned it before) will know the feeling. A young Scot in London on his way to work in the City abandons the rat race and heads home to Edinburgh, in search of meaning and a pint of lager. All this happens against the backdrop of the folk anthem Caledonia.

We Unionist Scots who live outside Scotland are the biggest suckers for this sort of sentimental hokum. Show us footage of a loch, or a decent hill, or a long road leading to a wind-lashed distillery, add some stirring music featuring fiddle players, and we start tearing up and pledging to go back, on holiday. The old joke about Sean Connery applies. The ex-Bond was a Scottish nationalist and resident in Spain and the Bahamas. Connery, it was said, would do anything for Scotland… apart from live there.