Could China Go the Way of 1980s Japan?—Part 4

Commentary As I write this, the Bank of England has just raised its benchmark short-term rate for the second time in the recent past. The European Central Bank stood pat at its Feb. 3 meeting; but beset by inflation at a multi-decade high, it is inevitable that the ECB will get dragged into the nascent inflation-fighting across the globe sooner rather than later. Elsewhere, Jerome Powell’s Fed will begin raising U.S. interest rates next month and start to reduce the size of its balance sheet soon thereafter. China is an aberration now. The People’s Bank of China has recently embarked on a multi-step easing process, both cutting short-term interest rates and relaxing bank reserve requirements. Analysts who follow China by and large blame two things for the divergence. First, China’s half-hypocritical “zero tolerance” policy for COVID has exacerbated what was already a dramatic slowdown in the world’s second largest economy. Second, the obscenely hyper-leveraged real estate sector continues to slowly implode, led by that high-profile “marketized default” of Evergrande. Notably, the ripple effects are now spreading throughout the country on the latter, as developers and investors alike pull their horns in. This is ominous; and tells the tale of where China’s economy and slowly shrinking bubbles are headed. At a time when Evergrande and other developers need continued new business to keep all their respective “balls in the air,” business and new orders have collapsed. So far, our “ingredients” for a major, looming comeuppance for China are the following: The world’s biggest public and private debt loads, compared to gross domestic product (GDP). The private sector is already in hunker-down, depression mode; especially in real estate. Slowing business/economic activity more broadly, especially for manufacturing. Most of the world sees this, even if it remains oblivious to the likely geopolitical and, later, the global deflationary fallout at some point. Those will be subjects of future articles. But what few see is an evolving game plan where Chinese leader Xi Jinping is in some ways actually working to hasten a debacle; albeit one he would capitalize on in various ways. Having gamed the West and other, emerging nations as well, China now is going to become more insular. It has bought, borrowed, or stolen all the world has had to offer. Now—with the retreat from globalization in many ways accelerating over the last couple years—Xi is looking to consolidate his domestic power and stature by, ostensibly, reverting to Mao Zedong’s model of “common prosperity.” The $64,000 question, of course, is that as China financially/economically erodes for a spell, can the rest of the world be spared a related fallout? After all, when the last major geopolitical foe of the United States—the former Soviet Union—went into history’s dustbin, the effect on global markets and the economy was slight. As a percentage of the globe’s total growth, the Soviet economy hardly registered as a rounding error. China is a FAR different kettle of fish. In a recent Financial Times analysis, Ruchir Sharma ended a meaty chronicling of China’s debt monster and seeming no-win situation thus: “Chinese president Xi Jinping is trying to revive a form of socialism reminiscent of the era of Mao Zedong. His government has started cracking down on the excesses of capitalism, including the wealth and power of tech tycoons, and the rampant speculation and rising debts of the property sector. “The problem: what happens in China no longer stays in China, which is the main engine of global growth. In many ways, China follows the same deformed model of capitalism as most western countries, only more so, taking on ever increasing levels of debt to generate less and less growth. “The result is growing financial fragility. Like its more advanced rivals from the US to Japan, China has created a financial system that is in constant need of government support stimulus. “What we are likely to witness over the coming months is an epic clash between a leader with supreme powers determined to change the course of his nation, and the economic constraints imposed by gargantuan debts.” (Emphasis added.) For a much deeper dive into all of this, see “China and the New World Disorder” and “Evergrande’s Marketized Default and the Consequences” on my website, The National Investor. Also, I recently took a very deep dive into this whole subject in a video interview with my old friend, the long-time Washington-area conservative columnist Cliff Kincaid. Read part I here. Read part II here. Read part III here. Views expressed in this article are the opinions of the author and do not necessarily reflect the views of The Epoch Times. Follow Chris Temple has set himself apart with his unique ability to make the intricacies of the markets and our world understandable to the average person, chiefly via his newsletter The Nationa

Could China Go the Way of 1980s Japan?—Part 4

Commentary

As I write this, the Bank of England has just raised its benchmark short-term rate for the second time in the recent past. The European Central Bank stood pat at its Feb. 3 meeting; but beset by inflation at a multi-decade high, it is inevitable that the ECB will get dragged into the nascent inflation-fighting across the globe sooner rather than later.

