The Chinese Economy Is In A Death Spiral

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The Chinese Economy Is In A Death Spiral



The Chinese Economy is in Trouble: “What we are going to see with China, for the first time that anyone can remember who’s alive, is an economy that’s twice the size of the U.S., possibly three times the size of the U.S., and it’s going to be very weird living in that world,” said Elon Musk on the “All-In with Chamath, Jason, Sacks & Friedberg” podcast.To get more latest news on china's economy, you can visit shine news official website.

At first glance, Musk looks correct. China is catching up to America fast. Last year, the Chinese economy skyrocketed 8.1%, producing $17.46 trillion in gross domestic product. The American economy clocked in at $23.00 trillion, growing only 5.7%.

Yes, Musk is America’s leading visionary, but this particular vision is off-target. The Chinese economy will never overtake America’s, at least not this century.

Elon Musk is making predictions by extrapolating. Extrapolation works most of the time, but not now.The Chinese economy – and the nation overall – is passing a series of inflection points. The most fundamental one is demographic: The Chinese population is on track for a steep decline. The most immediate inflection point is economic: China is now contracting. The country needs growth to retire monumental debt, however.

We start with the “relentless maker and breaker of civilizations,” demography. Demography will break China, which according to demographers from Xian Jiaotong University is slated to lose half its population in 45 years. At the end of this century, China could be about one-third as populous as it is now.

The country, therefore, faces the sharpest demographic decline in history in the absence of war or disease. Panicked efforts to avoid the decline—moving from a one-child policy in 2015 to a three-child policy in 2021, for instance—have proven unsuccessful in increasing birth rates

Such a precipitous fall means that, if China is going to pass America to reach the top spot, it will have to do so within, say, a decade before a falling population begins to undermine economic performance. In the next ten years, however, China’s economy is more likely to come apart.

It is already in distress. In April, the economy clearly contracted. Industrial output was down 2.9% from the same month last year. Retail sales were off 11.1%. New car sales plunged 47.6%.

Draconian lockdowns, the result of Beijing’s “dynamic zero-COVID” policy, have essentially brought much of the eastern portion of the country, the heart of the national economy, to a halt. China’s ports and airports are operating at far below capacity, and river and truck traffic is way down, about 40% off.

China cannot ship what it does not produce. Factories are either closed or struggling. Even politically favored companies have been hit hard. Tesla’s Gigafactory 3, in Shanghai, was closed for three weeks due to the COVID lockdown. Now, because of a lack of parts, it is running at only 45% capacity.Beijing, by ditching misguided disease-control policies, can eventually reverse the economic damage. What it cannot do is escape the consequences of its unprecedented buildup of indebtedness. Nobody knows how much debt China has accumulated, but an estimate of 350% of annual gross domestic product sounds about right. Because of the infamous “hidden debt,” the number could even be higher.

However much debt there is, China is now facing a reckoning. Beijing avoided a downturn in 2008 by overstimulating the economy, primarily with debt-financed infrastructure. Now, the country has to either pay back the debt or resolve the situation by other means.

Many believe that because there are not many external obligations the crisis will be easy to resolve. Yes, the Chinese people owe the money to themselves, but these types of crises, history shows, are the most difficult ones to fix because every fix requires that domestic parties—not foreign bankers—suffer. Beijing is trying to further delay a reckoning because it is concerned about social stability, which means the resolution of the matter will take far longer than anyone now thinks.

In the meantime, the debt-ridden property sector is beyond repair. Property developers, especially starting last September, have been missing payments and defaulting on obligations. Evergrande Group, once China’s largest property developer, accumulated a staggering $305 billion in obligations and is struggling, even with full government backing. It has been effectively rescued for the moment, but smaller developers are falling. Sunac China, now the fourth-largest developer, just missed a bond payment and announced it does not expect to make other bond payments.

On the surface, the situation looks manageable. New home prices in 70 major cities in April fell only 0.2% from the previous month. The market, however, was “frozen,” in other words, buyers and sellers were too far apart on price for transactions to occur.

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