China's slow-moving economic disaster
axios.com
axios.com
When you're that big, politically, militarily, economically, you need to be able to "clear your orbit" of other territories that could smash into you. It might be direct military involvement, or aggressive economic intervention (Belt and Road)
Was this where Japan stumbled? They were militarily neutered after WWII and largely subject to US political whims-- did that restrict their ability to prevent Taiwan and Korea from stealing their economic thunder?
which is a question framed from a zero-sum game.
The world isn't zero sum. The idea is that the "stolen" economic opportunities would've been there for the japanese had it not been "stolen" is wrong. It's like saying that a pirated piece of music is a stolen sale.
The fact is, japan's output didn't drop - the new asian tiger economy of south korea and taiwan caught up. The world is richer because of it, even if the japanese didn't get to own a share of that wealth directly, they can benefit indirectly.
I suppose china learnt the wrong lesson from this perspective observing japan. They do wish to prevent anyone else from stealing their thunder, and they are taking action right now for this purpose. And it is this very action that's causing the tension in asian pacific.
Imagine if in an alternative world, the US did not invite china into the WTO, and worked to integrate them into global trade? If the US had held such a belief that the world was zero sum, china would not have had the opportunity to get foreign investment and become the manufacturing powerhouse it currently is today.
And yet china cannot see how folly their current behaviour is, and insist on pursuing a geopolitical agenda that involve expansionism and coercion of their neighbours, rather than tight economic cooperation and integration.
The chipmaking-gear sanctions are both about enforcing a dependency on an independent Taiwan via TSMC, and keeping the PRC from being more militarily and economically self-sufficient.
The ZTE and Huawei bans were less about security and more about cutting off a place where they had effectively undercut the Western competition. There was no hoop they could have jumped through that would have convinced regulators their gear was safe-- the fix was in from day one. We're seeing the same thing with TikTok now.
It's easy to see a message of "we like you when you're making our cereal box toys, but don't get near our high value premium economic development" in those actions.
> The world is richer because of it, even if the japanese didn't get to own a share of that wealth directly
Japan, SK and Taiwan are all export economies, they import energy, build sophisticated products in more or less similar industries, export them and punch way above their weight on the list of world's top exporters. If Hyundai grabs a chunk of Toyota's market around the world, and Samsung replaces Sony, that is a direct loss for the Japanese with no "indirect benefits" in sight.
Not really. Yes, China is starting to experience demographic decline but it will be a long long time before it affects them economically. They could still absorb every North American job and still have people left over. That's just how big China's population is. Demographic decline will eventually bite them but they have a very long runway. China is very different from Japan's case.
As for policies, again, not really. It's more that about 10 years ago most low cost manufacturing shifted out of China because cheaper regions caught up and were able to provide better value. China has been been talking about this trend since before Xi and a big focus has be shifting to a service economy built on internal demand. This is the part where policies come into play. The shift has not gone as well as they hoped. And again, it's not really about Xi messing up Deng's work. The world, and China, is different from Deng's world. Deng's approach would not work in a world where low cost manufacturing has moved overseas. If anything, it's more of an issue that Xi has stuck to closely to Deng's approach and not adapted to the changing world.
no, but the next step, which is to mimick what japan did post lost-decade, is to move into higher value manufacturing, increase automation and increase domestic service industry.
However, the required tech, research cooperation and transfers that would've been needed is going to need deep trust and cooperation between the west and china - that entails giving up the full authoritarian control of the economy. This isn't something the CCP can entertain, unlike japan.
China still has ambitions of becoming a superpower that can dictate terms on the world stage. I think this is the difference between Xi and Deng. Xi cannot move past being second fiddle. And i think this is the real cause for china's downfall (if it were to happen).
If you're a absolute lowest-value-add manufacturer (think cereal box toys), yeah, you could put that anywhere plastic stock could be delivered. But as you start to make more sophisticated products, supply chains get way more relevant. If your cereal box toy acquires a blinking LED, a coin cell battery, and a screw to hold the battery box closed, it becomes compelling to manufacture the main casting in China because all the other parts are already made there and the logistics will be cheaper and more responsive.
