Ukraine’s counter-offensive has failed for now – the West needs a new plan

 Sat, November 11, 2023 at 10:00 PM PST·

It’s mud season again in Ukraine, a phenomenon with such significance there that it has a special name: “bezdorizhzhia”, the season of bad roads. The Russians say “rasputitsa”. It’s most severe in the spring, when melting winter ice makes the earth muddy, but it generally happens with the autumn rains too.

Bezdorizhzhia has a paralysing effect on armies, especially armies on the attack. Even tanks, which are specifically designed for off-road mobility and exert much less pressure on the ground than cars or trucks do (the enormous weight of the tank is spread over a much greater area by the tank’s tracks), frequently can’t move off paved roads during mud season.

They often can’t move at all, as paved roads laid across mud country may break up if you drive heavy vehicles on them during bezdorizhzhia.

Most soldiers and most of an army’s supplies move in wheeled vehicles, rather than tracked vehicles such as tanks. Almost all wheeled vehicles are strictly road-bound in mud season and often the rest of the time too. A marching soldier also can’t cross the mud with any ease.

Attacking during mud season, then, is a terrible idea.

The Russian army, reinforcing the impression of incompetence it has given ever since the invasion, is of course mounting a huge attack in the Avdiivka area right now.

Reportedly a third assault wave of 40,000 men is about to be thrown in. Ten days of rain are forecast, with temperatures remaining well above freezing. British military intelligence has already suggested that Russian losses in Avdiivka will be the worst in any operation this year, and that’s saying something.

Ukrainian President Volodymyr Zelensky, under intense international pressure, has sought to give the impression that his army’s counter-offensive has not come to a halt as was strongly suggested by his commander-in-chief, General Valery Zaluzhny, last week. But despite Zelensky’s upbeat tone, Zaluzhny will certainly not be attacking for the next few weeks unless the weather is unusual: it would be simply throwing his men away.

Bezdorizhzhia doesn’t last into the winter: as it gets cold the rain gives way to snow and the ground becomes firm again. But winter brings its own problems. Again, it favours the defender over the attacker, especially in eastern Europe. “General Winter” was famously always the deadliest Russian commander that French and German invaders had to face.

Zaluzhny can’t attack seriously through the winter, it’s that simple. The counter-offensive has halted.

Far from a Blitzkrieg

All across the Western world this is being treated as some kind of failure by the Ukrainians. It’s unfortunate that many Western commentators, often former military officers, have previously given it as their opinion that Western tanks, used correctly, would enable a brilliant Blitzkrieg-style breakthrough and end the war in a matter of weeks.

A Blitzkrieg-style breakthrough hasn't quite materialised in Ukraine - Efrem Lukatsky/The Associated Press

They argued that Russia’s huge, well-equipped tank forces failed in the initial invasion because the Russians were doing it all wrong: they didn’t know how to coordinate their tanks, infantry and artillery in “combined arms” warfare the way Western soldiers can.

Western tanks have been promised to Ukraine: the German Leopard, the US Abrams and British Challengers. But the actual delivery took a long time. Just 87 Leopards and 14 Challengers had reached Ukraine as of August and precisely zero Abrams. Denmark and the Netherlands’ contributions won’t arrive until next year.

Even so, a hundred tanks is a lot of tanks: it’s enough for an armoured brigade. The Ukrainians also had lots of decent Soviet-pattern ones. They had managed to pull a lot of troops out of the line to be rested, re-equipped and trained – often by Western instructors from the same armies that produced the confident ex-military commentators. They had the division-sized armoured force that Western officers had said could win the war.

Yet the mighty Ukrainian armoured spearhead has advanced just 10 miles. Far from a Blitzkrieg, this has been more like erosion than lightning.

This is uncomfortable for the Western military commentators. One of two things must be the case: either they were wrong and tanks, even with Western training and tactics, are no longer a decisive weapon; or the Ukrainians, despite being trained by Western armies, must be doing something wrong.

Nobody likes admitting that they might be wrong, so Western military and ex-military opinion (not usually expressed in public, but nonetheless fairly universal and stated in writing) is that the Ukrainians have been doing it wrong and this is the real reason they haven’t defeated the Russians.

