China’s economy in a death spiral

China’s economy is in trouble: “What we’re going to see in China, the first time anyone can remember who’s alive, is an economy twice the size of the U.S., maybe three times the size of the U.S., it’s going to be very strange to live in China. That world,” said Elon Musk on the “All-In with Chamath, Jason, Sacks & Friedberg” podcast.

At first glance, Musk looks right. China is fast catching up with the US. Last year, China’s economy soared 8.1 percent, generating a gross domestic product of $17.46 trillion. The US economy reached $23.00 trillion, an increase of only 5.7%.

Yes, Musk is America’s leading visionary, but this particular visionary is off target. China’s economy will never catch up with the US, at least not this century.

Elon Musk is making predictions by extrapolation. Extrapolation works in most cases, but not now.

why not?

China’s economy — and the country as a whole — is going through a series of inflection points.most fundamentally Demographics: China’s population is rapidly declining. The most immediate inflection point is the economy: China is now contracting. However, the country needs growth to pay off its huge debt.

we start from “The ruthless creator and destroyer of civilization,” Demographics.Population will break China’s, says demographer at Xi’an Jiaotong University Projected to lose half of the population in 45 years. By the end of the century, China’s population could be about a third of what it is today.

As a result, in the absence of war or disease, the country faces its worst population decline in history.Panicking to avoid a decline—for example, moving from a one-child policy in 2015 to a three-child policy in 2021—has proven unsuccessful in raising birth rates

Such a sharp decline means that if China is to overtake the United States for the top spot, it will have to do so within a decade before population decline starts to undermine economic performance. However, over the next decade, China’s economy is more likely to fall apart.

It’s already in trouble. In April, the economy contracted significantly. Industrial output fell 2.9% from a year earlier. Retail sales fell 11.1%. New car sales plummeted 47.6%.

Severe lockdown is Beijing’s ‘dynamic zero-coronavirus disease“The policy has essentially brought much of the eastern part of the country, the heart of the national economy, to a standstill. China’s ports and airports are running well below capacity, and river and truck traffic has plummeted by about 40 percent.

China can’t ship what it doesn’t produce. Factories are either closed or in trouble. Even politically favored companies have been hit hard. Tesla’s Gigafactory 3 in Shanghai was closed for three weeks due to the outbreak. coronavirus disease lockdown. Now, due to missing parts, It only runs at 45% capacity.

By abandoning its erroneous disease control policies, Beijing can finally reverse the economic damage. What it cannot do is escape the consequences of its unprecedented debt accumulation. No one knows how much debt China has accumulated, but an estimate of 350% of annual gross domestic product sounds about right. That number could be even higher due to the infamous “hidden debt.”

No matter how much debt it has, China is now facing reckoning. In 2008, Beijing avoided an economic downturn by over-stimulating the economy, mostly through debt-financed infrastructure. Now, the country can either pay its debts or solve the problem in other ways.

Many believe that the crisis will be easily resolved without too many external obligations. Yes, the Chinese owe themselves money, but history has shown that these types of crises are the hardest to resolve because each resolution requires domestic parties – not foreign bankers – to suffer.Beijing is trying to further delay the liquidation as it fears social stabilitywhich means it will take much longer to solve the problem than anyone now imagines.

Meanwhile, the debt-laden real estate sector is beyond repair. Property developers, especially since September last year, have been defaulting on payments and defaulting on their debts. Evergrande Group, once China’s largest property developer, has amassed a staggering $305 billion in debt and is struggling even with full government support. For now it has been effectively rescued, but smaller developers are falling. Sunac China, now the fourth largest developer, Just missed a bond payment and announced that no other bond payments are expected.

On the surface, the situation looks manageable. New home prices in 70 major cities fell just 0.2% month-on-month in April. However, the market is “frozen,” in other words, buyers and sellers are too far apart in price to trade.

“We haven’t seen a price crash yet,” J Capital Research’s Anne Stevenson-Yang told “CBS Eye on the World”‘s John Batchelor on Wednesday. “The Chinese government has quietly poured a lot of money into developers so they can keep their inventory on the market and avoid discounts of 30%, 40%, 50%.”

Government intervention can maintain prices but not force sales. Property sales fell 46.6% year-on-year last month Biggest drop since August 2006.

Developers are adjusting. New construction starts by floor area in April fell 44.2% from a year earlier. As a result, the demand for building materials is declining.

China's economy

A resident and a child look out through a gap in a fence in a closed residential complex during the coronavirus disease (COVID-19) pandemic in Shanghai, China, May 10, 2022.Reuters/Aly Song TPX Photo Day

Signs of the future of the housing market, and therefore, the economy does not look good. Real estate accounts for 25% to 30% of total GDP. About 70% of Chinese household wealth is linked to property. In China, apartments are not just assets. In China, they have become a storehouse of wealth, the equivalent of money.

This Chinese “money” looks set to depreciate as confidence fades.investor withdrawal A record $17.5 billion in portfolio assets— Stocks and bonds — from China in March. The U.S.-based Institute for International Finance noted that the outflows were limited to China and not part of a broader flight from emerging markets. The pullback continued a trend evident in February. By all accounts, capital flight continues.

This trend will continue, especially as the Federal Reserve continues to raise U.S. interest rates, and the People’s Bank of China, China’s central bank, cannot match the rate hikes. China’s monetary authorities are now in trouble. They need to lower interest rates to stimulate the economy, but such a move would exacerbate capital flight.

The renminbi, one of the world’s strongest currencies last year, is now weak, Down about 7% in the past three months. Last month was the worst month ever for the Chinese currency.

The Communist Party, reluctant to implement structural reforms, is taking a last-ditch effort. “Lockdown is about keeping people unaware of it and keeping people from complaining about it,” said Stevenson-Yang, who is also an author of the magazine. China Only: Emergence of Isolation and Potential Return“That’s what China usually does, which is to stop the flow of information, not really solve the problem. They’ll do more of that over time.”

Beijing has done a good job of censorship, but a reckoning of the Chinese economy is coming. China is fast approaching its death spiral, a point of no return, with fear gripping markets in the final crisis.

Gordon G. Zhang is the author China is about to collapse And the great US-China tech war.follow him on twitter @GordonGChang. Chang was also the senior editor in 1945.

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