Something Strange is Happening in China

The average Chinese citizen saves more than 40%

of their income. Where in the US

it's less than 10% because the only real choice

in China has been to save. There are huge gaps

in Chinese health

care and social security. And the one child policy

that China held on to for so long left generations dependent on just one child to help

support them in old age. So just 38% of Chinese GDP comes from its citizens

buying stuff. Where in the US it's 70%. That is a problem for China because it makes the country

overly reliant on selling stuff

to other countries, or on the construction

of apartment buildings, roads and bridges,

because there comes a point where you've built too much. Or countries say,

we want less of your stuff, which is exactly

what is happening today. It wouldn't matter

that the people of China save most of their money

instead of spending it. Really? Not a big deal

until you start demanding, start expecting. Start stating

in very official documents and speeches that I'm. we will grow at 5% this year And every other year Because if you cannot get the people in your country

to spend money, how do you grow with that

5% to grow? You've got to make more,

sell more. By definition, there has

to be more going on. Money

must be changing hands. So when Xie Jinping says We will grow at 5%

this year. someone has to make

it happen. And for a party

that likes to get its way, you as the head of one

of the Chinese provinces, you're not going to let

the president down. The first and easiest

thing for you to do is build. China

at least tripled the length of its roads over the past

25 years. Take all the roads

in the US. That's

how much asphalt was laid. Every bridge currently

in the US built in 20 years. The entire number

of housing units that currently exist

in the US, plus an extra 50 million rail lines. Take Union Pacific, BNSF and CSX strung out

all of their tracks. That's

how much rail was built. It's just a staggering

amount of infrastructure built in such a short

amount of time, desperately needed to bring the Chinese economy

into the modern era. Jaw droppingly

impressive, but only so much can be built. There are only

so many people to drive on those roads

to live in those houses, These are China's ghost

cities. Sprawling empty spaces. Entire cities

are being created, often in the middle of nowhere. There's nobody here. people are convinced that if you keep building, people will come. Oh, if you're unfamiliar

with the ghost towns, these were massive

complexes of housing, sometimes entirely new

cities. Millions of housing units

that remained completely vacant for years

after being built. Some of the ghost towns

and roads to nowhere with the coverage

was hyperbole, but a lot of

it was absolutely true at the time,

and some remains true today. Which brings

the incentive problem into full view, the basic rule of incentives is you get

what you reward for. Because when an apartment

complex is built, money is moved

from one group of people to another

for the materials, a labor, marketing,

consulting. Every piece

that goes into building out a city of apartments

adds to a number. It counts as economic

activity gets added to GDP. Regardless

of whether anybody ever lives

in the apartment complex. Do it

enough times, and a leader of a province

in China can point and say, we built all this

and add it all up. My area of the country

grew by 8%. As Leland Miller puts it, You could build a bridge. You tear it down,

you build the same bridge. You tear it down,

you build a labor train, and you could have GDP of whatever number you want,

at least in the short term. it's not productive growth. It's not real growth. Leland Miller runs

China Beige Book. I have followed the company

for a long time, and I've found time

and time again they get China right. And it's because

they collect their own data inside of China

through people in China. we started getting a lot of attention

because what we were doing is putting out an alternative to

Chinese national statistics. And we were saying,

look at their statistics, listen to what

they're saying, listen to us too, because we can see

the problems coming that the government

doesn't really want to acknowledge

most of the time. You actually have a presence

within China collect data that isn't given out by the Chinese government? That's exactly right. So? So, China Beige

