The Dragon Economy: What Experts Don’t Want You To Know About China’s Economy
There’s been a lot of commentary on the state of tariffs against the Chinese economy from the United States government. Headlines often read how tariffs either work or are causing the opposite intended effect. You never hear about the looming economic inconsistencies from the dragon economy.
Everything post-1949 is planned by the central committee, named the politburo.
That fosters an environment of high efficiency and quick progress, but also creates artificial bubbles that are hard to analyze in a shadow ecosystem. Since the start of the year, the Shanghai composite index has lost more than 30% of its value.
Let’s go more in-depth than tariffs and tame the paper tiger.
The back story. If you’re going to know anything about an economy, you first must know something about its people and their shared history. The Chinese people are resilient and throughout history have always wanted the rise of China, but history’s timeline has not always shown them favor.
Before communism, wars, and geological adversities battered the nation; it was a China of developing industrial potential. Little do people know that in the early 1900s China was industrializing. After the Japanese invasion was over the communist were sitting in an advantageous position.
The great leap forward, cultural revolution, and an intellectual exit of millions of Chinese people left the great nation with a deficit of creativity. For decades stagnation laid its hand on the country, and the population exploded from 554,419,275 people to well over 1,000,000,000.
Enter the 1980s and 90s.
Famous leader and the cult of personality, Deng, was a political moderate and wanted to reform China to a market-oriented economy. To accomplish this, he created special economic zones such as Shenzhen.
He planned to allow Chinese students to learn overseas and bring back with them intellectual property and take advantage of high production cost in developed countries by allowing environmental dumping. Because of zero regulation, low income, and subsidies from the government, China grew at a fast pace.
Once the World Trade Organization admitted the people’s republic of China to its council, China’s economy grew astronomically at the expense of developed countries and China’s environment.
It’s not that China did not have economic hurdles like other countries, it’s merely that they didn’t have to go by their rule book. If exports needed a boost, they would devalue their currency. When the stock market did fall, they would freeze it, leaving investors puzzled.
When the gross domestic product declined, China would pressure localities to make up the difference by spending money provided by Beijing. There is little to no accountability in what is called a command economy. It may have market characteristics, but its heart is still an artificial ecosystem.
Sooner or later you must clean out your closet.
Even with a command economy, you cannot hide things in your closet forever. The very idea that made China strong is also it’s Achilles heel. An economy is a living breathing Organism that has multifaceted issues that shape its future.
Going forward this is what the Silk Road nation is facing.
A looming real estate collapse: China’s real estate market has boomed for many years. Cities like Shanghai are experiencing dramatic increases in real estate prices. The rise has made buying a new home hard but has rewarded homebuyers with cash influx in the form of equity.
Right beside the first-tier city where housing is hard to find you will have an artificial city dubbed a “ghost city” manufactured by a local government with Beijing’s money in the hopes of artificially inflating the GDP and then masking the debt in the form of private corporate debt.
This bubble cannot continue for multiple reasons. Private companies are debt laden and cannot carry the weight anymore. People are no longer able to buy homes, and sooner or later the overabundance of homes in some localities will cause a massive market correction.
Market liquidity is tightening: Shadow banking is a common practice in China to ease market lending and boost the economy. Again, it’s a form of concealing debt and artificially increasing the gross domestic product. It also acts as Beijing’s go-to way of injecting cash into a fledgling economy.
In 2018 China has embarked on a mission to stop shadow banking and cool off their economy. Tightening has resulted in a 40% reduction in market liquidity and loans being made my red chip banks. Because of the Shanghai composite index and outsourcing repatriation. They have stopped cracking down on shadow banking for now with the hopes that it will help the economy in 2019.
A less competitive manufacturing environment: There’s a migrant crisis within the borders of China. Unlike most countries, China’s small cities are emptying at a fast pace. There’re over 70 million migrants that flood cities like Shenzhen illegally to work.
The government has what they call the Hukou system which relegates it citizenry to certain areas. Freedom to live where you want does not exist for millions of its citizens. Beijing has always tolerated migrant workers because it gives factories and outsourcers the ability to hire cheap labor.
To curb the housing crisis, China is cracking down on its migrant population, and naturally, rising wages are resulting in a less competitive environment on the world stage. Factor that in with environmental regulations and you have a China that is less able to procure new overseas investments.
Business outsourcers are repatriating: The trade war isn’t about trade at all. Since the days of the Silk Road trade has been the exchange of goods that were not available in a host country. Today we have business outsourcers that move jobs overseas to satisfy their shareholder’s palate.
These are for the most part American and European companies that manufacture in China, hire Chinese workers, and then export the product back to their host country. Outsourcing is not trading at all but constitutes a large portion of the Chinese dream.
To escape rising political tension, higher production cost, imposing tariffs, in the forced transmission of intellectual property, companies are repatriating back to their host countries or simply moving their supply chain to a more competitive environment like India or Vietnam.
Lest we forget That there are dozens of developing countries eagerly waiting to
take a piece China’s mooncake.
Then finally we have a reaction from Beijing.
China’s one belt one road (OBOR) Initiative is a desperate reaction to looming troubles at home that mirrors the same tactics used by Soviet Russia to Spur the economy via “debt diplomacy.” Such tactics are used to conceal China’s debt, boost production, and trap smaller nations in a cycle of debt.
Malaysia has recently canceled their agreement with China in fears that the one belt one road initiative is a Faustian pact. Other nations too are becoming aware of the rising tide of debt diplomacy.
One thing is for certain.
The Chinese people will be the very ones to shape the future of their own lives and define what China can be for generations to come. Investors, however, can only be left with a feeling of uncertainty which is of course painted with Providences brush across the Shanghai composite index.