This seems like the same play as early Silicon Valley, and Taiwan in the era of early PC clones.
A question on workforce reduction due to decline in birthrate.
In west, we seemed to have solved the problem with immigration. Is it possible China can also adopt the same policies? Essentially bringing in migrant labour class workforce from South East Asian countries with much less per capita income such as Laos, Cambodia, Myanmar etc.
That makes no sense, yields go up with higher supply of bonds (i.e. more borrowing).
> PRC economy is doing fine, it has enough head room to do difficult economic rebalancing and maintain reasonable growth
PRC economy is seeing deflation right now which is typically a death knell for an economy.
China is still a middle-income country. It's trying to avoid the middle income trap. People expect it to grow 7-10% annually, but now it's dropping closer to the growth rates of developed countries - which if sustained, means it won't ever escape the middle income trap. Add on top the demographic challenges and it's a very serious problem for China.
There's good and bad deflation. PRC deflating is largely due to domestic oversupply due to excess inventory due to global demand contraction. More broadly it's reflection of strength PRC industrial/manufacturing. Consumption indicators like car sales and others are fine. It's not great, but it's fine.
Re middle income: PRC is potentially high income this year if not already (IMF April 2023 per capita estimate for PRC was 13,720 vs WB 2023 high income classification @13,205), they'll get there in a few years of moderate growth regardless. If the central bank strengthened rmb by ~1% vs USD they would be high income right away. But they'd rather deal with weakened rmb (5% this year) to hold on to exports.
The incentive for the PRC is to stay statistically middle income for as long as possible due to WTO perks and rhetoric with the global south. People should ask themselves why PRC has managed RMB in the last few years to be just slightly below high income. Or if PRC is overreporting population then they've been high income for years. Note IMF's PRC per capita estimate in 2022 was 12810 vs WB 12720. IMF 2024 prediction range is 13970-14800 vs WB 2024 high income @13,854. We're reaching a point where trying to STAY middle income for PRC is unsustainable. PRC reaching high income is basically a done deal.
Finally, escaping "trap" with respect to the original middle income paper is broader discussion than per capita GDP - it's really about not stalling in industrial development which in result stalls income potential, in which case PRC is basically the 2nd least trapped country (after US) in terms of having complete industrial chains. Essentially everyone except the US is more trapped than the PRC. The issue middle income trap argument vs PRC (or India) is stupid large population can still be stuck in per capita high middle/low high income even if they have escaped the actual "trap" of inability to continue industrializing/developing because you can only put so many bodies in high end sectors, and base effect of large popluation denominator simply drags down per capita indicators even if in aggregate a massive countries comprehensive power is significantly above small (like NL) / medium (like SKR) /even large (like JP) advanced economies.
That's because US interest rates have climbed, depressing the value of existing bonds at low interest rates. Interest rates climbed because of inflation and an overheated economy. China interest rates are dropping, keeping bond yields high, because their economy is stalling. I'm not sure you could paint that as a good thing.
> There's good and bad deflation.
No, deflation is generally viewed as bad because it incentivizing savings and further depressed economic activity.
> PRC is potentially high income this year if not already
I mean sure, high income as in $13,000 per capital GDP, which is 5x smaller than USD GDP per capita. It's certainly not going to be in the league of highly developed countries any time soon.
> The incentive for the PRC is to stay statistically middle income for as long as possible due to WTO perks and rhetoric with the global south.
That's a ridiculous statement. Countries want low growth because of WTO perks? Really? What is the point of WTO perks other than increasing wealth?
> PRC is basically the 2nd least trapped country (after US)
You're talking about a different kind of trap than middle income trap if you're throwing the US into the bucket.
