Tales from the Edict 30 - China Reacts

While America proved to be agile enough to rush through plans for the nation even as the depression of 2030-31 was bearing down on the global economy, China was far less aware of what was about to befall their economy and society. This may be due in part to the leadership believing the idea that by applying the correct incentives, its own domestic consumption could fill in any drop in overseas demand. Even through the pandemic years (2020-2022) the economy had responded well, showing strong growth while other major economies were slow to recover. Despite there being no empirical evidence to the contrary, China believed it was insulated from the rest of the world’s economic malaise.

Like the crash of 1929, few saw the 2030 depression coming. In the years preceding 2030 the major economies were stable, if not for the weak growth of less than 2% except for China which was running at 4%. The irony of these figures would not be lost on the world when it was later calculated that all this growth could be attributed to the purchasing of cryptocurrencies. Bitcoin and its brethren had come to replace housing as the investment of choice. In China, where the leadership had acted several years before to ban cryptocurrency, the Chinese consumer had discovered ‘Open House’.

This new type of financial vehicle came in the form of a building plot sold as a securitized overseas asset and held by a financial bank. These investments began when the housing market ground to a halt. Forced to find a new means of financing themselves, provincial governments sold land into ‘Local Government Financial Vehicles’ who then sold on the valuable rights for building. These LGFV had spurred on the domestic housing boom, and ‘Open House’ allowed provincial and prefecture administrators to continue this funding mechanism. Only now there was no physical building required to attract a purchaser. Open House enabled Chinese consumers to make indirect investment into the cryptocurrency marketplace.

Days before the financial crash of 2030, Bitcoin reached $500,000. Coincidentally, central government took an interest in reports of the house building industry going into recession and warned they would take matters into their own hands if provincial government did not sort out the issue. Provincial administrators panicked in fear of their ploy being discovered and shut down Open House. Starved of new investment from the largest domestic market, cryptocurrency values reversed and began a precipitous fall.

Within a week of the end of the Chinese New Year the worst financial crash had fallen on China. Hundreds of millions of households lost their savings. The public put pressure on the authorities to act but they were met with silence because at a provincial level those in power were the ones responsible for Open House. Very quickly central government became aware of what provincial authorities were trying to hide and it was clear that action had to be taken to appease growing anger in the population.

In short order heads rolled. A total of 11,312 administrators and persons of authority were removed from office, many of them summarily shot. Tens of thousands of families were deported for re- education. A major overhaul of provincial government was promised, but already it was too late. China’s GDP fell by 43% in the space of two quarters, the internal market ravaged by consumer demand evaporating. Unemployment, which officially did not exist, became widespread as factories laid off workers. Orders from overseas were also drying up.

Remarkably, given that China had amassed such a huge amount of internal bad debt, this did not cause a worse crisis with regards to the wider world. The Renminbi was a reserve currency but defaulting on loans within China did not directly compare to the failing loans from its Road and Belt Initiative which saw country after country defaulting in the face of the depression. The Renminbi was hit hard, but so was every other major currency.

For the politburo, internal disorder was the biggest worry. For millennia, the greatest threat to China has always been from within. The sheer size of its territory and population made it vulnerable, and its greatest fear was always revolution from within rather than invasion from outside. An invader would get bogged down by the scale of the task, just as the politburo feared being overwhelmed.

Under pressure cooker circumstances a one-party state would want to externalise the problem and China’s military were placed on a war footing. The borders were closed. Information grew scarce as the internet was shut down and censorship was imposed. The US president called the Chinese leader. A week went by and nothing happened. The US 6th Fleet moved into the Indian Ocean. Taiwan stood at alert for a month. Nothing happened. By the beginning of March tensions were beginning to dissipate as China focused on the internal discord. The depression lasted longer in the cities and towns than the countryside. Among the big economies, China suffered the greatest fall but when the time came its economy rebounded as it always did, but the scars of the experience informed the leadership of a more cautious approach going forward.