Shane Leary joins Miles Yu to discuss the Chinese Communist Party’s Buy New Products campaign, an attempt to subsidize consumer spending in the face of a sluggish economy. They then turn to a controversy surrounding the Beijing half marathon, in which African competitors allowed Chinese national record holder He Jei to prevail in the last moments, and its implications for the broader trend of fraud in Chinese society. Finally, Shane and Miles discuss credit rating company Fitch’s decision to downgrade China’s credit from stable to negative, and its economic implications.
China Insider is a weekly podcast project from Hudson Institute's China Center, hosted by Miles Yu, who provides weekly news that mainstream American outlets often miss, as well as in-depth commentary and analysis on the China challenge and the free world’s future.
Episode Transcript
This transcription is automatically generated and edited lightly for accuracy. Please excuse any errors.
Miles Yu:
Welcome to China Insider, a podcast from the Hudson Institute's China Center. I am Miles Yu, senior fellow and director of the China Center. Join me each week along with my colleague, Shane Leary, for our analysis of the major events concerning China, [the] China threat, and their implications to the US and beyond.
Shane Leary:
It's Tuesday, April 23rd, and we have three topics this week. The first is China's buy new products campaign, an attempt on behalf of the party to spur economic activity. Second, we discussed a sports cheating scandal during the Beijing half marathon and the broader trend of fraud in the PRC. And last we discuss the downgrading of China's credit rating from stable to negative by credit rating company Fitch. Miles, how are you?
Miles Yu:
Very good Shane.
Shane Leary:
Wonderful. Well, so for our first topic in March, the CCP announced its buy new products campaign, an effort to subsidize consumer spending for appliances and other products. Can you tell us a bit about this and the reasoning behind it from the CCP’s perspective?
Miles Yu:
Well, this is nothing new. I mean, China tried this a measure several times before, but this time seems to be on a massive scale. Toward the end of March, 14 Chinese ministries and the administration authorities issue a massive directive to the nation demanding people to buy new products. In other words, you have to really trade your old products and to buy new products. So the local government are mobilized. Millions of cadres went to people's homes to check on the expiration date of their meters, appliances, even cars and computers. They arbitrarily enforce that kind of expiration date, in the west in some companies we call lifecycle. So the use for certain years, then you must change it. But this is consumer goods. People do not have money to buy this stuff. So, this kind of an anti-market, Chinese executive administrative demand for people to buy things.
And not only that, there's also a certain element of xenophobia in there because Xi Jinping is ordering Chinese to buy goods made in China. So that's not good news for international enterprises invested in China. So this is the newest measure to solve this similarly unsolvable problem, not is China's tanking economy. The economy is tanking mostly because the three major index of the healthy economy, consumption, export, investment are all down, way down. So each has a foreign domestic aspect of this in this consumption export and investment. Now foreign aspect has gone south, consumption has been down due to covid, trade war, and anti-dumping policies in the international communities. So people just simply buy fewer goods recently overseas. With that, China is an export-oriented economy, also went down for the same reasons, but most importantly, the foreign direct investment, the FDI has come to almost zero due to xenophobia and ideological-ization of China's economy by Xi Jinping.
So, because of this, Xi Jinping tried a couple of years ago, something he called ‘dual circulation’ to emphasize the domestic consumption part of that and restricting import and force Chinese people to invest. But dual circulation has been a couple of years and it's still in trouble right now. It's getting worse because domestic demand still is very low due to stock market volatility and most importantly real estate collapse. Along with that is the drastic decline in trust in the CCP’s ability to do things right. So this is a problem that [the] Chinese government is trying to solve and this is also reflected in the, this is one of the reasons why China has to launch this massive buy new products campaign to solve its economic worlds. But export is also in trouble because as I say, China is an export-oriented economy, but the export has been curtailed dramatically.