The suggestion is that if Western officers had been given an armoured division they would have done much better with it.

Even if one is an armoured warfare true believer, it’s still hard to picture a Western general really doing much better than Zaluzhny and his colleagues. In order to carry out a classic Blitzkrieg operation, after all, one must first get past the enemy’s front lines. This is extremely difficult to do if they are heavily manned, heavily fortified and protected by deep minefields and lots of heavy weapons.

Heinz Guderian, the German general generally credited with carrying out the first Blitzkrieg in the assault on France in 1940, was up against the heavily fortified Maginot Line. He solved his problem by simply going around it through Luxembourg and Belgium. It’s not usually possible for a defender to have strong fortifications everywhere.

Russia today certainly doesn’t have strong fortifications everywhere. The Russia-Ukraine border all the way from the battle front to Belarus is only lightly protected.

However, Ukraine can mount only minor, semi-deniable operations on Russian soil and cannot use any Western equipment in them, because that has been a condition of Western support.

Even the battle front itself from the border to Donetsk does not have to be very strongly held by the Russians, as Ukrainians breaking through that part of the lines would have the Russian border in front of them, where they would have to stop and the Russians wouldn’t. Any Ukrainian attack there would probably be a feint.

Then, from Zaporizhzhia to Crimea, the front line is along the Dnipro river, a formidable obstacle.

That just leaves a hundred miles of front, from Zaporizhzhia to Donetsk, where the Ukrainians are not blocked by the river and can drive for the Azov Sea. If they could get there they would have cut the Russian army in two, leaving the Crimean half totally dependent on the Kerch bridges for supply – bridges that would then be within range of some Ukrainian weapons. The war would be all but won.

But knowing where the Ukrainian attack has to come means that the Russians can build their Maginot Line – actually called the Surovikin Line – and the Ukrainians have to attack straight into it. Even Heinz Guderian might not have made much progress in this kind of situation.

Ukraine is hampered by the West's refusal to let its weapons breach Russian territory - Libkos/The Associated Press

But they can’t do any of these things because we won’t let them.They could mount a major attack across the almost undefended eastern border, or go around the eastern end of the battle front Guderian-style and roll the Russians up.

Both these options would force the Russians to pull troops and guns and construction effort out of the Surovikin Line. The Ukrainians could mount their real assault somewhere between Donetsk and Russia, ending their drive to the Azov on Russia’s coast. But they can’t do any of these things because we won’t let them.

First we forbid the Ukrainians from operating on Russian territory (or anyway, using our weapons to do so), which forces them to attack along a very limited front. Second, just to make sure they really have no chance of success, we dithered for months before agreeing to supply tanks and then took more months to actually send them, just to make sure that the Russians had lots of time to build the Surovikin Line.

Bluntly, there has been no Ukrainian military failure here. We in the West have forced them to fight with their hands tied behind their backs. The fact that they have made any progress at all is impressive.

Still, it remains a fact that the offensive is stopped for the winter. And it’s also pretty clear that if nothing changes, next year will be a lot like this year: grinding, attritional warfare.

“There will be no deep and beautiful breakthrough,” General Zaluzhny admitted last week. “We have reached the level of technology that puts us into a stalemate.”

Putin’s diminishing power

The prospect of stalemate, bizarrely, is seen by some in the West as a reason to reduce or cut off military support.

The thinking seems to be: well, we’ve spent a lot of money and given you lots of equipment with which our military men say they could have defeated the Russians and you’ve totally failed to defeat them, so we’re not going to give you any more. We’ll just let you run out of ammunition and die, and allow the same criminals who raped and murdered and tortured at Bucha and elsewhere, the same regime that steals children en masse and rounds people up for disappearance into the gulags, to take your country from you.

And we’ll just hope that we’re not next: that Russia won’t rest and rearm and then move in on somewhere else.

However, cutting support doesn’t make sense even if you don’t care at all about Ukraine. Even if we care only about ourselves and our own safety and want that safety at the lowest possible cost, we should keep sending aid.

