Prelude to Chaos: China's Economic War and the Looming Crisis|| Digging into China

Hi, I'm Dongsheng. Welcome to Digging into China, where we explore China in-depth to review unique perspectives. Today's discussion focuses on China's internal economic conflict. Many of you are likely familiar with China's external economic struggles, particularly the trade war with the United States. This conflict, marked by intermittent escalations, captures significant media attention and public interest, drawing focus to the broader narrative of international trade disputes. However, a far more critical issue, one that directly impacts everyone's interest, is China's internal economic war. Regardless of how the US-China trade war unfolds, its overarching trajectory is clear. The two nations will progressively decouple, leaving China increasingly isolated. Under these conditions, the concept of internal circulation within China's economy will become ever more pronounced. So what does internal circulation entail? At its core, it represents a zero-sum struggle, where participants compete fiercely for a diminishing pool of resources. This intense competition ultimately resembles an economic war. To understand how this internal economic war is waged, we must avoid viewing China's economy as a monolithic entity. Instead, we need to move beyond the traditional classical economics and consider the framework of location economics, or economic geography. This approach requires us to divide China into distinct regions and analyze their economic interconnections. Location economics examines economic development through the lens of geographic location. It seeks to uncover the patterns governing how capital and productivity are distributed across different regions, identifying the most suitable areas for economic growth. Early economic geographers proposed an idealized model known as the Equilateral Hexagonal Framework. This model posits that each economic region radiates from a central hexagonal core, with development spreading outwards. Each hexagon represents an economic zone, arranged in a pattern reminiscent of biological cell structures. The defining factor in these zones is economic efficiency. Regions with greater efficiency are better positioned to serve as economic hubs. Applying this hexagonal model to China's economy can shed light on certain phenomena. We can segment China's economy into several regions, with the most developed including the Yangtze River Delta, centered on Shanghai, and the Pearl River Delta in compassing cities like Guangzhou and Shenzhen, supported by Hong Kong. These regions align with traditional notions of economic zones, driven by economic efficiency and exhibiting a distribution that extends from the core to the periphery. Yet, upon closer examination, the theory of location economics falls short of fully explaining China's economic landscape. Coastal economic zones may indeed be built on economic efficiency, leveraging their geographic proximity to facilitate maritime international trade. The global value chain heavily relies on sea transport, enabling regions like the Yangtze and Pearl River Deltas to integrate seamlessly into international supply chains. This geographic advantage translates into economic strength. The challenge, however, lies beyond these coastal hubs. China's inland regions feature a variety of economic zones and centers of varying sizes, which are not always established based on geographic advantage or production efficiency. Some inland zones are located in areas with suboptimal geography and lower productivity. Conversely, certain northern coastal areas, such as China's northeastern coast, boast favorable geographic conditions, yet lack in economic development. This suggests that analyzing economic zones solely through commercial or economic lenses is inadequate, with limited explanatory power. To comprehensively account for China's economic zones, we must augment traditional location economics with additional factors. Incorporating political and power dynamics offers a more accurate perspective. A region's emergence as an economic center is not solely the result of commercial activity or geography, but is also shaped by political and historical influences. Historically, politically advantaged regions often evolved into economic hubs. While this pattern appears globally, our focus today is on China. In 2014, Li Feiyue, an associate professor at Nantai University's School of Economics, published a paper titled The Structure of Actual Power and Local Economic Growth, which provides valuable insights. The paper argues that the allocation of political power across China's regions significantly influences local economic outcomes. Nominally, all regions operate under the unified leadership of the Communist Party. But in practice, informal systems reveal stark regional disparities. Li's research analyzed economic development across 29 regions from 1952 to 2008. It found that economic disparities between eastern and central western regions existed in the 1950s but were less pronounced than in later decades. These gaps widened dramatically following the reform and opening up policies of 1978. Post-1978, the strongman politics of the early People's Republic of China gradually waned, leading to a decline in central authority. Local economic development progressed in tandem with this weakening of central control. As disparities grew, researchers noted distinct differences in grassroots political structures between eastern and central western regions. A key feature of eastern coastal areas is the higher proportion of local cadres, resulting in political power being more concentrated among grassroots officials. What distinguishes these cadres? Unlike their counterparts, local cadres are unlikely to be promoted to central ministries or reassigned to other regions. They typically spend their careers in their hometowns, tying their personal interests closely to local economic development. When political power shifts toward grassroots levels, it incentivizes local cadres to drive economic growth. Eastern cadres are thus more willing to take risks such as attracting investment to boost local economies. In contrast, cadres transferred from other regions lack emotional or practical ties to the area, subject to reassignment at any time. Their interests are not aligned with local economic progress, reducing their inclination to pursue risky development initiatives. Thus, when examining why southeastern China prospers economically, we must look beyond geography and efficiency. The structure of grassroots politics, local governance dynamics, and geographic factors collectively fuel the southeast's rapid development, widening the gap with central and western regions. This analysis draws from a report by a mainland Chinese scholar, which underscores a critical truth. Economic growth does not hinge on the central government's leadership or planned economics. Rather, reduced central intervention fosters greater local prosperity. Published in a mainland journal, the report's conclusions are somewhat restrained. In my view, even grassroots cadres are unnecessary. For a region to thrive economically, only two conditions are required—a robust rule of law and an