Here are two articles by Jim Rickards on China which are well worth 10 minutes of your time. — Enjoy.
Addison Wiggin presents
The Daily Reckoning
The China Myth, Exposed
By Jim Rickards
Portsmouth, New Hampshire
August 3, 2020
Dear Reader,
For almost twenty years, the myth of a “rising China” and the “Chinese century” has been gathering steam.
Of course, the U.S. is recognized as a superpower now, but its days as the greatest power in the world were numbered, according to this myth.
China was prized both by U.S. manufacturers for its cheap labor and by U.S. consumers for the cheap prices on Chinese exports (never mind that the goods were shoddy with few exceptions and often fell apart not long after you removed them from their glossy clamshell wrappers).
The globalists praised the advent of highly integrated supply chains and just-in-time logistics that would bind global economies together and pave the way for One World governance, taxation and money.
There was only one problem with this narrative. It was completely false.
Chinese labor is running low because as many as possible have already moved from the country to the city.
Tight supply chains proved fragile as we saw during the COVID-19 pandemic when the U.S. could not get protective gear made in China and China threatened to cut off exports of antibiotics to the U.S.
Our craze for cheap Chinese goods meant that China piled up over $1.4 trillion in U.S. Treasury notes which makes China our biggest creditor.
Beyond that are horrific human rights abuses such as organ harvesting (without anesthetic) from political dissidents, concentration camps, reeducation camps, forced abortions, forced sterilizations, firing squads and more.
The Silicon Valley CEOs simply turned a blind eye in pursuit of profits. The cost in lost U.S. jobs was catastrophic.
The China myth has now been revealed to be a fraud. China has shown its true colors by suppressing freedom in Hong Kong in violation of a treaty with the UK that was supposed to run until 2047.
China’s military is still weak, despite advances in recent years. Its economy is bloated with unpayable debt and it is alienating potential friends from Australia to Japan and beyond.
The globalist dream for China has crashed and burned. Good riddance.
Meanwhile, dramatic developments may be under way within China itself…
Washington Times national security reporter Bill Gertz has excellent connections inside the U.S. intelligence community and a long track record of accurate geopolitical predictions far in advance of events.
Gertz now reports that China is going on red alert.
It’s putting up signs telling citizens how to get to bomb shelters. Military factories are being moved away from factories that produce civilian products. Ham radio operators report rumors of an impending attack on some remote islands technically controlled by Taiwan.
These activities suggest China may be preparing military action of some kind.
More importantly, rumors persist of an internal power struggle between Chairman Xi and what is known as the Shanghai political faction led by Zeng Qinghong.
China is entirely subordinate to the Chinese Communist Party. You can study the Chinese government all you like, but you won’t learn anything about how China works unless you study the role of the party.
The Communist Party and its survival come first. Everything else in China is devoted to that end.
The problem is that the Communist Party itself is opaque and difficult to understand. Written rules mean nothing. What counts are personal loyalties and control over organs of state power through party cadres.
For the time being, Communist Party Chairman Xi seems to be in a dominant position. He has the most firm grip on power of any leader since Mao Zedong, who died in 1976.
Considering China is much richer and more powerful militarily today than in the days of Mao, Chairman Xi is arguably the most powerful individual in history with firm control over the lives of 1.4 billion Chinese and many more in surrounding countries.
It’s difficult to know, but Chairman Xi may be walking on shaky ground.
It’s often difficult to sort fact from fiction in China, but investors should be braced for some kind of geopolitical shock emerging from China in the next few months.
It could be military action or what could essentially be a coup.
The rumors may amount to nothing, but they may indicate a major shock. And I should point out that Bill Gertz has a great track record for accurate forecasting.
Treasuries, gold and cash would benefit from a Chinese shock, while Chinese stocks and emerging markets would be badly damaged.
Investors should prepare accordingly.
Below, I show you why the Chinese economy is basically a house of cards, and why it’s mired in the “middle income” trap. Read on.
Regards,
Jim Rickards
for The Daily Reckoning
China’s House of Cards
Dear Reader,
U.S. policy through the Bush and Obama administrations was simple. It looked the other way at questionable Chinese trade practices, technology and intellectual property theft, etc. In return the U.S. got cheap manufactured goods and China’s willingness to finance trillions of dollars of U.S. government debt.
But President Trump came along and changed the rules of the game. He’s said lost jobs in the U.S. are not worth the cheap goods and cheap financing. He bet that China had no alternative but to keep producing those goods and keep buying our debt, even if the U.S. imposes tariffs to help create manufacturing jobs here.
Trump is right that China needs the U.S. to sustain economic growth. China’s economy is not just about providing jobs, goods and services. It is about regime survival for a Chinese Communist Party that faces an existential crisis if it fails to deliver.
It is an illegitimate regime that will remain in power only so long as it provides jobs and a rising living standard for the Chinese people. The overriding imperative of the Chinese leadership is to avoid societal unrest.
Once the Chinese job machine stalls out, popular unrest could emerge on a scale much greater than the 1989 Tiananmen Square protests. This is an existential threat to Communist power. In Hong Kong, China will not tolerate threats to its authority.