As a few of the more perceptive commentators have pointed out, spending money on military aid for Ukraine is the most cost-effective defence spending anyone in Nato has ever done.

As long as he faces opposition in Ukraine, Putin’s threat to anyone else is shrinking - GAVRIIL GRIGOROV/AFP

The Ukrainians have destroyed the Russian army as it existed in 2022: its tough, volunteer “kontraktniki” contract soldiers are gone, as are all the better classes of conscripts and all of Russia’s best tanks, armoured vehicles and artillery pieces.

Putin is reduced to sending the dregs of his jails to war in ancient vehicles rescued from the scrapheap. Russian air and sea power, too, have been badly mauled – or else exposed as missing or ineffectual, in not a few cases. Russia’s entire ability to make war is tied up: even basic defence capabilities in places other than Ukraine have been degraded.

As long as the Ukrainians are fighting, Vladimir Putin’s threat to anyone else is hugely diminished. Westerners are spending small percentages of our normal defence budgets on Ukraine assistance in order to be more or less entirely safe from Russia. It would be madness to stop doing so, no matter how long the stalemate might last. As long as the Ukrainians are willing to fight, we should back them.

Sliding into a stalemate

Even still, a stalemate is undesirable. Ukraine will run out of men before Russia does and the more people of working age it loses, the harder it will be to rebuild its society and economy after the war.

The risk is there that large numbers of refugees taken in across Europe may not want to return home and this problem worsens with every Ukrainian killed or maimed and every Russian bomb, missile or shell fired. We need Ukraine back as a strong ally and the breadbasket of Europe as it was, not as a shattered, depopulated wasteland.

Given that the stalemate is our fault, we Westerners should end it. This is the more so as it would involve no difficult or dangerous action by us.

The clue is in General Zaluzhny’s remark: Ukraine has reached a level of technology that puts it in a stalemate. We have sent tanks, artillery, and armoured vehicles. We have sent missiles of certain types, but only Britain and France have dared to send long-range precision strike missiles – and we only had the Storm Shadow / SCALP to send.

The Storm Shadow / SCALP (“Système de Croisière Autonome à Longue Portée”) is a somewhat modified version of a French 1980s-vintage runway-buster weapon called APACHE. We in Britain like to claim it was jointly developed with France, but it is really just an APACHE with a British bunker-busting warhead that doesn’t work terribly well (as colleagues of mine in the bomb-disposal world discovered during the Iraq invasion).

As one would expect with such an old weapon, it’s not all that effective. In particular, being a subsonic cruise weapon – in other words, a small robotic jet aeroplane – it is relatively easy to detect and shoot down. Its makers nowadays like to claim that it has some kind of “stealth” attributes but this appears to be no more than marketing fluff.

The Ukrainians have managed to make Storm Shadow strikes on the Russian naval base at Sevastopol in Crimea, but they had to carry out various special-forces raids and other attacks beforehand in order to take down Russian air defences so that the missiles could fly in.

They have not managed to put the Crimean airbase at Saky out of commission and the Storm Shadow is simply not delivering the effect it theoretically should: that of putting all Russian-occupied Ukraine under Zelensky’s guns.

Despite the fact that the Kerch bridges ought to be well within the Storm Shadow’s reach, they are still standing – allowing supplies and munitions to flow into Crimea and the “land bridge” of Russian-held territory south of the Surovikin Line. It’s generally thought that the Storm Shadow’s British bunker-buster warhead, backronymed to be dubbed BROACH (“Bomb, Royal Ordnance, Augmented Charge”), can’t do bridges.

In any event, by this point we can say that Storm Shadow isn’t going to break the stalemate for Ukraine. Nor is the obsolete, short-ranged M39 version of the US Army Tactical Missile System (ATACMS), which Joe Biden has grudgingly and belatedly sent.

This is a supersonic ballistic missile, which is much harder to shoot down. But the M39 cannot reach Saky, Sevastopol or Kerch and its cluster warhead cannot do bridges or hardened targets.

Breaking the deadlock

What the Ukrainians need is one of the proper, full fat versions of ATACMS that followed the original M39: one with a unitary warhead rather than cluster submunitions, meaning that it can take out concrete structures.