PRC rates are basically steady and has been for past 10 years, vs US treasuries / bond market undergoing recent yield curve drama. The story isn't PRC bonds are spectacular, but PRC bond/banking is steady vs US whose currently not. The broader point being indicators reflect PRC is doing basically fine, it's not collapsing due to exogenous crisis like western MSM tries to paint. It's doing fine because she's proactively managing economy, including rebalancing problematic sectors. There's a fundmental difference between trying to pour out a 100 alarm fire when your house is ablaze due to negligance vs proactively doing controlled burning to prevent unexpected and potentially said catastrophic blaze. The western media presents the former, to build narrative of collapse. Reality is the latter, aka stable unwinding within economic controls, with comfortable headroom to be in ball park of expected growth of 4-5%, aka essentially still top performing among major economies despite, deliberately amputating parts of itself.
>deflation generally
GENERALLY. There's also analysis on deflation being fine, but it depends on type / cause of deflation. Deflation via improved productivity, i.e. PRC industry being able to bring value down in such analysis is not correlated with depressing economic activity. Especially not to the point of contracting.
>It's certainly not going to be in the league of highly developed countries any time soon.
That's literally the technical definition of high income, of course the western narrative bar is going to moved once PRC reaches technical high income, to but not advanced economy income, but that's officially WB high income. Relative to advacned economy high income, I am the first to state will not happen due to denominator effect, PRC has 600M on 1000rmb per month, aka 40% of the population contributes to 5% of GDP, they're going ot drag down per capita indicators until they die. There's reason Xi's China dream aims for modest IIRC 40k PPP by 2050. But the entire muh high income meme is distraction from broader point that geopolitical competition is about comprehensive national power. PRC doesn't need high per capita income when in aggregate she can outperform, i.e. she's closer to being on par with highly developed US in terms of actual capability than any other "advanced economy" who are frankly to small to even be in the race.
>ridiculous
WTO has preferrential rules if you're a developing country, and PRC enjoys exploiting technicalities. This isn't anything new, when IMF first worked with PRC to agree on per capita income, PRC insisted on 50% lower. PRC has every INCENTIVE to look weaker to multinational institutionals for perks. Current GDP / national accounting grossly deflates input of imputed rent, to the point of knocking 6-8% of GDP. And when PRC smoothes GDP, it under reports as much as it over reports. It should not be surprising PRC games stats to her benefit, but as I said, it's a card with limited shelf life that's ending.
>different kind of trap than middle income trap
No, this is quite literally the central thesis of the middle income trap paper. The TRAP is inability to move up value chains, the pain of the TRAP is being stuck in middle income, because no high value sectors = no high wage. PRC has no issue moving up value chains due to massive high skilled human capita pipeline. At PRC scale, some of PRC will have high value, highish income, somem being multilple advanced countries worth of people. That's enough to escape the industrial trap, but not enough to pull everyone to advanced economic standards. I'm throwing US in the bucket because PRC/US is top 2 rank with 3+ being distant, distant competitor. Very few countries have the aggregate talent pool and ability to coordinate said talent to competently dabble in every sector. Hence US and PRC are least trapped in terms of traps that prevent countries from moving up value chain. The caveate I added is middle income trap is a stupid way to assess economic progress for countries with as many people as PRC (again really PRC and India), because they can have low per capita indicators while in aggregate have significantly more national power. Which TBF the OG paper isn't framed in terms of geopolitical competition, but that's really what people are talking about when they dogwhistle PRC is stuck in middle income - that PRC will have the capabilities of a middle income country, when basically no one else has slight chance of being US peer competitor (as acknowledged by US). Hence PRC, by virtue of having reasonably developed core tech in almost every sector is as trapped as US (aka least trapped) if you apply the actual reasoning of middle income trap in a geopolitical context.
Of course it has because economic growth has been steady. Not to mentioned the fixed exchange rate and capital controls. But a "steady" interest rate is hardly the mark of a vibrant economy or that the economy is doing fine.
The fact that youth unemployment is so high, exports are dropping as is foreign investment, are far more important signs that China has some serious economic challenges ahead.
