What is the truth about the Chinese ‘ growth miracle’?

Wednesday, 30 March 2022 — Albert Park

[6 min read]

Dear Reader,

In his last article for The Daily Reckoning Australia, Jim Rickards started to explain why the West’s delusions of China are starting to break down. We’re always told about how powerful the Chinese economy is. But that isn’t the complete truth…

In today’s Daily Reckoning Australia, Jim dismantles the delusion of the Chinese ‘growth miracle’. The truth may be out, but that doesn’t make us any safer…

Best wishes,

Callum Newman,
Editor, The Daily Reckoning Australia

Dear Reader,

Despite economic success, China is likely near the peak of its power and influence in the world. A host of problems are confronting the Chinese economy. These problems include excessive debt, collapsing real estate markets, an unprecedented demographic collapse, and a classic balance of power response to China’s hegemonic ambitions in the Western Pacific. All these issues are explored in more detail below.

The most immediate threat to China’s economic growth is also the most ordinary and familiar to development economists. It’s called the ‘middle-income trap’.

Development economists divide nations into low-, middle-, and high-income based on annual per capita GDP figures. This can be a crude measure, but it’s a good way to compare developing economies with developed economies and measure progress toward joining the rich country club.

Low-income is generally defined as about US$5,000 in annual per capita GDP. Middle-income is around US$12,000 in annual per capita GDP. High-income is around US$20,000 in annual per capita GDP or higher.

China’s annual per capita income is US$11,819, as estimated by the IMF. This ranks them 77th out of 213 countries, territories, and principalities. China is squarely in the middle-income rank. By contrast, the US per capita income is US$68,309, ranking them 10th in the world. The richest country in the world on a per capita basis is Monaco, at US$190,532 per year.

This data is a refutation of those who claim China is ‘catching up’ in economic size and will soon surpass the US. These claims are based on estimates of purchasing power parity, which are irrelevant because of income inequality and the fact that many goods and services — from haircuts to Big Macs — are not available for export.

The actual nominal GDP numbers are US$22.7 trillion annual GDP for the US versus US$16.6 trillion for China. This puts the Chinese economy at just 73% of the size of the US economy.

When the same numbers are compared on a per capita basis, the average Chinese citizen only makes 17% as much as their American counterpart. The Chinese economy would have to grow 600% while the US economy stood still for China to surpass the US. That will never happen.

The middle-income trap is a dead end for developing economies around the world, including China. Only four non-oil-producing countries of significant size (Japan, Taiwan, Singapore, and South Korea) have broken out of the middle-income ranks to join the high-income countries. Every other developing economy, from Costa Rica to Vietnam, remains stuck in the middle-income trap or below.

The ‘growth miracle’ of China is fake news

The path from low-income to middle-income is straightforward. All that is required are limits on government corruption, migration from farms to cities, and financial capital to launch assembly-style manufacturing. China has been very successful at this, with hundreds of millions having moved to the cities and billions of dollars invested for simple manufacturing of everything from sneakers to iPhones.

This relatively direct evolution from low- to middle-income accounts for the ‘growth miracle’ of China over the past 30 years. In fact, there was no miracle — just the growth expected from urbanisation and foreign investment on a massive scale.

China has now exhausted most of that potential growth. Countries such as Malaysia, India, Vietnam, and Indonesia are repeating China’s growth path at China’s expense, in terms of pricing power and foreign investment. The path to high-income status is not doing more of the same. It involves creating and applying high technology with high value added.

To the extent that China has some high technology, it has either been stolen from the West or has been developed exclusively for military applications. China has shown no aptitude for indigenous research and development of technology for civilian manufacturing. Western firms are doing a much better job of both protecting their intellectual property and prohibiting exports of technology to China that could be used to destroy Western competitors.

As a result, China’s growth is now hitting a wall.

The truth is out

China’s growth was reported at 4.9% (annualised) for the third quarter of 2021, compared with 7.9% for the second quarter. Both figures are down significantly from the 10% annual growth China routinely reported prior to the global financial crisis in 2008.

These official figures of growth are materially overstated because 45% of Chinese GDP consists of investment. About 50% of that investment is wasted on ghost cities and white elephant infrastructure that provides temporary jobs but offers no lasting returns on investment.

If adjustments were made to the official Chinese figures for this wasted investment, actual growth in China is closer to 3% per year, perhaps even lower. Again, this comes as no surprise. It’s exactly what happens when countries get caught in the middle-income trap.

If that were the whole story of the Chinese economy, it would be bad enough. It’s not. The full story is much worse. In my coming editions of The Daily Reckoning Australia, we will look at the entire landscape — including debt, demographics, real estate, and growing geopolitical backlash. The resulting picture will be far less intimidating from an economic perspective than many Western analysts realise. But it may be far more dangerous from a geopolitical perspective.