Joe Biden is afraid to send real ATACMS because he thinks the Ukrainians would use it to take out the Kerch bridges, once and for all. He’s afraid that this might lead Putin to nuclear escalation. Olaf Scholz is refusing to send Germany’s Taurus missile – much like Storm Shadow, but with a better warhead that can do bridges – for the same reason.

Appeasement is in the air. Biden, Scholz and their school of thought do not want to give the appearance of supplying a war-changing weapon because they are afraid it would make Vladimir Putin angry.

The arrival of American missiles helped the Ukrainians drive back Russian forces during the 2022 counter-offensive - Anadolu Agency

But this timid attitude isn’t terribly logical. War-changing weapons have been sent before.

The counter-offensive of 2022, in which the Russians were driven back across the southern Dnipro river, was a huge success because of the arrival of another American missile, the Guided Multiple Launch Rocket System (GMLRS), mostly fired from the Himars vehicle. This can make precision strikes to ranges of more than 70km, much further than anything the Ukrainians had before. The Russians had not realised that the Ukrainians (or friends of theirs) had a way to locate all their field headquarters.

Multiple headquarters and other important targets like ammo dumps were duly taken out by volleys of GMLRS. The Russian army west of the Dnipro fell into disarray and the Ukrainians pushed it back across the river. A US-supplied weapon had changed the war.

Similarly, it was argued that sending Western tanks would provoke Putin. It took Britain’s offer of Challengers to show Biden and Scholz that sending tanks was safe.

Again, it was widely thought that supplying Storm Shadow missiles would lead to the Kerch bridges falling and Russian headquarters across the theatre being pummelled as the weapon’s limitations were not widely known. Yet the sending of Storm Shadow did not provoke Putin to anything more than bluster.

We should stop listening to the argument that the Ukrainians are fighting wrongly. Yes, Western tank armies have beaten Soviet-equipped ones easily in Iraq and Kuwait but this was not because they had Western tanks and Western officers: they won because they had total dominance of the air and thus could use precision strike weapons anywhere in theatre.

We should give the same capability to Ukraine, firstly in the form of proper full-fat ATACMS and then by making sure that the coming F-16 fighter jets are equipped with everything up to and including the Joint Air-to-Surface Standoff Munition (JASSM), which is everything that Storm Shadow is supposed to be and more.

It’s time to cease taking counsel of our fears and end the stalemate in Ukraine, by taking steps no more aggressive than those we have already taken.

The West needs to get this war wrapped up, so that we can look elsewhere.

Why China’s economy won’t be fixed

 

An increasingly autocratic government is making bad decisions

Whatever has gone wrong? After China rejoined the world economy in 1978, it became the most spectacular growth story in history. Farm reform, industrialisation and rising incomes lifted nearly 800m people out of extreme poverty. Having produced just a tenth as much as America in 1980, China’s economy is now about three-quarters the size. Yet instead of roaring back after the government abandoned its “zero-covid” policy at the end of 2022, it is lurching from one ditch to the next.

The economy grew at an annualised rate of just 3.2% in the second quarter, a disappointment that looks even worse given that, by one prominent estimate, America’s may be growing at almost 6%. House prices have fallen and property developers, who tend to sell houses before they are built, have hit the wall, scaring off buyers. Consumer spending, business investment and exports have all fallen short. And whereas much of the world battles inflation that is too high, China is suffering from the opposite problem: consumer prices fell in the year to July. Some analysts warn that China may enter a deflationary trap like Japan’s in the 1990s .

Yet in some ways Japanification is too mild a diagnosis of China’s ills. A chronic shortfall in growth would be worse in China because its people are poorer. Japan’s living standards were about 60% of America’s by 1990; China’s today are less than 20%. And, unlike Japan, China is also suffering from something more profound than weak demand and heavy debt. Many of its challenges stem from broader failures of its economic policymaking—which are getting worse as President Xi Jinping centralises power.