Elsewhere, Jerome Powell’s Fed will begin raising U.S. interest rates next month and start to reduce the size of its balance sheet soon thereafter.

China is an aberration now. The People’s Bank of China has recently embarked on a multi-step easing process, both cutting short-term interest rates and relaxing bank reserve requirements.

Analysts who follow China by and large blame two things for the divergence. First, China’s half-hypocritical “zero tolerance” policy for COVID has exacerbated what was already a dramatic slowdown in the world’s second largest economy. Second, the obscenely hyper-leveraged real estate sector continues to slowly implode, led by that high-profile “marketized default” of Evergrande.

Notably, the ripple effects are now spreading throughout the country on the latter, as developers and investors alike pull their horns in. This is ominous; and tells the tale of where China’s economy and slowly shrinking bubbles are headed. At a time when Evergrande and other developers need continued new business to keep all their respective “balls in the air,” business and new orders have collapsed.

So far, our “ingredients” for a major, looming comeuppance for China are the following:

  • The world’s biggest public and private debt loads, compared to gross domestic product (GDP).
  • The private sector is already in hunker-down, depression mode; especially in real estate.
  • Slowing business/economic activity more broadly, especially for manufacturing.

Most of the world sees this, even if it remains oblivious to the likely geopolitical and, later, the global deflationary fallout at some point. Those will be subjects of future articles.

But what few see is an evolving game plan where Chinese leader Xi Jinping is in some ways actually working to hasten a debacle; albeit one he would capitalize on in various ways.

Having gamed the West and other, emerging nations as well, China now is going to become more insular. It has bought, borrowed, or stolen all the world has had to offer. Now—with the retreat from globalization in many ways accelerating over the last couple years—Xi is looking to consolidate his domestic power and stature by, ostensibly, reverting to Mao Zedong’s model of “common prosperity.”

The $64,000 question, of course, is that as China financially/economically erodes for a spell, can the rest of the world be spared a related fallout? After all, when the last major geopolitical foe of the United States—the former Soviet Union—went into history’s dustbin, the effect on global markets and the economy was slight. As a percentage of the globe’s total growth, the Soviet economy hardly registered as a rounding error.

China is a FAR different kettle of fish.

In a recent Financial Times analysis, Ruchir Sharma ended a meaty chronicling of China’s debt monster and seeming no-win situation thus:

“Chinese president Xi Jinping is trying to revive a form of socialism reminiscent of the era of Mao Zedong. His government has started cracking down on the excesses of capitalism, including the wealth and power of tech tycoons, and the rampant speculation and rising debts of the property sector.

“The problem: what happens in China no longer stays in China, which is the main engine of global growth. In many ways, China follows the same deformed model of capitalism as most western countries, only more so, taking on ever increasing levels of debt to generate less and less growth.

“The result is growing financial fragility. Like its more advanced rivals from the US to Japan, China has created a financial system that is in constant need of government support stimulus.

What we are likely to witness over the coming months is an epic clash between a leader with supreme powers determined to change the course of his nation, and the economic constraints imposed by gargantuan debts.” (Emphasis added.)

For a much deeper dive into all of this, see “China and the New World Disorder” and “Evergrande’s Marketized Default and the Consequences” on my website, The National Investor.

Also, I recently took a very deep dive into this whole subject in a video interview with my old friend, the long-time Washington-area conservative columnist Cliff Kincaid.

Read part I here.

Read part II here.

Read part III here.

Views expressed in this article are the opinions of the author and do not necessarily reflect the views of The Epoch Times.


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Chris Temple has set himself apart with his unique ability to make the intricacies of the markets and our world understandable to the average person, chiefly via his newsletter The National Investor.  With over five decades in the financial and investment world, his commentary has appeared in Barron’s, Forbes, Investors’ Digest, among other publications. To discover how to get his proprietary research in the paid newsletter service, go to The National Investor.