China's southern Goldilocks in the recent month is in green energy exports and e-commerce. Those are two sectors that are surging green energy mostly included the big three. One is solar panels, EV batteries, and the EV[s] themselves. China suddenly surged as an international exporter. E-commerce obviously is booming too in China, even though Alibaba is in trouble. But China is marching into global e-commerce market through Temu and SHEIN in particular. So other than that, China's export is in big trouble also because there is a massive resentment in [the] EU and in the United States against China's dumping practice particularly there's the big three items that I talk about plus e-commerce. Even Janet Yellen, secretary of Treasury went to China last week. She yelled at China in Beijing about China's over capacity, especially in solar panels, EV batteries, and EVs. It was even worse is the, because this is the election year in the United States, the democrats in charge suddenly woke up to the long-forgotten victims of China's ruthless state, sponsored anti-market, economic and trade practices in order to gain votes of the factual workers, the labor and trade unions, the blue collar workers in restaurants and shops.
You see that President Biden, who is losing to Trump in every key voting bloc, in all major opinion polls that you can find in the aggregate of a real clear politics, for example. President Biden is now campaigning like Trump promising more tariffs on Chinese imports, blaming China for hollowing out Americans steel industry and the manufacturing base. When Trump goes to Chick-fil-A [inaudible] with the black employees there, Biden goes to Wawa to do the same like Trump who has attracted enormous blue collar votes in America's heartland. President Biden is losing to Trump, Democrats, the base voters, the way the Republicans lost their base voters to FDR during the Great Depression, particularly the blacks and the southern poor. All in all, this campaign politics really put China in an even worse situation. China [has] become the obvious target and I think that's the correct target on the investment side, should desperately begs the Wall Street to go back to China, but to no effect.
So, as we'll see later in this program, China's international reputation, its investment credit has been dramatically cut by all the major rating agencies. This is a problem, no demand domestically. So government creates demands by forcing people to buy new products. This new campaign of buy new products campaign is just bullheaded. I say it's a trick in many cases. It's literally precisely that because this new director from all the major government ministries never says it's for ending the CCP’s economic disaster. But it mobilize[s] millions of China's [inaudible] nationwide to implement the executive order for[cing] people to buy. The question is people are mostly broke right now. They don't need the kind of spending on the durable goods. So, the question then comes down to, who will pay for this? [The] government promises but no specifics. Local governments are empowered to extort more money from ordinary Chinese citizens in the name of enforcing this new directive.
So, this further increase anxiety and uncertainty. For those of you who have access to Chinese cyberspace, you can see this volcanic eruption of distaste against this measure. There's a new made in China, buy Chinese made, is bad for international businesses obviously, so because make China further a closer society with a close economy to international investment, international marketing. This is also one aspect of the new or buy new products campaign. It is not just for consumers, it's for Chinese business as well. [The] government forced them to buy new equipment and machine tools. Those are very expensive and these demands are artificially created by the government, which all leads to higher and higher unemployment rate. If factories could not afford this very expensive equipment, the higher unemployment creates political instability. Furthermore, so region's foundation will be shaking. So this is all bad for all sides, to all sides. So, I don't see really [a] good way for the CCP to get out of this.
Shane Leary:
I mean it sounds like what you're saying, they're going to have to put more pressure on citizens in terms of taxation to make this happen. And it might not even serve businesses really because they'll be compelling them to develop new things. So is it fair to say this simply won't work? Has this had success in the past? You mentioned this is nothing new in terms of Chinese economic strategy.
Miles Yu:
It won't work precisely because the approach the Chinese Communist Party has adopted to solving any economic problems. That is, by centralized economic decision power into the hands of an ideological communist party supreme leader. Xi Jinping, every measure [he] has taken so far has been anti-market and centralizing command economy. So that's why it's going to fail. It's doomed to fail because it is not based upon market principle of command and demands and supply.
