by Jim Rickards, Daily Reckoning:
When I write collapse, I’m not referring just to a financial meltdown. I’m referring to a broad-based social collapse that could call into question the rule of the Chinese Communist Party (CCP), which some historians refer to as the Peasant Dynasty.
In order to understand the vulnerability of China, it helps to consider the counter-narrative that the China is a rising great power. We’ve heard for decades that Chinese GDP would soon exceed U.S. GDP to make China the largest economy in the world. China has also long been known as having the largest population in the world.
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The latest addition to the super-China narrative is that China is passing the U.S. in technology and AI and that this technology applied to the People’s Liberation Army (PLA) would give China military superiority as well. From this position, it’s a short hop to a Chinese takeover of Taiwan and expulsion of the U.S. from its position in the Western Pacific. At that point, the Asian Century will have truly displaced the American Century (1914-2008).
Every One of Those Statements Is Wrong
I’ve said for years that Chinese GDP would never surpass U.S. GDP. The reason is that China is now stuck in the middle-income trap. It’s an accomplishment for an economy to move from low per capital annual income (about $5,000) to middle per capital annual income (about $15,000). China has accomplished that. But you cannot simply extrapolate from middle-income to high-income ($24,000 or higher) on a linear basis dependent only on the passage of time.
It takes an extraordinary effort to break out of the middle-income trap. Only a few countries (Japan, Singapore, South Korea and Hong Kong) have ever accomplished it. The key is technology and high-value added production to replace low-value added assembly style production. China has not accomplished this. Most of China’s technology is stolen from the West. That’s not good enough, because the country you stole it from already has it and has already applied it efficiently. You have to invent your own technology and apply it before competitors are even aware. China has failed miserably at this.
Growth Is Near Impossible
Chinese GDP is often touted as a measure of success, but it is overstated by about 100%. Investment is roughly 45% of Chinese GDP compared to about 25% in most developed economies. Over half of Chinese investment is wasted.
I’ve been to China many times and have seen the empty ghost cities and the monumental train stations that are mostly empty. If that wasted investment were written-off, Chinese GDP would drop from 5.0% to 3.6%.
With honest accounting for bad debt in the government-controlled banks, Chinese GDP would drop to 2.0% or lower. China’s government debt-to-GDP ratio of 250% makes it impossible for China to grow faster than the debt burden is growing. This dynamic makes future growth even more difficult.
On the Chinese high-speed train that runs from Shanghai to Beijing at over 300 kph. China has produced major technological advances, but it has done so in non-sustainable ways including excessive debt and theft of intellectual property.
The other impediment to growth in China is demographic. China’s population is shrinking at an alarming rate, partly as a result of the one-child policy (1980-2010). Now, China wants to encourage families to have two or three children. But the damage is done.
Chinese women today do not want families because of new opportunities presented by education, high-paying jobs and urbanization. China will lose over 300 million working age citizens in the next forty years. If output is understood as working age population multiplied by productivity, then economic growth in China is a near impossibility.
And China is no longer the highest population country in the world. They were recently surpassed by India. That population gap between India and China will only widen in the years ahead.
As for military superiority, China is not even close to U.S. capability despite the Biden administration’s cuts in spending on new weapons and combat readiness. China touts its lone aircraft carrier without mentioning that it was actually built by Russia. China is trying to build an aircraft carrier fleet, but that’s an immensely complex task that can take twenty years to fully implement.
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