Book is The largest private data collection

operation in the world. Focused on the Chinese

economy All right. So China is running

out of stuff to build. Certainly at the same volume

as the last two decades, literally millions of vacant

housing units, some of the biggest construction firms and home

builders in the country have gone through bankruptcy

in the past few years. so to keep growing

at the demanded pace, China cannot just keep building. We'll sell things

to the rest of the world. Could work, but China is already doing a lot of that. Countries

have become much less keen to take in all the products being pumped out by China's excess

manufacturing capacity. They want to build

stuff too. BMW, Volkswagen, Mercedes employ almost

1% of Germany's workforce. Germany doesn't want

BMW to go out of business. The U.S. doesn't want to lose steel

mills. India has sky high tariffs on smartphones,

solar equipment and even toys

coming from China. The walls China is having

to climb to get goods. And other countries,

particularly the biggest countries, are

getting higher by the day. Hard to build

more infrastructure. Hard to sell

more to other countries. China needs to get this line

closer to these lines. These lines represent

how much people, normal people you and mean

people in Europe. People in Japan contribute to the economy with our normal everyday

spending, just buying and selling

stuff. The global average is 56%. It's 68% in the US, 52% in Europe, 56% in Japan. In China, it's 38%. The answer for China really is to get its people to buy the stuff

its companies make. So why don't they? Why do the people of China refused to spend more? whoop. First, China's history. Certainly, its recent

history is one of struggle struggle that is etched in the mind of the Chinese

people. There have been 12 famines

in China big enough to be named over the past

400 years. That's one

every 40 or so years. And history's worst famine

took the lives of at least 30 million people in China

just 60 years ago. The magnets of that famine is partially due

to human choices. But of course, people

remember it. How could you not? Mentally, it can happen. There just isn't enough

farmland in China for how many people

need to be fed. And the farmland

that is available is prone to natural disasters, particularly flooding

and drought. This is where

China grows its food. If you were to add it all

up, you'd come close to 600 million acres. And depending

on a few factors, it takes about

one acre of land to feed one person

for a year. So it makes sense

that for every 100 calories consumed in China,

about 40 are imported just in the United States,

an area roughly the size of Utah is used to grow calories to export to China, This is just one example of a lack of abundance

in environments of scarcity. People

tend to spend less savings as a way to defend against future uncertainty. to China's 36 year long, one child policy

meant that today's Chinese parents

can only hope to rely on one child to take care of them

in old age. Historically, children

were the labor force of a household

plowing fields, hunting to cooking, to canning everything,

to taking care of the parents and grandparents

as they got older. Even today, only the wealthiest in America can afford to have 24/7 care for aging parents

and grandparents. As unappealing

as a nursing home might be

when you do become old, they are not available

to the vast, vast, vast, vast majority

of the rest of the world. They just don't exist. So the care of the elderly, it falls down the age

ladder. The child,

one child does it. And increasingly in China, it's the one child taking care of six people, parents

and the grandparents. What's

called the 4 to 1 model. And when you see the cost of hospitalization in China as an elderly person,

the savings makes sense. Median income in

the country is about $7,000 per year. The cost

to stay in the hospital on average

in the country about $1,200. Yes, there is a good amount

of money pushed into the Chinese

health care system. I want to be clear. I'm not saying that China has low quality

health care or non-existent health care, but it's not

equally distributed. If you live in rural China,

your health care options and costs

are significantly different from someone

that lives in a tier one city like Shanghai. About 72% of health

costs are shouldered by the state, but

the rest is out of pocket, with the out-of-pocket

expenses landing heavily on catastrophic health events and chronic care. So you have to save $1,200

to 17% of the median annual income,

the median annual income. Half of people are below

that number. This cost of health care, this being taken care of by just one child with virtually

no prospect of long term care from a facility, drives

people to stash money. And importantly, it

brings us to number three. Don't lose money you saved. Because the prospects

for turning money into more money

are nowhere near what many

in the West are used to. Let's take it up a notch. Every month,

the average American automatically buys

about $500 worth of stocks. Paycheck to for one K, which buys the S&P 500, which buys individual shares of the 500 biggest and best companies

in America. Making this 537

page document. Perhaps the biggest reason

Americans wake up to green on their screen

most mornings. The ability to tax free

invest their money into the biggest

and best companies in the world

with the promise. The idea, at least, that the money invested will turn into more money, an idea so powerful it tripled stock ownership in the US in just 20 years. Only 20% of Americans own stock in 1979. Today it's over 60% because of