A decade or so ago China’s technocrats were seen almost as savants. First they presided over an economic marvel. Then China was the only big economy to respond to the global financial crisis of 2007-09 with sufficient stimulatory force—some commentators went as far as to say that China had saved the world economy. In the 2010s, every time the economy wobbled, officials defied predictions of calamity by cheapening credit, building infrastructure or stimulating the property market.

During each episode, however, public and private debts mounted. So did doubts about the sustainability of the housing boom and whether new infrastructure was really needed. Today policymakers are in a bind. Wisely, they do not want more white elephants or to reflate the property bubble. Nor can they do enough of the more desirable kinds of stimulus, such as pension spending and handouts to poor households to boost consumption, because Mr Xi has disavowed “welfarism” and the government seeks an official deficit of only 3% of gdp.

As a result, the response to the slowdown has been lacklustre. Policymakers are not even willing to cut interest rates much. On August 21st they disappointed investors with an underwhelming cut of 0.1 percentage points in the one-year lending rate.

This feeble response to tumbling growth and inflation is the latest in a series of policy errors. China’s foreign-policy swagger and its mercantilist industrial policy have aggravated an economic conflict with America. At home it has failed to deal adequately with incentives to speculate on housing and a system in which developers have such huge obligations that they are systemically important. Starting in 2020 regulators tanked markets by cracking down on successful consumer-technology firms that were deemed too unruly and monopolistic. During the pandemic, officials bought time with lockdowns but failed to use it to vaccinate enough people for a controlled exit, and then were overwhelmed by the highly contagious Omicron variant.

Why does the government keep making mistakes? One reason is that short-term growth is no longer the priority of the Chinese Communist Party (ccp). The signs are that Mr Xi believes China must prepare for sustained economic and, potentially, military conflict with America. Today, therefore, he emphasises China’s pursuit of national greatness, security and resilience. He is willing to make material sacrifices to achieve those goals, and to the extent he wants growth, it must be “high quality”.

Yet even by Mr Xi’s criteria, the ccp’s decisions are flawed. The collapse of the zero-covid policy undermined Mr Xi’s prestige. The attack on tech firms has scared off entrepreneurs. Should China fall into persistent deflation because the authorities refuse to boost consumption, debts will rise in real value and weigh more heavily on the economy. Above all, unless the ccp continues to raise living standards, it will weaken its grip on power and limit its ability to match America.

Mounting policy failures therefore look less like a new, self-sacrificing focus on national security, than plain bad decision-making. They have coincided with Mr Xi’s centralisation of power and his replacement of technocrats with loyalists in top jobs. China used to tolerate debate about its economy, but today it cajoles analysts into fake optimism. Recently it has stopped publishing unflattering data on youth unemployment and consumer confidence. The top ranks of government still contain plenty of talent, but it is naive to expect a bureaucracy to produce rational analysis or inventive ideas when the message from the top is that loyalty matters above all. Instead, decisions are increasingly governed by an ideology that fuses a left-wing suspicion of rich entrepreneurs with a right-wing reluctance to hand money to the idle poor.

The fact that China’s problems start at the top means they will persist. They may even worsen, as clumsy policymakers confront the economy’s mounting challenges. The population is ageing rapidly. America is increasingly hostile, and is trying to choke the parts of China’s economy, like chipmaking, that it sees as strategically significant. The more China catches up with America, the harder the gap will be to close further, because centralised economies are better at emulation than at innovation.

Liberals’ predictions about China have often betrayed wishful thinking. In the 2000s Western leaders mistakenly believed that trade, markets and growth would boost democracy and individual liberty. But China is now testing the reverse relationship: whether more autocracy damages the economy. The evidence is mounting that it does—and that after four decades of fast growth China is entering a period of disappointment. 

China’s economy is way more screwed than anyone thought

 Linette Lopez

Wed, June 14, 2023 at 11:00 AM PDT

Entering 2023, the relentless drumbeat of Wall Street consensus was pounding out one consistent rhythm: China is back. After years of lockdowns and suppressed output, economists and investors cheered the end of Beijing's zero-COVID policy and the economic boom that was sure to follow. The colossus-in-waiting that is the Chinese consumer was about to roam freely, analysts said. This was great news for the whole world — everyone would benefit from the globe's second-largest economy getting healthy.

