US Attitudes Toward China are Changing
Throughout the Obama presidency, Americans believed China to be the leading economic power in the world — although it remained solidly in second place. This attitude began to change in 2016, and now Americans see the US as the leading economic power by 11 percentage points. It is only a Gallup opinion poll, but the survey results once again reflect the economic reality, 12 years after the distortion.
China’s Long Economic Slowdown
The Chinese economy was already slowing and facing a major debt crisis well before the outbreak of the coronavirus. Government, business and household debt burdens have been growing in many countries to worrisome levels but nowhere more than in China, the world’s second-largest economy.
… The temporary economic shutdown of major areas within China and many businesses is likely to cause a severe deterioration in credit conditions, which were already weakening. Asset and property values will fall, causing defaults on corporate and personal loans. These failures will cascade through the banking system, causing credit markets to freeze up, which will, in turn, cause businesses and households to slash spending.
Demand for goods and services will fall sharply, hurting both domestic and foreign suppliers. The Unitd States has far less exposure in terms of investment in and foreign trade with China than most Asian countries. Also, many Asian and African countries have become addicted to Chinese investment, in part, because of the Chinese Belt and Road Initiative projects. Thus, the consequences of a Chinese recession will be later and less damaging to the United States than to many other countries.
… Certain sectors of the U.S. economy are already being hit. Those companies that have a large exposure to the Chinese market (many high-tech and automobile companies, for example) are going to see a significant drop in sales. Companies that source raw materials and component parts in China are likely to suffer some supply disruptions. __ Source
None of this is news to regular readers here. But with the multiple disruptions and impacts from the recent coronavirus outbreak — and the loss of face and loss of trust — China is suddenly struggling from within a much deeper hole. And any nation or corporation that is too closely tied to Chinese interests will take a hit.
Demographic Bust Doesn’t Help
Market economics failed to topple Chinese communism, but the potential halving of its population by the end of the century just might. Their 30-year program of allowing no more than two children per family actually resulted in a lowering of the average birth rate to less than one child per family.
When accounting for single-child families, multi-child families and the no-child families, who decided life was easier without any children, the birth rate in China is now actually 0.7 per family.
… not a single country in the developed world even has a replacement birth rate (2.1 children per woman, according to the UN Population Division) any longer. The United States will continue to grow a little as a result of immigration. India’s rapidly growing population has finally slowed and may one day stabilize.
Economically, we can expect countries to struggle with fewer young workers and taxpayers. Automation will help but robots don’t buy refrigerators or smart clothes for the office party. Consumption is the bedrock of any economy. __ Source
It is not just China that will need to overhaul its economic (and political) strategy. Every economy that has been based largely on growth, exports, and consumption will need some major re-tooling. Policies relating to central banking and sovereign debt will require deep and creative remodeling.
Where Will Innovation Come From?
It is clear that innovation will play a strong role in the health of future economies, as demographic shrinkage sets in.
So far as research and innovation are centered in universities, we can look at rankings by economic impact of patents filed, to determine where the most innovative university research centers are.
When measuring overall innovation by corporation, the nature of innovation becomes more international:
When comparing innovation by nation, some countries can punch above their weight:
Here is a different innovation index from Bloomberg:
Reality Check: Size of Economy & Size of Population Matters
No matter how innovative a country may be per capita, if it is a tiny homogeneous cog in the international economic machine, its total impact will be blunted by its small size. The big players will still control the board, but for the smaller players it is better to be innovative than not.
While not as innovative as Israel, South Korea, or Switzerland, China’s huge economy and population size will allow it to exert a strong influence on international affairs for decades to come — even if no one else will completely trust China or be its friend.
Will the US Decouple from China & the World?
Of the major nations, the US is less dependent upon imports and exports — as a percentage of GDP — than the others. A large part of that small dependency on imports/exports involves trade with Canada and Mexico. As for US trade with China, it is likely that supply line decoupling will accelerate post-corona virus.
In the recent Peter Zeihan video below, Zeihan explains how the effects from the demographic collapse of the world’s leading nations will converge, resulting in a very confusing and disunited set of national interactions. As the threads unravel, things are apt to get very messy, even without new viral pandemics.
If the US withdraws from the Bretton Woods order, China will find itself fighting an uphill battle just to stay even in terms of food and energy imports. As the US shifts manufacturing supply lines home — and to friendlier and more reliable trading partners — other “western nations”, especially European and Anglospheric nations, will begin to see the wisdom of doing the same.
“There are both national security issues and economic issues for the US being too dependent on Chinese production for decades, including the risk of a crisis that stops or slows down China production, like the coronavirus, and the risk of [intellectual property] theft and US goods suffering from counterfeit production once they begin producing in China,” Ferry said.
Coronavirus has, then, been added to a basket of grievances that led to Trump’s hardline approach towards China. As the economic fallout deepens, it would not be a great shock if the clamour to divorce grows.
From congressional hearings to various think tank events, many in Washington are now convinced that it is impossible for China and the US to move in the same direction. __ The Coming of the Great Decoupling?
For China to be able to pretend to keep up in the innovation derby, it will need to crank up its espionage machinery, because it is likely that the future will see less foreign direct investment to China and less voluntary technology transfer to China. In other words, for 30 years China has been spoon-fed its prosperity at the expense of the home populations of the world’s top manufacturing and most innovative corporations. In the future it will be more necessary for China to steal it.
Attitudes toward China will probably not be getting better anytime soon.
The coronavirus has evolved into two major types, with differing transmission rates and geographical distribution, according to a study published in the National Science Review on Tuesday.
Meanwhile, infection counts in Taiwan, Hong Kong, and Singapore have barely changed.