China Enters the Doom Loop
China’s authoritarian gerontocracy has built a Doom Loop with Chinese characteristics, with over half the economy now crashing.
Chinese exports are now plunging at the fastest pace since the covid lockdowns: Exports fell 14.5% on the year, driven by a 21% drop in exports to Europe and a 23% drop to the US.
Meanwhile, imports to China are also falling — 12.4% on the year — as shrinking manufacturing buys fewer inputs and households buy less.
In short, foreigners aren’t buying, and the Chinese aren’t spending either.
This is all a problem for Chinese factories because they’re obscenely overbuilt thanks to cheap central bank money and government subsidies. To give a sense, the FT reported that Chinese automakers can produce 40 million cars a year, but the Chinese only buy 20 to 25 million. China’s now actually throttling new car production — denying production licenses. Even as the US is pouring hundreds of billions into production, that will soon be swept by cut-rate Chinese EV’s.
Manufacturing makes up over 27% of the Chinese economy and has contracted for four straight months now, bringing quarterly GDP growth nationwide to just 0.8%. The economy just officially entered deflation for the first time since the 2008 crisis.
Meanwhile, China’s comically indebted housing industry — also roughly one-quarter of the Chinese economy — is showing new distress, threatening the life savings of millions who could lose it all on empty apartment buildings. Just last week major homebuilder Country Garden, held up by China’s government as the poster-child of prudence and a model for the rest of the industry, missed two bond payments on their total $200 billion in debt, leading to a debt downgrade from the now ubiquitous Moody’s.
Considering this is all coming with youth employment at record highs — above 20% — it could signal political trouble.
Can China Reverse the Slide?
What’s driving the manufacturing pain is largely out of China’s control: Westerners not buying stuff. Korea’s exports also fell 17%, while 5 of 7 Asian countries contracted last month. Just about the only country buying is, ironically, Russia. Which, alas, is a tiny market: Mexico with nukes, as the saying goes.
China can’t do much about Americans and Europeans not buying — that’s our recessions talking, and it’s getting worse in both the US and Europe. Meaning more plunging exports and falling factory prices in China. Eventually, prices fall to the point that factories shutter, the overcapacity dries up, and prices can recover. Of course, at the expense of potentially millions of jobs and millions of freshly unemployed youth.
As for the property boom, it was driven by cheap money — buying an apartment was a no-lose proposition for millions of Chinese who plowed their life savings into empty cities that, apparently, cannot defy gravity forever.
Meaning the main solution — and China’s go-to whenever the economy slows — is to crank out more cheap money by cutting interest rates and handing tens of billions more to homebuilders.
The problem is that China is now swimming in debt — it has $50 trillion in non-financial debt, even higher than the US as a proportion of GDP. This raises fears of a Japan-style deleveraging, leading to potentially years of slow growth. Deflation, of course, makes those debts even bigger. This limits China’s easy options.
The Overhyped China Story
China taking over the world has been the story of the decade.
In reality, President Xi’s decade-long rule has been terrible for the Chinese economy, replacing China’s free market miracle with regulatory crackdowns to hobble any political threats and channel capital to state-dominated industries. The upshot is growth under Xi has been about 5 to 6 percent — a far cry from the miracle days and pretty standard for a poor country.
Xi’s covid lockdowns have been monumentally destructive, his post-covid recovery has fizzled, and now China is running straight into a global recession. Xi is probably too careful to, say, invade Taiwan to soak up all those unemployed youth. But then, I thought that about Putin, too, and I was wrong.
As for the US and Europe, expect China’s manufacturing problems to flood us with cheap goods. Which is great for consumers and should take some of the edge off inflation short-term, at the expense of what’s left of American and European manufacturing.