But six months into the year, Wall Street's dreams for the country are turning into a nightmare.

Far from an economic explosion, China's recovery from COVID has been weak. Industrial production has disappointed. Trade — both imports and exports — has slowed markedly. There is debt everywhere, especially in property development, which makes up 30% of the economy. Trading partners are upset for a litany of reasons, from human-rights abuses to concerns about the government's increasing role in the country's commerce. The private sector — which was expected to drive most of China's bounceback — is running scared.

The fizzled reopening isn't just a short-term disappointment, it's a sign that the old China is gone. The mechanisms that drove the "Chinese miracle," a triple-decade transformation that made the country an international force, have broken down. The bubble in China's property market finally popped. And because of real estate's central role in the economy, the painful process of absorbing those losses will continue to suck money away from Chinese households, banks, and China's massive web of local governments. China's working-age population is getting old, and there are fewer young people to replace them than at any time in the country's modern history. Exports remain key to the economy, but countries that once championed free trade have turned from globalism to protectionism.

As opposed to slumps in the past, it also does not appear that Beijing is going to step in and reverse this downward trend. Chinese President Xi Jinping has instead been preparing his people for an era of lower growth, making it clear that's what the economy can achieve in its current state, and it's also the structure he likes.

And while Wall Street is trying to put on a good face, banks like JPMorgan are starting to write notes to clients asking if it's even worth investing there. This is one of those questions where if you have to ask, that in and of itself is a problem.

Other big-time investors are full-on ditching the once-promising country. The legendary hedge-fund manager Stanley Druckenmiller, a longtime believer in China's growth who described the entrepreneurial energy in the country before COVID as "New York on crack," painted a grim picture of the future for a crowd of attendees at the Bloomberg Invest Conference in June.

"Looking out 10 or 15 years, I just don't see it. Unless there's a change in power at the top, I think that's going to be a very undynamic economy," he said. "We're expecting a sugar high and some kind of robust growth there for the next six to nine months, but looking out, I do not look at them as a big challenge to the US in terms of economic power and growth."

Instead of the exuberant recovery that Wall Street was expecting, we are witnessing the last gasps of the Chinese economic miracle. And almost no one was ready.

Don't call it a comeback

Analysts thought that 2023 would provide us with a glorious rally in the Chinese stock market. Morgan Stanley and Goldman Sachs said it was coming. Bank of America's forecast argued that while recessions would grip the rest of the world, China would be a "notable exception" and that country's reopening would be a "reprieve." Expectations for China's growth hit a 17-year high.

It was supposed to be a great time, but it's barely been good. In April, China's economic data came in weak largely across the board. A survey of manufacturing executives by China's National Bureau of Statistics found that activity in the country unexpectedly contracted. Industrial production, another measure of how much the country is making, grew by 5.9% from the month before — solid but well shy of the 10.6% increase that analysts were expecting. And the property market, which is a key part of government revenue, also stalled out, with land sales falling 22% in the first quarter of 2023. In a note to clients aptly called "That's It?," the Societe Generale economist Wei Yao calculated that retail-sales growth compared to the month before was basically zero.

Analysts think May might bring some reprieve. Car sales seemed to be recovering, which should cheer Beijing. And analysts at China Beige Book, a service that surveys Chinese businesses, predict that the retail and service sectors will likely surprise to the upside. "CBB's revenue and profit margin indices improved for a third-consecutive month in May. They also marked the strongest single-month readings for each indicator since the initial Covid downturn of early 2020," they wrote in a recent report. But that doesn't mean the boom is just arriving a little late.

"The Chinese economy may be reopening, but it's not going to be reactivating," Leland Miller, the founder of China Beige Book, told me. This recovery is a "head fake," he said.