But if China encounters a severe crisis, Xi could quickly lose what the Chinese call, “The Mandate of Heaven.” That’s a term that describes the intangible goodwill and popular support needed by emperors to rule China for the past 3,000 years.
If The Mandate of Heaven is lost, a ruler can fall quickly.
The story isn’t new, but China has serious structural economic problems and its internal contradictions that are finally catching up with it.
International business is already moving quickly to move supply chains from China to Vietnam and elsewhere in South Asia. Once those supply chains move, they will not come back to China for at least ten years if ever. These are permanent losses for the Chinese economy.
Will China be able to overcome these headwinds?
Economies can grow through consumption, investment, government spending and net exports. The “Chinese miracle” has been mostly a matter of investment and net exports, with minimal spending by consumers.
“Chinese markets” is one of the great oxymorons. There are no markets in China. Everything is tightly regulated and manipulated (at best) or a complete fraud (at worst). For example, China puts up strong GDP numbers with occasional blips such as the 2020 pandemic or the 2008 global financial crisis.
But, Chinese GDP is 45% investment (25% is more typical for other large economies) and 50% of that 45% is wasted.
But the investment component is thinly disguised government spending — many of the companies conducting investment in large infrastructure projects were backed directly or indirectly by the government through the banks.
This investment was debt-financed. China is so heavily indebted that it is now at the point where more debt does not produce growth. Adding additional debt today slows the economy and calls into question China’s ability to service its existing debt.
Up to half of China’s investment is a complete waste. It does produce jobs and utilize inputs like cement, steel, copper and glass. But the finished product, whether a city, train station or sports arena, is often a white elephant that will remain unused.
The Chinese landscape is littered with “ghost cities” that have resulted from China’s wasted investment and flawed development model. What’s worse is that these white elephants are being financed with debt that can never be repaid.
And no allowance has been made for the maintenance that will be needed to keep these white elephants in usable form if demand does rise in the future, which is doubtful.
If you subtracted the waste from the reported GDP, you’d find that actual GDP is more like 3% than the 6% China reports.
Essentially, China is on the horns of a dilemma with no good way out. On the one hand, China has driven growth for the past nine years with excessive credit, wasted infrastructure investment and Ponzi schemes.
The Chinese leadership knows this, but they had to keep the growth machine in high gear to create jobs for millions of migrants coming from the countryside to the city and to maintain jobs for the millions more already in the cities.
The two ways to get rid of debt are deflation (which results in write-offs, bankruptcies and unemployment) or inflation (which results in theft of purchasing power, similar to a tax increase).
Both alternatives are unacceptable to the Communists because they lack the political legitimacy to endure either unemployment or inflation. Either policy would cause social unrest and unleash revolutionary potential.
China has hit a wall that development economists refer to as the “middle income trap.”
This happens to developing economies when they have exhausted the easy growth potential moving from low income to middle income and then face the far more difficult task of moving from middle income to high income.
Developing economies can grow at double-digit rates as they move from low-income (about $3,000 annual per capita income) to middle-income (about $10,000 annual per capita income).
The main requirements are limits on corruption, a large pool of available labor, and an attractive legal environment for foreign direct investment. Once investment is used for infrastructure and labor is mobilized, large-scale basic manufacturing can commence.
This powers growth and the accumulation of hard currency reserves from export earnings.
The difficulty begins when an economy tries to move from middle-income to high-income (about $18,000 annual per capita income). That move requires more than cheap labor and infrastructure investment.
It requires applied technology to produce high-value added products.
China remains reliant on assembly-style jobs and has shown no promise of breaking into the high-income ranks.
Only Taiwan, South Korea and Singapore have made this transition, (excluding Japan after World War II, and oil-exporting nations). All other developing economies in Latin America, Africa, South Asia and the Middle East including Brazil and Turkey remain stuck in the middle-income ranks.
This explains why China has been so focused on stealing U.S. intellectual property.
China has not shown much capacity for developing high technology on its own, but it has been quite effective at stealing such technology from trading partners and applying it through its own system of state-owned enterprises and “national champions” such as Huawei in the telecommunications sector.
But now the U.S. and other countries are cracking down on China’s technology theft.
Meanwhile, China’s per capita income is only $11,000 per person compared to per capita income of $65,000 in the United States. Put differently, the U.S. is only 38% richer than China on a gross basis, but it is 500% richer than China on a per capita basis.
In short, and despite enormous annual growth in the past twenty years, China remains fundamentally a poor country with limited ability to improve the well-being of its citizens much beyond what has already been achieved.
China is confronting social, economic and geopolitical pressures that are testing the legitimacy of the Communist Party leadership and may lead to an economic crisis of the first order in the not distant future.
My view is that a crisis in China is inevitable based on China’s growth model, the international financial climate and excessive debt.
A countdown to crisis has already begun.
Regards,
Jim Rickards
for The Daily Reckoning
James G. Rickards is the editor of Strategic Intelligence. He is an American lawyer, economist,
and investment banker with 35 years of experience working in capital markets on Wall Street.
He is the author of The New York Times bestsellers Currency Wars and The Death of Money.
Thanks to Paradigm Press LLC, publisher of The Daily Reckoning, for permission to reprint it here.
