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The Daily Missive

Moutai Malaise

By August 25, 2023No Comments

The emperor is rich, but he cannot buy one extra year."

— Chinese Proverb

China is not an easy place for Westerners to understand.

There are the usual confusions over haggling, trust in the authenticity of deals, the fact that 92% of the nation comes from one genetic stock—the Han. Those facts are so basic, they’re almost cliché.

Another cliché is they will work really hard and one day, by sheer will and numbers alone, they will overwhelm the Western economies.

In the early-2000s, Bill Bonner and I met with a gentleman by the name of Fred Hsu, setting out to open an office in Beijing. We were under the impression China was going to be an increasingly important place to do business in the decades ahead.

The challenges we faced were unlike any we’d encountered before. There were issues with credit card payments; the very concept of subscription-based products, which was our forté, and their version of a trading culture was unlike anything we’d ever experienced.

On the writing front, we found difficulty because Mandarin Chinese doesn’t use tenses. Good luck reviewing a translation of any of the content we thought was good in English.

Of course, there’s also the small matter of the law prohibiting a publisher from printing anything remotely critical of the Communist Party or any stock or company, for that matter.

What a head of steam we must have had back then to think a libertarian-minded independent financial press from the United States could finagle a successful publishing business in China at all.

Ironically, at the time, I was also doing a lot of press promoting any one of our three books Demise of the Dollar, Financial Reckoning Day or Empire of Debt. Our publisher, John Wiley & Sons, sold the rights of all three to a Chinese publisher.

Demise of The Dollar (see: third edition here) actually sold more copies in China than it did in the United States.

Imagine their delight when the publisher found out its author was in Beijing from time to time during the year. At one point, they organized a press interview that landed my Western mug on the front page of the People’s Daily—the most widely circulated newspaper in China and, not coincidentally, the mouthpiece of the Chinese Communist Party.

They were quite pleased to have a book called Demise of the Dollar selling as well as it was in their own country.

During that press junket, our partner, host and guide was explaining that the Chinese bubble could never collapse. The Party wouldn’t allow it. Besides most of the value being generated by Chinese rapid rise as a leading global manufacturer for, well, everything was being stored in brand-new apartments in cities around the country.

Curiously, his argument was that as long as no one cracked the seal on the doors of those apartments, they could never lose value. What could possibly go wrong?

“I don’t know, Fred,” I remember saying, tapping into my early-onset curmudgeon. “I don’t really care if China is different. And I grant you, it is different. But economics is economics and it works the same way at all times in all places. This is a bubble and it’s going to burst some day.”

“No. It won’t,” Fred said resolutely.

Yesterday, Bloomberg released some disturbing news about China. It will take a little bit for me to explain, so just bare with me. I’ll also tell you why it’s worth our attention here in the US.

“China is attempting to defuse risks from its $9 trillion pile of off balance-sheet local government debt,” Bloomberg begins, “without resorting to major bailouts.”

Nine trillion dollars of debt needs to be restructured pronto.

The task is the most serious threat to Chinese president Xi Jinping’s chokehold on the communist party and the government itself. Bloomberg continues:

To thread the needle, the provinces and cities whose borrowing drove the world’s largest infrastructure boom will need to roll back their spending and restructure debt—all without drastically dragging down economic growth. If they fail, it could thrust the world’s second-biggest economy into a prolonged malaise.

In order to finance the building boom Fred was so fond of… and so convinced would never end… the government created what are known in English as Local Government Financing Vehicles (LGFV).

In interviews the Bloomberg team did with employees of several of the LGFVs it was revealed that the companies are not earning enough revenue to cover the interest on the loans they were meant to take out on behalf of local governments. Here’s one example they cite, presented here for illustrative purposes:

Guizhou province is home to some of the country’s most financially strained LGFVs, yet owns the country’s second-largest company by market value: liquor producer Kweichow Moutai Co., worth about 2.23 trillion yuan. The [liquor] company was pressured into buying a stake in a local road-building LGFV when it ran into financial trouble in 2020. Moutai shareholders, which include investment funds and retail investors, were not happy, and have resisted further cash injections.

President Xi’s government’s plan was to turn firms like Moutai into profitable businesses “so they’d no longer need government money to pay the interest on their debts.” The liquor company was doing just fine when it’s goal was simply to whet the whistle of construction workers knocking off from building roads. The government forced them to be concerned with profitably building the roads themselves. Investors have thus far not gone along with the government’s plan.

We wouldn’t be able to write these words and publish them through our now defunct Beijing office, but there it is. A small but less than insignificant peek behind the opaque nature of state capitalism as practiced by the People’s Party.

Nine trillion dollars is a lot of money. Especially for the rural communities of China to finance. The entire country of the United States has to “roll over” or refinance $13.1 trillion—over the next 4 years.

Not that that’s an easy feat, either, but at least the US is rolling over Treasuries, not off-the-book debt in the form of LGFVs.


Okay, here’s the “why it matters to you” part: Since the early 2000s when outsourcing manufacturing to China became as trendy as denim short skirts, China’s share of global production has risen steadily from 11% in 2000 to a high of nearly 30% in 2021. At the height of US global share in manufacturing in 1930, Uncle Sam accounted for 34% of global production. Currently, the US sits just north of 15%.

The point being: Chinese production accounts for almost as much of the global production of goods as the US did right before the Great Depression. When a debt crisis wrecked the U.S. economy in the 1930s the depression quickly spread around the world.

A debt crisis of any magnitude inspired by an LGFV crisis across China, could spell disaster for a myriad of companies in the US who’ve depended on cheap labor from China to fuel their business models.

And that’s just in the US. All Western countries have been greedily partaking of cheap labor markets in China for years. Worth keeping an eye on.

So it goes,

Addison Wiggin
The Wiggin Sessions

P.S. Fred, himself, is Han Chinese. But his parents left China were both working as college professors in the US when Fred was a kid.

He grew up in Kentucky. Even I can hear the Southern drawl in his Mandarin.

Addison Wiggin

Addison Wiggin Addison Wiggin is an American writer, publisher, and filmmaker. He was the founder of Agora Financial and publisher for 18 years. An acclaimed New York Times best-selling author, his books include: Financial Reckoning DayEmpire of DebtThe Demise of the Dollar, and The Little Book of the Shrinking Dollar. Addison is also the writer and executive producer of the documentary I.O.U.S.A., an exposé on the national debt, shortlisted for an Academy Award in 2008. He lives in Baltimore, Maryland with his family. Addison started his latest project, The Wiggin Sessions, powered by The Essential Investor, in March 2020. He films from a homegrown studio in his basement.