(Urban) Youth unemployment is high because PRC talent pipeline is finally firing on all cyclinders and graduating largest cohort of 12m this year. Even 50% youth unemployment that's 6m new skilled entering workforce, trending towards 50-100m of just new STEM by 2050, when US set to expand by 40m population total. Broad unemployment 5%, meaning youth get jobs eventually. Is it a challenge to make so many skilled jobs? Yes, but reality is even reaping 50% is the greatest skilled demographic divident in recorded history concentrated in one country. And this is demographically baked in based on previous 22-30 years of birth (cohorts for future tertiary).
Geoeconomically, vs west who has talent shortage, youth unemployment curse / challenge is also blessing of not knowing what to do with excess talent, as PRC moves from 25% skilled workforce of developing country to 50/60/70+ of advanced economies by hammering tertiary according to plan. For reference current PRC has like (napkin math) ~25M STEM (many fresh) vs US ~35M. If she's @50% youth unemployment that's 4-5 years before eclipsing US in STEM pool. That's a recipe for an economy doing fine, where by fine is enough talent to compete with US/west in every sector. Hence even dogshit baseline of PRC 50% unemployment rate, as in permenant, 50% of PRC youths becomes NEET and not eventually finding jobs like current stats reflect (and basic common sense), PRC is still US/west bloc peer competitor territory. Potential of PRC doing dogshit is inherently very high due to scale, let alone fine.
Exports dropping because EVERYONE's exports dropping due to global contraction. Meanwhile PRC increased exports by 1T in last 4 years, more than the previous 10. It's categorically the largest expansion in globalism, also in recorded history. And currently holding on to much of it - her exports is dropping less than others who are MORE export depedentant as % of GDP (20% vs export dependent being 40-90%). This is a 5 steps forward 1 step back drop, not 1 step forward 2 steps back of media framing.
FDI has been neglible part of PRC domestic investment as % of GDP in PRC is ~40% vs EU/US/OECD 20-30%. Losing FDI is relative to PRC domestic investment, a paper cut. FDI value is so far = foreign investors have more experienced / risk taking / guidance. But that's a skill indigenous investors need to develop eventually, especially now that it's (again deliberately) unwinding RE so people stop sinking so much savings into housing to direct investment in more productive sectors.
TLDR is western reporting over inflates the challenges PRC faces. Some are difficult, maybe even serious. Certainly not "disaster"ous. But many signs people think are serious are not really. IMO nothing as challenging as 90s SEO / iron rice bowl reforms. Trends point to PRC being fine. And PRC being fine, relative to rest/west, is PRC comprehensive power growing greatly.
Which is not really the important development. More broadly, PRC bonds pretty mid, but have been positive & stable for past 10 years vs movement in US treasury performance in the last few months - it's interesting all the PRC economy is collapsing again narrative started right when the yield curve went south.
[1]https://www.cnbc.com/2023/08/15/china-economy-july-industria...
China is hiding bad economic data and everyone should be aware why it is to protect their investments.
Additionally, it's about 1,4 billion people and China is acting very aggressively against the West for decades under Xi. There is more to come.
If something happens, most people had an indication of it.
1. Evergrande declaring bankruptcy in New York.
2. Evergrande shares opening for trading in Hong Kong after a year and a half and plummeting by nearly 90%.
3. Country Garden posting massive losses and indicating worries about meeting their debt obligations.
4. The post Zero COVID boom not happening. Instead of seeing expected massive growth, China is seeing Western levels of growth. Heck, Japan, the poster child of a stagnant economy, has been growing more than China during the post Zero COVID expected boom.
5. Xi Jinping telling college graduates to go back to their villages and work on their parents’s farms.
6. China entering deflation.
Edit: 7. I completely missed this one. It’s in the article. After record high youth unemployment China has now suspended reporting those numbers. Yeah, stopping reporting numbers thst are not going in a positive direction is a clear sign of a functional positive economy.