Two Indicators shaking China's economy : Planet Money Xi Jinping recently secured his third term as China's president – so we're looking at two shocks to the world's second-largest economy. First: How China's housing boom turned into a real estate crisis. Second: How the recent U.S. ban on selling advanced semiconductor chips to China could affect China's technology industry.

Two Indicators shaking China's economy

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Lee Xin (ph) bought his apartment nine years ago. He paid for it in full with a mortgage.

LEE XIN: (Through interpreter) When I bought this house, I looked with pride at what I'd accomplished.

WONG: But his apartment is still only half finished, so he's paying his mortgage and rent to live somewhere else.


Having your own apartment in China is kind of crucial for young men like Xin, who want to be attractive marriage prospects. You know, like Xin grew up poor in the countryside. He now has a good job at marketing in the big city in Xian, but an apartment can really seal the deal.

WONG: And he did get married. But while they're waiting for the apartment, they've put off having kids. And at the same time, they're watching house prices in China skyrocket.

LEE XIN: (Through interpreter) I'll never have the ability to buy an apartment again. I really can't afford the price today.

WOODS: And Xin's problem may soon become President Xi Jinping's problem. Xi was just reappointed, and China is in a real estate crisis.


WONG: Hello and welcome to PLANET MONEY. I'm Wailin Wong.

WOODS: And I'm Darian Woods. Today on the show, we have two recent episodes of PLANET MONEY's daily podcast, The Indicator. This is all about two changes that are happening at the heart of China's economy.

WONG: First up, the biggest asset class in the world is Chinese property, and it's in trouble. We'll look at a potted history of real estate in China and how this economic bomb is detonating.

WOODS: And after that, a tectonic shift as the U.S. bans advanced semiconductor chips for China. We'll break down why these chips matter, what the bans entail, how we got here and what this means for China, the U.S. and the world.


WOODS: As President Xi Jinping was reappointed last month, there was mixed economic news coming out of China. Third-quarter GDP numbers were finally released, and we had economic output growing at a healthy 3.9% from a year earlier. At the same time, the Chinese stock market took a dive.


PRESIDENT XI JINPING: (Non-English language spoken).

WOODS: And in his speech announcing his reappointment, Xi Jinping spoke of new challenges and tests.

WONG: And I'm guessing top of mind for him is the catastrophic loss of confidence in real estate developers. New sales of homes have plummeted, and developers are going bankrupt. Forty percent of homes bought over the last several years remain incomplete.

WOODS: And to fully understand this mess, you kind of have to go back to the start of the 1990s, when only about a quarter of the population lived in cities. And as the economy opened up from central planning, more people came from rural areas into cities to work in factories. And the housing shortage was massive. Millions of people were moving every year into cities, and each person had on average just over 76 square feet to themselves - so, like, the size of a bed and not really much else. There's a lot of dormitories. It was cramped.

WONG: And so China needed to build, but property developers faced a huge hurdle. Don Weinland is the China business and finance editor for The Economist newspaper.

DON WEINLAND: The idea of a Chinese company going overseas to get funding from capital markets - pretty much nonexistent. And then, yeah, within China, especially for private companies, accessing bank finance or something like that, you know, it was very difficult.

WONG: So in 1994, the Chinese government created a new policy so that private developers could raise the cash needed to build apartment compounds. It set up a system where developers could sell apartments and projects when only a quarter of the construction had been completed.

WOODS: And for those who don't buy houses off the blueprints, that's not usually the case in places like the U.S.

WONG: That's right. And the money that homebuyers paid, usually through a mortgage, would go to an escrow account overseen by the local government to make sure the developer was using most of this for the construction of that project.

WOODS: But in practice, it was quite different. Property developers use this money essentially as loans to grow their business. Like, yeah, they plan to build that apartment sometime in the future. But in the meantime, let's use that cash to buy up a bunch of new land and use it as collateral for borrowing even more. We'll find some new buyers, rinse and repeat.

WONG: Were all the apartment complexes shaped like pyramids?

WOODS: Yeah. You got to get on the top floor.

WONG: (Laughter) I got a great deal for you. It's the penthouse.

WOODS: And amidst all this kind of financial exuberance, one property developer stands out, and that's Evergrande. So right now, it has $300 billion in debt. It is the most indebted company in the world. And so fueled by pre-sales, speculative investors and support of state-owned banks but also genuine demands - like, there was a huge need for housing - property over the last 30 years has been booming.

WEINLAND: What it looked like was 50, 60 cranes on the horizon. Like, if you were in any mid-tier city in the mid-2000s, you know, there were just tons of construction sites all over the place.

WONG: So in one respect, the policy worked. Houses for these people moving into cities were getting built, houses for people like Xin.

WEINLAND: You have kind of this emerging middle class. Owning a property, owning your own home became incredibly important.

WOODS: Chinese property values just grew and grew. It became more common to invest in a second or a third or even a fourth home - well, at least on paper.

WONG: And then you get to the situation now where even though the Chinese economy is two-thirds the size of the American economy, its property sector is worth double that of the U.S. And there's one big reason why this massive growth can't continue forever.

