The Chinese Take-Away
China’s economy has peaked, here is the take away
America may not have reached its doomsday just yet. According to Wall Street Journal, the threat of actual default was mostly over wrought political theater, as evidenced by Janet Yellen’s well-timed extension of the “X date” when the parties involved started acting like adults.
Mind, an actual default would have been as disastrous as advertised; it would have eroded the faith in the US dollar that underpins its status as the global reserve currency. But that begs the question that there is currently another alternative to the greenback – you can’t replace something with nothing. Beijing may want the Yuan to rival the dollar, but it lacks both heft and the trust of investors. Still, that hasn’t stopped the rhetoric and talk of war from Beijing, so it might help to take a look at our closest competitor.
Back in 2010, when the US was in the DT’s from the 2008/09 financial crisis, China’s economy was about 70% of the US, and most economists were predicting that it would overtake America’s by the end of the decade. And by one metric, it has. Goldman Sachs even went so far as to predict that it’s economy would be half again as large by 2050. The first didn’t happen and the second probably won’t. Analysts at Capital Partners now reckons that the best China will do is reach about 90% of the US economy by 2035, and hover around near-parity after that.
When China opened up its economy in 1978 after being a Marxist Feudal state, it clocked some 9% growth per annum for a generation, lifting some 800mm people out of the sort of poverty that doesn’t happen in America. Had that growth continued, the Chinese economy would have overtaken us. But nothing can grow by 9% indefinitely, that’s just what happens when an economy matures. President Xi has overseen underwhelming growth, the economy has never hit its growth target since he’s been in power. And those official numbers are made-up. Assessing China’s economic activity on factors Beijing can’t fake paints a different picture: Satellite images of night-time light intensity suggests that actual economic activity nationwide could be only a third of what the official numbers claim.
A peak in economic growth isn’t necessarily followed by a steep decline – and in China’s case the smart bet is a plateau with its eventual decline being a long, slow one. Its exports are huge, but most of that is assembly production of international firms rather homegrown innovation, and those nodes in the supply chains are easily rerouted to places like Malaysia, Thailand and Vietnam. Which is exactly what is happening.
Structurally, the country’s demographics are famously working against it – last year the population peaked. The UN reckons that China’s rapidly ageing population will cut the number of working age Chinese by a quarter by 2050. The government seems unable to get the birthrate up and is curiously hostile to immigration, so more state resources will be funneled into care for the elderly as productivity takes a nose dive and switching to a consumer driven economy becomes harder. None of this will do much for the Beijing’s ballooning sovereign debt.
Can we say that China's economy has peaked? Probably. This is likely to make China more, not less aggressive. In fact, it already has: It tried to punish Australia for asking embarrassing questions about covid. Australia found other markets for their goods that once went to China, but China struggled to replace its Aussie suppliers. After realizing it was being bit as hard as the intended target, Beijing quietly rolled back the sanctions.
All of which is to say that China will never be the global power, although it is a global power, and the US better get used to it.
It also draws a cautionary tale for America’s current experiment with overbearing industrial policy. What the socialist republics never understand is that government simply can’t mandate economic growth and geopolitical heft. You can declare yourself a world leader, but no one is obliged to believe you. Or for that matter, buy your products. You can mandate that 67% of new cars in the US are EV’s by 2032, and you can mandate that they must be made in America. On the ground, though, car companies either operate at a loss, or make the average cost of car ownership three times what it is. In short, a government – in Washington or Beijing - can’t legislate success, although it can subsidize failure.
Real power doesn’t come from ambitious five-year plans or terrifying your citizens with secret police or the IRS. It comes from oceans of C-average, state university salespeople big-leaguing each other with the last gadgets, cars and correcting their multiple children’s teeth.
It’s nothing you’d ever put on a poster, but there we are.