They Were Once Destined to Overtake the US Economy Forever

They Were Once Destined to Overtake the US Economy Forever

Oh Well, Maybe Centralized Autocracies Just Cannot Get There

After consolidating his power, eliminating term limits and extending amplified repressive measures against all of China, especially the Uighur region in Western China, and by ignoring the 1984 handover treaty with the UK (continuing the same of governance that that Hong Kong had prior to the actual handover in 1997 under 2047) imposing that repression onto that island city, President Xi Jinping pictured himself as the new Mao Zedong. Xi was set to redefine China under his brutal centralized control. The “state is the power” mantra led to Xi’s efforts to contain, if not crush, the decades of billionaire wealth-related arrogance and power based on capitalism. CEOs and major holders of wealth were arrested, often much of their wealth confiscated, and all were required to pledge absolute fealty to Xi and the Communist Party. The state (read: Xi) was the only power. The Chinese growth engine began to slow.

Xi illustrated his power by imposing an economy destroying “zero tolerance” policy against COVID outbreaks, even as the pandemic had subsided. Chinese productivity plummeted as factories closed. His commitment to the Peoples Liberation Army (the entire Chinese military which is part of the Communist Party and not the government itself) was reflected in the greatest military build up on earth, quickly eclipsing the US Navy and Army at least in size, while building an ultra-modern air force. His expanding the land mass of one of the Spratley Islands gave him a military base from which to extend PRC domination over regional seas. As massively overbuilt residential housing resulted in huge failures which rippled into the banking sector that funded this egregious effort was tanking access to capital, growth and bad economy ripples became waves. Unemployment, especially among younger, and often well-educated workers, soared.

All the saber-rattling, threats to invade Taiwan, China’s confrontational tactic with regional nations as it attempts to control neighboring waterways and undersea exploitation rights, its willingness to use its naval and air power in a war of risky brinksmanship as it attempts to assert control of what the rest of the world considers international waters and its willingness to use heavy debt loads imposed on regional powers under China’s Belt and Road initiative – intended to create regional commercial linkage infrastructure with China at the center – were part of the grand plan… but became the grand distraction to become a national rallying point to bring the Chinese people together under Xi’s “magnificent” leadership. China’s economy was actually unraveling under the litany of Xi’s attempt to rework his centralized control mode. To make matters worse, the birthrate in China dropped like a stone, well below replacement value. There were fewer younger workers (especially employed younger workers) to care for an aging and retiring population.

So, with double whammy of massive youth unemployment and an aging population, “China is aging so quickly that over the next quarter-century, 520 million people, or nearly 40 percent of its current population, will be older than 60. And over the next decade the public pension will run out of money, according to the Chinese Academy of Social Sciences, a government research institution… ‘Because of the aging population, people are skeptical about their future pensions,’ said Tao Wang, the chief China economist at UBS. ‘They worry that in the future the payout would be less.’… China is aging so quickly that over the next quarter-century, 520 million people, or nearly 40 percent of its current population, will be older than 60. And over the next decade the public pension will run out of money, according to the Chinese Academy of Social Sciences, a government research institution… Citing a rapidly aging society, difficult job market and uncertainty about the future, some young people are rejecting the idea of saving for old age.” Alexandra Stevenson and Siyi Zhao, writing for the March 5th New York Times.

Prices for Chinese exports are falling fast as Xi attempts to reignite his failing economic plan. In recent travels to China, US Treasury Secretary Janet Yellen told Chinese officials to stop dumping cheap goods into the US marketplace, that it’s time to transform the PRC economy for a modern world where it own people are prioritized. Yellin’s message includes telling the PRC “to stop relying on exports to prop up their underperforming economy and instead boost their own consumer market. ‘We don’t want to be overly dependent, and they want to dominate the market,’ she said in an interview. ‘We’re not going to let that happen.’” Andrew Duehren for the April 3rd Wall Street Journal. China may pass the US economy for a very short while, but then…

Xi’s grand plan is flawed at so many levels. As the April 4th The Economist tells us: “The scope of this plan is breathtaking. We estimate annual investment in ‘new productive forces’ has reached $1.6trn—a fifth of all investment and double what it was five years ago in nominal terms. This is equivalent to 43% of all business investment in America in 2023. Factory capacity in some industries could rise by over 75% by 2030. Some of this will be made by world-class firms keen to create value, but much will be prompted by subsidies and implicit or explicit state direction. Foreign companies are welcome, even though many have been burned in China before. Mr Xi’s ultimate aim is to invert the balance of power in the global economy. Not only will China escape dependence on Western technology, but it will control much of the key intellectual property in new industries and charge rents accordingly. Multinationals will come to China to learn, not teach.

“However, Mr Xi’s plan is fundamentally misguided. One flaw is that it neglects consumers. Although their spending dwarfs property and the new productive forces, it accounts for just 37% of GDP, much lower than global norms. To restore confidence amid the property slump and thereby boost consumer spending requires stimulus. To induce consumers to save less requires better social security and health care, and reforms that open up public services to all urban migrants. Mr Xi’s reluctance to embrace this reflects his austere mindset. He detests the idea of bailing out speculative property firms or giving handouts to citizens. Young people should be less pampered and willing to ‘eat bitterness,’ he said last year.

“Another flaw is that weak domestic demand means some new production will have to be exported. The world has, regrettably, moved on from the free-trading 2000s—partly because of China’s own mercantilism. America will surely block advanced imports from China, or those made by Chinese firms elsewhere. Europe is in a panic about fleets of Chinese vehicles wiping out its carmakers. Chinese officials say they can redirect exports to the global south. But if emerging countries’ industrial development is undermined by a new ‘China shock,’ they, too, will grow wary. China accounts for 31% of global manufacturing. In a protectionist age, how much higher can that figure go?

“The last flaw is Mr Xi’s unrealistic view of entrepreneurs, the dynamos of the past 30 years. Investment in politically favoured industries is soaring, but the underlying mechanism of capitalist risk-taking has been damaged. Many bosses complain of Mr Xi’s unpredictable rule-making and fear purges or even arrest. Relative stockmarket valuations are at a 25-year low; foreign firms are wary; there are signs of capital flight and tycoons emigrating. Unless entrepreneurs are unshackled, innovation will suffer and resources will be wasted.

“China could become like Japan in the 1990s, trapped by deflation and a property crash. Worse, its lopsided growth model could wreck international trade. If so, that could ratchet geopolitical tensions even higher. America and its allies should not cheer that scenario. If China was stagnating and discontented, it could be even more bellicose than if it were thriving.” Indeed, that need to appear tough as a distraction for failure, is a threat to world peace in a huge way.

I’m Peter Dekom, and to allow irrational and xenophobic economic threats, such as the tariffs on Chinese goods promised in Trump’s campaign rhetoric, is very much like waving a red flag in front of an enraged bull, a bull with an outsized military and ultra-modern weapons.