China is an heavily export oriented economy losing access to the markets of the advanced economies day-by-day. Their play is to pivot into a consumer market before their foreign reserves eventually dries up, but that's hindered by the large population.
China right now is largely headed for collapse with ever increasing prices of Chinese parts and ever growing debt burden growing at a faster rate than the economy and a rapidly aging population, probably the most in the world. They've got a decade at best left as a semi-modern country before they start to regress.
- Imports and exports have been crashing lower. [1]
- They've spent decades lying about their unemployment rate, leaving it mostly unchanged around 4.x% perpetually. [2] It's likely far higher, some good estimates peg it around 2 to 2.5 times higher.
- They've rapidly become one of the most indebted nations. Most of that occurred in just seven or eight years, taking on debt of epic proportions in record time. They took their total debt to GDP ratio from around 158% in 2007 to over 300% today. [3] [4] [5]
- They have perhaps 500 million people living on ~$3 per day. Most of those people are poor farmers, not allowed to own the farm land they work on. In any mid-tier or above economy, about 400+ million of those people would be unemployed, because farming productivity would be vastly higher. Instead, in China farming productivity is held artificially low, because those people would have nothing to do otherwise. South Korean farmers are upwards of 40 times more productive than Chinese farmers. [6]
- Since the great recession when China's boom ended, they've turned to stimulus programs and debt to fake growth, and have inflated at least two major asset bubbles, in real estate and equities. Both of which are now falling. The article notes that if you had bought stocks a year ago, you'd still be up nicely - I've noticed articles keep saying that as the market keeps falling, pretty soon it'll no longer be true. Then what?
- They had to aggressively devalue their currency, as a next to last ditch effort to shore up falling exports, and tumbling competitiveness.
- Return on invested capital domestically has been falling for years. As has the return on debt.
- Capital is rapidly fleeing China, to the tune of roughly 3/4 of a trillion dollars in the prior year. [7]
- China has begun eating their foreign reserves, consuming upwards of $300 billion over the last 12 to 14 months. [8] They have significant reserves of course, however only half of those are accessible without causing serious consequences for the global economy and their biggest customers.
- China may have vaporized $6.8 trillion on worthless investments. [9] The estimates could be off by a lot and it would still be a massive sum.
- China has spent hundreds of billions of dollars trying to prop up their stock market bubble. The fall of that bubble, and the fall of their real estate bubble, will wipe out perhaps $10 plus trillion of assets. That removes a lot of assets that are needed to help offset their huge debt burden.
- China no longer has a significant advantage in manufacturing costs. Countries such as the US, Mexico and Vietnam are increasingly competitive versus China in manufacturing.
- Container rates for Asia and China are crashing, indicating deep economic problems. [10]
- Core industries like steel are falling hard. [11] [12]
The problem here is China has seriously miscalculated and focused too heavily on exports. The rest of the world doesn't want more Chinese exports than they did in 2007. Export lead growth only gets you so far.
Japan [with a population of ~128 million] could run its economy into exports and scale to catching up with the West in that manner because of the smaller population.
China's exports have stopped growing and that is a very, very serious problem with debt fueled growth focused on exports. They'll have to print money [to bring export growth back and avoid a private debt bubble bursting] which is why everyone is betting against their currency. Or they'll go into a recession and they'll need to print money.
That's not what they're doing. China is losing her biggest customer, possibly for an extended period of time. If America's economy collapses, China's likely will too.
I wouldn't say there's a ton of market share to be grabbed: the global economy is suffering from a savings glut. Chinese manufacturing dominates entire industries, and already other countries in Asia are offering lower-cost alternatives for labor (e.g., textiles in Vietnam).
In practice, China has driven down the cost of many finished goods (while driving up the cost of commodities) through its investment in manufacturing capacity and infrastructure. Its latest investments were probably non-economic; in other words, they will never pay back the principal due to overbuilding both capacity and infrastructure.
On the infrastructure side, there are entire cities with almost no inhabitants. These 'ghost cities' exist as hedges against principal-robbing inflation -- Chinese households have used property as a stable store of savings since traditional bank deposits and investment vehicles return below-inflation rates of return. This has inflated multiple speculative bubbles in Chinese real estate; the actual reckoning probably has yet to arrive.
On the capacity side, it's the same story. To choose a single, specific example: over 50% of Chinese steel capacity is lying idle; there have simply been too many factories built in the past ten years. The price of solar in the past few years has dropped precipitously because of Chinese over-investment in production capacity -- just ask Solyndra. The price of solar plummeted below what anyone predicted because of China's state capitalism, and a mandate to gobble the market share in the solar industry. (In this case, at least, there are positive externalities.) Chinese solar panel manufacturers are not making profits due to the intense competition and oversupply in the market.