The problem is that while consumers may be picking up, the biggest drivers of the Chinese economy — property and exports — are going to stay dormant. Consumer consumption makes up about 37% of the Chinese economy (in the US that figure is about 70%). So a return to normal activity from consumers is helpful, but it's not enough to carry the economy. China was never going to be able to deliver on the miracle reopening that Wall Street wanted without getting the wheels of its massive export and property machines moving. Beijing has tried to shift the country toward a consumption model, like the US, but exports still make up 20% of China's economy. In May, outbound shipments declined by 7.5%, the first decrease this year. The slump is largely due to a general global economic slowdown, but it's also due in part to unfavorable geopolitical dynamics that seem to worsen by the day. Imports, an important indicator of China's domestic health, also slowed. Beijing put the entire economy in a deep freeze during COVID, but that doesn't mean reopening will heat things up. China's economic return will be lukewarm at best.

"Things will improve in 2023, and then you'll have the same structural issues slow things down in 2024, 2025," Miller said. "Then people will stop paying attention to the cyclical and start paying attention to the structural problems, which are a feature of the economy for years to come."

Not beast mode, blob mode

China is facing a long, painful road ahead, and policymakers in the Chinese Communist Party seem uninterested in market-oriented solutions to ease their journey. "The root causes of the disappointing recovery look increasingly structural — a deleveraging mindset and a more permanent loss of animal spirits," Societe Generale's Yao warned in her recent note.

At the core of China's structural problem is debt. For years, the country's growth came from infrastructure and property development, a lot of bad investments were (and still are) made because there was no concern for whether or not there was real demand for all of it. There was not. Now that bill is coming due. Beijing finally got real about the debt it helped fuel in the property market and cut off its supply of cheap credit in order to cool it down. But the ramifications of this change go beyond an implosion in one sector of the economy. We're watching sacred cows being slaughtered here.

For years, China's local governments funded themselves largely by selling land to property companies. In the US, we fund local governments through property taxes. China doesn't have that, and smaller, poorer provinces are already begging for help because the way they used to raise funds is no longer available. Imagine US politicians trying to fix a problem like this. Oh, wait, no. Don't. I want you to have a nice day.

The breakdown in local financing has a real and immediate impact on Chinese society. As the credit flow slowly got choked off, property companies started selling apartments before they were built, funding themselves on the backs of Chinese consumers. But as the market has gone bust, some developers aren't making good on their promises to the people they sold to, leaving households up the creek. Property was supposed to be a safe investment for China's savers. Over 70% of China's wealth is tied up in real estate. It was the investment that secured a family's place in the middle class. And the problem isn't just for older people nearing their twilight years — the property bust is hurting the prospects for the next generation, too. Some starved local governments are raising college tuition fees as high as 54% at a time when youth unemployment is over 20% and a record number of students are trying to get a higher education.

Working all of this debt and destruction through the economy equals deflation and slow growth. "You have to set policy for the weakest part of the system," Logan Wright, a partner at Rhodium Group told me. "That means interest rates stay low, a weaker currency, and outflows." Slower growth isn't just a shift, it's a historic end to an era.

Miracles only last so long

In this environment, trade is critical to China. Now would be an ideal time to ramp up exports, to bring in capital from the outside world. But as I've argued many times, Xi is a closer, not an opener. Geopolitical tensions have the US — China's biggest trading partner — "de-risking" from China (not decoupling, the powers that be have decided that word is too toxic). Many US corporations are looking to move operations elsewhere, either by reshoring them to the States or by "friendshoring" them to more ideologically aligned countries. Last year, China made up 50.7% of US imports from Asia; that's down from over 70% in 2013, according to the management-consulting firm Kearney.

For the rest of the world, moving away from China is inflationary — it will take time and money to set up factories closer to home. The complexities of dealing with a sputtering Chinese engine will be a problem for many countries that have become tangled in Beijing's economic web. The end of the miracle will be a pain for many investors and markets — it will make things less stable, and the world will have to find new sources of growth.

In a world of free trade and trust, China's problems would probably be easier to solve. But that's not where we are. China's economic model was built on a world that embraced globalization. We are in a world of protectionism, cautious investment, and regional alliances. As investors move their attention from short-term COVID improvements, they'll start seeing that long term, the Chinese economy has completed its transmutation from strong, rapid growth to a long, slow grind. Like many see changes in markets, this may seem like it's happening slowly, but one day it will feel like it's happening all at once.