WEINLAND: You know, the population is not going to continue increasing over the next decade. So if developers continue to build at the rate that they are now, you know, there's just simply not going to be enough people to buy those homes.

WOODS: I mean, it's always risky to kind of call bubbles, but it does seem fairly frothy.

WEINLAND: I don't think you'd be taking a huge risk to be calling the Chinese property market a bubble. I mean, people have been calling it that for a decade.

WONG: The Chinese government saw just how inflated property values had become and just how much debt developers had taken on as they expanded and expanded. And it decided to finally act in 2020. It wanted to pop the bubble, but very slowly.

WOODS: Very slowly indeed. And so the government introduced what's known as the three red lines, which are basically just rules restricting the amount of debt that property developers could take on. And so for companies like the giant Chinese developer Evergrande, this meant that it could not finance the construction of some of the projects that it had pre-sold. And as Evergrande failed to pay back its investors, people like Lee Xin got nervous for their own projects. I mean, a nine-year wait is frustrating. But if the home that you paid for does not get built at all, that could be devastating. So across the country, people who had paid for properties that had not been delivered engaged in some civil disobedience.


WOODS: They stopped paying their mortgages.

WEINLAND: It's very surprising to see homebuyers across the country stop paying. Yeah. In China, you know, organizing a protest is incredibly risky, and it's incredibly difficult.

WONG: Lee Xin is still paying his mortgage. He's worried about repercussions.

WOODS: But earlier this year, he and his wife had had enough. They and 300 other homebuyers from the same unfinished apartment block decided to squat, to live in their unfinished apartment. He and his wife are on the 28th floor.

LEE XIN: (Through interpreter) There was no water or electricity, but everyone at the time thought that at least we don't need to pay rent anymore.

WONG: Xin was basically camping in his 28th-story apartment. So, like, they had solar-powered lighting, a camp stove, endless runs downstairs - 28 floors - to fetch bottled water and go to the public toilet 'cause they didn't have that hookup in their apartment.

WOODS: It sounds like a nightmare. After four months, the local government asked them to move out. So they went back to paying the mortgage and rent. But the action did seem to embarrass the local government into getting construction going again. The catch, though, is that the apartment developer and the courts are saying that Xin and the other homebuyers will probably need to pay more money to get the final legal ownership of their unfinished apartments. So far, Xin has refused.

WONG: Don Weinland says that we're not seeing property values in China crashing right now, but this is a slow-rolling nightmare for millions of homebuyers like Xin. Don says China's housing mess is symptomatic of a government that's tolerated and even encouraged wild levels of speculation for too long.

WEINLAND: I mean, really, this is the outcome of a lack of reform and poor reform and pushing off problems well into the future.

WOODS: So I guess Xi Jinping comes to a new term in some pretty inauspicious economic circumstances.

WEINLAND: Yeah. I mean, this is, you know, front and center on the list of things that he has to do to get the economy right.

WONG: I just really want Xin to get his house.

WOODS: Yeah, I mean, that should be No. 1. And I imagine Xi Jinping has a pretty long list as well.

WONG: Yeah, I would not want that to-do list. It makes my own to-do list look very nice by comparison.


WOODS: There are other major shifts happening in China's economy, too, and some are coming from outside. Like, the U.S. banned China from acquiring advanced semiconductor chips. And that puts a giant question mark around a sector which is a top priority for Beijing. That's coming up after the break.


WOODS: Real estate isn't the only big economic story in China right now. There are also these new tensions in the trade relationship with the United States, and that's specifically around technology.

WONG: On Oct. 7th, the U.S. announced sweeping export controls on advanced semiconductor chip technology to China - you know, those chips used in supercomputers and even in some self-driving cars. Greg Allen is a technology and security expert.

GREG ALLEN: This policy overturns 20-plus years of U.S. trade policy and national security policy towards China. It's an incredibly big deal.

WOODS: To appreciate just how big this ban on advanced chips is, just look back at the year 2000. China had been slowly opening up its market since the late 1970s, and it was now a considerable player in manufacturing. The U.S. voted to accept China into the World Trade Organization, which regulates trade.


BILL CLINTON: Good afternoon.

WOODS: Here's President Bill Clinton at the time. He's speaking at the White House Rose Garden.


CLINTON: We will be exporting, however, more than our products. By this agreement, we will also export more of one of our most cherished values - economic freedom.

WONG: Were we all just a lot happier in the '90s and the early 2000s?

WOODS: It's a level of earnestness that I don't know if exists any longer.

WONG: Oh, totally. But you know, this was the mainstream thinking at the time. That's according to Greg Allen. He's the director of the AI Governance Project at the Center for Strategic and International Studies.

ALLEN: The theory was that as long as we're in globally integrated trade networks, we don't need to worry too much about what technologies we transfer to China. We just need to make sure that we maintain our leading position, and we can do that by being open to free markets.

WOODS: But then came 2012, a year where two pivotal moments in world history happened. One was Xi Jinping becoming China's leader. And the other was a little geekier. It happened at an online competition hosted by Stanford and Princeton. It was the ImageNet Large Scale Visual Recognition Challenge.