environment that nurtures entrepreneurs and innovation. No officials are needed. This reality poses a significant problem, as it reveals the Communist Party's governance lacks legitimacy. Economically, China would fare better without the Party's involvement. Recognizing this, the Party is now focused on consolidating local power, reinforcing central authority, and suppressing regional economies. This marks the onset of China's internal economic war, which is poised to escalate. Let's explore how this war will unfold. The central government employs three primary strategies against local regions. First, it uses national planning to redistribute wealth through transfer payments, siphoning revenue from prosperous areas. Data indicates that China's central fiscal oversight covers 31 provinces and five independently planned cities, 26 of which face substantial fiscal deficits, with expenditures exceeding revenues. This shortfall is offset by contributions from a few coastal provinces, such as Zhejiang, Jiangsu, Fujian, and Guangdong. Public budget data for 2024 shows transfer payments exceeding 10 trillion yuan. The transfer of funds from coastal to inland regions, both in scale and method, occurs without the consent of taxpayers in the contributing areas. In plain terms, this is tantamount to theft. Consider a U.S. state attempting to transfer its revenue to another state without legislative approval, an unlikely scenario. Yet in China, this unauthorized transfer is routine. The reason is stock. Chinese citizens' money and taxes are not their own, akin to livestock whose products belong to the farm. The second strategy involves appointing loyal central officials to diminish local autonomy. The third entails launching periodic political campaigns, often under the pretext of anti-corruption, deploying central inspection teams to suppress local regions. These tactics enable the central government to plunder and constrain local economies and politics. Underlying these measures is a broader strategy, decoupling from U.S. trade, which fundamentally reverses the progress of reform and opening up. Amid this decoupling, recent years have seen Chinese authorities revise cadre evaluation criteria. Economic performance is no longer the primary measure. Absolute loyalty to the party and Xi Jinping is now the sole benchmark. This shift signals the end of the reform era and a return to strongman politics, severing the foundation for coastal prosperity. Economic indicators now clearly point to a future of widespread poverty. Let's examine some data. First, population, the bedrock of any economy. In 2024, most Chinese regions reported population declines, with only Zhejiang, Fujian, Guangdong, and Xinjiang showing growth. This sharp drop precipitates a real estate collapse. Land transfer revenues have plummeted from recent highs by 17% to 83%, with most regions seeing at least a 50% decline. By March 2025, new residential construction areas fell by 24% and official buildings by 35%. China's past economic model relied heavily on land finance, so real estate collapse triggers broader fiscal deterioration. Regardless, while growth has been modest at around 15%, local debt ratios have surged from 20% to over 35%. This reflects not a dramatic rise in debt, but a significant drop in local revenues, inflating debt proportions. This typifies a stock-based economy, lacking new growth avenues and growing increasingly frail. Without innovation, China's economy lacks dynamism, growth, or creativity. Historically, growth depended on foreign trade. But today, coastal trade enterprises are collapsing en masse. In Guangdong, manufacturers have absconded, leaving empty factories and unemployed workers. China's purported high-tech sectors are largely illusory. Electric vehicles are now a high-risk industry, and the domestic chip sector has seen over 10,000 related firms collapse in a year. Industrial upgrading has failed, and traditional sectors like trade and real estate have imploded. China's economy is effectively on life support, with no growth prospects, only depleting existing resources in a fierce, zero-sum struggle toward collapse. Coastal regions face a dual crisis, widespread trade enterprises' failures, and central government suppression. In this economic war, they are likely to lose, as their response options are limited. Under China's political system, local regions wield little power, rendering resistance futile. Historically, local power factions like Jiang Zemin's Shanghai clique or Ye Jianying's Guangdong group resisted central control. These factions were the central government's greatest fear. Since Xi Jinping's rise, he has relentlessly dismantled local power bases to consolidate authority. The compliance of local bureaucrats enabled his swift success. Now, all political and economic directives emanate from the center, reshaping China's political and economic landscape. The prior east-west developmental imbalance is giving way to uniform poverty. In this war, coastal regions' only resource is to compete for human resources, their sole means of survival. Human resources represent labor and, crucially, the tax base underpinning local revenue. Without a population to tax, economies and finances wither. Mainland media acknowledged, euphemistically framing it as a talent competition. In truth, it's a scramble for tax bases. Coastal regions leveraging geographical and historical economic advantages retain some appeal for young workers. These advantages may prolong their viability, but only as a temporary reprieve. Soon, the economic disparity between coastal and inland areas will vanish. Who emerges victorious in this war of collective impoverishment? Xi Jinping. For several reasons. This process redistributes wealth, enabling Xi's clique to amass resources through initiatives like third-tier city construction or western development, which shift coastal industries inland, effectively transferring assets. These transfers are overseen by Xi's king or lawyers. Second, relocated industries and capital ultimately enrich Xi personally, serving his aim to weaken rivals and bolster his power. Third, Xi's advisers likely anticipate that economic conflict will precede a hot war. Before that, Xi seeks to economically cripple opponents while strengthening his position. Historically, economic wars presage physical conflicts, as resources dwindle to near zero in a heated zero-sum struggle. Minor remnants may spark violence. What we witness is a prelude. The true conflict looms, promising widespread devastation. In economic location terms, Xi aims to position itself as the hexagonal core, the economic epicenter. Wherever Xi is, the economy follows, a key driver of this war. China's internal economic war appears as a regional contest for scarce resources. But it Xi Jinping reshaping the economy's foundational logic. Yet, the war itself is not the gravest tragedy. For China's people, the true peril lies post-war, when a hot war may erupt, imperiling lives. Thank you so much for watching. If you find this video helpful, please like it, drop a comment below, and hit the subscribe button right here. It really helps YouTube suggest my video to others. I'll be back with more content soon. Until then, be well.