Shane Leary:
For our next topic, this past week the winner of Beijing's half marathon He Jie has had his win revoked. He Jie is a national record holder in China and a member of China's national marathon team. In addition, three African runners have also had their results canceled. So, what happened here is that the three African runners intentionally slowed down and even appeared to wave or gesture He Jie onto the finish line allowing him to win. Can you shed some light on this for us? I mean, why do you think this happened?
Miles Yu:
This happened in China all the time. So much so people don't take this very seriously because there is what we call the banality of evil. I mean fatigue shall we say. I mean this is a reflection of not just in sports. China literally has become the people's republic of cheating, consumer cheating, and you can see the culture of stealing and intellectual property rights. This is just as a matter of course, it's a very intrinsic part of Chinese life. Sport cheating is a very poignant precisely because it has a mass appeal internationally and international sport cheating is the most [inaudible] because sports is one of the remaining popular entertainment event that global audience[s] really trust. So that's why even though there's here and there scandals, but the overall people trust the process, the refereeing system and China get into this and they basically spoil the goodwill of the international community.
You'll recall this is not the marathon, half marathon incident is not really that isolated. It's not an isolated incident. You recall during the vigorous discussion about [the] origin of Covid in 2019 and 2020, there was a China sponsored 2019 Wuhan military games that took place in September 2019. And even [in] that game, China as a sponsor was called cheating red-handed, they send their athletes some kind of secret shortcuts so [the] Chinese competitor would win and that was 2019. Swimming doping is obviously on a massive scale. This incident, which is recently exposed and caused international uproar is the Chinese government, anti-doping agency tested a whole bunch of Chinese swimmers several months between the 2021 Tokyo Olympics. And they found out there were 23 top Chinese swimmers [who] had used illegal drugs. So, this should have been banned immediately, 23 of them, the Chinese government, why they took this action because they knew if [there were] any leak out of this massive doping scandal and the entire Chinese government's reputation will be gone.
So that's why they reinforce the international swimming authority WADA, WADA, and so say, Hey, we found this, but they injected these drugs by accident. It's basically they eat the same kind of food. Nobody would believe this kind of a story, but WADA did. So, the scandal of this scale is really astonishing. WADA, the International Swimming Authority, allowed the 23 top Chinese swimmers to compete in 2021 Tokyo Olympics. Four of them won gold, WADA refused to disqualify those Chinese doped swimmers. Furthermore, WADA withheld the report for two years until journalists dug it out and exposed the scandal. So, this is what's so astonishing right now. China's massive sport cheating is different from any other countries with a doping addiction such as former Soviet Union and East Germany. China is different because China has a willing cooperation and the complicity of international sports organizations like WADA. And that is really astonishing. Those organizations are very corrupt right now and some of them are even suspected of being in China's pockets. And that's the pernicious aspect of all this cheating right now.
Shane Leary:
That is astonishing. And I mean as you note, this is not an isolated incident in China and maybe even an indication of a broader trend of fraud. Would you say, I mean is this something that is sort of solely top-down, driven by the government? Does the government make any attempt to overcome widespread fraud or what would be the genesis of this?
Miles Yu:
First of all, international sports competition and all the assets trained for that has always been monopolized by the government, by the state. So, anything that you saw, doping is near a hundred percent sponsored by the state. We had a doctor, who's a woman doctor, she's very brave, I believe she lives now in Germany. She was China's top sport doctor. She revealed that she herself orchestrated, administered all [these] doping campaigns in the past. So, this is nothing new. Sports is a view by China as a measure to gain international reputation. So like the Soviet Union, like East Germany, like Romania, like China. So they're all of the same nature. So that's why doping here is different. People always say, yeah, in the United States you have doping instance too, and the Lance Armstrong and all those guys, oh, you're a hypocrite. That's totally not true because the sports cheating scandals caught in the West are almost done by individuals.
