China’s Economy Is Stalling, What Does This Mean For China, For The US Economy And The World?
China's economy is in real, real trouble.
This isn't just important because of the fact that China's growth has a profound impact on the rest of the global economy though it most certainly does. It is also important because there are increasing signs that:
China economic growth is decelerating fast.
More worryingly still, it appears as if China's leaders may not be interested in fixing its problems.
On the first point, here is the slate of economic data that came out this week:
Just terrible and inarguable: China's economy is struggling massively. The question is:
What do they do about it?!
That brings us to the second point which is, if anything, even more concerning about the long term China's trajectory.
To demonstrate why it might be best to simply point out that China is obfuscating or even retiring a lot of the economic data that they just don't like the sound of.
For instance, it is not inspiring that China has recently decided that they are going to stop publishing youth unemployment figures.
Those numbers are currently at a record high (21%) and represents millions and millions of young Chinese hoping to achieve the middle class and middle income "Chinese Dream" that President Xi Jinping references frequently.
The irony is these same youth have spent much of their schooling memorizing the core tenets of "Xi Jinping Thought" and so will be very familiar with the aspirations he outlines and the fact that they seem to be slipping away very, very quickly.
This is very bad. Starting to change metrics and "retire" data you don't like is up there in the annals of "signs your economy is being mismanaged." And the thing about economic mismanagement is once it starts, it can go on for a long time because it gets harder and harder to confront and fix the real issues when you are doing your best to pretend they don't exist.
The end of reporting the youth unemployment number isn't a one off either. Rather, it is consistent with a wider and long running that is tightly mapped to the present leadership regime:
This is worrying and the takeaway is very simple and depressing: things will likely get worse for the Chinese economy before they get better.
We made a similar point two summers ago when US policymakers and administration officials seemed to want to do anything but confront the tide of rising inflation. They actually just hoped it would go away on its own. It took until November (and the midterms to pass) before we got serious about tackling the stubborn non-transitory rising prices.
So, that was a huge mistake for the US then and it is perhaps an even bigger mistake for China today. Let no one say we are not equal opportunity critical here at Pebble HQ.
Back to the economy itself. The problem for China or the real risk worrying investors around the world is very simple:
If they won't confront the issues plagueing the economy then regardless of how precisely bad the current economy is may not improve any time soon. In fact, it may worsen.
This discovery was like a cold wind coming from the east that caused global markets to steeply sell off.
Just about everything went down: Chinese stocks, US stocks, US bonds, global commodity prices (including oil), you name it.
As you can see here, it is universally bad. It was also worse than the already very low expectations:
All of this leads to two questions:
Will China be able to improve any time soon?
Does a possible Chinese recession mean that the US will be severely impacted?
The answer seem like "no, not really" and "yes but not that badly."
On the first, China did rush out some emergency stimulus measures, including a surprise cut to interest rates this week.
Then they did it again just as we were going to press as well.
That makes the third such move since June but it seems unlikely that even these back-to-back cuts will be enough to reverse the current decline.
The reason is pretty simple. China faces two issues that are self reinforcing:
They have a decline in global demand for their exported goods.
They have weak domestic growth.
They are trapped, as we have argued before, between trying not to rely on the old engines that drove so much of their growth the last 20-30 years.
These include property, exports and infrastructure.
Now those sectors are either under fire from China's trading partners or not that interested in creating yet more debt in already over levered and poorly performing domestic sectors.
It is all sort of a mess.
But even more than that is the fact that China's leaders are trying to pivot China away from the debt fueled growth of the past few decades. It might be a commendable aim but Xi Jinping seems to be doing it in a characteristically brutal and coercive manner.
This is hammering consumer confidence. Those unemployed young people and deflating real estate bubble are hurting many people and leaving them feeling poorer, less optimistic about the future and struggling to drive the economy forward in the way that China requires.
If you can't export your way to prosperity, then you need to domestically consume your way. That is difficult when your domestic economy is facing a massive headwind from a deflating real estate bubble.
This is a problem for the global economy but more for developing countries that export raw material to China than developed countries. There are exceptions to this binary - like Australia and New Zealand - but it is far better to the US or Europe than it is to be a country like Zambia that relies heavily on selling to China.
So, while markets took fright this week and the new out of China is actually very bad and likely to get worse before it gets better but it could even help the US economy by lowering the cost for raw materials like oil, copper, wheat, you name it.
China is in trouble. They are also not alone....
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