for one case and IRAs and no other countries

anywhere near that level. Feeding a cycle that creates

wealth, that gets people to spend more,

that creates companies to make products,

to sell to those people. People then buy stock in those companies,

creating more wealth. The cycle

goes on and on and on. when you think you can leverage

your earned wages by letting it compound

for years, and investments that grow,

that turn into more money reliably

for almost 100 years, just think how freeing that is when it comes

to spending money. It even has a term

the wealth effect. The more money you feel you have,

the more you'll spend. So when we switch our view over to China,

this is a place run by a political party

that is not interested in increasing its people's

wealth through investment. You can see it in

policy choices, and you can see it by simply looking at the Chinese stock

indexes trading at the exact same level

it was at 20 years ago, you can't bring consumption

up by just telling people

to spend. The problem with the Chinese

model, the economic model before of the Chinese

economic model now is that it

suppresses households. It suppresses

the private sector in order

to benefit the state. in large part because the best,

most important, most profitable companies in China are owned

by the government with no path for a regular person

to invest in them. This is one of the more

pronounced effects

of a communist system that feels very alien

to those that live in capitalist

countries. Major construction

companies, energy companies,

defense companies and banks are quite literally owned and run by the Chinese Communist

Party as what are called state owned enterprises, also known as southeast. It's like if the US

government owned JPMorgan, plus all the other banks, Lockheed Martin, plus all the other defense

companies, ExxonMobil plus all the other oil companies and a heap

of other critical companies. The incredible returns

that have compounded on those companies over

the years would never have been distributed

in a retirement plans and regular people's

bank accounts. In a way, of course,

there's a positive to that. All the efforts

of these companies that profit

from building things for China

are, at least in theory, redirected back into building things

for China. But as with most things,

there's a trade off. And that trade off

here is regular. People don't

get to directly participate. The people

don't have agency to direct what is implicitly their share of the return to the things suited for their individual situation. One of the most interesting and powerful economic things the US ever did were those 41K and retirement savings laws. I'm not aware of how that conversation

unfolded. You know,

was there some quiet conversation in a dark room where a dozen people

got together and were like, listen, if they have

their money in it, too, they'll also want it

to go up. I don't know,

but that was the effect, for better or worse, because the US has something

of an inverse problem where they don't

really want to save, they want to consume it's trade offs every time. Lots of struggle. Not enough kids. Nothing to invest in. This is where

almost all of the global tension

with China is. Countries and companies

all around the world are like, listen, we've been fairly supportive

of your development. We've come to China,

we've set up shop, kept tariffs on you

extremely low. Part of

that was because we thought you wanted to be one of us, to have a big,

wealthy population that would buy stuff

from us, just as we do from you. I mean, really,

this was the rallying cry in the 2020

tens for free trade. How big China's consumer market would become if free trade was embraced. We're talking 1.4 billion people buying stuff from other countries. But 25 years in, your people are barely

buying anything from us, and we don't think

it's the people's fault. And we're not certain it's

because they don't want to. It's because you don't

want them to. Now, there's ways

you could fix this, they're all ways

that are completely anathema to the way

XI Jinping runs the country. you could shift assets

from the state sector to the household sector

to the private sector. give them more capital,

you could, create a much more robust

social safety net. You could appreciate

the currency. So you could put more

purchasing power in the pockets of households They're not doing

any of this stuff So this increasing tension

between China and the rest of the world

is not going anywhere until they can get this line

to start moving up. That is the whole ball game. Even a modest move from 38% to 48% would come close to balancing China's trade with the rest of the world. We have another big video

on China coming out next. Leland Miller will be back. Everyone

say goodbye to Leyland. I highly recommend following China Beige Book on Twitter. It's punchy stuff. Humorous. Link is in the description and hit that subscribe

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