Almost all of them. Lance Armstrong, of course once found, their career will be over. China is different when cheating scandal is orchestrated by the state and when discovered, China would, the first instinct is to cover up. Second instance is to find all kinds of ridiculous excuses and nobody would believe it. And to cover it up too, in this case, for example, you talk about the half marathon scandal. This guy He Jie, he's clearly not the best runner there. The three African runners were clearly covering up. So the Chinese sports authority came up with this ridiculous excuse after a national, even global uproar erupted. The Chinese authority said, well there's three Africans, they were pacers, they're pacemakers. This is a nonsense because the three Africans pacemakers, they actually won silver and bronze. They won medal medals too. They went on the stadium to receive this award. Clearly they're not registered as pacemakers, they're registered as competitors. So, He Jie is China's top marathon runner. And you can see through the footage to the last lack, he was clearly struggling and the three African runners were running at ease that could have easily won the case. But this is scandal, this is cheating. That's [the] Chinese style.
Shane Leary:
And for our last topic earlier this month, the global credit rating company Fitch revised its rating on China's credit from stable to negative, citing rising risk to China's public finances and an uncertain economic outlook. Moody, another credit rating company similarly changed their rating to negative this past December. Miles, we've talked a lot about China's uncertain economic outlook, but why is this development in particular important?
Miles Yu:
Well, it's important because as I said, which is related to the earlier sports cheating, I say at the beginning, many audience listeners probably felt like I was particularly harsh on China being the people's republic of cheating. I was not kidding. The biggest cheating scandal in China is certainly one of the biggest ones is China's cheating on its economic reality. The Chinese government has been deliberately promoting the mirage of a Chinese economy is in good shape. For decades, they could get away because there's some greedy unprincipled Wall Street investors trying to make a big quick buck in China knowing that China's economic reality is terrible, but they want to go there and to invest more money by creating this artificially promoted the hype [inaudible] of Chinese economy. Now Chinese government is going after even some of the major firms on Wall Street. So people woke up and they realized it's not really a realistic expectation to make money in China anymore.
Chinese government obviously is responsible for the truth telling rating by the international ratings agencies because China has cut off virtually all the data sharing with everybody. China has stopped reporting on some of the key economic data. For example, youth unemployment rate, China's government last time, which is over a year ago, reporting China's youth unemployment rate is a 19.9%. That's almost 20%. In any healthy economies, this is a really sort of a red flag. But in China this is not really a big deal. So Chinese government did order to end this reporting. So there's no reporting on China's unemployment rate. This is really bad. Because of this, all the rating agencies, so, you talk about top three, Standard & Poor 500, S&P 500, and you talk about Moody's and then Fitch they represent the mainstream of the industry in international business enterprises.
Fitch is relatively small, but Fitch often is looked upon as a sort of tiebreaker. Their ratings are more of a little bit odd, little bit sort of unconventional but convincing. Now all the three major international ratings agencies, Moody’s, S&P 500, and now Fitch has caught China's credit outlook to negative. So this is more of the economic reality China. So we're seeing more and more of this. So why is this important? Because it is important for international capital to reassess their desire, expectation of China's investment environment. Now, Xi Jinping and Chinese government and now Wall Street and including some of the major China promoters like Harvard University and all these relationship committees, they're trying to sort of woo the international capital back to China. And so the timing is actually very, very crucial because with all the professional ratings are so negative and I think the chances for the FDI to go back to China is not really that rosy yet.
Shane Leary:
Well, Miles, I think that's all the time we have this week. Thanks so much for talking to me and look forward to doing this again next week.
Miles Yu:
Alright, I'll see you next week.
Thank you for listening to this episode of China Insider. I'd like to thank my colleague Shane Leary for taking part in this undertaking every week. I'd also like to thank our executive producer, Philip Hegseth, who works tirelessly and professionally behind the scenes for every episode to make sure we deliver the best quality podcast to you, the listeners. If you enjoy the show, please spread the words. For Chinese listeners. Please check our monthly review and analysis episode in Chinese. We'll see you next time.