China’s multidecade ascent was aided by strong tailwinds that have now become headwinds. Its government is concealing a serious economic slowdown and sliding back into brittle totalitarianism. The country is suffering severe resource scarcity and faces the worst peacetime demographic collapse in history. Not least, China is losing access to the welcoming world that enabled its advance. Beijing threw tens of billions of dollars into biotech, yet its COVID-19 vaccines can’t compete with those produced in democratic countries, they write for Foreign Affairs.
The pace of recent events suggests Xi Jinping really is in a hurry, the Economist adds. He has clamped down not only on big business but also on the entertainment sector. Ideological education in schools has been reinforced: children as young as six are being taught about “Xi Jinping Thought,”The End of China’s Rise
The cost of shipping from China is falling, because there is no product to ship.
The visible impact of all this will be mostly within China, but its macro effects will be global. Such wealth destruction should be intensely deflationary. That may be part of the goal, in fact. Chinese consumers are feeling significant inflation in food, housing, and other living costs. Demographic factors, particularly population aging, will increase this pressure. Decades of the one-child policy reduced working-age labor supply, which raises wages and other prices.
But it won’t stop there. For years, China’s voracious appetite for energy and materials underpinned prices worldwide. At the same time, its low manufacturing prices basically exported deflation. Hence we saw little or no inflation in most finished goods but a lot of inflation in commodity-intensive services like food, energy, and housing.
In short, China is losing its role as the world’s lead manufacturing exporter.Losing It
Simply due to demographic change, China is losing the part of its population that provides its workforce and military force. China is not wealthy enough to support its worldwide imperialistic aims. The facade of endless economic expansion and the pretense of technological mastery have fooled the shallow thinkers of the world. But financing your growth on highly leveraged lending and very little else, does not provide for a long term future.
It might take five or even 10 years for the Chinese government to wake up to the seriousness of the demographic crisis. After all, there are always more immediate and urgent concerns at hand. By the time the government wants to do something about the crisis, it could be too late. No country in East Asia has been able to reverse the trend.Demographic Crisis
China has poisoned its land, its water, its air, and its people. People in China are dying too soon, and are being born with terrible defects due to the many toxins in the environment.
China steals its intellectual property. Without its armies of state supported criminals scouring the world for intellectual property and industrial/military secrets, China would be farther along on its inevitable decline curve. But “getting old before getting rich” is pulling the rug out from under the grand plan.
Evergrande is not an exception. It is the rule.
Property developers there have long claimed that the success of their business is driven by the three carriages—high turnover, high gross profit, and high leverage. But all of these proverbial carriages are breaking down as the effects of Evergrande’s crisis spread throughout the economy. Potential homebuyers, for example, frightened about what they read in the news, are becoming reluctant to close on homes, resulting in an already sharp decline in home sales. What is more, they are likely to refuse to prepurchase unfinished apartments or put down deposits, except at large discounts, thereby squeezing liquidity and raising financing costs for the developers.
At the same time, sales agents and other employees are likely to be highly distracted during working hours, worrying about their employment prospects and in some cases the loss of their savings in wealth management products. Such circumstances can cause a sharp decline in labor productivity. What’s more, contractors have been suspending construction work until their payment prospects have been assured, while suppliers, similarly, are less willing to accept commercial paper as payment for their deliveries. The result, as Evergrande has already announced, is that construction projects are rapidly falling behind schedule.
The consequences are reduced revenues, higher operational and interest expenses, and increased frictional costs—the combination of which turns net profits into net losses. These headwinds make repayment prospects even more difficult, thus reinforcing the cycle.
The most worrying aspect of financial distress behavior is that once it is set off, it often seems to spiral quickly out of control.
China is an evil empire, beyond all doubt. But it takes a bit of intelligence and awareness to see how far the vile dictatorship is overleveraged and cantilevered on a platform of smoke and mirrors. No one is safe inside the bamboo prison.
Anyone in China can be “disappeared,” if the Party apparatchiks decide it.