Investors need to keep both dynamics in mind. A China growing weaker economically may behave in a more reckless manner on the geopolitical stage. Both developments pose challenges for investors, whether they are in the Chinese market or not. What happens in China doesn’t stay in China.

All the best,

Jim Rickards,
Strategist, The Daily Reckoning Australia

This content was originally published by Jim Rickards’ Strategic Intelligence Australia, a financial advisory newsletter designed to help you protect your wealth and potentially profit from unseen world events. Learn more here.

Dear Reader,

What jolly insanity!

This report came last week, from Yahoo! Finance: ‘LA county, America’s largest, sees gas prices hit record high’:

‘Los Angeles County saw a new record in average gas prices on Tuesday as the price of crude oil remains over $100 a barrel, signaling the cost to fill up at the pump won't be easing soon enough for drivers.

‘The average price for the largest U.S. county by population rose 2.3 cents to $6.011 — nearly 17 cents more expensive than it was a week ago, $1.224 higher than one month ago, and $2.085 greater than one year ago, according to figures from the American Automobile Association.

‘Highest Recorded Average Price

‘Regular Unleaded $5.866. 3/22/22

‘Diesel $6.297. 3/11/22’

California is a leader. Its governor, Gavin Newsom, who — along with Chelsea Clinton and Transportation Secretary Pete Buttigieg — was formed by the World Economic Forum’s ‘School for Young Leaders’ (aka…the Davos Deciders), has a plan to deal with inflation:

‘“We are working on a proposal that helps Californians with rising gas prices and provides funding to public transit so they can provide direct relief for riders,” Newsom spokesperson Erin Mellon told the Los Angeles Times.’

Get it? Spend more money!

And Mr Newsom is not alone in the dark night of economic ignorance. Along come three House Democrats with white canes. Yahoo! Finance:

‘Three House Democrats introduced a bill last week to provide Americans with monthly direct payments through 2022 — or, at least, while prices remain exceptionally high.

‘Reps. Mike Thompson of California, Lauren Underwood of Illinois, and John Larson of Connecticut unveiled the plan. It would provide $100 monthly checks to individuals and $200 to couples while the national gas price average is $4 a gallon or above. Households would also be able to claim another extra $100 for each dependent they claimed on their tax returns.’

Tax, borrow, or print?

Let’s see. Where do they get the money? There are only three possible sources. Taxes. Borrowing. Or printing. By which of these are the people of the US better off? If the money is raised via taxation, it is simply taken from one citizen and given to another — both of whom suffer from rising prices. If it is borrowed, it must be paid back — with interest. By whom? How? When?

California cannot print money, but the US can. And since fewer and fewer people want to lend at today’s ultra-low (but rising!) rates, most likely, all future spending programs will be funded by the Fed’s printing presses.

In other words, attempts to salve the hurt caused by rising prices will result in even higher prices.

We used to rely on Canadians to be a little more prudent and dignified than those of us south of the 49th parallel. No more. The province of Quebec is already ahead of Newsom and the three looney Democrats. The government in Quebec City announced a new spending program that is supposed to ‘help Quebecers cope with the sharp increase in the cost of living that we have seen in recent months’, according to Finance Minister Eric Girard.

As many as six million Quebecers are supposed to receive a CA$500 stimmy/gimme cheque.

Mo’ money

And here, back in the good ol’ USA, is CNN with an even more bodacious proposal:

‘The administration should ask Congress to authorize a payment of $1,100 per household to pay for four months of higher prices going forward, and provide an option for the president to provide a second or even third check to low-and-moderate income families for an additional four months in the event that prices remain high. We don’t know when this crisis is going to end or when prices for essential goods and services will return to more affordable levels.’

Sure. Whatever. There must be at least 80 million ‘low and moderate’ income families in the US. Giving them US$1,100 every four months would cost, in round numbers, about US$250 billion a year, with no plausible source of funds other than the printing press.

But wait. Why not tax oil company profits and distribute the money to consumers? Yes, that idea too — like a runaway trash barge — is floating around the media. It would ‘kill two birds with one stone’, say proponents, who seem to have it in for our feathered friends. It would help reduce reliance on the devil’s pitch…while alleviating the pain of rising gasoline prices.

What is the matter with these geniuses? Prices rise (inflation) when the supply of money goes up faster than the goods and services that it buys. Of course, there’s always more to the story. But if you’ve understood that much, you’ve got the important part. Taxing oil company profits would only discourage production…while handing out money would encourage consumption. Gasoline prices would rise faster than ever.

Don’t they teach these ‘young leaders’ anything in their WEF school? Don’t they learn how to control inflation? Or do they just show them how to use inflation to get what they want?

But what do they want?

More to come…

Regards,

Bill Bonner,
For The Daily Reckoning Australia