China’s problems with excessive debt, adverse demographics, and decoupling from developed economies such as the US are known.
Still, China’s problems go well beyond these key economic drivers.
Corruption exists in China on a scale not even seen in Africa and the Middle East. It’s a double-edged sword.
On the one hand, you can become immensely rich with the right connections and projects. On the other hand, once you participate in that system, you can be denounced by the Party at any time and disappear into prison or a grave.
This makes senior party officials loyal and paranoid at the same time. It’s the Stalinist playbook with Chinese characteristics. Comrade Xi Jinping has used this system to become the most powerful Chinese dictator since Mao Zedong.
Slow growth for China is baked into the pie because of excessive debt. Even slower growth will prevail in the long run because of China’s radically crashing working-age population and the low productivity (but necessary) demands of eldercare. The real estate collapse is like an albatross around the necks of both consumers and builders.
The developed economies are slowly cutting China off from high-tech imports of semiconductors and equipment. Direct foreign investment is being dissuaded by the de facto expropriation of Alibaba, Ant Group (and other tech giants), and the house arrest of oligarchs like Jack Ma. Major firms like Apple are gradually moving new investment to India while others look to Vietnam, Indonesia, and Malaysia.
China is caught in the middle-income trap and there is no escape.
Escape from COVID
Throughout 2021 and 2022, China’s main approach to COVID consisted of the Communist Party’s zero-COVID policy. In practice, this meant that if a single individual contracts COVID, they are isolated.
If more than a few in one location get COVID, then an entire building or neighbourhood is locked down. No one is allowed to leave or enter the lockdown zone. Some residents are sealed inside their apartments, including steel beams welded to their doors.
An even wider outbreak can result in an entire city being shut down. This happened in Shanghai (population 26 million) and Beijing (population 22 million) in the late winter and spring of 2022.
These extreme lockdowns were ruinous to the Chinese economy. The lockdowns meant no train or air travel to or from the affected city. COVID testing tents were set up every few blocks. Residents were required to have negative test results no more than two days old. This meant continual testing on a mass scale, which was immensely expensive and personally intrusive. Social media apps and the internet are constantly censored to avoid any bad COVID news from spreading.
This inhumane and pointless policy finally pushed people past the breaking point on 24 November 2022.
A fire broke out in an apartment building where residents had been locked down for 100 days. The fire was horrific and made worse because the fire department could not get to the building to fight the blaze due to COVID lockdown barricades. The number of people burned to death has been suppressed by Communist State media but is estimated to be 50 or more.
This tragedy led to mass protests involving hundreds of thousands in Guangzhou, Shanghai, Beijing, Chongqing, and many other cities over the course of 25 November to 2 December.
The Communists resorted to mass arrests, internet censorship, seizure of cell phones, and even dispatched tanks to patrol the streets. The protests died down by early December, but a turning point was reached.
From lockdown to ‘let it rip’
Suddenly, the Communist Party of China did a 180 and decided to end all extreme lockdowns and just let the virus rip through society. In the end, this was the only practical choice.
The virus is respiratory and spreads easily through the air. It is highly contagious. There is no practical way to keep the virus from spreading. Of course, the mRNA vaccines are not real vaccines and do nothing to stop infection and retransmission of the virus.
The result of letting the virus rip is herd immunity. This is exactly how the US and Europe finally got through the pandemic (although mutations of the virus have kept the pandemic alive and could cause more severe outbreaks in future).
The problem is that China was totally unprepared for this swift reversal in public health policy. While the US and Europe may have muddled through to herd immunity, China has nowhere near the amount of medical facilities, ICU beds, oxygen, and clinical treatments needed to deal with the surge.
Already the Chinese medical system is near collapse, as patients die while lying in hallways waiting for hospital beds.
The degree of desperation is revealed by official statements that the population should resort to traditional Chinese medicine (TCM), which involves herbal remedies and other homeopathic approaches using plants and minerals.
TCM may actually be useful, but resorting to neolithic treatments is not a testament to the state of modern Chinese medical preparedness.
With China’s population of 1.4 billion, no effective vaccines, and limited hospitalisation facilities, herd immunity will come at the cost of about two million dead.
That’s not a medical failure. It’s the expected mortality count assuming 30% of the population is infected, and the fatality rate among the infected is about 0.50%. Both rates could easily be higher.
A rolling crisis
The ‘reopening’ cheerleaders on Wall Street point to the fact that the worst of the infections and fatalities may already be over in major cities like Shanghai and Beijing.
That may be true. There is good evidence that major COVID outbreaks peak after about five weeks and return to pre-outbreak levels after about 10 weeks from the initial surge.
However, that 10-week pattern applies to each outbreak in a given locality. There will be many outbreaks on a rolling basis as one city after another gets hit.
This analysis also ignores the aftermath of the outbreaks. The pandemic may wane in a major city like Shanghai but that ignores the costs in terms of the dead, burials, cremations, replacement workers, and family trauma.
The virus does not respect pedigree. Many reports show that China’s best and brightest among university professors, government officials, and entrepreneurs have died in large numbers alongside everyday Chinese people.
Finally, the possibility of new, more lethal mutations or recombination of two existing strains of the virus cannot be discounted. China unleashed the virus on the world. Now they are belatedly paying the price.
In short, the Chinese economic reopening narrative is written in sand. China’s problems are far greater than the pandemic, and there’s no assurance the pandemic itself will fade soon.
China won’t escape the middle-income trap, nor crippling debt, declining demographics, or disruptive decoupling
China is a poor country with a growing middle class and a small slice of the super-rich, many of whom are descendants of Communist Party leaders of the 1930s (so-called princelings) or relatives of the existing Communist Party elite.
China’s economic growth is now stymied by the dynamics of the middle-income trap, which affects many other emerging economies in Asia, Africa, and Latin America.
The only way to escape from the middle-income trap without being a major oil and gas exporter is through technology and high-value-added production.
That path is blocked for China because of China’s lack of an innovative culture, restraints on China’s ability to steal technology, and new prohibitions on exports of high-tech equipment and technology to China.
Other headwinds adversely affecting Chinese growth are excessive debt, demographic decline, real estate collapse, and a return to Maoist principles under Chairman Xi Jinping.
The response to the pandemic has hindered Chinese growth since 2020. Still, China’s economy would be struggling due to the other headwinds mentioned, even in the absence of a pandemic.
The myth of a robust Chinese ‘reopening’ is just that: a myth concocted by Wall Street analysts and asset managers interested in pumping Chinese stocks. This myth has had some short-term success but will soon fail, just as the prior reopening in the spring of 2022 failed.
In the end, China’s real growth will slow to a rate near 3% per annum, perhaps lower, which will not be enough to service dollar-denominated debt or lift 900 million villagers to even modest middle-class living standards.
The Chinese miracle was never a miracle, just an expected outcome for a developing economy starting from a very low base. That phase is over.
The future looks bleak from here.
All the best,
 |
Jim Rickards,
Strategist, The Daily Reckoning Australia
This content was originally published by Jim Rickards’ Strategic Intelligence Australia, a financial advisory newsletter designed to help you protect your wealth and potentially profit from unseen world events. Learn more here.