WONG: The task was to build a computer system - like, some kind of artificial intelligence - that would draw from a massive database of over a million images and figure out what that image was. Like, was this an oven or a bowling ball or a dog? And if it's a dog, what dog breed is it?

WOODS: It's a (ph) English Terrier.

WONG: (Laughter).

WOODS: And a team of computer scientists based in Canada called AlexNet turned up for the competition using a system called machine learning. And they'd taken the system to the next level using graphics processing units - GPUs - the kind of graphics chips you use for gaming.

WONG: Graphics chips are really good at simultaneously running the same calculation many, many times, like identifying aspects of hundreds of thousands of images.

WOODS: Like looking at hundreds of thousands of pictures of ovens.

WONG: Is this an Easy-Bake Oven? So AlexNet's accuracy swept to the floor.

ALLEN: And that is really the modern artificial intelligence revolution. It sort of got started in computer vision, but quickly went on to speech recognition, language translation and just a host of other applications where machine learning does quite, quite better than traditional software.

WOODS: Greg says machine learning is now used everywhere in the military, from guided missiles to analyzing vast quantities of satellite imagery.

ALLEN: So rather than looking, you know, at every single glacier or every single picture of empty ocean with nothing in it, they pre-process all that collected imagery using artificial intelligence. And the artificial intelligence will come up with answers like, this airfield didn't have very many planes in it yesterday, but today there are 20 new aircraft which I think have an 85% chance of being fighter aircraft. I recommend a human analyst to take a closer look at these images.

WONG: And to train the artificial intelligence systems, you need advanced computer chips. And so when advanced computer chips give your military an edge in almost everything where software is used, they become even more prized for security.

WOODS: And that brings us to where the China-U.S. relationship around semiconductor chips has gotten incredibly tense. Now, a lot has happened over the last decade. For instance, the Chinese government has launched cyberattacks on U.S. companies to steal trade secrets. Now, that is not great, obviously, if you're a U.S. chip company like Intel or NVIDIA.

WONG: And Greg highlights a key moment in 2017 when the Chinese government passes its national intelligence law. This law said the Chinese government could compel Chinese citizens to hand over technological know-how in matters of national intelligence.

ALLEN: And so what this means is, any day, if you are, for example, a Chinese citizen who is working for an American company at their overseas in China subsidiary, the Chinese government might pay you a visit someday and say it is now your duty as a citizen of China to steal the technological secrets of your American employer and bring them back and give them to us. And by the way, this is the law. So if you refuse to comply with us, we can jail you for this.

WOODS: And Greg says it became clear that when it comes to dealing with China, separating trade from security concerns was impossible. So the Biden administration has decided that because the U.S. cannot guarantee that its advanced chips will not be used for military purposes in China, they don't get any at all.

ALLEN: It is now a China-wide restriction. This new policy just fundamentally changes what it's like to do technology, research, development and manufacturing in China.

WONG: It also stops China from making its own high-end computer chips because American companies are barred from sending equipment and software to China that's used to design and manufacture these advanced chips. This is an area that the U.S. dominates.

ALLEN: China has climbed very high in the semiconductor industry, but it was built on a foundation of U.S. technology. When the current equipment breaks, there will be no spare parts, and there will be no advice from the American manufacturer on how to make do with what you've got.

WOODS: In fact, dozens of American executives working on advanced chips in China may have to either quit or apply for a special license - which is really uncertain - or give up their ties to the U.S. entirely. Multinational semiconductor companies are already transferring their American staff away from anything to do with China.

WONG: Greg has one major caveat, though. China can still smuggle in parts from other countries. And he says this is a huge task for the agency charged with enforcing the ban. But still, he says, the screws have tightened across large swaths of the Chinese semiconductor industry.

ALLEN: This policy is designed to not only slow that - this is designed to reverse that.

WOODS: I mean, this is a profound point. This is the end of U.S. optimism over the possibility of China as a trading partner in the world where one rival's advances spares the next and we both kind of go into the future together. It's a real shift. It's a loss.

ALLEN: And it's not just a shift for the United States. You know, you've seen actions out of the Chinese government like the crushing of Hong Kong, like the atrocities in Xinjiang. And all of that has sort of led the entire world to reassess the desirability of a strategy based on peace through trade, when it is clear that these authoritarian regimes see the world quite differently, and that what - the effects that we thought we were going to have in pursuing that policy over the past two decades have just not come true.

WONG: Yeah. Russia's invasion of Ukraine does seem to have called that theory into question.

WOODS: It really has. Like, I'm thinking, how will China respond to all this? I mean, it throws us into this uncertain world where political tensions between countries has the potential to come with some enormous economic consequences.


WOODS: These Indicator episodes were produced by Nicky Ouellet and Aowen Cao. They were engineered by Gilly Moon, Josh Newell and Robert Rodriguez. Dylan Sloan checked the facts.

WONG: Viet Le is The Indicator's senior producer, and Kate Concannon edits the show. Jess Jiang is PLANET MONEY and The Indicator's acting executive producer.

I'm Wailin Wong.

WOODS: And I'm Darian Woods. This is NPR. Thanks for listening.

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