It is time for America’s preeminent financial institutions and its most highly regarded investors to tell the truth about China. The wheels are coming off in China, economically, politically, and socially. America needs to decouple completely from President Xi Jinping’s regime.
Private capital is fleeing China. Chinese millionaires are buying international assets. Many are leaving the country permanently and relocating to places such as Singapore and America. Chinese businesses and consumers are also buying gold “like there is no tomorrow.” The most affluent don’t want their hard-earned money subject to the whim of all-knowing Xi.
But deflation has also gripped China. Prices across the economy have been falling for six consecutive quarters by an average of 0.8%. Consumer prices are flat, with 40% of typical consumption items declining annually. When deflation becomes embedded in an economy, both businesses and households delay purchases. They wait for lower prices. In the 1990s, Japan was caught in a deflationary spiral. Deflation hobbled the Japanese economy for three decades. Experts say that China is in the early stages of a long-term bout of deflation.
The manufacturing sector has flatlined for the last four years. Industrial profits are down 7%. The Chinese banking system is in crisis. The latest stimulus measures in China are designed to recapitalize the banks, not to put money in the pockets of the household sector. Xi wants Chinese households to consume more and to save less. But 70% of household wealth is in the Chinese property market and unfortunately for Chinese households, the property sector continues to experience price declines. New home prices have been down for 16 consecutive months. In the United States, the wealth effect increases consumption and investment. In China, the wealth effect is negative. The Chinese won’t consume when they feel poorer and when they know prices are falling.
China should launch a helicopter drop of household stimulus. But all-knowing Xi believes that transferring resources to the household sector, including expanding the almost nonexistent social security safety net, breeds laziness and will divert funds from his military and other pet projects. Xi’s solution is to export China’s way out of slow growth and deflation. The problem for Xi is that while China is a manufacturing powerhouse, the U.S., the European Union, and others are pushing back hard against the Chinese policy of dumping excess production in overseas markets. China will not be able to export its way out of its deflationary spiral.
Other challenges are clear on the political front.
Corruption is spreading. In the past few days thousands of healthcare workers were arrested on charges of corruption. The Chinese Communist Party is waging a long term battle against corruption inside the Chinese military. Public demonstrations against the government are rising. Incidents of violent crime are increasing. Moreover, Xi is unable to stop China’s demographic implosion. The birth rate is below the replacement rate and the population is aging rapidly. Demographics are destiny, and for China, the horizon is dark.
Capping things off, youth unemployment in China remains high, more than 15%. Recent college graduates can’t find jobs. The Chinese government continues to support the less efficient state-owned enterprises and neglects the more productive private sector. This is an ingredient for longer-term social instability — Xi’s greatest fear.
Make no mistake: China is a broken-down car.
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James Rogan is a former U.S. foreign service officer who later worked in finance and law for 30 years. He writes a daily note on the markets, politics, and society. He can be reached at [email protected]