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rahul razdan's avatar

Actually, the real story is simpler ...

1) Through a "copy me" structure China built an export led economy focused on providing the world with two values (lower cost, nearly infinite labor). The world was only too happy to engage because this offered a "tool" not available in their native countries.

2) As the Chinese tried to move up the value chain and became more competitive, it became harder and harder to continue the same level of growth. They had to move up the value chain because lower cost geographies existed. Artificial means (currency manipulation) used to maintain cost advantages. With some notable exceptions, the economy built had very little inherent innovation which could be competitive on a world-wide basis.

3) Initial investments in infrastructure had massive productive value (because of the starting base). However, without market discipline and with ideas of full employment, a classic debt/real estate bubble emerged. In these bubbles, structures are built for the sake of building them and not their economic value.

4) Having exhausted domestic construction (many empty buildings), a brilliant idea... Belt/Road initiative! Chinese developers are so competitive that they have to do work for free for people who cannot possibly pay them back, but let's pretend the loans are good. Belt/Road projected as sign of Chinese power, but in reality, it is just feeding the debt beast.

Finally, believing its own media headlines of Chinese power, government takes an aggressive posture. Foreign direct investment plummets. it turns out it is not that hard to move low-value supply chains. Chinese citizens, recognizing the situation far better than their government, shutdown and go into "depression" mode. Demand plummets. Outsourcing of manufacturing accelerates. For their own survival, Chinese companies aid in this process. The whole neighborhood turns hostile.

Underneath, there are lots of green shoots (EV, Solar, etc), but will they survive?

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Julian Gough's avatar

Excellent quick-and-dirty explainer. Now do a post on how bad you think it's going to get. I'd be interested in your take.

I should probably say, I'm one of those people who has been looking at the Chinese economy, and in particular the real estate/infrastructure-investment bubble (the unused airports, unused high-speed rail lines, etc), with ever-mounting astonishment, for years. I kept thinking it had to pop, but the CCP kept finding ways to inflate it further. If they have finally run out of levers to pull, if the entire property sector is now finally collapsing, I can't see how it won't pull the whole country down the toilet after it. This looks like the mother and father of all property crashes, it is going to hit EVERYONE in China extremely hard (property was the only place a normal person could invest), and there is nobody available to blame except the CCP. How does the CCP survive that, when no young person has ever experienced serious recession before, and the youth employment rate, going INTO this recession, is already so alarmingly high that they have stopped publishing the figures? I fear the mandate of heaven may be withdrawn at some point in the next five years.

Of course, the CCP has made sure there is no remaining organisation, political, social or religious, of any kind in China who could take over any of the CCP's functions – so a massive public collapse of confidence in the CCP, à la East Germany in 1989, is unlikely lead to anything good in the short term.

Anyway, I would value your thoughts! What am I missing? How can the CCP avoid the menacing train of consequences currently steaming down the track towards them?

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