The list is long. So no, there's isn't much 'market share' left to steal. China needs to build its domestic consumption share of the economy, by building its service sector and stoking domestic demand -- basically by making its citizens richer and selling to themselves. That's the only way forward, at least according to Professor Pettis.
China's economy would crumble a little if it could not sell anything outside anymore. Imagine a few billions of people losing their current level of life in China... a good recipe for regime change.
The Chinese internal economy is not as robust as its export economy, and shifting the economy to one based on consumption is an important goal to making it actually healthy. Right now, people just save or invest...and the investments are limited to some shady financial products and...real estate.
China is in deep trouble; it has a total debt to GDP ratio of 282%, the highest compared to the other big gdp countries. (http://bloom.bg/1evYSQ5). The housing bubble has already burst in the 3rd and 2nd tier cities in China, and the 1st tier cities are close to bursting. And the shanghai stock market is close to retracing back to 2000, since the current stock market has a p/e ratio that's 41% higher than that of US's 2000 dot com market. (http://bloom.bg/1HNgqA4)
When (not if) the china's stock market collapses, and the capital flight from China accelerates (estimated 600 Billion a year currently http://bit.ly/1NJQuIX), then China is going to be permanent decline for the next 10-20 years. It would be anyone's guess what China will do then, since it will inevitably suffer massive internal unrest, due to the fact that it's ruled by a bunch of dictators.
EDIT: China seems to be following the same path as Japan in 1990, except China has really screwed up their environment and rich people really want to leave the country.
I've run a business in China for over a decade and follow the macroeconomic situation here closely.
Here's the deal:
The Chinese economy became investment-driven instead of export-driven following the Great Financial Crisis. Exports are less important to GDP than real estate construction and infrastructure development (subways, high speed rail, bridges, etc).
In terms of exports, Europe is the biggest trading partner, not the US. The US is number 2.
The Chinese economy has a big problem: the government can drive GDP as much as it wants via state-driven investment and debt, but much of that is malinvestment and the debt cannot be self-funded. So there is and has been a large debt problem. This is why the Chinese economy has been slowing and the government has not found a politically acceptable way to tackle the problem.
The US trade war is basically kicking the Chinese economy while it's already down, but it's not the key source of the problems here.
China is having quite a few problems on their hands though like the implosion of their real estate market that is tied to nearly everything else due its size. Their exports are down from companies decoupling somewhat with “China + 1”.
In the long term, they have a bit of a population problem as their demographic dividend ends and their birth rate remains low.
I don't think this article is right on the cause. China's biggest problem is, imo, the continued slow motion train wreck of evergrande and its real estate market collapsing. So much of China's growth was money sloshing around due to things getting built. But that seems to be harshly falling. There's hundreds of billions of debt hovering around default and the best these companies can do seems to be to double down on building and selling more buildings, which I sort of expect people don't particularly want to buy. General supply chain issues and covid affect this too. Food availability due to lower exports of wheat from russia and ukraine could cause an issue too.
Yes, but the success of China was built on an export economy. They're consuming more internally as they become wealthier, but it remains to be seen how smooth that transition will be. There have been many burps already (Evergrande, the banning of crypto mining to prevent wealth flight, etc...).
Turning China into an inward-looking closed market is an idea still, not a recipe.
I think we are reaching a stasis point in the global economy. Aging populations across Europe, Japan and the US are driving demand lower. Developing economies could pick up the slack, and China has been trying to get their population to save less and spend more, but the results haven't been that great so far.
China has always talked a big game about rebalancing without actually making the changes to do so. At some point they were going to run out of export growth as they got richer.
What they need to do, and probably won’t, is stop devaluing the yuan and relax capital controls so that Chinese consumers can invest and spend in something that isn’t housing, and finally fuel consumption growth. The current situation essentially results in Chinese being underpaid.
This is bad new for everyone. China's economy is a the only thing that is driving global demand - at least for the last few years after the financial crisis.
The distortion in the system are massive, the main things that work well (and extremely well) is the export sector. BUT China's export sector has always been more dependent on foreign investment, foreign management and external inputs. Even the height of it's manufacturing boom, China could run a trade deficit because its export sector was so oriented to labor-intensive final assembly activity.
The real estate sector is well know for its ungoldly distortedness, it's science establishment is riddled with fraud, it's economic statistics are generally falsified. The pollution produced by it's industry (and corrupt state) is now making a true deadly impact on its society but the pollution is also a product of its energy sector's costs being falsified and so-forth.
It would be a crisis so long as China remains an export-driven manufacturing-based economy. But, as China becomes wealthier, knowledge-based economy, it won't be as big a deal. With 1/6th of the world's population, I would think there would be plenty of domestic buyers.
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